Balance sheet leverage is one of my indicators.

As the Global Financial Crisis was starting, I did a quick analysis of the Fannie Mae and Freddie Mac balance sheets and determined they were leveraged at 150-to-1 once you subtracted out their intangible assets. They had all manner of intangibles on their balance sheet, such as future tax abatements that may or may not occur.

In any event, intangibles like goodwill, potential tax credits and the like are mostly an accounting fiction since you can't sell them. Know anyone who will buy some goodwill - the amount you paid above book value for an acquisition? I don't.

Well at 150-to-1 you know that was eventually going to blow up, and since both were in my mother's estate, I quickly sold them. And they were taken over by the federal government about 9 months later.

Subsequently, I remember listening to John Mack, CEO of Morgan Stanley during the Global Financial Crisis years, expounding on how proud he was that Morgan Stanley had reduced its leverage to 35-to-1. "Holy cow!" I thought. Normal depository banks have to retain about 8% capital or operate at 12-to-1 leverage and here was a major investment bank happy they were being conservative at 35-to-1.

So if the Federal Reserve is telling banks to build their balance sheets, a fancy way of saying reduce your leverage, then you know they're not sanguine about the economy.