‘A Powerful Signal of Recessions’ Has Wall Street’s Attention
nytimes.com
nytimes.com
We're starting trade wars on multiple fronts, exiting or weakening multilateral alliances (and simultaneous giving an advantage to our global adversaries), and weakening the balance sheet of the federal government (during a business cycle peak). Of course this is going to end terribly.
France has a bunch of “protected” industries and they have the nerve to complain when others retaliate?
For the record, I am opposed to all tariffs and subsidies. But framing this as a Trump-caused issue is intellectually dishonest. He’s just attacking the status quo (wrongly or rightly.)
So is the EU protecting nearly every industry? Isn’t that the point of this “trade war” — the EU has been applying tariffs to almost everything for a long time. Doesn’t the US have a right to retaliate?
French milk is already better than most American milk, yet France puts a 36% tax on dairy imports in addition to heavily subsidizing dairy. So the effective tariff is much higher. And European consumers end up losing because they have to spend more of their money on dairy — all to protect a fairly small industry when measured as a percentage of GDP. Yet every time reforms are attempted, farmers literally riot.
Why should a country accept their goods being taxed without being able to respond in kind?
This is tit-for-tat to be sure, but the tit didn’t start with the Trump tariffs.
Existing trade agreements have recognized this; it's not something that the EU has unilaterally imposed in recent years. The average EU tariff on American goods is under 3 percent.[0] More importantly, the average tariff--for both the EU and the rest of the world--have been steadily declining.[1] That was the trend. The administration's recent trade policy upends that trend for no real purpose.
If the goal is to see tariffs lowered and barriers removed--one that I heartily support--you don't undertake a policy that will spur the opposite. You sit down at the negotiating table like adults and hammer out a trade deal. Which is a lot harder than it sounds, because every tariff of your own that you can use as leverage in the deal has its own domestic supporters. Many of whom are politically well-connected. It's not surprising then, that the administration chose to pursue a simpler (albeit inherently flawed) approach.
0. https://www.export.gov/article?id=European-union-Import-Tari...
1. http://money.cnn.com/2018/06/07/news/economy/trump-tariffs-t...
I'd be a bit more sympathetic if the US government had asked the EU to remove duties before creating new ones, but that doesn't appear to be the case. And at the same time people complain that it's totally unfair that the Canadians seek to limit imports of some goods from the US...
Commonly known as the "Chicken Tax", this was imposed by LBJ in response to French & German duties on imported chicken meat. Congress lumped light trucks into the bill because LBJ wanted the support of the UAW, who didn't like the importation of the VW Type 2 pickup as well as Japanese utility vehicles.
At the moment, the tax on light trucks is the only remaining part of this bill. And it's pretty toothless as Honda is now building trucks in Alabama, and Ford/GM are building fullsize trucks in Canada & Mexico (which don't get taxed because of NAFTA) yet somehow get classified as domestics.
This is a dangerous escalation from Trump which will lead to a global trade war and recession at the very least.
https://en.m.wikipedia.org/wiki/Protectionism_in_the_United_...
I'm not sure the exact details but it was all set in Uruguay Round of the General Agreement on Tariffs and Trade (GATT), spanning from 1986 to 1994 and embracing 123 countries. And then I guess people kind of forgot about it. EU's trade weighted average MFN tariff was 2.3% for non-agricultural products (in 2013) and no one seemed particularly bothered about it till now.
I would suspect it's a general 6% tarriff on things that haven't been included in a trade deal before, and thanks to WTO rules it'll be the same for Japanese motorbikes as well.
http://investor.harley-davidson.com/our-company/motorcycle-r...
It is basically guaranteed to do so unless the business cycle has stopped for good (unlikely). The question in my mind is who the scapegoat is going to be, and how much denial there's going to be if the real effects of slowing growth start becoming apparent.
In my opinion, the tax cut that has been benefiting the economy is the move away from zero percent interest rates. Lending to banks at below inflation is like a tax that goes directly to them. But when we keep on raising short term rates above inflation, that's going to be like a tax too, and I expect we will promptly get whiplash since the Fed doesn't know when to stop.
Maybe I am becoming a crank, because I feel Cassandra-ish, like major macroeconomic problems are so simple but nobody gets it. Feel free to explain why I am totally wrong.
https://data.bls.gov/timeseries/CES0000000001?output_view=ne...
Furthermore, to finance that tax cut, a lot of money is being borrowed. When government is out there shilling its bonds, this crowds out investment into corporate bonds and equity, depressing growth.
