> Prepare for the inevitable recession. It's not different this time.
This point is tautological. Of course there will eventually be a recession. No one can say when.
There are different factors in every cycle. The QE period is essentially unprecedented. The rise of tech stocks in the last 20 years is a once-in-a-century type structural change in the economy.
It's fair to say the market is currently closer to the top than the bottom and above the historical mean and a reversion to mean is inevitable but whether the current mode goes on for days, months or even years is anyone's guess.
[1] https://www.bloomberg.com/opinion/articles/2018-12-03/u-s-yi...
My understanding is that this inversion (the 2 year/10 year) is generally regarded as the most reliable indicator of recession. The media has really latched onto the yield curve this time around though, so any inversions have been getting reported as the indicator that a recession will start soon, which isn't really right.
For example, the article you linked from December 2018 was about 3 year and 5 year yields inverting, which tends to happen about 2.5-3 years ahead of a recession. Then the 3 month/10 year spread inverted at the end of May 2019, which tends to predate recession by about 12-18 months. Now the 2 year 10 year is inverted, which tends to happen about 18-24 months before a recession.
So what's happening is a pretty good indication that a recession is likely to occur closer and closer to the present, with each inversion providing another data point about the timeframe. It's just that the media's overhyping of every individual inversion is giving you the sense that these inversions don't tell us anything particularly interesting, when history shows the opposite to be true.
As pointed out in the article you linked, what happened in late 2018 was a small section (3-5 year treasuries) inverted. When people talk about yield curve being a harbinger of recession, they're usually talking about the 2-10 year spread, which is what the parent post referred to.
You may argue "things are different this time", but you shouldn't be comparing apples to oranges.
There are somewhat different ways to measure it, and by some metrics, it merely "touched" the zero line instead of went below. Bloomberg may have been using a dramatic flair.
Also, when it does drop below zero, the actual recession was roughly 12 to 18 months later. Thus, that occurrence, even if interpreted as an inversion, is not (yet) inconsistent with past patterns.
>Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.
Everything since the last recession is, on some timescale, followed by a recession. So, technically, you'll be correct. But so were the people saying this in each of the years since 2008. If you don't have an upper bound on this, it's unfalsifiable and, when taken as advice, can't be used for any concrete actions.
If investors were as certain as you, a recession would be happening now.
The only way this would not turn into recession is if the tariff's are withdrawn or fed lowers the rate even further or with quantitative easing. Any of these would prolong the recession
Last 10 years people bought a lot more ETFs so it is not like someone will call their broker screaming "SELL SELL SELL". Online brokers are a thing now but you have much more data visible in online interfaces. Like fees for selling all your stuff "RIGHT NOW". With more information easily available and people understanding what ETFs are, there is a huge stabilizing element in stock market.
Games and internet goods are now real, not like 2008 or at the time of .com bust. Though those things are still virtual in essence but they affect real life much more than earlier. So even if there is manufacturing slowdown, no one has numbers on how much people are spending on virtual stuff. Sales of books, movies, software went really up, because delivery mechanisms of today were not there 10 years ago.
People who knew technology like me 10 years ago did not had money to spend it on virtual stuff. People who grew up playing computer games are now in their 40ies or 30ies. Now they have money and can spend it on stuff that previous gen was seeing as stupid.
That said virtual goods market still has plenty of potential to grow. There are multiple jobs to fill for filtering and creating content. There was no such thing as "influencer" or full time youtuber 10 years ago. In the end, no there is no artificial intelligence or algorithm that can filter original content or create one.
Manufactured good you can sell once, virtual good you can create once and sell to everyone.
Your faith in people remaining rational when their 'returns' are displayed as -5/10/15/20% is adorable. :)
It will be interesting to see what happens with the rise of index fund popularity during the next downturn. The best thing most people saving for retirement can do is simply not log into their account, and continue to squirrel away a little every month automatically.
This kind of condescending garbage does not belong on HN. It's poison that needs to be kept away from this site. Please stop the know-it-all, 20-something, rhetoric.
I am not saying a recession ISN'T imminent - but to declare affirmatively due to a technical indicator that one IS in an environment which has differences from the past is equally egregious. This yield inversion is based on sentiment, not fundamentals (yet).
