15 ms·

The yield curve as a leading indicator

90 points by jackallis 4y ago

PaulHoule 4y ago
Economic indicators tell a clear story in good times but go crazy when there is a crisis. I psychology of inflation is different than the past, because people have so little experience with it and don’t really believe in it. It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later. They’d figure there is no point in saving because the value of money will get eroded. Today people see a Big Mac meal costs $9.99 at McDonalds and think “I can’t afford that!”, gas is $4.99, diesel is close to $7 and people think they have to stop the bleeding by hitting the brakes on consumption. I think supply chain problems are taking a bite out of demand. I have wanted to buy equipment for my photography/art hobby and I can’t get it. I am saving money until it is available, not buying something else.
- lotsofpulp 4y ago
  > They’d figure there is no point in saving because the value of money will get eroded. I would figure investing it is better than buying crappy food or holding dollars that are losing purchasing power. Maybe there was no VOO or VCSH decades ago, but it is an easy no brainer nowadays.
  - j7ake 4y ago
    Investing in what ? If you bet on tech in the last 6 months you lost 50 percent of your investment. You would have to wait for stocks to double to break even, which can be a long time.
    - djbusby 4y ago
      Who's "investing" for only 6mo? My tech holdings are off over the last 6mo, sure (lots of stuff is) but I'm still up from 1996.
      - puranjay 4y ago
        After the massive ramp up we had, it can very well take years, even a decade before we hit another new all time high.
    - thebean11 4y ago
      Of course it's easy to cherry pick in hindsight. But we're talking about people with cash right now, they are investing at current valuations not valuations from 6 months ago.
      - InefficientRed 4y ago
        So where are you putting your cash now?
        thebean11 4y ago
        A mix of tech and broad (global) stock ETFs
    - mjthrowaway1 4y ago
      There are plenty of non-tech equities at reasonable P/Es. There’s also shorting the market. ARK may be down but SARK is up…
    - rco8786 4y ago
      That is 1 sector over a short time frame. Stocks can also double in a short time.
    - gonzo41 4y ago
      You could keep buying. Your argument always assumes you pick a point in time and never consider new information or fundamental information. Such as, there were less computers doing things in the world yesterday than today and there'll be more tomorrow. Seems like a reasonable investment over the medium term.
    - tsss 4y ago
      Well, if you bet on tech you are stupid. All world indices are still up 3% in the last 12 months and have only lost like 10% in the last 6 months.
  - PaulHoule 4y ago
    People in the 1960's thought inflation would be benign for stocks because earnings go up with inflation but the 1970s was a bad decade for stocks. The 2010s were a great decade for stocks, the 2020s might not be. That too changes the psychology. The good times in stocks were supported by very low interest rates, which some people call "financial repression" -- despite that there was tremendous demand for "stablecoins" (government bonds) even at negative real interest rates. Even if you believe conditions are right for technological and social progress, interest rates will be a headwind for the stock market if they revert to the mean.
    - _ea1k 4y ago
      > People in the 1960's thought inflation would be benign for stocks because earnings go up with inflation but the 1970s was a bad decade for stocks. I hear this a lot. Its true that stock returns relative to inflation weren't great, but what was better? I mean, cash lost a huge percentage of its value. Stocks seemed to pace inflation. Were bonds a better investment during this period?
      - PaulHoule 4y ago
        Gold was the best investment of the 1970s. Harry Browne, who ran for president as a libertarian suggested using gold as a hedge https://www.investopedia.com/terms/p/permanent-portfolio.asp https://www.investopedia.com/terms/p/permanent-portfolio.asp The "all weather" fund from Bridgewater is similar in thinking but substitutes inflation-protected bonds for gold.
        _ea1k 4y ago
        Thank you, that makes a lot of sense and is a perspective that I hadn't thought about.
    - puranjay 4y ago
      Makes me wonder about the fate of all these unprofitable startups If you couldn’t turn a profit during practically the best time for tech startups in 2020-21, I can’t see how you can turn a profit when money is much tighter.
  - bushbaba 4y ago
    Holding dollars was a a better investment than holding assets these past few months.
    - lotsofpulp 4y ago
      Holding dollars is always a better investment if your investment time horizon is a few months. In an FDIC insured account. If it’s a year to a few years, high quality bond ETFs likes VCSH should do the job. If it’s further out than that, then sink the money into broad market equity ETFs.
    - mywittyname 4y ago
      Assuming you sold at the top. But the S&P500 is at March '21 values. And, who knows, we may have already experienced the bottom.
  - formerkrogemp 4y ago
    OP states people are looking at food and not buying it because it's too expensive. @lotsofpulp suggests these same people invest their money. I don't think people who can't afford that much food are going to be investing that much. 'Have you tried not being poor?'
    - lotsofpulp 4y ago
      I thought PaulHoule was referring to people eating BigMacs and buying gas for leisure, hence the decision to not splurge on those things in contrast to previous decades where they may have.
  - dahart 4y ago
    > I would figure investing it is better than buying crappy food or holding dollars that are losing purchasing power. Isn’t that more of a class distinction than a decision for most people? The rich will invest either way, and the poor won’t. Both will buy food. The economy still runs on consumption (which is kinda required for investment to even work, right?) > it is an easy no brained nowadays I’m a little skittish on making new investments at the moment, and it seems to be going around? You’re saying that’s obviously foolish and people should be investing right now despite potential indicators of a recession?
    - lotsofpulp 4y ago
      > Isn’t that more of a class distinction than a decision for most people? The rich will invest either way, and the poor won’t. Both will buy food. There are more than two classes. The bottom 60% might be running on fumes, but the 60% to 70% might be thinking about foregoing spending $2k on a road trip that they can choose to invest instead, and the 70% to 80% might be thinking about a $4k Hawaii trip that they would forego. And the 80% to 90% might avoid $10k on an international destination. And the 90% to 95% might choose to invest $5k in the market instead of buying first class seats and put an extra $50k in an IRA as opposed to a new car. > You’re saying that’s obviously foolish and people should be investing right now despite potential indicators of a recession? Yes. Buy low, sell high. If you need to sell within a few years, then stick to cash or bonds. Although, what I actually meant by “easy no brainer” is that it is dead simple to invest in all equities at basically no cost due to the availability of extremely low cost broad market ETFs like VOO. Anyone can invest in the whole market for cheap within seconds of logging into their brokerage account. As I wrote in another comment, for money you need within a year or two, stick it in an FDIC insured saving account, for money within a few years, put it in VCSH, and for money you do not need for a long time, put it in VOO or VTI or similar and forget about it.
