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Yield Curves Invert in U.S., U.K
- gigatexal 7y agoOne of the surest signs to a recession one can find.
- eloff 7y agoIt's right about half the time historically iirc. Which is better than most indicators, but still just flipping a coin.
- odonnellryan 7y agoHasn't it been right 7/8 of the last recessions?
- gravelc 7y agoAs the joke often goes, it predicted 14 of the last 8 recessions.
- TheCondor 7y agoIs that for just inversions? I thought the indicator was that it needed to invert for a full quarter.
- anonymousJim12 7y agoHas it ever inverted but then a near term recession never followed?
- gzu 7y agoNo https://fred.stlouisfed.org/series/T10Y2Y/ https://fred.stlouisfed.org/series/T10Y2Y/
- freehunter 7y agoWe had one close call in the mid 90s, about 1995-1996. I don't think it actually inverted but it was within less than one percentage point away from inverting. Luckily, 1995-1996 was the start of the Dotcom bubble, which gave us a few more years before the recession of 2001 hit. We could stave off the coming recession if we had another Dotcom-type bubble, but market corrections are inevitable so it would just be a delay.
- mrep 7y ago> We could stave off the coming recession if we had another Dotcom-type bubble, but market corrections are inevitable so it would just be a delay. Recessions aren't some magical part of economies that are required to happen every so often. As freddie_mercury pointed out yesterday [0], Australia, has gone 27 years without a recession, Japan had no recession from 1961-1993 (32 years), and the Netherlands had no recession from 1981-2008 (27 years). [0]: https://news.ycombinator.com/item?id=20692043 https://news.ycombinator.com/item?id=20692043
- freehunter 7y agoIf there are bubbles, there will be corrections. And the more "bubbly" the economy, the more often there will be corrections. It's hard to quote other, wildly different economies as examples of why market corrections are not inevitable, but Australia, Japan, and Netherlands are not the same economies as the US. >Recessions aren't some magical part of economies that are required to happen every so often Correct, but they do seem to be some magical part of America's economy that is required to happen as often as bubbles happen. They're not regular and you can't set your watch to them, but as sure as there is expansion, there will be contraction. And the bigger the expansion, the bigger the contraction.
- frankbreetz 7y ago"As recession signals go, this so-called inversion in the yield curve has a solid track record as a predictor of recessions. But it can take as long as two years for a recession to follow a yield curve inversion." https://www.reuters.com/article/us-usa-economy-watchlist-graphic/predicting-the-next-u-s-recession-idUSKCN1V31JE https://www.reuters.com/article/us-usa-economy-watchlist-gra...
- SketchySeaBeast 7y agoJust in time for someone else to come into power and have to deal with the mess.
- doubleunplussed 7y agoIf it's so sure, why isn't it priced in already? I can't help but notice my investments are only down a couple of percent recently, well within the range of normal fluctuations.
- viraptor 7y agoNo paywall: https://outline.com/26v69X https://outline.com/26v69X
- ConceitedCode 7y agoHN really seems to like these stories. Previous discussions: 8 months ago - https://news.ycombinator.com/item?id=18593407 https://news.ycombinator.com/item?id=18593407 4 months ago - https://news.ycombinator.com/item?id=19463225 https://news.ycombinator.com/item?id=19463225 4 months ago - https://news.ycombinator.com/item?id=19491763 https://news.ycombinator.com/item?id=19491763 8 days ago - https://news.ycombinator.com/item?id=20615403 https://news.ycombinator.com/item?id=20615403
- odonnellryan 7y agoThis is news, since it is the 2-10 year.
- whenchamenia 7y agoYou say election funny.
- dragontamer 7y agoThe 2-10 year is the "official" indicator. The other inversions were signs that the 2-10 year was going to invert. The 2-10 year is the actual news. When the 3-month / 10-year starts to invert, its basically inevitable that the 2-10 year indicator will trip eventually. The 2-10 year invert doesn't happen instantaneously. It slowly moves into place. Yeah, we could see the signs for months.
- torstenvl 7y agoTime to get more conservative with your investments. Just moved my retirement accounts from 100% in a 2050 lifecycle fund to 75% in a 2030 lifecycle fund and 25% in just government bonds. Not all investment vehicles have a "lifecycle" fund but its intent is to be appropriately conservative for a target date. As the date grows closer, the fund gets more conservative in order to lessen the risk of sudden swings right before you retire. I don't recommend day-trading, or liquidating all your investments, or anything like that. However, if there's a professionally managed fund with the specific goal of being stable along the timeframe of 11 years, I'm gonna take it.
- jermaustin1 7y agoI'm 40% in cash, 50% in S&P and 10% in small-cap. The last few months, all of my contributions have been going into cash, so that when the fall happens, I can hopefully scoop up a deal.
