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[flagged] Krugman Sees Possible U.S. Recession with Little Fed Wiggle Room (bloomberg.com)
45 points by paulpauper 7 days ago | hide | past | web | favorite | 76 comments

"Krugman isn’t alone in seeing a gloomy outlook for the world’s biggest economy. U.S. chief financial officers in a Duke University survey published in December overwhelmingly said they expect a recession within two years."

edit: https://www.cfosurvey.org/wp-content/uploads/2018/12/Q4-2018...

"Nearly half (48.6%) of US CFOs believe that the US will be in recession by the end of 2019 and 82% believe that a recession will have begun by the end of 2020. CFOs are even more pessimistic in most other regions of the world: Africa (97% believe that a recession will have begun no later than year-end 2019), Canada (86%), Europe (66.7%), Asia (54%), Latin America (42%)"

Given that we've had a 10 year bull run in the stock market, predicting a recession in the near future isn't exactly a risky bet.

You would think so, but there was a pronounced movement lower in the PDF I linked to in sentiment in the last two quarterly survey results.

Whether he happens to be correct or not (a broken clock is right twice a day), Krugman has zero credibility. He has a Nobel Prize, so people listen to him, but the man is a dyed-in-the-wool Keynesian who takes no responsibility when his prognostications fail to materialize again and again.

Where are the specific examples, you ask? There's an entire podcast devoted to smashing his (often-contradictory) arguments: https://contrakrugman.com/

I don't trust Krugman simply for how willing he is to jump into rabid politics. I never trust a political ideologue when it comes to intellectual matters. As it shows they are very likely to value defending their 'tribe' (and attacking the other tribe) over having an open intellectual perspective on issues.

And of all the different intellectual pursuits economists seem to have the easiest time skirting around issues when the data doesn't match their idealized worldview.

A very old joke: economists have predicted 9 out of the last 5 recessions.

I mean really though, why do people even care about "economist/analyst predicts X" stories at all these days? If you're around markets for any period of time (or read Taleb) you know they know nothing and their predictions are worse than useless. It's just garbage information noise and the people who say or publish it should be embarrassed that they think they can predict the future.

There is a lot of noise and one can never time the market, but I think many of us are interested in analysis because we have a general interest in the economy.

What about X% of economists predict Y?

Worth listening to the interview in full (and ignoring the headline).

Krugman: A recession seems possible now. I'm most worried that we raised interest rates too soon and won't be able to lower them enough to restart economy. Also current administration isn't super competent, if something complicated happened they would make mistakes.

Headline writer: Krugman promises recession.

Don't just read the headline, dig in to what the competent people are actually saying.

Some details:

The federal funds rate in mid 2007 was 5.25%, it's now at 2.4%. (https://fred.stlouisfed.org/series/FEDFUNDS).

Also the Bush administration gets a lot of hate, but his and then Obama's economic team did an awesome job managing something that could have been very very bad.

Is there a recent enough article documenting the frequency of the word “recession” in the news articles from the last 3-6 months? I’m asking because I remember reading an article in The Economist printed in the first part of 2008 where some economists had shown a correlation between the use of the word “recession” in mass-media and the probability of a recession actually taking place.

Well, you can see search interest: https://trends.google.com/trends/explore?date=all&geo=US&q=r...

The dip "out" of recession interest in mid 2008 is interesting. Also interesting that you can spot 2011, when "double dip recession" came into popularity as a buzz-phrase. (see for example at the time: https://www.nytimes.com/2011/09/08/business/economy/american...)

If you're looking for a good predictor, look at the 10 yr/2 yr yield curve. When it inverts, a recession normally follows in 12-24 months, and it will likely invert in March.


The smart money has been getting out of the market for some time. But you can't sell unless someone else wants to buy. So at the end of the business cycle there is usually a blizzard of "the economy will keep doing good" articles contrary to common sense, trying to get the rubes to buy so the smart money can bail, await the crash, and then buy the stock back at pennies on the dollar.

Uh... and why would such a correlation be notable? I mean, at the peak of expansions[1] everyone likes to predict recessions. That's literally the same logic as noting that people in the tropics tend to search "hurricane" in August and concluding that the resulting storms are Google's fault.

[1] Check the stock market or some other favorite grown metric. Things hit a peak level about a year ago and have been mostly flat ever since. This is what the peak of a growth cycle looks like; every one can see that.

What? Your hurricane example is not the same at all. No one is saying that predictions of a recession in the media are the cause of the recession.

The OP is just asking if there is a way to predict the likelihood of a recession by using media reports. The answer could very well be no, but it is nothing like saying that google searches for hurricanes cause storms.

The correct analogy is that it would be like searching for media reports of incoming hurricanes in order to tell if there was a hurricane coming. I imagine that method would work well for telling if a hurricane is coming (though it would be more straight forward to just look at the weather report)!

