>> Vanguard tracks data to predict the likelihood of a recession at certain points in the future.
Having read nearly the entire literary output of one Nassim Taleb, I'd like to see the results of past predictions on this one. I'm pretty sure it will show that this "tracking" carries no actual predictive power.
Based on historical data, how accurate would it be to say that a recession happens every 7-10 years? What percent of recessions(for some definition of recession) follow this pattern? Are there different patterns for different kinds of economic/political environments? Does anyone know of a good analysis that a layman could understand?
> Based on historical data, how accurate would it be to say that a recession happens every 7-10 years?
Starting with the Great Recession and working backwards to and including the Great Depression, the gap from the previous US recession for each recession has been:
By the very nature of vanguard, except for its tiny, tiny managed funds, vanguard doesn't ever do shit with this knowledge. Just continues following the index.
"We don’t make any actual predictions about where things are going next month or, in the markets, next year. The stock market could rise a lot, short-term. We don’t know."
Vanguard's model says the probability of a recession by late 2020 is between 30% and 40%, which is higher than normal.
That also means that the probability of no recession by late 2020 is between 60% and 70%, which is lower than normal.
I don’t know how to say this any more plainly: anyone who predicts such things is 100% full of shit. It’s a random process. Anyone able to predict this with a significant degree of certainty would quickly become a multi-trillionaire. Insanely huge financial institutions employing thousands of PhDs were not able to predict the last big one and many of them would have collapsed without government’s help. What makes you think anyone has the foggiest clue as to the timing and severity of the next black swan event?
Agreed. There are an unlimited number of variables that cannot all be accounted for, and even the most insignificant of them have the ability impact the future in dramatic ways. There is absolutely no saying what the likelihood of a recession is.
This is a fair comment and I'm not sure why you were downvoted. However it is not a single random event either. A continuous random process with memory would probably be the most appropriate model, and this would be what Vanguard and others use to make estimations of likelihood.
Any student of Taleb should know that "black swan" events are rare, unexpected, extreme outliers.
Economic recessions are none of these. They are common, expected, and well within the experience of most adults.
Booms and busts have been recurring semi-regularly since the beginning of market economies.
While it would be foolish to predict with any great certainty the date or duration of the next downturn, we can say with high confidence that a downturn will occur.
It doesn't seem unreasonable to observe that recessions are more likely when the yield curve is flat and valuations are historically high than when the yield curve is steep and valuations are more moderate.
>> In recent years, the company has put the probability of a recession six months out at close to 10 percent. Now, Vanguard says the chances of one by late 2020 are between 30 and 40 percent. That’s Vanguard’s highest-ever estimate for that time frame, Mr. Davis said. (A six-month forecast reported a greater than 40 percent probability before the recession that started in December 2007.)
The parenthetical was the interesting part to me. I would love to see some long-term data on their forecasts.
When I see a $5T asset management firm making predictions of market downturn, I wonder if it is only trying to predict the future or influence it. That is, did they place bets then went on to warn everyone of impending disaster so they can then profit from it.
Vanguard is practically synonymous with index investing. They have everything to gain from letting retail investors continue to believe the stock market is a free ride. Why would they cash that in for a one time profit gain?
If anything, this is an angle at manipulating the Fed into keeping rates low
> If the facts change — with, say, the Federal Reserve delaying anticipated interest-rate hikes in response to a weaker economy — the recession forecast will change, too, Mr. Davis said.
That's just the way the Federal Reserve works. As long as they are around, they will loan money at interest rates that they set. Potentially they could get out of the money business and we could go back to using precious metals for money, but I don't know how you get there from here.
I don't believe Vanguard trades for its own account.
Given their structure, I'm not sure how they could trade on their own account. IANAL, but they're a registered investment advisor and that status requires them to act as a fiduciary for their clients.
Plus, with their structure as a mutual company the firm is owned by its customers. Even if they did trade for themselves, the account would effectively be owned by all their customers, wouldn't it?
If there's any profit to be made from a market trend, that trend is more likely to be volatility than a downturn, as far as I can surmise. They make commission from trades that are made, and at scale that's a lot of profit. It's the same thing that keeps Coinbase profitable in that bear market. Of course I could be wrong, but generally you sometimes hear about the big shorting positions from big players. I don't recall Vanguard traders making the news, and I'm not sure they're involved in options, either.