      - dahart 4y ago
        Yes of course there are more than two classes, but usually the line between having enough free cash to invest or not is pretty binary, what’s what I want to say I meant there by ‘rich’ and ‘poor’ ;). I’m sure most of us here are in one of the middle classes, but speaking personally, my investments have really never rested on having excess income, and I very much doubt that it does for most people above the, say, 70% line. Investments and savings are made in advance of tallying play cash. When I forego a vacation, the money gets dispersed among other optional uses, maybe a stay-cation and a PlayStation and dropping a little extra in the kids’ savings accounts. On the flip side, eating at McDonalds in the first place is generally speaking a class indicator. I assumed that was the reason @PaulHoule used McDonalds. Foregoing McDonalds is quite unlikely to result in having enough cash to invest in something else. You still have to eat, and a lot of foods are more expensive than McDonalds even from a typical grocery store.
- mberning 4y ago
  Businesses and services that were absolutely overrun a year ago are now dead quiet. You go to change a car title or renew your license and you will be seen right away instead of waiting 2 hours. Same thing with restaurants and bars. I went the other night and was pleasantly surprised that it was just me and the barman. People are already reflexively pulling back on discretionary items. It won't be long before we have a surge in car repossessions and foreclosures. Kind of hard to justify paying on a car you can't even afford to put gas in.
  - bombcar 4y ago
    Local repoman is now doing AAA auto service and towing because repossessions completely dried up during covid with deferrals, etc. I suspect that's going to start up again soon.
- wslh 4y ago
  The issue with inflation and supply chains is renegotiation. Inflation force organizations and people to renegotiate deals and that take time which slow down the supply chains performance.
- Ericson2314 4y ago
  > It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later. They’d figure there is no point in saving because the value of money will get eroded. I highly doubt this was ever the case, rather than what some orthodox econ types told themselves without evidence.
  - gedy 4y ago
    People totally do that with housing price inflation
    - Ericson2314 4y ago
      Fair, but buying a long lived asset to both save money and get a larger capital gain is different than rushing to buy depreciating goods because one is worried their prices will go up further. More broadly, if there was price stability for single family homes, buyers would be outraged!
      - thehappypm 4y ago
        As a homeowner I’d be fine with price stability. I don’t see why the price should go up (and that just increases my tax burden). I certainly don’t want to be in the hole if I sell though.
        Johnny555 4y ago
        I agree, I bought my house as a home, I really don't need or want it to go up in value. I think many people would be better of if we had policies discouraging residential housing as an investment. My home's value has gone up over 30% since I bought it around 18 months ago (and 50% since 3 years ago) - I couldn't afford to buy my own home if I were house shopping today.
        Ericson2314 4y ago
        Oh don't get me wrong, I would love a world with housing price stability. Renting with a land value is good.
- usrn 4y ago
  At some point you just run out of money, which happened before the inflation really got started.
- puranjay 4y ago
  I had planned a vacation 2 years ago before the pandemic. Obviously had to shelve that. Now the price for the same ticket has increased by 2.5x I still paid for it and justified it in my head that this is the first time I’ll be traveling in two and a half years. But if I had to do it again, I can’t justify it at all. There has to be some level of “spite spending” from two years of pandemic as well - people who know that they’re overpaying but they do it anyway because they’ve been locked up for two years.
  - eldavido 4y ago
    I'm 37 now and this idea of "collective psychology" really fascinates me. Mention age because I'm just old enough to start seeing these large-scale "shifts of mood" over my own life. In hindsight (US perspective here), I can now see how the mid/late-90s were a happy time, 9/11 was a complete "shock", optimism kicked back in around 2005 leading to the 2008 financial crisis (huge run-up in house prices, sloppy mortgage underwriting, etc), but 2008 was a bomb, and now 14 years on, the way I'd describe the last decade is "slow-burn turbulence". We know it's getting more chaotic, we see it, politics is more fragmented, but it's hard pointing to one particular event as "it" the way we could with, say, 9/11. I mention this because I think these cycles have profound effects on economic variables like spending, credit use, etc. Your commend about "spite spending" fits perfectly with this--yes, household balance sheets are deteriorating, but people are just sick of covid, they want to take a vacation, and get outside. I think a similar thing drove housing in the 50s, actually. It's easy to look back on the mid-century dynamic as "boring", "sterile" even, but WWII ended in the mid-40s, and if I'd spent a year of three getting blown up in Europe or Japan, a quiet house in the suburbs is exactly what I'd want.
    - puranjay 4y ago
      I'm 34 and feel the same way. You can feel the zeitgeist change every 8-10 years. Its like the world has a collective consciousness (even though I largely think that's just based on the media you consume.)
      - michaelt 4y ago
- 88913527 4y ago
  The Big Mac is $9.99 for the person unwilling to download the McDonald's app and use the digital coupons. More broadly, we are very quickly entering a world of personalized pricing, and the best prices go to those willing to jump through whichever hoops sellers create. It's a K-shaped recovery, but it's also K-shaped pricing. So you're seeing more "MSRP" type pricing in places we're not used to seeing it -- kind of like how list prices for college go up and up every year, yet the net price is relatively flat [0]. [0]: https://d3f7q2msm2165u.cloudfront.net/aaa-content/user/files/Screen%20Shot%202018-12-02%20at%2011.51.51%20AM.png?1543780344489 https://d3f7q2msm2165u.cloudfront.net/aaa-content/user/files...
  - bombcar 4y ago
    Everyone has realized what colleges and "enterprise" sellers realized years ago - nobody will pay $10 for a Big Mac if you sell it for $6, but if you price it at $10 and offer even really easy coupons to get it down to $6, you will sell a decent amount of $10 Big Macs.
    - throwaway787544 4y ago