- the-dude 7y agoGerman economy shrinks : https://edition.cnn.com/2019/08/14/business/germany-economy-gdp/index.html https://edition.cnn.com/2019/08/14/business/germany-economy-... UK economy shrinks : https://metro.co.uk/2019/08/09/pound-plummets-uk-economy-shrinks-first-time-since-2012-10546136/ https://metro.co.uk/2019/08/09/pound-plummets-uk-economy-shr...
- petre 7y agoWhat would you expect? Brexit fears and almost every EU government banning ICE vehicles ten years from now. Good luck selling those Volkswagens. Add to that Trump's trade war with China. The EU is probably next. https://www.reuters.com/article/us-usa-trade-europe-autos/trump-says-auto-tariffs-never-off-the-table-in-eu-trade-talks-idUSKCN1US2F7 https://www.reuters.com/article/us-usa-trade-europe-autos/tr...
- adventured 7y agoItaly is similarly stuck in contraction mode. Gross exports represent 46% of EU GDP, up from 39% in 2008. For China, gross exports are 20% of GDP, down from 33% in 2008. For the US, gross exports are 12% of GDP, the same as in 2008. A trade war is a nightmare for the EU. It's amazing they've stayed above water this long with 46% of GDP dependent on exports. They'll get economically thrashed if it keeps getting worse.
- marcusverus 7y agoThere are articles all over the internet stating matter-of-factly that the US-China trade war has had a hand in the German recession. Why is that the case? At first blush it seems like newly un-fulfilled demand in the US and newly available supply/capacity in China would be a boon for other countries. What am I missing?
- IfOnlyYouKnew 7y agoGermany exports mostly industrial goods, such as machines (for manufacturing). As such, China is a far more important market than the US. The overlap of things both China and Germany manufacture is relatively small. Or, in economists' terms: Germany's and China's goods are complementary more than competitive.
- learc83 7y agoIt's a self fulfilling prophesy to an extent because all it takes to cause a recession is to convince everyone there's a recession.
- jfengel 7y agoThat's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. People who buy securities for the purpose of re-selling, rather than holding, bid prices up, based not on fundamental valuation but on the thought that it will become more popular. Stock markets aren't the same as the economy as a whole, but stock market bubbles boost the economy when irrational exuberance increases the total apparent wealth. And when enough people decide that it's peaking, it does, and the same process works in reverse, causing a recession. So yeah, it's a self-fulfilling prophecy, but that doesn't mean there's a way to avoid it. The market prices are already high; they must eventually revert to something closer to a true valuation. But since that time is determined almost entirely by consensus, nobody knows when. Indicators like this one are a sign that people are changing their minds, but it's been that way for a while. They're just indicators of public perception, and the public takes them into account, too.
- paganel 7y ago> That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. I'm really curious how the index funds will behave in the upcoming recession, afaik that was one of their main mantras and selling points, so to speak, i.e. that the market only goes up (or a certain part of the market, the most important part of the market) and that you'd be a fool not riding the wave by investing in said index funds which were in turn investing in that part of the market "assured" to always go up. In other words, what will people do when they'll see their index funds go down 10 or 20% yoy? Will they take their money out of said index funds? Will they wait for the next uptick?
- raincom 7y agoWhen a market crashes, we will see 20% drop becoming 40%--its all exponential drop offs, as people pull out money, when not many buyers around.
- synaesthesisx 7y agoMarket conditions have changed to the point where the yield curve is likely irrelevant, and markets will continue to moon indefinitely.
- steveeq1 7y agoSo we'll never have another recession? That's silly. All markets crash.
- rfrey 7y agoWhat specifically has changed?
- whatshisface 7y agoI'm not the OP, but if the Fed decides that the stock market isn't going to fall, then come hell or high inflation it's not going to fall. Some people think that the recent history of interventionist monetary policy (QE) points to a Fed that is willing to pump up asset prices in the event of trouble. Does that mean the economy won't fall apart? No, but it does mean that holding cash could be a worse idea than holding equities.
- gzu 7y agoThere’s now also moral hazard too with the rise of indexing and retirement. They need to keep the WHOLE stock market up. Many fewer investors now do any research and chose companies based on fundamentals. The companies that exist today must exist forever into in roughly the same proportions to keep SP 500 index from falling too heavily. Companies exploit this relationship now by destroying their balance sheets and using buybacks to boost their relative market caps vs other companies to capture more passive investment money flow. There’s a good argument (elsewhere) that because vanguard of we’ve entered a pseudo communist market system.
