5 ms·

It'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 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. 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 ago
    When 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.
  - neogodless 7y ago
    Index funds will do exactly as well as the aggregate of the individual stocks that they track (whether equities, bonds, treasuries, real estate, metals or something else.) The selling point is that investing (as opposed to trading) is a long-term method of increasing wealth. And, historically over any reasonably long period of time, broad index funds grow (between dividends and selling price) more than inflation, and do so without requiring the individual investor to "bet right" on individual companies, or to time when they buy and sell. Of course, some people panic when index funds see massive drops (which are often much worse than 20%) and sell when the price is much lower. They lock in the losses thinking they can perfectly time the "low point" and buy back in at just the right moment. (A few are right. Most are not!) Investing does include personal tolerances for risk, an ability to be patient, etc so you have to figure that out for yourself. But the most successful investment plans are a combination of diversification and sticking to your plan through the bad times as well as the good. You shouldn't be reacting to the market (as a long-term investor.) You should have a solid plan in place. If you have a firm asset allocation of 80% stocks and 20% bonds with a line item in your investment policy statement that says "Re-balance when there is 5% or greater drift" then you wait until you cross that drift threshold, sell and buy what you need to get back to your target asset allocation, and you go on with your daily life.
  - Anon1096 7y ago
    We've already seen this in 2008. The funds will go down, then once the recession passes will return to normal. Long term holders have little to fear.
    - turk73 7y ago
      That's a pretty naive assessment. The reason stocks came roaring back was because of Quantitative Easing. There is no guarantee that further new easing could have the same effect. Governments worldwide basically bailed everything out by adding mountains (TRILLIONS) of new debt to replace the debt that vanished by write-offs. It was all highly unethical to bail out Wall Street at the cost of Main St. Regular people got fucked big time.
- wool_gather 7y ago
  Good points. > that doesn't mean there's a way to avoid it I don't think this is strictly true, though. As you said, "Stock markets aren't the same as the economy as a whole". The financial part of our current economy seems to have an outsized perception/participation rate. If the rules of the game changed to reduce the appeal of financial activity, there might be less second- and third-order "betting on bets (on bets)" and less of the self-fulfilling prophecy you're talking about. This may not be feasible in the world we live in: it would take a very different political climate, and of course there would be knock-on effects for society. But imagine that we turned our income tax rationale inside-out and policy shifted so that wages had very very low rates and investment income very high rates. Note I'm not advocating this, just offering it as a "what if".
me_me_me 7y ago
Especially since speculants start betting on it further driving it happening.
nabdab 7y ago
It takes more than that. Recessions are not just the second order effect of people being financially causious.
- rrss 7y ago
  What more does it take?
  - samsonradu 7y ago
    Paying back debt?
    - arethuza 7y ago
      But presumably individuals or companies decide to pay back debt in situations where they think the immediate economic future is negative?
Ididntdothis 7y ago
You could also reverse that and say "all it takes to cause a boom is to convince everyone there's a boom". People think the markets are rational and maybe over decades they are but in the short term half of it is sheer psychology and herd mentality.
inscionent 7y ago
Human society is a self fulfilling prophecy. It is an ocean of slow moving mob mentalities, crashing against each other.

jfengel 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. 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 ago
  When 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.
- neogodless 7y ago
  Index funds will do exactly as well as the aggregate of the individual stocks that they track (whether equities, bonds, treasuries, real estate, metals or something else.) The selling point is that investing (as opposed to trading) is a long-term method of increasing wealth. And, historically over any reasonably long period of time, broad index funds grow (between dividends and selling price) more than inflation, and do so without requiring the individual investor to "bet right" on individual companies, or to time when they buy and sell. Of course, some people panic when index funds see massive drops (which are often much worse than 20%) and sell when the price is much lower. They lock in the losses thinking they can perfectly time the "low point" and buy back in at just the right moment. (A few are right. Most are not!) Investing does include personal tolerances for risk, an ability to be patient, etc so you have to figure that out for yourself. But the most successful investment plans are a combination of diversification and sticking to your plan through the bad times as well as the good. You shouldn't be reacting to the market (as a long-term investor.) You should have a solid plan in place. If you have a firm asset allocation of 80% stocks and 20% bonds with a line item in your investment policy statement that says "Re-balance when there is 5% or greater drift" then you wait until you cross that drift threshold, sell and buy what you need to get back to your target asset allocation, and you go on with your daily life.
- Anon1096 7y ago
  We've already seen this in 2008. The funds will go down, then once the recession passes will return to normal. Long term holders have little to fear.
  - turk73 7y ago
    That's a pretty naive assessment. The reason stocks came roaring back was because of Quantitative Easing. There is no guarantee that further new easing could have the same effect. Governments worldwide basically bailed everything out by adding mountains (TRILLIONS) of new debt to replace the debt that vanished by write-offs. It was all highly unethical to bail out Wall Street at the cost of Main St. Regular people got fucked big time.
wool_gather 7y ago
Good points. > that doesn't mean there's a way to avoid it I don't think this is strictly true, though. As you said, "Stock markets aren't the same as the economy as a whole". The financial part of our current economy seems to have an outsized perception/participation rate. If the rules of the game changed to reduce the appeal of financial activity, there might be less second- and third-order "betting on bets (on bets)" and less of the self-fulfilling prophecy you're talking about. This may not be feasible in the world we live in: it would take a very different political climate, and of course there would be knock-on effects for society. But imagine that we turned our income tax rationale inside-out and policy shifted so that wages had very very low rates and investment income very high rates. Note I'm not advocating this, just offering it as a "what if".

me_me_me 7y ago

Especially since speculants start betting on it further driving it happening.

nabdab 7y ago

It takes more than that. Recessions are not just the second order effect of people being financially causious.

rrss 7y ago
What more does it take?
- samsonradu 7y ago
  Paying back debt?
  - arethuza 7y ago
    But presumably individuals or companies decide to pay back debt in situations where they think the immediate economic future is negative?

Ididntdothis 7y ago

You could also reverse that and say "all it takes to cause a boom is to convince everyone there's a boom". People think the markets are rational and maybe over decades they are but in the short term half of it is sheer psychology and herd mentality.

inscionent 7y ago

Human society is a self fulfilling prophecy. It is an ocean of slow moving mob mentalities, crashing against each other.