Hold That Recession: U.S. Indicators Are Trouncing Forecasts
bloomberg.com
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multiple quarters where the US GDP decreases, even if its just 0.1% each time, will be called a recession.
That basically doesn't happen. If 3% of the payroll needs to be cut, ~3% of people are usually laid off, instead. Resistance to lowered numeric wages is why moderate amount of inflation are typically considered a good thing: workers will more often accept less or no increase than they will an actual drop.
https://asset.barrons.com/public/resources/images/ON-BS188_C...
The commonly used U.S. definition is the one from NBER (National Bureau of Economic Research):
"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
Here's a list of past recessions: https://www.nber.org/cycles.html
A good thing to keep in mind while the "experts" are bombarding you with their theories.
My intuition seems to think that even if the market recover/gain some more in the near term, it's not going to go much further before hitting a correction/recession. In addition there is simply too much uncertainty around Brexit, Trump, Iran/Saudis, China/Hong Kong, climate-driven black swans, tech bubbles (e.g. AI, blockchain).
I ended up taking money out at the end of July and am not sweating my decision, even though we've recovered about what we lost in August at this point. This shit is a house of cards, I don't have a problem missing out on marginal gains if it means avoiding a major crash.
Trump? Strongly suggesting that the US push yields lower, and the only tool it has to do that is by adding more money into the market. Fueling the nonstop 30-year bull market in treasuries and other government bonds, before fueling the excess capital flows into every other asset.
Iran/Saudis? Epic Oil Boom Town of unprecedented proportions with coastal US and middle america being the primary recipients.
Tech bubbles? A by product of excess money added to the markets, see the 'Trump' entry.
China/Hong Kong? What? You gotta really re-evaluate how relevant that situation actually is. Everyone's had plenty of time to deleverage their exposure to that city, and nobody is going to get involved. The surrounding megacities in Guangzhou have all the output now. HK is 3% of China's GDP and has been functioning as an administrative convenience to circumvent customs duties, for years. Sorry about the people, it has nothing to do with the global markets. China itself is an accounting basket case though, but thats always been the case and not a new issue for your portfolio.
Brexit? Britain's problem more than anybody else, people have had even longer to deleverage exposure there, and its a slow motion train wreck that the whole rest of the EU has already moved on from.
Climate black swans? Well you got me there. The whole point of a black swan is something not being in the model. This is always true and not quantifiable, you either have the appetite or not.
I'm a complex systems person though, and it's the interactions between all these things which has spoiled my appetite.
I'm not saying I'm right or that anyone should follow my lead, simply pointing out that these things, taken as a whole, makes the future seem very uncertain and leads me to side with the more cautious camp.
If people collectively decide to stop buying that stuff then yeah you'll get your crash, distressed companies, and massive layoffs. but with the European Central Bank starting up QEternity and the Federal Reserve about to start to QE4eva, they're going to be pumping all debt and holding it to maturity...
I don't think the big ones feel anything. (Fed, ECB)
ECB's frontman was a Goldman Sachs alumni, accountable to no one, doing private placements with his buddies, issuing corporate bonds directly to the ECB instead of the ECB picking them up on the secondary market.
The US Fed gets a chairman to just the Board of Governors, who is more accountable to the other people on the board of governors, and then the actual Federal Reserve. They are not accountable to the US President or the American people in any capacity.
They transcend administrations and are completely divorced from main street rhetoric. They don't care and don't have to. They emerge from their screens a few times a decade and say "huh, there's new pronouns now" and go back to resource management monopoly that they've been playing for 100 years.
> and will now employ these "creative" options without regard for any long term consequences
I think so, when you look at the incentives. The consequences are very few: there is a risk that the people are disillusioned by how resources are distributed since not everyone has to exchange labor or capital for resources (ECB buying newly issued bonds for billions of euros that didn't previously exist). there is a risk of hyperinflation if there is a real disruption in the need for the monetary union's currency, but uncontrollable need to inject more of the currency into the market.
In the mean time, they can keep assets on their balance sheet forever, with only a slight embarrassment if those assets cause losses (such a bonds that default).
Got some upside from some stock? Maybe take that profit and move to a Cash type position.
Diversity of Investment.
If on the other hand everyone starts saying "it's different this time!" that means it's time to run for the hills and start stockpiling canned food and shotguns.
1) "Nobody knows nothing." This means nobody can predict what's going to happen. Nobody.
2) Pick your asset allocation and "Stay the course". This means determine how much risk is appropriate for you, invest in an appropriate portfolio, and don't deviate from your plan.
Follow these two (and maybe a few more), and prosper.
There's plenty of other places to put money though.
I’d prefer that all stocks did a buyback instead of paying a dividend.
