That would be consistent with a recently published report by Merrill Lynch Chief Economist David Rosenberg suggesting a 100% probability of a recession. Reading from his latest writing:

“We recently unveiled a new recession probability indicator that uses the shape of the yield curve (10-year note/3-month LIBOR) and corporate spreads (Baa) to predict the probability of a recession within the next 12 months. (The model is based on a recent Fed paper, which used the 10/2-year yield curve and Aa spreads.) The results are striking: taking into account corporate spreads, the model is flashing a 100% chance of a recession in the next year, up from 75% in October and essentially zero in the summer. Looking at history, the model did a pretty good job predicting the 1990-91 and 2001 recessions. In December 1989, recession odds jumped to 95%, and by August 1990 an official recession had set in. Similarly, the model was showing 100% recession odds in October 2000; by September 2001, the economy was in an official downturn.”

Recession a Sure Thing: Not So Fast

We know only two things in life are certain: death and taxes.

Now, along comes Merrill Lynch economist David Rosenberg with the declaration that there is a 100% chance of a recession in 2008.

One hundred percent, as in it’s going to happen beyond the shadow of a doubt.

In a report released Wednesday, Rosenberg referred to a recently unveiled “recession probability indicator that uses the shape of the yield curve (10-year note/3-month LIBOR) and corporate spreads (Baa) to predict the probability of a recession over the next 12 months.”

Hmmm. In any case, after crunching some relevant numbers, the model is predicting a 100% likelihood of a recession.

But wait. According to the same report, another model for gauging the probability of a recession, one that uses the shape of the yield curve and the level of the Fed funds rate, is showing a 50% chance of a recession.

Confusing? You bet.

Read More…

No related posts.