Recession?

[Ausmumof3]

Economics is pretty much a giant mystery to me

https://www.adelaidenow.com.au/business/markets/inverted-yield-curve-a-signal-of-looming-financial-collapse-expert-warns/news-story/7b0768a48b64236c96bfda4002024de3

Does this sound realistic to those of you with more knowledge or is it just sensationalist reporting?

[lovinmyboys]

I don’t know much about it, so I shouldn’t be commenting, but I was just talking about this while getting my hair cut. We don’t currently own a home and I am scared to buy one right now. My stylist was saying she can’t put her finger on it, but she feels like the economy is going to tank soon. Maybe we have both just been reading sensationalist things. 

[Arcadia]

No idea. This was what I read on MarketWatch this morning which affected stock market sentiments. https://www.marketwatch.com/story/yield-curve-recession-indicator-flashes-red-as-10-year-yield-falls-below-3-month-yield-2019-03-22

“The yield curve as measured by the spread between the 3-month Treasury bill TMUBMUSD03M, +0.00% and the 10-year note TMUBMUSD10Y, +0.00% inverted for the first time since 2007, following a sharp rally in longer-dated notes. The spread between the two maturities stood at around negative 3 basis points. On Friday, the 10-year note yield fell nearly 10 basis points to 2.434%, while the 3-month bill was down a single basis point to 2.462%, Tradeweb data show. Bond prices move inversely to yields. The last nine times the yield curve has inverted, a recession has followed, according to the San Francisco Fed.”

[Farrar]

I've been reading for awhile that a recession is definitely coming. I am also no economic expert, but I generally trust that the sources I'm seeing are correct, unfortunately. 

[ChocolateReignRemix]

The article has some accurate information but trends towards the hysterical a bit.

Every day you don't have a recession you are a day closer to your next.  The 3 mo/10 year yield curve did invert, and this is often an indicator that a recession is looming.  Some of the impact of the indicator is lessened as that time horizon for the predicted recession is fairly wide, with the average time lag being somewhere around a year (give or take).  There is a question as to whether the amount of debt held by central banks is lessening the reliability of the inversion as a predictor this time around.  I am still catching up on the financial news today, but I don't think the inversion lasted through the trading day.  If not I would be looking more closely at the average yield between the 3 mo and 10 yr over a 30 day average.  Institutional demand can play a role in a brief inversion.

We definitely are seeing slowing economic growth due to variety of headwinds.  The past year of the trade war has caused a many companies to hold off on making investments as they are not sure about future pricing/demand.  China has showed weakening growth (more alarming due to China usually overstating growth so admitted declines causes a concern that things are even worse), we have slower growth in the EU, and Brexit is looking more like a shit show ever day. 

On the plus side, there are signs the US and China could reach something that looks like a deal, China started a stimulus effort in late 2018 which should yield fruit soon, and the job market and consumer spending in the US remains strong.  The US housing market has taken a hit but most of that impact has already appeared in the data and shouldn't get much worse in the near term.

Summary:  I have expected a recession or enough of a slowdown to feel like one by 2020.  I don't see anything that really changes my mind, other than a small chance that the China deal causes some exuberance and sparks business investment again.  The Fed has also backed off of rate increases in the near term which takes that fear off the table, and helps alleviate some of the debt concern expressed in the article.  We also do not have any indications yet that credit markets have gotten overly risk averse (helped a bit by future business investment running low at the moment),  In the end I think all the headwinds together gives us a short recession and without additional negative stimuli I don't expect anything more than something along the lines of what we felt around 2000.

What I do not see is a massive global meltdown akin to 2008.  And yes, every analyst wants to be the one who can say they called "The Big One", which means some will call everything that next Big One until they get one right.  Keep in mind that consensus of economists have successfully predicted 12 of the past 3 recessions. 🙂

If you want to play economist with the pros, watch the labor markets, energy markets (especially a collapse in demand) and the manufacturing reports.  If you see unemployment increasing while the manufacturing reports decline and energy demand drops, you will know the recession is on the horizon.

ETA: the inversion did hold through the day.  I would still wait and see what the movement is over the next month. 

 

Edited March 23, 2019 by ChocolateReignRemix

[Ausmumof3]

25 minutes ago, ChocolateReignRemix said:

The article has some accurate information but trends towards the hysterical a bit.

