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Yield curve is blaring loudest recession warning since 2007
- marktangotango 7y agoHe says the signal from the curve suggests money markets should be pricing in a higher probability of the Fed’s policy rate going to zero in the coming year. Anyone with finance knowledge here? What's the take away, recession, no recession?
- asplake 7y agoTranslation: the markets are pricing in the expectation that the Fed will (need to) stimulate the economy by reducing interest rates from their already low (close to zero) levels
- jerf 7y agoThere will definitely be a recession, at some point in the future.
- apalmer 7y agoWell according to the people quoted in the article it's a textbook scenario of fed either acts aggressively or recession. That's the take away. Now the quoted folks might be wrong, or they might be right but sometimes the textbook scenario doesn't play out...
- formercoder 7y agoI'm worried about a self fulfilling prophecy. Keep in mind the yield curve represents how the market prices US treasury bonds at differing maturities. When the LT bond yields drop, it's because everyone is buying them. That could happen for a multitude of exogenous reasons. Then though, everyone sees that the yield curve is flattening, panics because it's a recession predictor, and buys LT bonds, thus lowering LT yields further and creating a cycle.
- deleted 7y ago[deleted]
- TheSoftwareGuy 7y agoI'm not a finance or economics expert, what I've gathered from various internet sources is that yes: the yield curve has been inverted for over 1 quarter, which historically should mean there will be a recession coming. However there are questions about whether it will be right again. One reason is that when the US government implemented Quantitative Easing during the great recession, it did this by buying a bunch of treasuries. There is some question about whether the inverted yield curve we are seeing now may be a result of that, rather than solely a result of investors predicting below zero interest rates.
- nscalf 7y agoThe fed can use the rate to effectively decrease the cost of borrowing money. The rational there is if economic activity is slowing, you decrease the cost of spending money. The rate is usually dropped when economic activity slows, and should be increased as economic activity increases. I'm sure people will disagree, but I don't think we've had the rate increase to levels prior to the last recession (though I didn't actually double check). Effectively, anticipating a drop in the fed's rate is an expectation that economic activity will slow (recession behavior) and the fed will have to stimulate it by making money cheaper. To me, the interesting part of this is what the fed does after the rate reaches 0. Read up on Quantitative Easing and Ben Bernanke's response to the last major recession, it's a really interesting environment to learn a bit about.
- HNisCurated 7y agoThe Republicans/Trump started the trade wars and have every reason to say things are fine. And businesses want their customers and employees to think everything is fine. It's created this weird economy where everyone is stretched thin for the last year. Ive seen it at 2 companies and hear it from my friends. But you talk to anyone with right leaning political objectives and it's "nonsense" or "minor correction". They are too disconnected to see it coming.
- jedberg 7y agoLet’s assume you believe a recession is coming. What’s your investment strategy to protect yourself? Two recessions ago (2001-2002) i invested in REITs through the stock market. It worked really well and I doubled, but it turned out I just got lucky with exit timing because they were pump and dump schemes and I got out coincidentally just before the “dump”. I even got a payment from the class action lawsuit against them a few years later. So, what’s an actual sound strategy if you think a recession is coming?
- jonstaab 7y agoI don't know anything about investing, but I keep thinking that if I had extra cash I'd short Google :D Seriously though, anyone with experience have opinions on this?
