
‘A Powerful Signal of Recessions’ Has Wall Street’s Attention - digital55
https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html
======
throwaway5752
The difference is that a powerful group of people is enacting policies that
have triggered recession/depression in the past and no good historical
precedent/academic support for working. It's seems kind of crazy to me we're
ignoring that part.

We're starting trade wars on multiple fronts, exiting or weakening
multilateral alliances (and simultaneous giving an advantage to our global
adversaries), and weakening the balance sheet of the federal government
(during a business cycle peak). Of course this is going to end terribly.

~~~
akhilcacharya
>Of course this is going to end terribly.

It is basically guaranteed to do so unless the business cycle has stopped for
good (unlikely). The question in my mind is who the scapegoat is going to be,
and how much denial there's going to be if the real effects of slowing growth
start becoming apparent.

~~~
ttul
With any luck (sorry), the crash happens just prior to Election Day.

~~~
williesleg
Not likely. All the new jobs and lower taxes will keep it boosted for a long
time.

~~~
perl4ever
Recent history shows that the Fed starts raising interest rates and then goes
just a bit too far. They're like a driver who won't stop rhythmically pressing
and releasing the gas pedal, until the passengers get motion sick.

In my opinion, the tax cut that has been benefiting the economy is the move
away from zero percent interest rates. Lending to banks at below inflation is
like a tax that goes directly to them. But when we keep on raising short term
rates above inflation, that's going to be like a tax too, and I expect we will
promptly get whiplash since the Fed doesn't know when to stop.

Maybe I am becoming a crank, because I feel Cassandra-ish, like major
macroeconomic problems are so simple but nobody gets it. Feel free to explain
why I am totally wrong.

------
cal5k
An article from 2005 with the same prediction:
[http://money.cnn.com/2005/12/27/news/economy/inverted_yield_...](http://money.cnn.com/2005/12/27/news/economy/inverted_yield_curve/index.htm)

The recession didn't happen until 2-3 years after that, making me question the
utility of such predictions. "A recession will happen - eventually" is about
as useful as predicting your own eventual demise.

~~~
ISL
The S&P on roughly that date was 1268. In the depths of the recession, it
reached as low as 684.

~~~
yellowstuff
Then a year after the lows it was back over 1200, and it's basically been
straight up since then. Unless you timed things very accurately you were
better off simply holding.

~~~
codingdave
Over the long run, that is always true. Just hold and grow, until you are
within 10 years of retiring. Then move to a more conservative position.

~~~
timr
_" Over the long run, that is always true. Just hold and grow, until you are
within 10 years of retiring."_

No, it isn't. It's quite possible to lose money with a buy-and-hold strategy
if you get unlucky, particularly if you aren't diversified. It's probably the
most reliable way of investing, but you can still lose money. Stocks are not
guaranteed to go up over all possible 50-year intervals.

Monte carlo simulations of S&P500 investments illustrate this:

[https://seekingalpha.com/article/4109617-buy-hold-just-
works...](https://seekingalpha.com/article/4109617-buy-hold-just-works?page=2)

~~~
samsonradu
I really don't understand why you are being downvoted. I've been checking
/r/investing for a while now and the general advice is to put all you have
into the stock market (diversify) and HODL.

Everyone says there's no way the market can underperform on a longer run and
you can't time it so don't bother. When someone brings back 2008 they downvote
it to death and reply that it went back up so it will be all fine. When the
market goes south just keep buying.

Japan would like to have a word with you.

~~~
timr
_" Japan would like to have a word with you."_

Indeed. But more prosaically, many of these HODL types are discounting how
much they'll actually freak out at a market correction. They've never seen a
30% drop, or lived through a five-year correction (let alone an extreme
situation, like Japan). Even if you have the stomach to handle the drop,
things happen on a five-year horizon that people don't consider: extended
unemployment (which tends to happen during recessions), children, houses, etc.