Every day you don't have a recession you are a day closer to your next.  The 3 mo/10 year yield curve did invert, and this is often an indicator that a recession is looming.  Some of the impact of the indicator is lessened as that time horizon for the predicted recession is fairly wide, with the average time lag being somewhere around a year (give or take).  There is a question as to whether the amount of debt held by central banks is lessening the reliability of the inversion as a predictor this time around.  I am still catching up on the financial news today, but I don't think the inversion lasted through the trading day.  If not I would be looking more closely at the average yield between the 3 mo and 10 yr over a 30 day average.  Institutional demand can play a role in a brief inversion.

We definitely are seeing slowing economic growth due to variety of headwinds.  The past year of the trade war has caused a many companies to hold off on making investments as they are not sure about future pricing/demand.  China has showed weakening growth (more alarming due to China usually overstating growth so admitted declines causes a concern that things are even worse), we have slower growth in the EU, and Brexit is looking more like a shit show ever day. 

On the plus side, there are signs the US and China could reach something that looks like a deal, China started a stimulus effort in late 2018 which should yield fruit soon, and the job market and consumer spending in the US remains strong.  The US housing market has taken a hit but most of that impact has already appeared in the data and shouldn't get much worse in the near term.

Summary:  I have expected a recession or enough of a slowdown to feel like one by 2020.  I don't see anything that really changes my mind, other than a small chance that the China deal causes some exuberance and sparks business investment again.  The Fed has also backed off of rate increases in the near term which takes that fear off the table, and helps alleviate some of the debt concern expressed in the article.  We also do not have any indications yet that credit markets have gotten overly risk averse (helped a bit by future business investment running low at the moment),  In the end I think all the headwinds together gives us a short recession and without additional negative stimuli I don't expect anything more than something along the lines of what we felt around 2000.

What I do not see is a massive global meltdown akin to 2008.  And yes, every analyst wants to be the one who can say they called "The Big One", which means some will call everything that next Big One until they get one right.  Keep in mind that consensus of economists have successfully predicted 12 of the past 3 recessions. 🙂

If you want to play economist with the pros, watch the labor markets, energy markets (especially a collapse in demand) and the manufacturing reports.  If you see unemployment increasing while the manufacturing reports decline and energy demand drops, you will know the recession is on the horizon.

ETA: the inversion did hold through the day.  I would still wait and see what the movement is over the next month. 

 

Thanks for this very well explained commentary!  I agree, I see dire financial predictions semi regularly from one source or another but something about this one seemed to be a bit more concerning somehow.  We have some financial decisions to make over the next six months.  I don’t want to hold off forever on stuff in fear of the next one.  However we were fairly young just before the last one and had paid down our mortgage pretty well.  Our accountant decided to play financial adviser and recommended we reborrow and invest a significant amount in shares.  We seriously thought about it but held off and sure enough the gfc happened a couple of months later.  On the other hand we had a property investment opportunity at one stage and held back because of uncertainty and it would have been a pretty successful thing!

at this point I kind of wish I had studied economics at school.

[ChocolateReignRemix]

Just now, Ausmumof3 said:

Thanks for this very well explained commentary!  I agree, I see dire financial predictions semi regularly from one source or another but something about this one seemed to be a bit more concerning somehow.  We have some financial decisions to make over the next six months.  I don’t want to hold off forever on stuff in fear of the next one.  However we were fairly young just before the last one and had paid down our mortgage pretty well.  Our accountant decided to play financial adviser and recommended we reborrow and invest a significant amount in shares.  We seriously thought about it but held off and sure enough the gfc happened a couple of months later.  On the other hand we had a property investment opportunity at one stage and held back because of uncertainty and it would have been a pretty successful thing!

at this point I kind of wish I had studied economics at school.

 

1.) Ask yourself if these are long term or short term decisions.  The shorter the term the more recession risk I would assign to the decision.

2.) Evaluate your personal risk in a recession.  How secure are your primary sources of income?  How leveraged are you? Not all recession risk is equal.

3.) I am old school here, but never borrow to invest. And even though the numbers don't totally support this, eliminating debt has life equity value that doesn't show up in a balance sheet.  The best of both worlds is investing for the future while also working a debt elimination plan but sometimes life says "hahahaha no!" to that plan.

4.) If it is an investment decision (and this is not professional investment advice), equities have limited upside in the near term.  I wouldn't let FOMO (fear of missing out) play a role at this time.  If it is more of a real estate decision it is more of a grey area.

[Arcadia]

18 minutes ago, Ausmumof3 said:

  On the other hand we had a property investment opportunity at one stage and held back because of uncertainty and it would have been a pretty successful thing!

at this point I kind of wish I had studied economics at school.

