IT'S HERE!

You know, that thing everyone said wasn't coming

Sahm I am, green eggs and ham

In my last post, I mentioned about how unemployment in the U.S. has finally begun rising more consistently - something I’ve being saying will happen for many months in addition to suggesting that the U.S. is likely already in recession - and in passing, I mentioned the Sahm Rule. The Sahm Rule is a recession indicator that has gained some notoriety (probably because it was developed by a former Federal Reserve employee) and which is based on the change in the unemployment rate. Unlike many of the data points that I’ve used in the past to say that rising unemployment is coming, the Sahm Rule uses actual unemployment data to say that recession has arrived before the National Bureau of Economic Research (NBER) makes recession official, i.e. the Sahm Rule is not forward looking (it’s saying what is in the here & now) but has a good track record at stating when a recession is present (this shouldn’t be a surprise because ex-post data should be accurate).

In actual fact, the Sahm Rule is something of a lagging indicator because when it says the U.S. economy has entered recession, it is usually some time after the recession actually began, it’s just that the NBER backdates the official start.

My attention was drawn to this topic during the week because I didn’t think the Sahm Rule had been triggered yet, but an article by The American Institute for Economic Research (AIER) said that it had, so I did the numbers. In my haste to replicate the formula, I made a miscalculation and the result triggered the Sahm Rule recession call. Interestingly, my miscalculation gave me the exact numbers that the AIER used when they published their article. Once I corrected my miscalculation, it was clear the Sahm Rule hadn’t been triggered (it was close, but not quite).

The fact that AIER made the same miscalculation is not the important thing. What is most important is that the alternative method of calculation (i.e. the miscalculation) has proved just as accurate as the official Sahm Rule formula over the entire history of the data back to 1948. Not only that, but it has actually been better because it called the start of economic recessions up to 3-months earlier than the official Sahm Rule formula.

Like I said, using this modified version of the Sahm Rule, the U.S. is in recession now.

The U.S. unemployment rate, which is the basis for all these ‘rules’, alongside the timing that each rule was triggered, calling for a recession. The shaded area is the official recession as called by NBER which was made known some time later and backdated

The above chart shows the Sahm Rule’s recession calls alongside my accidentally discovered Modified Sahm Rule. The chart also shows Michael Kantrowitz’s (of Piper Sandler) similar rule, which has possibly a superior track record of saying when the U.S. is in recession, and which has already been triggered a couple of months ago.

This just goes to highlight what I’ve published on this website many times:

• economics is slow moving;

• officialdom is backward looking;

• the “experts” (e.g. the Fed, Wall St. etc.) always get it wrong;

• the idea of a “soft landing” or “no landing” was always laughable

Secret sauce

What’s my secret sauce that enables me to confidently go up against the big guns and beat them at their own game? Firstly, it’s having the ability to correctly interpret information, and that includes knowing what is important and what can be ignored. To do this requires context, and that’s what is missing from the Fed and Wall Street’s process. They are conditioned in their thinking, i.e. yes, they’re highly educated, but their brains are trapped in academic ways and academic thinking is the worst sort. Secondly, I apply an understanding of humans, which is another factor missing from the calculations of the establishment.

Integrating both of these two aspects is key.

First of all, when you look at the people in central banks and similar official capacities, and in Wall St. jobs - I know, I’ve met them and worked with them - they aren’t free thinking. Quite the contrary. Their thinking is along the lines of, “I’m in this role, so I must think like a person who holds this position”. In other words, they don’t take their intellect into their jobs and apply it, they take the job and apply that to their intellect. They conform to the machine.

That’s why I could say in 2021 that there will be a recession, probably beginning in 2023, and not change my view since. The data was moving in that direction, but none of it was confirming a recession at that stage. What gave me certainty was how predictable the response by officialdom would be … and so it has turned out, again.

Extract from “Double dipping is poor form, but it still happens” [July 2021]

I recall when my kids were younger, that sometimes I could see potential arguments or fights building. As a parent, it’s easy to see these things happening and to understand what it might end up becoming. Many parents let these childish interactions play out to their finale and then get wound up themselves because of the disharmony created (i.e. the children’s problem becomes the parent’s problem). I discovered that when I saw behavior brewing that was likely to end up escalating, I could put on an act as an angry parent (but like any acting, it has to be believable to the audience) and that was enough to quell the building argument, and because I was only acting angry, I was able to switch it off immediately (like any performer) and not get drawn into the emotional stress of bringing order amongst fighting children. Understanding central banks like the Fed and how Wall St, and even the trolls on X or LinkedIn, behave is very similar to understanding and managing children. They’re the ones with no understanding of what they’re doing, and I don’t let it become my problem.

Autistic eye for the neurotypical guy

Here on Substack, I have a dashboard that lets me see the number of views my posts have got etc. I had a look at it a few days ago and my autistic brain and its amped-up pattern recognition abilities immediately spotted something that I found interesting, even though it was upside down.

The following chart is a bit of a clutter, but it’s an overlay of the S&P 500 Index (inverted; log scale) on top of my monthly reader numbers. There has been a correlation between the number of my readers and the performance of the U.S. stock market. My reader numbers took off when the market fell in 2022 and investor worry was elevated, but there are comparatively few readers now, which tells me that retail investors are not concerned at all about the stock market today.