I made that comment thinking it would be a completely uncontroversial
statement of fact. It's amazing to me that I'm getting downvoted, as if I've
expressed an opinion of some kind.

~~~
samsonradu
It's worrying indeed how most people just take growth for granted and don't
want to at least consider alternatives.

Btw, here's a talk I found interesting regarding growth and the future of the
economy:
[https://www.youtube.com/watch?v=KKLDevYyE9I&index=13&t=0s&li...](https://www.youtube.com/watch?v=KKLDevYyE9I&index=13&t=0s&list=LL60XAnYR5NWk1eI9brmJ-
jQ)

One part I liked regarding the Madoff scandal:

 _Obviously, you were like how could these people be so stupid to give this
person all this money? Didn 't they read the details? ... But one of the
reasons it happened, psychologically, was because people thought 8-10% with 0
risk was perfectly normal. That's why nobody asked any questions._

EDIT

And regarding my Reddit rant, also scared me that many people don't pay off
their mortgage because they get a better return from the stock market,
something I find quite wrong unless you're living in a hyper-inflation economy
(which is not the case in the developed world)

~~~
samsonradu
@dgacmu Cannot reply to your comment so I will here.

> For any investor, there is a point in the mortgage interest rate vs risk-
> adjusted returns space at which investing is better. That point may differ,
> of course.

I agree there always is a point, what I think is that the risk-adjusted return
should be much bigger to be worth taking. The spread between the mortgage rate
and the stock market return usually is not that big.

There will always be missed investing opportunities but leveraging the house
you live in to squeeze an extra 1-2 percentage point at the risk of going bust
doesn't look optimal to me.

~~~
dgacmu
Right - but what you just said was an expression of your risk/reward
preference. :) But also, in the US, there's a pretty large contingent of
mortgage holders who have <= 3.75% mortgages [1], which compare very nicely to
the (expected / hoped for) 9.7% average return from a diversified total market
fund. That's not 1-2%, that's an expected ~5%, depending on how things sit
from a tax perspective.

(You don't need to account for inflation in that return calculation, since the
mortgage rate is also affected by inflation.)

If you're me -- 42, great job security, relatively small mortgage relative to
income, and in a high tax bracket that's unlikely to change soon -- it's a no-
brainer: Take the risk and go for higher long-term expected yield. A recession
just means I keep doing what I planned to do anyway - working and saving more
money for retirement.

If you're 60, planning on retiring in 5 years (and so about to drop into a
lower top marginal tax rate), and in an industry with uncertain job prospects
... suddenly paying off the mortgage looks more attractive from a risk
minimization perspective. Or at least splitting the difference.

[1] Most people who took out or refinanced mortgages in Jun 2012 - Jun 2013,
and 2016
[https://fred.stlouisfed.org/graph/?g=NUh](https://fred.stlouisfed.org/graph/?g=NUh)

The "or refinanced" is important, because when rates were that low, a lot of
people had a strong incentive to refinance, so the actual distribution of
outstanding mortgages is biased towards the lower rates. [2]

[2] This is a study from 99, but the point remains:
[https://www.newyorkfed.org/medialibrary/media/research/curre...](https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci5-4.pdf)

~~~
samsonradu
> which compare very nicely to the (expected / hoped for) 9.7% average return
> from a diversified total market fund.

Understood, guess it's hard for me to wrap my head around this. As a european
this feels unsustainable and way too good to be true.

------
simonsarris
People often note, like another comment here notes:

> since 1960 there has been a US economic recession once every 5 to 10 years.
> The last one ended in 2009, 9 years ago

This is an interesting line of thinking, but I think it's a mistake. We can
use this fact itself and circumscribe some meta-thinking around it. Put the
same fact another way, this is arguing that the 1960's started a _brand new
paradigm_ that was materially different from the 1950's-before.

For all we know, the 2020's+ will repeat the past (in a way) and usher in a
paradigm different from the 1960's! No more recessions every 5-10 years.