 

My husband and I had economics as a compulsory subject in engineering first year. When my husband suggested we buy a $290k condo in 2010 as rental property, I said I wasn’t up to more stress. It would have possibly fetched a profit of $500k if we bought that unit and sold it last year. However, my husband’s entire department was retrenched in late 2013. If he wasn’t able to find a job in time, we would have end up paying two mortgages, two property tax, two HOA (condo monthly maintenance fees) using our emergency savings with unknown rental income. A good friend’s husband was unemployed for a year. We won’t have enough emergency savings in 2013 to pay for two homes with one home having unpredictable rental income if my husband was unemployed for a year. My husband and I are risk adverse though.

ETA:

We are mortgage free now so if a $200k condo rental property opens up locally, we could take the risk.

Edited March 23, 2019 by Arcadia

[Garga]

I’m only halfway through teaching my son economics for high school, and this is my first economics class, so take this with a grain of salt.

From what I gather, in a capitalist economy, there are cycles of boom and bust (recession) and those cycles are inevitable.  They are not necessarily something to be feared as if it’s something we can avoid.  I mean, we can fear them, but it’s not like we can stop them.  Sort of like a pregnant woman can fear giving birth, but it’s not unexpected and it’s unavoidable—you know it’s coming.  Busts are unavoidable.  You know they are coming.  They will happen with regularity. It’s just the nature of how this sort of economy works.

So, if you’re thinking, “oh, I’ll bet a recession is coming soon!”, you’re right.  There is always a recession coming soon.  Always. 

This isn’t something unexpected or something that can be stopped.  It’s just part of how things work and all you can do is to prepare for the cycles as they come in your lifetime.  You will see a recession many times during the span of your lifetime, so always keep some extra money saved up.

Remember:  I’m only halfway through my first one-semester high-school economics class, so maybe I’m wrong, but that’s what I’ve learned so far.  🙂.   I’m actually feeling rather comforted to know that this is just How Things Work.  I always thought recessions came out of left field and no one understood why and they blindsided everyone.  But it’s not like that.  We always know one is coming, because after a few good years, we always have a recession.  I’m sure I’ll see another 3 or 4 or 5 or so in my lifetime.

Edited March 23, 2019 by Garga

[LucyStoner]

It’s like earthquakes.  We are due and we can be reasonably certain one is coming but we haven’t perfected the methodology to precisely predict when, where and how bad.  

I expect a cyclical recession.  It’s not going to be another 2008 though.  

[PrincessMommy]

6 hours ago, LucyStoner said:

It’s like earthquakes.  We are due and we can be reasonably certain one is coming but we haven’t perfected the methodology to precisely predict when, where and how bad.  

I expect a cyclical recession.  It’s not going to be another 2008 though.  

This... exactly.  My husband keeps close watch on markets but says something similar.  They'll always be predicting one because it's cyclical.   But, we are due 

[kbutton]

10 hours ago, ChocolateReignRemix said:

 

1.) Ask yourself if these are long term or short term decisions.  The shorter the term the more recession risk I would assign to the decision.

2.) Evaluate your personal risk in a recession.  How secure are your primary sources of income?  How leveraged are you? Not all recession risk is equal.

3.) I am old school here, but never borrow to invest. And even though the numbers don't totally support this, eliminating debt has life equity value that doesn't show up in a balance sheet.  The best of both worlds is investing for the future while also working a debt elimination plan but sometimes life says "hahahaha no!" to that plan.

4.) If it is an investment decision (and this is not professional investment advice), equities have limited upside in the near term.  I wouldn't let FOMO (fear of missing out) play a role at this time.  If it is more of a real estate decision it is more of a grey area.

This is really helpful perspective. Thanks!

 

[Bootsie]

This is a chart that shows the relationship between yield curve inversion and recessions.  The vertical shaded rectangles indicate recessions in the US.  Whenever the 10-year yield falls below the shorter term yield (In this chart the shorter term is a 2-year Treasury security yield), the blue line falls below zero.  There have not been enough occurrences of this to have a large enough sample size to say that there is a statistically significant relationship.  But, it has happened enough that it is something to notice and take as a warning sign.

One reason that has been suggested for this relationship is that banks tend to borrow from their depositors short-term (e.g. you deposit your tax refund in your bank and then spend it on a summer vacation) and lend money long-term (e.g. you borrow money for 15 years to buy a house).  Because banks are typically in this situation, it is difficult for them to be profitable with an inverted yield curve.  When banks are not profitable, they can not make business loans that fuel the economy.

[Guest]

Peter Leeds, the stock matket investor/analyst shows many reasons to believe a recession is coming soon to an economy near you. One is the “velocity of money” or how long it takes a dollar to circulate. 