Step 1 - do dumb and harmful things to increase your popularity among ignorant supporters
Step 2 - blame the innocent for the inevitable crisis
Step 3 - use the crisis you created to justify more dumb and harmful things
Step 4 - multiple crises cascade into catastrophe
Step 5 - use the catastrophe to justify emergency powers, suspend due process, arrest political opponents, mobilize local militias to "restore law and order"
Or, I suppose, it could be incompetence that still knows how to recognize opportunity...
and so it goes.
I'll add the embrace of nationalism. Many of the leaders through WWI and WWII, including Churchill, put significant blame on nationalism for the wars, which is why they supported internationalism including the EU (or the beginnings of it at the time), UN, World Bank, IMF, etc.
Here's Churchill talking about it:
http://www.churchill-society-london.org.uk/astonish.html
If Europe were once united in the sharing of its common inheritance, there would be no limit to the happiness, to the prosperity and glory which its three or four hundred million people would enjoy. Yet it is from Europe that have sprung that series of frightful nationalistic quarrels, originated by the Teutonic nations, which we have seen even in this twentieth century and in our own lifetime, wreck the peace and mar the prospects of all mankind.
...
What is this sovereign remedy?
It is to re-create the European Family, or as much of it as we can, and provide it with a structure under which it can dwell in peace, in safety and in freedom.
We must build a kind of United States of Europe.
...
And why should there not be a European group which could give a sense of enlarged patriotism and common citizenship to the distracted peoples of this turbulent and mighty continent and why should it not take its rightful place with other great groupings in shaping the destinies of men?
Imagine what happens if the economy gets rekt.
We could be in for some dark and nonlinear times.
Emerging into common use across and throughout The Internet circa 2014.
The recession didn't happen until 2-3 years after that, making me question the utility of such predictions. "A recession will happen - eventually" is about as useful as predicting your own eventual demise.
No, it isn't. It's quite possible to lose money with a buy-and-hold strategy if you get unlucky, particularly if you aren't diversified. It's probably the most reliable way of investing, but you can still lose money. Stocks are not guaranteed to go up over all possible 50-year intervals.
Monte carlo simulations of S&P500 investments illustrate this:
https://seekingalpha.com/article/4109617-buy-hold-just-works...
For buy and hold to fail for something like the S&P500, companies would need to fail to make money or pay dividends for 50 years. If that's going on retirement is the least of your concerns.
It is a simple, uncontroversial fact that the stock market is not guaranteed to return your money over a randomly chosen N-year period. LTBH merely minimizes the chance that you'll lose money; it doesn't eliminate the chance.
If you believe the stock market guarantees you safe returns, you are wrong. No matter what strategy you use, no matter what outlook you choose, you can lose money in the stock market. Don't invest what you can't afford to lose.
Editing as clarification for downvoters: This was a sincere question. Since no one can afford to lose their retirement savings, but few people will generate enough income to retire without making long-term investments in the stock market, I was curious what strategy timr was actually advocating. My own approach is to invest in index funds that automatically adjust their investments to be more conservative as my retirement date nears.
This is investing 101. Any financial planner will tell you the same thing. Most will tell you that you shouldn't have money in the stock market if you're going to need it within the next five years. Ten years is a better number.
Sure, keeping ~3 years income outside of the market if your actually retired is a good idea idea. But, just because the market tanked does not mean you lost money. You have the same share of the same companies if the market goes up or down.
If you need the money in five years, you should not be putting it in the stock market. If the money is truly "put to retirement" then you don't need it in five years, and you're just agreeing with me, pedantically.
The problem is that most of these HODL folks have never lived through a downturn, and will be crapping their pants when they realize that they really were secretly counting on the money being there. I've seen it happen twice now. The forums are filled with people "buying the dips" on 1% drops, but suddenly seeing a 30% short-term correction in their portfolio causes mass hysteria. The smart players have cash on hand, and are ready to buy -- precisely because they didn't "buy the dips".
Warren Buffet has $116 billion in cash on hand.
https://www.fool.com/investing/2018/03/04/warren-buffetts-11...
But sure, by your logic, he's "timing the market."
You wrote:
> Did you even read the link? [..]
Which is against HN netiquette:
"Please don't insinuate that someone hasn't read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that."" [1]
http://awealthofcommonsense.com/2014/02/worlds-worst-market-...
