Reccession Odds: Greenspan 50%, Merrill 100%

In an interview this morning with NPR, former Fed Chairman Alan Greenspan said that the odds of a recession are "clearly rising" and are now about 50%.

click for NPR radio broadcast
Greenspan540_2Earlier on Thursday, CNBC reported that Greenspan raised his view of chances of a
U.S. recession to 50%, from 30%:

"Greenspan said it’s too soon to say whether a recession is coming, "but the odds are clearly rising."                      

getting close to stall speed" in economic growth, he said. "And we are
far more vulnerable at levels where growth is so slow than we would be
otherwise. Indeed … somebody who
has an immune system which is not working very well is subject to all
sorts of diseases, and the economy at this level of growth is subject
to all sorts of potential shocks."


The former Fed chair is downright chipper compared with some of the data crunchers over at Merrill Lynch: They look at the simple formula involving the Yield Curve and Corporate Spreads. This correctly forecast the 2001 and 1990-91 recessions.

Based on Merrill’s read of these two elements — and I don’t know precisely what they do to generate this chart based on those factors — they have a much more distraught view of the economy than the Maestro:
100% Chance of Showers


Chart courtesy of Merrill Lynch, Gartman Letter


If any one can tell me how this chart gets assembled and massaged, it would be greatly appreciated . . .


Greenspan: Recession Odds ‘Clearly Rising’
NPR,  Morning Edition, December 14, 2007

Merrill Lynch Global Research

Greenspan Says Recession Odds Are `Clearly Rising’
Vivien Lou Chen
Bloomberg, Dec. 14 2007

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What's been said:

Discussions found on the web:
  1. sn commented on Dec 14

    hmmm…I wonder how their indicator worked in predicting recessions prior to ’91?

    Looks interesting but more than 2 data points would be nice.

  2. Joe commented on Dec 14

    Greenspan is both an arsonist and a fireman.

  3. 2and20 commented on Dec 14

    That chart of theirs is rubbish! Given that it is supposed to predict recessions 12 months forward, lets look how it did:

    From ’91 to ’93 it predicts a recession with 100% probability…it never happened.

    In late ’98 and late ’99 it predicted a recession with nearly 100% probability. It never happened.

    From ’02 to mid ’03 it predicted a recession with near 100% probability…it never happened.

    Usual analyst garbage. Anything predicting 100% will never be right.

  4. F. Frederson commented on Dec 14

    Once again I urge Greenspan to have a large cup of STFU, and to spend more time on the golf course.

    And I urge reporters to stop asking someone who couldn’t see either the stock market bubble or the housing bubble for his opinion.

  5. TP commented on Dec 14

    Have past Fed Chairmen had as much of a media presences post-tenure, as Greenspan?

  6. Fred commented on Dec 14

    Perhaps the better question is , are we heading for a mid cycle slowdown?

    Sounds more plausable to me.

  7. John commented on Dec 14

    Agreed, two data points is meaningless. How has this done going back to at least the mid-1940’s?

    Furthermore, this tool seems to have “predicted” a recession in early 1999, at least two years before the recession officially started. Without a timeframe, such predictions are not useful. After all, I can predict with 100% certainty that we WILL have a recession — because economic cycles happen. But that statement is meaningless without some sort of time element.

  8. John commented on Dec 14

    My apologies for my last post. I didn’t see the fine print of “over the next 12 months”. I defer to 2and20’s post.

  9. a5 commented on Dec 14

    Nothing like changing your predictions to fit the trend.

    He must have read Cramer’s book.

    I doubt Cramer read his though.

  10. Eric Davis commented on Dec 14

    That chart to be honest just sort of looks like…. the market gets volatile and it goes to 100% and it stays there till there is an announcement of a recession… regardless of how many years it takes… You wait long enough and it will happen.

    LOL, That chart is below 20% less than it’s above 80%….

    “hey bob, the chart is up above 80%.”

    “oh ignore that, once we get to 100% we are within 2 years of a recession.”

    I bet rolling dice would be more predictive.

    Interesting how consistent it is at going 2-3 years beyond the recession.

    That is fun chart porn.

