Vanguard Warns of Worsening Odds for the Economy and Markets

The prediction didn’t work out so well—so far. Hindsight compresses time. Things said in 2004 and 2005 definitely bubbled up to the top after Lehman’s collapsed in ‘08 as “correct predictions of the coming financial crisis.”

If things implode tomorrow or six months or even a year from now everyone will look back at that Krugman quote and say, “The man’s a damn genius, he totally called it.” It’s easy to forget about the time period when a financial prediction was wrong before it was right, particularly when the magnitude of disruption is significant. Sometimes the time even emboldens the former position because “they knew all along.”

The one thing we do know is that markets are cyclical. There is always another crisis lurking around the corner. If you went to a cash position the day after Trump was elected you seem like a fool today. You can wake up a financial genius tomorrow. Maybe you didn’t sell at the top, but people who got out of real estate in 2005 probably don’t look back with too much regret saying, “should have hung in there another two years.”

To be fair, I remember him taking that back and admitting he let emotions cloud his judgement pretty much right away. I can forgive a bad (and probably very sleep-deprived) election day take if they admit it.

Disclaimer: I'm not intimately familiar with his views, but since he's a pretty prolific political columnist (in addition to being an economist) I'm sure there's plenty of other stuff worthy of criticism.

Ehh, the reason my parents retired millionaires, despite never having earned an annual six figures combined in their lives, as well as putting two kids through college with no financial aid, was because of being invested in the stock market during the Reagan 80s economy.

This comment has no relevance to the article posted.

There's a fun Mathematica applet exploring this.

http://www.demonstrations.wolfram.com/StockMarketReturnsByPa...

Spoiler: it's highly, highly sensitive to parameters. You might choose to lag the time windows for several months to account for a delay in the effect of new policies, or lead to account for anticipation, or use as the underlying "invest or not" determination a time series reflecting laws, who holds the Executive, who holds the Legislative, some combination... but tweak any of these parameters and the outcome will flip wildly.

Of course this makes it very easy to reverse engineer a particular outcome if your audience is not familiar with the effect.

> I suspect it's because the trickle down effect doesn't work.

Well, maybe.

Or maybe Republican policies are beneficial in the long term, which means they don't start working until after they've left office and don't stop working until the Democrat who replaces them has dismantled them.

Or maybe voters tend to vote Republican when they are uncertain about the future, i.e. in periods of instability.

Or maybe the President doesn't make a huge difference either way in most cases, and the business cycle got into a rhythm where corrections started happening in a quasi-regular rhythm that seems to coincide with elections with Republican incumbents. (The only point where it seemed to get out of this rhythm, after WWII, was the double-dip recession of the early 80's, which coincided with a Democrat -> Republican party switch that didn't switch back until there was another recession).

Or maybe there's been only 15 US Presidents to serve at least a full term in the past 100 years and it's not a meaningful sample size. I'm going to bet that's the one.

people are greedy. they vote for tax cuts when the economy is doing well.

It is worth considering that international indexes are often more expensive than domestic, and also have had more volatility historically. They're also often pinned to the USD.

And put it where?

Vanguard is practically synonymous with index investing. They have everything to gain from letting retail investors continue to believe the stock market is a free ride. Why would they cash that in for a one time profit gain?

If anything, this is an angle at manipulating the Fed into keeping rates low

> If the facts change — with, say, the Federal Reserve delaying anticipated interest-rate hikes in response to a weaker economy — the recession forecast will change, too, Mr. Davis said.

I don't believe Vanguard trades for its own account.

Given their structure, I'm not sure how they could trade on their own account. IANAL, but they're a registered investment advisor and that status requires them to act as a fiduciary for their clients.

Plus, with their structure as a mutual company the firm is owned by its customers. Even if they did trade for themselves, the account would effectively be owned by all their customers, wouldn't it?

If there's any profit to be made from a market trend, that trend is more likely to be volatility than a downturn, as far as I can surmise. They make commission from trades that are made, and at scale that's a lot of profit. It's the same thing that keeps Coinbase profitable in that bear market. Of course I could be wrong, but generally you sometimes hear about the big shorting positions from big players. I don't recall Vanguard traders making the news, and I'm not sure they're involved in options, either.

Aren't we near the end of a 7-10 year cycle regardless?

By the very nature of vanguard, except for its tiny, tiny managed funds, vanguard doesn't ever do shit with this knowledge. Just continues following the index.

Didn't Taleb himself predict the past recession, although using very different methodologies.

https://www.globalresearch.ca/risk-experts-who-predicted-200...

They're not making a prediction.

"We don’t make any actual predictions about where things are going next month or, in the markets, next year. The stock market could rise a lot, short-term. We don’t know."

Vanguard's model says the probability of a recession by late 2020 is between 30% and 40%, which is higher than normal.

That also means that the probability of no recession by late 2020 is between 60% and 70%, which is lower than normal.

>> In recent years, the company has put the probability of a recession six months out at close to 10 percent. Now, Vanguard says the chances of one by late 2020 are between 30 and 40 percent. That’s Vanguard’s highest-ever estimate for that time frame, Mr. Davis said. (A six-month forecast reported a greater than 40 percent probability before the recession that started in December 2007.)

The parenthetical was the interesting part to me. I would love to see some long-term data on their forecasts.