The stock market has been going higher, yet there is always talk about financial risk in the economy. Talk is cheap. Data can tell us the real story. There are a number of indices available from Federal Reserve Banks which can provide insight on the financial risks or stresses in the current economy through a number of market-based measures. We think that these indices are a much better way of framing any discussion concerning financial crisis risk and can represent a more focused discussion on where the current economy is headed.
Using these indices is consistent with our disciplined and systematic approach to investing. Let's not talk about our feelings concerning financial risk, but speak about relative measure through time of variables that are associated with financial stresses.
We still have a lot to learn about the links between financial measure and crises. The correlation between any one Fed financial risk indices are highly variable and not much stronger than what we have found by looking at the VIX index alone, but when looked as a group, the stress indices provides useful information.
The first chart shows that since September financial stress has been moving up with all of the indices. All saw a spike in October albeit to different degrees. The Cleveland index is the most volatile and will also show the most noise. The Kansas City index is produced monthly and will be a much smoother than the other series.
The five year post-Financial Crisis data shows we have had two major stress points in the post-crisis period, fall of 2010 and fall of 2011. The Chicago and Cleveland stress readings are at the highest levels in years.
The long-term numbers are all skewed by the Great Financial Crisis. The economy is nowhere near those levels and are away from higher levels seen four years ago. It would be premature to suggest that these indices are pointing to a recession, but the numbers do provide a reason for why the Fed is still interested in patience and can explain some of the talk that the economy is not rosy.
The first chart shows that since September financial stress has been moving up with all of the indices. All saw a spike in October albeit to different degrees. The Cleveland index is the most volatile and will also show the most noise. The Kansas City index is produced monthly and will be a much smoother than the other series.
The five year post-Financial Crisis data shows we have had two major stress points in the post-crisis period, fall of 2010 and fall of 2011. The Chicago and Cleveland stress readings are at the highest levels in years.
The long-term numbers are all skewed by the Great Financial Crisis. The economy is nowhere near those levels and are away from higher levels seen four years ago. It would be premature to suggest that these indices are pointing to a recession, but the numbers do provide a reason for why the Fed is still interested in patience and can explain some of the talk that the economy is not rosy.
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