An entire generation of young investors has never lived through a serious market decline, and have only been rewarded for HODL. HN skews young. There are a lot of people here who are going to find their worldview painfully challenged when the market does finally turn.
The surest sign of a market bubble in an asset is when I find myself arguing with people that yes, the price of the asset can indeed go down.
Everyone says there's no way the market can underperform on a longer run and you can't time it so don't bother. When someone brings back 2008 they downvote it to death and reply that it went back up so it will be all fine. When the market goes south just keep buying.
Japan would like to have a word with you.
Indeed. But more prosaically, many of these HODL types are discounting how much they'll actually freak out at a market correction. They've never seen a 30% drop, or lived through a five-year correction (let alone an extreme situation, like Japan). Even if you have the stomach to handle the drop, things happen on a five-year horizon that people don't consider: extended unemployment (which tends to happen during recessions), children, houses, etc.
I made that comment thinking it would be a completely uncontroversial statement of fact. It's amazing to me that I'm getting downvoted, as if I've expressed an opinion of some kind.
Btw, here's a talk I found interesting regarding growth and the future of the economy: https://www.youtube.com/watch?v=KKLDevYyE9I&index=13&t=0s&li...
One part I liked regarding the Madoff scandal:
Obviously, you were like how could these people be so stupid to give this person all this money? Didn't they read the details? ... But one of the reasons it happened, psychologically, was because people thought 8-10% with 0 risk was perfectly normal. That's why nobody asked any questions.
EDIT
And regarding my Reddit rant, also scared me that many people don't pay off their mortgage because they get a better return from the stock market, something I find quite wrong unless you're living in a hyper-inflation economy (which is not the case in the developed world)
For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.
> For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.
I agree there always is a point, what I think is that the risk-adjusted return should be much bigger to be worth taking. The spread between the mortgage rate and the stock market return usually is not that big.
There will always be missed investing opportunities but leveraging the house you live in to squeeze an extra 1-2 percentage point at the risk of going bust doesn't look optimal to me.
(You don't need to account for inflation in that return calculation, since the mortgage rate is also affected by inflation.)
If you're me -- 42, great job security, relatively small mortgage relative to income, and in a high tax bracket that's unlikely to change soon -- it's a no-brainer: Take the risk and go for higher long-term expected yield. A recession just means I keep doing what I planned to do anyway - working and saving more money for retirement.
If you're 60, planning on retiring in 5 years (and so about to drop into a lower top marginal tax rate), and in an industry with uncertain job prospects ... suddenly paying off the mortgage looks more attractive from a risk minimization perspective. Or at least splitting the difference.
[1] Most people who took out or refinanced mortgages in Jun 2012 - Jun 2013, and 2016 https://fred.stlouisfed.org/graph/?g=NUh
The "or refinanced" is important, because when rates were that low, a lot of people had a strong incentive to refinance, so the actual distribution of outstanding mortgages is biased towards the lower rates. [2]
[2] This is a study from 99, but the point remains: https://www.newyorkfed.org/medialibrary/media/research/curre...
Understood, guess it's hard for me to wrap my head around this. As a european this feels unsustainable and way too good to be true.
1. Usually a certain amount of equity in the house is protected by state law (varies from state to state). So if someone sues you and/or you go bankrupt, no one can touch your principal residence provided your equity in the home is below the state's threshold. That is assuming you stayed current on your repayments and the bank is still good with lending to you.
2. No recourse loans. If you pay off more earlier, you are just opening yourself up to further risk. I'd much rather lose a bit on super low interest rates (and maybe a little in lender's insurance, too), than lose out if the housing market crashes.
It takes most of a decade to see the full effects of a temporary surplus or shortage.
The intraday low was 666.
A 2 year window of precision is completely useless
Median wages, labor participation rates, access to education and health care, etc... are all more interesting measures. If the economy is only working well for the top 20%, then it's not a very good economy no matter what the GDP and stock market says.
"The economy" isn't a living creature, so the phrase is a metaphor, and different people are likely to have very different ways of interpreting it, according to their own interests and concerns. A hedge fund manager, a real estate magnate, and an unemployed single parent will have very different ideas about what is important for "economic health."
You could probably do worse than to start with actual human health, though. Even if your goal is something narrow, like the opportunity to personally accumulate money through speculation, a high average level of human health is a great foundation for that kind of growth.
Of course, if you accept all that, the news is again very ominous.
One way might be to measure average incomes against cost of living. The economy is healthy if the majority of incomes are going up faster than the costs of living are.
