CREDIT SUISSE: THE PRECONDITIONS FOR A DOUBLE DIP ARE NOT IN PLACE
Credit Suisse is still in the weak economy, but stay long equities camp. They say the risk of a double dip is very low and history backs their claims. They note that no recession has occurred within the current type of environment:
“We note that each US recession since 1960 has been preceded by all the following factors:
- A flat or inverted yield curve (10-year minus 3-month);
- Positive real short-term rates (3-month minus core CPI);
- Excess inventories of finished goods (inventory level above trend);
- The growth rate of lead indicators falling to zero (based on the Conference Board index of leading indicators).
In particular, over the past 60 years, there has not been one recession in the US where the yield curve was steeper than 0.7% (compared to 2.8% currently), real short-term rates were lower than minus 0.3% (now -0.8%), inventories were more than 3% below trend (now 17% below) or the Conference Board index of leading indicators rose more than 1.6% on a 6m basis (now 3.9%) six months before the start of the recession. That is to say: the preconditions for a double-dip in the US are not place.”
Source: CS
Did they note that none of those recessions were balance sheet recessions? I haven’t looked individually at each, but I’m pretty sure they weren’t. I still maintain that we never came out in the first place. Massive gov’t intervention does not create a good, strong economy.
This is nonsense. The current recession is far worse than any of those other 1960-to-present recessions, so comparing them is totally useless. Looks the same BS to me as the brilliant models of the banksta’s: ‘house prices never go down, they always go up by at least 5%’.
I wonder if they have bothered to look at Japan? When short rates are zero, by definition you cannot have an inverted yield curve. However, that hasn’t stopped them from staying in a soft depression for two decades.
Did they note that none of those recessions were balance sheet recessions?
The late 80′s/ early 90′s recession was marked by excess CRE leverage and punctuated by bank failures. It’s quite comparable to the most recent recession, but for the degree.
I wonder if they have bothered to look at Japan? When short rates are zero, by definition you cannot have an inverted yield curve.
CS really did blow this point — they should know that the zero bound makes inversion impossible at this stage. However, there is an argument that the slope is steep enough now so that it isn’t comparable to a flat or negative curve, and that’s the argument that they should be making if they wish to use the yield curve.
But this isn’t Japan, either. Japan isn’t comparable because it has economic policies that restrain consumption to such a degree that it is quite difficult for Japan to use consumption to pull GDP out of recessionary levels.
Japan is trying to maintain an export-based economy despite having high wage rates and a strong currency, which is a recipe for sluggish growth. An economy with a strong currency and high wages should be using those drivers to consume more imports, which will ultimately drive positive GDP when the cheap foreign purchases feed domestic growth. Japan’s export-oriented policies were fine during the 60s and 70s when the yen was cheap and wages were low, but nown they are about 30 years behind the curve.
The conference board of leading indicators uses the yield curve and inventories, so listing it with the others is circular and shows poor reasoning. With so many people saying that we can’t go in to a double dip I think I’ll take the contrarian play.
Excess inventory cannot be assessed from past levels. We are de-leveraging. So when the sales rate goes down, suddenly the inventory will look excessive. It’s rear view mirror forecasting.
I love how people can just jump up and down, etc., etc., on their bearish biases.
Ignore data at your own peril. Yes, we all understand that this is a balance sheet recession and we will likely have to muddle through this for some time.
That said, the world has not ended so let’s just keep working, shall we.
Actually, this is more than a balance sheet recession in the case of housing and commercial real estate. In a balance sheet recession, people devote their income to paying off their debts so that there is little or no money left to make new purchases. In the case of housing, many people have lost jobs and may have moved in with relatives. They are not making making many new purchases, but in addition, they have given up their houses, so that they are adding to the inventory of unsold houses.
Likewise when businesses downsize, they need less space, so they move into a smaller space and add to the inventory of empty buildings. Similarly, retailers close unprofitable stores and add to the inventory of empty retail space. In these cases, this is a classic inventory correction recession. Except that the additional inventory is coming from unexpected sources.
Everyone else has done a good job of pointing out the sheer idiocy of the post, and I want to agree wholeheartedly. Even a first year student in accounting could use the data posted here and on Calculated Risk previously to show the mountain of debt that we have yet to address. And since we have not done anything to restructure all those debts, they are hanging over us like an avalanche. Our banks are basically insolvent, and we are facing a major balace sheet recession.
LOL
you have got to be kidding me CS