If you're curious, here's the full stock performance dataset I pulled for the last recession: https://shan.io/writing/learnings-from-the-2008-great-recess...
Edit: Idk why the downvotes. Yield inversions occur much more often than recessions therefore by necessity some yield inversions are preceded by another yield inversion instead of a recession.
Since recessions are cyclical all inversions eventually lead to a recession. There haven’t been enough cycles to draw any sort of meaningful conclusions based on temporal proximity of the inversions to the recessions.
> a yield inversion may or may not lead to a recession
> all inversions eventually lead to a recession
The main two problems that faced US economy in the last 60 years - energy and jobs, have been solved by US. For energy, US is now the largest energy producer in the world. For jobs, US has climbed out of the hole of threats from globalization, increased internal labor force and automation, by using tariffs, deportations, border walls, upgraded workforce via increased education, and splitting threat from its main outsourced competitor China.
If the metrics are wrong or only partially focused, their meaning is less or non significant. There is ample recent evidence that only a narrow upper class is improving while the increasing lower class is dropping in terms of cost-of-living-adjusted income.
white-collar workers have seen their wages grow by nearly 7.5% https://www.usatoday.com/story/opinion/2019/08/14/blue-colla....
Workers at the lower end of the pay scale finally are getting the most benefit from rising wages https://www.cnbc.com/2019/03/13/workers-at-lower-end-of-pay-...
> “the message is growth is slower, yes, but the risk of recession is grossly overstated. As long as the Fed continues to do the right thing” by cutting rates a couple more times.
Apparently a healthy economy is one the Federal Reserve manipulates by keeping interest rates as low as possible. How long can they keep this up?
They can also print money, the second lever at their disposal.
There's a fascinating video about this, from Ray Dalio. Give it a look, it's pretty interesting.
Eventually, the other shoe will drop, I'm sure, but hell, the Dow is floating around 27k. A little couple hundred point dip is just an opportunity to buy in at a discount.
If you're in the market right now, you may see no gains in the next 3-4 years so you should have a 10 year horizon to realize gains.
Personally though, I just invest in a 3x leveraged S&P 500 ETF and roll with the punches. Unless there’s some cataclysmic event, that 3x leverage will almost always outperform the S&P, even with the volatility drag.
actual returns = return - var(r) / 2
If the S&P 500 has a Sharpe ratio of one and say, a 10% mean yearly return and 10% vol, we first need to turn it into single day returns and volatility (since these leveraged products rebalance daily) so we get:
S&P 500 Daily Returns = S&P 500 Daily Vol = 0.1 / sqrt(252) = .006299 or ~6 basis points
Before the volatility tax, thix means that our leveraged product should get 18 basis points of returns and volatility daily. In our annualized we get:
3x S&P 500 Annualized Returns = Annualized Vol = 29.99%
Now we factor in the volatility tax:
actual returns = .2999 - .2999^2 / 2 = 25.49%
Now comparing with actual market data: https://www.etf.com/UPRO#overview
PERFORMANCE [as of 09/19/19] 1 MONTH 3 MONTHS YTD 1 YEAR 3 YEARS 5 YEARS 10 YEARS UPRO 12.19% 7.41% 64.68% 1.13% 34.64% 22.78% 31.97%
The annualized return of UPRO is 31.97%.
If we look at: https://www.investopedia.com/ask/answers/042415/what-average...
We can see that the S&P 500 3x leveraged is an excellent investment on a non risk-adjusted basis. On a risk-adjusted basis it's worse, the S&P 500 in the example having a Sharpe ratio of 1 while the 3x S&P 500 having a Sharpe ratio of 0.8499. But since you can't eat risk adjusted returns and it's going to be difficult for retail investors to get significant leverage to actually invest in good risk-adjusted portfolios, the 3x daily levered S&P 500 is a fantastic investment.
The prospectus of UPRO [1] : "returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period."
A recession will happen when there is a mix of two things: 1) a big financial/economic issue that affects an important sector of the economy (crisis), 2) widespread panic.
There are already multiple candidates for 1), but what hasn't happened is 2).
Why? That's anybody's guess.
My guess is Trump.
For people to panic, there needs to be sustained media coverage and focus. But now whatever Trump says is more important than anything else for the media.
If you look at the media since Trump became president, the most important issues have been all stuff related to his government, and whenever the media has focused on anything for too long, he's come out with some other thing that the media shifts their attention to.
So we've had lots of small panics, which by now have mostly desensitized the public.
If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown recession.
That said, panic is a real component of crises and Trump's ability to shift focus could actually be a real asset, though it will be many years before historians and economists recognize it.
Yes, and also 2. Without panick and a lot of intensive short selling, Lehman wouldn't have happened.