  11. Costa commented on Dec 14

    is the fed drop on Monday the same type of drop they have been doing FOREVER? If so $20billion is pretty much normal

  12. wnsrfr commented on Dec 14

    [deleted] your post probably contained content that a spam filter rejected. If Barry were deleting your post, you wouldn’t get the SPAM message.

    Blogs are harrassed constantly with worthless spam, and one as popular as Barry’s with the readership it has must be under siege. He isn’t going to manually delete all the crap. I would point-out also, that you are actually spamming by advertising for those other blogs in your post.


    BR:: No, that was me.

    He’s way too rude, creepy and obnoxious for my tastes.

    Privilege revoked . . .

  13. mike commented on Dec 14

    The 2001 prediction was correct, but was three years early! If you pulled your money out of the market immediately when it hit 100%, then you would have missed all the gains in late 98 and 99. The thing about predicting a recession is you will eventually be right. Barry – you’ve been negative for as long as I can remember, yet the market is still up about 5% this year. Sure, not great returns, but not the doom and gloom you’ve been ranting about for the past 2 years. Eventually you will be right though with your recession prediction since booms don’t go on indefinitely.

  14. michael schumacher commented on Dec 14


    yea it is virtually the same type of operation but this time they can attach a big press release to it and claim “coalition of the willing” or words to that effect.

    The irony of that is the total amount auctioned in two offerings (that has yet to occur) has already been surpassed by the repo.’s of this week alone.

    Today’s was over subbed to the tune of over $80 billion…with a total amount of just $5b given out….

    “just 5 billion”

    Sad that we call $5 billion a small amount

    Anyone see or hear CNBC’s spin of C’s action today…..priceless!!!!!

    Just like the “investment” in MBI


  15. Karl Smith commented on Dec 14

    The chart is generated by running a probit regression with CP spreads and the difference between (most likely) the fed funds and the ten year against as the X variables and the Y variable as follows:

    The Y variable is set equal to one if the month in which the X variables are measured is 12 months behind a NBER defined recession and zero otherwise.

    Then you take the coeffecients you get from the regression and plug in the spread and the yeild difference that occured in each month and out pops the probability that a recession will occur in 12 months.

    You can massage it by your inclusion of other variables as well as choice of time periods to estimate over.

  16. Metroplexual commented on Dec 14

    The best indicator of recession I heard was when I was in site location. When corporations pull back there is no business and that is when the work would dry up. My old bosses there said that they knew a recession was coming up and got it right just about every time.

  17. Costa commented on Dec 14

    thanks. Thats why i was scratching my head, they are saying how $20 billion is so huge, when this goes on every week. At least they can make it public and make it seem like everything is ok

  18. Fullcarry commented on Dec 14

    Can we have a recession if everyone is convinced we are going to have one?

  19. Sam Park commented on Dec 14

    There’s a Fed study on this model using the long-term yield and short-term yield spread. The method is just like how Karl Smith summarized it.

    I’m sure Merrill’s model is a variation of the Fed’s model.

    Basically, the probability rises as the spread widens (higher short yield than the long yield).

    Regarding its predicability, it’s done okay, but wasn’t always correct.

  20. michael schumacher commented on Dec 14

    I counted all the repo.s YTD and earlier this week they totaled just over $600 BILLION (I think I stopped on Weds.)

    At this point it is fruitless to continue counting. Whatever “they” require will be met with open hands and yet more people saying they need more.

    If you want a truly delusional view of what passes for “analysis” look no farther than Kudlow’s woefuly mis-directed scribe against the Fed…who until recently was squarely in the corner of Mr. Fantasy himself.

    I gather the repo amounts offered will decrease going into the new year so that the banks can yet again lobby for more rate cuts.

    I have one piece of advice for them:

    USE THE EFFING DISCOUNT WINDOW….we all know why they won’t but the Fed could leave that as the only alternative to them. They need to do that.


  21. j commented on Dec 14

    …. and only 1 of those Repos all year was a permanent addition , the rest were all temporary

  22. michael schumacher commented on Dec 14

    makes no difference “j” you can argue all you want about the fed’s textbook answer for how THEY see repo’s put to use. This is the way the Fed inflates assets and claims no responsibility.

