That’s hardly a valid prediction of the Feb.-Apr. 2020 pandemic recession which came well before the expected 12-18 month lead time. I suppose your characterization of pretty impressive is tongue in cheek.
Not at all.
The lag is quite variable–the 12-18 month part is just the most common range, not the key insight.
I think it’s astoundingly impressive.
To date, the signal has had precisely zero false positives and zero false negatives in 34 years out of sample.
That’s perfection: it literally could not be any better.
Nothing else comes close.
The next best would likely be a “coincident indicator” that gives you no advance warning at all.
The biggest real world problem with the signal in terms of utility is that it predicts US recessions, not bear markets.
To profit from it directly would require something like trading GDP futures.
Thanks, I know how to read a chart. When I see 100% correlation, I pay attention.
I get that, but two comments;
One has 34 years of out of sample validation, the other doesn’t.
At the moment one is signalling an upcoming recession and the other isn’t. So there definitely isn’t 100% correlation.
Maybe you know how to read a chart, but I know how predictive models are built. : )
If your cookies or IP address profile you or locate you in a way that can be validated, it’s probably using a patent with my name on it.
Both the stock market and yield inversion are leading indicators of recession. Sometimes the stock market tops before the inversion. For example, in 1973 there was a January market top and a July yield inversion.
The quarterly average was important when yield inversion was originally formulated. (It is not a one-day signal, but instead uses a quarterly average.)
Bear markets are worse when there is a recession. So, the yield inversion might provide insight into the size of the drawdown. Sorting the last table in the post linked below, by months:
CAGR1 is for the 12 months after the yield inversion event.
months is number of months from yield inversion to market top.
(months is negative when yield inversion is after the market top.)
If there is a yield inversion this quarter, the market might fall another 15% to 30% over 12 months. Yield inversion looks likely given the FED’s determination to stop inflation. Iinflation is a worldwide event with macro underpinnings (war, pandemic), and so is not going to be easy to tame this time around.
"The paper defines yield inversion events using a quarterly average of 10 year minus 3 month Treasury interest rates. There have been 8 events in the last 50 years, with the latest [in 2019]…
4 bull market tops were 1 to 9 months before yield inversions.
3 bull market tops were 10 to 22 months after yield inversions.
2 bull market tops do not line up with any yield inversions. https://discussion.fool.com/i-repeated-the-analysis-presented-in…
Not at all. The lag is quite variable–the 12-18 month part is just the most common range, not the key insight.
I think it’s astoundingly impressive.
Yeah, okay, the main objection I have is not the twelve months but the prediction itself in this case. Many factors can be encompassed by this yield curve measure, which ultimately correlate with recessions, such as fed policy, long term inflationary expectations which guide long term interest rates, etc. One thing no one could predict, not the Fed, not the most astute observers in May 2019, was that six months later a deadly virus would emerge in a wet market in Wuhan and engulf the world in a pandemic that would bring life to a halt. An astoundingly impressive prediction it is not. An astounding coincidence it is.
We’ll never know if, in the absence of the pandemic, there would have been a recession in 2020 anyhow, but the recession that did occur was not predicted by the monetary indicators. I don’t care what anybody may think to the contrary.
We’ll never know if, in the absence of the pandemic, there would have been a recession in 2020 anyhow, but the recession that did occur was not predicted by the monetary indicators. I don’t care what anybody may think to the contrary.
Your position has a bit of an internal quirk–
While asserting that one can’t know what would have happened absent the pandemic, you go on to assert with certainty what would have happened–no recession : )
I think it’s much more parsimonious assume that a US recession was likely going to happen around 2020-2021 anyway.
In my mind the only uncertainty was the timing.
In 2019 there were already lots of cracks visible in the system, with end-of-days style signs of extremes everywhere at the end of the longest economic expansion in memory.
And, yes, the bond market was yelling at us to pay attention.
10 year treasury yields had already fallen from over 3.2% to under 1.5% before the pandemic rout started.
If the pandemic had any effect on that probably inevitable recession, it was probably to fine tune the timing.
It came on more suddenly, and was much weirder.
But most importantly it was probably very much shorter because of the ocean of cash added to the mix.
