How does this decline compare to previous recessionary ones?

[NW-Bound]

^^^ As I said, people chart different courses.

 

[plex]

I'm leaning towards it continuing to follow a remarkably tight similarity to 2008, we are currently in the last big rally before that horrible plunge. I don't think the yield curve will recover before it happens. We are seeing an interest rate environment much more similar to the 70's and early 80's, I expect the yield curve to react similarly, it went positive only after the recession was almost over.

Amongst the factors that point towards this: seeing immense layoffs building up from the largest companies starting this quarter, instead of just a bunch of hiring freezes, house buying interest falling off a cliff (not a big deal for those locked into a 2-3% mortgage, but the all-time high percentage of investment property owners do not have access fixed mortgages), disposable savings nearing/past negative, and high levels of credit card debt. Demand for goods and services is finally coming down, reflected by the decreasing rate of inflation numbers, inventory is piling up, recreational services will be the last to fall, so expect to see restaurants packed right up to the plunge and even a little past it. Unemployment is very low, and seems ready to explode upwards, similar to what happened during the last big plunge.

 

[audreyh1]

It’s true that after the 1980s the curve came out of inversion before the recessions began. But if you look at those two early 80s recessions, the curve was more strongly inverted to start, and also stayed inverted until near the end of the recessions. Back then the Fed was fighting inflation. Is inflation back? Is the Fed fighting it?

 

[NW-Bound]

It’s true that after the 1980s the curve came out of inversion before the recessions began. But if you look at those two early 80s recessions, the curve was more strongly inverted to start, and also stayed inverted until near the end of the recessions. Back then the Fed was fighting inflation. Is inflation back? Is the Fed fighting it?

You are correct that the chart I linked in post #190 shows a different situation in the period of 1970-1980 than the two more recent hard market crashes of 2003 and 2008.

In the earlier period of 45 years ago, the Fed was trying to slay inflation, unemployment be damned. And we had terrible energy shortage back then too. The misery index was very high (misery = unemployment + inflation).

In the more recent recessions, the Fed was pumping money into the economy to aid it.

And indeed the yield curve stayed inverted longer in the 1970-1980, while it recovered sooner in the recent recessions.

 

[NW-Bound]

Showing off again, huh?

I took 6 calculus courses in engineering college and I can't even speel calculus any more! (thanks speel check)

Eh, I can still do integration by parts, and solve some simple ODEs. Still remember many trig identities too.

And that's why they still want me to go back to work.

However, I make more money at home selling options than they can afford to pay me. So, no thanks.

 

[razztazz]

Yield curve is reputed to be a 'leading indicator' of recession.
https://www.investopedia.com/terms/i/invertedyieldcurve.asp

Are we worried about a recession of what the stock market is / will be in short-order, doing? If the market turns up before the recession over we could be seeing it right now. The upturn I mean, not the recession. Especially if the recession proves to be weak and short, which it does seem to be tipping its hand towards.

Another thing I noticed. If all the corrections depicted in the chart are different, what kind of insight are we looking for when we keep trying to find a previous correction that looks like the current one? Why would it look like any of them? And if it does why would that tell us anything?

Mostly rhetorical questions I suppose.

 

[Markola]

Everyone's course is different.

Some try to swerve around a pot hole, some drive over it.

Yes, to each, their own, always. For myself, every single time before that I thought the future was clear and tried to swerve, I’ve ended up in the ditch. Now I hit the potholes straight on and keep going.

 

[Lsbcal]

By my methodology I would not sell anything through January. But I might reduce equities if we have a rally from here. Currently at 60/40 but could go to 50/50.

 

[NW-Bound]

Yes, to each, their own, always. For myself, every single time before that I thought the future was clear and tried to swerve, I’ve ended up in the ditch. Now I hit the potholes straight on and keep going.

Nothing wrong with that, if you slow down before reaching the pot hole.

Some just stop driving altogether, and get out to walk. This is not recommended.

 

[NW-Bound]

Another thing I noticed. If all the corrections depicted in the chart are different, what kind of insight are we looking for when we keep trying to find a previous correction that looks like the current one? Why would it look like any of them? And if it does why would that tell us anything?

Mostly rhetorical questions I suppose.

First, we try to understand why the past recessions were different from one another. This is good for an education, even if you stop here and don't do anything else.

Then, we scratch our head trying to guess which past recessions this one is going to be most similar to.

The 2nd part is of course the hard part. Is it worthwhile?

