Yield curve is blaring loudest recession warning since 2007

https://www.bloomberg.com/news/articles/2019-08-05/yield-curve-blares-loudest-u-s-recession-warning-since-2007

by tempsy • 7 years ago

251 335 7 years ago

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?

asplake• 7 years ago

Translation: the markets are pricing in the expectation that the Fed will (need to) stimulate the economy by reducing interest rates from their already low (close to zero) levels

jerf• 7 years ago

There will definitely be a recession, at some point in the future.

apalmer• 7 years ago

Well according to the people quoted in the article it's a textbook scenario of fed either acts aggressively or recession. That's the take away.

Now the quoted folks might be wrong, or they might be right but sometimes the textbook scenario doesn't play out...

formercoder2• 7 years ago

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.

TheSoftwareGuy• 7 years ago

I'm not a finance or economics expert, what I've gathered from various internet sources is that yes: the yield curve has been inverted for over 1 quarter, which historically should mean there will be a recession coming.

However there are questions about whether it will be right again. One reason is that when the US government implemented Quantitative Easing during the great recession, it did this by buying a bunch of treasuries. There is some question about whether the inverted yield curve we are seeing now may be a result of that, rather than solely a result of investors predicting below zero interest rates.

nscalf3• 7 years ago

The fed can use the rate to effectively decrease the cost of borrowing money. The rational there is if economic activity is slowing, you decrease the cost of spending money. The rate is usually dropped when economic activity slows, and should be increased as economic activity increases. I'm sure people will disagree, but I don't think we've had the rate increase to levels prior to the last recession (though I didn't actually double check).

Effectively, anticipating a drop in the fed's rate is an expectation that economic activity will slow (recession behavior) and the fed will have to stimulate it by making money cheaper. To me, the interesting part of this is what the fed does after the rate reaches 0. Read up on Quantitative Easing and Ben Bernanke's response to the last major recession, it's a really interesting environment to learn a bit about.

jedberg2• 7 years ago

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?

jonstaab• 7 years ago

I don't know anything about investing, but I keep thinking that if I had extra cash I'd short Google :D

Seriously though, anyone with experience have opinions on this?

jedberg2• 7 years ago

I don’t invest in tech stocks because they are far too volatile. :)

skybrian• 7 years ago

Historically, you'd lose everything. Maybe the future is different, but I suggest staying far away from stock picking and especially shorting.

rglover• 7 years ago

I'm not an experienced investor but I'd highly recommend these books (ignore the titles, they sound cheesy but the information is great):

Warren Buffett's 3 Favorite Books (light technical): https://www.amazon.com/Warren-Buffetts-Favorite-Books-Intell...

Warren Buffett Accounting (heavy technical): https://www.amazon.com/Warren-Buffett-Accounting-Book-Statem...

Podcast by the guys who wrote these: https://www.theinvestorspodcast.com/

TomGullen• 7 years ago

Isn't the obvious answer cash/gold? Timing is everything though, recession incoming could 6 months, 18 months or 10 years away. And depends on your investment goals (EG if you're in your 30s and have it in a pension best let it be).

haolez• 7 years ago

Cash? What about the gov... I mean, the central bank printing money?

nostromo9• 7 years ago

If you think you can time the top, invest in gold and bonds.

... but that's probably a dumb thing to do.

Instead I'd recommend staying in the market at all times, and diversifying. A good one is Ray Dalio's All Weather Portfolio:

https://www.etftrends.com/fixed-income-channel/remember-all-...

Brushfire• 7 years ago

Move into cash, so you're ready when the market drops.

refurb• 7 years ago

How do I know when the market drops that's it's the bottom?

formercoder2• 7 years ago

Assuming a recession is definitely coming, soon, buy triple levered S&P 500 shorts. You better know exactly when "soon" is though.

VikingCoder7• 7 years ago

The market can stay irrational longer than you can stay solvent.

alecb• 7 years ago

Defensive ETFs (consumer staples, health care, utilities) along with diversified bonds. Investors also tend to migrate toward dividends during a recession. Note that health care is not as safe given the political climate.

A few funds from the above to consider: VDC, FUTY, BLV, BND, VIG

H8crilA23• 7 years ago

Proper strategic asset allocation. There are strategies that work no matter what happens, such as the Ray Dalio's All Weather Portfolio:

https://www.portfoliovisualizer.com/backtest-asset-class-all...

The standard approach of 60/40 stocks/bonds is not enough if you can't stomach 30% losses. And don't even think about going 100% stocks if you can't stomach 50% drops.

ijpoijpoihpiuoh5• 7 years ago

You probably thought this was obvious, but I just want to clarify for others what "works" means. It doesn't "work" in the sense of performing as well as, e.g., 100% stocks. It's actually not even close, for most start and endpoints. But if you buy at the top and want to sell at the bottom, this portfolio will not lose nearly as much value as stocks would.

marktangotango2• 7 years ago

You might want to look into "inverse short etf's". I personally don't invest in them because it requires a sizable position to make meaningful profit, and timing is very hard.

hn_throwaway_99• 7 years ago

I understand what you're getting at, but this this horrible advice to the OP. Timing is not just "very hard", is extremely difficult, arguably approaching impossible depending on who you ask. I guarantee for the investor at the level of asking "What should I do in times of recession?" market timing IS impossible.

saalweachter• 7 years ago

What is your goal, when you say "protect yourself"?