- rglover 7y agoI'm not an experienced investor but I'd highly recommend these books (ignore the titles, they sound cheesy but the information is great): Warren Buffett's 3 Favorite Books (light technical): https://www.amazon.com/Warren-Buffetts-Favorite-Books-Intelligent/dp/0982967624/ref=sr_1_7?keywords=warren+buffet+investment&qid=1565024674&s=gateway&sr=8-7 https://www.amazon.com/Warren-Buffetts-Favorite-Books-Intell... Warren Buffett Accounting (heavy technical): https://www.amazon.com/Warren-Buffett-Accounting-Book-Statements/dp/1939370159/ref=pd_bxgy_14_img_3/146-4556005-4124231?_encoding=UTF8&pd_rd_i=1939370159&pd_rd_r=c233f8d8-cd22-40e2-a976-2c7912510c7e&pd_rd_w=f8hkP&pd_rd_wg=F2tTg&pf_rd_p=a2006322-0bc0-4db9-a08e-d168c18ce6f0&pf_rd_r=Z3R0TJA4E07E76AQS86D&psc=1&refRID=Z3R0TJA4E07E76AQS86D https://www.amazon.com/Warren-Buffett-Accounting-Book-Statem... Podcast by the guys who wrote these: https://www.theinvestorspodcast.com/ https://www.theinvestorspodcast.com/
- H8crilA 7y agoThe Economist Yield curves help predict economic growth across the rich world. https://www.economist.com/graphic-detail/2019/07/27/yield-curves-help-predict-economic-growth-across-the-rich-world https://www.economist.com/graphic-detail/2019/07/27/yield-cu...
- nostromo 7y agoThe newfound obsession with the yield curve could have interesting effects on the economy. 1. The Fed now pays attention to it, so its indicator value could be dramatically weakened, or erased. (Previous Feds continued to raise rates after an inversion before previous recessions, while this Fed has done the opposite lowered them.) or... 2. Inversions become a self-fulfilling prophecy. Despite low inflation, low unemployment, and healthy profit growth, markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.
- lbotos 7y agodo you have a source that the fed used this metric as a reason for lowering rates?
- nostromo 7y agoJust go read the Fed's meeting notes. > Several participants also noted that the slope of the Treasury yield curve was unusually flat by historical standards, which in the past had often been associated with a deterioration in future macroeconomic performance. https://www.federalreserve.gov/monetarypolicy/fomcminutes20190130.htm https://www.federalreserve.gov/monetarypolicy/fomcminutes201... (I don't think the latest notes have been released yet, so these are from earlier this year.)
- H8crilA 7y agoIt's been known since at least the 80's. It's not newfound. Perhaps the retail investor is more aware of it.
- nostromo 7y agoCan you link me to something on that? I'm genuinely curious. The research I've seen all stems from the original paper, published in the late 90s. (And it took two recessions for it to be taken seriously as a recession indicator.)
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- lkrubner 7y agoIt's interesting to consider how much we all now simply assume that there will be no financial stimulus. 50 years ago, in similar circumstances, we could simply assume that a spending bill could be passed to offset any risk of recession. Nowadays we assume there is no hope of that. President Kennedy, and President Nixon, and President Carter and President Reagan, all of them pushed for more military spending at certain key moments, not always because they saw the need for more military spending, but because it was an easy way to get some extra stimulus to offset the risk of recession. But there is no way, nowadays, to put together a coalition that will vote for any kind of stimulus, even if that stimulus were given some non-obvious name such as "Modernize the Navy".
- megous 7y agoWhere will you get money for a "stimulus" without reducing people's ability to spend elsewhere, or reducing spending elsewhere as a government?
- H8crilA 7y agoThe point of a recession is that the economy is underutilized (unemployment for example). Therefore more overall spending is needed. If you overdo it you get inflation, that's why it's the typical central bank target.
- megous 7y agoI don't think that's the point of recession, necessarily. Previous recession happened for other systemic reasons, like subprime mortages bubble bursting bringing down with it a lot of other things. Unemployment was more like a temporary consequence of that and necessary changes/realignment of expectations/allocation of money in the economy.
- H8crilA 7y agoIt is. There's only goods and services in the real world, and at some point people slow down on exchanging them. That's a recession. "How the Economic Machine Works" https://youtu.be/PHe0bXAIuk0 https://youtu.be/PHe0bXAIuk0
- _bxg1 7y agoMy favorite investment advice, courtesy of Mr. Money Mustache: "Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month. Enough to live off for life and retire. You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!” Is this a sensible way to think about it? No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster. Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks...There’s only one time you care if one of your shares is down: on the day you sell it." https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/ https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-...