It pays to know past history. For example, if an investor saw the similarity of the dot-com bubble to the tulip bubble, that would save his skin.

 

[Brat]

Setting charts aside, we will be undergoing an economic transformation in the next year. This will impact both the customer base (think Nike's sales to China) and supply chains (think Apple and Russian energy). There will be embedded inflation for the next two years while this works through the worldwide economy. Our inflation is not primarily the result of consumer demand.

This decline is different.

 

[Markola]

^^^^ Namely that 40% of all dollars in existence have been conjured from thin air since 2020. Cash injections to suffering people and businesses (Main Street) rather than the usual banksters (Wall Street) was worthy. Nonetheless, excess dollars chasing the same or fewer goods and services = inflation.

But if we have a recession in the midst of inflation, that = stagflation.

 

[MichaelB]

^^^^ Namely that 40% of all dollars in existence have been conjured from thin air since 2020. Cash injections to suffering people and businesses (Main Street) rather than the usual banksters (Wall Street) was worthy. Nonetheless, excess dollars chasing the same or fewer goods and services = inflation.

But if we have a recession in the midst of inflation, that = stagflation.

Well, M2 peaked in 1Q22 and has been declining since then, so if M2 drove inflation it should be negative right now, which it clearly is not.

Demand remains strong, and is driven by wage growth, which remains robust. Excess dollars are driving inflation, but they are coming from salaries, not Central Bank actions.

 

[Koolau]

Eh, I can still do integration by parts, and solve some simple ODEs. Still remember many trig identities too.

And that's why they still want me to go back to work.

However, I make more money at home selling options than they can afford to pay me. So, no thanks.

Yes, but can you still apply L'Hospital's rule? Heh, heh, I still recall learning how to pronounce it, but haven't otherwise thought about it in 55 years - so YMMV.

 

[razztazz]

. For example, if an investor saw the similarity of the dot-com bubble to the tulip bubble, that would save his skin.

That might save his skin but his reaction to a perceived similarity would be coincidental. His skin might be saved in spite of and not because of.... Its The Mr Magoo Syndrome.

 

[Koolau]

Well, M2 peaked in 1Q22 and has been declining since then, so if M2 drove inflation it should be negative right now, which it clearly is not.

Demand remains strong, and is driven by wage growth, which remains robust. Excess dollars are driving inflation, but they are coming from salaries, not Central Bank actions.

My (limited) understanding is that the money pumped in over the past 2 years is still in the system and is affecting inflation. True, they've (finally) quit stimulating, but there must be a lot of dollars still floating around. They ARE drying up somewhat as folks are now back to using credit instead of left over stimulus money. Hawaii still has (literally) tons of stimulus money lying around from Covid - yet to be spent. Our (state) gummint sent us all $600 recently because they had so much.

Demand may also be driven by shortages though I'm no expert. Shortages drive inflation as well (I think.) YMMV

 

[MichaelB]

My (limited) understanding is that the money pumped in over the past 2 years is still in the system and is affecting inflation. True, they've (finally) quit stimulating, but there must be a lot of dollars still floating around. They ARE drying up somewhat as folks are now back to using credit instead of left over stimulus money. Hawaii still has (literally) tons of stimulus money lying around from Covid - yet to be spent. Our (state) gummint sent us all $600 recently because they had so much.

Demand may also be driven by shortages though I'm no expert. Shortages drive inflation as well (I think.) YMMV

Yes, the money injected in the past 2 years did stimulate demand, and fed the fires of inflation. That was fiscal spending, not M2 or other monetary stimulus, as argued in an earlier post.

The additional fiscal spending has ebbed and is returning to earlier pre-pandemic levels, and supply for manufactured goods has improved, yet inflation persists. Consumer spending is remaining high.It appears that a combination of continued employment gains and continued high wage increases are the drivers, the primary being wage increases.

This is not good news, because when wages and prices feed into each other inflation is very difficult to control.

 

[NW-Bound]

Yes, but can you still apply L'Hospital's rule? Heh, heh, I still recall learning how to pronounce it, but haven't otherwise thought about it in 55 years - so YMMV.

Eh, it is called l'Hôpital's rule because it's named after a French mathematician.

Yes. This rule is one of the obvious ones.

 

[Markola]

Yes, the money injected in the past 2 years did stimulate demand, and fed the fires of inflation. That was fiscal spending, not M2 or other monetary stimulus, as argued in an earlier post.



