“We have an inverted yield curve, a negative savings rate, six-year-high industry operating rate, multiyear-high commodity prices, cycle-high profit margins, uncomfortably high unsold inventories of both homes and autos, and a peaking-out in housing starts — all classic late-cycle developments…Be wary of the pundits telling you how great soft landings are. They hardly ever happen. The odds of a soft landing after a Fed tightening cycle inverted the entire yield curve are slim.”
-Merrill Lynch’s David Rosenberg
>

That quote is in a NYT column by reporter Conrad de Aenlle, who seems to be making up for his puff piece on employment last week. Aenlle continues:

“There’s more than a small chance of going into recession,” said James C. Cusser, a senior bond manager at Waddell & Reed. “It’s smaller than 50 percent, but a year ago that would have been off the table.”

"The catalyst could come from the Fed if it continues to raise rates, with or without a pause this week. Persistent tightening could push rates on adjustable-rate mortgages past some unidentified tipping point, he said.

James B. Stack, editor of the InvesTech Market Analyst newsletter and an investment adviser with a conservative approach, offered no odds, but he still worries that a recession may be on the way.

One concern is the National Association of Home Builders Confidence survey. The last time the mood of builders sank as low as it is now, Mr. Stack wrote, “the economy was just three months away from entering the 1990 recession.”

Incidentally, Stack is the first newsletter I recommend to laypeople who want to do very little tweaking on their holdings; He is straight forward, and invests quite conservatively.

I would add utilities to the defensive sectors recommended by Rosenberg: 

"Health care and consumer staples, industries known for producing stable earnings streams in challenging economic conditions and areas of the stock market that have produced high returns in past recessions. Since 1973, the two groups have risen at annualized rates of more than 28 percent when the economy is in recession, he pointed out.

Stack recommends a 47 percent investment in stocks and 23 percent in cash, and the stocks he favors are concentrated in the same sectors Mr. Rosenberg mentioned. His choices include Dentsply International, a maker of dental products; Biomet, a manufacturer of surgical implants; and the beverage companies PepsiCo and Diageo."

Source:
Market Values
Talk Turns to Chances of Recession
CONRAD de AENLLE
NYTimes, August 5, 2006
http://www.nytimes.com/2006/08/05/business/05values.html

Category: Economy, Employment, Federal Reserve, Investing, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “What are the Odds of a Recession?”

  1. Craig H says:

    Can’t argue with the DEO chart, but it looks a little overbought on the daily for an entry. A pullback to 68-69 would be nice.

    Booze is always a crowd pleaser.

  2. bsi87 says:

    Anyone worth his salt knows that one can’t determine a recession until after the fact and the official definition is 2 consecutive quarters of negative growth in real GDP. IMO it’s pretty much a wasted exercise.

  3. CDizzle says:

    Barry (and gang):

    As opposed to evaluating the odds of an impending recession, allow me to ask this question:

    When did we last see this (quasi) perfect storm of recession indicators spelled out by Mr. Rosenberg (and a host of others) and avoid a recession?

    In essence, could we possibly more quickly get to the heart of the issue by asking:

    What are the odds of AVOIDING a recession?

  4. glenn says:

    bsi87,

    anyone worth their salt knows that your above comment is FALSE. ECRI for one nailed the 2001 recession months before its start date. FWIW, at this point in time, they do not see a recession in our immediate future (out about 6 months), but I for one am paying very close attention to their WLI index…it’s growth rate is about to go negative for the first time in a while.

  5. glenn says:

    CDizzle, excellent question.

  6. wcw says:

    I read a good article that surveyed a few different models.. hold on, click here [federalreserve.gov].

    As of February, the simplest model was predicting a 50% chance of recession, the other three he investigated around 20%. While I don’t have the time to dig up the data and run those models, my bet is each number is up a little as of August.

    Back when I read the paper, I put my bet down on Model A; still there, mainly based on concern over the shakeout as housing prices settle.

  7. BSI87 says:

    Glenn,

    Good luck. No one knows till AFTER the fact. Will ECRI nail it this time? What if you position your portfolio for a recession and ECRI screws the pooch and the mkt takes off?