      "Here's a coupon for a free Hash Brown!" oh great! hmm, while I'm here I might as well spend $5
  - wonderwonder 4y ago
    You are right. With that said I absolutely hate the fact that I have to load my phone with privacy invading apps for every place I shop. I go to 7-11 and they ask if I have a membership card for discounts, when I asked for one they said its an app and I have to install it... Similar is gas pricing. 10 cents cheaper if you have the app or gas station CC.
    - eldavido 4y ago
      The limit case is Spirit Airlines. Sure they're cheaper, but do you really want to feel like you're going to court getting on the plane, arguing over how many personal items you're allowed, their size, etc? There is in fact a limit to what many people (including me) will put up with, at some point, you just want no change fees, no baggage fees, etc and pick Southwest. Incidentally, when people talk about schools and healthcare, and suggest a one-size-fits-all model, I'm shocked they don't see how much peoples' preferences vary. If we can have so much choice and variety when it comes to something as stupid as air travel, it seems crazy we wouldn't want the same thing in healthcare.
- lumost 4y ago
  If people generally perceive that 1) They will not earn more money in the future to offset the price increases. and 2) Their savings will outpace inflation. Then they will react to inflation by saving more and deferring consumption. In order for this to change, saving/investment must generally be a bad deal for the average consumer - or they have to have the expectation that future earnings growth will offset inflation. After 50 years of flat wages, it should be unsurprising that the average consumer does not believe 1 will be true.
  - deleted 4y ago
    [deleted]
- InefficientRed 4y ago
  > psychology of inflation is different than the past... It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later... Today people see a Big Mac meal costs $9.99 at McDonalds and think “I can’t afford that!” Apparently homo economicus has an interesting digestive system. Does the Econ dept have an Anatomy book explaining how folks can eat 2x this year and then not eat next year?
  - gadflyinyoureye 4y ago
    As glib as your comment is, the answer is that people will probably start eating at home. I'm not saying they will eat higher quality foods, but they won't be eating fast food as much. The value proposition isn't there. I see this in my own life. I've eaten out for about 80% of my dinners. Taco Bell use to be $0.89 a taco. Now it's around $2. It took me 15 minutes round trip to get Taco Bell. My time (including fuel for the car) and food costs are now at or below $2 per taco (where I would get at least 3 for myself, two for my wife and 2 burritos betwixt us). I can eat steak and potatoes for the same total cost of a meal. Homo economicus still has a digestive system. It's now considering the amount of energy (money) required to gather the food. Similar to the homo sapiens idea of, "Should I eat these nuts or get a pack of people to take down a bison?"
    - InefficientRed 4y ago
      Food at home is up 11%; food away from home is only up 7%.
      - gadflyinyoureye 4y ago
        You have to keep in mind gas to get the food. Now if you stop on your way, you can call is 0 total. If you go home first, do things, then go get food, you need to include the cost of fuel.
        InefficientRed 4y ago
        This only strengthens my point. Going to the grocery store in nearly every household's weekly/biweekly cadence, but most people drive to go out to eat. If we include additional energy costs, the spread in inflation between food at home and food away from home is even larger.
- caseysoftware 4y ago
  > I think supply chain problems are taking a bite out of demand. I have wanted to buy equipment for my photography/art hobby and I can’t get it. I am saving money until it is available, not buying something else. There's another aspect of this one.. There are people buying right now despite not being able to get their item because they're afraid it will cost much more later. Then they wait. On the retailer's side, the responsible ones hold the money and count it as a liability (ha!) while the normal ones count it as revenue right now and spend accordingly. The complication comes in later if that retailer goes out of business. Suddenly you're out the money and the item gets delivered to an entity that no longer exists.. and then goes to a liquidation auction getting sold for a fraction of the price to clear the retailer's debts. (Technically, you'd be on that list but so far down it doesn't matter.) This isn't hypothetical either. If you know where to look, you can get some AMAZING deals right now.
  - andrewSC 4y ago
    Any suggestions on where to look? Feel free to contact me discreetly if that's a concern.
    - bulletninja 4y ago
      Same, i'm discreet too.
- beebmam 4y ago
  What evidence do you have that demand is down historically?
- btilly 4y ago
  Economic indicators tell a better story when they are not manipulated. In particular the impact of Fed QE policies on these rates is sufficient that I would not trust them to tell a comparable story now to what they did before QE started in 2009.
- gmadsen 4y ago
  I doubt the average consumer was ever motivated by inflation to spend. Its a nice story economists tell, to advocate for their inflationary policies
- mud_dauber 4y ago
  Just moved into a new apt & found a broken window frame. The owner was wanting to upgrade several other windows at the same time - only to hear a six-month leadtime for new windows. Poof. There goes (I'm guessing) $2K of window demand.
- mym1990 4y ago
  The thing is, last time inflation was this bad in the 70s and 80s, per capita income was also going up. And maybe real income was not going up, but it was somewhat blunting the full effect of inflation. If you look at per capita income from 2019 to 2020 it actually went down. BUT we only really have 2 data points right now(2019 and 2020) so I don't think we will see a full picture until 2024 or 2025. Personal data point, but psychologically I am definitely cutting spending on things like restaurants and groceries. I can afford that fast food meal for 20$, but I don't value it at that price, so I just don't buy it. I'm not really crying 'boo hoo inflation', I just kind of pass on it and go on about life. Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2020&locations=US&start=1960&view=chart https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2020...
  - larryett 4y ago
    Same here. There is a valuation expectation from 20 years of low inflation and food culture that has completely upended eating out for me. I am trying to flip this to a positive with eating less in general and eating less meat.
- chewz 4y ago
  > psychology of inflation is different than the past, because people have so little experience with it and don’t really believe in it. This is called second round effect and it will come later, when people will spend and demand wage raises no matter what actual inflation rate would be then... This is excatly what central banks are trying to avoid by cooling economy before inflation expectations got anchored and lead to inflaton spiral (in economic lingo)