- draw_down 7y agoThat’s a good argument for not watching your share prices if you just plan on holding. Not sure it’s good for much else.
- quotemstr 7y agoThe problem is that stocks can crash for two reasons: 1) business cycle, and 2) secular economic weakness. In the latter case, that value isn't coming back. Imagine, in terms of your example, that the price of hens dropped because the government passed a law mandating veganism. Would you be wise to buy more hens in this situation?
- _bxg1 7y agoThe advice assumes you're investing in an index fund or something equivalent; the market as a whole, amortized, goes up. Individual companies may be a different story.
- pastaking 7y agoCan someone provide an ELI5 on what are yield curves and why is it an indicator of a recession?
- freehunter 7y agoNothing in economics is super easy to ELI5, but the short answer is since the market always trends upward, longer term investments should always return more in interest. If longer term investments are giving lower interest rates than short term investments, that is an indicator that investors believe the market will decline. Longer answer: The yield curve shows the interest rate you can expect for a certain timeframe of investment. For example, if you buy a 1 year bond, you can expect a 2% return. If you buy a 5 year bond, you can expect a 5% return. If you buy a 10 year bond, you can expect a 7% return. Since you won't be getting your money back for 10 years, you get more interest. Longer term investments are generally considered more stable, since the markets always trend upwards over time. But if investors do not feel comfortable in the stability of the market long term, the yield rates go down. So if I have a 1 year bond at 1% interest, a 2 year bond at 0.7% interest, a 5 year bond at 0.5% interest, and a 10 year bond at 5% interest, that indicates investors are expecting the market to decline in the next two years. The market will recover within 10 years, but it will go down in the short run. Remember the market always trends upward, so if longer term investments are worth less than short term investments, it's a predictor that the market is expected to decline.
- blankcheque 7y agoJust wanted to say that I think you did a pretty good job with the explanation.
- xutopia 7y agoWow... thank you for that! That's the best explanation I had so far!
- H8crilA 7y agoBecause the yield curve is priced into all assets. That's how you discount future corporate earnings to derive present value of the stock, for example. An inverted yield curve means that there's a mistake in the market - people thought interest rates would be lower than the are. It means that assets are overpriced if this situation persists. Also it is an indicator because it works :) https://www.economist.com/graphic-detail/2019/07/27/yield-curves-help-predict-economic-growth-across-the-rich-world https://www.economist.com/graphic-detail/2019/07/27/yield-cu...
- jorblumesea 7y agoFor long term investors, does this even matter? If your time horizon is 10+ years, it seems like this is just water under the bridge.
- tabtab 7y agoIt does matter: it's time to get your "buying kit" prepared because good deals are around the corner.
- H8crilA 7y agoYup, trade bonds for stocks. Never go 100% on stocks. As Buffett says: "I will never be caught short on cash".
- neural_thing 7y agoThe S&P 500 didn't exceed 1929 highs until 1954. Not saying it's a perfect parallel, but there are definitely precedents of stocks not working well for decades.
- H8crilA 7y agoNo, you're not including dividends. It had positive returns way before 1954. But yeah the 30's was called a depression for a reason.
- _delirium 7y agoJust to put a date to this: including dividends, it matched its 1929 high again around 1943/1944.
- ashelmire 7y agoWhat if you continuously invested over that time?
- gnopgnip 7y agoRecession does not usually mean a stock market crash either
- throwaway5752 7y agoSlightly older poster here. This is exactly how it felt when the bad times started in 1999-2000 and 2007-2008. People will tell you not to panic and justify why it's different. For the most part, nobody has a clue. Make sure you can meet about a year of expenses including health insurance. This is always a good idea. Also, these always last longer than you expect. This is almost self-fulfilling, because unless most market participants capitulate a bottom can never be reached.