I have a feeling this method wouldn't work well for predicting a recession though.

> No one is saying that predictions of a recession in the media are the cause of the recession.

That was the clear implication I took from the phrasing. And it seems to be confirmed by a bunch of other posters here.

Again I ask: everyone can see that we're at the peak of a growth cycle, why is it notable or surprising that pundits are predicting that we'll hit the downward slow soon? It seems it's only notable if you're trying to blame the recession on the pundits.

It would only be notable if pundits can accurately predict if there will be a recession in the next year. I doubt they can because these things are difficult/impossible to predict (otherwise no one would have lost money in the Great Recession in 2008).

You say it is obvious that we are at a peak of a growth cycle. Maybe you are right, but you also could very well be wrong... People have been saying we are at a peak for several years now.

My point was mainly that your analogy was a stretch.

None of that is correct, though. Plenty of people in 2007 were complaining about overheated real estate markets (though no one outside the banking industry knew the disastrous leverage that was in flight). Plenty of people in 1999 (even the Fed chariman! Remember "irrational exuberance"?) could see that the dot com boom was unsustainable. In both situations wehre were predictions of downturns everywhere in the media, and they were right.

Likewise lots of people were predicting a few years solid growth starting in 2009. And they were right too!

And all I'm saying is that it's more likely that they were right because economic cycles are broadly predictable on the multi-year scales and not because Paul Krugman has some kind of magical power to produce a recession just by talking about it.

It would show an actual predictive power of such prognoses.

Contrary to your assertion, I don’t necessarily see a clear signal in the stock market (which only loosely correlates with the economy) or other economic indicators. Job growth is still somewhat strong, for example. And many a temporary flattening of indicators have given way to another run.

Of course as day follows night, recession has followed expansion. But the cycle just isn’t as regular as the 24h day, or the 12 months that make a year.

Just as we have become better at predicting the weather or the path of hurricanes, economists have become better, but not perfect, at predicting, and even softening the blow of, recessions.

OP was merely asking if news archives could be used for a sort of crowdsourced signal, a valid and interesting question. Google trends might also be interesting to look at, although I haven’t heard much of their flu prognosis in recent years.

Bad analogy. There is a plausible mechanism by which consumer sentiment—and, thus, the economy as a whole—can be influenced by media reports. There is no similar mechanism by which the weather can be influenced by media reports.

It's not a bad analogy, it's an alternate explanation of how you could see the same effect without any causal relationship between recession sentiment and actual recession.

Another example are quack cures: unusual cures are tried when people are at their sickest, then people improve, and they credit the improvement to the cure. Almost everybody who is very sick gets better, though, and the rest are too dead to denounce the cure as fake.

Bad logic. The presence of a plausible hypothesis doesn't prove causality! This mistake is like 80% of bad science. How many times are we going to repeat it?

The counterfactual I provided is just an obvious example of the fallacy. The real meat of the argument was in that post too -- it's far more likely (Occam and all) that people are predicting recessions because every dummy can see that a recession is likely following the end of an expansion than that there is some kind of magical effect on public thinking.

This is just politics. You don't want your favored entity to get blamed for a recession, so you find a way to make that recession the "fault" of your political enemies. But no, growth cycles are cycles for a reason, and we don't need "fault" to describe what happens.

I was commenting strictly on your analogy. I agree that correlation does not equal causation.

The entire point of the analogy is that it is well known that sentiment does not affect the weather.

1. Correlation is not causation

2. The "cause" of 2008 was not media reports, but years of actual bad behavior by banks. Now if you want to rewrite history, awesome, but be transparent about it.

I mean, assuming economists know what they're talking about (which is a big ask) it would make sense that a looming recession causes articles about a looming recession, so the correlation makes sense. A complete lack of correlation would be one hell of an indictment, as it'd mean recessions out of nowhere and nobody having the remotest of clues.

Then why bring it up? Either it means economists were right about 2018 (correlation) or it means they caused the recession -- indirectly or directly -- by warning people about it (causation).

I don't think GP's post implied that the link is causal.

Then why bring it up without saying that? It sparked an entire thread about what makes a "causal" relationship.

Given that economic activity is so heavily influenced by "sentiment", which is shaped by media, I don't doubt that you're true

Surely a simpler explanation is that we're not terminally stupid as a species and are able to see — and thus talk about — looming recessions?

As in, there's a correlation between heatwaves and A/C use. You could hypothesise that A/C cause heatwaves, but the simpler and fairly obvious explanations is that people use their A/C more during heatwaves.

There is an entire field of economics which basically rejects the idea of human beings being rational economic actors and making decisions based on sentiment. If enough people tell you that there is a recession, it's not impossible to think that a significant minority will ignore the numbers and actually start believing it.