So:

* Maybe from now on there will be a recession every 20 years

* Or Fed manipulation will get "so good" that we won't have large recessions

* Or capital's other options for returns (real estate, emerging markets, etc) will look bad-ish for the next 10 years and continue to prop up the stock market because its the only good outlet for extra cash for a decade or three

I could see any of these being plausible. I think leaning on the past is a bit
of a mistake. Personally, I think the third one is quite possibly the case.
Other non-stock-market options simply do not look as attractive as they used
to, relatively.

The future will look very different from the past, as Thiel says.

~~~
jpao79
So some random thoughts on the case for this time its actually different are:

1.) The internet and computing has increased the flow of information.
Investments in data mining and data science by the Fed lets it make better
decisions and test stuff iteratively and react to changes faster. Companies
can also track inventory in a more controlled manner and not build too much
too fast. Employees can find prevailing wage information easier to find
better, more productive jobs. Home buyers can see how overvalued their houses
are relative to other cities.

The internet and computing is enabling a much higher control loop (a.k.a. a
steeper gradient descent toward optimal economic output based on the
production needs for the current population).

2.) Steady reduction in the reliance on oil and gas. Much of the crazy
inflation in past cycles was due to oil and gas shortages.

Would love to get opinions and more cases for why its different.

~~~
Mountain_Skies
Your second point is interesting since the US Dollar is the primary currency
used for the oil trade. Demand for dollars beyond our borders lets us export
our debt through inflation. If there is less reliance on oil, demand for
dollars to service that market goes down and so does our ability to pass part
of our debt off on to everyone who holds dollars. No idea if this is a large
enough effect to matter or if there are other feedback loops that counteract
it but decreased oil usage could have its own negative economic effects that
aren't immediately apparent.

------
ameister14
[https://www.bloomberg.com/news/articles/2018-05-14/fed-s-
bul...](https://www.bloomberg.com/news/articles/2018-05-14/fed-s-bullard-
blames-central-bank-for-flattening-yield-curve)

David Kelly from JPMorgan and Bullard, the head of the Fed Reserve of St.
Louis, say the yield curve going inverted doesn't mean that much because it's
being manipulated by the Fed - that means it's broken as a measuring tool
(still should be watched, though)

~~~
Analemma_
A Fed chairman is never going to say, "Yup, there's a recession coming": the
incentives of their position don't permit it. So they will always come up with
reasons why a signal with a previous 100% success rate doesn't mean much now,
but in the end, it always amounts to "This time is different", aka, the four
most expensive words in history.

~~~
Eridrus
Looking at the table, it's odd that only "inversions" are counted as
predictions, and there seem to be far more cases where it got "close" to zero,
but not quite there.

Without a good explanation on why that exact point is so critical, I am a bit
skeptical that this is anything but noise.

If there is a good explanation of why it is critical, then we're not really in
worrying territory yet either then, because we're not there yet, and we're in
the zone of lots more false positives.

~~~
ISL
An inverted yield curve is an explicit statement that bond buyers expect the
near term to be worse than the long term.

When the yield on the long-term note is _smaller_ than the short-term yield,
and buyers would still rather buy the long-term note, something is afoot.

~~~
ak39
Correct. This is the only rational explanation for the inversion. There is
nothing else to imagine about the negative (inversion). Whether the number is
"gamed" or just a single statistic makes zero difference to what the market is
actually saying about debt instruments: "we care about now than the future".

What is afoot, as you say, is clearly a lack of confidence in longer term
markets resulting in a move towards keeping asset in cash. Or those strange
commodities like gold.

I personally believe global markets are in for a rough ride very soon. Brexit
is not going to help much either. DT is going to have no time for Twitter.