Ascribing specific causes to market and economic moves is a very doubtful business.
I bet you can’t spot Sept 11 on a graph of the S&P closes on trading days in 2001 without the dates marked.
(I looked at this graph yesterday, then just tried it today, and was still wrong)
In this case, all we know for sure is that the prediction from the yield curve was right, out of sample, once again.
Please, Motley Fool, do not close down these remaining message boards. A thread like this is the reason I’ve been here for 20 years. I don’t know of any other online community where I can enjoy such great discussions about economics and investing.
Agree 100% percent Ges. After a period where stock investing looked like a sorcery, I finally saw some green, and some of the MI signals talked about by Jim and Zeelotes seemed to do exactly what they said they would do.
Thanks Jim. I note that you very wisely stated that while a yield curve inversion indicates recession, it may not indicate the date of bear market…
Naïve question, but is it possible (hopeful of course):), that the bear market may precede the recession, or occur in the anticipation of a recession, such that the market falls, then recession becomes official, and then market recovers and runs in the positive direction…of course, this is purely momentum investing, but still would be nice to know if there has been precedents for such events, where a bear market precedes recession, and then the recession occurs, and counter-intuitively triggers a market rally (a true one rather than bear market rallies)
For example, since the talk was about recession for more than a few months now…, and both the S&P500 and QQQ had fallen by 20-30% (and recovered a bit recently), is it possible that the worst has come and gone… Would be nice if true and hopefully this is more than just wishful thinking ):
Your position has a bit of an internal quirk– While asserting that one can’t know what would have happened absent the pandemic, you go on to assert with certainty what would have happened–no recession : )
I didn’t say that. I said that it was utterly impossible for the monetary indicator to predict the recession that did happen.
is it possible (hopeful of course):), that the bear market may precede the recession
Recessions are a lagging indicator, and are not called until several months after the actual recession. The US might be in a recession now, we will know in about a year. Most bear markets end before the recession ends. The pattern is:
bear market starts (market top)
recession starts
bear market ends (market bottom)
recession ends
But the recession dates are not known until several months after the event. The current recession might be over. There might be some indicator that the recession is over, but the official dates are not much use in identifying stock market bottoms.
“Seven of the last ten recessions started soon after a stock market top, with an average lead of 7 months (range 1 to 13 months). Stock market tops did not lead three recessions (1953, 1960, 1980 recessions). There were four stock market tops that did not lead recessions (1961, 1966, 1976, 1987 market tops).” https://discussion.fool.com/bear-markets-and-recessions-32819220…
However, I’m loathe to thank you for your contribution to this outcome.
Yes, well, I’m a little depressed myself that my net contribution to society could have been better : )
I justified it at the time with the reasoning that hey, you’re going to get an ad anyway, you might as well get one that you might conceivably relate to.
I was also in the mailing list business (physical and email), which goes hand in hand with profiling.
(most valuable search keyword in the late 1990s: mesothelioma, purchased by the asbestos law suit ambulance chasers)
Having seen how the sausages are made, the main result is that I was left with a desire not to be profiled myself.
I don’t have a smartphone, and don’t have accounts with Facebook, Google, Instagram, Uber, or anything similar. I don’t use Chrome.
Even the dumb phone I carry is in someone else’s name (by accident originally, but I decided to keep it that way).
My iPad has almost no apps, and I don’t use iCloud.
Only about a dozen people have my “true” email address.
It’s super easy to profile me using my posts here, but otherwise pretty difficult.
don’t have accounts with Facebook, Google, Instagram, Uber, or anything similar
Sadly, that hasn’t stopped those folks from creating profiles of you anyway. Esp. if you have ever emailed someone with, e.g, a gmail account. My phone is too much my vade mecum to revert to dumb phone-ness but I also don’t have accounts with the obvious social media. It is a tough tradeoff.
Sadly, that hasn’t stopped those folks from creating profiles of you anyway. Esp. if you have ever emailed someone with, e.g, a gmail account
Oh, I’m pretty up with how it works.
I’ve never sent a gmail message nor had an account with which to do so, nor would I let anyone log into gmail on one of my devices.