What is your timeline for your investment? Are you putting money in or taking money out? Do you want your temporary losses to be as low as possible throughout the decline, to make money on the decline, or to have the largest gains three years after the recession ends?

maximente2• 7 years ago

to feel better or to perform better?

feeling better: 100% cash. let the feeling of safety wash over you as the market continues to climb while you bathe in risk-free dollars (that are always depreciating due to Fed policy, but whatever). eventually, use your expertise in market timing to identify the hour the market bottoms out; scoop up assets at bargain levels.

perform better: stay in the market, knowing that there are many more recessions ahead of you, that you can't time the market, and that time in market is by far the best predictor of long term performance. understand that if you aren't retiring soon, recessions are sort of like sales: the same companies still produce the same assets (Apple still makes hardware, ...), they're just valued less due to silly emotions.

of course, if you're retiring soon or don't have outside income you may want to get out of stocks and into bonds, depending on your appetite for risk.

goldenchrome• 7 years ago

As someone who has spent a long time researching personal investing, this is the correct answer.

nostromo9• 7 years ago

Do people remember the "taper tantrum" or the correction in 2016? A curve inverted then (2016) too, and there was a lot of market volatility. There were even calls that "we're due for a recession!"

https://blogs.wsj.com/moneybeat/2016/02/03/the-yield-curve-i...

Then in 2017 and 2018 we saw record profits, low unemployment, and general economic gains all around.

datpuz3• 7 years ago

To perform better, do you think buying in now when you're already sitting on cash would be a smart move?

Assuming a recession hits in the next two years, and I'm able to invest at a considerable discount, wouldn't it be better for performance to wait? Are these assumptions bad?

mars4rp• 7 years ago

keeping 100% cash is not risk-free if feds keep lowering dollars we could run into inflation and hyper inflation. so keeping cash could be the riskiest thing to do in that scenario!

reggieband• 7 years ago

In addition to this request ... my main concern lately is inflation. My suspicion is the next major North American crisis will be inflation. I see this already with housing prices in hot markets (SF, NY, Vancouver, Toronto) and the wages for high-tech workers in those markets. A good salary went from $150k to $500k a little bit too quickly, IMO (but maybe I'm just a grey beard and my sense of time is skewed).

Given that the already low interests rates are likely on their way back to zero, and given China does not seem keen on continuing to fund the US through bond purchases (why would they if the US is engaging them in a trade war?), it seems high inflation is one possible result.

What is the investment strategy in times of high inflation?

mrfredward• 7 years ago

To answer your question, if you're expecting a jump in inflation that others don't see coming, the key is not to own debt. Stocks can take a short term dip on inflation because it's bad economic news, but in the long run businesses will end up operating with proportionally higher revenues and expenditures, and as a result end up with proportionally higher stock prices. Real estate should go up proportionally (at least in theory). Gold sometimes jumps as people get into a "run for the hills" panic mentality. Debt, however, will be paid back in a now less valuable currency, so you'd be locked in to an inflation adjusted loss.

Now to answer the question you didn't ask: most people who study the matter are more worried about deflation than inflation in the developed world, and making your whole investment strategy a big bet that economists, hedge-fund managers, and world leaders know less about the economy than you (and/or the pundits you see on TV) is usually not the way to go. Picking a boring mix of stock and bond index funds and sticking with it often serves people better.

kitten_smuggler2• 7 years ago

Buying Bitcoin

ericd8• 7 years ago

Generally, gold performs well in high inflation. Stocks and Real Estate have a much shakier track record there.

datpuz3• 7 years ago

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.

ijpoijpoihpiuoh5• 7 years ago

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.

rorykoehler2• 7 years ago

Don't time the market. Set up a long term investment thesis /strategy and allocate funds accordingly... Always. In good times or bad.

jly2• 7 years ago

It depends on what your plans are for the money.

If this is long-term savings, I would invest it all into a balanced portfolio as soon as you can and forget about it - there are many portfolio examples out there that only use a few 'total market'-style ETFs, as an example. I too have sat on cash at times during the last couple decades and it has cost me a lot of returns. Trying to time these things is basically like gambling and it will drive you crazy.

If you plan to use the cash in the short-term or it's emergency savings, I would personally keep it in cash to protect the principal. High yield savings accounts or short-term treasuries will at least provide some inflation protection.

adventured• 7 years ago

I've lost a decent amount of money to inflation and opportunity cost.