------
tjr225
As someone who (I'm guessing like a lot of others who post here) didn't really
have any financial responsibilities during the .com bust and the real estate
bust, it will be interesting to have a neck in the game this go around!

~~~
throwaway5752
This, in a nutshell, is why the human condition is so tragic. This won't be
"interesting", believe me. Watch what happens when the body of startups funded
by global pools of capital (which are the underlying source of capital for
VCs) sees the NPV of software startups vanish as lower expected investment
returns smack up against higher risk-free rates. The current software economy
is incredibly leveraged and intertwined. Most startups are not cashflow
positive, and they're explanation for that is that they have low CapEx.
However, it's all been transferred to OpEx that is the web of mutuality
between them. There is a huge body of low quality startups that are going to
stop paying monthly Slack, Git(hub/lab), Trello/Atlassian, Twilio, Mongo,
every other monthly-billed service, and put the breaks on AWS/GCE/et al
spending. The AWS spending, for example, will result in layoffs in Seattle,
which will lead to people forced out of their homes and forced sales for
losses (which will ruin them financially), and that will result in a cycle of
real estate deflation (which, as you saw in 2006, leats to pools of buyers
trapped in their home, killing construction and labor mobility). And
thankfully we'll have deregulated or de-fanged federal regulators just in time
for all of this! WeWork is the obvious first bankruptcy, since they almost
entirely exist because of venture funding froth. I don't know who have funded
them offhand, but that might result in forced selling of private shares and
lower private valuations, with further deflation risks in that sector. Then it
will expand to the broader economy. /rant.

edit: I worked through both the dot-com and mortgage-backed security fraud
crises. They were terrible.

~~~
Bromskloss
So, it _will_ be interesting, after all!

Now, how do we make money from this?

~~~
rainbowmverse
Startup idea: knowledge sharing, resume hosting, and real estate/rental
listing platform for people chasing their current quality of life at a lower
cost of living.

------
mhuffman
I don't agree with Ray Dalio on everything, but his take on the business cycle
seems useful and solid:

[1]
[https://www.youtube.com/watch?v=PHe0bXAIuk0](https://www.youtube.com/watch?v=PHe0bXAIuk0)

~~~
Bromskloss
Specifically, what is presented here is a Keynesian view, right?

------
debt
I can see it now...

Investors will mistake the loud pop caused by the bursting crypto bubble for
gunshots. They'll jump for cover, becoming scared of tech, but as they do
they'll then mistake another loud sound, this time a kaboom, of the AI hype
cycle exploding. With it will go chatbots, self-driving cars and voice-powered
assistants.

Then there's a rupture and a glow then a mushroom cloud appears on the
horizon. People are unsure of what happened. Was that Facebook? Amazon?

Either way, this will tear a hole through the spacetime fabric of tech itself
thus causing a black hole of fear; Google and Apple will hold on for dear life
as everything around them gets sucked in.

At first a few Bird scooters fly past into the black hole of fear, Uber/Lyft
sail by and explode in mid-air as they're sucked in, Zenefits instantly is
ripped apart and evaporates creating a sort of Aurora Borealis surrounding the
massive hole.

Somehow the blackhole of fear eventually closes and everything in midair
tumbles back to sanity. Google/Apple regain their footing and observe the
destruction around them.

The only thing left will be a few broken Lime scooters, a robotic arm that
makes burgers and shitload of defense contracts.

~~~
freehunter
>bursting crypto bubble

I've been looking for lateral career moves in my industry for a while now, and
I'll be damned if every "exciting new company" in information security isn't a
blockchain company. And not a single one of them can tell you what they're
doing with the blockchain to help with security, they can only tell you how
much money they're making.

------
dlandis
Of course they bury the most important part in the last sentence of the
article.

> So if long-term rates were pushed lower by central bank bond buying, and now
> short-term rates are being pushed higher as the Fed tightens its monetary
> policy, the yield curve has nowhere to go but flatter.

“In the current environment, I think it’s a less reliable indicator than it
has been in the past,” said Matthew Luzzetti, a senior economist at Deutsche
Bank.

------
zeveb
I think it's nearly unarguable that the current market is irrational. The
problem is the old adage that the market can remain irrational longer than you
can remain solvent, and thus simply shorting it can result in short-term
bankruptcy.

Worse, there's a corollary that even trying to move your funds into lower-risk
vehicles now can _still_ lead to long-term losses vice keeping them in higher-
risk investments now and moving them later (e.g. in a month, or a year, or two
years).

I honestly don't know what to do with my money. Right now I'm basically
keeping everything where it is: not selling stocks, bonds or real estate, but
not buying much either. But leaving my cash as cash has its own cost.