The additional fiscal spending has ebbed and is returning to earlier pre-pandemic levels, and supply for manufactured goods has improved, yet inflation persists. Consumer spending is remaining high.It appears that a combination of continued employment gains and continued high wage increases are the drivers, the primary being wage increases.



This is not good news, because when wages and prices feed into each other inflation is very difficult to control.

It’s more than fiscal stimulus. Congress spends, Treasury sells bonds to fund the spending, and the Fed buys the bonds, which is called QE.

You really think wages and prices are behind this inflation? I do not. Look at this:

 

[Koolau]

Eh, it is called l'Hôpital's rule because it's named after a French mathematician.

Yes. This rule is one of the obvious ones.

Kinda depends where you look as to the spelling. I learned about L'Hospital's rule ca 1968 and it was pronounced (not good at this pronunciation stuff) Low-pi-tal. Heh, heh, used it for a dozen or so exercises and never thought of it again until someone mentioned calculus. YMMV

https://byjus.com/maths/l-hospital-rule/

 

[Samsung4321]

if an investor saw the similarity of the dot-com bubble to the tulip bubble, that would save his skin.

Noo Yoik 1999 Dec 30:

Agitated stranger at air port; "What do you think of Doggone.com?"
I, sagely; "It's a bubble."
He, "What's Bubble?" ['Exiting new growth listing?']
I, slightly scornfully; "As in South Sea Bubble."
There after a brief explanation of my related primary school history lesson of 1959.
He, reflectively withdrawn.

Perhaps I saved his family's skin. Perhaps not.

Then along comes dodgycoin.com ...

 

[NW-Bound]

Here's an article in The Economist recalling the inflation period of late 70s to early 80s. I was young then, and was too busy with building a family to have time to follow the news to know that Italy saw inflation as high as 22%, or that New Zealand still had 16% inflation in 1985.

See: https://finance.yahoo.com/news/playbook-1980s-dealing-inflation-110045542.html

... the experience of the 1980s may become instructive. And once you dig into the history, the decade holds three tough lessons for today’s policymakers. First, inflation can take a long time to come down. Second, defeating inflation requires the participation not just of central bankers, but other policymakers too. And third, it will come with huge trade-offs. The question is whether today’s policymakers can navigate these challenges.

 

[MichaelB]

You really think wages and prices are behind this inflation? I do not. Look at this:

The initial surge in inflation was caused by a sudden sharp disruption in supply of goods together with strong consumer demand fed by fiscal stimulus.

What is keeping inflation high is the continued high level of wage increases. Wage growth has been over 7% per annum since the beginning of the year, and this points to an overall inflation rate of around 5%. There’s no way to reduce it until wage growth falls to less than 5%.

The inflation we currently see is caused by excessive consumer demand. That in turn is driven by wages, not M2. Wages are $10T (annually) in the US, so over 2 years an additional 10% adds $1T to consumer spending. That entire amount is in the pockets of consumers and they (we) are looking to spend.

The problem with looking at monetary data like M2 is there is no way to show how or if that money even reaches consumers. In fact, the past 20 years of monetary policy shows it doesn’t. The money stays within the financial system and doesn’t reach the overall economy. QE had a greater impact on prices of financial assets, much less so on consumer prices.

The reason this distinction is critical to understand is how it will affect upcoming policy measures. If M2 were the cause of inflation, it would be simple to reduce the M2 and watch inflation fall in step. Unfortunately, because inflation is held at its current high level because of wages, the only way to reduce it is by reducing the growth of wages. That means business activity needs to slow and the level of employment needs to fall.

 

[Lsbcal]

I don't have a model for inflation or for the economy or for the stock market. But I do keep up with market history. There was an excellent article by Carlson here about recessionary bear markets and non-recessionary bear markets: https://awealthofcommonsense.com/2022/05/the-2-types-of-bear-markets/

To date we have been down (in late September) as low as 25.2% from the SP500 peak. We are now 333 days out from the peak. The article groups bear markets as:
1) recessionary average bottom = -39.4%, 390 days
2) non-recessionary average bottom = -25.9%, 202 days

The call on whether we are in a recession can come very late in a decline and is a murky concept I think.

I don't like that the yield curve is inverted but I've not found a model that uses this to predict my market timing -- and I have really looked at this. The best predictive model I can find is a (1) declining SP500 trend coupled with (2) rising unemployment. We have met #1 so far but not #2.

So as always I'm confused but nervous.

 

[target2019]

^^^
Author of article included one recession in both tables.