Xcelerate 4y ago
I’m not an economist, but as a data scientist, these models always seem way too simple to me to actually predict anything about the economy.
- JackFr 4y ago
  Well you need to consider what treasury yields represent. They are the market response from thousands of participants with hundreds of billions of dollars of skin in the game to the question “What will you pay today for a dollar in 3 months? What will you pay today for a dollar in 10 years?” That market consensus captures a lot of information and boils it down to its essence.
  - malfist 4y ago
    Is mob wisdom a good indicator though?
    - kmonsen 4y ago
      Mob wisdom and informed people betting with their money are two different things. Not saying the matter is 100% accurate, but better than what is normally called mob wisdom.
    - TuringNYC 4y ago
      Yes, if you have money on the line (as GP says.) We assume rich people/orgs are making decisions in their self-interest, which is a good assumption.
    - s1artibartfast 4y ago
      Yes, when the entire value of the economy is predicated on mob sentiment.
    - sb057 4y ago
      It's the foundation of our economic system, so we better hope it is!
    - stonemetal12 4y ago
88913527 4y ago
The linked chart shows the 10Y:3M spread. Another frequently cited chart is the 10Y:2Y spread, which went negative in both August 2019 and April 2022: https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y
- mtoner23 4y ago
  So the 10/2 spread predicted Covid19? idk if this is a good indicator.
  - usrn 4y ago
    There's a conspiracy theory going around that the overreaction to Covid was because people wanted to hide how rough things were going to be economically.
- jackallis 4y ago
  https://www.wsj.com/amp/articles/yield-curve-almost-flashes-recession-maybe-but-who-knows-when-11648118199?mod=hp_lista_pos2 https://www.wsj.com/amp/articles/yield-curve-almost-flashes-...
- hammock 4y ago
  The 10-2 is the better predictor and the more-often cited. Confusing why they used 10y-3m here
  - pterhx 4y ago
    This is probably because the economist who first looked into relationship between the yield curve and recessions used 10y-3m [0]. His reasoning is that the 3m gives a better outlook of the conditions happening at the moment than the 2y. [0] https://www.npr.org/transcripts/1092678307 https://www.npr.org/transcripts/1092678307
JackFr 4y ago
The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions.
- spywaregorilla 4y ago
  I find it funny that this joke seems to imply getting 5/12 false positives means that it's an obviously bad model.
  - rco8786 4y ago
    I'm not a statistician, but if something is ~50% accurate in predicting a recession does that not make it roughly equivalent to a coin flip?
    - spywaregorilla 4y ago
      It's a big topic. But 5/12 false positives tells you nothing about accuracy. You also need to measure the number of true negatives and false negatives and what not. Accuracy tends to be worthless for most use cases when the event being predicted is rare. If you're predicting a 1 in a million event always predicting NO gives you a 99.9999% accurate model. Many medical tests are 99%+ accurate, but the false positive rate, meaning the probability that you don't have the disease given a false positive test is still extremely high. Like 90%+. Bayes law fucks us all.
      - MikeDelta 4y ago
        For those interested, a bit more background on false positives of rare events https://math.hmc.edu/funfacts/medical-tests-and-bayes-theorem/ https://math.hmc.edu/funfacts/medical-tests-and-bayes-theore...
      - kmonsen 4y ago
        Medical tests are often designed that way. For example cheap/quick hiv tests have a low false negative and a high false positive. They are still useful, you filter out most people safely and the ones with a positive test can take a more expensive test to check.
theknocker 4y ago
H8crilA 4y ago
Before you get optimistic about this, the 3month yield will soon rise, rather quickly, almost certainly: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... Or you can just look at the entire curve, which subsumes all the information in the OP link and in the fedwatch tool: http://www.worldgovernmentbonds.com/country/united-states/ http://www.worldgovernmentbonds.com/country/united-states/ In particular there is basically no yield spread left between the 2y and 10y.
- cced 4y ago
  The implication here being that people put as much faith in the dollar 2y or as they do 10y (low confidence), correct?
  - H8crilA 4y ago
    You should read more about the yield curve or the bond market in general, it is a pretty clever beast. More immediately to this thread - the 3m yield will most likely soon become what is currently the 1-2yr yield, and that without changes in the 10yr yield will close the 3m 10y spread.
Threeve303 4y ago
Many are saying there is no recession now or coming soon and point to various figures to prove it... This ignores deep structural problems that have been covered up by QE. QE itself was a cook the books kind of scenario to provide liquidity... Then it became impossible to roll it back once companies and the market got addicted to the money. So now we approach a point where tightening has to happen because both the Federal Reserve and U.S. Govt have run up the balance sheets and debts to very high insane levels not meant for "peace time". Now as they attempt to roll it back, certain issues start to appear. First due to lots of factors... main one likely being generational bretton woods style changes to the global economy and the reserve currency used. The only argument against this is that China, Russia and maybe most of OPEC moving away from using dollars to handle various transactions tends to cause certain unexpected issues while that is happening. One of those is inflation since for mant years it has been one of the United States main exports... So while all of this is rolled back or changed, it reveals all of the existing structural problems that were never really addressed... All of these factors either mean a big crash or a controlled demolition of the whole QE system and a global reordering of trade. There are far too many factors to control and many more are not controllable. So expect a crash. To determine when this is likely, maybe watch the repo and reverse repo market rates. Since 2020 they have increased steadily, now in trillions of overnight funding needed, and continuing to grow. This could quickly lead to something not often discussed where the Federal Reserve loses the ability to control interest rates. It is kind of a paradox, balance sheet growth -> liquidity -> inflation -> higher borrowing costs -> more balance sheet growth.. This process cant go on forever... Many metrics exist to watch it but the idea that the Govt will one day say OK we cant fund repos tonight, everything financially will be locked up by morning... like 2008 but worse.. That Paul Volcker guy had a lot of good ideas that they tried and failed to implement since 2008. Maybe those will deserve a second look, once all of this is over. Point being, nothing was fixed since the 2008 crash and as soon as the free money runs out, it will be obvious. Also, inflation kills democracies more often than anything else. May you live in interesting times.

