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The problem is there will be a downturn at some point. In some of those cases on your chart the market went up for a while after the negative yield event then t

The problem is there will be a downturn at some point. In some of those cases on your chart the market went up for a while after the negative yield event then turned down. So event y (Recession) is going to happen at some point after event x (Yield inversion). If some one keeps claiming recession they happen will be right at some point.

dragontamer 8y ago
Do you have a better indicator of recession? The yield inversion is ALWAYS within 3-years of a recession. That's pretty darn good in a world where candlesticks and dead cat bounces are your "technical" indicators... There's even good logic for why the yield inversion is predictive of recessions: because when people buy 10-years (even if the 10-year is a lower-yield than 2-years), it means that people expect the next 2-years to suck. So its better to lock into a long-term 10-year yield, than to hold onto a better yield for only 2-years. -------------- Note: The 10-year has NOT inverted yet. But it is only 0.10% away from inverting.
- oceanplexian 8y ago
  Typically business cycles of the us economy last about 38 months. So your "predictor" that comes two years early isn't predicting anything. An analogy would be saying that you can predict 50/100 Blackjack games with 90% accuracy. Sure- you can, but it's a meaningless prediction that has no correlation to any individual game. Example: https://awealthofcommonsense.com/wp-content/uploads/2015/02/Recessions-Historical.png https://awealthofcommonsense.com/wp-content/uploads/2015/02/...
  - dragontamer 8y ago
    I'm not sure if you've studied other "indicators". But the point I'm trying to make is that we ALL know that indicators in economics are kinda bad. But of all the bad indicators economists have, the Yield Inversion is one of the most powerful, predictive, and correct indicators in existance. That indicator alone should give people pause. Well, when it happens. The 10-year has NOT inverted yet, but its darn close to inverting.
mrep 8y ago
Hence the good old phrase: "The Stock Market Has Predicted Nine Of The Past Five Recessions"
- dragontamer 8y ago
  Yeah, but that doesn't apply to the yield inversion indicator. The yield inversion doesn't have a false positive over the past 40 years. The 5 times the 10-year yield inverted, were followed by 5 recessions: 1980, 1984, 1991, 2001, and 2008. That's 5 for 5.
  - mrep 8y ago
    When your sample size is 5, claiming your algorithm has a 100% success rate and no false positives isn't saying much at all.
    - dragontamer 8y ago
      MY sample size is 40 years. And there are other studies that go back 100+ years with similar conclusions. https://faculty.fuqua.duke.edu/~charvey/Research/Thesis/Thesis.htm https://faculty.fuqua.duke.edu/~charvey/Research/Thesis/Thes... So it isn't a perfect indicator over 100+ years, but its still a damned good one. Furthermore, there are solid fundamental economic principles and calculations which back up the thesis. Yield Curve seems to predict GDP (or more specifically: the market participants predict a recession, which causes the market participants to buy/sell bonds in a specific way to make an inverted yield curve). This isn't some hokey theory positioned by bear websites like zerohedge. This yield-curve inversion is a fundamental attribute taught in major schools of modern economics. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.519.6890&rep=rep1&type=pdf http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.519... > The historical record does not show this connection to be only a post-WWII phenomenon. The yield curve inverted between June 1920 and March 1921 and again between January 1928 and November 1929.7 Data from the 19th century are incomplete and do not easily lend themselves to analysis.8 Nevertheless, support for the thesis of the yield curve as a predictor of business cycles can be traced as far back as the mid-1800s.9 We're looking at a pattern that has been relatively reliable since the mid-1800s. Inverted yield curves STRONGLY (but not perfectly) predicts recessions over a period of ~150 years, and perfectly predicted recessions of the last 40 years. This is one of the best indicators of all of economic theory.

dragontamer 8y ago

Do you have a better indicator of recession? The yield inversion is ALWAYS within 3-years of a recession. That's pretty darn good in a world where candlesticks and dead cat bounces are your "technical" indicators... There's even good logic for why the yield inversion is predictive of recessions: because when people buy 10-years (even if the 10-year is a lower-yield than 2-years), it means that people expect the next 2-years to suck. So its better to lock into a long-term 10-year yield, than to hold onto a better yield for only 2-years. -------------- Note: The 10-year has NOT inverted yet. But it is only 0.10% away from inverting.

oceanplexian 8y ago
Typically business cycles of the us economy last about 38 months. So your "predictor" that comes two years early isn't predicting anything. An analogy would be saying that you can predict 50/100 Blackjack games with 90% accuracy. Sure- you can, but it's a meaningless prediction that has no correlation to any individual game. Example: https://awealthofcommonsense.com/wp-content/uploads/2015/02/Recessions-Historical.png https://awealthofcommonsense.com/wp-content/uploads/2015/02/...
- dragontamer 8y ago
  I'm not sure if you've studied other "indicators". But the point I'm trying to make is that we ALL know that indicators in economics are kinda bad. But of all the bad indicators economists have, the Yield Inversion is one of the most powerful, predictive, and correct indicators in existance. That indicator alone should give people pause. Well, when it happens. The 10-year has NOT inverted yet, but its darn close to inverting.

mrep 8y ago

Hence the good old phrase: "The Stock Market Has Predicted Nine Of The Past Five Recessions"

dragontamer 8y ago
Yeah, but that doesn't apply to the yield inversion indicator. The yield inversion doesn't have a false positive over the past 40 years. The 5 times the 10-year yield inverted, were followed by 5 recessions: 1980, 1984, 1991, 2001, and 2008. That's 5 for 5.
- mrep 8y ago
  When your sample size is 5, claiming your algorithm has a 100% success rate and no false positives isn't saying much at all.
  - dragontamer 8y ago
    MY sample size is 40 years. And there are other studies that go back 100+ years with similar conclusions. https://faculty.fuqua.duke.edu/~charvey/Research/Thesis/Thesis.htm https://faculty.fuqua.duke.edu/~charvey/Research/Thesis/Thes... So it isn't a perfect indicator over 100+ years, but its still a damned good one. Furthermore, there are solid fundamental economic principles and calculations which back up the thesis. Yield Curve seems to predict GDP (or more specifically: the market participants predict a recession, which causes the market participants to buy/sell bonds in a specific way to make an inverted yield curve). This isn't some hokey theory positioned by bear websites like zerohedge. This yield-curve inversion is a fundamental attribute taught in major schools of modern economics. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.519.6890&rep=rep1&type=pdf http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.519... > The historical record does not show this connection to be only a post-WWII phenomenon. The yield curve inverted between June 1920 and March 1921 and again between January 1928 and November 1929.7 Data from the 19th century are incomplete and do not easily lend themselves to analysis.8 Nevertheless, support for the thesis of the yield curve as a predictor of business cycles can be traced as far back as the mid-1800s.9 We're looking at a pattern that has been relatively reliable since the mid-1800s. Inverted yield curves STRONGLY (but not perfectly) predicts recessions over a period of ~150 years, and perfectly predicted recessions of the last 40 years. This is one of the best indicators of all of economic theory.