In what is undoubtedly one of the most beloved pieces of sketch comedy in the history of television, the late Charlie Murphy describes Rick James as a “habitual line-stepper”.
The sketch (it’s actually series of sketches) paints a picture of James as an out-of-control coke addict, perpetually high on a potent combination his own celebrity and the best blow money could buy in the 80s. Lost in his own glamorous reality, Rick does whatever Rick wants, up to and including physically assaulting Murphy for no discernible reason.
Being a skeptic on FinTwit (short for “financial twitter”) these days feels a bit like Charlie must have felt in the heyday of Rick’s celebrity. As soon as you log on, bullish market pundits, high on the inexorable rally and basking in the glow of their hundreds of thousands of adoring followers, pop up and hit you with an S&P chart or one of those fucking PMI checkerboards which, by virtue of the fact that pretty much every global economy is expanding simultaneously, is lit up in bright green.
And this shit happens first thing in the morning. Every morning. As soon as I figuratively walk in the door and dare to get near the FinTwit V.I.P. section, it’s: “Charlie Murphy!”
Just like Charlie, you don’t know what to do at first. “That puts me in a weird space. Yeah that’s a popular pundit and he’s a star, so maybe I’m overreacting. Maybe I shouldn’t say nothin’, but my ghetto side is goin’ yo call this motherfucker out right here. What the fuck is wrong with him?”
That’s what gets me into Twitter back-and-forths with popular market pundits. They step over the line. Habitually. They’re habitual line-steppers. Here’s a classic example:
But just like there was no deterring a coked-up Rick in the 80s, there’s no deterring these people because just like Rick, they don’t feel pain. They’re so high on central bank liquidity heroin they can’t feel it when you try to explain that the euphoria they’re reveling in is the product of policymaker intervention. And that’s the difference between them and Rick – at least Rick knew he was high. Most of these people don’t even make the connection between $15 trillion worth of central bank heroin injections and the charts they blast out to their legions of equally inebriated followers.
Of course just like the bulls can put together visual “evidence” to support the contention that the inexorable rally in risk assets isn’t the product of central bank accommodation (and thereby subject to disappear when that accommodation is rolled back), so too can the skeptics goal-seek their own visual narrative. I used to work with a guy whose sole purpose for existing was to create the scariest charts imaginable on the Bloomie even if it meant committing egregious chart crimes on the way to deliberately misleading people.
This is why I find sellside research so useful. Frankly, sellside macro research gets a bum rap in my opinion. Perhaps because it’s associated with the inherently conflicted recos that come out of the equities desks, there’s a tendency for people to malign it as a “contrarian indicator” or else claim it’s simply not that useful. I disagree with that assessment. Sure, there are notoriously bullish strategists and notoriously bearish strategists and yes, some of those people have become caricatures of themselves over the years as their reputation for leaning one way or another leads them to produce increasingly cartoonish pieces that are clearly designed to further their reputations as “uber-bulls” or “permabears”, whichever the case may be. But most macro research strikes a decent balance and if you can get past the whole “talking the prop desk’s book” thing, what you’ll find is that conspiracy theories aside, there’s a lot of utility in perusing research written by people who you know for a fact are some semblance of competent and are subject to at least some form of compliance strictures.
All of that to say that Goldman’s latest note on recession risk is a good example of research that acknowledges the overtly positive global economic backdrop while simultaneously enumerating the risks.
Of course predicting recessions is like predicting the weather and everyone has their own version of the “economists/weathermen” joke, so the bank’s take is more an academic exercise than it is anything else. But hey, that’s kind of the point. I’ll take an honest effort at an academic exercise over a mindless tweet any day of the week.
Goldman sets out to “revamp” their cross-country recession model in order to “gauge the risk of a downturn across major advanced economies” using their proprietary indicators, some of which regular readers of their research will be familiar with.
I’m not going to put you through the wringer in terms of the tedious details, but suffice to say their indicators are more high frequency than official country data so the estimates are more timely. The four domestic explanatory variables they employ are, from the note:
- growth momentum, measured with our CAIs relative to our estimate of potential growth;
- slack, measured with our output gap estimates;
- changes in financial conditions, measured with the year-over-year change in our FCIs, and;
- FCI levels, expressed in deviations from a five-year centered moving average
They define recessions using the definitions published by the Economic Cycle Research Institute (ECRI), they account for cross-country correlation of recession risk, and in this new iteration of their previous model, they’ve simplified the statistical techniques.
Obviously, you don’t care about any of that. All you care about are the results and you’ll be happy to know that recession risk is low. Here’s Goldman:
Exhibit 7 shows the estimated recession risks for the current quarter, and the next 4, 8, and 12 quarters for all the individual economies in our model. We also include the unconditional risks of recession at each horizon, which differ substantially across countries. We truncate the recession probability estimates outside the 95% range as our confidence in their accuracy is low (showing, for example, <2.5% for very low probabilities). We also provide joint probabilities for a Euro area recession (proxied with the ‘big four’ member states) and for recession risk across the majority of advanced economies.
As you can see, the near-term recession risk in DM is low (for instance, the one-year probability is just 5% for the U.S.). That said, do note that it rises for the U.S. materially over two and three years. Here’s the chart for just the U.S.:
What accounts for that? Simple: too damn much of a good thing. Here’s Goldman one more time:
But early signs of overheating are beginning to emerge in a number of advanced economies. Although inflation has generally remained low, our analysis suggests that slack is diminishing rapidly across DM economies. We estimate that the US, Germany, the UK and a number of smaller G10s (including Canada, Sweden and New Zealand) have already moved past full employment.
The global risk rally–with the S&P hitting new all-time highs day after day–has pushed our FCIs to unusually accommodative levels. Our global FCI, for example, is now at the most accommodative level since mid-2013. Overheating labor markets and stretching valuations could soon be “too much of a good thing,” and might raise the probability of a risk further down the road.
That’s an important paragraph. The Ricks of the financial punditry seem to have lost touch with the idea that you can indeed have “too much of a good thing” – that eventually, economies will simply overheat and risk assets will buckle under their own weight – that inflation could finally materialize and give central banks a “motive for murder”, so to speak.
In the meantime, I suppose the skeptics will be continually subjected to the increasingly outlandish antics of today’s pundit “stars”.
Our advice to anyone who wants a measured assessment would be to not get too close to them on a morning when futs are tipping a particularly strong open – they might slap you with a generic 5-year chart of the Dow…
Low interest rates are one heck of a drug.
Good stuff. Thanks for posting.