90 points by jackallis 4y ago

Economic indicators tell a clear story in good times but go crazy when there is a crisis. I psychology of inflation is different than the past, because people have so little experience with it and don’t really believe in it. It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later. They’d figure there is no point in saving because the value of money will get eroded. Today people see a Big Mac meal costs $9.99 at McDonalds and think “I can’t afford that!”, gas is $4.99, diesel is close to $7 and people think they have to stop the bleeding by hitting the brakes on consumption. I think supply chain problems are taking a bite out of demand. I have wanted to buy equipment for my photography/art hobby and I can’t get it. I am saving money until it is available, not buying something else.

lotsofpulp 4y ago
> They’d figure there is no point in saving because the value of money will get eroded. I would figure investing it is better than buying crappy food or holding dollars that are losing purchasing power. Maybe there was no VOO or VCSH decades ago, but it is an easy no brainer nowadays.
- j7ake 4y ago
  Investing in what ? If you bet on tech in the last 6 months you lost 50 percent of your investment. You would have to wait for stocks to double to break even, which can be a long time.
  - djbusby 4y ago
    Who's "investing" for only 6mo? My tech holdings are off over the last 6mo, sure (lots of stuff is) but I'm still up from 1996.
    - puranjay 4y ago
      After the massive ramp up we had, it can very well take years, even a decade before we hit another new all time high.
  - thebean11 4y ago
    Of course it's easy to cherry pick in hindsight. But we're talking about people with cash right now, they are investing at current valuations not valuations from 6 months ago.
    - InefficientRed 4y ago
      So where are you putting your cash now?
      - thebean11 4y ago
        A mix of tech and broad (global) stock ETFs
  - mjthrowaway1 4y ago
    There are plenty of non-tech equities at reasonable P/Es. There’s also shorting the market. ARK may be down but SARK is up…
  - rco8786 4y ago
    That is 1 sector over a short time frame. Stocks can also double in a short time.
  - gonzo41 4y ago
    You could keep buying. Your argument always assumes you pick a point in time and never consider new information or fundamental information. Such as, there were less computers doing things in the world yesterday than today and there'll be more tomorrow. Seems like a reasonable investment over the medium term.
  - tsss 4y ago
    Well, if you bet on tech you are stupid. All world indices are still up 3% in the last 12 months and have only lost like 10% in the last 6 months.
- PaulHoule 4y ago
  People in the 1960's thought inflation would be benign for stocks because earnings go up with inflation but the 1970s was a bad decade for stocks. The 2010s were a great decade for stocks, the 2020s might not be. That too changes the psychology. The good times in stocks were supported by very low interest rates, which some people call "financial repression" -- despite that there was tremendous demand for "stablecoins" (government bonds) even at negative real interest rates. Even if you believe conditions are right for technological and social progress, interest rates will be a headwind for the stock market if they revert to the mean.
  - _ea1k 4y ago
    > People in the 1960's thought inflation would be benign for stocks because earnings go up with inflation but the 1970s was a bad decade for stocks. I hear this a lot. Its true that stock returns relative to inflation weren't great, but what was better? I mean, cash lost a huge percentage of its value. Stocks seemed to pace inflation. Were bonds a better investment during this period?
    - PaulHoule 4y ago
      Gold was the best investment of the 1970s. Harry Browne, who ran for president as a libertarian suggested using gold as a hedge https://www.investopedia.com/terms/p/permanent-portfolio.asp https://www.investopedia.com/terms/p/permanent-portfolio.asp The "all weather" fund from Bridgewater is similar in thinking but substitutes inflation-protected bonds for gold.
      - _ea1k 4y ago
        Thank you, that makes a lot of sense and is a perspective that I hadn't thought about.
  - puranjay 4y ago
    Makes me wonder about the fate of all these unprofitable startups If you couldn’t turn a profit during practically the best time for tech startups in 2020-21, I can’t see how you can turn a profit when money is much tighter.
- bushbaba 4y ago
  Holding dollars was a a better investment than holding assets these past few months.
  - lotsofpulp 4y ago
    Holding dollars is always a better investment if your investment time horizon is a few months. In an FDIC insured account. If it’s a year to a few years, high quality bond ETFs likes VCSH should do the job. If it’s further out than that, then sink the money into broad market equity ETFs.
  - mywittyname 4y ago
    Assuming you sold at the top. But the S&P500 is at March '21 values. And, who knows, we may have already experienced the bottom.
- formerkrogemp 4y ago
  OP states people are looking at food and not buying it because it's too expensive. @lotsofpulp suggests these same people invest their money. I don't think people who can't afford that much food are going to be investing that much. 'Have you tried not being poor?'
  - lotsofpulp 4y ago
    I thought PaulHoule was referring to people eating BigMacs and buying gas for leisure, hence the decision to not splurge on those things in contrast to previous decades where they may have.
- dahart 4y ago
  > I would figure investing it is better than buying crappy food or holding dollars that are losing purchasing power. Isn’t that more of a class distinction than a decision for most people? The rich will invest either way, and the poor won’t. Both will buy food. The economy still runs on consumption (which is kinda required for investment to even work, right?) > it is an easy no brained nowadays I’m a little skittish on making new investments at the moment, and it seems to be going around? You’re saying that’s obviously foolish and people should be investing right now despite potential indicators of a recession?
  - lotsofpulp 4y ago
    > Isn’t that more of a class distinction than a decision for most people? The rich will invest either way, and the poor won’t. Both will buy food. There are more than two classes. The bottom 60% might be running on fumes, but the 60% to 70% might be thinking about foregoing spending $2k on a road trip that they can choose to invest instead, and the 70% to 80% might be thinking about a $4k Hawaii trip that they would forego. And the 80% to 90% might avoid $10k on an international destination. And the 90% to 95% might choose to invest $5k in the market instead of buying first class seats and put an extra $50k in an IRA as opposed to a new car. > You’re saying that’s obviously foolish and people should be investing right now despite potential indicators of a recession? Yes. Buy low, sell high. If you need to sell within a few years, then stick to cash or bonds. Although, what I actually meant by “easy no brainer” is that it is dead simple to invest in all equities at basically no cost due to the availability of extremely low cost broad market ETFs like VOO. Anyone can invest in the whole market for cheap within seconds of logging into their brokerage account. As I wrote in another comment, for money you need within a year or two, stick it in an FDIC insured saving account, for money within a few years, put it in VCSH, and for money you do not need for a long time, put it in VOO or VTI or similar and forget about it.
