According to data from negative Real Interest Rates, another US recession is likely to occur between 2011 Q4 and 2012 Q4, with 2012 Q1 the most likely... See below.
The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has remained high at 572 in July 2011.
As a result of recent market turmoil the numbers for August will be very interesting indeed. Since a recession will not occur until this spread turns negative, and since one indicator shows that a recession will occur within 18 months, we can assume that this indicator will begin to drop down over the next few months. Inflation has already picked up again and, at 3.6%, is the highest it has been since October 2008.
Nevertheless since the introduction of QE2 in November 2010, the net monetary base has increased faster than inflation.
I have factored in recent market turmoil in this indicator. While July 2011 ended well with a reading of 293, the turmoil in recent weeks has seen 10 year bond rates drop nearly 100 basis points from 3.00% to 2.08% by the close of trading on 2011-08-18, which has led to a mid-monthly reading of 195. If this indicator stays true to its historical data, then there will be one of two events leading up to the beginning of the recession. The first is if the Federal Reserve will keep the Federal Funds rate effectively at zero, which it will do barring any major inflationary outbreak. If this occurs then 10 year bond rates will drop to zero as well, or at least converge to within a few basis points. This appears to be the situation currently. The second event will occur if the Federal Reserve increases rates in response to an outbreak of inflation. If this occurs then the Federal Funds rate will exceed the 10 year bond rate, thus placing the indicator into negative and presaging a recession. Inflation has been increasing markedly in the last six months, so this event may yet be the result. As far as I know, 6% inflation seems to be the new Fed goal so any change in the Federal Funds rate will have to see inflation increase beyond this amount.
Real ten year bond rates came in at -0.43% in July. As I have pointed out before, all experiences of negative 10 year bond rates since the 1950s have resulted in an eventual recession.
If we take previous instances of negative real bond rates into account, a recession will start between 2011 Q4 and 2012 Q4, with 2012 Q1 the most likely. These previous experiences also indicate that unemployment will also likely peak between 12.1% and 18.7%, with a result around 16.9% the most likely.
This is a new index based on some playing around with a spreadsheet. The idea is to adjust the Russell 2000 - the indice that measure market capitalisation (amount of shares multiplied by share price) for the whole market - by the US Dollar Index. This would, in turn, measure the value of US market capitalisation throughout the world, rather than just the US.
As you can see there appears to be a "line of resistance" that has formed since 2000. The high of 532.12 was reached in August 2000. The second high of 417.43 was reached in May 2007 while the third high of 351.4 was reached in February 2011. The 2000 and 2007 highs were followed by a recession and it looks as though the 2011 high might be followed by a recession too.
I'm still trying to work out if this is just a coincidence so take this indicator under advisement. Before 2000 such "lines of resistance" didn't seem to apply when looking at recession indicators. Note also that the most recent index number (286.01) is a mid August figure based upon figures from close of trading 2011-08-18.
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Net Monetary Base vs Inflation (spread)
The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has remained high at 572 in July 2011.
As a result of recent market turmoil the numbers for August will be very interesting indeed. Since a recession will not occur until this spread turns negative, and since one indicator shows that a recession will occur within 18 months, we can assume that this indicator will begin to drop down over the next few months. Inflation has already picked up again and, at 3.6%, is the highest it has been since October 2008.
Nevertheless since the introduction of QE2 in November 2010, the net monetary base has increased faster than inflation.
Note: A negative result implies that inflation is growing faster than the money supply, an event which indicates that a recession will occur within 1 to 36 months (with an average of 12 months)
Note: All recessions are preceded by a negative result.
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Federal Funds Rate vs 10 Year Bond Rate (spread)
I have factored in recent market turmoil in this indicator. While July 2011 ended well with a reading of 293, the turmoil in recent weeks has seen 10 year bond rates drop nearly 100 basis points from 3.00% to 2.08% by the close of trading on 2011-08-18, which has led to a mid-monthly reading of 195. If this indicator stays true to its historical data, then there will be one of two events leading up to the beginning of the recession. The first is if the Federal Reserve will keep the Federal Funds rate effectively at zero, which it will do barring any major inflationary outbreak. If this occurs then 10 year bond rates will drop to zero as well, or at least converge to within a few basis points. This appears to be the situation currently. The second event will occur if the Federal Reserve increases rates in response to an outbreak of inflation. If this occurs then the Federal Funds rate will exceed the 10 year bond rate, thus placing the indicator into negative and presaging a recession. Inflation has been increasing markedly in the last six months, so this event may yet be the result. As far as I know, 6% inflation seems to be the new Fed goal so any change in the Federal Funds rate will have to see inflation increase beyond this amount.
Note: A negative result implies a highly restrictive monetary environment, an event which indicates that a recession will occur within 4 to 39 months (with an average of 22 months).
Note: If both the first and second graphs are negative at the same time it indicates that a recession will occur within 1 to 21 months (with an average of 11 months).
Note: All recessions are preceded by a negative result.
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Real 10 Year Bond Rates Rates
Real ten year bond rates came in at -0.43% in July. As I have pointed out before, all experiences of negative 10 year bond rates since the 1950s have resulted in an eventual recession.
If we take previous instances of negative real bond rates into account, a recession will start between 2011 Q4 and 2012 Q4, with 2012 Q1 the most likely. These previous experiences also indicate that unemployment will also likely peak between 12.1% and 18.7%, with a result around 16.9% the most likely.
Note: Real Interest Rates based upon 10 year Bonds can indicate how the value of money is determined in comparison with the market's safest investment. A negative result implies that inflation is eroding the savings of those who have invested in 10 Year Bonds. A negative result over a three month average indicates that a recession may occur between 4-18 months, with an average of 8½ months and a median of 6 months.
Note: Not all recessions are preceded by negative real 10 year bond rates. Nevertheless all instances of negative 10 year bond rates (since the 1950s) have been followed by a recession.
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Market Capitalisation adjusted by USDX
This is a new index based on some playing around with a spreadsheet. The idea is to adjust the Russell 2000 - the indice that measure market capitalisation (amount of shares multiplied by share price) for the whole market - by the US Dollar Index. This would, in turn, measure the value of US market capitalisation throughout the world, rather than just the US.
As you can see there appears to be a "line of resistance" that has formed since 2000. The high of 532.12 was reached in August 2000. The second high of 417.43 was reached in May 2007 while the third high of 351.4 was reached in February 2011. The 2000 and 2007 highs were followed by a recession and it looks as though the 2011 high might be followed by a recession too.
I'm still trying to work out if this is just a coincidence so take this indicator under advisement. Before 2000 such "lines of resistance" didn't seem to apply when looking at recession indicators. Note also that the most recent index number (286.01) is a mid August figure based upon figures from close of trading 2011-08-18.
(The orange line is the recession line, the red line is the line of resistance)
Data Sources
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