Wonk Attack: Interest Rate Spreads & LEIs

I have previously mentioned Paul Kasriel’s work with interest rate spreads and leading economic indicators.

Paul notes that if you don’t like the reconfigured LEIs — and I was critical of the white wash the cheerleaders at the Conference Board did to cover up the inverted yield curve — you can
still derive value from them.

His suggestion: Corroborate the LEI signals by also looking at the negative spread between the yield on
the Treasury 10-year security and the federal funds rate (on a
four-quarter moving average basis) and a year-over-year contraction in
the quarterly average of the CPI-adjusted monetary base.

Let’s call these two charts the Kasriel Recession-Warning Indicator:
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Leis_year_over_year

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The 1966 LEI signal was false, but the Rate Spread should have kept you out of trouble.
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Interest_rate_spread

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Regardless, the combo of both of these have flipped negative, suggesting that the economy is slowing down . . .

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Source:
Recession Imminent? Both the LEI and the KRWI are Flashing Warning
Paul L. Kasriel
Northern Trust March 22, 2007
http://tinyurl.com/2p2ftr

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