The yield curve inverted on March 2019, this has served as a reliable marker, predicting every recession since the 50s. Apparently the market typically strengthens after inverting, but typically within a year and half, a recession hits. So we’ve got time right?
How big or small has no model i can find. You can find analyst and pundits that say the next one will be light or it could be apocalyptic. So it sounds like its guess work.
The markets have been a bit more erratic recently but otherwise no obvious signs that things were amiss.
Then last week there was extreme volatility inside the bank funding market where the interest to get money for the banks was much higher than it should have been in a normal economy 10% in some cases.
Then the Fed not only dumped money into that system (the first time since 2008 as far as I can tell), but dumped 75 billion, the max allowed 3 times in a week and 50 odd billion for 2 billion last week. They also just announced that they would continue to infuse the markets with the max amount daily till Oct 10th. What i consider even more concerning is the lack of analysis of WHY/what the cause it and why they are doing it, even still. nearly all the analyst I can find, say that’s not a good sign. Suggesting either they don’t know, or they are masking even worse news
Possibly unrelated the Fed lowered the interest Rate 2 times in the past couple of months, which they normally don’t do (as i understand it) unless they are trying to stimulate the economy. Was this a political calculus to support keeping a strong economy for the 2020 election driven by the President (like some speculate), or again masking worse news. Or a another reason i missed?
Seems like a lot of yellow flag triggering faster, when we should be fairly strong for a year. So is that ultimately good, or does it mean we should be more concerned about what its going to look like when the shoe drops.
I’m no expert, but I am keenly curious and trying to find out more information (as is my 401k), and love to hear and vette new information as we watch what happens until the shoe DOES finally drop…
Re: this bit, why they did it is to bring the repo rates back down to normal levels and thereby to maintain control of monetary policy. Why it happened, is another matter, and there are various theories, most related to the withdrawal of quantitative easing reducing increasing the amount of collateral available for repo and a miscalibration of required reserves, and some suggesting it has at least something to do with the structure of the dollar funding market and the Fed’s role in it vs other jurisdictions. See for instance this discussion on Alphaville (free registration required).
As you mentioned, and I was reading in Fortune where this has been a long time coming when it ended QE and that bank reserves have been steadily depleted.
What i dont see much of, is how bad that can be, Although, since we are unique to other markets, those models wouldnt apply to us.
One of the things IMHO which made the last recession so dangerous was the rampant fraud in Consumer Debt (Mortgages, etc and the Credit Default Swap ratings). The place I’ve been thinking for awhile that will have that same impact (coupled with a lot of outright fraud) is Corporate Debt:
Question, don’t the treasuries of large non-financial corporations have access to the repo markets? If something was happening on the lines of your point, would/could it appear in the repo markets?
I don’t actually know. I’m guessing a bit, as it’s not really my field. I’m going more on what I saw in the 2008 crash, and my assumptions there. I was investing with an eye towards the real estate bubble in early 2008, but I thought that the Banks would come out big winners and took a pretty big hit after putting money into BofA. When they picked up Countrywide, I thought that would be a steal and thought(that portion of) my money would be in a pretty good place to ride it out and come out on top.
What I didn’t count on was that there was so much fraud going on in the market , not just on the borrower side, but in so many ancillary areas related to it (e.g. all the CDO/Credit Default Swaps and their ratings), etc.
As a result, 11 years later, BofA is at about 70-75% of what I bought at in 2008, and they did alright compared to the rest of the sector. Citi had to do a 1 for 10 swap and is at about 15% of where they were.
So, my lesson is to look for how rampant fraud will tilt the scales again, and it will be in financial instruments again, IMHO. I’m thinking that that Corporate Debt explosion is going to have a lot of funny stuff going on when the bottom falls out again. Maybe I’m wrong, but it’s the area I’ve been seeing various articles about which seem to indicate that it could easily mirror what happened in 2008, and be a huge driver.
FWIW, I’m a buy and hold investor for the most part, I don’t look for shorts,options, etc - it seems a lot like gambling, and I look for places to invest the money I can afford to invest - generally dividend payers on a DRIP. It’s possible the short markets will catch this kind of financial chicanery I’m envisioning in the Corporate Debt markets, and any Collateralized Debt Obligations/Credit Default Swaps there, but IMHO, there’s probably a lot of funky/wishful accounting there which could be rising, and start taking major players down. As an example, look at the demise of Thomas Cook over the weekend due to crushing debt and a changing business environment.