- turk73 7y agoI think you're wrong and I do have a clue. Having lived through the 2000 mess, I don't think corporations are that over-valued and that capital isn't chasing complete and utter pipe dreams this time around. This is nothing like 2000, where Raleigh, NC had nearly full occupancy of all office space due to stupid little startups everywhere. Today's startups are VC-funded, but that VC requires a lot more demonstrated value and due diligence. Sure, there's lots of losers, but none of them are systemic risks. 2008 was caused by serious fraud in mortgage bonds coupled with no-doc, low-doc, neg-am mortgages being rated "AAA" inside of a massive housing bubble blown by Bill Clinton and abetted by GWB. Many banks and big investments firms were over-leveraged with risky bonds they didn't understand. There was also CDS all over the place. We don't have that this time around, either. What are the Black Swans? Student loan debts, maybe. Otherwise, I can't think of much other than the total US Debt if that ever actually becomes a problem. No clue when that will be. Today's market action is just counter moves reacting to China's devaluation. Yawn.
- sudosteph 7y agoIs the Raleigh thing your personal experience, or was that just an anecdote with Raleigh as stand-in for "place that's not SV or NYC and thus has no business operating startups"? Because I live in Raleigh, and there are still a ton of stupid little startups occupying the office space (except now they're all at one of 10 different co-working spots). To be kind to my fellow Raleighites, there are one or two with potential too. Still almost no legit VC funding in the area, but people didn't stop trying. Too many college kids around who don't know any better.
- mettamage 7y agoThis is why I don't dare to be a starting entrepreneur right now. I'm afraid I'll definitely fail and cannot afford living expenses and have nothing to show for it in the end. Or do people consider 2 years coding at your own startup as 2 years of programming experience? I know some people who say that they don't.
- sudosteph 7y agoDepends on the person. A lot of people would definitely count that as experience. Also, if you save up now, there's a chance that a recession could bring housing prices back down... so at least you have that going for you?
- nscalf 7y agoI'm relatively young, so I wasn't responsible for expenses when the last crash happened. I had the great fortune of having only 1-2 months of savings early in my career when the startup I was working for went under. I was a software engineer with less than 6 months of experience, and had a hard time finding a job (essentially a first job with that experience level), and learned really early on that I want zero debts and a year of savings. Right now I am down to only ~$150/month in 2% interest school loans (down from $450/month a couple years ago), $500 rent (when I initially lost my job this was up to $1,700!), and I'm about to lose my parents insurance. In all, I pay out roughly $1,000/month, and I make sure to have at least $10,000 on hand at any time. Everyone I know tells me this is probably too much emergency fund and I could get away with 3-6 months expenses and get more earning potential from that extra half a year, but I refuse to ever be caught off guard. The immense stress of trying to figure out how you will pay for rent this month is unlike anything I've experienced. Even if a depression never comes again, I'll always aim to have nearly a year of runway in case I lose my source of income. But I say all of this to say that having a savings is more than just potential future security. I feel confident voicing my opinion at work, I am willing to stand by my principles and leave if I want to, and I'm willing to walk away from an environment that makes me unhappy. In my opinion, having this type of savings gives you a similar feeling as financial independence will feel---I'm working right now because I want to, not because I have no other options. That makes life a lot more pleasant.
- joncrane 7y agoYou're doing great. Are you on a path to FIRE?
- nscalf 7y agoThanks! That's loosely the plan. I'm hoping to get there one day, but knowing myself I would always be working on something, so the retire early part doesn't really apply to me. After work I tend to pick up other stuff, like contract work or learning something new (currently working through fastai).
- JohnJamesRambo 7y agoThis next few years of bitcoin bull run is going to be incredible.
- gingabriska 7y agoWhat advise do you've for someone holding large amount of liquid USD cash?
- kitten_smuggler 7y agobuy bitcoin, gold, and long term bonds
- elihu 7y agoArticle is paywalled so I didn't read it, but I went and looked at the federal reserve's yield curve page[1] and indeed it does look quite inverted. 3 month has been performing better than 10 year for awhile now, but now the 10 year yield has dropped to where it's below the 1 month, 2 month, and 6 month as well and is only slightly better than the 1 year. That's interesting. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019 https://www.treasury.gov/resource-center/data-chart-center/i...
