
Yield curve is blaring loudest recession warning since 2007 - tempsy
https://www.bloomberg.com/news/articles/2019-08-05/yield-curve-blares-loudest-u-s-recession-warning-since-2007
======
_bxg1
My favorite investment advice, courtesy of Mr. Money Mustache:

"Suppose you’re just starting out as an egg farmer, and your goal is to build
up a nice, profitable business. You want to build up a flock of hens so big
that they are eventually producing thousands of eggs per month. Enough to live
off for life and retire.

You buy your first 100 hens, and they get right to work. You allow those eggs
to hatch so more hens can be born, and you also continue to buy hens from the
farm supply store. Suddenly your phone rings and it’s Farmer Joe down the
road. “The price of hens has just dropped by 50%! You’ve just lost five grand
on those hundred hens you bought last summer!”

Is this a sensible way to think about it?

No, of course not. You’re happy that hens are cheaper, because now you can
build your egg business even faster.

Stocks are just like hens. They lay eggs called “dividends”, which are real
money that can either flow automatically into your checking account, or
automatically reinvest itself to buy still more stocks...There’s only one time
you care if one of your shares is down: on the day you sell it."

[https://www.mrmoneymustache.com/2016/02/29/what-to-do-
about-...](https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-
scary-stock-market/)

~~~
VikingCoder
That is an awful way to think about it.

At any given instant, you are about to start investing in something. You may
have to stop investing in something else to do it. Your goal at any instant is
to maximize the profit of your next few moments of investing. An effective
strategy for you MAY to go long, as you describe, holding on to an investment
for a long time. But that doesn't mean it's the most effective strategy for
everyone.

The farmer may do better to unload his hens, live off of cattle for a few
years, and then move back to hens.

~~~
dageshi
No, it really isn't. You're trying to time the market, which is about as
reliable as gambling unless you intend to dedicate your entire life to it. The
parent post is correct, recessions are opportunities to buy what you were
going to buy anyway at a cheaper price and get more for your money, provided
of course you don't need the money for other purposes in the near future.

~~~
jfengel
Recessions are opportunities to buy... if you have cash. If you were long in
the market at the peak, then you don't have any cash. If it's something you
were going to "buy anyway", then you'd have already bought it... unless you
were holding cash and trying to time the market. You can sell something, and
buy at a discount, but only by selling something at the same discount.

I believe that's what the parent meant. At any given moment your money is
somewhere: stocks, cash, bonds. You transfer from one to the other when you
feel the time is right for it. In that sense every move is market timing.

That does imply that most people shouldn't move their money very often. Do
some research, buy and hold, and don't worry overmuch about whether you bought
near the top or the bottom. Put new money (e.g. salary) into something with
low overhead, like an index fund, unless you've got good reason to think you
can do better with a specific choice of stock.

If you find a bargain, buy it. But buying bargains is a matter of timing: it's
only a bargain if it goes up eventually.

~~~
mooreds
> You can sell something, and buy at a discount, but only by selling something
> at the same discount.

Most people sell labor or knowledge for 20-50 years during their lives. Pretty
much continuously. So during a recession you can spend some of the money you
get from your labor on stocks that are "on sale".

~~~
yellowapple
Except that - as we (hopefully) learned with the _last_ recession - you're
significantly more likely to be outside the "most people" category in this
case, because layoffs tend to happen when companies have less money.

------
jedberg
Let’s assume you believe a recession is coming. What’s your investment
strategy to protect yourself?

Two recessions ago (2001-2002) i invested in REITs through the stock market.
It worked really well and I doubled, but it turned out I just got lucky with
exit timing because they were pump and dump schemes and I got out
coincidentally just before the “dump”. I even got a payment from the class
action lawsuit against them a few years later.

So, what’s an actual sound strategy if you think a recession is coming?

~~~
datpuz
I'm in this boat. I've had too much cash sitting in a money market account for
a couple of years in anticipation of a recession. I feel like the corporate
tax cuts might have kicked the can down the road a little.

It's a weird spot to be in and I'm still not sure what to do. I've lost a
decent amount of money to inflation and opportunity cost. The feeling is as
strong as ever but I know that macro trends aren't things anyone can
accurately predict.

