Recent Posts

Sunday, January 13, 2019

On The Limited Issuers Of Inflation-Linked Bonds

This article is an excerpt from my latest book on inflation-linked bonds -- Breakeven Inflation Analysis. It describes one of the peculiarities of the inflation-linked bond market, which is the dominance of central government issuers.

One of the key economic problems facing inflation-linked markets is that central governments tend to be the major source of net supply of these bonds. This is very much unlike the case for conventional bonds, where non-central government supply is significant. If there is a shortage of private sector duration, it is in the 30-year part of the curve, as the credit analysis of such debt is tricky for most issuers. (Utilities and similar would be the most natural fit, but as the telecom industry showed, even apparently stable business models can be greatly disrupted by new technology, or by CEOs with grandiose schemes.)

Wednesday, January 9, 2019

Activity-Based Recession Probability Models

Chart: U.S. Recession Probabilities
There are two broad classes of models that produce recession probabilities: those that are based on activity variables, and those that use indicator variables to generate forecast information. This article discusses the former category: models that are based on activity variables, which provide a coincident recession probability. Forecasting models are obviously more interesting, and attract the most research attention. However, activity-based models are more reliable, to the extent that data are not revised.

Monday, January 7, 2019

Blanchard Address On Low Interest Rates

Olivier Blanchard gave an address at the AEA: "Public Debt and Low Interest Rates." It offers a good summary of mainstream thinking about fiscal policy using a variety of models, which makes it interesting as an introduction. My initial comment is that the difficulty with mainstream approaches to this topic are key assumptions that are embedded into models. I am unsure how useful debating the models is when the validity of the assumptions can be questioned.

Friday, January 4, 2019

The Latest Jobs Report And Recession Probability Models

The December Nonfarm Payrolls report was much stronger than expected, which reduced recession worries. I will leave the dissection of the report internals to others, but I just want to point out how these data fit in with my current research topic: recession probability models. It is safe to say that there is a divergence between activity data and sentiment indicators (including market pricing, such as the yield curve). Recession models based on activity data have one advantage in the current environment: they are unlikely to register a false positive.

Wednesday, January 2, 2019

Should We Care About Technical Recessions?

My current plan is to organise my book on business cycles around recessions. However, while thinking about one topic, I realised that there was one technical issue that pops up: what happens if there is a recession that is largely inconsequential? We have not had such recession in the United States in decades (if ever), but we have to accept that such events are possible.

Wednesday, December 26, 2018

Santa Rally? Ho, Ho, Ho.

Chart: S&P 500 Stock Price

For those of us who own equities in our retirement funds, the latest dive in stock prices is somewhat disconcerting. However, the question remains: how significant is this weakness on the rest of the economy? I am in the camp that downplays the significance of the information embedded in stock prices: although very useful in theory, in practice, stock price movements are driven by the herd psychology of investors. Even so, it raises the issue of a recession odds for 2019.

Sunday, December 23, 2018

Happy Holidays!

Merry Christmas! I hope that everyone is having a great holiday season. I also would like to thank my readers for their support this year.