    Personally I like Ed Hyman at ISI but am I going to position my portfolio on economic outlooks that may have junk data in them or be manipulated? Nope.

  8. babycondor says:

    BSI87, how, then, are you going to position your portfolio?

  9. A says:

    Oh, I get it. An ISI posting “plant”. So someone bashes Trennert and an ISI employee comes to the rescue with a post. lol. You could be a little less obvious.

    The odds of someone who refutes the first negative post about ISI and views ISI research as the best and just so happens to be reading one of thousands of blogs out there is a little too coincidental. There are dozens of top firms and many more market personalities such as Barry yet we just so happen to like the obscure ISI group. LOL!

  10. BSI87 says:

    Baby,

    I bought bonds when people hated ‘em and said that if you bought ‘em stay with very short maturities. Mine are 30 year. I’m short OIH for now. Drillers’ costs are going up and their personnel costs are jumping. Short a bit of the mkt with SDS. Short a bit of gold.

    50% cash.

    Biggest change right now is taking smaller positions in relation to equity esp when I trade from the long side.

    And take profits quicker.

    Watching SMH and the Trannies as well.

  11. BSI 87

    The official start or end of a recession is irrelevant — but a slowdown impinging on corporate profits that sends the market lower is what the takeaway is . . .

  12. BSI87 says:

    Ed Hyman from ISI was on Wall Street Week pretty often. ISI people often have articles in Barrons.

  13. Ted Craig says:

    Barry’s right. I know an economist who says the last recession started in 1997, with the East Asian financial crisis. It took years after that for corporate profits to recover, much longer than the official recovery. He asserts that’s part of the reason the recovery has seemed weak. Because the last recession was much deeper and longer than officially acknowledged.

  14. Craig says:

    Let’s say something substantial happens, like a pipeline springs a leak and oil heads higher for an indeterminant time…….

    The fed is after inflation and energy hasn’t broken yet.

    Ben’s job is to kill the inflation disease, even if it severely disables or kills the patient.

    .25 basis points, STAT!

  15. BSI87 says:

    Barry,

    Agree. The earnings slowdown will show up much more quickly. That was my point. Q3/Q4 2006 could be recession qtrs and mark a tradeable bottom at the same time. No reason to get hung up about the economic state, maybe we can bring Al Kahn’s “banana”.

  16. Becky says:

    I just went to the CNBC website. Charles Nenner is the second guest scheduled in the 2:00 hour!

  17. JDamon says:

    Craig,

    Can you explain to me how raising interest rates a 1/4 point is going to cause gas prices to go down? I mean, what the Fed has raised rates 16 or 17 straight times, yet oil prices have been climbing the whole time. Guys, people have got to drive. It just costs more to do it, less money left over for other items. That right there is DEFLATIONARY. People consuming less, prices fall to meet slowing demand. Adding interest rate hikes is a double whammy to the consumer/economy. Fed needs to be done. Focus should be on drilling off our shores and in Anwar. In the short term, Bush should release some strategic oil reserves to get prices down and/or cut some portion of the fed/state taxes tied to gas prices.

    If they have half a brain in their heads, they will pause.

  18. JDamon says:

    Since the Market started tanking May 11th and the market values stocks around 6 – 9 months out, don’t people think that the market has already priced in a mild recession? I mean, the market didn’t react one iota to great earnings releases by most companies this quarter (because they are looking at Q4 already). P/E multiples are at 20 year lows, so why does everyone think we have so far to go. If you really look at the sectors individually, I bet they are all off around 15% from their highs. This my friends means the market already has figured BB will kill the economy.

  19. Ken says:

    Both the Russell and MidCap indexes have tried to rally off of double bottoms at the 23.60% retracement levels from the 2003 bottom. If prices can’t get back above Friday’s reversal then the next target should be the 38% level within the next 3 months. Note the daily 50 ema has crossed under the daily 200 ema on the Midcap index and should cross under on the Russell if there is further market weakness.

  20. Si says:

    I continue to believe the biggest problem with this economy is peoples expectations. Recessions are just as natural a part of the markets as growth. Someone just has to get a hold of this economy by the scruff of the neck. I am hoping Ben B knows this. Do we really want to live in an economy built on spec housing?