- mrep 7y ago> Companies exploit this relationship now by destroying their balance sheets and using buybacks to boost their relative market caps vs other companies. Buying back shares doesn't increase your market cap, it increases the value of each individual stock since they now own a larger percentage share of future earnings. > to capture more passive investment money flow. It has no real effect because index funds will actually have to sell stock from companies who do buybacks in order to decrease their share of the company back to normal proportional levels.
- aalleavitch 7y agoYou’re not going to get a return on investment if none of your consumers have enough money to buy anything. A negative return is the market itself telling you that you need to give them money for purchases to even happen.
- apo 7y agoKey recession indicator is flashing red. Unlike the stock market, which is both backward- and forward-looking, the bond market is myopically forward-looking. When the yield between the 10-year and 2-year US treasury inverts, a recession is months away. This chart, showing the difference between the yield (or spread), shows recessions in grey: https://journal.firsttuesday.us/using-the-yield-spread-to-forecast-recessions-and-recoveries/2933/ https://journal.firsttuesday.us/using-the-yield-spread-to-fo... Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does. Point to consider is the effect of Quantitative Easing (QE). Here, the Fed buys long-term treasuries such as 10-years. This makes long-term rates appear lower than they would otherwise be. The Fed only slightly unwound this policy, meaning it still holds most of the long-term bonds it bought to fix the 2008/2009 crisis. The net effect is that the Fed could be triggering an early recession warning here. Regardless, combining this leading indicator with others such as transportation weakness, manufacturing slowdowns, and other economies tipping into recession (despite the loosest central bank policies in modern memory) leads to only one conclusion. Prepare for the inevitable recession. It's not different this time. Edit: one way to play this as an investor is to buy long-term treasuries. The idea being that as interest rates fall, the value of these assets increases (bond prices move inversely with interest rates). Go as long out on the yield curve as you can. Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains. Or not. Instead, just continue to receive above-market rate interest payments. There's risk here because there's no way to know how low long-term rates will fall before reversing course (and eroding any capital gains you might have picked up).
- Raidion 7y agoAlso worth noting that if you go long, and there is a stimulus required, you may be in trouble as rates are low enough that you can lose money to inflation. No free lunch.
- smaddox 7y agoIf a stimulus is required (which it definitely will be when the next downturn hits, unless we want the worst depression in history), we'll be begging for inflation. But there will be massive deleveraging and the resulting deflation to compete with. All the while, there will be fools crying for austerity, and business men thinking a sovereign government with the power to issue currency should be run like a business (i.e. tightening the belt during a downturn).
- 0003 7y agoIt literally broke the Fed: https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y If you go to the homepage of the st louis fed and search popular series, this is the first that shows up.
- gzu 7y agoIncredible. All errors now. Seems like people are just now finding this chart.
- cryoshon 7y agothis frightens me far more than the yield curve inverting. the information-distributing capacity of the fed's website is built for routine loads, but the fact that it is down suggests that everyone is scrambling.
- jcfrei 7y agoThey say they don't ring a bell at the top. But maybe there's a server that goes down...
- neplus 7y agoI find the general interest of the public in inversions - similar to their interest in negative yields - a bit surprising. I suppose it must be due to these concepts seeming counter-intuitive. Some brief notes, not all of which are meant to tie seamlessly together: 1. What's the lag time? Inversions in the past have had rather large lag times before recessions actually began (most recently they've been 24 months, 13 months, and 19 months for 2s10s). Inverted yield curves signal anticipation of future rate cuts or long-term rates staying the same or whatever (depends on the shape, obviously), but if you're of the view that global yields are just going to stay low for the foreseeable future (an increasingly common view, I make no claim as to my agreement with it) then sure the US and UK need to adjust down and get flatter. Why is there not a recognition of a new normal going on here? It's not like money is outrageously expensive or developed economies have been running hot (as historically inversions have indicated). We've had a decade of reasonably good growth in the US and UK with very low rates and the assumption was that long-term rates would be ~3-4%. Maybe money will just always be relatively cheaper now with long-term targets around 2-3%. 2. How expensive is money? In the past when inversions have occurred the Fed Funds rate has been significantly above inflation (sometimes by hundreds of bps), making money outright expensive. Money right now is relatively expensive (compared to the past 10 years, post GFC), but historically we're still talking about money being very cheap. I'm a bit of a relativist, but I think you need to make a distinction between money that is outright expensive and money that isn't (as is currently the case). 