You also obviously know that one ride on the S&P 500 from a relatively low point, will bury such inflationary losses in dramatic fashion. And one bad ride down from these heights could easily cost you the better part of a decade to fully recover. First do no harm, don't lose money; don't chase or try to force returns. Patience plus money is the critical combination to being positioned to pounce on opportunity. Most people lack the cash when the opportunties are plentiful (eg 2009-2010). And you don't need very many big broad hits (like riding the S&P to a triple over six years out of the great recession) across a lifetime, only a few.

I know there are better things I could do with the cash in the meantime

This deep into an expansion (10 years at that), I'd say that now is exactly the time to hold the line on your patience. The stock market is seeing close to flat earnings growth and its multiple is very high, combined with everything else it certainly appears to be an out-of-gas scenario. We would need to see rather extraordinary earnings growth - and soon - to buffer the earnings multiple this market is carrying. And we're also not seeing macro economic growth like you would want to see, to feel confident in the market moving much higher than it already is. In the late 1990s we were seeing 4-5% growth (18 straight quarters of 4%+ growth in the late 1990s), now 2% is more common. China was an engine for the world economy for ~15 years; that is now over. Where's the next engine? There may not be one in the near future.

A large share of this market climb the last few years has been nothing more than multiple expansion, it's not coming from an organic surge of earnings growth and productivity growth (the tax cuts were a big part of it, which wasn't organic; that adjustment spike is over). I consider this a very dangerous market based on growth rates & multiples (Warren Buffett appears to also hold that belief, based on his net equity selling and refusal to deploy Berkshire's epic $122b in cash; few have consistently navigated such circumstances better than Buffett, whether 1999-2000 or 2007-2008, he has a rigid wiring for it based on the value available to be purchased with capital; his spidey sense is tingling, clearly).

I'd suggest you stick to being patient, wait for a better price vs value environment, and or for another major financial opportunity that comes along in your personal life. Lacking the capital to seize on opportunities when they become abundant, is a truly terrible trap to be stuck in, infinitely worse than the modest inflationary mouse nibbling at your capital now.

Others will note something about not timing the market. Keep in mind this is absolutely not about timing a market. It's about being unwilling to dramatically overpay for what you're buying (eg paying a 30x multiple for zero growth on various blue chips). It's calculating value for price. That is not a matter of timing, it's a matter of deciding what price you're willing to pay for what value you get. Buffett for example isn't a market timer (he points this out at every opportunity, going back many decades); rather, he has fairly strict rules about what he's willing to pay for what value he gets. Being unwilling to overpay is not about timing or guessing, it's about having rules for what you're willing to pay for what you get.

ZenSystem• 7 years ago

People seem to be saying a) hold the cash and wait or b) put it in the market. There is a compromised path that exposes you to both scenarios (though by definition eliminates your ability to get the maximum possible upside).

Compromise: Put your cash in, for instance, Betterment's new 2.69% savings account so that it's at least earning reasonable interest for 2019. CIT online bank is another alternative at 2.4% for over $50k. Both are FDIC insured.

Take 10-30% of your cash holdings, divide by 12 and dollar-cost average your way into the (potentially bulging) market by making identical sized investments every month.

If we see a crash soon you've limited your downside exposure. If we keep growing you've exposed yourself to some upside. Recalibrate in a year or so.

webninja4• 7 years ago

People are saying buy the S&P500 index when it’s at a 17x P/E ratio. Currently it’s at a 20.5x P/E ratio.

AnimalMuppet• 7 years ago

I don't know if "pimp and dump" was deliberate or a typo, but it's a beautifully accurate phrase.

awinder• 7 years ago

All personal opinions and not advice but you can go topish to bottom and back to even on the 2009 recession in around 2 years, and that was a bad one. So if your investment horizon is in the +10 year range you can pretty safely just keep on trucking, dollar cost averaging will work it’s thing, if anything maybe buy the bottom with reserves.

sp332• 7 years ago

Everyone else is giving investing advice, so I'll throw in something different: pay off your debts. It's better to have some assets and some debts than it is to have no debts but low assets. But if you really think that your assets are about to decrease in value, you might as well use them now.

granshaw• 7 years ago

Yup, if, say, you have a mortgage at 3.5%, paying principal off early is ~equivalent to a 3.5% risk-free rate

numbers• 7 years ago

Does "debt" include car payment here as well? Even if it's at a 0.9% interest rate? I only carry that as debt right now since it was about 30k in total that I didn't want to pay in cash.

oarabbus_• 7 years ago

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

If you've made intelligent investments you believe in long-term, then the best strategy is to do nothing. Sit tight and wait it out, whether the recession lasts 1, 3, or 8 years.

radcon• 7 years ago

Vanguard Prime Money Market (VMMXX) or Ally Savings account. My money will be in VMMXX just because I already had a Vanguard account open.

Should get you ~2.2% return and getting your money out is relatively easy. IIRC you can even write checks against the account.

webninja4• 7 years ago

+1 to the Vanguard money market fund. It’s been best in class for the last 10+ years.

basch3• 7 years ago

Let's say your strategy is right and that if you could accurately predict a downturn, sell equity and buy REITs.