Another might be the percentage of adults who are collecting incomes, based against the average of incomes. (Effectively, a more accurate unemployment figure).
Another way might be to measure the average amount of savings individuals hold. Or, their assets, excluding homes and automobiles.
---
I would propose that the stock market is probably the worst way to measure economic health. Because the vast majority of the population owns no stock themselves but must be customers of these companies, so the vast majority of the population only suffers when stocks price changes for any reason (both when it goes up, and when it goes down).
I'm not advising timing the market, several illustrative arguments in this thread showing how it can not pay off, especially if selling is a taxable event.
The reason I say that point is irrelevant is because what matters most is the signs that a recession is about to happen. Once you have the signs, you pretty much know the recession is inevitable, given the fact that the signs are bad enough that you think the recession could happen in a few short years.
I guess a solid 0-3 prediction would still allow aggressive positions outside that window, and caution or shorting as you come up towards 3 years since the prediction. But precisely because that would be so effective for investors, I assume it can't be that consistent a signal.
The yield curve is like seeing upturned leaves in the wind: a storm may coming, but it’s not clear when.
A signal with a 3 years error is actually useful here. If the signal is instead "there will be something in 2-3 years", that's instead a great signal.
As someone elsewhere notes, since the 60s we've had a recession every 5 to 10 years. Were there two recessions a year apart that I missed?
EDIT: Ah, the other commenter supplied it as the mean length of an economic cycle, measured peak to peak or trough to trough.
But a trough in the economic cycle isn't necessarily a recession unless the trough is two quarters of negative GDP growth.
> since 1960 there has been a US economic recession once every 5 to 10 years. The last one ended in 2009, 9 years ago
This is an interesting line of thinking, but I think it's a mistake. We can use this fact itself and circumscribe some meta-thinking around it. Put the same fact another way, this is arguing that the 1960's started a brand new paradigm that was materially different from the 1950's-before.
For all we know, the 2020's+ will repeat the past (in a way) and usher in a paradigm different from the 1960's! No more recessions every 5-10 years.
So:
* Maybe from now on there will be a recession every 20 years
* Or Fed manipulation will get "so good" that we won't have large recessions
* Or capital's other options for returns (real estate, emerging markets, etc) will look bad-ish for the next 10 years and continue to prop up the stock market because its the only good outlet for extra cash for a decade or three
I could see any of these being plausible. I think leaning on the past is a bit of a mistake. Personally, I think the third one is quite possibly the case. Other non-stock-market options simply do not look as attractive as they used to, relatively.
The future will look very different from the past, as Thiel says.
And if capital flows into the stock market, not to keep pace with growth or to expropriate the standard rate of profit, but simply because it has nowhere else to go, then the natural outcome of this is overproduction. Which leads to a falling rate of profit. Which eventually means falling stock prices, as earnings and market cap are always linked over the long term (even for Amazon.com, which will have to start showing a profit when it moves from #8 to #2 on the Fortune 500 list).
A nice, 500 page overview: https://press.princeton.edu/titles/8973.html
This Time Is Different: Eight Centuries of Financial Folly
by Carmen M. Reinhart & Kenneth S. Rogoff (2009)
Anyone who's been even an armchair observer of economics for 20+ years should know well how silly these conversations can get.
Just as one unimportant example: Bond vigilantes used to be a term you'd encounter regularly, when's the last time you heard it now?
https://www.cnbc.com/2018/02/09/bond-vigilantes-saddled-up-a...
But of course, that's illegal, so it would never happen would it. But at the same time, you and me will never, ever, hear from the bond vigilantes again.
Although faster cycles might also mean faster adaptation, soooo.
The lasting booms starting post WWII surprised economists of the time. Stagflation was so out-of-model that the 1970s caused a major shift in economic theory. The list goes on.
And, of course, we already know that traditionally aligned indicators have been out of sync since ~2007. Productivity and wages broke lockstep in the 70s, wage growth has lagged employment growth to an unprecedented degree since 2009, the current consumer debt bubble is overwhelmingly student loan debt which is largely non-dischargeable and impossible to repossess.
There's an entire genre of thinkpieces arguing that the economy has been doing something unprecedented since 2008, a lot of which line up with your third theory where a strong stock market is basically a reaction to weak fundamentals in other investment categories. It's weird to see that abandoned when people try to do predictions from past indicators.
