All Forum Posts by: J. Martin

As I was browsing through data for potential recession predictors, I ran across none other than an index specifically designed to determine when recessions are taking place! The index is actually designed to estimate if we are CURRENTLY in a recession, but every time it registers more than 4% for two consecutive months, we end up already in a recession or go into one within 6 months (over the last 48 years and 7 recessions). It just registered over 4% for the first time since the last crisis in December 2015!

What was striking to me about this data is that EVERY time the reading is over 4.0% for two consecutive months, a recession has either already started, or starts within 6 months. EVERY TIME for the last 48 years and 7 recessions. It has never registered over 4.0% for two consecutive months and NOT had a recession. We had our first in December 2015! So I will be keeping a close eye on the Jan 2015 number, and sent an email to the publishers of the data to pick their brain on my analysis..

Note that this is not the type of index that will slowly rise as things get worse. It rises quickly when recessions are starting, and we should know within 1-3 months if we are very likely progressing into a recession. The index uses non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales - along with some fancy statistical transformations.

Let's look at it recession by recession..
T-0 is the month of the second consecutive occurrence of the index over 4.0% "D Day"
T-1 is the month of the first occurrence.
Orange is the start of the recession.

This predictor is very close to the actual start of recessions (even though recessions starts are not announced by the NBER until significantly later.) This makes sense, because that is the objective of the index - to identify recessions earlier than the NBER method. The table below shows the number of months until the start of the recession, as measured from the second consecutive monthly reading above 4.0%. (Note that 2007 is one month off..)

Would it concern you if we have another reading above 4.0% in Jan 2016?
Is this worthless?
Some informational or predictive value?

 George,

I agree with your points about the 10yr being dictated by the world economy and worldwide QE. And the short term is controlled by the Fed, depending on how accommodative they want to be. But I still think the yield curve spread has informational and predictive value about where we are in the cycle. Like I said before, not perfect, but more than worthless. Here's why:

a) The relationship seems to hold up over the last 50 years or so
b) If there is QE worldwide and financial volatility pushing down the 10 yr, it probably means the world is weak. So if that is what is compressing the 10yr yield, and the yield spread, doesn't that also impact the US economy (exogenous shocks?)
c) In addition to the exogenous economic scenarios impacting the 10yr and our economy, the compressed spread itself does not help..
d) I will be monitoring this, in addition to several other variables, to try to see how closely and often several variables are doing what they did before prior recessions. As Minh Le says, history doesn't repeat itself, but it rhymes ;)

I agree with you that it is too difficult to isolate all the variables contributing to everything. We do not need to be statisticians here. If enough of the charts are reaching trends or levels they regularly reach before something takes place, its probably worth paying attention. The more pointing in that direction, the more I am getting cautious.. Call it tea leaves or whatever. But again, the information and predictive value of some th

 George,

I agree with your points about the 10yr being dictated by the world economy and worldwide QE. And the short term is controlled by the Fed, depending on how accommodative they want to be. But I still think the yield curve spread has informational and predictive value about where we are in the cycle. Like I said before, not perfect, but more than worthless. Here's why:

a) The relationship seems to hold up over the last 50 years or so
b) If there is QE worldwide and financial volatility pushing down the 10 yr, it probably means the world is weak. So if that is what is compressing the 10yr yield, and the yield spread, doesn't that also impact the US economy (exogenous shocks?)
c) In addition to the exogenous economic scenarios impacting the 10yr and our economy, the compressed spread itself does not help..
d) I will be monitoring this, in addition to several other variables, to try to see how closely and often several variables are doing what they did before prior recessions. As Minh Le says, history doesn't repeat itself, but it rhymes ;)

I agree with you that it is too difficult to isolate all the variables contributing to everything. We do not need to be statisticians here. If enough of the charts are reaching trends or levels they regularly reach before something takes place, its probably worth paying attention. The more pointing in that direction, the more I am getting cautious.. Call it tea leaves or whatever. But again, the information and predictive value of some these exceeds zero I think..

 George,

I agree with your points about the 10yr being dictated by the world economy and worldwide QE. And the short term is controlled by the Fed, depending on how accommodative they want to be. But I still think the yield curve spread has informational and predictive value about where we are in the cycle. Like I said before, not perfect, but more than worthless. Here's why:

a) The relationship seems to hold up over the last 50 years or so
b) If there is QE worldwide and financial volatility pushing down the 10 yr, it probably means the world is weak. So if that is what is compressing the 10yr yield, and the yield spread, doesn't that also impact the US economy (exogenous shocks?)
c) In addition to the exogenous economic scenarios impacting the 10yr and our economy, the compressed spread itself does not help..
d) I will be monitoring this, in addition to several other variables, to try to see how closely and often several variables are doing what they did before prior recessions. As Minh Le says, history doesn't repeat itself, but it rhymes ;)

I agree with you that it is too difficult to isolate all the variables contributing to everything. We do not need to be statisticians here. If enough of the charts are reaching trends or levels they regularly reach before something takes place, its probably worth paying attention. The more pointing in that direction, the more I am getting cautious.. Call it tea leaves or whatever. But again, the information and predictive value of some these exceeds zero I think..

@Heather Thompson ,

So you want an agent that lives in Vallejo, but specializes in Hayward and San Leandro, so they know the neighborhoods really well..? Did I misunderstand that?  I can't think of anyone off the top of my head that just lives in Vallejo lol but..