The lesson to learn from last time is not to avoid REITs but to choose higher quality ones. Buy high quality US Core (USRT) and residential (REZ) and if you want to diversity further (REET) is 1/3rd global. Ive also left out ICF, REM, IYR. Blackrock alone has plenty of ways to stick your money in real estate.

dharma15• 7 years ago

Why REITs before a downturn? Looks like USRT took a beating in the last crisis

loeg7• 7 years ago

It depends on your goals. Are you retiring in the next 5 years? If not, you mostly don't care. Odds are you aren't going to time the market perfectly and you might as well stay the course.

OscarCunningham• 7 years ago

By the way, "recession" doesn't mean the same thing as "stock market crash". The definition of a recession requires GDP to go down for two consecutive quarters. Although there is some correlation it's still completely possible for GDP to go down while the market goes up. So even if you correctly predict a recession, you won't necessarily be able to predict the market.

gnopgnip2• 7 years ago

Cash, or gold would seem to be the answer but this is not the case. Invest a larger portion in bonds. Historically stocks and bonds are negatively correlated, and if stocks go down bonds go up, but at the same time both grow over time

spectrum1234• 7 years ago

Sell stock to pay off debts. I just took out $50k from a ROTH IRA (all contributions not earnings so no penalty) to do this.

H8crilA23• 7 years ago

The Economist

Yield curves help predict economic growth across the rich world.

https://www.economist.com/graphic-detail/2019/07/27/yield-cu...

nostromo9• 7 years ago

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.

lbotos• 7 years ago

do you have a source that the fed used this metric as a reason for lowering rates?

nostromo9• 7 years ago

Just go read the Fed's meeting notes.

Several participants also noted that the slope of the Treasury yield curve was unusually flat by historical standards, which in the past had often been associated with a deterioration in future macroeconomic performance.

https://www.federalreserve.gov/monetarypolicy/fomcminutes201...

(I don't think the latest notes have been released yet, so these are from earlier this year.)

H8crilA23• 7 years ago

It's been known since at least the 80's. It's not newfound. Perhaps the retail investor is more aware of it.

nostromo9• 7 years ago

Can you link me to something on that? I'm genuinely curious.

The research I've seen all stems from the original paper, published in the late 90s. (And it took two recessions for it to be taken seriously as a recession indicator.)

ryacko• 7 years ago

The yield curve is an indicator of institutional investor expectations. There are other economic indicators that would cause them to be more bearish on bonds.

JamesBarney• 7 years ago

Sophisticated investors and the Fed have been paying attention to yield curve inversions for a while.

But they also look at heaps of other data like manufacturing indices which is one of the first signs of a coming slow down.

peteey• 7 years ago

I would not expect a slowdown in manufacturing to be detrimental to the US because Microsoft, Visa, and Facebook do not make physical things. Much of the US economy's value is in IP.

rorykoehler2• 7 years ago

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• 7 years ago

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.

superfrank• 7 years ago

markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.

I don't think you are saying it is, just that the markets believe it is, but the funny thing is that it's not a perfect predictor of an oncoming recession.

While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.

lazerpants2• 7 years ago

While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.

I thought it only inverted once without a recession in the following 30 months.

"The U.S. Treasury yield curve has inverted before each recession in the past 50 years and has only offered a false signal just once in that time, according to data from Reuters." https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-...

whatok• 7 years ago

There is no "newfound obsession" with it. If you think about what it means, you cannot have a healthy economy with a prolonged inverted yield curve.

lkrubner2• 7 years ago

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".

megous4• 7 years ago

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

H8crilA23• 7 years ago

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.

wavefunction• 7 years ago

You borrow it which is what successive GOP administrations have done, including the current one.

prewett• 7 years ago

Assuming what you say is true (I’m not convinced, though), it didn’t work. There were recessions in 1958, 1960-61, 1969-70, 1973-75, 1980, 1981-1982 [0]. And actually, yes there is broad support for stimulus. Bush #2 gave out helicopter money, and we had Quantitative Easing where the Fed bought treasuries for a few years after 2008. And, in fact, the current Fed chair just lowered interest rates on recession fears.

[0] https://en.m.wikipedia.org/wiki/List_of_recessions_in_the_Un...

piker• 7 years ago

and we had Quantitative Easing where the Fed bought treasuries for a few years after 2008. And, in fact, the current Fed chair just lowered interest rates on recession fears.

Not to necessarily disagree with your first points, but these latter two examples are "monetary policy" which is supposed to be independent of political processes and distinguishable from "fiscal policy" which is the spending of the US govt and necessarily political.

lkrubner2• 7 years ago

A comment on Hacker News is not the right place to get into a conversation about the evolution of thought regarding the effectiveness of monetary policy, versus fiscal policy, but our current understanding did not exist before 1980 and Presidents did engage in stimulus spending, which they often assumed could at least party overcome the actions of the central bank.

Also, as piker said, some of your examples confuse monetary and fiscal stimulus.

