A wary bear is moderately long...

"The signs of recession are everywhere" replied my cynical (a badge of honour) writing partner when I suggested shares of one of the sounder UK banks were approaching bargain status. I knew exactly what he meant - enough argument covering this sentiment is to be had for free on many financial websites: US twin deficits, UK public sector debt, asset bubbles, asian central bankers etc.

And yet.

Exhibit A: Estrella-Mishkin Recession Table
The US 10 year Treasury notes minus 3 month T-bill spread has narrowed every month since May 2004 (when it was 3.7 points) to February 2005 (1.6 points). But even that is not a small enough spread to be worthy of consideration on the useful Estrella-Mishkin recession probability table (exhibit A). And even if it were, the table forecasts 4 quarters out. A more sensitive trigger would be nice.

One of the better instant gratification harbingers of doom (and boom for that matter) is the Chicago Fed National Activity Index (CFNAI). It tells a similar story (exhibit B) - just where is this recession?

Many other indicators tell similar tales: credit spreads (AAA versus 10 Year notes) haven't widened alarmingly over the last couple of quarters; the S&P500 is up over the last 6 months; the Purchasing Managers Index is well above 50; and the Philadelphia Fed's "Anxious Index" survey shows a pathetic 5% chance of negative GDP growth in Q1 2005 rising to only 8% in Q2.

Exhibit B: Chicago Fed's National Activity Index
This is terrible news - how does a bear rationalise it?

Not easily. It's true enough that the potential risks to the economy are dangerous ones. But to get from "potential" to "realised" with recessional severity does not look likely in the next 12 to 18 months. And beyond that just isn't visible.

The knives might be out, but they haven't been slid in just yet.

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