Ehh, the reason my parents retired millionaires, despite never having earned an annual six figures combined in their lives, as well as putting two kids through college with no financial aid, was because of being invested in the stock market during the Reagan 80s economy.
In 1980, at the end of the Carter administration, the US was suffering from a bad recession that double-dipped in 1981. From 1982 onwards, the economy grew without a hitch until 1990-91. You could blame that recession on Reagan and Bush, but it didn't happen during the Reagan years.
Boy blaming Reagan for the 91 recession (2.5 years after his term) is a stretch. And also, in retrospect, the '91 recession was a blip, in what was largely a booming decade of growth.
I'm generally dubious of blaming large macroeconomic trends on the incumbent President anyway:
* The FED has more direct influence and control (although the FED chair is appointed by the President, so I guess you can blame him indirectly)
* Congress is responsible for most domestic policies, even the ones championed by the President.
* Tons of economic factors are outside of the US government's direct control, especially when it comes to science and technology. (Some of these factors are even outside the control of any American actors: many of the recessions between 1970 and 1990 were at least partly caused by disruptions in the oil market.)
* Even factors that you can attribute to government actions are more long-term in focus: ARPANET was established in the Johnson administration and didn't yield macroeconomic gains until the Clinton administration, while most of the economic benefit of the Interstate Highway System was realized long after the Eisenhower administration.
Spoiler: it's highly, highly sensitive to parameters. You might choose to lag the time windows for several months to account for a delay in the effect of new policies, or lead to account for anticipation, or use as the underlying "invest or not" determination a time series reflecting laws, who holds the Executive, who holds the Legislative, some combination... but tweak any of these parameters and the outcome will flip wildly.
Of course this makes it very easy to reverse engineer a particular outcome if your audience is not familiar with the effect.
> I suspect it's because the trickle down effect doesn't work.
Well, maybe.
Or maybe Republican policies are beneficial in the long term, which means they don't start working until after they've left office and don't stop working until the Democrat who replaces them has dismantled them.
Or maybe voters tend to vote Republican when they are uncertain about the future, i.e. in periods of instability.
Or maybe the President doesn't make a huge difference either way in most cases, and the business cycle got into a rhythm where corrections started happening in a quasi-regular rhythm that seems to coincide with elections with Republican incumbents. (The only point where it seemed to get out of this rhythm, after WWII, was the double-dip recession of the early 80's, which coincided with a Democrat -> Republican party switch that didn't switch back until there was another recession).
Or maybe there's been only 15 US Presidents to serve at least a full term in the past 100 years and it's not a meaningful sample size. I'm going to bet that's the one.
Pretty sure being able to afford food, a home, and healthcare is much more beneficial to society as a whole than having a poor underclass of laborers. But hey, maybe it’s the stuff you said too.
I get that we’re deep in a non-sequitur subthread here, but I don’t see how what you said is a meaningful explanation of the theory of recessions coinciding with Republican presidential administrations.
Unfortunately I don't have a reference or link, but I'm under the impression that it's generally agreed that for a new president to start affecting the economy takes 1-2 years.
> The chances of a recession by the end of 2020 are mounting. And the prospects for the American stock market in the next decade have worsened appreciably.
The day after Trump's election win, NY Times published an article [0] by nobel-prize winning economist Paul Krugman saying:
"It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?
Frankly, I find it hard to care much, even though this is my specialty. The disaster for America and the world has so many aspects that the economic ramifications are way down my list of things to fear.
Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never."
That prediction didn't work out so well.
And maybe these new prognostications are built on more solid foundations, but still they are prognostications, and if the past decade has taught us anything, it seems most pundits and economists have no clue what they are talking about.
The prediction didn’t work out so well—so far. Hindsight compresses time. Things said in 2004 and 2005 definitely bubbled up to the top after Lehman’s collapsed in ‘08 as “correct predictions of the coming financial crisis.”
If things implode tomorrow or six months or even a year from now everyone will look back at that Krugman quote and say, “The man’s a damn genius, he totally called it.” It’s easy to forget about the time period when a financial prediction was wrong before it was right, particularly when the magnitude of disruption is significant. Sometimes the time even emboldens the former position because “they knew all along.”
The one thing we do know is that markets are cyclical. There is always another crisis lurking around the corner. If you went to a cash position the day after Trump was elected you seem like a fool today. You can wake up a financial genius tomorrow. Maybe you didn’t sell at the top, but people who got out of real estate in 2005 probably don’t look back with too much regret saying, “should have hung in there another two years.”