But about fiscal stimulus:

There was widespread fear of a recession in the early 1960s, which was part of Kennedy's motivation for more spending on Nasa and the military. Also, there were 2 tax cuts. The expansion from 1961 to 1969 became the longest in USA history, up till that time.

Reagan ran absolutely massive budget deficits, which lead a very long expansion, from 1982 to 1990.

javagram3• 7 years ago

The administration just agreed to a budget-busting compromise bill that breaks through the Budget Control Act limits.

Stimulus is already happening.

_bxg15• 7 years ago

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-...

quotemstr3• 7 years ago

The problem is that stocks can crash for two reasons: 1) business cycle, and 2) secular economic weakness. In the latter case, that value isn't coming back. Imagine, in terms of your example, that the price of hens dropped because the government passed a law mandating veganism. Would you be wise to buy more hens in this situation?

_bxg15• 7 years ago

The advice assumes you're investing in an index fund or something equivalent; the market as a whole, amortized, goes up. Individual companies may be a different story.

VikingCoder7• 7 years ago

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.

_bxg15• 7 years ago

Or you use a robo-investor which does the above for you, and then your only decision is, "Do I invest more in the market or pull money out of the market?" That's where the question becomes as simple as the chickens metaphor.

gamblor956• 7 years ago

Your goal at any instant is to maximize the profit of your next few moments of investing.

This is only true for short traders or others who measure profits on a horizon measured in hours or less. For everyone else, the chicken example is pretty good, though the feasibility depends on the timescale over which you will be investing.

dageshi• 7 years ago

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.

sachdevap3• 7 years ago

Another commenter pointed to this: https://awealthofcommonsense.com/2014/02/worlds-worst-market...

tl;dr: Even the worst market timer would do well to just hold on to stock.

nostromo9• 7 years ago

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

This is only true if the farmer can predict the future.

jjwhitaker• 7 years ago

Now the cost of entry to egg farming is 50% what you experienced and competition doubles as new firms can compete at rates below the margin you need to be profitable given your higher cost of entry. Although you also benefit from cheaper hens you are unable to contest with new firms and could go out of business as your original debt to buy hens becomes unsustainable.

In other words, external forces are unpredictable. Although not always the most profitable, proper risk and market assessment of an industry, its trends, and possible future are important considerations when launching a new endeavor. However, if we all knew hens were about to drop to half price tomorrow nobody would be buying today decreasing demand and ballooning supply until the prophecy is self fulfilled.

JoshTriplett3• 7 years ago

Your goal at any instant is to maximize the profit of your next few moments of investing.

Not at all. My goal with investing is "How do I get a good return on investment in the next X amount of time?", for various values of X that tend to be as long as reasonably possible.

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

The comment you're responding to gave an example of hens dropping in price. That's the worst time to unload them. Trying to time the market is a great way to buy high and sell low.

javagram3• 7 years ago

There are plenty of stocks that don’t pay dividends.

Moreover living off the dividends and not the principal assumes you have vastly more savings than most people manage to do. For most people, they should anticipate to run down their principal in retirement, not just interest and dividends.

dharma15• 7 years ago

This depends completely on each individual's circumstances (level of income, your resident country's tax regime/pension rules) but I think many HN readers are in a fortunate position to be able to build up sizeable enough pension pot in 15-20 years, which at retirement can provide a modest income based on 4% yield - without touching the principal.

wefarrell• 7 years ago

That analogy is problematic because it makes no connection between the price of hens and their perceived ability to generate wealth.

_bxg15• 7 years ago

Further down the blog post (now linked), he looks at historical data which suggests that dividends remain relatively constant despite fluctuations in stock price.

tcbawo2• 7 years ago

If you were planning on buying more chickens tomorrow, you might be inclined to wait instead if the price is falling. Especially if the cost of hens relative to eggs is near an all-time high.

sachdevap3• 7 years ago

All time high has nothing to do with what the value will be anytime tomorrow. If you can't predict the value for the next day, what is the point of waiting to time the market. Besides, even the worst timers of the market do pretty well with disciplined investments.

overcast• 7 years ago

It doesn't matter, that's the point. They are laying dividends that you wouldn't otherwise accumulate because you WAITED.

nostromo9• 7 years ago

This is true if you’re buying stocks (hens) for eggs (dividends) — which is true for me because I’m one of those rare cash-flow investors.

But I fear that the vast majority of investors are price speculators, not dividend farmers.

H8crilA23• 7 years ago

As always speculators will die. This has been the case for millenia.

andy_ppp• 7 years ago

Interesting, which stocks should I invest in for dividends?

johnvanommen• 7 years ago

I love this post.

Market timing is dumb.

I put money in the market if it's going up, I put money in the market when it's going down. Always be saving.

at-fates-hands• 7 years ago

I put money in the market when it's going down

The only problem is when the market is going down, most people are losing money. Therefore, people don't have any excess funds to invest when its technically the best time to invest (when the market is going down).