  21. M.Z. Forrest says:

    In the scary idea department, I’m not sure if it matters whether we have a recession or not. Take the higher interest rates: Corporations were sitting on a lot of cash (i.e. not investing in capital) 150 basis points ago.

    I mean it is not as if you have to be worried about manufacturers (not resellers) losing those stellar returns that they haven’t been having. In regards to wage inflation unless you subscribe to the theory that this time is different and the gap between rich and poor will continue to grow, you had to expect a regression to the mean at some point.

    The interest rate business I believe is entirely due to forex concerns. In the short run I don’t think the US can sustain rate hikes whereas I think the Euro is in a better position to do so. Heck, over the past two months we’ve seen a slowing of foreign inflows and the markets can’t climb. Imagine if we actually started seeing outflows.

  22. John says:

    bsi87,

    “the official definition is 2 consecutive quarters of negative growth in real GDP”

    The National Bureau of Economic Research (NBER) determines the dates of economic peaks and troughs. To identify the dates of recessions “the committee does not rely on a simple rule of thumb such as two consecutive quarters of negative growth, nor relies on GDP data alone, in making its determinations, but rather looks at a broader array of statistics”. See http://www.nber.org/cycles/recessions.html.

  23. Craig says:

    JDamon:
    They won’t, but the question is, will there be a recession, which I believe there will be.
    The numbers are on my/history’s side.

    No matter, either they raise and the market goes south, or they don’t and the market goes south.

    Choose one: Inflation or slowing economy.
    It’s like choosing between Kerry and Bush. It’s all south from here.

  24. Mark says:

    Becky-

    Word on what Nenner said?

  25. ss says:

    The psychology is just astounding.

    ” …it wasn’t for bad luck, I wouldn’t have no luck at all”

    “I’ve been down so GD long, well it looks like up to me…”

    The internet (e.g. Drudge, The Big Picture, etc) creates an accelerating wave of negativity…like a snake eating its tail. Perhaps we should “turn off the machines”, and take a walk to the nearest Walden Pond.

  26. BSI87 says:

    Well we’ve beat the hell out of that dead horse.

    Officially, what defines a recession is two consecutive quarters of negative growth in real Gross Domestic Product. In practice, any period of high rates of unemployment, interest rates, inflation, or other indicator is called a recession by politicians and media people.

    Or this.
    http://economics.about.com/cs/businesscycles/a/depressions.htm

    Doesn’t matter. By the time it’s recognized, the mkts will have taken off.

  27. Craig says:

    You guys crack me up!

    Could it be that reality actually determines sentiment, not the press or whoever/whatever you are watching/listening to/reading?

    Why the constant focus on the bearer and not the news?

    Are we supposed to defend the news we like or simply take note? I have nothing to defend, except my $.

  28. Becky says:

    NENNER SYNOPSIS

    Short-term low the end of this week, then up till Sept 4 or 5, but he said don’t chase it because then we start dropping and we don’t bottom till the end of the year.

    Maybe 1 more rate hike, then slow eases. Sees a substantial housing drop.

    Says Nasdaq to bottom 12-15-06. Dow should put in a “good low” the end of December and hit upside target of 14,580 in 2007. He said stay long all of 2007. 2007 should be a very good year, he said.

    Someone else heard him say that interest rates would go down till the middle of 2009.

    If anybody can add anything, please do!

  29. ss says:

    “Could it be that reality actually determines sentiment, not the press or whoever/whatever you are watching/listening to/reading?”

    Lol…There’s a different “reality” on Al Jazeera and CNN compared to FOX, et al.

    As a glass half full person, I want to hear the other side to keep me on my toes. (not my heals)

  30. Craig says:

    Ah, so you start out already see something as “half full”?

    What if the sentiment is actually negative, meaning half empty? Does your half fullness protest or blame it on the NYT?

    If it’s between Fox and Al Jazeera, and you actually want reality, it would behoove you to listen to both, question both severely, and to entertain several thoughts in your head at the same time. Attacking either as a source won’t do anything to either support or refute reality. That could be why Fox and al Jazeera don’t make my source list. They are editorialists, not reporters.