Also, suggesting folks buy long-term treasuries is literally following what the market is doing right now. Suppose the trade deal is fixed tomorrow and governments add surprise stimulus in the coming months. (by the way, you have a crystal ball as much as I do) If recession fears go away in a few months, those long term treasuries would lose value on the principal and you could very much experience capital losses (if you sell).
Also:
> Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains.
Are you suggesting you can time the market like this? There is abundant literature which says people can't. How are you able to?
Do you really believe that's going to happen? The "cold war" with China is heating up.
>governments add surprise stimulus in the coming months
What happens to interest rates?
>If recession fears go away in a few months
What do you mean by "recession fears"? People are examining the data and seeing the global economy slowing down; it isn't arbitrary, it's data driven, with the caveat that no indicator is perfect.
>*those long term treasuries would lose value on the principal and you could very much experience capital losses (if you sell).
Yes, investing has risk. But I find it odd you criticize using simple indicators, then state that if recession fears subside, treasuries will lose value. The value of bonds fluctuates with interest rates, not "recession fears". We can very easily have a bull market with falling rates. It's happened before.
Do not imply a recession is possible, the Silicon Valley elite have not yet fully cashed out.
When actors are aware of the risks and exposures, they can sometimes inadvertently move the goal post further into the future due to their actions. In this case, the movements made by Central Banks and others may have led to the longest continuous economic growth in US history.
I would argue that the government's decision to delay the $150b tarifs was in part to delay the upcoming recession to help support retail & manufacturing numbers in the end of year sales.
I agree there is an inevitable recession, it is now a matter of how low it will get, how quick it can bounce back, its ramifications to the world, how it may impact your life and the strategy you intend to have to hedge the risks.
> Prepare for the inevitable recession. It's not different this time.
Just once can someone put their money where their mouth is? If you are going to say that with such certainty, I expect that you have pulled your money from the market. Perhaps you have even bought a few puts.
If by "months" you mean nearly two years.
"The last inversion of this part of the yield curve was in December 2005, two years before a recession brought on by the financial crisis hit."
"A recession occurs, on average, 22 months following such an inversion, according to Credit Suisse."
https://www.cnbc.com/2019/08/13/us-bonds-yield-curve-at-flat...
It's not just that. The reason yield curve inversions tend to imply recessions is that it's an indication people are taking their money out of stocks and putting it into long-term treasuries. But China just announced a round of currency devaluation. With what's happening in Hong Kong on top of that, it makes people want to dump assets denominated in Chinese currency in favor of ones (like treasuries) denominated in other currencies like USD and GBP. So you get low supply and high demand and what happens? Low long-term bond yields.
Consider that recessions are typically caused by something. A decade ago it was the housing crisis, in the 1990s it was the dot com bust, in the 1980s it was savings and loan, in the 1970s it was the oil crisis, etc.
So what's the cause supposed to be? It can't be a trade war with China. Some tariffs on a few hundred billion in imports is tens of billions of dollars, which is a rounding error against a $20T economy.
There is also too much debt sloshing around which something has to be done about at some point (probably printing a lot of money), but that's been true for years and nothing about it is likely to change overnight one way or the other.
So what's the thing that's supposed to be causing this? Because without that it looks a lot like a misleading indicator.
Cool, so have you bought puts on SPY? What terms did you go with / how much did you buy?
When the yield between the 10-year and 2-year US treasury inverts, a recession is months away.
This chart, showing the difference between the yield (or spread), shows recessions in grey:
https://journal.firsttuesday.us/using-the-yield-spread-to-fo...
Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.
Point to consider is the effect of Quantitative Easing (QE). Here, the Fed buys long-term treasuries such as 10-years. This makes long-term rates appear lower than they would otherwise be.
The Fed only slightly unwound this policy, meaning it still holds most of the long-term bonds it bought to fix the 2008/2009 crisis.
The net effect is that the Fed could be triggering an early recession warning here.
Regardless, combining this leading indicator with others such as transportation weakness, manufacturing slowdowns, and other economies tipping into recession (despite the loosest central bank policies in modern memory) leads to only one conclusion.
Prepare for the inevitable recession. It's not different this time.
Edit: one way to play this as an investor is to buy long-term treasuries. The idea being that as interest rates fall, the value of these assets increases (bond prices move inversely with interest rates). Go as long out on the yield curve as you can. Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains. Or not. Instead, just continue to receive above-market rate interest payments. There's risk here because there's no way to know how low long-term rates will fall before reversing course (and eroding any capital gains you might have picked up).