How can I best make money off this coming recession?

In 2009 during the real estate crisis, I purchased 2 properties for rentals for fairly cheap. They had depreciated by about 35% at the time when I purchased. They've since almost doubled in value ($120k=>~$220k ea) and have had a nice little cashflow ever since. I put down 20%. My mother did the same when she retired and purchased 6 outright and 2 mortgaged. She lives comfortably in retirement on a $11k/mo income, which will not ever go down since it's not in a "retirement account." She can also will them to her children. There are many advantages for real estate investments if you can hold onto them, especially if you can pick them up below regular market conditions. That's just money in the bank as the prices will increase to regular levels again.

Assuming your mother and yourself each have your own residences, your 2 households own 12 properties. Your situation isn't unique. Investors over the past decade went on a massive buying spree that has reduced the pool of affordable, available homes.

Assuming you put down 20k on the 100k homes, you've returned 500%. That is incredible, but also fairly common story from the past few years. "I made it rich with real estate!" "How?" "Easy, buy at a historically low price."

The word is out, it's not a secret to success anymore. There is a pile of money out there waiting to invest in under-priced homes. This drives prices up! Because of this, a recession will not trigger a home price drop.

Property values will likely remain stable/inflated until something happens to break whatever math it is that keeps investors invested. It's the massive stockpile of homes investors gobbled up in 2009-12 that need to be released back to the market. It is a self-perpetuating cycle, people rent a home because home prices are too high due to investor held inventory. Then investors keep renting their asset out because renters don't graduate to buying.

I could be way off, or have missed something obvious, but I don't think real-estate is going to be the big moneymaker form this recession unless something happens to dramatically increase inventory in places with jobs.

Save cash now. Wait until the recession forces other people sell their investments. Buy those investments at a discount.

But have the fortitude to hold on as value continues to plummet. Predicting a bottom is just as perilous as predicting a top.

Why not short in the meantime?

If you're very sure of a time horizon, sure, but holding shorts is costly. If you mispredict by a year, it's going to cost you.

Why not bet your savings on blackjack while you fill your 401k?

Go for it! Put your money where your mouth is.

aka: buy the dip

If the corporate bond bubble blows up as expected, looking into credit default swaps (CDS) seems like an intuitive answer. It's basically an insurance against a company defaulting on its debt. (Or as some would put it, the financial equivalent of you buying a fire insurance on your neighbor's house, without anyone asking if you happened to be an arsonist.) Doing so comes with a caveat in the current context: if the corporate bond bubble blows up, the main ones taking the hit are the banks. And if that blows up the financial system with it, again, neither taxpayers nor the Fed and the ECB are in a position to save the banking system. So you might end up in a situation where you've a winning lottery ticket but nowhere to collect.

An alternative mentioned in sibling comments -- which I completely agree with -- is to wait it out holding cash. This assumes you trust there won't be inflationary pressures. Depending on viewpoint there should be lots of that or deflation. It also assumes you're able to trust some institution to hold your cash and making it available when you need it. IMO that is less of a given, considering current private debt levels, if shit really hits the fan hard. But you never know, perhaps we can survive yet another 2008 type of crisis, and kick the can further down the road yet again.

Not much more easily than making money off of anything else. The threat of a recession is widely known; for any financial maneuver that could take advantage of it, the "returns if a recession hits" factor is already priced in.

Unless you have a PhD in quantitative finance, it's usually best to take it as axiomatic that you don't have a knowledge-based edge in the stock market, or anything similar.

It is going to be difficult, as your bets (trading options) are tied to timing. Same issues with Inverse ETFs. Usually it can take a couple of years to play out, by trapping people (bull/bear trap) on both sides of these bets.

Not a financial adviser, etc, but probably by making sure you have an adequate safety net and by continuing to buy and hold into a well-diversified portfolio come what may.

If someone is asking a basic question like this (no offense), they probably should be dabbling in options plays.

Do you mean, "should not be dabbling in option plays"?

“Buy land. They’re not making it anymore.”

Buy when prices dip and HODL.

Life insurance scams work best in times where people are starving.

Let's try to make money off tons of people's misery!

But seriously though, the "Great Recession" was the largest downturn since the Great Depression. Do you expect the next one will be as bad or worse?

I think you're being a bit harsh here (although OP's phrasing is a bit crass)- it's reasonable to want to hedge yourself against a downturn.

I'm not actively seeking to make money off a downturn aside from contributing to my 401k, which invests in a diversified mutual fund (I can't invest more actively for regulatory reasons). My main goal if that happens is to keep my job.

I hate autoplay so much. Firefox 66 can't come soon enough.