My browser deletes all cookies after each session.
They have no doubt been fingerprinting my iPad, (and trying to do so on my PC), but unfortunately there’s not very much I can do about that.
Consequently I would never use my iPad to search for anything personal.
My biggest beef is mandatory government web sites which can not be used without allowing profiling by commercial firm.
Same with mandatory cashless transactions that require giving all the transaction data to commercial profilers.
If I choose to make the deal with the devil to trade my information for freebies, as pretty much everyone else does, that’s my decision.
And if the government wants to track me or my money movements, well, they’re the government. They have the power, and (surprisingly) I generally trust them.
But no government should make private company profiling mandatory.
It is the responsibility of every government to ensure there is a means of payment (cash, or CBDC)
for every transaction which does not require one to allow tracking and profiling by an entity OTHER than the government.
The Europeans are real keeners on data privacy–in the press releases, anyway.
The FT did a study of European government portals recently, and IIRC there were not dozens, but hundreds of private sector tracking devices encountered.
If Amazon or Walmart or MonsterVibrators.com or whoever wants to use Google Analytics to track and profile me and my location, that’s cool.
If I want to use those web sites, it’s the cost of playing. I can always just not use them, in theory.
But the drivers’ licence bureau? The passport office?
They found private sector tracking widgets on sections of government help sites specific to certain diseases.
Smartphones have what? to do with “yield curve inversion”, even though that is already tagged OT? LOL
We had a dumb-phone (flip phone) for many years, until all the carriers switched over to 2G and obsoleted it. Since we had to get a new phone anyway, and since I had built up so much credit with my Sprint account ($25 min to be added every 3 months and calls cost me 25 cents/minute–and we rarely made calls) that we could get a smartphone for “free” using our credits, so the wife was pleased to finally get a smart phone.
Turns out nowadays that you just about have to have a smartphone. From what I’ve read, to enter into Canada you MUST have a COVID app on your phone, even citizens. And with lots of merchants & vendors you basically need to use a smartphone. Everybody, and I mean everybody assumes you have a cell phone. Makes it tricky with places like banks & brokers when they need to send you a text to verify that it’s you. Tricky for us, because our house is in a dip and we don’t get a cell signal here.
We have a dummy google account for the phone— Android essentially requires a Google account-- used exclusively for the phone. We never do anything other than install apps. But suddenly a week ago, Google somehow figured out my real Google account and hooked it up to the phone.
Google is evil. But I still own a bunch of GOOG stock.
Ralph,
Thanks! For instance, I have the Kiwix app on the phone and have downloaded an (instantly obsolete) version of wikipedia and wiktionary (~100Gb). I was recently somewhere that was 4 air hours from a cell tower and was able to look up all sorts of stuff. Every year or so I update to the latest (obsolete) wiki db. The entry for e.g. Henry the VIII doesn’t change that quickly. I also have a mapping app that uses open map data rather than Google or Apple maps. All my recipes are on the phone, and something over 3000 epub books. So yeah, I find the phone indispensible. And once in a while I call someone with it.
You could use an open source smartphone like Librem 5. https://puri.sm/products/librem-5/ In the very long term, my plan is to move to something like this. I almost entirely use open source software on my home computers, TV boxes etc and don’t miss anything but the phone side is still not there and moving to purely free software will definitely make me miss things.
They are highly privacy focused and offer a lot more than a dumb phone. I have been trying to get more private (deactivated my facebook account, basically never use my LinkedIn or Instagram account though I haven’t deleted them yet, changed from chrome to firefox and duckduckgo etc.) but I am still using gmail and an Android phone tied to my google account as well as google maps. Hence, while slightly more private than before, I can still be easily tracked if they put the additional effort. Since I don’t see almost any ads ever and have set up my youtube and other video access that way, I don’t know why they will. I have to be the most unprofitable customer ever :).
Kiwix is definitely a favorite app of mine. With wikipedia, gutenberg and wikivoyage, it is a pretty powerful free and non-tracking encyclopedia and books. It ensures that I have to not use a high end phone even though I am prepared to pay for one since they all don’t have microSD support to store all that stuff.