    Brokers get piles of cash from the Fed and as long as they return the amount by the required term date (and with that premium attached along with it) they get yet another round of money to do the same thing.

    But keep believing the banks and brokers who can’t see into next week let alone next year FTM.

    The most overused quote of the last 6 months”

    “we do not anticipate further write-downs”

    I think LEH is the latest to tout that line.


  23. Christopher Laudani commented on Dec 14


    The chart is carefully constructed by a room full of men who get paid whether it is right or wrong.

    After publishing the chart, they are whisked back to the Upper East Side in a private car that is driven by a man who makes 1/1000th what they make.

  24. michael schumacher commented on Dec 14

    For those looking for yet more evidence of the slowing economy. We talk about art, or high end apartments in NY but pay close attention to the Barret/Jackson car auction in mid-January.

    Never has so much cheap money been put to use over the last several years. Who in the hell would pay over a million bucks for a damn Barracuda with a non-matching engine???

    The same people who brought you the current problems. Billions of broker money went to the high end car auction market over the last several years. It’s going to be fun watching these idiots get what’s coming to them from that side as well.


  25. Estragon commented on Dec 14


    A quick look at the fed’s h.4.1 for the last couple of weeks appears to show banks doing exactly as you suggest.

    Going backwards from the most recent (Dec 12) release, repos are; $45,643MM, $46,857MM, and $49,250MM, for a total reduction of ~$4billion in repo borrowing.

    Figures for discount window borrowing are; $3,047MM, 342MM, and 55MM for total new borrowing of ~$3billion.

    Am I reading this wrong?

  26. blam commented on Dec 14

    Recession is such a nasty word. I think it is fair to say that the most vocal bears for the last few years have been right about the insane fundametals but wrong about the timing and elevation of the credit bubble.

    I have been unable to get past my cynicism long enough to benefit from the outsize stock performance. Looks and feels like 98 – 2001 to me. And I am dfinately not wading into the water now.

    I am afraid of a stockmarket that derives such a high percentage of it’s value from earnings growth and financial crisis level interest rates. Even a return to normal corporate margins, accompanied by rising interest rates could knock 25 % off this high-flyer. I am skeptical of the glowing earnings reports and, given the extent of L3 accounting in the financial business, would not be surprised if reported E has been overstated fairly substantially over the past few years with accounting gimmicks and does not represent cash flow.

    A recession induced drop in E, along with a retrentment in the “multiple”, and we have a serious market revaluation.

    Bernanke seems to be doing the best he can to undo the maestro’s prescriptions. I hope they concentrate more on getting liquidity to the people instead of the wall street gearing machine. Since the street hijacked the flood of Katrina funds, the bubble has been unstoppable.

    Just say NO to recession. Just a cyclical correction. Many citizens suffer during economic downturns and I do not look forward to it, even if it’s inevitable. Wall street is usually able to take a huge bite out of savings and pensions on the way down. That’s one of the worst effects of equity bubbles.

  27. Estragon commented on Dec 14

    This recession odds thing is a bit of a hoot. Why do we obsess over a binary outcome (recession or not, formally defined)?

    The world will not end if growth goes to -.00001% for two quarters, nor will the clouds suddenly part to the sound of a celestial choir if growth “only” slows to +.00001% for two quarters.

  28. michael schumacher commented on Dec 14


    It appears that way however those amounts are paltry when compared to the overall amounts required by the auction process.

    When you repo a total of over $600 billion in less than a year’s time a reduction of $4 billion is not going to make any headlines. That’s what .006%? not exactly what I would call utilization but point taken nontheless.

    They would use it however the stigma of reporting out officially is what is keeping that from happening.

  29. John commented on Dec 14


    Yes, we can have a recession if everyone is convinced we are going to have one. I remember distinctly talking with clients who were very worried about the certainty of the 2001 recession, which they obviously got from the financial news media.

    However, I do not believe that anyone can consistently know in advance how long or how deep a recession will be. My impression is the average pundit more often than not predicts a soft landing or at worst only a mild recession. I read that even prior to the 1974 recession, which proved to be the worst since the Great Depression, prognosticators were predicting a soft landing. Since there is almost always some ammunition for either extreme, how can anyone really know?

