No Double Dip Recession in Sight, Expecting Further Fall of Risk Premia

by: Benign Brodwicz

There is no double-dip recession in sight. There is a natural pulse to the economy, and it is stabilizing. The damage done to effective demand is huge, however, and there is a chance that the natural pulse has been stopped. However, without an inversion of the yield curve a further pronounced downturn is exceedingly unlikely.

The yield curve was inverted in 1928-1929 and before every postwar slump (and there never failed to be a slump after an inversion; if anyone can provide me with Treasury yield curve data for the 1920s and 1930s I would appreciate it). Also, before every postwar recession the unemployment rate has risen toward its adaptation level and crossed it almost exactly at the onset of the recession. Currently, the “animal spirits” variable is forecast to rise even with rising unemployment. Here is the recession “probability” for the coming year:

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As I have been forecasting all year, the RP = Baa – Aaa risk premium has fallen sharply in the past month, so this trade has worked out nicely. This is research, however, not investment advice. Risk premia may fall more slowly for several years, until the next slump.

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From my perspective, the two things that will signal the next collapse will be an inversion of the 1/10 Treasury yield curve, and the unemployment rate rising toward its adaptation level from below. Currently the adaptation level is 6.1 while the print unemployment rate is 9.4. This process is forecast to take several years. See the last “animal spirits” update for details.