Odds

The market has been playing with the concept of economic recession for a while now. It’s somehow clearly defined as two consecutive quarters of negative gdp, but it has to be officially declared and confirmed by the National Bureau of Economic Research (NBER). And it’s not that simple. It can “feel” like a recession and not be officially tagged as such, and even when we had 2 negative quarters of gdp, the NBER can decide not to declare it for other subjective reasons. In the chart below, you can see 9 indicators used by GS to calculate the odds for the U.S. economy. It’s currently 17%, but we need to take into account that the path of this indicators is not linear. VIX and spreads can go up in a day and the odds can triple. But even with that in mind: what do we do with 51% probability of recession? What changes do we introduce in our portfolios to cope with that increase? At what level of this probability can we consider it certain? And finally and more importantly does it have any predictive power of what NBER will do?

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