I know there are better things I could do with the cash in the meantime, but I
haven't done the research. I didn't really expect to be sitting on cash for
such a long time. Would love to hear anyone's advice.

~~~
ijpoijpoihpiuoh
FWIW people have been calling the top since as early as 2013. There is every
reason to believe that there will be a recession tomorrow, but I also would
not be surprised if this expansion extends into the early to mid 2020s.

If you have this feeling now, and have had it for most of the current
expansion, you might want to consider the possibility that your gut sense of
whether there will be a recession is just broken, and whether you should stop
listening to it. Because I guarantee you it's going to be telling you to get
out of the market two or three years after the next expansion starts, and who
knows how much money you're going to have left on the table by the time you're
done with that one.

~~~
datpuz
I've only been holding out since ~2017, but I definitely see your point. I
know I'm probably being irrational by continuing to hold out, and I'm
suffering a bit from the sunk cost fallacy. I guess I'm irrationally avoiding
the situation where I held out for two years, only to buy in at the top, and
look like a total doofus.

~~~
fourstar
Do not listen to these people who constantly tell you to “just invest now,
it’ll average out, etc”. Go with your gut. Cash is a position. Know when and
how to use it to your advantage.

~~~
pedrocr
If you know how to do this you should be making bundles of money trading other
people's money. If it's your own money and you don't have any particular
reason you think you have a deep insight don't fall into the trap of thinking
you see patterns where they don't exist. Our brains pattern match way too
much. Retail investors with actual insight into markets have to be one in a
million or less.

~~~
fourstar
You can make great money with this method. It’s called buying low and selling
high. It’s how the majority of non-leveraged investors make their fortunes.
Just need to wait for the next down cycle. Everything is cyclical.

------
xivzgrev
Here's the funny thing about recessions - they're usually predicated by some
exuberance somewhere, and when it bursts it then ripples to the rest of the
economy.

1930 was the stock market, 2000 was the dot com, 2007 was real estate (there's
a bunch of recessions in between I'm skipping because I'm less familiar w/
them).

This time around...there's actually NOT a lot of exuberance. People are still
scared and not getting ahead. Unemployment is at record lows but wage growth
is stagnant, meanwhile people's basic expenses have exploded through the roof.
Who has money to spare on stupid fads & bets? People are just trying to afford
housing, healthcare, and education.

I feel like a lot of the talk around recession is simply people EXPECTING a
recession and reacting accordingly, which will cause some downturn but won't
impact the fundamentals of people buying shit in the economy.

I'm not saying we won't ever have a huge recession again, of course we will,
but I don't see a current _real_ indicator of it.

~~~
delfinom
>I'm not saying we won't ever have a huge recession again, of course we will,
but I don't see a current real indicator of it.

What? Are you just ignoring to ignore real estate bubble 2.0 (empty properties
kept by speculators but at the end of the tunnel the price will implode when
nobody has money to buy), the average length of car loans exceeding 5 years as
people push out for lower and lower monthly minimums because they otherwise
can't afford those $50k trucks, and other elephants such as medical and
student loan debt?

~~~
graeme
The funny thing is people are doing all that with resignation rather than
exuberance this time around, at least that’s the zeitgeist I perceive.

I’m guessing the fact that they’re doing it is the significant part, but it
does feel different to earlier times.

------
nostromo
The newfound obsession with the yield curve could have interesting effects on
the economy.

1\. The Fed now pays attention to it, so its indicator value could be
dramatically weakened, or erased. (Previous Feds continued to raise rates
after an inversion before previous recessions, while this Fed has done the
opposite lowered them.)

or...

2\. Inversions become a self-fulfilling prophecy. Despite low inflation, low
unemployment, and healthy profit growth, markets decline due to the assumption
that the yield curve inversion is a perfect forward indicator of recession.

~~~
rorykoehler
Low unemployment is not a useful metric for 2 reasons. First is it does not
account for people who have dropped out of participating in the labour market.
Second is the race to the bottom in many industries. The uberisation of
everything is driving income inequality. Eventually if you stop watering the
plants they stop bearing fruit. Our economy is all fruit (ie complex financial
instruments generating even more dollars for rich people by moving money
around) no water (livable income for the masses) these days.

~~~
causalmodels
> First is it does not account for people who have dropped out of
> participating in the labour market

There are alternative measures to U3 (the official unemployment rate). The U5
and U6 measures of unemployment are designed to capture discouraged workers.

