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The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen. A
by aazaa 5y ago
The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen.
As Keynes famously said: "The market can stay irrational longer than you can stay solvent."
An indicator that does a pretty good job of signaling the "when" of a recession, and by extension the likely "when" of large market corrections, is yield curve inversion. It predicted the recession of early 2020 quite well, even with the external shock of the pandemic.
https://www.forbes.com/sites/leonlabrecque/2020/02/26/another-yield-curve-inversion-symptom-of-covid-19-or-a-recession/ https://www.forbes.com/sites/leonlabrecque/2020/02/26/anothe...
From the perspective that somehow a reset of the business cycle has happened through government transfers (not exactly a sound assumption), watch interest rates, and in particular the relationship between the 2 and 10 year.
Should we start to see a rise in short-term rates, without a similar rise in long rates, watch out. You'll no doubt see a multitude of articles explaining how "this time is different." It won't be. And on top of all of that, we'll head into it with the most overvalued market in history.
- hhmc 5y agoAn inverted yield curve has accurately predicted 9 out of the last 5 recessions ;) You can even see it on the chart in the linked article, in 2005/06 — that time, it was different.
- 55555 5y agoThat's not that bad! Still seems potentially very useful.
- ZephyrBlu 5y ago9/5 is terrible accuracy.
- dannyw 5y agoIn the investment industry, 9/5 is excellent.
- hdjjhhvvhga 5y agoHow do you mean? Looks like an equivalent of a coin flip to me.
- harimau777 5y agoI'm not super knowledgeable in this area, but one possibility is that the "9 of the 5" only gives the number of times that it predicted that there would be a recession. There could be many more times that it accurately predicted that there would not be a recession.
- 55555 5y agoIf you flipped a coin every day in order to determine whether or not a recession would start, you'd be wrong 99% of the time.
- josephcsible 5y agoHow do you figure? Wouldn't you be wrong 50% of the time?
- chii 5y agoit's approximately 50/50. You're almost just as good with a coinflip.
- dannyw 5y agoA coinflip would be a 3650/5 or so. A biased coinflip that gives 5 signals would be 5/0.
- ItsMonkk 5y agoFed Fund Rate vs 30YT since 1970(only cherry picking this year because the data on fred is poor before this period, and end of gold standard is significant) is a perfect 8/8[0]. [0]: https://fred.stlouisfed.org/graph/?g=ENDs https://fred.stlouisfed.org/graph/?g=ENDs
- thissuchness 5y agoAnd how many degrees of freedom went into the choice of metrics to compare? Just because something went 8/8 doesn't mean it will predict the future crashes.
- ItsMonkk 5y agoI'd argue that minimum time frame -> maximum time frame is a more fundamental metric than any other individual yield curve.
- bruce343434 5y agoWhich curve am I looking at and for what? The blue line dips a lot of times, but only sometimes does a dip coincide with a recession.
- SantalBlush 5y agoThis "9 out of the last 5" quote is the deadest of beaten horses on HN. It shows up at least once a week here, and it is written with such smugness and unoriginality that it makes even dad jokes funny by comparison. Let's cut to the chase and make a bot that posts "9 out of the last 5 recessions, hyuk!" on every post remotely related to finance and be done with it. It is the furthest thing from a substantive comment; it is a recycled low-effort joke in the style of reddit.
- hans-moleman 5y ago9 out of 5 readers cringe at this type of comment. (I’ve never heard of the expression before so I found it amusing)
- SantalBlush 5y agoI agree that it's amusing the first time one reads it. But it is posted here a lot and has become very trite; it probably competes with Hanlon's razor in terms of frequency. After just a cursory search, here are some other examples: https://news.ycombinator.com/item?id=20372163 https://news.ycombinator.com/item?id=20372163 https://news.ycombinator.com/item?id=19995167 https://news.ycombinator.com/item?id=19995167 https://news.ycombinator.com/item?id=22352073 https://news.ycombinator.com/item?id=22352073 https://news.ycombinator.com/item?id=2127845 https://news.ycombinator.com/item?id=2127845 https://news.ycombinator.com/item?id=21023682 https://news.ycombinator.com/item?id=21023682 https://news.ycombinator.com/item?id=14417296 https://news.ycombinator.com/item?id=14417296 https://news.ycombinator.com/item?id=20641031 https://news.ycombinator.com/item?id=20641031 https://news.ycombinator.com/item?id=17266452 https://news.ycombinator.com/item?id=17266452 https://news.ycombinator.com/item?id=9476984 https://news.ycombinator.com/item?id=9476984 https://news.ycombinator.com/item?id=20656629 https://news.ycombinator.com/item?id=20656629 https://news.ycombinator.com/item?id=1628716 https://news.ycombinator.com/item?id=1628716
- greesil 5y agoMy interpretation is that it's not a joke, but instead a way to convey the heuristic can have false positives.
