Back From Holidays in France: Swiss Franc/Euro Parity, US Downgraded! And an Imminent Recession?

1. Introduction

The world is hitting Switzerland with an unprecedent purchasing-power surge; the magnitude of the `impulse' was completely unexpected. Very interesting disequilibrium - from a trader perspective -. Even more so when considering that the president of the Swiss National Bank (SNB) used to be partner of a hedge-fund (Moore-Capital-Management) in earlier days. There are some real nice opportunities to pick up... right now. In particular for SNB because even a `loosing bet' could be advertised as a `heroic intervention': nothing to loose... go for it now!

About trading: all filters of  MDFA-XT are `short'. Good grief!

About the recession...

2. Recession Fears

On Econbrowser Jim argues:

"Even in the absence of those developments, there is no question that the U.S. economy has been weakening considerably. JP Morgan reminds us that U.S. stock prices declined 15% or more within the space of 4 months on 30 separate occasions since 1939, and only half of those were associated with an economic recession. But watching this morning's stock market, it's hard to be confident that this time is going to turn out in the favorable half of the distribution."

• Side-note: I take the liberty to re-interpret the optimistic `only half' statement by the more appropriate `at least half' in the present context.

Let's have a look at the data:

2.1 Econbrowser Index

Jim's Econbrowser index is about 15% (currently, the index describes 2011:Q1, not Q2!): see hamilton.pdf (download on August 11 2001). Given recent GDP-revisions (see gdp2q11_adv.pdf by the BEA) this figure is likely to deteriorate further as the index undergoes future revisions itself.

2.2 CFNAI

The Chicago-Fed National Activity Index is `dangerously' close to the critical mark of -0.7 as can be seen from the latest July-release: cfnai_july2011.pdf

2.3 Business-Cycle Index

Chauvet's BCI for May (based on data up to July) indicates a probability of 22%. The downloaded picture (date: 11.August.2011) can be accessed here: chauvet.pdf. At the date of writing this entry, Piger's index hasn't been up-dated (still the April figure).

2.4 ADS-Index

The `cryptic' ADS-index hosted by the Philadelphia FED is unremittingly on the zero-mark since two years now: ads_2yrs.pdf. As such there is not much to be gained from ( a straight line).

2.5 USRI

The latest June-figure of the USRI was up-dated mid-July:

At present time, the recession indicator relies on the upper-graph (MDFA-B): the blue line is slightly `faster' than the red line in the sense that the design emphasizes phase-artifacts of the corresponding real-time filter.

• One observes a steady move towards the zero line of both MDFA-B filters in the upper-graph (recession probabilities pass the 50%-mark when the lines drop below zero).
• The shorter MDFA-E cycle (lower graph) shows evidence of a relaxation along the  corresponding time-axis.

I conjecture that the relaxation of the shorter cycle will be seen in the longer (MDFA-B) cycle too. As of now, there does not seem to be much evidence in disfavor of the (admittedly sluggish) recovery. So let's have a look to the `future' as supported by some leading indicators.

2.6 LEI (and CEI)

Coincident and leading indicators of the conference board (CEI/LEI) improved further: lei_cei.pdf. In particular, the leading index does not support evidence in favor of an imminent recession.

2.7 WLI

The weakly leading index of the ECRI is slightly improving too: wli.pdf (the graph is based on uswliw3.xls which was downloaded on August 11 2011).

3. Summary

I conjecture that some of the indicators coqueting with a recession signal are driven by `bad noise'.

Presently I don't see strong data-based evidences for an imminent recession in the US. But then I wasn't "watching this morning's stock market".