~~~
rsanek
Plus, all of the published rates are extremely highly correlated. It can be
hard to agree on what number is "right", but when one rate is relatively low,
so are all the other rates.

------
throwaway5752
Slightly older poster here. This is exactly how it felt when the bad times
started in 1999-2000 and 2007-2008.

People will tell you not to panic and justify why it's different. For the most
part, nobody has a clue. Make sure you can meet about a year of expenses
including health insurance. This is always a good idea.

Also, these always last longer than you expect. This is almost self-
fulfilling, because unless most market participants capitulate a bottom can
never be reached.

~~~
turk73
I think you're wrong and I do have a clue.

Having lived through the 2000 mess, I don't think corporations are that over-
valued and that capital isn't chasing complete and utter pipe dreams this time
around. This is nothing like 2000, where Raleigh, NC had nearly full occupancy
of all office space due to stupid little startups everywhere. Today's startups
are VC-funded, but that VC requires a lot more demonstrated value and due
diligence. Sure, there's lots of losers, but none of them are systemic risks.

2008 was caused by serious fraud in mortgage bonds coupled with no-doc, low-
doc, neg-am mortgages being rated "AAA" inside of a massive housing bubble
blown by Bill Clinton and abetted by GWB. Many banks and big investments firms
were over-leveraged with risky bonds they didn't understand. There was also
CDS all over the place. We don't have that this time around, either.

What are the Black Swans? Student loan debts, maybe. Otherwise, I can't think
of much other than the total US Debt if that ever actually becomes a problem.
No clue when that will be. Today's market action is just counter moves
reacting to China's devaluation. Yawn.

~~~
sudosteph
Is the Raleigh thing your personal experience, or was that just an anecdote
with Raleigh as stand-in for "place that's not SV or NYC and thus has no
business operating startups"?

Because I live in Raleigh, and there are still a ton of stupid little startups
occupying the office space (except now they're all at one of 10 different co-
working spots). To be kind to my fellow Raleighites, there are one or two with
potential too. Still almost no legit VC funding in the area, but people didn't
stop trying. Too many college kids around who don't know any better.

------
nscalf
I'm relatively young, so I wasn't responsible for expenses when the last crash
happened. I had the great fortune of having only 1-2 months of savings early
in my career when the startup I was working for went under. I was a software
engineer with less than 6 months of experience, and had a hard time finding a
job (essentially a first job with that experience level), and learned really
early on that I want zero debts and a year of savings.

Right now I am down to only ~$150/month in 2% interest school loans (down from
$450/month a couple years ago), $500 rent (when I initially lost my job this
was up to $1,700!), and I'm about to lose my parents insurance. In all, I pay
out roughly $1,000/month, and I make sure to have at least $10,000 on hand at
any time. Everyone I know tells me this is probably too much emergency fund
and I could get away with 3-6 months expenses and get more earning potential
from that extra half a year, but I refuse to ever be caught off guard. The
immense stress of trying to figure out how you will pay for rent this month is
unlike anything I've experienced.

Even if a depression never comes again, I'll always aim to have nearly a year
of runway in case I lose my source of income. But I say all of this to say
that having a savings is more than just potential future security. I feel
confident voicing my opinion at work, I am willing to stand by my principles
and leave if I want to, and I'm willing to walk away from an environment that
makes me unhappy. In my opinion, having this type of savings gives you a
similar feeling as financial independence will feel---I'm working right now
because I want to, not because I have no other options. That makes life a lot
more pleasant.

~~~
joncrane
You're doing great.

Are you on a path to FIRE?

~~~
nscalf
Thanks! That's loosely the plan. I'm hoping to get there one day, but knowing
myself I would always be working on something, so the retire early part
doesn't really apply to me. After work I tend to pick up other stuff, like
contract work or learning something new (currently working through fastai).

------
H8crilA
The Economist

Yield curves help predict economic growth across the rich world.