Welllll kinda. Total inflation adjusted comp has done almost nothing but go up: https://fred.stlouisfed.org/series/COMPRNFB
But I think this too was a paradigm change: Wages shifted to untaxed benefits, like healthcare. At least I think that's going on.
https://www.epi.org/publication/understanding-the-historic-d...
> There is a widespread but mistaken belief that wage stagnation has been partially caused by a shift of compensation toward benefits. Benefits have grown far less than most people realize, rising from 18.3 percent of compensation in 1979 to just 19.7 percent of compensation in 2014
I certainly believe this on a national scale, but I've never seen these stats properly adjusted for globalization. A billion people were lifted out of poverty in the time period mentioned. It doesn't seem to me that these traditional indicators are wrong, they've just been corrected for a global marketplace.
It is no stretch to say that there has been a new paradigm that started in the late 60s as the Vietnam war extracted a heavy monetary toll.
https://fred.stlouisfed.org/series/AMBNS
The current monetary system is only a few decades old.
1.) The internet and computing has increased the flow of information. Investments in data mining and data science by the Fed lets it make better decisions and test stuff iteratively and react to changes faster. Companies can also track inventory in a more controlled manner and not build too much too fast. Employees can find prevailing wage information easier to find better, more productive jobs. Home buyers can see how overvalued their houses are relative to other cities.
The internet and computing is enabling a much higher control loop (a.k.a. a steeper gradient descent toward optimal economic output based on the production needs for the current population).
2.) Steady reduction in the reliance on oil and gas. Much of the crazy inflation in past cycles was due to oil and gas shortages.
Would love to get opinions and more cases for why its different.
Let's say bonds are yielding 10%. Here's a stock that has a dividend of $1/year. What should the price be? $10 (assuming the company is not growing), because that's the price you would pay to get the same return in bonds. (Note that the bond market is twice as big as the stock market, so it defines the "normal" rate of return.)
Now bonds drop to 2.5% rate of return. Now the same stock is worth $40.
It's not just that the stock market is the only good outlet for extra cash. It's that the low rate of return in other markets raises the price of stocks until the risk-adjusted yield rates match.
Here's a talk I found interesting regarding growth and the future of the economy: https://www.youtube.com/watch?v=KKLDevYyE9I&index=13&t=0s&li...
One relevant part I liked regarding the Madoff scandal:
Obviously, you were like how could these people be so stupid to give this person all this money? Didn't they read the details? ... But one of the reasons it happened, psychologically, was because people thought 8-10% with 0 risk was perfectly normal. That's why nobody asked any questions.
David Kelly from JPMorgan and Bullard, the head of the Fed Reserve of St. Louis, say the yield curve going inverted doesn't mean that much because it's being manipulated by the Fed - that means it's broken as a measuring tool (still should be watched, though)
Without a good explanation on why that exact point is so critical, I am a bit skeptical that this is anything but noise.
If there is a good explanation of why it is critical, then we're not really in worrying territory yet either then, because we're not there yet, and we're in the zone of lots more false positives.
When the yield on the long-term note is smaller than the short-term yield, and buyers would still rather buy the long-term note, something is afoot.
What is afoot, as you say, is clearly a lack of confidence in longer term markets resulting in a move towards keeping asset in cash. Or those strange commodities like gold.
I personally believe global markets are in for a rough ride very soon. Brexit is not going to help much either. DT is going to have no time for Twitter.
Why not trying to spice things up with a baby coming at the same time or your significant other being diagnosed with cancer ? /s
Wtf, people :|.
My naivety is apparent and I will treat future discussions like these with more care. Apologies if I struck a nerve.
You can leave off the 'lihood' bit and it is just as true if not more so.
Recessions kill people.
Life is full of ups and downs, some of them economic. Yes, this is just another one. Don't despair, things get better. Value your family and friends, and everything will be okay.
It occurs to me that we still haven't done a damn thing about 2B2F... those banks with the public backstop seem far more dangerous than some temporary tariffs.
edit: I worked through both the dot-com and mortgage-backed security fraud crises. They were terrible.
I’ve made tons of money from the usual FANG suspects in the past few years, but it’s all unrealized gain. No doubt I’ve thought about selling off every year, but chose instead to continue riding it out, always wondering how much it’s going to take for me to be satisfied.
On days like today when FANG stocks are getting beat up, I wonder how much longer this can really go. Every year that passes I take more seriously any sign that suggests these stocks can no longer defy gravity.