~~~
mnctvanj
In same boat. I've just been splitting my new investments between stock and
cash and treat my cash as part of my diversification strategy (or a hedge
against possible market peak). If a recession occurs, I'll hope it drops a
lot, put my cash back in, and hope it comes back up. All those things have
always happened (recession, recovery - not necessarily me timing a market
bottom) so I feel ok about my cash. Whatever it loses in value to inflation
should come back if I buy cheaper stocks during a market lull. Or so I tell
myself.

------
Apocryphon
"Sure, it seems like a strange time to be worried about recession.
Unemployment is at an 18-year low, corporate investment is picking up steam,
and consumer spending shows signs of rebounding."

Isn't that always the best time to be worried about recession?

------
peterwwillis
While it's not a very accurate predictor, since 1960 there has been a US
economic recession once every 5 to 10 years. The last one ended in 2009, 9
years ago.

~~~
pnathan
Yep. "We're due" is my perspective on bear markets. We've had a bull for a
long time now, and there's adequate macro factors that a tipoff into a bear is
a fairly reasonable expectation.

In other words, it's quite time to make sure your holdings are prepared for a
recession.

~~~
TimTheTinker
> make sure your holdings are prepared for a recession

How do you do that? If you're market-invested, there's very little chance of
actually predicting the timing of the downturn.

Perhaps sell while confidence is high and then buy like mad when prices have
gone way down? Sounds risky...

~~~
pnathan
> make sure your holdings are prepared for a recession

Make sure your bond / stock / cash / etc holdings are properly balanced. Don't
overweight in one area. If you've not paid attention to your risk exposure
over the past while, it's a good time to do so!

------
AznHisoka
"Stocks have been in a sideways struggle since the Standard & Poor’s 500 last
peaked on Jan. 26."

Is this really true? Almost every single stock I've been tracking has just
been going up this year, especially the tech ones. Even ones with decreasing
revenues like GoPro.

~~~
scrooched_moose
Ford has been sliding for 5 years:
[https://finance.yahoo.com/quote/F?ql=1&p=F](https://finance.yahoo.com/quote/F?ql=1&p=F)

GE has been in freefall: [https://finance.yahoo.com/quote/GE?p=GE&.tsrc=fin-
srch](https://finance.yahoo.com/quote/GE?p=GE&.tsrc=fin-srch)

Honeywell has basically been stagnate since January:
[https://finance.yahoo.com/quote/HON?p=HON&.tsrc=fin-
srch](https://finance.yahoo.com/quote/HON?p=HON&.tsrc=fin-srch)

Same with 3M: [https://finance.yahoo.com/quote/MMM?p=MMM&.tsrc=fin-
srch](https://finance.yahoo.com/quote/MMM?p=MMM&.tsrc=fin-srch)

The S&P500 index as a whole has crept up a little but many of them are
struggling.

Edit: I can't figure out how to get it to link to the 5 year charts, which is
how I was looking at it.

~~~
jedberg
It's interesting if you look at the winners and losers in the S&P500, most of
the winners are new tech, most of the losers are old tech or non-tech.

So the question is, are the new-tech companies the only thing propping up the
S&P500, or are they truly the "new economy" and will continue to thrive while
all others fail?

~~~
mistermann
This sounds pretty familiar to the broader economy and labor force. New
economy companies on the coats are killing it, enough to make overall GDP look
spectacular, but if you look behind that impressive headline number and the
corresponding don't worry be happy cheerleading, things don't look so pretty.

I sometimes wonder if this inconsistency between perspective of view of the
same reality might also have an effect on individual opinions.