One phrase he uses that rings true IME is “irrational exuberance.” Investors begin behaving as though the stock market can only go up forever. He uses another phrase, which also rings true - “aggressive unbelief.” So, if he warns someone that a fall is coming, they get aggressively angry about the warning. They have “aggressive unbelief.” 

I have witnessed both irrational exuberance and aggressive unbelief regarding the economy in the past year. I also saw this just before the dot com bubble burst and when housing starts tanked. Because my family is heavily involved in housing construction, I saw this up close and pesonal. I remember hearing my BIL flatly claim that due to where we live (DC Metro region), there was no way housing starts could really fall here. Well, obviously, that is wrong. If people lose their jobs, they can’t move into a $700,000 house no matter how desirable the area or convenient to the cities. 

[kbutton]

19 minutes ago, Quill said:

One phrase he uses that rings true IME is “irrational exuberance.” Investors begin behaving as though the stock market can only go up forever. He uses another phrase, which also rings true - “aggressive unbelief.” So, if he warns someone that a fall is coming, they get aggressively angry about the warning. They have “aggressive unbelief.” 

Sounds like human nature kicking in. I have never heard it applied as a measure of economics before, but it sure shows the power of time distance to help us forget negative events.

[Bootsie]

Alan Greenspan popularized the use of the term "irrational exuberance" when he was Federal Reserve chair, in a speech he was giving in 1996.  Nobel Laureate Robert Shiller has an excellent book entitled Irrational Exuberance.  His 1st edition came out right about the time of the stock market peak in 2000.  The second edition came out right before the financial crisis and was highly prophetic.  

[Ausmumof3]

On 3/23/2019 at 2:44 PM, ChocolateReignRemix said:

 

1.) Ask yourself if these are long term or short term decisions.  The shorter the term the more recession risk I would assign to the decision.

2.) Evaluate your personal risk in a recession.  How secure are your primary sources of income?  How leveraged are you? Not all recession risk is equal.

3.) I am old school here, but never borrow to invest. And even though the numbers don't totally support this, eliminating debt has life equity value that doesn't show up in a balance sheet.  The best of both worlds is investing for the future while also working a debt elimination plan but sometimes life says "hahahaha no!" to that plan.

4.) If it is an investment decision (and this is not professional investment advice), equities have limited upside in the near term.  I wouldn't let FOMO (fear of missing out) play a role at this time.  If it is more of a real estate decision it is more of a grey area.

Dh has been attached to the construction industry for years which is a definite factor. He has now moved away from that to some degree but would still be somewhat vulnerable.  

Real estate wise prices appear to be going backwards here in some states.  I think everyone’s a bit unsure as to what the long term result will be.

[ChocolateReignRemix]

7 minutes ago, Ausmumof3 said:

Dh has been attached to the construction industry for years which is a definite factor. He has now moved away from that to some degree but would still be somewhat vulnerable.  

Real estate wise prices appear to be going backwards here in some states.  I think everyone’s a bit unsure as to what the long term result will be.

 

I have a few Aussie friends scattered about and they have told me something similar about real estate prices.  Construction is particularly recession sensitive so I would certainly be cautious.  There isn't an impending international economic Armageddon but on a personal level there doesn't need to be.  As the old economic saying goes, if your neighbor loses his/her job there is a recession.  If you lose your job then there is a depression.

The other one I like is:

--A recession means you need to tighten your belt.

--A depression means you have no belt to tighten.

--And in a panic you don't need a belt because you no longer have pants.

[Carrie12345]

I agree with the concept of “there’s always a recession coming”, but it still makes me worry in my particular region. We haven’t come close to fully recovering from the real estate bust, so additional troubles are certainly not needed. On the other hand, will a “decent” recession bring another batch of transplants to our more affordable area, bumping us back up a bit? I suppose we’ll see.

My husband’s industry is pretty secure, and his company is growing. His skills are also sought by others outside of the company.  He’s in the business of saving other businesses money on necessary work. Though we’re nowhere near loaded, I think we’re okay to get through anything less than a complete collapse. 

[ChocolateReignRemix]

4 hours ago, Fifiruth said:

Here is some good economic news as reported on money.com (Money magazine):

http://money.com/money/5639032/stock-market-strong-start/

 

Interesting but not particularly useful when discussing a potential recession, particularly as it was written before the yield curve inversion on Friday and the latest manufacturing numbers.  It also focuses on stock market returns, which are nice so far in 2019 but still has down around 5% from October.

Monday is going to be a shaky day for the markets based on current futures action and the performance of Asian markets today. Another correction in the next few months is not out of the question.  A lot will depend on trade deals and the next round of economic reports.