    - dahart 4y ago
      Yes of course there are more than two classes, but usually the line between having enough free cash to invest or not is pretty binary, what’s what I want to say I meant there by ‘rich’ and ‘poor’ ;). I’m sure most of us here are in one of the middle classes, but speaking personally, my investments have really never rested on having excess income, and I very much doubt that it does for most people above the, say, 70% line. Investments and savings are made in advance of tallying play cash. When I forego a vacation, the money gets dispersed among other optional uses, maybe a stay-cation and a PlayStation and dropping a little extra in the kids’ savings accounts. On the flip side, eating at McDonalds in the first place is generally speaking a class indicator. I assumed that was the reason @PaulHoule used McDonalds. Foregoing McDonalds is quite unlikely to result in having enough cash to invest in something else. You still have to eat, and a lot of foods are more expensive than McDonalds even from a typical grocery store.
mberning 4y ago
Businesses and services that were absolutely overrun a year ago are now dead quiet. You go to change a car title or renew your license and you will be seen right away instead of waiting 2 hours. Same thing with restaurants and bars. I went the other night and was pleasantly surprised that it was just me and the barman. People are already reflexively pulling back on discretionary items. It won't be long before we have a surge in car repossessions and foreclosures. Kind of hard to justify paying on a car you can't even afford to put gas in.
- bombcar 4y ago
  Local repoman is now doing AAA auto service and towing because repossessions completely dried up during covid with deferrals, etc. I suspect that's going to start up again soon.
wslh 4y ago
The issue with inflation and supply chains is renegotiation. Inflation force organizations and people to renegotiate deals and that take time which slow down the supply chains performance.
Ericson2314 4y ago
> It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later. They’d figure there is no point in saving because the value of money will get eroded. I highly doubt this was ever the case, rather than what some orthodox econ types told themselves without evidence.
- gedy 4y ago
  People totally do that with housing price inflation
  - Ericson2314 4y ago
    Fair, but buying a long lived asset to both save money and get a larger capital gain is different than rushing to buy depreciating goods because one is worried their prices will go up further. More broadly, if there was price stability for single family homes, buyers would be outraged!
    - thehappypm 4y ago
      As a homeowner I’d be fine with price stability. I don’t see why the price should go up (and that just increases my tax burden). I certainly don’t want to be in the hole if I sell though.
      - Johnny555 4y ago
        I agree, I bought my house as a home, I really don't need or want it to go up in value. I think many people would be better of if we had policies discouraging residential housing as an investment. My home's value has gone up over 30% since I bought it around 18 months ago (and 50% since 3 years ago) - I couldn't afford to buy my own home if I were house shopping today.
      - Ericson2314 4y ago
        Oh don't get me wrong, I would love a world with housing price stability. Renting with a land value is good.
usrn 4y ago
At some point you just run out of money, which happened before the inflation really got started.
puranjay 4y ago
I had planned a vacation 2 years ago before the pandemic. Obviously had to shelve that. Now the price for the same ticket has increased by 2.5x I still paid for it and justified it in my head that this is the first time I’ll be traveling in two and a half years. But if I had to do it again, I can’t justify it at all. There has to be some level of “spite spending” from two years of pandemic as well - people who know that they’re overpaying but they do it anyway because they’ve been locked up for two years.
- eldavido 4y ago
  I'm 37 now and this idea of "collective psychology" really fascinates me. Mention age because I'm just old enough to start seeing these large-scale "shifts of mood" over my own life. In hindsight (US perspective here), I can now see how the mid/late-90s were a happy time, 9/11 was a complete "shock", optimism kicked back in around 2005 leading to the 2008 financial crisis (huge run-up in house prices, sloppy mortgage underwriting, etc), but 2008 was a bomb, and now 14 years on, the way I'd describe the last decade is "slow-burn turbulence". We know it's getting more chaotic, we see it, politics is more fragmented, but it's hard pointing to one particular event as "it" the way we could with, say, 9/11. I mention this because I think these cycles have profound effects on economic variables like spending, credit use, etc. Your commend about "spite spending" fits perfectly with this--yes, household balance sheets are deteriorating, but people are just sick of covid, they want to take a vacation, and get outside. I think a similar thing drove housing in the 50s, actually. It's easy to look back on the mid-century dynamic as "boring", "sterile" even, but WWII ended in the mid-40s, and if I'd spent a year of three getting blown up in Europe or Japan, a quiet house in the suburbs is exactly what I'd want.
  - puranjay 4y ago
    I'm 34 and feel the same way. You can feel the zeitgeist change every 8-10 years. Its like the world has a collective consciousness (even though I largely think that's just based on the media you consume.)
    - michaelt 4y ago
88913527 4y ago
The Big Mac is $9.99 for the person unwilling to download the McDonald's app and use the digital coupons. More broadly, we are very quickly entering a world of personalized pricing, and the best prices go to those willing to jump through whichever hoops sellers create. It's a K-shaped recovery, but it's also K-shaped pricing. So you're seeing more "MSRP" type pricing in places we're not used to seeing it -- kind of like how list prices for college go up and up every year, yet the net price is relatively flat [0]. [0]: https://d3f7q2msm2165u.cloudfront.net/aaa-content/user/files/Screen%20Shot%202018-12-02%20at%2011.51.51%20AM.png?1543780344489 https://d3f7q2msm2165u.cloudfront.net/aaa-content/user/files...
- bombcar 4y ago
  Everyone has realized what colleges and "enterprise" sellers realized years ago - nobody will pay $10 for a Big Mac if you sell it for $6, but if you price it at $10 and offer even really easy coupons to get it down to $6, you will sell a decent amount of $10 Big Macs.
  - throwaway787544 4y ago