Be especially wary of this. Many (most) retirement investment guides will encourage you not to touch things, depending on the time until your retirement. Certainly there are exceptions and strategies for heavy loss avoidance, but timing the market is a thing even pros are not good at. Be wary before you pull the trigger on anything heavily impacting.
I wouldn’t be surprised if companies with huge “cash” piles like Apple do, but the overwhelming majority of participants are banks, brokerages and funds. Most companies just put their cash in money market funds or similar (which funds may well then do repo lending).
Kind of. That article jumps between high yield (which is never a “safe haven”) and the lower end of investment grade, which is in normal economic times in the sense of being more or less negatively correlated with equities because of interest rate expectations, but is still fairly risky in a recession. It’s certainly the case that corporate leverage is one of the biggest risks to financial stability at the moment and fairly likely that the next crisis will manifest the strongest in corporate debt (especially, but not exclusively high yield). I certainly wouldn’t be investing in a high yield bond fund at the moment. But that doesn’t mean you should be moving everything out of “bonds” either. The next downturn is overdetermined and equities will also suffer a lot when it happens, not least because it seems like every major economy outside the US is slowing down at about the same time.
Also, please don’t dive down a ZeroHedge rabbit hole. That place has some interesting stuff now and then, but it’s also constantly, spectacularly alarmist and filled with goldbuggery and other such silliness. If you’re not equipped to sort through the nonsense it will fill you with dumb ideas.
Short markets in corporate debt are what credit default swaps are.
There was a study I read about (I’m sure I can find if if there’s interest) which tracked returns for different people’s retirement plans. Women did better than men overall, and the conclusion was it was because they do less trading than men - they let their money sit in the market whereas men are always trying to move stuff around to time the market.
One group that did especially well? Was people who forgot they had an investment account! Because they forgot about it, they didn’t trade around at all.
So yeah, constantly reallocating and moving funds around(*) is basically making the guys who get commissions rich, not you.
(*) I’m not talking about periodically rebalancing to keep your portfolio in line with your desired allocations, I’m talking about moves made in trying to anticipate or react to the market.
My guess is that this is being done at the insistence of Trump, who it seems will do anything to try to keep a recession/downturn of any sort from hitting because it would hit his “popularity” numbers. I would be surprised if there was any other reason.
The only caveat to that is that we do have some folks on the forum that are either in retirement or very close to it. Though they should have changed their portfolio to be less risky at some point, times like this are the one indicator and encouragement to reassess and change where things lie. And that’s about the only time I would touch mine.
Nah. Trump is definitely putting pressure on the Fed to lower interest rates, but this is an intraday liquidity issue, not a large-scale monetary policy one (except that if left unchecked the Fed would be unable to implement monetary policy). There’s almost no chance that Trump was even briefed on this before the Fed acted, let alone would know what the hell they were talking about.
Wow, I got hurt, but not hurt like that. Sorry to hear it.
I guess the lesson I learned — maybe the wrong one! — is not to even try to pick stocks anymore. I invest in low-cost index funds via Vanguard these days, and keep a very conservative portfolio including a large cash balance.
Absolutely. And I’m one of those people - I have been liquidating my individual stocks and moving money into bonds, but as you said, because I’m rapidly approaching retirement and not because I’m reacting to anything going on in the markets.
I hesitate to speak in broad generalities, but unless someone panicked and withdrew their money at the height of the great recession, they should have easily recovered by now. My portfolio recovered probably 4 years after (and when the crash hit, I was probably 90% in stocks).
Also, while I can’t predict stuff, while another recession will definitely happen (someday), seems to me the odds of having another recession like 2008 are pretty low. That one was on the verge of catastrophic.
Mine as well, but even though I have time until retirement, there are always things that happen. As an example, there are many who lost jobs last recession and never came back into the workplace because they could not find employment (of their choosing.) It’s hard to plan for that.
Let’s hope any recession is short lived. I think moving forward from the current world political stage, even if only somewhat, would bring back a lot of consumer confidence, and hopefully economic resurgence.