------
jakecrouch
One explanation of the inflation of the public and private markets in the US
is that the Chinese are in the middle of a massive debt bubble, anyone with
cash there has nothing good to do with it, so they've been willing to invest
in the US at almost any price.

~~~
adventured
That isn't a good explanation. China has extremely tight capital export
controls in place, you can't easily get your money out of China to invest it
into the US.

Beyond the annual $50,000 currency conversion limit they've put into place
domestically, they've also made it an obnoxious and suspicious process to go
through even if you attempt to convert the allowed $50k.

The US is far wealthier than China is anyway, and that's with 1/4 as many
people. There is no need for Chinese capital to spur asset inflation in the
US, the US has more than enough capital to do that on its own.

------
apo
One way to profit from yield curve inversion:

When you see a persistent yield curve inversion, buy the longest maturity
treasuries you can find. For example, 30 years.

This is counterintuitive because shorter maturities (2, 5 years) will yield
more when you make your purchase. However, your capital gains will likely
compensate for missed yield after the recession has run its course and return
a tidy profit.

Alternatively, the economic landscape after the recession may be much worse
afterwords. Persistently low interest rates (even deflation) will be in your
favor if you decide to keep your treasuries because you'll find nothing to buy
with a better risk/return ratio.

Of course, it goes without saying that selling your long treasuries to pay
expenses will truncate your returns.

~~~
Bromskloss
> When you see a persistent yield curve inversion, buy the longest maturity
> treasuries you can find. For example, 30 years.

> This is counterintuitive because shorter maturities (2, 5 years) will yield
> more when you make your purchase. However, your capital gains will likely
> compensate for missed yield after the recession has run its course and
> return a tidy profit.

Sorry, could you flesh out the details here? You buy treasuries with a long
maturity. What is expected to happen with them after that, and after how long?

------
ronnier
> The so-called yield curve is perilously close to predicting a recession —
> something it has done before with surprising accuracy — and it’s become a
> big topic on Wall Street.

> The yield curve is basically the difference between interest rates on short-
> term United States government bonds, say, two-year Treasury notes, and long-
> term government bonds, like 10-year Treasury notes.

> Typically, when an economy seems in good health, the rate on the longer-term
> bonds will be higher than short-term ones. The extra interest is to
> compensate, in part, for the risk that strong economic growth could set off
> a broad rise in prices, known as inflation. Lately, though, long-term bond
> yields have been stubbornly slow to rise — which suggests traders are
> concerned about long-term growth — even as the economy shows plenty of
> vitality.

~~~
frockington
The Fed is reducing its budget sheet which will have a significant effect on
the yield curve. Inviting comparisons between the yield curve now versus any
other point in history is foolish. These are probably the same people who
predicted a recession when Trump was elected, after Brexit, and at least once
a month for the last decade

~~~
67_45
What does that mean "reducing budget sheet?" Also, what is meant by long and
short term interest? I thought the fed only set one universal interest target.

~~~
kamarg
Short and long term interest rates in this case are for US Treasury Bonds that
mature at different lengths of time. Short term bonds tend to have lower
interest rates since you're taking less risk that your money will be tied up
when the economy grows at a faster pace. If you invest in long term bonds and
the economy hits a growth spurt, your money is stuck for a much longer period
of time earning less interest than if you had invested in something other than
that bond.

Edit: Missed the first question in your post. The Federal Reserve is
essentially buying fewer Treasury Bonds when the bonds it currently holds
matures. Instead of reinvesting the payoff + interest that it received for
those bonds, it is now just taking that money and essentially keeping it out
of circulation.

~~~
67_45
What is the goal of essentially reducing the amount of money in the economy?

~~~
bwanab
To reduce the heat in what could be an overheated economy. Many economists
look at the employment rate as being too low which could signal inflation.

~~~
kybernetikos
This confuses me a little. Many things seem to be pointing towards inflation -
worsening global trade climate, high employment, knowledge that economic
difficulty will be met with printing etc. But if the market expects inflation
then shouldn't long term rates be higher to offset the expected inflation?

