Wednesday, May 8, 2013

The risk of recession is low and declining

Credit default swap spreads are coming back down to earth, and they are now at a new post-recession low. They are still higher than they were in early 2007, when markets were still unconcerned about the budding subprime mortgage crisis, but they are now lower than they were just prior to the onset of the Great Recession. Pessimism is thus receding, and I think that's what is pushing the prices of corporate bonds and equities higher, not excessive optimism. Not yet, at least.

Looked at another way, CDS spreads are telling us that the risk of a recession is declining meaningfully. As I've been saying for months now, avoiding recession is all that matters to investors. When cash yields nothing but risky investments yield a lot more, it only makes sense to remain in cash if you are very fearful of another recession or an onslaught of bad news. The economy is likely growing at a disappointingly slow pace, but it is nevertheless growing, and the risk of recession is low and declining. More and more investors are seeing the train leaving the station and they are increasingly anxious to not be left behind. As investors attempt to shift out of cash, they inevitably push up the prices of risk assets.


William said...

Scott, do you plan to tell us readers when - or shortly after - you lower your investment exposure to equities and / or high yield corporate bonds?? Your sale of some AAPL shares was particularly well timed.

Interested parties would like to know. (smile)

Benjamin Cole said...

15k on the Dow, and climbing.

Property in recovery.

And who does not like QE? Was somebody on this board worried abut QE?

Inflation at 1.1 percent, near record lows for the postwar era. Lately inflation has been falling.

Commodities had their run, and that boosted supplies and cut demand. They hit a ceiling.

The Fed killed the USA economy reacting to higher oil prices (that may have been goosed on the NYMEX, btw).

I wonder of they will make that mistake again.

Dimitris said...

Dear Scott
CDS spreads have almost zero forecasting capacity in anticipating future crisis...just in 2007 they were at the same low levels as today. Somebody could argue that we are back in the nirvana of 2007 and early 2008 when nobody was imagining the depth of the coming recession. Is this right or wrong?