Predicting Next Recession
bloomberg.com
bloomberg.com
Today, all the same people talk about coming recession.
I was lucky to have my first job in finance during the credit crunch crisis. Until it was over media we're adamant it's just a correction. We did not believe it either ... we all thought it's a good time to buy cheap before the next bull run. Only about 3 people actually predicted it (even though AFTER the recession media came up with a dozen people who claimed so - none of them ever made any bets on it)
It's hard to imagine recession come when everyone expects it.
However, You can still have downward spiral even in case "everyone is talking/preparing for coming crisis". Imagine this:
- China going finally bust
- honkong peg to dolar broken (financial companies there going bust)
- australia mining slowdown and property market bust
- australia banking woes
Even though there are money on the sidelines, you can have crisis and even more money on the sidelines during few fearful quarters.
I don't think any sane person doubts that China is going to have a debt crisis btw (it started a while ago), the question is whether they can do what they did in 1997.
But yeah: already started.
If people expect stocks to crash, then the expected "crash" is probably already priced in. If people expect a recession, then the reduction in economic activity is something of a self-fulfilling prophecy.
That's why the fear of losing out dominates everything else right now and every mini correction gets bought - until something unexpected happens.
And before anyone says "fed reserve 2 percent", the federal reserve is known to lie.
Especially when those in power are doing everything they can to prevent it. The Federal reserve has a trading floor and participates as a proxy for the government in the markets. There is also the rumored Plunge Protection Team. We actually have markets pricing in the likelihood of further quantitative easing 11 years after it was first done to address a prior crash. And for it all, we have only really accomplished concentrating wealth and increasing income inequality.
None of the above really appears sound. I expect things to change, mainly because I think the above cannot continue indefinitely.
At this point I think it just depends on what the central banks want, as they took control over stock market prices with the low interest rates.
That's not really true outside the US. And in fact it's not even true for the smaller cap stocks in the US. The Japanese stock market being the most cited foreign example of the opposite. Pretty much everywhere outside the US the stock market is very vulnerable. Odds are this will come to the US sooner or later.
They can QE forever to feed the demand, however it's on the whim of a few powerful people when and how some shortage will occur. Stocks grew 20% YoY with flat earnings in the last few years. Price discovery and market signals are dying, but they are dying for both directions up or down.
Many analysts expect asset prices and income inequality to be a major topic of debate this election and we don't know yet if Fed policy will be at the crosshairs. Either way social justice impulse will be stronger against the tech giants either thru cancel culture or outright riots.
It is "manipulated" to the same extent as anything else.
Of course as technology is getting faster and creating more value, and people are moving to cities, it's hard to get a correct valuation, but still gold seems undervalued compared to these other asset classes.
Be clear: you are betting if you take Bogle's advice. You are going all-in. If you know what you are doing, great...but that is probably not the case.
I used to trade domain names at that time, mostly to fund my college. Everyone in my industry was talking about how the value of certain domains will 10x in the next 5 years and other irrational projections.
Maybe its that experience, but I've since maintained a personal theory that a serious recession hits when people least expect it. When there is too much easy credit in the system and business optimism isn't grounded in any fundamentals, that's when you should fear a recession.
Not when everyone is telling you that a recession is just around the corner. Because then you're already more careful in your decision making
Not sure how much of this is founded on economics of course
... ... Opps : recession. ;-) it's a paradox
I also believe that a moderate recession every decade is healthy, cleaning up the economical landscape of unproductive investments.
Here's all the data on how stocks performed during and after the last recession: https://shan.io/writing/learnings-from-the-2008-great-recess...
How can you have a model that gives a 100% chance of something happening in the future? Yet that's what it says during the last recession. And it falls off a cliff when the actual recession ended in June 2009.
I was alive and trading during that time, and I reckon the business cycle would be quite easy to predict -as in, the model would be in a textbook- if you could be that confident of recession one day and the opposite the next.
The model isn't in a textbook because predicting the economy is nothing to do with economics as it is taught at universities. Economists use complex structural models because they are fun to teach and create barriers to entry. This is why DSGE models are so popular in universities, govt, and central banks but barely used anywhere else.
If you want to forecast the business cycle, you just need linear regression. You can't ever be 100% (unless a recession is already occurring) because the economy is always changing but basic models are pretty accurate (the BIS has done quite a bit on this recently - https://www.bis.org/publ/work818.htm - funnily enough, the term spread isn't the be all...but economists have a big problem with including things like credit.
The current monetary system creates money in form of debt with interest which can only be paid by issuing even more debt.
As soon as the central banks pull the plug on liquidity (either by raising rates or fixing the balance sheet) you will have a cascade effect of bankruptcies which "clears out" all debt that could never be repaid in the first place.
Right now the central banks are increasing liquidity around the globe again hence the low probability of a recession.
Because there is nothing else to do? Whatever happens to the market it keeps going up. There is little reason to search for an upturn (and you don't want to jinx it), so they are searching for a downturn.
The year leading into the Great Recession was mostly around 36%. One year before the 2001 recession it was 24%. And then we have spikes around > 40% in 1999, 2002, 2003, 2006, 2016, and 2018, none of which "paid off".
So how are we supposed to interpret these numbers? That a 40% chance of a recession has a 15% chance of actually predicting a recession?
What if the forecast is Bayesian rather than frequentist?
The bubble will burst soon...
