Fintech executive, writer, math geek, and investment systems developer. Founder and CEO of Altruist and Founder of FormulaFolios.

Recession Probability Update - December 2011

Recession Probability Update - December 2011

Each month I calculate the strength of the US economy using a math based model I call RPA (Recession Probability Analytics). When the number rises above 50 it means the US economy is in the bottom 50% of all historical conditions relative to it history. While far from perfect, the model has had an uncanny ability to correlate (negatively) with stock market returns. In other words, when the model moves above 50 the S&P 500 has fallen over 25% and when it is below 50 the S&P 500 has risen over 15%.  I began publishing the model in November of 2007.

Here's the full history of RPA from inception:

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RPA has been issuing a warning the last 2 months and continues to do so for December.  Despite being correct (thus far) in November it was wrong badly in October and given how strong December has been historically we'll have to wait and see how valuable the model proves this year.

As of today's writing this holiday season spending has been very strong, despite the fact our economy is not strong and not improving at a significant rate.  Aside from what the model says [my personal opinion interjection] - I actually find it disturbing that consumer spending for the "Black Friday" weekend was an all time time high given sustained unemployment, lower wages for workers, lower home values, and protestors complaining about consumerism the past few months.  Where exactly is all this money coming from?  We all know it's not from savings.

I could be wrong - but it sure looks like people are just looking for some instant gratification via retail therapy.  That behavior is not only unsustainable, but also carries long term consequences far more painful than the short term elation from getting a good deal.

My opinion aside, facts are facts; and they suggest the economy is still is the lesser half of all its history - which is a warning worth noting for investors.

If you have any questions or comments about RPA - feel free to use the comment feature on my blog.  If you're getting this notice via email you can of course just hit the reply button and your email will come to me directly.

Thanks and have a great week,

Jason Wenk

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