[https://www.economist.com/graphic-detail/2019/07/27/yield-
cu...](https://www.economist.com/graphic-detail/2019/07/27/yield-curves-help-
predict-economic-growth-across-the-rich-world)

------
marktangotango
_He says the signal from the curve suggests money markets should be pricing in
a higher probability of the Fed’s policy rate going to zero in the coming
year._

Anyone with finance knowledge here? What's the take away, recession, no
recession?

~~~
formercoder
I'm worried about a self fulfilling prophecy. Keep in mind the yield curve
represents how the market prices US treasury bonds at differing maturities.
When the LT bond yields drop, it's because everyone is buying them. That could
happen for a multitude of exogenous reasons. Then though, everyone sees that
the yield curve is flattening, panics because it's a recession predictor, and
buys LT bonds, thus lowering LT yields further and creating a cycle.

------
lkrubner
It's interesting to consider how much we all now simply assume that there will
be no financial stimulus. 50 years ago, in similar circumstances, we could
simply assume that a spending bill could be passed to offset any risk of
recession. Nowadays we assume there is no hope of that. President Kennedy, and
President Nixon, and President Carter and President Reagan, all of them pushed
for more military spending at certain key moments, not always because they saw
the need for more military spending, but because it was an easy way to get
some extra stimulus to offset the risk of recession. But there is no way,
nowadays, to put together a coalition that will vote for any kind of stimulus,
even if that stimulus were given some non-obvious name such as "Modernize the
Navy".

~~~
megous
Where will you get money for a "stimulus" without reducing people's ability to
spend elsewhere, or reducing spending elsewhere as a government?

~~~
H8crilA
The point of a recession is that the economy is underutilized (unemployment
for example). Therefore more overall spending is needed.

If you overdo it you get inflation, that's why it's the typical central bank
target.

~~~
megous
I don't think that's the point of recession, necessarily.

Previous recession happened for other systemic reasons, like subprime mortages
bubble bursting bringing down with it a lot of other things. Unemployment was
more like a temporary consequence of that and necessary changes/realignment of
expectations/allocation of money in the economy.

~~~
H8crilA
It is. There's only goods and services in the real world, and at some point
people slow down on exchanging them. That's a recession.

"How the Economic Machine Works"
[https://youtu.be/PHe0bXAIuk0](https://youtu.be/PHe0bXAIuk0)

~~~
megous
There is also demand, and capital, and it's allocated somehow (inflexibly,
because people tend to like ownership), and there are governments (agents with
systemic effects, almost by definition), and there are various currencies and
boundaries in the world, and million other things,... and slowdown in economic
activity in any geographic area can come for all kinds of reasons, and it's
generally a symptom and not a cause.

Increased (or trying to artificially increase) economic activity (as measured
by GDP) is also not good by itself, but only in relation to meaningful demand.

Otherwise, digging and filling holes (like in a war, basically) would be an
overally good thing, which it is not.

There's no need to increase spending via a central bank currency manipulation,
just because it's lower than before, nor is it the only way to achieve that.

~~~
H8crilA
I'm merely stating that a recession is, by definition, less stuff and services
being exchanged between people and institutions. Money is just an abstract
concept by which people do such exchanges.

And money printing (lowering interest rates, QE, helicopter money, fiscal
stimulus like New Deals or the likes of building the Hoover's Dam) is a
generally acknowledged consensus on how to at least try to fix it. That is how
to at least try to make people transact more.

------
pastaking
Can someone provide an ELI5 on what are yield curves and why is it an
indicator of a recession?

~~~
freehunter
Nothing in economics is super easy to ELI5, but the short answer is since the
market always trends upward, longer term investments should always return more
in interest. If longer term investments are giving lower interest rates than
short term investments, that is an indicator that investors believe the market
will decline.

Longer answer:

The yield curve shows the interest rate you can expect for a certain timeframe
of investment. For example, if you buy a 1 year bond, you can expect a 2%
return. If you buy a 5 year bond, you can expect a 5% return. If you buy a 10
year bond, you can expect a 7% return. Since you won't be getting your money
back for 10 years, you get more interest.

Longer term investments are generally considered more stable, since the
markets always trend upwards over time. But if investors do not feel
comfortable in the stability of the market long term, the yield rates go down.