The biggest impact on the econony - via the spending minds of the masses - is how the mainstream media plays the strenght of the economy in the context of the USA's 2020 election. The middle to the left will be pulling out the stops to look for bad Trump-sourced economic news. That could become self-fulfilling.
Listening to the guy who the big short was based on now, my main takeaway is that the banks deleveraged significantly since 07/08, down to ~11 vs ~30 then. Of course, part of the problem is they were using financial tricks to cover up bad assets... so I think they might be more leveraged than they are letting on.
Second, the legislation afterwards only really did one thing: make the "fix", aka fed bailout, automatic. This means there should be less time between drop and recovery. At the same time, it creates incentive for bankers to be more reckless.
Politically, midterms are always about the economy at heart. If Trump is serving Wall Street well enough they will try to keep him propped up for 2020, and would probably try to delay the big dip till either right after or till 2023/24.
https://econbrowser.com/archives/2019/06/recession-anxieties...
https://www.investmentwatchblog.com/rosenberg-on-lagged-effe...
“A total of 1,160 CEOs in the US have left their jobs in the first nine months of 2019, according to data from recruitment firm Challenger, Gray, & Christmas. That’s up 13% from the same period in 2018, and the highest turnover at this point in the year since the company first began tracking CEO departures, in 2002.”
https://qz.com/work/1727662/why-ceo-turnover-in-2019-is-at-a...
Do you have more prominent examples?
It's usually policy error in the other direction - keeping easy money for too long. I.e. you don't handle a catastrophe by fixing the down leg (that's emergency measures with bad side effects), you prevent the up leg. Alan Greenspan will be forever remembered and hated by some after his efforts to create the dotcom and the housing bubble.
You are basically correct but these factors are essentially structural. For example: is the central bank independent from the govt? How much oversight is there over policy decisions? Etc. In the West, it has been politically impossible to actually do this.
Your understanding of early 1990s Britain is not correct. The UK was forced to raise rates because of the ERM and rising inflation. The govt ran the BoE so it should be quite obvious that they had no desire to slow the economy down but were forced to do so.
Also, this is not about the FED being dependent or independent from the government. This is about the widespread idiocy of thinking that expensive assets = well-being of the country. Dotcom and 2008 (and today, but let's wait for it to burst first) are all FED's pedal-to-the-metal work.
Again: no they didn't. They didn't "want" high rates. You understand how dependent the Conservatives were on home owners and the structure of UK mortgages?
The reason ERM was the main policy goal of Major was inflation. The Bundesbank was the immediate cause but the reason they got into that position was inflation (if you read the research, even the die-hard Lawson fans believe that the ERM set the stage for the 1990s).
Yes, the nature of the relationship between the central bank and the govt determines the response to those events. Do you realize that there have been substantial changes in this relationship since the Fed was created? The Fed is politically unable to respond. I don't understand the relevance of your point about expensive assets...that determines nothing, the market will go up and down regardless of anything.
MarketWatch - https://www.marketwatch.com/story/the-sp-500-is-in-its-first...
CNBC - https://www.google.com/amp/s/www.cnbc.com/amp/2019/06/24/ana...
Also, I fail to see how this theory applies to the recession of '08.
This isn’t a big secret, it’s right there in FOMC meeting notes. Google Greenspan and punch bowl. Google Kalecki and politic aspects of full employment.
It is like saying that wars are easy to predict because they are (obviously) the result of governments declaring war.
Same thing for companies, even if a layoff is planned, no one knows exactly when it will happen, not even the people who planned it. It may be earlier than expected, or later, or not at all depending on the results, the whims of the market, the legal framework...
Like when central bankers refused to use negative interest rates even though the natural rate was clearly plunging into the negative. In 2009 their own Taylor rule models put the correct rate at negative 4% (https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-t...). Central banks kept interest rates very high at zero.
This is the top comment, while someone calling it a conspiracy theory is down-voted. That is sad.
The Fed was founded in 1913. The US had recessions in 1785, 1789, 1796, 1802, 1807, 1812, 1815, 1822, 1825, 1828, 1833, 1836, 1839, 1845, 1847, 1853, 1857, 1860, 1865, 1869, 1873, 1882, 1887, 1890, 1893, 1902, 1907, 1910.
Do you notice how frequent recessions were, pre-Fed? The average duration was also much longer. Blaming recessions on the Fed (who are trying to manipulate the business cycle) doesn't jibe with the data.
Perhaps it's my perception, but I've noticed this more lately.
I mean, there's always been a perception, for as long as I've been on this site that "things used to be better", so take that with a grain of salt, but objectively, if we don't have the "antibodies" in this community to reject obvious conspiracy theories like this... we're in a bad spot.
I think the current finance era may come to be viewed in the same light as the fire-fighting practices of the past century. Always working to prevent the little fires leaves the forest unhealthy and sets up an eventual inferno that no one can control.
Indeed. That's the norm with recessions. It just so happens that the last one, the one we all remember (2008) was...really bad. It will affect people's perceptions for the rest of their lives, much like the Great Depression.
It is also very odd to call all of the periods you mention recessions...they weren't. Some of them were specific banking panics that had no effect on the real economy. The purpose of the Fed, which was effective eventually, was to alleviate the disruption caused by the agricultural cycle (which caused gold to flow in/out changing the monetary base. But there was no real mandate for economic stability, that isn't why the Fed was created, and that idea would have made no sense to central bankers until very recently (probably the 1980s, although for different reasons over time).
I'd compare it to forest fires. They should be frequent and small. Make them less frequent (via suppression), and they get a lot worse and much more dangerous.