Thursday, August 05, 2010

Those Leading Indicators

I mentioned the weird yield curve argument some time ago, but Albert Edwards, the highly regarded global strategist at Societe Generale, writes today:

I've read some real rubbish recently. I read, for example, that a recession cannot be imminent because the yield curve has not yet inverted. Indeed one of the key components for Conference Board leading indicator is the shape of the yield curve (10y-Fed Funds). This has been regularly adding 0.3-0.4% per month to the overall indicator, which is now falling MoM! The simple fact is that with Fed Funds at zero, it is totally ridiculous to suggest there is any information content in the steep yield curve, which will now never predict a recession. Without this yield curve nonsense this key lead indicator is already predicting a recession.

Click on chart to enlarge, courtesy of Societe Generale.

Also the team of global economists at Goldman Sachs had similar fear mongering charts last week. Click on charts to enlarge, courtesy of Goldman Sachs.

However, ECRI went out to streets yesterday in order to defend its stance in regard to US WLI. As to recession call, they stated:
However, a recession is hardly baked in the cake, which is why we aren’t making a recession call at this time. Simply put, we don’t predict the predictors. If we see our collection of leading indexes (including the USLLI, which turns ahead of stock prices) swing decisively toward the recession track, we’ll make a clear recession call. Until then, we’ll keep monitoring our leading indexes, as we’ve done for decades.

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