3. Where's high yield going? Over the past month a bit up. But this is after we've seem high yield spreads compress in to historically tight levels. Cov-Lite offerings are still being printed and snatched up despite the inversion of 3ms10s we've seen for a few months now. 4. Is there an issue in our financial systems plumbing? In my view, yes. The yield curve has been inverted for foreign-buyers (over 2016-2018 a very important buyer of treasuries) because they don't fund around the 3m point, but rather on (OIS + Libor-OIS spread + XCCY of the relevant currency). If you're a Japanese life insurer or European pension fund you can't take FX risk (FX markets are volatile!) so you need to swap back into your local currency. These hedging costs got to a point last October where you're facing significantly negative yields (practically speaking) for foreign buyers so they buy their local negative yielding debt instead (as it's a relatively better investment). Because US auctions can't fail - primary dealers need to act as a back stop - you've had firms like JPM and BofA taking on huge amounts of treasuries. This has really clogged the o/n repo market and is beginning to distort bank balance sheets. They can't keep absorbing the amount of issuance the Treasury is pumping out with these trillion-dollar deficits. There's also an issue of bill-issuance notional amounts and banks trying to elongate their duration which is dampening down the 10yr. The Fed needs to cut rates further - in my view - to steepen out the yield curve to get foreign buyers coming back in. It'll probably need to be at least 75-100bps from here to get meaningful purchases. The Fed has really pushed themselves into a tight spot from a pluming perspective. 5. Yields down, prices up. If you bought the 100yr Austrian bond you'd get negative yields, yes. Also if you bought the bond a few years ago you would have outperformed equities on an absolute basis. So, like, negative yields aren't great, but asset appreciation from a sovereign bond with no default risk going into more negative territory is good if you're a fast money player (the bond price is nearly $200 now!). In fact, it's even good for a pension fund who has no intention of holding to maturity.
- buboard 7y agoStill baffled that this is called a curve
- soVeryTired 7y agoAny continuous locus of points is a curve - that's what makes the Jordan Curve Theorem hard to prove :) On a more serious note, the graph displayed in the article is a timeseries of the difference between two points on the curve. The actual curve looks something like this: https://en.wikipedia.org/wiki/Yield_curve#/media/File:Yield_curve_20180513.png https://en.wikipedia.org/wiki/Yield_curve#/media/File:Yield_...
- buboard 7y agoisn't that discontinuous?
- soVeryTired 7y agoQuips about the Jordan curve theorem aside, I don't think that's really a meaningful question. It is or it isn't, depending on how you want to model it. Yield curves are bootstrapped from known bond yields at liquidly-traded tenors (1Y, 2Y, 5Y, 10Y, and short-dated). Those are the heavy black dots in the image. Outside of those tenors the 'true' rate is anyone's guess: you're basically interpolating. Whether that interpolation is continuous is up to you!
- deleted 7y ago[deleted]
- kasey_junk 7y agoThe 2/10 relationship is not the curve. The curve comes from the traditional visualization of all the yield/term points at any given time. A curve is a pretty normal way to visualize a bunch of Cartesian points at once.
- alex_young 7y agohttps://s3.amazonaws.com/gurufocus_charts/yieldChart_curve_chart_top_container.png https://s3.amazonaws.com/gurufocus_charts/yieldChart_curve_c...
- whatshisface 7y agoYield curve inversions could be forecasting either bad stock market performance or low interest rates. If the Fed drops interest rates in a year back down to near-zero rates, nobody is going to be selling a 3 month treasury for 3%. In that case, being in a 10-year treasury for 2% will feel like a pretty good idea. Interest rates put an upper limit on federal bond yields, and it's possible that the yields represent a forecast of a very low upper limit.
- meddlepal 7y agoI don't want the economy to tank anymore than the next guy but if it blows up before the 2020 elections and kills President Trump's chance of re-election that would be a fantastic silver lining.
- techntoke 7y agoI'm calling it now, but you won't actually see a recession until after he leaves office. The rich and powerful control the market and it has no actual real indicator to the effects a majority of people are seeing in their personal lives.
- mgamache 7y agoThat supposes the rich and powerful give a rip about trump. They don't. If anything, they don't like his unpredictability. But, I don't think it's really tied to a person or party. For example, Obama provided the wall street bailout.
- kart23 7y agoI just thought of a horrifying thought. Bernie becomes president, recession hits inauguration day. Banks start to fail, but he doesnt bail anyone out because 'bernie cant be bought'. At least obama did the right thing and saved the economy.
- techntoke 7y agoI think Bernie and Warren are perfectly capable to work within the constructs of a free market than most people give them credit for. However, that doesn't mean that there shouldn't be transparency involved and if bankers begin manipulating the markets to try to control politics then they should be brought in for a public investigation in front of congress.
- davinic 7y agoThe rich and powerful will continue to do what they always do: act in their own personal interest. If they decide they can make more by divesting from the market, you can bey they will. There is no monolith.