Over 40+ years, consider not just a few current strong companies like Apple and MS, but also many others that have gone through many business cycles or perhaps have ended. IBM, Oracle, Sun, DEC, SGI, Cray, HP, Intel, AMD, ATI, NVIDIA, Maxtor, Seagate, Dell, Gateway... Or, consider other baskets to suit your employer basket: IBM, EDS, CA (tech consulting)... PWC, Arthur Andersen (audit/services)... Sears, Montgomery Wards, JC Penney (mail-order/logistics/merchants)...
I think many people make the mistake of "this time it's different" or "I'm different". My cohort saw many people go through the dot-com bubble and it sure seemed random as to which ones won a lottery and which ones got only a t-shirt in the end.
In my view, the only rational strategy would be to continually convert your employer compensation and reinvest into the diversified portfolio you would otherwise consider prudent if you weren't in that particular job. Anything less than that, and you are making an implicit gamble to time the market while perhaps telling yourself it is a tax optimization.
Now, how do we make money from this?
I don't know exactly what that means, but if it means what I think it does, I've been there. I was at a startup in 2001 and we were getting interest from VCs, to move out of angel funding. The economy was already slowing but then 9/11 happened and there wasn't a VC that was shopping for at least 6 months, all the investment money dried up literally overnight. We barely survived on salary austerity and a RIF.
Investors will mistake the loud pop caused by the bursting crypto bubble for gunshots. They'll jump for cover, becoming scared of tech, but as they do they'll then mistake another loud sound, this time a kaboom, of the AI hype cycle exploding. With it will go chatbots, self-driving cars and voice-powered assistants.
Then there's a rupture and a glow then a mushroom cloud appears on the horizon. People are unsure of what happened. Was that Facebook? Amazon?
Either way, this will tear a hole through the spacetime fabric of tech itself thus causing a black hole of fear; Google and Apple will hold on for dear life as everything around them gets sucked in.
At first a few Bird scooters fly past into the black hole of fear, Uber/Lyft sail by and explode in mid-air as they're sucked in, Zenefits instantly is ripped apart and evaporates creating a sort of Aurora Borealis surrounding the massive hole.
Somehow the blackhole of fear eventually closes and everything in midair tumbles back to sanity. Google/Apple regain their footing and observe the destruction around them.
The only thing left will be a few broken Lime scooters, a robotic arm that makes burgers and shitload of defense contracts.
I've been looking for lateral career moves in my industry for a while now, and I'll be damned if every "exciting new company" in information security isn't a blockchain company. And not a single one of them can tell you what they're doing with the blockchain to help with security, they can only tell you how much money they're making.
> So if long-term rates were pushed lower by central bank bond buying, and now short-term rates are being pushed higher as the Fed tightens its monetary policy, the yield curve has nowhere to go but flatter.
“In the current environment, I think it’s a less reliable indicator than it has been in the past,” said Matthew Luzzetti, a senior economist at Deutsche Bank.
Worse, there's a corollary that even trying to move your funds into lower-risk vehicles now can still lead to long-term losses vice keeping them in higher-risk investments now and moving them later (e.g. in a month, or a year, or two years).
I honestly don't know what to do with my money. Right now I'm basically keeping everything where it is: not selling stocks, bonds or real estate, but not buying much either. But leaving my cash as cash has its own cost.
Isn't that always the best time to be worried about recession?
In other words, it's quite time to make sure your holdings are prepared for a recession.
How do you do that? If you're market-invested, there's very little chance of actually predicting the timing of the downturn.
Perhaps sell while confidence is high and then buy like mad when prices have gone way down? Sounds risky...
Make sure your bond / stock / cash / etc holdings are properly balanced. Don't overweight in one area. If you've not paid attention to your risk exposure over the past while, it's a good time to do so!
Is this really true? Almost every single stock I've been tracking has just been going up this year, especially the tech ones. Even ones with decreasing revenues like GoPro.
GE has been in freefall: https://finance.yahoo.com/quote/GE?p=GE&.tsrc=fin-srch
Honeywell has basically been stagnate since January: https://finance.yahoo.com/quote/HON?p=HON&.tsrc=fin-srch
Same with 3M: https://finance.yahoo.com/quote/MMM?p=MMM&.tsrc=fin-srch
The S&P500 index as a whole has crept up a little but many of them are struggling.
Edit: I can't figure out how to get it to link to the 5 year charts, which is how I was looking at it.