> Things said in 2004 and 2005 definitely bubbled up to the top after Lehman’s collapsed in ‘08 as “correct predictions of the coming financial crisis.”
Also known as a broken clock is right at least twice a day. Vanguard is doing the same thing here by saying sometime in the next 2 years the economy will start doing worse. They'll be right eventually.
> If you went to a cash position the day after Trump was elected you seem like a fool today. You can wake up a financial genius tomorrow.
Many people were expecting another market downturn at around the time Trump was elected - not because of Trump but because it was 8 years since the last one. The market rallied instead and now Trump has a buffer.
The market today could fall by as much as it did in 2008, and it would still be at about the same level as it was when Trump was elected.
To be fair, I remember him taking that back and admitting he let emotions cloud his judgement pretty much right away. I can forgive a bad (and probably very sleep-deprived) election day take if they admit it.
Disclaimer: I'm not intimately familiar with his views, but since he's a pretty prolific political columnist (in addition to being an economist) I'm sure there's plenty of other stuff worthy of criticism.
It is worth considering that international indexes are often more expensive than domestic, and also have had more volatility historically. They're also often pinned to the USD.
True, but there are markets that are completely outside the reach of international capital markets - and are highly non-correlated to the US stock indexes.
- Congo, Somalia are the extreme case but you can make really good gains in real estate, telecommunication in these places. (I know that people might balk at the idea of investing in Somalia but I consider it a no brainer to invest in renewable energy in a place like Somalia - I also get to enjoy the risk premium for it)
The VIX has been steady while CBOE SKEW is at all time high of 159.03. While this by itself means nothing since SKEW has been trending upwards, it is interesting that the yield curve is also flattening.
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[ 5.2 ms ] story [ 122 ms ] threadHaving read nearly the entire literary output of one Nassim Taleb, I'd like to see the results of past predictions on this one. I'm pretty sure it will show that this "tracking" carries no actual predictive power.
Starting with the Great Recession and working backwards to and including the Great Depression, the gap from the previous US recession for each recession has been:
Only 3 of 14 of those gaps were in the 7-10 year range, and all of the rest are shorter.https://www.globalresearch.ca/risk-experts-who-predicted-200...
"We don’t make any actual predictions about where things are going next month or, in the markets, next year. The stock market could rise a lot, short-term. We don’t know."
Vanguard's model says the probability of a recession by late 2020 is between 30% and 40%, which is higher than normal.
That also means that the probability of no recession by late 2020 is between 60% and 70%, which is lower than normal.
Agreed, unlike every other random event that exists in the universe, recessions are the one thing whose likelyhood cannot possibly be expressed.
Economic recessions are none of these. They are common, expected, and well within the experience of most adults.
Booms and busts have been recurring semi-regularly since the beginning of market economies.
While it would be foolish to predict with any great certainty the date or duration of the next downturn, we can say with high confidence that a downturn will occur.
It doesn't seem unreasonable to observe that recessions are more likely when the yield curve is flat and valuations are historically high than when the yield curve is steep and valuations are more moderate.
The parenthetical was the interesting part to me. I would love to see some long-term data on their forecasts.
> If the facts change — with, say, the Federal Reserve delaying anticipated interest-rate hikes in response to a weaker economy — the recession forecast will change, too, Mr. Davis said.
Given their structure, I'm not sure how they could trade on their own account. IANAL, but they're a registered investment advisor and that status requires them to act as a fiduciary for their clients.
Plus, with their structure as a mutual company the firm is owned by its customers. Even if they did trade for themselves, the account would effectively be owned by all their customers, wouldn't it?
A Princeton paper was written on the subject.
https://www.princeton.edu/~mwatson/papers/DemRep_BlinderWats...
For the past almost 100 years the economy has done better on every major indicator with a Liberal in office.
I suspect it's because the trickle down effect doesn't work.
In 1980, at the end of the Carter administration, the US was suffering from a bad recession that double-dipped in 1981. From 1982 onwards, the economy grew without a hitch until 1990-91. You could blame that recession on Reagan and Bush, but it didn't happen during the Reagan years.
And yeah, it was a booming almost-three-decades of growth between 1982 and 2008, with blips in 1991 and 2001.
* The FED has more direct influence and control (although the FED chair is appointed by the President, so I guess you can blame him indirectly)
* Congress is responsible for most domestic policies, even the ones championed by the President.