- elicash 7y agoQuestion: While I'm sure economists have been studying this effect for decades, or maybe even way longer for all I know, it seems like this metric has been popularized as the key thing everyone looks at just in the last decade -- after the last recession that we had. Given the popularization, any chance of an increased observer effect? In either direction, I mean, positive or negative.
- mattdeboard 7y agono. also there is no "popularization." it's just a historical pattern.
- Godel_unicode 7y agoThat's absolutely not the case The Yield Curve is now talked about on nightly news shows and it used to be only known about by economists and people in finance. It's completely legitimate to question whether this increase in publicity for this one metric might be causing it to be less useful.
- mywittyname 7y agoProbably not. Normal people have little impact on the bond market, most of them accept market rates through some intermediary such as a bank or broker. It's the professional investors & monetary policy makers who really matter here, as they are the ones performing economic analysis on what rates should be.
- elicash 7y agoI just went and fact-checked myself via Google Trends. It does seem like the term had similar amount of web search traffic in late-2005 across all categories, compared to now. I didn't expect that at all. However, "News Search" only goes back to January 2008, so it's difficult to tell if 2005 also had similar news coverage. But the graph since 2008 definitely shows a massive increase: https://trends.google.com/trends/explore?date=all_2008&geo=US&gprop=news&q=yield%20curve https://trends.google.com/trends/explore?date=all_2008&geo=U... So I think I might be mostly wrong. (Of course, this wouldn't mean there's no observer effect... just that it would be at least partially baked-into our current understanding of how it works.) Edit: Hm. This seems to change a lot depending on the specific term used. "Yield curve inversion" makes it sound like people only started searching for this term in the last few years, and not really back in 2005. But changing it to "Yield curve inverted" shows the 2005 spike again. So now I'm just discounting Google Trends as a source, either way.
- soVeryTired 7y agoWhy'd neplus' comment below get killed? It's a bit jargon-y, but a decent analysis of the macro landscape at the moment.
- dkrich 7y agoI'm surprised that everyone blindly cites the inverted yield curve as a recession indicator without considering the "why". Seriously, if you were to ask ten people why an inverted curve predicts recession, you'd get ten completely different answers. I personally don't think this is necessarily the inversion that is going to be predictive of a recession because the inversion is occurring at the long end (the 10/30 years spiking as opposed to the 3 month/2 year selling off). I think the short end is far more important than the long end because the short end tells you about monetary conditions in the economy. If the short end yields start moving up, that means that it's going to become more expensive to borrow money so spending and capex contracts, which is what can bring on a recession. Even that depends on the degree to which monetary conditions deteriorate. Why are long bonds spiking? Because other central banks around the world are even more dovish than the US Fed, so money that is looking for long-term safe haven investments is coming aggressively into US long bonds. Take a look at three month commercial paper rates, which are actually in a major downtrend (not surprising given Fed policy): https://ycharts.com/indicators/3_month_aa_financial_commercial_paper_rate https://ycharts.com/indicators/3_month_aa_financial_commerci... Three month commercial paper rates represent the cost at which businesses are currently borrowing for short-term expenses on the open market. That cost is going down, too. I take that to mean monetary conditions are very good in the sense that there is no shortage of money floating around the economy looking for a return. Without some major fundamental change in economic conditions I don't see how equities can be expected to drop a whole lot from here. I think this is a blow off the top for rates that is going to be short-lived, especially if other central banks start tightening policy which nobody seems to consider a possibility. But if inflation starts creeping up, then they will likely start raising rates or keeping them where they are. Ironically, when central banks raise rates that is usually an extremely bearish indicator. It's a bit puzzling to me that everyone seems convinced that lower rates are bearish. Also, I can't think of a time when literally everyone focused on a single indicator at the same time, used said indicator as a predictive tool, and were proven correct. That's just not how markets work. People get scared and excited at the worst times tactically.
- xivzgrev 7y agoI agree. For the two recessions I’ve lived through, we didn’t arrive at them with everyone well aware it was going to happen. They snuck up and took the country by surprise. The tech bubble burst, and the real estate subprime bubble burst. We may go into a slump because everyone is expecting a splump to happen because it’s been 10 or so years of a bull run. But I don’t see a full-on recession without a large bubble bursting somewhere in the economy, causing a panic.
- admiralpumpkin 7y agoSensitive but not specific
- alkonaut 7y agoIt will be interesting to watch a recession that hits with zero or near zero (or even negative) central bank rates together with ongoing market disruptions such as the US/China trade conflict and Brexit. By “interesting” I mean terrifying.
- frankbreetz 7y agoI agree with this, also will we try to pass another tax cut to try to stimulate the economy. It seems to me should use tax cuts, large increases in government spending, and rate cuts to stimulate the economy on a "rainy days". Doing these things during a good economy seems foolish to me.