So if I have a 1 year bond at 1% interest, a 2 year bond at 0.7% interest, a 5
year bond at 0.5% interest, and a 10 year bond at 5% interest, that indicates
investors are expecting the market to decline in the next two years. The
market will recover within 10 years, but it will go down in the short run.
Remember the market always trends upward, so if longer term investments are
worth less than short term investments, it's a predictor that the market is
expected to decline.

~~~
blankcheque
Just wanted to say that I think you did a pretty good job with the
explanation.

------
apo
> Al-Hussainy expects investors to turn to even more aggressive positioning
> for rate cuts. He says the signal from the curve suggests money markets
> should be pricing in a higher probability of the Fed’s policy rate going to
> zero in the coming year.

Not just zero, but beyond.

The yield out to 30 years on German bonds recently fell below zero. Several
other advanced industrial countries are in a similar negative-yielding boat.
These are economies that are technically not even in recession.

The amount of negative yielding debt now exceeds $13 trillion:

[https://www.marketwatch.com/story/value-of-debt-with-
negativ...](https://www.marketwatch.com/story/value-of-debt-with-negative-
yields-nears-12-trillion-2019-06-18)

That's not a negative real rate (rate - inflation) which is not uncommon, it's
an absolute (nominal) interest rate.

No country wants to be left with the currency that appreciates. All countries
will pull out the stops to find a way to devalue.

The only thing industrialized countries fear more than an appreciating
currency is deflation. The first whiff of that monster and the big guns come
out and never stop firing.

At this point it's not unreasonable to expect the following possibilities (in
order of first appearance):

0\. zero short term rates to follow much quicker than consensus

1\. shock-and-awe QE (first implemented, but in a way that will look quaint by
comparison, in 2008-2009 crisis)

2\. direct purchase of stocks by the Fed and the ECB (Bank of Japan has been
doing this for a long time)

3\. debt forgiveness for college loans (regardless of the party in power)

4\. debt forgiveness for mortgages (discussed in 2008-2009 but never tried)

5\. credit card debt forgiveness (because why not, every other debt is being
forgiven)

Oddly enough, the later phases start to look like the systemic debt
repudiation brought about through the "jubilee year":

> Ancient Near Eastern societies regularly declared noncommercial debts void,
> typically at the coronation of a new king or at the king’s order.

[https://en.wikipedia.org/wiki/Jubilee_(biblical)](https://en.wikipedia.org/wiki/Jubilee_\(biblical\))

~~~
umeshunni
Has debt forgiveness ever been used in a modern industrialized economy? The
only instance I am aware of was of the Allies doing it in occupied Germany
post-WWII

------
mettamage
This is why I don't dare to be a starting entrepreneur right now. I'm afraid
I'll definitely fail and cannot afford living expenses and have nothing to
show for it in the end.

Or do people consider 2 years coding at your own startup as 2 years of
programming experience? I know some people who say that they don't.

~~~
sudosteph
Depends on the person. A lot of people would definitely count that as
experience.

Also, if you save up now, there's a chance that a recession could bring
housing prices back down... so at least you have that going for you?

------
webninja
Any stock that will never return money back to shareholders in a future
dividend, share buyback, liquidation, or buyout, won’t have a future value.

------
jorblumesea
For long term investors, does this even matter? If your time horizon is 10+
years, it seems like this is just water under the bridge.

~~~
neural_thing
The S&P 500 didn't exceed 1929 highs until 1954. Not saying it's a perfect
parallel, but there are definitely precedents of stocks not working well for
decades.

~~~
H8crilA
No, you're not including dividends. It had positive returns way before 1954.
But yeah the 30's was called a depression for a reason.

~~~
_delirium
Just to put a date to this: including dividends, it matched its 1929 high
again around 1943/1944.

------
elihu
Article is paywalled so I didn't read it, but I went and looked at the federal
reserve's yield curve page[1] and indeed it does look quite inverted.

3 month has been performing better than 10 year for awhile now, but now the 10
year yield has dropped to where it's below the 1 month, 2 month, and 6 month
as well and is only slightly better than the 1 year. That's interesting.

[https://www.treasury.gov/resource-center/data-chart-
center/i...](https://www.treasury.gov/resource-center/data-chart-
center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019)

~~~
ellisv
Data is also available from the Federal Reserve

[https://fred.stlouisfed.org/series/T10Y2Y](https://fred.stlouisfed.org/series/T10Y2Y)

------
gingabriska
What advise do you've for someone holding large amount of liquid USD cash?

~~~
kitten_smuggler
buy bitcoin, gold, and long term bonds

------
JohnJamesRambo
This next few years of bitcoin bull run is going to be incredible.

