Interesting to think oil was still on the way up to the Lehman collapse (dashed vertical line in the charts below). BEs were trundling along; yields continued to rise. Spreads and copper gave some indication; arguably the best was the equity market itself. But, unfortunately, the market also jumps at shadows, so not especially helpful.

The housing downturn was arguably the clearest macro warning sign (mind you, high profile bank failures were also happening). However, all these years later, there are still arguments about whether it was even a bubble, let alone whether it had the power to take the system with it (for the record, I am convinced it meets the definition of “bubble”).

Anyway, what’s the point? Well, we want to know if housing is the same setup as in 2006 (overvalued, a bubble popped by rates). We want to know if a recession is building today, given the mix of pricing below has some similarities (oil up, copper down, spreads up, dollar up, tightening etc.).

I would argue that it very clearly isn’t 2006. Massive inventory overbuilds, cyclical extremes in gross fixed capital formation (or viewed simply as a % of nominal GDP) don’t exist, household gearing is vastly better, and credit quality is in general much more sound. So there’s that.

Regarding recession, well, if anything, until recently the inflation is coming from households occupying a position of too much strength rather than leveraged consumption due to weakness.

However, as always, the difference between a slowdown, and a recession, can be very difficult to parse in real time, and our comments above are more for the US than, say, for places like Australia, New Zealand, and Canada, where the similarities to 2006, or 2014, or 2018 appear much stronger.

As such, we are sticking to areas where we are more highly convicted (e.g. overweight Australian government bonds and underweight Australian shares) in terms of our DAA tilts.

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