  30. mhm commented on Dec 14

    “a5” wrote “Nothing like changing your predictions to fit the trend.”

    That has a couple of misconceptions, mainly due to the “prediction” part.

    No professional trader/adviser predicts anything. They forecast. Like weather, market conditions change all the time and that affects/invalidate the previous forecast report.

    One can predict December is cold or December is the second best month for the market based on past recordings. But recent forecasts say December will be warmer than usual and the market will suck. It may still change…

  31. Estragon commented on Dec 14


    I assume you $600billion figure is repo turnover. I’m not entirely sure of the significance of that. Is it high historically, or is their some other number against which it is out of line?

    I do agree in part with you though, as repo $ outstanding (a more relevant figure in my view) are nearly double last year.

  32. michael schumacher commented on Dec 14

    It’s the turnover..
    To me it makes no difference as you just have a time frame to work with instead of an open ended agreement which is basically what these have turned into at this point.

    There seems to be little evidence that these will not continue going forward. IMO there is nothing temporary about what the fed is doing.

    When you really examine the relationships between the market(where it was vs. where it is now) and the amount of these “auctions” it’s fairly obvious to me that without those funds we would be well below 10k on the dow.

    I mean seriously we moved up almost 1000pts in 8-9 days on the hopes of a rate cut????

    Sounds hopelessly simplistic however sometimes the easiest answers tell the most truth.

    I think the real truth may lie somewhere in between however we are close to the ATH and we’ve had record amounts of repo’s to boot………makes you wonder if something actually went wrong (total sarcasm!)


  33. Karl Smith commented on Dec 14

    This recession odds thing is a bit of a hoot. Why do we obsess over a binary outcome (recession or not, formally defined)?

    If you look at the distribution of growth rates by quarter they are bimodal.

    That is, there are two likely states of the world. One in which the economy is growing at about 3.5% per year and one in which it is contracting by a little less than 1% per year.

    So, that means that it is more likely that you will be at one of these extremes than at .1%. Therefore, people are concerned about which extreme we are being attracted to.

    I hope that answer was not to pedantic but your question was a good philosphical one that could be summed up as “Do recessions matter”

  34. Jimmy commented on Dec 14

    the chart is from Merrill’s economists, they they are always right. just as the chart proved they predicted 8 of the last 2 recessions.

  35. Click Broker commented on Dec 14

    Merrill is bullish on Greenspan, booh-yah!

  36. Mike G. commented on Dec 14

    Looks to me like starting in 1989, they jacked it up to 100% by 1990. They kept it there for about 4 years; brought it back down over a year to zero; left it there for 3 years; rinse & repeat :) Barry, you were just assuming there was some kind of rigor and analysis behind it! Pshaw!

  37. Smokefoot commented on Dec 16

    This reminds me of similar but more precise chart from John Hussman’s weekly letter. He uses 4 or 5 criteria which he claims have been observed prior to each US recession: widening credit spreads, moderate or flat yield curve, falling stock prices, PMI in the low 50s or below, moderate employment growth. He shows a chart back to 1963 – these conditions preceded every recession except 1975 where the signal was late. In most cases it is just a few weeks before the official start of the recession.

  38. dsquared commented on Dec 17

    I would bet quids that it is not a probit model. A probit wouldn’t give you an easily-interpreted coefficient to plot like that, and if you managed to create one it wouldn’t make sudden switches like this. I am 99% sure that we’re looking at a plot of the output of a regime-switching model, probably some sort of state-space one a la Jaegwon Kim. As further evidence for this, I would note that such a model would have been state of the art about five years ago, which puts it right on the timeline for someone who was in econ grad school three years ago and has just got a job at Merrill.

    They’re not bad models, but they have a real tendency to over-fit. Some people claim good forecasting results for them in academic papers, but if this is being used in a live application, it’s the first time I’ve seen it done.

  39. Juan commented on Dec 18

    probably not the best idea to accept official recession dating as necessarily accurate, especially when, in this case, monthly GDP data is suspect and employment has, as evident from comparison of Business Employment Dynamics and monthly BLS figures makes clear, been quite overstated.

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