Reccession Odds: Greenspan 50%, Merrill 100%
In an interview this morning with NPR, former Fed Chairman Alan Greenspan said that the odds of a recession are "clearly rising" and are now about 50%.
click for NPR radio broadcast
Earlier on Thursday, CNBC reported that Greenspan raised his view of chances of a
U.S. recession to 50%, from 30%:
"Greenspan said it's too soon to say whether a recession is coming, "but the odds are clearly rising."
"We're getting close to stall speed" in economic growth, he said. "And we are far more vulnerable at levels where growth is so slow than we would be otherwise. Indeed ... somebody who has an immune system which is not working very well is subject to all sorts of diseases, and the economy at this level of growth is subject to all sorts of potential shocks."
~~~
The former Fed chair is downright chipper compared with some of the data crunchers over at Merrill Lynch: They look at the simple formula involving the Yield Curve and Corporate Spreads. This correctly forecast the 2001 and 1990-91 recessions.
Based on Merrill's read of these two elements -- and I don't know precisely what they do to generate this chart based on those factors -- they have a much more distraught view of the economy than the Maestro:
>
100% Chance of Showers
Chart courtesy of Merrill Lynch, Gartman Letter
>
If any one can tell me how this chart gets assembled and massaged, it would be greatly appreciated . . .
>
Sources:
Greenspan: Recession Odds 'Clearly Rising'
NPR, Morning Edition, December 14, 2007
http://www.npr.org/templates/story/story.php?storyId=17210282
Merrill Lynch Global Research
Greenspan Says Recession Odds Are `Clearly Rising'
Vivien Lou Chen
Bloomberg, Dec. 14 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGyhKOCi4xdU&
Friday, December 14, 2007 | 11:51 AM | Permalink
| Comments (42)
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hmmm...I wonder how their indicator worked in predicting recessions prior to '91?
Looks interesting but more than 2 data points would be nice.
Posted by: sn | Dec 14, 2007 12:21:26 PM
Greenspan is both an arsonist and a fireman.
Posted by: Joe | Dec 14, 2007 12:26:55 PM
That chart of theirs is rubbish! Given that it is supposed to predict recessions 12 months forward, lets look how it did:
From '91 to '93 it predicts a recession with 100% probability...it never happened.
In late '98 and late '99 it predicted a recession with nearly 100% probability. It never happened.
From '02 to mid '03 it predicted a recession with near 100% probability...it never happened.
Usual analyst garbage. Anything predicting 100% will never be right.
Posted by: 2and20 | Dec 14, 2007 12:27:10 PM
Once again I urge Greenspan to have a large cup of STFU, and to spend more time on the golf course.
And I urge reporters to stop asking someone who couldn't see either the stock market bubble or the housing bubble for his opinion.
Posted by: F. Frederson | Dec 14, 2007 12:31:10 PM
Have past Fed Chairmen had as much of a media presences post-tenure, as Greenspan?
Posted by: TP | Dec 14, 2007 12:31:10 PM
Perhaps the better question is , are we heading for a mid cycle slowdown?
Sounds more plausable to me.
Posted by: Fred | Dec 14, 2007 12:31:33 PM
Agreed, two data points is meaningless. How has this done going back to at least the mid-1940's?
Furthermore, this tool seems to have "predicted" a recession in early 1999, at least two years before the recession officially started. Without a timeframe, such predictions are not useful. After all, I can predict with 100% certainty that we WILL have a recession -- because economic cycles happen. But that statement is meaningless without some sort of time element.
Posted by: John | Dec 14, 2007 12:36:36 PM
My apologies for my last post. I didn't see the fine print of "over the next 12 months". I defer to 2and20's post.
Posted by: John | Dec 14, 2007 12:41:16 PM
Nothing like changing your predictions to fit the trend.
He must have read Cramer's book.
I doubt Cramer read his though.
Posted by: a5 | Dec 14, 2007 12:52:32 PM
That chart to be honest just sort of looks like.... the market gets volatile and it goes to 100% and it stays there till there is an announcement of a recession... regardless of how many years it takes... You wait long enough and it will happen.
LOL, That chart is below 20% less than it's above 80%....
"hey bob, the chart is up above 80%."
"oh ignore that, once we get to 100% we are within 2 years of a recession."
I bet rolling dice would be more predictive.
Interesting how consistent it is at going 2-3 years beyond the recession.
That is fun chart porn.
Posted by: Eric Davis | Dec 14, 2007 12:55:50 PM
is the fed drop on Monday the same type of drop they have been doing FOREVER? If so $20billion is pretty much normal
Posted by: Costa | Dec 14, 2007 12:56:54 PM
[deleted] your post probably contained content that a spam filter rejected. If Barry were deleting your post, you wouldn't get the SPAM message.
Blogs are harrassed constantly with worthless spam, and one as popular as Barry's with the readership it has must be under siege. He isn't going to manually delete all the crap. I would point-out also, that you are actually spamming by advertising for those other blogs in your post.
~~~
BR:: No, that was me.
He's way too rude, creepy and obnoxious for my tastes.
Privilege revoked . . .
Posted by: wnsrfr | Dec 14, 2007 12:59:48 PM
The 2001 prediction was correct, but was three years early! If you pulled your money out of the market immediately when it hit 100%, then you would have missed all the gains in late 98 and 99. The thing about predicting a recession is you will eventually be right. Barry - you've been negative for as long as I can remember, yet the market is still up about 5% this year. Sure, not great returns, but not the doom and gloom you've been ranting about for the past 2 years. Eventually you will be right though with your recession prediction since booms don't go on indefinitely.
