Corporate bond spreads predict we have another 7.8 million jobs to lose.

[roamer65]

Courtesy of calculatedrisk.com

In a forthcoming paper in the Journal of Monetary Economics show that spreads on low- to medium-risk corporate bonds, particularly those with 15 or more years until maturity, predicted changes in the economy phenomenally well, forecasting the ups and downs in both hiring and production a year before they occurred. Since writing the paper, they extended their analysis back to 1973 and found bonds' predictive ability still held.

With the massive widening in corporate-bond spreads last fall, the economists' model predicts industrial production will fall another 17% by the end of the year, and the economy will lose another 7.8 million jobs on top of the 5.1 million it has shed since the recession began. Ouch.

http://www.calculatedriskblog.com

[mix]

1. effectively

that would mean that unemployment would "officially" be between 15 to 20%...

Merrill Lynch thinks unemployment now is actually around 15%, much higher than the "official" 8.5%

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20090206/REG/902069980/-1/FWDailyAlert01&template=printart

[roamer65]

3. Imagine the truer U6 at that point.

25%-30%. Great Depression levels.

[roamer65]

4. Merrill is probably using th U6 rate...

which is currently near 15%.

[mix]

5. if Merrill Lynch is right, we are there already

[Deja Q]

2. If that doesn't change, then why bail out IBM, GM, and the rest? Let it fail.

I sure as heck don't know what to say or do, so I'm just getting on with life - the only fear is fear itself. I hate conspiracy theories, which probably aren't real and serve only to make everyone worry and fear and miss out on the lives we already have!

[indepat]

6. 'puke tax folly, perpetual wars, and nongovernance: the gifts that just keep on giving

:P

[GoesTo11]

7. Extrapolating beyond the data / overfitting

My gut says this model is not especially valid now. There are enough funny things going on with bonds now - distrust of bond insurers and ratings, impact of the stimulus on inflation, etc., that prices are out of whack. Doesn't mean the prediction in the article can't come true, but bond prices aren't a strong signal of it.

[Lucky Luciano]

8. you are right...

If anything, this is more likely to mean that bonds were sold in a panic and not allllllll of the companies will default. Therefore, bonds are probably too cheap - but you gotta pick them carefully. A lot of bonds were sold by force as hedge funds and banks holding them were ordered to delever.