Glossary
34 economics terms explained without jargon.
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- Bear market
- A period in which the stock market falls at least 20% from its high. By convention, it is the line that separates a correction from a bear market. It is not always accompanied by a recession.
- Bond
- A loan that can be bought and sold. The issuer (the government or a company) owes you the money and pays you interest over a set term.
See: Credit of risky companies · Credit of ordinary companies
- Coincident indicator
- A data point that moves at the same time as the economy. It does not warn in advance, but it confirms what is happening.
See: Stock market fear (VIX) · Rise in unemployment (Sahm rule) · Recession probability
- Commodities
- Basic goods bought and sold in large quantities, such as oil, copper, gold or wheat. Their prices react quickly to what is expected of the economy: industrial metals rise with growth and gold with fear.
See: Copper · Gold · Copper vs gold
- Confluence
- In Crisis Monitor, the surcharge added to the index when several areas (credit, jobs, markets…) show stress at the same time. A single isolated signal is less worrying than several together.
- Copper/gold ratio
- The price of copper divided by that of gold. Copper is used in industry and gold is a refuge, so if the ratio falls a lot it is a sign that fear weighs more than growth.
See: Copper vs gold · Copper · Gold
- Credit
- Money lent to companies or people. If it becomes more expensive or is cut off, companies invest and hire less and the economy slows.
See: Credit of risky companies · Credit of ordinary companies · Ease of borrowing
- Default
- When someone who owes money cannot pay it back on time. A wave of corporate defaults is typical of credit crises.
- DXY (dollar index)
- An index that compares the dollar with a basket of the main currencies (euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc).
See: Dollar strength
- Fed (Federal Reserve)
- The US central bank. It sets the benchmark interest rates and acts as lender of last resort in crises.
See: Rise in unemployment (Sahm rule) · Financial stress (St. Louis)
- Financial stress
- A situation in which markets function with difficulty: fear rises, credit becomes more expensive and it is harder to sell assets. Stress indexes summarize several data points in a single score.
- GDP
- Gross domestic product: the value of everything a country produces in a period. It is the most widely used measure of the size of an economy.
See: Factory output · Store sales
- Ignition point
- Each of the five quick signals in Crisis Monitor: HY ≥ 5%, DXY ≥ 106, the 10Y-2Y curve turning positive after inverting, VIX ≥ 30 and Sahm rule ≥ 0.50. With three or more at once, the emergency protocol is activated.
See: Credit of risky companies · Dollar strength · Long vs short rates (2 years) · Stock market fear (VIX) · Rise in unemployment (Sahm rule)
- Inflation
- The general rise in prices. If it is high, central banks raise interest rates, which makes credit more expensive and can slow the economy.
See: Consumer sentiment · Store sales
- Interest rate
- The price of money: what it costs to borrow or what is charged for lending. It is set by central banks and the market.
See: Long vs short rates (2 years) · Long vs short rates (3 months)
- Inverted yield curve
- An abnormal situation in which short-term bonds pay more than long-term ones. The market expects the economy to weaken and rates to fall. It has preceded almost every US recession since 1960, with months or even more than a year of lead time.
See: Long vs short rates (2 years) · Long vs short rates (3 months)
- Jobless claims
- The number of people applying for unemployment benefits for the first time in the US. It is published every week, so it is one of the first labor market data points to change.
- Junk bond (high yield)
- A bond from a company with a higher risk of default. To compensate, it pays more interest than bonds from solid companies. It is also called “high yield” or “HY”.
- Leading indicator
- A data point that tends to move before the economy does. It serves as an early warning, although it can also give false alarms.
See: Credit of risky companies · Long vs short rates (2 years) · Unemployment benefit claims
- Liquidity
- How easily something can be turned into cash quickly without losing value. In a liquidity crisis everyone wants to sell at once and it is hard to find a buyer.
See: Dollar strength · Ease of borrowing
- NBER
- The US National Bureau of Economic Research. It is the body that officially dates the start and end of recessions, usually months after they occur.
- OAS (option-adjusted spread)
- A technical way of measuring a bond’s spread after removing the effect of any embedded options, such as being callable before maturity. It is the standard measure of credit spreads.
- Recession
- A notable decline in economic activity that spreads across the economy and lasts several months: less is produced and spent, and unemployment rises. In the US it is officially dated by the NBER; the popular rule of “two consecutive quarters of negative GDP” is not the official definition.
See: Recession probability · Rise in unemployment (Sahm rule)
- Risk index
- The Crisis Monitor number from 0 to 100. It combines 15 scored indicators across five areas. Below 35 is Normal, between 35 and 60 is Alert and from 60 is Crisis. It is a measure of stress, not a prediction.
- Safe-haven asset
- Something people buy when they are afraid because they expect it to hold its value while the stock market falls. Gold and government bonds from solvent countries are the classic examples.
See: Gold · Copper vs gold
- Sahm rule
- An indicator created by economist Claudia Sahm: it triggers when the quarterly average of unemployment rises 0.5 points or more above its low of the previous 12 months. It has coincided with every US recession since 1970, although always with a delay.
- Spread
- The difference between two yields. For example, how much more interest a risky company pays than the government. The larger it is, the more risk the market perceives.
See: Credit of risky companies · Credit of ordinary companies · Long vs short rates (2 years) · Long vs short rates (3 months)
- Stock market
- The market where shares, which are small pieces of a company, are bought and sold. When people talk about “the market” in the US they usually mean the S&P 500 index.
- Strong dollar
- The dollar is worth more than other currencies. It makes dollar debts more expensive for anyone who does not earn in dollars, so it tends to squeeze emerging countries. It is measured with the DXY index.
See: Dollar strength
- Treasury bond
- A bond issued by the US government. It is considered one of the safest assets in the world, so its yield serves as a benchmark for measuring the risk of everything else.
See: Long vs short rates (2 years) · Long vs short rates (3 months)
- VIX
- The “fear index”. It measures how much volatility investors expect in the S&P 500 over the next 30 days, based on option prices. Below 20 it usually indicates calm; above 30, panic.
- Volatility
- How much a price swings. High volatility means large jumps up and down and is usually associated with uncertainty.
- Year-over-year change
- The comparison of a data point with the same period of the previous year. It prevents seasonal variations (for example, Christmas sales) from distorting the reading.
See: Factory output · Store sales
- Yield curve
- The comparison between what the government pays to borrow at different terms (3 months, 2 years, 10 years…). Normally the longer the term, the more interest.
See: Long vs short rates (2 years) · Long vs short rates (3 months)