Why wait? about:config

media.autoplay.default (1 for disabled, 2 for site by site basis)

media.autoplay.allow-muted false

Thank you so much for this.

Theres like 20 article saying there will and won't be a recession a day on bloomberg. Check out there youtube it's literally everyone giving their opinion.

On the day after Trump’s election, Krugman wrote:

> So we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened.

Are you sure you want to make investment decisions based on his predictions?

Here's an article from 2016 (3 years back!) where Krugman predicted a global recession.

"The economic fallout of a Donald Trump presidency will probably be severe and widespread enough to plunge the world into recession, New York Times columnist Paul Krugman warned..."

Glancing over 3 year's worth of employment, GDP and stock data, it seems safe to say Krugman is sometimes simply wrong. Very, very wrong.


"By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."

Out of all the incorrect predictions and offbase hottakes Krugman has made over his media career, the Internet-impact quote is one of only two predictions Krugman admits to getting wrong.

Krugman is not credible.


An economist’s prediction about the impact of new technology 8 years out is not comparable to an economist’s prediction about the near future of the economy or the effectiveness of government intervention.

Dragging this quotation out anytime Krugman says anything is weak and lazy. Pick any person who routinely makes a broad range of public predictions about what will happen in the medium term, and you will find some they got hilariously wrong.

What has he got right?

"But what is certain at this point [12/2017] so far in Trump's presidency is that anyone who sold stock on the basis of predictions by liberal "experts" like Larry Summers or Paul Krugman or Steve Rattner missed out on a 30%-plus surge in their financial wealth. At some point the market will take a tumble and these discredited gurus will shout "see." https://www.investors.com/politics/columnists/and-the-hits-j...

Reminds me of

“The stock market has forecast nine of the last five recessions.” Paul Samuelson (1966)

I see a possibly alive cat in a box.

It's notable that Krugman is now saying that there was "lots of room" to lower interest rates during the 2008 recession - he certainly didn't see it that way at the time, and was very vocal about this view. Does this mean that he has finally changed his mind?

Regardless, I don't think we'll be seeing anything like a recession this time around - the Fed has learned from their screwup in 2008 and won't make the same mistakes again.

Edit: A slowdown in growth as a result of e.g. problems in Europe or China might happen, but this would not be a "recession" as commonly understood. It would look very different in the data (inflation, unemployment rates and the like) and the appropriate policy response would be completely different as well.

Edit 2: And the Fed did a lot more than just "lowering interest rates" in a direct, trivial sense (and they _had_ to, since interest rates _were_ indeed quite low even before the Great Recession was widely acknowledged as such. I'm not sure why people - including Krugman - are now suggesting otherwise). I don't think many people would disagree that these policy measures were highly effective, but Krugman used to be a very vocal skeptic.

No, he just thought that heavy money printing and spending would be more sustainable - because lowering interest rates would kick the can down the road, and you wouldn't be able to lower interest rates again. People who disagreed with him insisted that lowered interest rates would lead to investment, and that interest rates could gradually start rising again. He, along with others of his school, insisted that safety net payments and infrastructure investments - or even just paying people to dig holes and other people to fill them - would generate immediate massive consumer demand, and supply would follow. The option of giving money to people who don't have lobbyists was not chosen, and the option to give money to people who do was.

Interest rates stayed low, companies sat on huge mountains of cash and just paid themselves more or invested in press releasable tech companies and other decorative unprofitable baubles, the markets rose into the stratosphere, and now there will be a reckoning.

You are reading it wrong. There was lots of room to lower rates in response to the 2008 crisis because the rates weren’t low before the recession.

After they were lowered to almost the zero bound there was not much else to do.

This one around, they are already low before the recession hits. The situation is not the same, hence the Fed has less wiggle room.

And thanks to the tax cuts, and a deficit nearing $1 trillion in a boom economy, there will be less wiggle room for fiscal stimulus vs tax cuts or spending as well, because the deficit will skyrocket if government revenues fall in a recession.

Krugman is being consistent and logical here.

History doesn't repeat but it rhymes.

They will not make the same mistakes again but different ones (not sure if I would even call it mistakes. In the end the Fed can't do much in a world of outrageous debt). Our whole economy is not set up to be stable. We push until things blow up, deal with the consequences, and then we start pushing again.

History doesn't repeat but it rhymes.

Just make sure the person in charge isn't out of touch and surrounded by people too sycophantic to call out mistakes. Also, don't use green screen improperly and re-use the same static shots. Also, save the lightsaber for key dramatic moments.

The problem is Fed has learnt its lesson. However, China/ Japan/Europe have learnt nothing and are sitting on their own set of unique problems and these countries will be the likely cause of next recession.

The U.S. did lower interest rates in response to the Great Recession. I don't think anybody, including Krugman, claims they didn't do so?

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