Wonk Attack: Interest Rate Spreads & LEIs

I have previously mentioned Paul Kasriel’s work with interest rate spreads and leading economic indicators.

Paul notes that if you don’t like the reconfigured LEIs — and I was critical of the white wash the cheerleaders at the Conference Board did to cover up the inverted yield curve — you can
still derive value from them.

His suggestion: Corroborate the LEI signals by also looking at the negative spread between the yield on
the Treasury 10-year security and the federal funds rate (on a
four-quarter moving average basis) and a year-over-year contraction in
the quarterly average of the CPI-adjusted monetary base.

Let’s call these two charts the Kasriel Recession-Warning Indicator:


The 1966 LEI signal was false, but the Rate Spread should have kept you out of trouble.



Regardless, the combo of both of these have flipped negative, suggesting that the economy is slowing down . . .



Recession Imminent? Both the LEI and the KRWI are Flashing Warning
Paul L. Kasriel
Northern Trust March 22, 2007

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What's been said:

Discussions found on the web:
  1. Camille commented on Dec 20

    What exactly is “CPI-adjusted monetary base?”

  2. John commented on Dec 20

    Monetary base divided by CPI

  3. michael schumacher commented on Dec 20

    Speaking of spreads…….looks like Morgan Stanley needs more cash. 2 points above Treasurey…

    Morgan Stanley $2.5B 10Yr Global Priced At Treasurys +2.00
    Last update: 12/20/2007 3:48:23 PM
    NEW YORK (Dow Jones)–Morgan Stanley (MS) priced $2.5 billion of senior unsecured global medium-term notes in a self-led deal on Thursday, according to people familiar with the deal.
    Terms were as follows:

    Amount: $2.5 billion
    Maturity: Dec. 28, 2017
    Coupon: 5.95%
    Price: 99.717
    Spread: 200 basis points over Treasurys
    Settlement: Dec. 28, 2007 (flat)
    Ratings: Aa3 (Moody’s Investors Service)
    AA- (Standard & Poor’s)

    I guess $5.5 billion wasn’t enough to get to January


  4. Johnny Vee commented on Dec 20

    Why isn’t the stock market/credit market showing the stress in the financials,i.e., bond insurers are about to go BK.

  5. Stuart commented on Dec 20

    From that above link, Yun commented

    “He also sought to disprove some forecasts calling for home prices to continue falling nationally next year. He suggested that such predictions were based on a widening gap between fast-rising home prices and slower-rising incomes.”

    People actually walk into a room to listen to that imbecile??????????

  6. D H commented on Dec 20


    Can you please cite some more work by Paul that you recommend? A website?



  7. lewis commented on Dec 21

    Those charts also confirm part of my life experience. Graduating in 1970, I started work life in a brutal recession, saw an even tougher one circa 1974-1975, followed by the Carter inflation/crash period. Somewhat scarred by those, I have been fascinated that since then, recessions have all been relatively mild, even when they followed periods of great excess.

    The eighties was a long boom period, with mildest of recessions mostly based on a real estate boom/bust cycle. We then hit the internet/tech 90s, with a total wacked out stock market crashing followed by a relatively mild recession, even with the 9/11 events thrown in. Now we’ve had the low money cost asset (mainly real estate) boom, and the question is, will we come out of this one with another relatively mild recession.

    If so, we seem to be partying hard for long periods since 1980 without paying the piper. Is this attributable to a wise and omnipresent Fed, good old dumb American fortune, the selling of our future wealth to fund the present, the existence of the Big Picture, or some combination of the above? Or, as Red Foxx would ask, is the Big One coming?


  8. Big Al commented on Dec 21

    Safe Haven Paul Kasriel archives, google it for address.

  9. egghat commented on Dec 21

    Well, the article is from March and one thing makes me curious: I thought the Heli-Ben is printing money like there is no tomoorrow. M3 is estimated to grow at double digit rates. How comes that the CPI-adjusted monetary base ist shrinking?

  10. John commented on Dec 21


    While the Big One certainly could happen at some point, two reasons for mild and infrequent recessions since the early 1980’s are the transition of the American economy from manufacturing to service and better technology systems that provide more accurate and timely information. These mitigate the dramatic inventory swings that regularly occurred in prior decades.

    There will always be economic cycles, but the difference is the amplitudes are compressed and the durations lengthened.

    By the way, just as smaller amplitudes are demonstrated by mild recessions, they are also the reason for seemingly muted recoveries that generate much political consternation.

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