* Tons of economic factors are outside of the US government's direct control, especially when it comes to science and technology. (Some of these factors are even outside the control of any American actors: many of the recessions between 1970 and 1990 were at least partly caused by disruptions in the oil market.)
* Even factors that you can attribute to government actions are more long-term in focus: ARPANET was established in the Johnson administration and didn't yield macroeconomic gains until the Clinton administration, while most of the economic benefit of the Interstate Highway System was realized long after the Eisenhower administration.
Soviet Union was still a thing. Reagan had only just started offshoring to China that would continue through GHW Bush, and Clinton.
Germany was still split.
Cost of education was a small fraction it is today. Housing costs the same and healthcare.
The world economy was vastly different.
Your parents retired as millionaires due to right time and place.
I make $200k yr. If wages had kept up with inflation, that would be more like $500-$600k/yr today.
Shits fucked
http://www.demonstrations.wolfram.com/StockMarketReturnsByPa...
Spoiler: it's highly, highly sensitive to parameters. You might choose to lag the time windows for several months to account for a delay in the effect of new policies, or lead to account for anticipation, or use as the underlying "invest or not" determination a time series reflecting laws, who holds the Executive, who holds the Legislative, some combination... but tweak any of these parameters and the outcome will flip wildly.
Of course this makes it very easy to reverse engineer a particular outcome if your audience is not familiar with the effect.
Well, maybe.
Or maybe Republican policies are beneficial in the long term, which means they don't start working until after they've left office and don't stop working until the Democrat who replaces them has dismantled them.
Or maybe voters tend to vote Republican when they are uncertain about the future, i.e. in periods of instability.
Or maybe the President doesn't make a huge difference either way in most cases, and the business cycle got into a rhythm where corrections started happening in a quasi-regular rhythm that seems to coincide with elections with Republican incumbents. (The only point where it seemed to get out of this rhythm, after WWII, was the double-dip recession of the early 80's, which coincided with a Democrat -> Republican party switch that didn't switch back until there was another recession).
Or maybe there's been only 15 US Presidents to serve at least a full term in the past 100 years and it's not a meaningful sample size. I'm going to bet that's the one.
The day after Trump's election win, NY Times published an article [0] by nobel-prize winning economist Paul Krugman saying:
"It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?
Frankly, I find it hard to care much, even though this is my specialty. The disaster for America and the world has so many aspects that the economic ramifications are way down my list of things to fear.
Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never."
That prediction didn't work out so well.
And maybe these new prognostications are built on more solid foundations, but still they are prognostications, and if the past decade has taught us anything, it seems most pundits and economists have no clue what they are talking about.
0: https://www.nytimes.com/interactive/projects/cp/opinion/elec...
If things implode tomorrow or six months or even a year from now everyone will look back at that Krugman quote and say, “The man’s a damn genius, he totally called it.” It’s easy to forget about the time period when a financial prediction was wrong before it was right, particularly when the magnitude of disruption is significant. Sometimes the time even emboldens the former position because “they knew all along.”
The one thing we do know is that markets are cyclical. There is always another crisis lurking around the corner. If you went to a cash position the day after Trump was elected you seem like a fool today. You can wake up a financial genius tomorrow. Maybe you didn’t sell at the top, but people who got out of real estate in 2005 probably don’t look back with too much regret saying, “should have hung in there another two years.”
Also known as a broken clock is right at least twice a day. Vanguard is doing the same thing here by saying sometime in the next 2 years the economy will start doing worse. They'll be right eventually.
> If you went to a cash position the day after Trump was elected you seem like a fool today. You can wake up a financial genius tomorrow.
Many people were expecting another market downturn at around the time Trump was elected - not because of Trump but because it was 8 years since the last one. The market rallied instead and now Trump has a buffer.
The market today could fall by as much as it did in 2008, and it would still be at about the same level as it was when Trump was elected.
Disclaimer: I'm not intimately familiar with his views, but since he's a pretty prolific political columnist (in addition to being an economist) I'm sure there's plenty of other stuff worthy of criticism.
http://www.philosophicaleconomics.com/2018/01/future-u-s-equ...
Personally instead of investing purely on weighed average, I tilt quite a bit towards international indexes. I'm American.
- Congo, Somalia are the extreme case but you can make really good gains in real estate, telecommunication in these places. (I know that people might balk at the idea of investing in Somalia but I consider it a no brainer to invest in renewable energy in a place like Somalia - I also get to enjoy the risk premium for it)