------
madballneek
I've been hearing this for years. It'll happen when it happens and no one can
actually predict.

#golong

~~~
solotronics
I always toyed with the idea of taking small positions far out of the money
buying puts to hedge against my 401k.

~~~
coliveira
Options are fairly priced. Meaning that they are priced according to the risk.
Unless you have some very good reason to use them, they can lead to ruin. This
is just another way to say that it is like playing in the casino.

On the other hand, if you have a lot of gains in the stock market, using
options may be a small price to keep your piece of mind. Just understand that
they give you no clear edge.

~~~
jedberg
If used correctly, options are like buying an insurance policy. You pay a
small amount up front to hedge against large future losses. Hence where the
term "hedge fund" comes from.

------
awinder
I’m curious about a related question for people who have been around a bit (or
are just generally knowledgeable). How should your average retirement investor
react when reading about the market like this? I’ve been well-educated on
staying the course, markets will dip etc. But I entered the market with some
force at the depths of the last recession so it’s been very easy to take this
advice. Now it feels like sitting on a railroad track waiting to get smooshed
by an oncoming train because it’s “the right thing to do”.

------
yosito
So it's probably a good idea to have some investments that aren't tied to USD
right now, yeah?

~~~
tryptophan
Global markets have at least .5 correlation with each other. Doesn't matter
which country or money you buy investments in. If you want to avoid market
risk then just stick to short term bonds(arguably the safest investment).

------
Animats
There's not much question that a recession is coming. But when? And what form
will it take?

The last recession was driven by a price collapse in housing. That was
unusual. The next one is more likely to be driven by trade problems, which is
more common historically. Also, the last few years have seen a lot of
investment into stuff that's not paying off, and after a few years, that comes
back to bite you.

~~~
pesmhey
Could you elaborate on bad investments made over the last few years?

------
javiramos
A page with technical documents and data explaining the yield curve as a
recession leading indicator [1].

[1]
[https://www.newyorkfed.org/research/capital_markets/ycfaq.ht...](https://www.newyorkfed.org/research/capital_markets/ycfaq.html)

------
Bromskloss
There is something sketchy in the underlying report [0]. In figure 2, they
draw what I understand to be a curve of the probability (according to their
model) of a recession happening within 12 months. The strange part is that
they identify a "critical threshold" (at probability 0.24), and seem to imply
that when the prediction goes above that value, a recession happens. That's
not how probabilities work. Are they meaning something else, or are they just
lost here?

[0] [https://www.frbsf.org/economic-
research/publications/economi...](https://www.frbsf.org/economic-
research/publications/economic-letter/2018/march/economic-forecasts-with-
yield-curve/)

~~~
debt
The probability of a recession rises immediately prior to a recession. When
the recession occurs, the probability drops immediately back down below the
threshold; as the probability of a back-to-back recession is very low and the
conditions that caused the recession immediately change.

So the critical threshold is saying "at any point beyond this line, as
conditions remain the same, bad things may happen at a very accelerated rate"

I think that's why the lines jump from .24 or .6 to 1.0(recession) and then
back below .24.

So as far as I can tell, they're not saying a recession is guaranteed if the
probability increases beyond the critical threshold, but are instead saying
the probability of a recession increases more quickly up into the point of an
actual recession than our ability to reliably predict and update the
probabilities that would predict said recession.

but idk

~~~
Bromskloss
> I think that's why the lines jump from .24 or .6 to 1.0(recession) and then
> back below .24.

None of the curves ever go to 1. The main curve ("spread only") never even
reaches 0.4.

> So as far as I can tell, they're not saying a recession is guaranteed if the
> probability increases beyond the critical threshold

They certainly shouldn't be saying that, since the curve being at that level
means precisely that the probability of recession is 0.24, not 1.

------
cubano
It's my current understanding that recessions are caused not by economic news,
but by the people's reaction to it's apparent demise.

I feel like they are priming the pump with stuff like this...I guess it's time
to hit the flush button on the Dow and suck all that "buy-n-hold" money outta
the market, and start the cycle all over again.

Cynical? I guess but I call it like I see it.

------
hestefisk
Someone should

A) run a neural network across thousands of historical economic / financial
metrics and find the best predictor B) ?????? C) Profit!!!