    "Here's a coupon for a free Hash Brown!" oh great! hmm, while I'm here I might as well spend $5
- wonderwonder 4y ago
  You are right. With that said I absolutely hate the fact that I have to load my phone with privacy invading apps for every place I shop. I go to 7-11 and they ask if I have a membership card for discounts, when I asked for one they said its an app and I have to install it... Similar is gas pricing. 10 cents cheaper if you have the app or gas station CC.
  - eldavido 4y ago
    The limit case is Spirit Airlines. Sure they're cheaper, but do you really want to feel like you're going to court getting on the plane, arguing over how many personal items you're allowed, their size, etc? There is in fact a limit to what many people (including me) will put up with, at some point, you just want no change fees, no baggage fees, etc and pick Southwest. Incidentally, when people talk about schools and healthcare, and suggest a one-size-fits-all model, I'm shocked they don't see how much peoples' preferences vary. If we can have so much choice and variety when it comes to something as stupid as air travel, it seems crazy we wouldn't want the same thing in healthcare.
lumost 4y ago
If people generally perceive that 1) They will not earn more money in the future to offset the price increases. and 2) Their savings will outpace inflation. Then they will react to inflation by saving more and deferring consumption. In order for this to change, saving/investment must generally be a bad deal for the average consumer - or they have to have the expectation that future earnings growth will offset inflation. After 50 years of flat wages, it should be unsurprising that the average consumer does not believe 1 will be true.
- deleted 4y ago
  [deleted]
InefficientRed 4y ago
> psychology of inflation is different than the past... It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later... Today people see a Big Mac meal costs $9.99 at McDonalds and think “I can’t afford that!” Apparently homo economicus has an interesting digestive system. Does the Econ dept have an Anatomy book explaining how folks can eat 2x this year and then not eat next year?
- gadflyinyoureye 4y ago
  As glib as your comment is, the answer is that people will probably start eating at home. I'm not saying they will eat higher quality foods, but they won't be eating fast food as much. The value proposition isn't there. I see this in my own life. I've eaten out for about 80% of my dinners. Taco Bell use to be $0.89 a taco. Now it's around $2. It took me 15 minutes round trip to get Taco Bell. My time (including fuel for the car) and food costs are now at or below $2 per taco (where I would get at least 3 for myself, two for my wife and 2 burritos betwixt us). I can eat steak and potatoes for the same total cost of a meal. Homo economicus still has a digestive system. It's now considering the amount of energy (money) required to gather the food. Similar to the homo sapiens idea of, "Should I eat these nuts or get a pack of people to take down a bison?"
  - InefficientRed 4y ago
    Food at home is up 11%; food away from home is only up 7%.
    - gadflyinyoureye 4y ago
      You have to keep in mind gas to get the food. Now if you stop on your way, you can call is 0 total. If you go home first, do things, then go get food, you need to include the cost of fuel.
      - InefficientRed 4y ago
        This only strengthens my point. Going to the grocery store in nearly every household's weekly/biweekly cadence, but most people drive to go out to eat. If we include additional energy costs, the spread in inflation between food at home and food away from home is even larger.
caseysoftware 4y ago
> I think supply chain problems are taking a bite out of demand. I have wanted to buy equipment for my photography/art hobby and I can’t get it. I am saving money until it is available, not buying something else. There's another aspect of this one.. There are people buying right now despite not being able to get their item because they're afraid it will cost much more later. Then they wait. On the retailer's side, the responsible ones hold the money and count it as a liability (ha!) while the normal ones count it as revenue right now and spend accordingly. The complication comes in later if that retailer goes out of business. Suddenly you're out the money and the item gets delivered to an entity that no longer exists.. and then goes to a liquidation auction getting sold for a fraction of the price to clear the retailer's debts. (Technically, you'd be on that list but so far down it doesn't matter.) This isn't hypothetical either. If you know where to look, you can get some AMAZING deals right now.
- andrewSC 4y ago
  Any suggestions on where to look? Feel free to contact me discreetly if that's a concern.
  - bulletninja 4y ago
    Same, i'm discreet too.
beebmam 4y ago
What evidence do you have that demand is down historically?
btilly 4y ago
Economic indicators tell a better story when they are not manipulated. In particular the impact of Fed QE policies on these rates is sufficient that I would not trust them to tell a comparable story now to what they did before QE started in 2009.
gmadsen 4y ago
I doubt the average consumer was ever motivated by inflation to spend. Its a nice story economists tell, to advocate for their inflationary policies
mud_dauber 4y ago
Just moved into a new apt & found a broken window frame. The owner was wanting to upgrade several other windows at the same time - only to hear a six-month leadtime for new windows. Poof. There goes (I'm guessing) $2K of window demand.
mym1990 4y ago
The thing is, last time inflation was this bad in the 70s and 80s, per capita income was also going up. And maybe real income was not going up, but it was somewhat blunting the full effect of inflation. If you look at per capita income from 2019 to 2020 it actually went down. BUT we only really have 2 data points right now(2019 and 2020) so I don't think we will see a full picture until 2024 or 2025. Personal data point, but psychologically I am definitely cutting spending on things like restaurants and groceries. I can afford that fast food meal for 20$, but I don't value it at that price, so I just don't buy it. I'm not really crying 'boo hoo inflation', I just kind of pass on it and go on about life. Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2020&locations=US&start=1960&view=chart https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2020...
- larryett 4y ago
  Same here. There is a valuation expectation from 20 years of low inflation and food culture that has completely upended eating out for me. I am trying to flip this to a positive with eating less in general and eating less meat.
chewz 4y ago
> psychology of inflation is different than the past, because people have so little experience with it and don’t really believe in it. This is called second round effect and it will come later, when people will spend and demand wage raises no matter what actual inflation rate would be then... This is excatly what central banks are trying to avoid by cooling economy before inflation expectations got anchored and lead to inflaton spiral (in economic lingo)

