Blog
Dear Clients,
You have not missed much. Below is a very detailed convoluted discussion between two top economists about recession or slow down. If you read the bottom note it explains liquidity which we have been hearing quite a bit. I would suggest you read the foot note before you read the article and it will make more sense as you wade through. Really it boils down to when and where a recovery might be and how severe will the conditions be in the 2011 marketplace.
For what is concerning us this market is not going to improve and this will keep the interest rates down. We have now had two moves upward of .25% each and there is still debate on the final planned move later this year of one more .25%. I am not in any way suggesting any one to lock in at this time. The Bank of Canada is bolstering its base rate to give it some space to drop if we do go into another recession next year, and as a response to that they are predicting prime will move back down. The Bank of Canada will not be forced to go to 0% or even under which would mean disaster.
Current rates that you can lock into are below. Current Prime rate is now 2.75%.
3 Year 3.75
4 Year 4.19
5 Year 4.29
Thanks for all your votes for the Spectator's Reader's Choice nominations. We still have to find out what categories we are nominated in. My clients are the best!
Enjoy the last 3 weeks of summer and be safe!
Cheers!
Suzanne Boyce
A US Double Dip: Tracking the Odds
Avery Shenfeld and Benjamin Tal
A double dip is to be avoided at all costs when holding a potato chip at the buffet line, and less trivially, when steering economic policy. Even before the NBER has actually confirmed the last recession ended, some are already starting to see the next one on the horizon. Renewed recession risks are drawing rising attention in the media, hitting consumer sentiment, and Google searches for "double dip" references are on the rise, just as searches for "recession" climbed late in 2007. Investors are similarly starting to fret. Although the equity market's correction is still well within the norms seen during expansions, the AAII bull/bear indicator is back to the levels seen during the recession, and it's much the same for other sentiment readings from Market Vane and the NAAIM.
But in the modern era, double dips are more often feared than felt. Indeed, if one defines a double dip as a downturn after an expansion lasting less than two years, the only post-WWII US twin dives were the recessions of 1980 and 1981-82. Double dips have also been rare in other major economies of late, although Japan fell into recession in 2000 only a year after it emerged from the "Asian crisis" recession. Prior to the 1940s, however, a more volatile world showed several cases of short-lived expansions that petered out. Few remember that the 1929 start of the Great Depression, for example, followed less than two years on the heels of a US recession that ended in Q4 1927.
So what are the tea leaves now telling us? Certainly, there are reasons for concern. The economy has been propped up by fiscal stimulus that is now winding down. Job growth has lacked its typical post-recession vigour, leaving a household sector swamped with bad mortgages having few reasons to accelerate spending. The ECRI leading indicator has turned markedly lower.
But there is still a base of ongoing support coming from healthy corporate profits, which typically presage both hiring and capital spending, and a wide-open tap on monetary stimulus. That has us projecting a sharp deceleration in US growth, but not an outright recession, with a similar fate in store for Canada. And thus far, the highest frequency data, taken individually and collectively in a model that tracks recession probabilities historically, comes down on the same side.
The Curve's Nobel in Forecasting
Markets often have a better nose for recessions than economists. The stock market is too jittery to be a reliable bellwether, with major declines having only a 50% success rate in predicting recessions, and giving five false positives since 1960. A recent study in the Journal of Finance1 found that an equity market liquidity measure has worked better, with a drying up in market liquidity often a telling sign of economic trouble ahead. Indeed, we saw liquidity plummeting at a pace not seen in more than 20 years ahead of the recent downturn. At present, market liquidity isn't sending out the same sort of warning signal.
The bond market also has an enviable track record as a recession indicator. Curve inversions-higher long rates than short yields-often foreshadow a slump, although that too has sometimes signaled downturns that failed to materialize.
Today's curve sounds no alarm bells. Even after the recent rally in US 10s and 30s, the Treasuries curve is much
steeper today than it typically is when a recession is coming up in the next few quarters. The Fed's recession probability model, which combines the yield curve and the funds rate, would clearly be very bullish on growth.
That said, we can't really replicate the inversions seen ahead of past slumps. Typically, part of the lead up to recession is a policy tightening that pushes up short rates. The long end of the curve can then invert as investors see a slowdown ahead, and doubt the longevity of the elevated short-term yields. That can't happen now, since short rates are near zero, essentially ruling out a curve inversion. The most the curve can price in is a long wait for an initial tightening, and it's impossible to differentiate whether that is due to expectations of slow growth, or outright recession. As well, the explanatory power of the yield curve has diminished in recent cycles relative to its longer term performance.
But corporate spreads are another fixed income indicator of where the market's head lies, and here, it's clear that investors are far from pricing in a recession. Ahead of a recession, spreads tend to widen sharply as investors anticipate credit defaults. On that score, while we saw some upward drift as markets eyed the risks emanating from Europe's sovereign debt crisis, spreads remain quite tight by the standards leading up to recent recessions, and don't show the sharp upward trend typically seen ahead of a downturn.
Economic Current/Leading Indicators
Since financial market indicators are perhaps less useful in a near-zero rate environment, it's worth keeping a close watch on what the high frequency economic data themselves are saying. Research by J. Stock and M. Watson2 showed that indicators that use larger numbers of economic series performed better than more narrowly based leading indicators in widespread use. The Chicago Fed's National Activity Index of 85 separate indicators was developed along those lines. Its three-month average, used as a cyclical indicator, continues to show an economy that is advancing at less than trend, but not on the brink of recession.
A possible shortcoming of that index in present circumstances is that some of its components are now a few months old, and so its latest reading would underweight the most recent, and generally disappointing, evidence. The Philadelphia Fed's ADS index, while not nearly as rich an indicator in terms of the number of series it incorporates (only six), has the advantage that it is updated weekly for a change in any of its components, which include weekly claims for unemployment benefits, one of the highest frequency series available. It too, while off its highs, is still above the levels seen at the start of the last two recessions (Chart 6). Note that its recent drop was exaggerated in that it included the rise and subsequent fall in employment associated with the US census.
CIBC Recession Probability Index
Still, that downturn in the ADS index suggests that recession risks stateside bear close watching. To help in that task, we have developed a probit model that looks historically at the status of four financial market and economic indicators relative to whether a recession had commenced within two quarters. The Fed's bare-bones model used only the funds rate and the yield curve slope, but given our concerns about the utility of the latter indicator, we enriched the model by adding credit spreads and the Philly Fed's ADS Index.
While the long-time scale of the chart makes small leads difficult to see, the model has a strong track record in anticipating recessions, although in the last downturn it was less of a leading signal than a coincident indicator. At present, the CIBC RPI predicts slim odds of a US recession commencing in the next two quarters. While we recognize that the probability estimate is likely understated due to the concerns about the yield curve slope measure noted above, it would still appear to be more consistent with a slowdown rather than a true double-dip recession.
Add it all up, and Seinfeld fans can be comforted in concluding that George Constanza does not yet hold the US economic potato chip in his hands. We're not in material danger of a rude double dip in the next two quarters. But, given the uncertainties, fiscal tightening ahead, and the potential for a slow economy to be vulnerable to shocks, we will keep an eye on our new indicator nevertheless.
Note 1. "Stock Market Liquidity and The Business Cycle" Journal of Finance, March 2010. Liquidity here is defined as a measure of how much stock prices move in response to each volume unit of trade. A high estimate indicates high liquidity (low price impact of trade) and low estimate indicates low liquidity (high price impact of trades).