- radiorental 7y agoAnd Mitch McConnell recently argued the exact opposite. When asked he said (paraphrising) "Why would we increase taxes when the economy is doing well, why would we want to hurt that growth?" The mind boggles.
- AnimalMuppet 7y agoThe idea of repaying borrowed money never occurs to people. The idea that interest rates might rise and cripple those who owe too much never occurs to people. That seems very short-sighted to me. But... what if they're right? Interest rates have been low for a decade. That's pretty unprecedented. What if they're going to stay low for another few decades? Maybe they're actually acting rationally... if they're right that this is going to continue for a long time. This scares me, because I fear that we're just putting ourselves in a worse and worse position for when things get tighter. But what if it really is different this time? What if they never do get tighter?
- prewett 7y agoMitch McConnell and the Republicans have a non-nuanced view that taxes == bad. It seems to lead to a lot of motivated cognition.
- 7y ago
- whenanother 7y agolol, the gig (economy) is up. us employment numbers was a sham hiding underemployment.
- cryptozeus 7y agoWhat would be the best asset store money? Cash ?
- majewsky 7y agoIf there were a "best" asset store, people wouldn't bother with the other ones. In reality, it's all tradeoffs depending on your situation.
- cryptozeus 7y agoI mean during the recession not in general. Equities are clearly the best for investment.
- kart23 7y agoGold usually, but it seems like a lot of people have been buying lately.
- hnModsRDanger 7y agoIf the government is printing money, not USD. Rare things, gold, Bitcoin, real estate if you can get it affordable.
- Dirlewanger 7y agoPark everything in a monkey market fund, and on the first up day of the recession, start buying everything.
- andrewdb 7y agoThere's always money in the banana stand.
- zanny 7y agoAs someone who has been out of BTC for years because I have no faith in it anymore and recognize it as the foreign controlled money laundering machine it is, its still probably going to skyrocket in this recession. I've been wrong every time before when I expected markets to grow wise to the pyramid scheme and centralized nature of bitcoin and how it doesn't function at all according to its creators vision and how it doesn't function at all as a currency whatsoever but the prospect of short term profits simply overrides all rationality in that fledgling market it seems. Its basically digital gold where the value is expecting other people in the future to really want it by thinking its valuable, and a global recession is exactly the time when something like that becomes more valuable.
- throwaway5752 7y agoEveryone serious knew that a trade war would set a recession in motion, and that it would be a trade war the US would lose because of the directionality of the trade. The thought has always been that the president was using a high leverage negotiating strategy (see https://www.newyorker.com/news/news-desk/for-trump-diplomacy-is-quite-literally-a-four-letter-word https://www.newyorker.com/news/news-desk/for-trump-diplomacy..., for example) to extract maximal concessions from PRC. But in the end, most of the people involving in mid and long range investment decisions thought that they could model him as a rational actor. What we are seeing is the investment community's realization this might not be true. You can look for many recent examples of shifts in investment activity (https://www.autoblog.com/2019/08/13/ford-gm-preparing-for-economic-downturn/ https://www.autoblog.com/2019/08/13/ford-gm-preparing-for-ec...).
- tlogan 7y agoAnd things will be worse because China is also heading into recession. You know, you need sell all these products to somebody... And when US consumer stops buying new iPhones (or what ever) combined with recession then situation is going be really really tough. So this will be worse that 2008. Much worse. Back in 2008, China was growing and helping to ease the recession. I do not think China's economy will grow during this cycle.
- throwaway5752 7y agoThe Fed does not have the tools at its disposal that it did in 2008, they have been exhausted. The leadership on either side of the 2008 transition was much better at every level. Also, 2008 was a balance sheet depression that was more tractable to fix with monetary approaches. What is happening, right now, is literally what happened in the Great Depression (with the concurrent reemergence of nationalism) and is what led to two back-to-back world wars https://www.dartmouth.edu/~dirwin/Eichengreen-IrwinJEH.pdf https://www.dartmouth.edu/~dirwin/Eichengreen-IrwinJEH.pdf
- adventured 7y ago> The Fed does not have the tools at its disposal that it did in 2008, they have been exhausted. That hasn't been exhausted even in the slightest. The Fed has the exact same tool at its disposal as it did in 2008: it controls the global reserve currency and can run an annual trillion dollar QE program for years as necessary, forcing the rest of the world to partially foot the bill of that QE program to the benefit of the US economy. The Fed took rates to zero for seven years and utilized multiple QE rounds to reinflate the economy and asset prices. The same exact approach is at its disposal heading into the next recession.
- paulliwali 7y agoLet's say a recession is in the future (12-24 months), what should the average person's position be? Transition to even longer-term investments?