Edit: Yep, Walgreens also not much higher vs 5 years ago.
Also hadn't seen that news. Interesting.
Was never very impressed with Synchrony. They used to address all my mail to Null Null, a bit disconcerting for an organization who ostensibly has to program systems to keep track of how much money they need to give me back.
So the question is, are the new-tech companies the only thing propping up the S&P500, or are they truly the "new economy" and will continue to thrive while all others fail?
I sometimes wonder if this inconsistency between perspective of view of the same reality might also have an effect on individual opinions.
"Milk has been in a sideways struggle since January 26. Carrots, too."
Beyond the annual $50,000 currency conversion limit they've put into place domestically, they've also made it an obnoxious and suspicious process to go through even if you attempt to convert the allowed $50k.
The US is far wealthier than China is anyway, and that's with 1/4 as many people. There is no need for Chinese capital to spur asset inflation in the US, the US has more than enough capital to do that on its own.
When you see a persistent yield curve inversion, buy the longest maturity treasuries you can find. For example, 30 years.
This is counterintuitive because shorter maturities (2, 5 years) will yield more when you make your purchase. However, your capital gains will likely compensate for missed yield after the recession has run its course and return a tidy profit.
Alternatively, the economic landscape after the recession may be much worse afterwords. Persistently low interest rates (even deflation) will be in your favor if you decide to keep your treasuries because you'll find nothing to buy with a better risk/return ratio.
Of course, it goes without saying that selling your long treasuries to pay expenses will truncate your returns.
> This is counterintuitive because shorter maturities (2, 5 years) will yield more when you make your purchase. However, your capital gains will likely compensate for missed yield after the recession has run its course and return a tidy profit.
Sorry, could you flesh out the details here? You buy treasuries with a long maturity. What is expected to happen with them after that, and after how long?
> The yield curve is basically the difference between interest rates on short-term United States government bonds, say, two-year Treasury notes, and long-term government bonds, like 10-year Treasury notes.
> Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.
Edit: Missed the first question in your post. The Federal Reserve is essentially buying fewer Treasury Bonds when the bonds it currently holds matures. Instead of reinvesting the payoff + interest that it received for those bonds, it is now just taking that money and essentially keeping it out of circulation.
There are many other factors, but it should be noted that this is the longest time of a financial expansion (time since the last recession) in modern history. In the 70s and early 80s there were 4 recessions in a 12 year period.
No. When the Fed buys bonds it issues MONEY.
Otherwise, it may be that the Fed reducing its budget sheet is irrelevant, or is a factor that is only exacerbating factors that were already at play, or even, perhaps, that short term yields exceeding long term yields actually causes recessions.
In capital markets, in order to justify taking risk, there has to be an accompanying return, otherwise people will not invest.
Inversion of the yield curve signals exactly that - returns are not enough to justify the risk, and that capital expenditures will go down, leading to lower returns, lower employment, and also a recession.
There is one key thing that very few people are talking about, however - the Fed basically controls the debt issuance, and has some (possibly even significant) ability to nudge the market in the direction it wants by buying/selling towards one end of the curve or the other.
This alone can effect the economy, but the Fed does not have a strong history here. But it's definitely possible, and I think we may experience that with the current Fed President, Jerome Powell.
[0] https://www.schwab.com/resource-center/insights/content/eye-...
[1] https://www.newyorkfed.org/research/capital_markets/ycfaq.ht...
[2] (PDF) https://www.dnb.no/seg-fundamental/fundamentalweb/getreport....
Long term rates are low because the market expects that any economic weakness will be met with quantitative easing and that long term global interest rates will be negative.
The market is not predicting recession. It is predicting more interventionist economic policy to prevent recessions, which is a good prediction.
#golong
On the other hand, if you have a lot of gains in the stock market, using options may be a small price to keep your piece of mind. Just understand that they give you no clear edge.
For some reason, nytimes paywalled clickbait is constantly spammed here.
The inverted yield curve. There are thousands of articles about the inverted yield curve. The death cross. The black swan event. All just voodoo clickbait nonsense.
Also, I love how the nytimes say "wall st is concerned" as if they knew what wall st was thinking and most importantly, they think that wall st is one entity. A lot of players make up wall st.
If any of these people at these news companies knew what wall st was thinking, they wouldn't be working at news companies making pathetic union salaries. They'd worked in finance and retire before they were 25.
Simply put, when the big players want there to be a recession, there will be a recession. Markets are human created and controlled by humans. It isn't a natural entity following the laws of nature.