JMTQp8lwXL• 7 years ago

When the market is going down, you at least get more shares for the same quantity of dollars. It's like stocks are on sale.

ThalesX• 7 years ago

I have a question and I'm sorry but where I am from, investing in the stock market is not really a big thing so I am really not educated in the matter. Am I dumb for holding on to some cash for when the market inevitably falls down so I can start my investing career with cheap stock?

I plan to just put around 10% of my income every month in it and just let it accumulate, but I have this nagging feeling crash is set for 2020. I have 2021 set as a hard cap if it doesn't fall until then, I plan on buying stocks, but until then I do plan on saving the 10% to be able to buy more when and if it falls.

So, am I dumb with this strategy? Am I better off just starting now and not keeping it in a savings account with a real low yearly yield?

Edit: don't want to pollute the comments so adding it here, thank you for your insights guys! :)

vkou2• 7 years ago

If the hens stopped laying eggs at the same time the price of them dropped by 50%, I'd be asking myself why I didn't keep my money in a mattress.

trias• 7 years ago

Well in the case of stacks, the expected dividend (price of the eggs) also dropped by half. So yes, you really are poorer when you bought those expensive hens compared to someone who buys them at the reduced price.

Godel_unicode4• 7 years ago

That's not how dividends work. Dividends are related to how much profit/cash the company has, and how many shares are outstanding. The price of an individual share doesn't effect that, only issuance of new shares and changes in cash flow.

martin_bech• 7 years ago

Yes and No. For single equities this is true. But if this means a markets are going to turn, credits are going to dry up, and demand is going to plummit, then you are going to have massive problems, in your egg company.. customers might default, your creditline might disappear, and your customers might see eggs as an unwanted luxury, when they can just eat dirt..

aqme28• 7 years ago

This is why recessions can be good for the young and employed.

If the price of eggs drops 50% once you're retired, then you might be in a lot of trouble.

MrMember• 7 years ago

If you're still invested in something that can lose 50% of its value when you're retired, you should rethink your investments.

tabtab3• 7 years ago

Dividends alone don't pay out that much on average. The main value of holding onto stocks is in selling them for more later. Dividends alone are probably not a good reason to buy and sit on stocks.

MandieD• 7 years ago

My T and GIS beg to disagree.

OrangeMango• 7 years ago

http://www.crsp.com/files/Big_Picture_2019.pdf

Look at that. US Stocks with dividends reinvested: 6 million dollars. US Stocks without dividends reinvested: 200 thousand dollars.

tomc19852• 7 years ago

Chickens' eggs are worth way more in proportion to the chicken than dividends are to a stock. The only way you're capturing appreciable amounts of money in dividends is with a very large portfolio. This kind of advice doesn't help folks trying to build a portfolio from nothing because $25 in monthly dividends doesn't really do or mean much.

I mean, of course don't try to time the market, but this story only further propagates the lie that everyone(tm) can make money on the stock market without gambling aggressively

H8crilA23• 7 years ago

In the long run it's only dividends that matter.

Using Robert Shiller's long term stock market data we find that s&p returns without dividend reinvestment is about 2%, after inflation. With dividend reinvestment it's about 6%. That's a 2x difference in 20 years.

gingabriska2• 7 years ago

Well as someone whoes has bank in Tokyo, I find it's difficult to invest in US stocks without paying withholding taxes.

Where do other international investors like ones from Singapore, Hong Kong invest? And what vehicles they use for minimizing taxes as an international investors.

I've USD cash in bank, so if USD falls in value my wealth is erroded overnight. Can someone suggest what I should be doing?

rb808• 7 years ago

If you're a proper farmer you probably have a big loan, if the price of hens drops 50% the only one calling will be the bank to foreclose on your farm.

seanmcdirmid2• 7 years ago

Only if you are using your hens as collateral for the loan, which isn’t very likely. As the hens are just overhead, the banks are more interested in the value of your farm (eg related to the price of eggs you are selling).

benj111• 7 years ago

I prefer the Buffett version:

"A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying"

https://finance.yahoo.com/news/warren-buffett-why-stocks-ham...

seanmcdirmid2• 7 years ago

If you are leveraged, then you may or may not be able to pay back your loans depending on the price and demand for the eggs you are selling. If the price of hens have fallen, it could be because there are too many hens or demand has fallen because the price of eggs has fallen.

For us, if stocks get too weak, the boom might be over and our ability to retain and obtain jobs that pay as much as they do now is very much in jeopardy.

throw0101a5• 7 years ago

Stocks are just like hens. They lay eggs called “dividends”,

The general advice of not worrying about market dips/corrections is good. Even if you only invest at market peaks, if you stick with it and don't sell, things will turn out pretty well:

Meet Bob.
Bob is the world’s worst market timer.

* https://awealthofcommonsense.com/2014/02/worlds-worst-market...

