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Recession Odds Surge To 47%, Highest Since 2011

Tyler Durden's picture




 

Once upon a time, when the market actually discounted the future path of the economy instead of being a lagging indicator to not only underlying macroeconomic conditions...

 

... or simply frontrunning central bank policy, economists would use it to anticipate key economic inflection points such as recessions and recoveries. Which is also why the recent correction in the market has spooked all those conventional economists who still believe there is a "market" instead of a centrally-planned "wealth effect" policy tool, whose only purposes is to react to every increase in the global $14 trillion central bank balance sheet.

It is these economists, which also include the academics on the Fed's staff, who took one look at the tumble in stocks in the past two weeks and decided that a rate hike may not be such a hot idea after all. Because if the market is sliding, it surely is telegraphing that not all is well with the economy and therefore tightening financial conditions would be suicidal for any central bank.

So assuming that after being wrong for 7 years about everything, economists are actually right about the market still having some discounting abilities left, what then is the market telegraphing? The answer, according to the Bank of America: the biggest surge in recessionary odds since 2011, which over the past few days have nearly hit a 50% probability of an economic slowdown.

BofA explains:

Recession probability from stock prices shoots higher: The more interesting and difficult question is whether the equity correction is signaling a deeper economic malaise. Equity prices can be leading indicators of recession. Indeed, Michael Hanson has developed a variety of probit models that use financial variables to estimate the risk of a recession. According to his model, the 15% annualized drop in the S&P500 index (over the past six months) is signaling a 47% risk of recession starting sometime in the next 12 months. That sounds fairly grim; however, we wouldn’t take the signal too literally. As Paul Samuelson famously quipped in the late 1960s: “The stock market has called nine of the last five recessions.” Our probit model sends a lot of false signals. For example, in 2011 the model saw a 59% chance of recession (which we argued strongly against at the time).

Here is the chart that BofA has created to track coincident recession odds based on market signals:

Actually BofA is dead wrong about 2011 being a false positive: the only thing that delayed the 2011 recession, was the Fed's launch of Operation Twist in September of that year, coupled with the Fed's liquidity swap line bailout of Europe in November, and the commencement of the ECB's massive €1 trillion LTRO in December 2011. It was this liquidity avalanche that delayed the effects of what was a  guaranteed recession, one which even the ECRI called.

Delayed but not eliminated, and with every passing year that the world's central banks have kicked the can of the global business cycle's down phase, the more acute it will be when it finally launches.

Finally, unlike 2011 this time not only is the Fed not planning any pro-cyclical liquidity interventions, but Yellen is actively considering tightening monetary conditions as soon as September with the start of the first rate hiking cycle in nearly a decade.

Which is why while the market may or may not be correctly discounting a recession this time, or anything else for that matter, an economic recession is precisely what is coming, just because every single time when financial conditions were as adverse as they are now, the Fed would proceed to bailout if not the economy, then certainly the "market."

 

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Mon, 08/31/2015 - 18:03 | 6492252 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

This time is differnet, the FED's got this.

Mon, 08/31/2015 - 18:16 | 6492301 quintago
quintago's picture

A chart which shows a false positive for a a recssion because of QE is a bullshit chart that does nothing more than track the flow of capital in and out of equity markets. There is more to that chart than you infer, however regardless of what it says, there are far too many charts showing too many things out there right now. Garbarge in, garbage out, and you don't know what is garbage.

I prefer to count the number of panhandlers at my local intersection.

Mon, 08/31/2015 - 18:03 | 6492255 BandGap
BandGap's picture

I guess if it's a casino we should have odds.

We are already in a recession/depression. Look around.

Mon, 08/31/2015 - 18:10 | 6492281 RiverRoad
RiverRoad's picture

Anybody recall that 2016 is a presidential election year? Duh...  We have the requisite recession now and it's over by November when everyone will be dancing in the strreets again.  Yawn.

Mon, 08/31/2015 - 18:14 | 6492300 stant
stant's picture

I post this again go look at the 2001 chart on the Dow to sept 11 and look at 2015 jan to last week , spooky

Mon, 08/31/2015 - 18:17 | 6492304 world_debt_slave
world_debt_slave's picture

recession?  Depression since 2010

Mon, 08/31/2015 - 18:17 | 6492305 richiebaby
richiebaby's picture
"Great Depression Odds Surge To 47%, Highest Since 2011"

There that's better

Mon, 08/31/2015 - 18:20 | 6492314 richiebaby
richiebaby's picture
"Mother of All Great Depressions Odds Surge To 47%, Highest Since 2011"

Better yet 

Mon, 08/31/2015 - 18:25 | 6492323 PrimalScream
PrimalScream's picture

If you stop to think about it - WHY is it a "Guesing Game" when the world's largest and most sophisticated economy is entering a recession?  If America was truly "at the top of its game" in economics, then there would be 50 different economic indicators that measured the health of the economy - and all of them would be ACCURATE.  You shouldn't have to throw darts at a dartboard to know exactly what is going on - when we have internet communications, cell phone data services, and high-speed computers. 

It's nothing short of criminal .. that our economic and financial data have become a "circus sideshow". 

Mon, 08/31/2015 - 18:30 | 6492354 gdiamond22
gdiamond22's picture

Hmmmmmm....where have I heard this '47%' before????

 

 

Mon, 08/31/2015 - 18:47 | 6492427 Raging Debate
Raging Debate's picture

June 2007 - "Chance of recession 25%." Alan Greenspan. This is the second leg of the current depression hurricane. First inflation then deflation. Shit the founders knew this about the central bank model 250 years ago. It exercabates natural business cycles while sending false market signals and is just a fig leaf for political corruption and laziness. 

 

Mon, 08/31/2015 - 18:56 | 6492450 honestann
honestann's picture

Recession odds:  47%

Depression odds:  100% (in depression now)

Tue, 09/01/2015 - 05:37 | 6494242 Harry Balzak
Harry Balzak's picture

In other words, we have a 47% chance the economy will improve.  

Way too optimistic.

Mon, 08/31/2015 - 20:53 | 6492925 f16hoser
f16hoser's picture

Dumb Asses, we've been in a 4 to 5 percent recession for a long, long, time. Enough with all this silliness...

 

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