The invisible hand of the market doesn't mean that the hand controlling the market doesn't exist. It just means that us mere peasants aren't allowed to see it.
I'm impressed by your naivety. Where's the cynicism? I've worked on wall street/finance and I've read finance publications for decades. It's not cynicism, it's experience.
> conspiracy-theory-type reasoning
What's the conspiracy?
> compounded by the agency fallacy.
I'd advise you to give Logic 101 another try. Also look up ad hominem while at it.
>What's the conspiracy?
According to your first comment, the "big players" are conspiring to cause recessions when they see fit.
I use a low-fee robo-investor, WealthSimple[0], that has me invested in a variety of ETFs (Canadian, American, international) and bonds, and will rebalance my portfolio when any specific market falls or grows more than the others.
I prefer this kind of investing because it's stupid, cheap, and works.
[0]https://wealthsimple.com/ Or https://wealthsimple.com/invite/FCU4AG for a referral that gets you both of us some additional cash managed for free.
The last recession was driven by a price collapse in housing. That was unusual. The next one is more likely to be driven by trade problems, which is more common historically. Also, the last few years have seen a lot of investment into stuff that's not paying off, and after a few years, that comes back to bite you.
[1] https://www.newyorkfed.org/research/capital_markets/ycfaq.ht...
[0] https://www.frbsf.org/economic-research/publications/economi...
So the critical threshold is saying "at any point beyond this line, as conditions remain the same, bad things may happen at a very accelerated rate"
I think that's why the lines jump from .24 or .6 to 1.0(recession) and then back below .24.
So as far as I can tell, they're not saying a recession is guaranteed if the probability increases beyond the critical threshold, but are instead saying the probability of a recession increases more quickly up into the point of an actual recession than our ability to reliably predict and update the probabilities that would predict said recession.
but idk
None of the curves ever go to 1. The main curve ("spread only") never even reaches 0.4.
> So as far as I can tell, they're not saying a recession is guaranteed if the probability increases beyond the critical threshold
They certainly shouldn't be saying that, since the curve being at that level means precisely that the probability of recession is 0.24, not 1.
I feel like they are priming the pump with stuff like this...I guess it's time to hit the flush button on the Dow and suck all that "buy-n-hold" money outta the market, and start the cycle all over again.
Cynical? I guess but I call it like I see it.
A) run a neural network across thousands of historical economic / financial metrics and find the best predictor B) ?????? C) Profit!!!
I'm a very blue moderate with some ideas that are sometimes rather far from the traditional one dimensional spectrum.
Sites like The Guardian, New Yorker, Atlantic, etc seem to do a better job. Newspaper funnels are entertaining - I spent some years in the newspaper world when this experimenting with paywalls started.
As a technologist, I see value after consistently accessing more than a few articles a month.. closer to 10 is where I see enough value to pay. I'm sure I'm only one persona though in their funnel.
EDIT: Here's a recent case of NYT suppressing newsworthy clips: https://theintercept.com/2018/06/20/administration-of-hate-t... Search for "The Daily" in the transcript.
Nonetheless, as my perspective evolved, I realized I can't countenance supporting them when they endorsed actual evil like the Iraq War and perpetuate so many things wrong in society. They'll always let you down when it counts, so I don't see a reason to be there for them when it doesn't.
https://www.google.com/search?q=Library+subscription+new+yor...
It ultimately depends on your time scale and tolerance for paper money variation. I've heard buy low, sell high is good; and, I have twenty or more years to move things around. So, when I notice a recession, I increase my proportion of stocks, on the assumption that they are undervalued. If I were to notice a bubble (unlikely) I would increase my proportion of government backed bonds, to wait until the next recession.
If I were retirement age, and needed to reify that paper into real money, I'd probably divest stocks in favor of government bonds that hold value during the downturn. "Government", on the assumption that they are less likely to default than corporate backed bonds.
Does it work differently elsewhere?
Usually if the future seems bleak, don't traders adjust their behavior and investments to avoid loss?
As long as finance is scared, it seems that a recession cannot happen.
Of course some might get frustrated and find that they are unable to expand their business, and break through barriers, and lobby against regulations.
I wonder how wall Street is behaving since Trump's election, and if risky policy is being put in place, and if wall Street is being cautious.
The potential upside is that tariffs are stress testing industries with supply chain issues, shaking out mal-investment.
Actually, no one knows the repercussions.