Comment by bdbenton | Hacker News Reader

Comment by bdbenton | Hacker News Reader

If you look at the 2-10 year spread US treasury bond rates, there is a massive yield curve inversion. Historically, this inversion has been a very consistent metric for predicting incoming recessions.

https://fred.stlouisfed.org/series/T10Y2Y

The current inversion hasn't been since the early 2000s and ensuing recession, which was characterized by the bursting of the dotcom bubble and the attacks of September 11th.

The dotcom bubble is attributed to venture capital funding, and the crash took out a lot of companies and hit others like Amazon pretty hard. Economic crisis is inevitable, it's built into the business cycle.

Following this logic, the next companies on the chopping block would be tech once again. This time, likely the "unicorns" that are the darlings of VC investors. Additionally, it's kind of an open secret that FAANG stock valuations are a bit disconnected from reality.

When you are on the edge of consumer tech, a lot of stock investors don't even understand how your business model functions and what gives it such a high valuation, and they don't really care as long as the price goes up. It's a darker side of the culture, as the trend is to splurge with VC millions and cash out at the zenith then move on to the next thing. History shows it's not sustainable.

I'm just old enough to remember the dot com bubble. Very few companies back then had much revenue, let alone any profit. Public tech companies in 2022 have enormous revenue and profit streams. Alphabet/Google is trading around 20 times earnings and Meta/Facebook is around 10 times earnings. The S&P 500 overall is in the high teens. I'm not sure I'd call that disconnected from reality.

Within the startup ecosystem there are embryonic products that if nurtured can develop into existential threats to most of the current Fortune 500 companies. Incumbents eventually have to pay up to survive, eg. Adobe acquiring Figma. This dynamic supports startup valuations broadly. Startups represent the future and the future is usually priced at a premium.

> Public tech companies in 2022 have enormous revenue and profit streams. Alphabet/Google is trading around 20 times earnings and Meta/Facebook is around 10 times earnings.

While this is true for the largest of ad companies like Google and FB, the same isn't true for the vast majority of recent tech IPOs like Robinhood, Duolingo, Couchbase, Monday not to mention literally all of the ridesharing and food delivery companies to name just a few.

In a way, excessive acquisition valuations are likely also a side-effect of too much money floating around that might change radically with increasing interest rates.

Ad spending is one of the first things to get chopped come a recession. So expect these numbers to go down.

So then the question becomes what's the profit margins? Can they absorb, say, a halving of revenue short term?

If they can't then they're going to start layoffs, and the first to go will be the ones that don't generate revenue, so the experience gets worse for users, and the pipeline of new products dwindles, and you've released a bunch of potential competitors that know your business into the labour pool.

This also removes the price support for those existing startups.

One problem is that in 2022, most of these companies have very fragile revenue in a contracting or even a steady-state broader economy.

In a time of genuine hardship, particularly of the energy/food constraint kind, there are a million consumer priorities before a new iphone (Apple), consumer electronics (Amazon), fast fashion, vacation travel, and the enormous adtech ecosystem (Google, Facebook) that is supported by such business, as well as the toolmakers (Adobe) for them.

> and the attacks of September 11th

Were they predicted by the yield curve inversion? Amazing. Those bond traders really know what they're doing.

Believe it or not, the bond market predicted covid months in advance with another yield curve inversion.

How do we know there's a casual connection? Sure, the yield cure was inverted, but if you asked an economist about that in late 2019 they could have given you plenty of reasons for that, but Covid would not have been one of them.

Believe it or not, there were some traders that seemed to predict 9/11.

https://www.jstor.org/stable/10.1086/503645#metadata_info_ta...

I believe they seemed to predict 9/11.

The point of the paper is they had inside information, so they did predict it.

Bin Ladin might have traded before the attack, it's possible. But that has nothing to do with the yield curve inversion as indicator of approchong economic downturn.

I suspect there is a lot of heavy sarcasm in this thread, but just in case people following along can't read it ... the 9/11 attacks probably didn't have any particular economic effect at all. The already-going-to-happen economic impacts were blamed on 9/11 and the US government's unhinged overreaction to 9/11 was possibly motivated in part by the signalling in the bond market.

Just like the high inflation caused by the war in Ukraine, not the trillions of moneys printed over a decade.

The printed money is funnelled to assets “not inflation”, the war affects bread and butter (literally) “inflation”.

I mean.. at a loss for words..

Agree to disagree I guess.

Read my “ as fingers in the air…

The 12-month inflation rate was already 8% prior to the invasion in Ukraine. Gas prices nearly doubled between March 2020 and February 2022. Blaming inflation on the war in Ukraine only makes sense if you ignore the previous two years.

> Gas prices nearly doubled between March 2020 and February 2022.

The months you selected are pretty much peak lockdown vs peak recovery, and are a reflection of demand for gas, not an oracle of some deep economic truth. Franky, I'm surprised the gas price difference is so small, considering the US economy shut down in March of 2020.

You're telling me the demand for gas went up during the time period when people were mandated to stay home? That doesn't make any sense.

No, I am not.

Demand (and prices) went down in March 2020, but had significantly risen in line with increased economic activity by February 2022.

Consequently, it shouldn't be surprising that there was a large price increase over the period bookended by those months.

I am not in the US, but I was very much at home in March 2020, homeschooling kids, and very much out and about in Feb 2022, taking them to birthday parties. I am in the "lockdown king" country of Australia, maybe only second to New Zealand in the zealousness of lockdowns.

Yes and no.

If I buy a house with a mortgage, that's a risk. If interest rates shoot up to 10%, 20%, or I get made redundant, I lose my house and the risk hasn't paid off.

Yes you could point to the fact that I bought the house as the reason why I am now bankrupt and homeless, but I don't think that tells the whole story.

There's always risks that could turn into something worse, quite often they don't though. I think it's reasonable to point to 9/11 as a cause of the following recession because if that hadn't have happened we wouldn't have had the recession (if you accept that assumption).

The joke here is that the bond traders could not foresee 9/11 and did not predict the response to 9/11. They were forecasting the recession based on predictable indicators.

And 9/11 itself couldn't possibly have caused a recession. 2 buildings just isn't enough damage to be measured in a system as large and complex as the US economy. If you want to argue that the Afghanistan invasion contributed to the recession I am sympathetic to that idea, but the general consensus seems to be that war is helpful for the economy (which I don't hesitate to argue is a stupid consensus - but it is what it is).

No. 2 buildings collapsing doesn't cause a recession.

But are you really saying 9/11 is just 2 buildings collapsing?

There's a lot of psychology in the markets.

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