@Mel Selvidge is a good agent in the East Bay, is an investor herself, runs a meetup group, and is a good person :)

@Kathleen L. might know someone up in the Vallejo area..?

There's one other person I'm blanking on right now, but I'll tag you if I think of them..

@Shannon Phillips ,

The rent control exemption for Section 8 applies to the circumstances of the tenant, not permanently to the building or to the individual unit. So if the tenant is not under Section 8 (is this true?) when you issue the notice, I do not believe the unit is exempt from rent control restrictions, unless under a different exemption. So is she under the Section 8 program still, but just not receiving a subsidy? Or is she no longer under Section 8?

What type of unit is it? Single family or condo? If so, you are most likely exempt anyway.
Was the unit constructed Jan 1, 1983 or after? If so, you are most likely exempt anyway.
Is it a 2 or more unit building constructed before Jan 1, 1983? Then you are most likely subject to rent control, and cannot just increase the rent by 10-20%, unless you:

a) Use capital pass-throughs, 70%, over number of years, 10% annual cap (see regs), or
b) Banked rents, also subject to restrictions

If you do not meet an exemption and fall under rent control (rent adjustment program) for Oakland, you will not be able to increase the rent more than 10% in one year. It is a hard cap. 30% in 5 years.
Also, note that the State of CA requires at least 60-day notice for rent increases of 10% or more.
Separately, non-payment of the full amount of the existing rent would be just cause for eviction.

I am not a lawyer and have no professional or other certifications, so I don't know nothin' about nothin'. ;)  But here's where all the info is:

http://www2.oaklandnet.com/Government/o/hcd/s/LandlordResources/index.htm

Also, the East Bay Rental Housing Association is a great resource, and you should be a member if you are asking this question. @Arlen Chou can probably attest to that!

http://www.ebrha.com/

Good luck out there Shannon!! :)
And welcome to Oakland!!! ;)

I've always thought they would just slam down rates, QE to the max, helicopter money, whatever to cause inflation.. "But if inflation then gets out of control, can they really raise rates substantially without blowing the national budget on interest on the debt?"

I would add:
Can they really raise rates without inverting the yield curve, causing another recession, and even more deflationary pressures? Without room to take rates down much, like the past..?

https://www.biggerpockets.com/forums/48/topics/284730-recession-and-job-loss-predictor-leads-by-25-years?page=1#p1852935

...Without inverting the yield curve and causing a recession...

At the top graph is the actual data. Then I lag the yield curve spread back by 12mo, 18, 24mo, and finally, 30 months for the last graph. It appears the lag time is almost a full 2.5 years for the yield curve to feed through to job growth and losses. And a pretty good relationship.. I don't know why some graphs didn't post above.. Sorry!

The yield curve is both a result of and a driver of the economy. A steeper curve generally indicates more economic health (demand for long-term borrowing), an accommodative federal reserve (low short term rates), and job growth usually follows.

A flatter yield curve generally indicates less economic health (less demand for long-term borrowing), a less accommodative federal reserve (short term rates rising), and job growth deceleration and/or job losses usually follow (aka recession).

The yield curve as a potential predictor of a recession is nothing new. However, I was surprised by how close changes in these relationships tracked each other, especially after looking at the lag..

@Account Closed ,

At the top graph is the actual data. Then I lag the yield curve spread back by 12mo, 18, 24mo, and finally, 30 months for the last graph. It appears the lag time is almost a full 2.5 years for the yield curve to feed through to job growth and losses. And a pretty good relationship.. I don't know why some graphs didn't post above.. Sorry!

The yield curve is both a result of and a driver of the economy. A steeper curve generally indicates more economic health (demand for long-term borrowing), an accommodative federal reserve (low short term rates), and job growth usually follows.

A flatter yield curve generally indicates less economic health (less demand for long-term borrowing), a less accommodative federal reserve (short term rates rising), and job growth deceleration and/or job losses usually follow (aka recession).

The yield curve as a potential predictor of a recession is nothing new. However, I was surprised by how close changes in these relationships tracked each other, especially after looking at the lag..

@Account Closed , @Gloria Mirza, @Robert Melcher,

I plan on adding this to my "recession monitoring" dashboard. What do you think? I think it's less than perfect, and more valuable than worthless ;) What do you say?

As I was poking around at the relationships between jobs and potential predictors of job losses, I started looking at a mathematical representation of something less quantitative, that we are all familiar with. This statistic seems to have a strong correlation with job growth and losses in the US. As you read below, you will see how I went from the raw data, to a transformation that shows a more clear relationship..

Orange Line is job growth/loss in the US. Blue line is my indicator/predictor..

What we can see is that there appears to be a pretty strong correlation between changes in these two variables. What is even better is that I have already transformed this data to show the strong correlation, even though my predictor variable actually significantly precedes jobs growth/losses. The predictor above is already "lagged" in time by 2.5 years! So let’s “unlag” it to it’s natural timing.. Slowly...

24 Month Lag

18 Month Lag

12 Month Lag

No Lag - Actual Data

The yield spread is the difference between 10 year and 2 year treasuries. "10's and 2's." When I first saw the chart directly above, it wasn't so obvious what the relationship was, but I could see the changes in job growth seemed to "chase" changes in the yield curve. And looked like it took about 2 years.

The yield curve is both a result of and a driver of the economy. A steeper curve generally indicates more economic health (demand for long-term borrowing), an accommodative federal reserve,