    They approach it the same as you, they have already picked their answer, then they try to make the facts fit their outlook.

    Right now I’m not hopeful for the market, a Bear some would say, but I could spin on a dime and go bullish in a second if overall sentiment went bullish. However, wishing won’t make it so, so saying I’m a half full kind of person would be about my outlook for LIFE, not the market. All I can do about the market is BE PREPARED.

  31. ss says:

    I try to FADE sentiment. Sentiment is an assimilation of OPINIONS…not reality. Big difference.

    Good luck.

  32. Becky says:

    The Nenner video is posted on the cnbc website.

  33. Mark says:

    ss-

    Is ECRIs increasing future inflation figures reality or are you fading those too?

  34. Mark says:

    Barrry-

    “Incidentally, Stack is the first newsletter I recommend to laypeople who want to do very little tweaking on their holdings; He is straight forward, and invests quite conservatively. ”

    HE WAS IN MOSTLY IN CASH FOR NEARLY FOUR YEARS OF THE BUBBLE (1996-1999). I’d say he was conservative! You’ve mentioned him twice in the last couple of days. Why do you so strongly recommend him?

  35. ss says:

    Mark,

    I acknoledged those Friday AM. The trend is still down. If it changes I most sertainly will.

    The 10 year at 4.92% and the 30yr at 5% is REALITY. Given your stance, you should be shorting these…are you?

  36. Mark says:

    ss-

    I hedged interest rate exposure another way.

  37. Cherry says:

    75% chance of a mild/moderate recession starting Q 1/2 of 2007. Then we leave the magical 25% possibility something happens that causes a implosion.

  38. whipsaw says:

    per R:
    “IMO recessions are not a natural necessity, but are caused by bad policy. Some people have a hard time believing it when things are going well. We’re only scratching the surface of the wealth tech/internet will create, and the productivity gains will ensure increasing profits. Growth may flucuate but slowing growth is not a recession.

    The real things to worry about are Iran, and why we haven’t bombed them into a glass parking lot by now.”

    Ah, I wondered where the intellectuals were? Nice comments, “R”, everything is great, war is good, and you do not hate anyone at all, do you?

    The only stumbling block is the peasants who whine about not being paid a fair wage and those goddam arabs and other whiners who complain about imperialism and zionism and global warming and all of that stuff. If only we could get rid of them and send Good Christian Capitalists like yourself on to Heaven, it would all be good, right? Of course you will first want to either convert or kill all of the Jews, but the setup for that seems to be in the works now in the Levant, so your eyes should be rolling back in your head.

    I really wonder what we are going to do with people like you once the Dark Shadow lifts and we resume operation as a Constitutional Repbulic?

  39. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  40. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  41. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  42. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  43. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  44. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  45. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  46. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  47. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  48. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  49. tj & the bear says:

    Economic booms & busts are simply reflections of human optimism & pessimism writ large. Human nature never changes, so economic cycles won’t either.

    Current conditions are arguably much worse than those that existed in 1929. The coming depression will be a doozy.

  50. Ned says:

    utilities look like a giant double top on the charts to me BR so I must beg to differ. should be interesting.

  51. Mark says:

    Ned-

    I am watching that chart also.

    Did anyone else pick up that Hussman REDUCED HIS DURATION in his bond portfolio last week and went full bore on PMs?

  52. Cherry says:

    It would? Doubt it. Those Peasents are gaining insight that THEY are the societal elite and not those rich bastards who rule through shady means need to be put in their place and made to serve the “true” elite of society, or the rerise of the natural aristocracy.

    That is the beginning of “real” Fascism/National Socialism. Mostly done by market failure caused………by Zionist, environmental destruction and the like. Maybe you ought to pay more attention……….

  53. BDG123 says:

    Cherry,
    I am not sure I understand your ramblings. Are you implying Jewish people are the cause of facism and socialism?

    I am trying to get some clarity as to whether you somehow are sympathetic to the Nazis and anti-Semitic or if you are razzing the prior poster.

  54. RP says:

    ss – why are you wasting time here when you could be going uber long on real estate, as a “FADE on sentiment”?

    Troll.