- abvdasker 7y agoYeah, same boat. I'm a pretty naive investor and through my 401k have about 50% of my net worth invested in index funds with the other 50% in cash. Are there simple strategies to limit exposure other than "sell everything"?
- datpuz 7y agoI asked this in a similar thread a couple of weeks ago, but I feel like the sentiment is a lot more pessimistic today than it was then. Anyway, I've been holding way too much cash for the last two years in anticipation of a recession. Everyone was telling me that trying to time the market is a bad idea and that I should just invest and forget about it, but given the current signals, might it be a good idea for me to hold out just a little longer? I'm really on the fence about it, I know I've lost a lot to opportunity cost and inflation and I regret holding out, but given recent news, it's hard for not to want to keep waiting... just a little longer...
- tcbawo 7y agoWhatever you feel comfortable with. To own stocks means to accept upside and downside risk. If you can't afford to lose 40% in a year because you might need the money within 10 years, reexamine your risk profile. It's okay to have cash on hand that you might need for a down payment, wedding, car purchase. If you're talking about money you won't touch in 10+ years and you won't panic sell, then don't try to time the market.
- wtvanhest 7y agoThis is not advice, but if I were 100% or even 50% in cash and had at least 20 years left of time horizon, with no immediate need for the cash, I'd probably put 5% back in the market each month until I had 100% allocation. But... the US does feel heated up, so who knows?
- apo 7y agoWhat would you turn the cash into if you weren't holding it?
- datpuz 7y agoI guess just index funds
- steelframe 7y agoI'm sorry to hear that you missed out on the market growth over the past two years. I am prepared to "lose" nearly 7 figures of net worth in the near future. But that's the "cost" I'm willing to incur so that I am able to stay in the markets for the long run.
- elamje 7y agoA very useful caveat from the insightful, and cautious, Howard Marks - > In that regard, the Financial Times noted on June 1 that “the [yield curve] has ‘inverted’ before every US recession in 50 years.” (Note, however, that this is different from saying every inversion has been followed by a recession.) https://www.oaktreecapital.com/docs/default-source/memos/this-time-its-different.pdf https://www.oaktreecapital.com/docs/default-source/memos/thi...
- kkotak 7y agoAkin to - "It always rains on my birthday. It's raining today - it must be my birthday."
- mlpinit 7y agoif p, then q is not equivalent with if q, then p. However this follows: if ~q, then ~p. It's not raining, it must not be my birthday.
- jjwhitaker 7y agoIt's more like: "It only rains on my birthday. It's raining today - it must be my birthday." At least I'm not aware of any inversions of the 10-2 bond yield curve in the last 50 years that was not followed by a recession, however minor.
- vkou 7y agoThere have been inversions in the X - Y bond yield curve in the last 50 years that were sometimes followed, and sometimes not followed by recessions. You didn't come to the number 10 - 2 independently. It was cherry-picked to fit the narrative.
- jjwhitaker 7y agoThe other ratios have inverted over the last 6 months, I think as early as the 5-1 ratio in January. The 10-2 is simply the more extreme indicator and the bigger signal that a recession will probably happen in the coming 12-24 months. I used 10-2 both as it is in the news this week and is the critical indicator that I studied in college. In January I was referencing the 5-1 as an early indicator that without correction would lead to the 10-2 inverting as well.
- williesleg 7y agoIt's a buying opportunity!
- strenholme 7y agoI remember the dot-com crash of 2001 and seeing companies close so fast, they didn’t their employees a final paychecks; I remember one day, after the dot-com collapse a position I was qualified for got filled within three hours. As someone who has seen this before, things are looking ominous: The stock market drop of late 2018 reminded me of the stock market drop we had in 2000, about a year before everything fell apart. The yield curve inversion doesn’t look good, nor does the problems with the German economy. Uber posting a multi-billion dollar loss and Tesla having a hard time getting income remind me of the very same issues during the dot-com bubble, where highly valued companies weren’t actually earning money. Moviepass’s debacle reminds me of Webvan; a company which tried to get VC by having a business model which was hemorrhaging money. I hope I am wrong, but I predict a tech sector crash in late 2019 or early-to-mid 2020.
- almost_usual 7y agoThe hyper growth of the dot-com crash was way different than today. Are there companies that are outrageously unprofitable today and over-valued? Yes. But it's nowhere near the dot-com hysteria. I doubt a tech sector 'crash' is going to occur but I wouldn't be surprised if a correction happens.
- doctorpangloss 7y agoFacebook and Google make their money off businesses buying advertising, people rightly see their profits as being very fragile.
- bduerst 7y agoAdvertising is a half a trillion dollar market - how is that fragile?
- doctorpangloss 7y agoThey said the same thing about mortgages, CDOs, etc.