- mellavora 5y agoSo you are saying that a plausible mechanism leads to a ~50% prediction accuracy? I'm curious how this stacks up to the accuracy of other prediction methods? Off the cuff, this one doesn't seem too bad. esp given the stochastic nature of the variable being predicted.
- phreeza 5y ago"Accuracy" in statistical terms is likely even higher because that would include the predictions of "no upcoming recession".
- scumcity 5y agoInteresting. I'm not a big fan of digital advertising, so I didn't click on your link. I found this, which was much more informative. https://www.investopedia.com/terms/i/invertedyieldcurve.asp https://www.investopedia.com/terms/i/invertedyieldcurve.asp
- deleted 5y ago[deleted]
- inopinatus 5y agoKeynes also said “in the long run, we’re all dead”. But with these popular quips, Keynes wasn’t undermining macroeconomic theory, but certainly is communicating that policy outcomes are civilisational in both scale and timeframe. Neither politicians, nor your investment advisor, use such a scoped time horizon.
- dcolkitt 5y agoAnother way to think about this is that historically equity returns are so consistently high that even with an accurate predictor of returns it’s not worth not being exposed to stocks. Even if you know the next ten years will be in the bottom decile of returns for the S&P 500, you’re still better off than with cash.
- plater 5y agoWell, ten years from now the S&P500 could very well be 30-40% below the current valuation. "the bottom decile of returns for the S&P 500" I guess we have not yet seen what that means. The next ten years might show negative yearly returns.
- mellavora 5y agoMath suggests otherwise. Quoting Hussman [1] "Suppose I offer you a security that will pay $100 two days from today. You can buy as much of it as you like today at $50, or you can wait until tomorrow. Tomorrow, I’ll flip a coin. If it’s heads, I’ll sell you the security at $99. If it’s tails, I’ll sell you the security at $25. What should you do? Clearly, if you buy the security today, you’ll double your money two days from now. That’s a 100% expected return for each dollar you invest, over that 2-day period. If you wait, you’ll earn nothing on the first day, but you’ll then have two possibilities. If heads, you’ll get just 1% on your invested money. If tails, you’ll get a 300% return, quadrupling your money. With a 50/50 chance at each, your expected return for every dollar you invest is 0.51% + 0.5300% = 150.5%. So waiting adds 50.5% to your expected return over that 2-day period." https://www.hussmanfunds.com/comment/mc201201/ https://www.hussmanfunds.com/comment/mc201201/
- deleted 5y ago[deleted]
- JackPoach 5y agoIt's not an indicator problem, it's a problem of people trying to time markets. Also, there are two ways to use the Buffet Indicator - right and wrong. The wrong way is to say 'it's overvalued, I should do something - short the market'. The right way is 'it's overvalues, I should avoid doing something - buying overvalued stocks'. Buffett has been sitting on piles of cash in the past for years and years, avoiding buying securities when they are overvalued. He never tried timing the market, simply waiting for the right moment. Nor did he sell stocks when they were overvalued in order to try to buy them back at a lower cost at least AFAIK from reading his biographies. So, for a value investor, it's a useful tool.
- paulmd 5y ago> sitting on piles of cash in the past for years and years, avoiding buying securities when they are overvalued. He never tried timing the market, simply waiting for the right moment. It’s not quite clear what you’re trying to say here, because if you popped into a newbie investment forum and said you were sitting on a pile of cash that you were avoiding investing because the market was overvalued, you’d be told that is the literal classic “trying to time the market” move. Buffett obviously is a sophisticated investor who knows what he’s doing but if your description is right this is absolutely still him timing the market. Timing the market isn’t just when you try to pick the day that’s lowest, it’s still timing the market if you are picking the month or year that is lowest.
- roenxi 5y agoThe denizens of the investor forum would be wrong; it isn't trying to time the market. This strategy is simply valuing the stocks. The problem with the plan is that holding piles of cash is a game for losers; you need the money to be in some sort of asset - it matters not what - to avoid the printers of the central banks. There is a real chance that stock prices never come down as much as everything else goes up.
- M3L0NM4N 5y agoI firmly believe that you should just invest on a fixed schedule. Every month, every year, whatever. And if you see a significant drawdown in between those periods you can buy in before the next scheduled buying time. But never get scared from investing when stocks are too high - this strategy works one way because you should always be long the market.