Posted by: mike | Dec 14, 2007 1:01:00 PM
costa-
yea it is virtually the same type of operation but this time they can attach a big press release to it and claim "coalition of the willing" or words to that effect.
The irony of that is the total amount auctioned in two offerings (that has yet to occur) has already been surpassed by the repo.'s of this week alone.
Today's was over subbed to the tune of over $80 billion...with a total amount of just $5b given out....
"just 5 billion"
Sad that we call $5 billion a small amount
Anyone see or hear CNBC's spin of C's action today.....priceless!!!!!
Just like the "investment" in MBI
Ciao
MS
Posted by: michael schumacher | Dec 14, 2007 1:09:55 PM
The Fed model as shown hereunder is stubbornly giving a low probability around 16 PCT for recession.
At this juncture three assumptions:
The interest rates are manipulated for misguidance
The Fed model is wrong
Mr Greenspan knows that the conundrum is still alive and well.
http://bp0.blogger.com/_5aAsxFJOeMw/R1q_AjNS8JI/AAAAAAAAApY/x2dG63oA754/s1600-h/recession-probability-track-2003-12-08-to-2007-12-06.JPG
Posted by: Philippe | Dec 14, 2007 1:25:47 PM
The chart is generated by running a probit regression with CP spreads and the difference between (most likely) the fed funds and the ten year against as the X variables and the Y variable as follows:
The Y variable is set equal to one if the month in which the X variables are measured is 12 months behind a NBER defined recession and zero otherwise.
Then you take the coeffecients you get from the regression and plug in the spread and the yeild difference that occured in each month and out pops the probability that a recession will occur in 12 months.
You can massage it by your inclusion of other variables as well as choice of time periods to estimate over.
Posted by: Karl Smith | Dec 14, 2007 1:26:35 PM
The best indicator of recession I heard was when I was in site location. When corporations pull back there is no business and that is when the work would dry up. My old bosses there said that they knew a recession was coming up and got it right just about every time.
Posted by: Metroplexual | Dec 14, 2007 1:28:15 PM
MS,
thanks. Thats why i was scratching my head, they are saying how $20 billion is so huge, when this goes on every week. At least they can make it public and make it seem like everything is ok
Posted by: Costa | Dec 14, 2007 1:35:45 PM
Can we have a recession if everyone is convinced we are going to have one?
Posted by: Fullcarry | Dec 14, 2007 1:45:50 PM
There's a Fed study on this model using the long-term yield and short-term yield spread. The method is just like how Karl Smith summarized it.
I'm sure Merrill's model is a variation of the Fed's model.
Basically, the probability rises as the spread widens (higher short yield than the long yield).
Regarding its predicability, it's done okay, but wasn't always correct.
Posted by: Sam Park | Dec 14, 2007 1:46:21 PM
I counted all the repo.s YTD and earlier this week they totaled just over $600 BILLION (I think I stopped on Weds.)
At this point it is fruitless to continue counting. Whatever "they" require will be met with open hands and yet more people saying they need more.
If you want a truly delusional view of what passes for "analysis" look no farther than Kudlow's woefuly mis-directed scribe against the Fed...who until recently was squarely in the corner of Mr. Fantasy himself.
I gather the repo amounts offered will decrease going into the new year so that the banks can yet again lobby for more rate cuts.
I have one piece of advice for them:
USE THE EFFING DISCOUNT WINDOW....we all know why they won't but the Fed could leave that as the only alternative to them. They need to do that.
Ciao
MS
Posted by: michael schumacher | Dec 14, 2007 1:48:08 PM
.... and only 1 of those Repos all year was a permanent addition , the rest were all temporary
Posted by: j | Dec 14, 2007 1:56:30 PM
makes no difference "j" you can argue all you want about the fed's textbook answer for how THEY see repo's put to use. This is the way the Fed inflates assets and claims no responsibility.
Brokers get piles of cash from the Fed and as long as they return the amount by the required term date (and with that premium attached along with it) they get yet another round of money to do the same thing.
But keep believing the banks and brokers who can't see into next week let alone next year FTM.
The most overused quote of the last 6 months"
"we do not anticipate further write-downs"
I think LEH is the latest to tout that line.
Ciao
MS
Posted by: michael schumacher | Dec 14, 2007 2:06:51 PM
Barry,
The chart is carefully constructed by a room full of men who get paid whether it is right or wrong.
After publishing the chart, they are whisked back to the Upper East Side in a private car that is driven by a man who makes 1/1000th what they make.
Posted by: Christopher Laudani | Dec 14, 2007 2:11:56 PM
For those looking for yet more evidence of the slowing economy. We talk about art, or high end apartments in NY but pay close attention to the Barret/Jackson car auction in mid-January.
Never has so much cheap money been put to use over the last several years. Who in the hell would pay over a million bucks for a damn Barracuda with a non-matching engine???
The same people who brought you the current problems. Billions of broker money went to the high end car auction market over the last several years. It's going to be fun watching these idiots get what's coming to them from that side as well.
Ciao
MS
Posted by: michael schumacher | Dec 14, 2007 2:23:00 PM
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