Xcelerate 4y ago

I’m not an economist, but as a data scientist, these models always seem way too simple to me to actually predict anything about the economy.

JackFr 4y ago
Well you need to consider what treasury yields represent. They are the market response from thousands of participants with hundreds of billions of dollars of skin in the game to the question “What will you pay today for a dollar in 3 months? What will you pay today for a dollar in 10 years?” That market consensus captures a lot of information and boils it down to its essence.
- malfist 4y ago
  Is mob wisdom a good indicator though?
  - kmonsen 4y ago
    Mob wisdom and informed people betting with their money are two different things. Not saying the matter is 100% accurate, but better than what is normally called mob wisdom.
  - TuringNYC 4y ago
    Yes, if you have money on the line (as GP says.) We assume rich people/orgs are making decisions in their self-interest, which is a good assumption.
  - s1artibartfast 4y ago
    Yes, when the entire value of the economy is predicated on mob sentiment.
  - sb057 4y ago
    It's the foundation of our economic system, so we better hope it is!
  - stonemetal12 4y ago

88913527 4y ago

The linked chart shows the 10Y:3M spread. Another frequently cited chart is the 10Y:2Y spread, which went negative in both August 2019 and April 2022: https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y

mtoner23 4y ago
So the 10/2 spread predicted Covid19? idk if this is a good indicator.
- usrn 4y ago
  There's a conspiracy theory going around that the overreaction to Covid was because people wanted to hide how rough things were going to be economically.
jackallis 4y ago
https://www.wsj.com/amp/articles/yield-curve-almost-flashes-recession-maybe-but-who-knows-when-11648118199?mod=hp_lista_pos2 https://www.wsj.com/amp/articles/yield-curve-almost-flashes-...
hammock 4y ago
The 10-2 is the better predictor and the more-often cited. Confusing why they used 10y-3m here
- pterhx 4y ago
  This is probably because the economist who first looked into relationship between the yield curve and recessions used 10y-3m [0]. His reasoning is that the 3m gives a better outlook of the conditions happening at the moment than the 2y. [0] https://www.npr.org/transcripts/1092678307 https://www.npr.org/transcripts/1092678307

JackFr 4y ago

The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions.

spywaregorilla 4y ago
I find it funny that this joke seems to imply getting 5/12 false positives means that it's an obviously bad model.
- rco8786 4y ago
  I'm not a statistician, but if something is ~50% accurate in predicting a recession does that not make it roughly equivalent to a coin flip?
  - spywaregorilla 4y ago
    It's a big topic. But 5/12 false positives tells you nothing about accuracy. You also need to measure the number of true negatives and false negatives and what not. Accuracy tends to be worthless for most use cases when the event being predicted is rare. If you're predicting a 1 in a million event always predicting NO gives you a 99.9999% accurate model. Many medical tests are 99%+ accurate, but the false positive rate, meaning the probability that you don't have the disease given a false positive test is still extremely high. Like 90%+. Bayes law fucks us all.
    - MikeDelta 4y ago
      For those interested, a bit more background on false positives of rare events https://math.hmc.edu/funfacts/medical-tests-and-bayes-theorem/ https://math.hmc.edu/funfacts/medical-tests-and-bayes-theore...
    - kmonsen 4y ago
      Medical tests are often designed that way. For example cheap/quick hiv tests have a low false negative and a high false positive. They are still useful, you filter out most people safely and the ones with a positive test can take a more expensive test to check.

theknocker 4y ago

H8crilA 4y ago

Before you get optimistic about this, the 3month yield will soon rise, rather quickly, almost certainly: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... Or you can just look at the entire curve, which subsumes all the information in the OP link and in the fedwatch tool: http://www.worldgovernmentbonds.com/country/united-states/ http://www.worldgovernmentbonds.com/country/united-states/ In particular there is basically no yield spread left between the 2y and 10y.

cced 4y ago
The implication here being that people put as much faith in the dollar 2y or as they do 10y (low confidence), correct?
- H8crilA 4y ago
  You should read more about the yield curve or the bond market in general, it is a pretty clever beast. More immediately to this thread - the 3m yield will most likely soon become what is currently the 1-2yr yield, and that without changes in the 10yr yield will close the 3m 10y spread.

Threeve303 4y ago

Many are saying there is no recession now or coming soon and point to various figures to prove it... This ignores deep structural problems that have been covered up by QE. QE itself was a cook the books kind of scenario to provide liquidity... Then it became impossible to roll it back once companies and the market got addicted to the money. So now we approach a point where tightening has to happen because both the Federal Reserve and U.S. Govt have run up the balance sheets and debts to very high insane levels not meant for "peace time". Now as they attempt to roll it back, certain issues start to appear. First due to lots of factors... main one likely being generational bretton woods style changes to the global economy and the reserve currency used. The only argument against this is that China, Russia and maybe most of OPEC moving away from using dollars to handle various transactions tends to cause certain unexpected issues while that is happening. One of those is inflation since for mant years it has been one of the United States main exports... So while all of this is rolled back or changed, it reveals all of the existing structural problems that were never really addressed... All of these factors either mean a big crash or a controlled demolition of the whole QE system and a global reordering of trade. There are far too many factors to control and many more are not controllable. So expect a crash. To determine when this is likely, maybe watch the repo and reverse repo market rates. Since 2020 they have increased steadily, now in trillions of overnight funding needed, and continuing to grow. This could quickly lead to something not often discussed where the Federal Reserve loses the ability to control interest rates. It is kind of a paradox, balance sheet growth -> liquidity -> inflation -> higher borrowing costs -> more balance sheet growth.. This process cant go on forever... Many metrics exist to watch it but the idea that the Govt will one day say OK we cant fund repos tonight, everything financially will be locked up by morning... like 2008 but worse.. That Paul Volcker guy had a lot of good ideas that they tried and failed to implement since 2008. Maybe those will deserve a second look, once all of this is over. Point being, nothing was fixed since the 2008 crash and as soon as the free money runs out, it will be obvious. Also, inflation kills democracies more often than anything else. May you live in interesting times.