~~~
gepoch
B is where you overfit your model and D is where oops actually we didn't
profit :(

~~~
jessaustin
Do you imply that someone has tried this before?!

~~~
karlmcguire
This time, we add a blockchain!1!!

------
haskellandchill
If we weren't going to enter a recession anyway, a trade war will surely
accelerate the process.

------
Sophistifunk
Can anybody ELI5? It seems to me that having the long-term bonds at a similar
ratio would mean good predictions? Wouldn't the rates have to be higher if
trouble is coming, in order to make the increased risk of a longer term bond
worth it?

------
j45
Is there a way to see NY times articles? Hn links to NY times always brings up
a pay wall.

~~~
bla2
A bit easier but also more expensive than the other options mentioned: Pay for
a NY times subscription.

~~~
colechristensen
This is one thing I did to attempt to make a small difference in the current
climate, picked a few media outlets I thought were doing a good job and paid
for subscriptions. Living in very solidly blue places, nothing else I have
done has likely mattered at all.

~~~
jadedhacker
You can do a lot in blue states/towns, but it involves pushing the Democratic
party further left (Medicare for All, Abolish ICE, Affordable housing, and
more) if that's your cup of tea.

~~~
colechristensen
It isn't my cup of tea. Pushing democrats further from center makes them lose
more than they already do. I also don't think many of those things achieve
their goals or are correct for a free society depending on context.

I'm a very blue moderate with some ideas that are sometimes rather far from
the traditional one dimensional spectrum.

------
lpgauth
Assuming there's a recession coming what is a good investment strategy?

~~~
Nzen
I am an undereducated stranger who hasn't grown a nest egg into millions. I
think I've heard the advice of people who have, albiet not reproducibly. +<I
only practice once a year, unlike Warren Buffett who has employees who think
on this full time all year.> Consider treating what I say, on this NP-Hard
problem, as naive misinformation.

It ultimately depends on your time scale and tolerance for paper money
variation. I've heard buy low, sell high is good; and, I have twenty or more
years to move things around. So, when I notice a recession, I increase my
proportion of stocks, on the assumption that they are undervalued. If I were
to notice a bubble (unlikely) I would increase my proportion of government
backed bonds, to wait until the next recession.

If I were retirement age, and needed to reify that paper into real money, I'd
probably divest stocks in favor of government bonds that hold value during the
downturn. "Government", on the assumption that they are less likely to default
than corporate backed bonds.

------
omegaworks
> in the United States, where borrowed money is the lifeblood of economic
> activity

Does it work differently elsewhere?

------
jokoon
Isn't scare mongering a common way to prevent risk?

Usually if the future seems bleak, don't traders adjust their behavior and
investments to avoid loss?

As long as finance is scared, it seems that a recession cannot happen.

Of course some might get frustrated and find that they are unable to expand
their business, and break through barriers, and lobby against regulations.

I wonder how wall Street is behaving since Trump's election, and if risky
policy is being put in place, and if wall Street is being cautious.

------
crb002
It depends if Trump tariffs raise enough tax revenue to offset deficit
spending and curb inflation. Like to see the tariff revenue numbers at the end
of the next quarter.

The potential upside is that tariffs are stress testing industries with supply
chain issues, shaking out mal-investment.

------
debt
Why do central banks still want to drive down long-term interest rates?

~~~
tryptophan
They don't. QE ended many years ago.

~~~
melling
The unwind of QE is just getting started. It’ll be interesting to see the
impact.

~~~
tryptophan
If anything, unwinding QE would raise long term rates.

~~~
melling
You are oversimplifying it.

Actually, no one knows the repercussions.