- ellisv 7y agoData is also available from the Federal Reserve https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y
- xivzgrev 7y agoHere's the funny thing about recessions - they're usually predicated by some exuberance somewhere, and when it bursts it then ripples to the rest of the economy. 1930 was the stock market, 2000 was the dot com, 2007 was real estate (there's a bunch of recessions in between I'm skipping because I'm less familiar w/ them). This time around...there's actually NOT a lot of exuberance. People are still scared and not getting ahead. Unemployment is at record lows but wage growth is stagnant, meanwhile people's basic expenses have exploded through the roof. Who has money to spare on stupid fads & bets? People are just trying to afford housing, healthcare, and education. I feel like a lot of the talk around recession is simply people EXPECTING a recession and reacting accordingly, which will cause some downturn but won't impact the fundamentals of people buying shit in the economy. I'm not saying we won't ever have a huge recession again, of course we will, but I don't see a current real indicator of it.
- padseeker 7y agoHow is it possible that basic expenses are through the roof (I agree with this) but its not reflected in inflation? It doesn't make sense to me. I'm not an economist, is there something I am missing or misunderstanding? Housing costs are through the rough but everything else is stable?
- delfinom 7y ago>I'm not saying we won't ever have a huge recession again, of course we will, but I don't see a current real indicator of it. What? Are you just ignoring to ignore real estate bubble 2.0 (empty properties kept by speculators but at the end of the tunnel the price will implode when nobody has money to buy), the average length of car loans exceeding 5 years as people push out for lower and lower monthly minimums because they otherwise can't afford those $50k trucks, and other elephants such as medical and student loan debt?
- graeme 7y agoThe funny thing is people are doing all that with resignation rather than exuberance this time around, at least that’s the zeitgeist I perceive. I’m guessing the fact that they’re doing it is the significant part, but it does feel different to earlier times.
- apo 7y ago> Al-Hussainy expects investors to turn to even more aggressive positioning for rate cuts. He says the signal from the curve suggests money markets should be pricing in a higher probability of the Fed’s policy rate going to zero in the coming year. Not just zero, but beyond. The yield out to 30 years on German bonds recently fell below zero. Several other advanced industrial countries are in a similar negative-yielding boat. These are economies that are technically not even in recession. The amount of negative yielding debt now exceeds $13 trillion: https://www.marketwatch.com/story/value-of-debt-with-negative-yields-nears-12-trillion-2019-06-18 https://www.marketwatch.com/story/value-of-debt-with-negativ... That's not a negative real rate (rate - inflation) which is not uncommon, it's an absolute (nominal) interest rate. No country wants to be left with the currency that appreciates. All countries will pull out the stops to find a way to devalue. The only thing industrialized countries fear more than an appreciating currency is deflation. The first whiff of that monster and the big guns come out and never stop firing. At this point it's not unreasonable to expect the following possibilities (in order of first appearance): 0. zero short term rates to follow much quicker than consensus 1. shock-and-awe QE (first implemented, but in a way that will look quaint by comparison, in 2008-2009 crisis) 2. direct purchase of stocks by the Fed and the ECB (Bank of Japan has been doing this for a long time) 3. debt forgiveness for college loans (regardless of the party in power) 4. debt forgiveness for mortgages (discussed in 2008-2009 but never tried) 5. credit card debt forgiveness (because why not, every other debt is being forgiven) Oddly enough, the later phases start to look like the systemic debt repudiation brought about through the "jubilee year": > Ancient Near Eastern societies regularly declared noncommercial debts void, typically at the coronation of a new king or at the king’s order. https://en.wikipedia.org/wiki/Jubilee_(biblical) https://en.wikipedia.org/wiki/Jubilee_(biblical)
- umeshunni 7y agoHas debt forgiveness ever been used in a modern industrialized economy? The only instance I am aware of was of the Allies doing it in occupied Germany post-WWII
- webninja 7y agoAny stock that will never return money back to shareholders in a future dividend, share buyback, liquidation, or buyout, won’t have a future value.