- yalogin 7y agoI wonder how much NPR's Planet Money contributed to the general awareness of the Yield Curve. That is where I learned about this and they speak about this multiple times on numerous episodes.
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- alexandercrohde 7y agoSo, somebody with a more rigorous understanding correct me if I'm wrong, but I always thought it was a truism that any advice about the market appearing in print was necessarily useless: If there is advice (e.g. Buy/Sell when X happens) and there is statistical proof it's a good indicator, then large companies with multibillion portfolios would act on that evidence. At which time their behavior would "correct" for the indicator. At which point there is no value to the layman.
- ethbro 7y agoScale. Some opportunities can't scale to multiple billions in size, which means they persist as available inefficiencies. So broadly speaking, yes. But specifically, maybe. Additionally, one of the reasons bonds and yields work they way they do (per my understanding) is that all buyers aren't free. Institutional buyers (e.g. banks) are required by regulation to consider ratings. So they have to park their large amounts of money somewhere, and they have a limited number of legal choices.
- prewett 7y agoAs you may have noticed from the article, the point of yield curves inverting is that it is a pretty reliable recession-coming indicator: "The curve inversion to this point is flagging a 55-to-60 percent chance of a U.S. recession over the next 12 months" Also, if your timeframe is long-term, information in print is relevant, since a stock frequently trades in a region for months or years. In fact, there is a whole school of investing, value investing, that looks for companies the market is undervaluing. Generally they do this by looking at information in print but seeing it with more wisdom than the short-termers. (Problem is, wisdom is difficult to get.) But for short-term trading, I think Bloomberg would invite you to subscribe to the terminal. "Before it's here it's on the terminal" I think they say.
- alexandercrohde 7y ago>> "The curve inversion to this point is flagging a 55-to-60 percent chance of a U.S. recession over the next 12 months" So if that's reliably actionable, why aren't billion-dollar investors shorting market indices right now?
- Myrmornis 7y agoWhat change if any should someone make if they have money in robo-investing services like wealthfront? Is shifting money to cash or lower risk robo accounts a sensible strategy, or have undesirable consequences crystallizing losses/gains, a somewhat expensive perturbation going against the robo algorithms that you have elected to trust?
- ccarpenterg 7y agoP(recession | inverted yield curve) = P(inverted yield curve | recession) * P(recession) / P(inverted yield curve)
- throwawaymanbot 7y agoThe GOP... take a bow... Bravo.. all on their heads shall this rest.
- 40acres 7y agoThe forward looking indicators indicate recession, the backwards looking indicators indicate recession, and the general pattern of the yield curve suggests a downturn within ~20 months. Question is; what's a normal personal investor to do? Knowing that expectations are baked into the price and timing the market is a fools errand, what can normal people do to shield themselves? I've been 90/10 asset allocation since entering the workforce (2013) and it's been amazing for me. I obviously plan to continue to contribute to my funds but at what point would a rebalance or choosing a different fund be wise? A majority of my fund holdings are in tech, healthcare and banking/finance.
- cheschire 7y agoThe balanced portfolio is a 60/40 stock/fixed income (government bonds, etc) split. If you're running hot (a 90/10 balance seems quite toasty) then perhaps you could consider pulling back to a more moderate position until you feel we're approaching the bottom, and then return to your aggressive split.
- starky 7y agoThat depends on your risk profile. Are you going to freak out if your portfolio loses 30% of its value in a year? Then maybe move to a more balanced portfolio. If you are happy to wait and let things turn around again, then stay the course. Timing the market is generally not recommended because the people that do this every day have a much better grasp on what is going on than the public in general and they will have already responded en-masse before you can, so at best you are hoping to get lucky.
- rglover 7y agoFor what it's worth: https://www.youtube.com/watch?v=K-vW9ByuXTE https://www.youtube.com/watch?v=K-vW9ByuXTE
- golover721 7y agoWhile the press will blame trade tensions with China for this, in reality the US economy has been doing well lately, however outside the US the other major economies have not been growing. Ranging from plateauing to shrinking. That is the real reason we are seeing this correction.
- DiseasedBadger 7y agoReal question: When this doesn't happen, what becomes of the handwringing and the doomsaying? Do we just forget the errors and self-interested lies, and treat the people disingenuously emoting over this nothing, like good people? Serious question.
- aoeusnth1 7y agoHandwringing can be earnest, even if it's mistaken. Judge people by what they could have known at the time, and their intentions. But, more realistically, yeah, people will just forget all the bad predictions.
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- abstractbarista 7y agoTime to buy more equities, as always. Seriously, once you have good emergency cash, just keep buying whenever you can and stay sharp at work. What happens in the future is always a buying opportunity.