The specific advice of going after dividends is not as prudent, as one should (especially with retirement savings) go after total return:

* https://www.youtube.com/watch?v=UpXI_Vd51dA

There are a whole bunch of myths that have sprung up over dividends:

Dividend Myth #1: Companies that pay dividends are inherently better investments than those that don’t.
Dividend Myth #2: Dividend investors are successful because they select excellent companies and buy them when they are attractively priced.
[Total of six myths.]

* https://canadiancouchpotato.com/2011/01/18/debunking-dividen...

david927• 7 years ago

if you stick with it and don't sell, things will turn out pretty well

I think that thinking is at fault, at least in part, for the massive loss that's pending in terms of a deep market correction, because it's valuing based on growth and not on fundamentals.

If you can sell eggs for 10 cents each, you have a cap on the price of chickens. Now you can adjust this for future growth but you still have a limit in the fundamentals of getting a return on your money.

But when you invest ignoring that, you might do well for a very long time. As chickens go from $500 to $1,000 to $10,000, etc. more people see it and join in, pushing the price higher. In the end, it's a Ponzi scheme. You'll only do well if you get out before it comes crashing down.

manjana• 7 years ago

The problem is just that your dividends are halved if the yield percentage don't double after the stock has halved.

linsomniac• 7 years ago

I was once building a new computer. I got 2x 32MB memory sticks, for something like a grand. When I bought there were a few places listing them for an impossibly low price, like $100. A month or two later, EVERYONE was selling them at $100.

The average investor shouldn't try to outsmart the market. But, if there are indications the price of hens is going to dip dramatically, it may be worth delaying that big purchase.

mikeash• 7 years ago

This is a bad analogy. Hens are a relatively cheap, rapidly depreciating asset that require constant maintenance and will cease to be productive in a few years. The capital cost of the hen itself is essentially negligible. Of course you don’t mind when they get cheaper.

This is completely unlike stocks, which you can hold forever at no cost, and whose output, on average, goes up over time.

If we need to make an analogy to something non-investors can relate to... well, it’s pretty tough. Which is probably why there are so many different opinions out there about how you should feel in response to various events.

the_watcher• 7 years ago

I wholeheartedly agree with the principle here, but not all stocks pay dividends, so it's not precisely fair to compare them to hens in that way.

cko• 7 years ago

A month ago I sold a sizeable amount of real estate. I will quit my job in 6 months (resulting in lower cashflow).

Do I buy as many hens as I can right now?

I heard of studies that lump sum investing is better than dollar cost averaging two thirds of the time, but I’m quitting my biggest income source soon. What is one to do in this case?

acchow• 7 years ago

Wall Street Bets follows this philosophy - it's only a loss if you sell.

cylinder2• 7 years ago

This is, by far, one of the stupidest things I've ever read on this site.

pastaking• 7 years ago

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

freehunter• 7 years ago

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• 7 years ago

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

xutopia• 7 years ago

Wow... thank you for that! That's the best explanation I had so far!

H8crilA23• 7 years ago

Because the yield curve is priced into all assets. That's how you discount future corporate earnings to derive present value of the stock, for example.

An inverted yield curve means that there's a mistake in the market - people thought interest rates would be lower than the are. It means that assets are overpriced if this situation persists.

Also it is an indicator because it works :)

https://www.economist.com/graphic-detail/2019/07/27/yield-cu...

jorblumesea• 7 years ago

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.

tabtab3• 7 years ago

It does matter: it's time to get your "buying kit" prepared because good deals are around the corner.

H8crilA23• 7 years ago

Yup, trade bonds for stocks. Never go 100% on stocks. As Buffett says: "I will never be caught short on cash".

neural_thing• 7 years ago

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.

H8crilA23• 7 years ago

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.

ashelmire2• 7 years ago

What if you continuously invested over that time?

gnopgnip2• 7 years ago

Recession does not usually mean a stock market crash either

tempsy• 7 years ago

Hard to say. I think we've entered a period of time when extremes (black swans) are the new normal.

kgwgk• 7 years ago

Sometimes corrections do matter. If you bought at the peak in 2000, including dividends and adjusting for inflation it would have taken 13 years to get back to the initial level. Maybe it’s nothing, maybe the S&P 500 won’t get back to 3000 in a while. Probably it’s nothing...

throwaway5752• 7 years ago

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• 7 years ago

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.

sudosteph2• 7 years ago

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.

athenot• 7 years ago

In 2000, was it obvious that the internet startups were mostly pipe-dreams? In 2007, was the repackaging of bad debt into prime a common knowledge? Maybe it was but I learned about the causes way after the proverbial stuff hit the fan.

