Sunday, July 06, 2008

Upcoming Recession - NOT!

Here is a chart of the Intrade prediction market contract for the probability that a recession starts during 2008 in the United States. The numbers on the right hand are the price of the contract and represent the probability that a recession develops in 2008. The smooth line is the 50 day moving average of the contract's price.

You can see that recession probability was estimated to be highest in January and March, and that it dropped precipitously during April, May, and June. The probability is still hovering near 30% despite the dramatic drop in the market averages during the past 7 weeks. 

My guess is that the Intrade traders think that the financial crisis which occupied the headlines in March is past, and with it the danger of any recession in 2008. Now maybe the stock market is trying to tell us something the Intrade speculators don't know, but I doubt it. In any case I think this divergence between the recession probability and the stock market drop over the past 7 weeks is a bullish omen.

8 comments:

tom k_ said...

Carl, get a grip. From MSN website, Jon Markman article.

"The facts suggest that the magnitude of problems to be faced could be much greater than many now perceive," the BIS report states. "While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

Reading between the lines, financial derivatives expert Satyajit Das, who gave us the best warning last year of impending crisis, said the "astonishing" document is a "scathing indictment" that suggests the world economy is on the verge of "total financial breakdown."

The BIS concludes central banks are now virtually powerless to control the destructive forces of inflation that they unleashed by maintaining a policy of easy credit for the past decade and says the next steps taken to rein in the beasts must lead inevitably to a severe and prolonged deflation and global recession.

Anonymous said...

The EURUSD currency pair is trading sideways after a very shortterm bearish swing from 5909 down to 5675 recorded early on Friday. I expect market to move in a range for the next 5 to 6 days between 5670 and 5910 before another attempt to the upside is likely to take place but i do not expect the all time high at 6919 to be in danger, in agreement with Carl's first guesstimate for the euro headed down. Good trading all and start into the new week !MC

Win said...

Carl,

I see a ST bounce this week, perhaps for the next one or two weeks. I plan to short the bounce. I continue to see Oil as the wild card. I have a $145 target for Oil. If Oil consistently closes above that, then I think it will go to $160. As mentioned earlier, I don't see a sustained rally (SPX + NDX) unless Oil cracks. I see clear inverse correlations on Daily charts between USO and the SPX.

Anonymous said...

Yeah and I can pull up an article stating next week is the rapture. Bias kills, trade the charts not the fa. We are going higher.

PrintFaster said...

Carl, Looks like you are a fade here. Based on your views last December 31, I would guess the Qs are headed to 35:

QQQQ: The Q’s are headed for 54.20 and eventually to the 60 level.

There is wrong, and then there is so so wrong.

I am ready to capitulate which by my measure means a rip up in 2 weeks.

JOSE said...

I went shopping this past thursday for some swim trunks/beachwear. From the looks of it, the recession is not yet hear, or maybe passed, or too shallow to notice.. Anyways..What I saw when I walked into the Century 21, in downtown NYC, financial district was incredible.. Huge lines, lots of ringing registers, people shopping everywhere, and they were all americans, all new yorkers. I know they were locals because I grew up here...few foreign tourists which struck me as odd. PEOPLE are shopping folks...they saved up a few paychecks, payed down the bills and they are SHOPPING..the consumer lives.

Anonymous said...

Mr Futia
It is understandable and probably correct way to trade to be completely detached from other sources.
But surely you won't ignore what is happening all over the country!
Here in California, people are losing jobs in doves, corporates are cutting positions so aggressively, and loan market is dried up.
Recession or not, rosy future in stock market or any other market is unlikely.

T.C.B.

Anonymous said...

Intrade uses the rather ludicrous "two consecutive quarters of negative GDP change" (the second of which must occur in 2008) as its definition. If the definition was something like "a recession means that any month of 2008 is contained in a period later defined as a recession by the Business Cycle Dating Committee," the odds would probably be closer to ninety percent.

http://bloomberg.com/apps/news?pid=20601039&sid=aFR.kFWcXvEw