This leads me to wonder what may be going on now that I don't yet understand.

lazerpants2• 7 years ago

Most concerns around a black swan have to do with leveraged loans, corporate debt, and corporate loan/bond payback schedules.

https://asia.nikkei.com/Spotlight/Datawatch/Swelling-US-corp...

vespertine• 7 years ago

You're mixing hindsight with foresight. It's never obvious at the time what will bring about the next recession. It also doesn't have to be a single factor that causes a recession. The previous two could be majorly tied to a single cause but the 1990 recession cannot. It was triggered by the savings and loans crisis but was also tied to ballooning deficits and an inflated real estate market. (sound familiar?) The hairline cracks of the next recession could already be happening but those that see them will remain quiet as it is in everyone's best interest to project confidence in the market until the point where it all falls down. I was flipping houses before the housing bubble burst and things didn't quite feel right but everyone just kept chugging right along like it was going to be that way for ever. I started feeling uneasy when, at one point, there were 9 large subdivisions being built at the same time. "Where are all these people coming from?" Nowhere, that's where they were coming from. But I remained confident up until the day when I got stuck with 11 adjustable rate mortgages that almost doubled overnight. My gut feeling is we're heading into a recession but I'm probably more overly cautious than I used to be.

fredophile• 7 years ago

I think any downturn will have an over sized impact on startups due to the nature of that type of business and the requirements for ongoing investment. This time around there are also a lot of startups that exist mainly to provide services to other startups. I expect them to also do very badly in a downturn.

akeck• 7 years ago

Re year of expenses, I had nothing for running room in 2008. It made the stress way worse, even though I ended up keeping my job. If anyone here hasn't built any savings, start cramming immediately. Even a few months of extra savings can make a huge difference.

mettamage• 7 years ago

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.

sudosteph2• 7 years ago

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?

nscalf3• 7 years ago

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• 7 years ago

You're doing great.

Are you on a path to FIRE?

nscalf3• 7 years ago

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).

JohnJamesRambo• 7 years ago

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

gingabriska2• 7 years ago

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

kitten_smuggler2• 7 years ago

buy bitcoin, gold, and long term bonds

elihu• 7 years ago

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...

ellisv• 7 years ago

Data is also available from the Federal Reserve

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

xivzgrev• 7 years ago

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.

padseeker• 7 years ago

How is it possible that basic expenses are through the roof (I agree with this) but its not reflected in inflation? It doesn't make sense to me. I'm not an economist, is there something I am missing or misunderstanding? Housing costs are through the rough but everything else is stable?

delfinom2• 7 years ago

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• 7 years ago

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.

krona• 7 years ago

Corporate debt is the driver of the next recession. From the debt fueled growth of Chinese business to the exploding pension funds of Europe. That's where the exuberance is.

H8crilA23• 7 years ago

You may be interested to know that the stock market is more overvalued than in 2008 (CAPE), and home prices are also higher than then (Case-Shiller).

There is some exuberance in the corporate credit. How does Uber survive for so long, selling dollar bills for 70c.

yasp• 7 years ago

What about when you normalize for the current low interest rate environment?

joewadcan• 7 years ago

This time around...there's actually NOT a lot of exuberance.

I'd argue that you're scoping exuberance only to consumers. If you define exuberance a bit more broadly, there's lots of irrational behavior in corporate debt right now. This could be a result of super low interest rates and unchanged expectations from fund managers, but it's less obvious than homeowners buying a third and fourth house because they can. Corporate debt might not seem to be able to topple an entire economy, but we don't really know how widespread those ripples could go. If corporate debt dries up, businesses stop expanding and jobs could be at risk.

Izkata2• 7 years ago

One example, if I'm understanding the exuberance idea right, is tech valuations like Uber - in the billions, but also can't make a profit.

rbavocadotree• 7 years ago

How about private equity? It's not something that makes mainstream news often, but it's a bubble that many are expecting to burst. It's a massive market that relies on heavily leveraged borrowing and is tightly integrated with the well being of the economy. Just like the mortgage market of 2007.

JeremyNT• 7 years ago

This time around...there's actually NOT a lot of exuberance.

It's always in the best interest of the people who benefit from a bubble to make such driving factors less visible, so the bubble can continue longer - and hindsight is, as they say, 20/20.

Which is to say... just because you can't see the causes yet, doesn't mean that they're not there. The Fed is happily handing out cash and people are borrowing large amounts of it to shuffle around while they can. There are lots of areas where people are making what normally would be considered risky bets which keep paying off because the economy is strong, and they just leverage themselves in the extreme to take advantage of that.

So whether it's another real estate collapse or another SV-funded startup collapse or some other kind of collapse that isn't yet apparent, after the other shoe does finally drop we'll be kicking ourselves for not noticing how bad things had gotten on the way there.

thesagan• 7 years ago

There's a lot of exuberance lately in areas that benefit from low interest rates; housing (again), corporate debt (this one is huge), and sovereign debt (another big one).

Over the last few decades, we seem to have a boom-bust debt cycle of sorts, and it doesn't seem to be abating at the moment given what we're seeing with the Fed, yields, and debt.

cylinder2• 7 years ago

I generally agree and promote this sentiment. However, you are confusing bubbles popping with recessions. You can have standard recessions without bubbles.

apo• 7 years ago

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...

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)

umeshunni• 7 years ago

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

webninja4• 7 years ago

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.

Yield curve is blaring loudest recession warning since 2007

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