My favorite investment advice, courtesy of Mr. Money Mustache:
"Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month. Enough to live off for life and retire.
You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!”
Is this a sensible way to think about it?
No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster.
Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks...There’s only one time you care if one of your shares is down: on the day you sell it."
Let’s assume you believe a recession is coming. What’s your investment strategy to protect yourself?
Two recessions ago (2001-2002) i invested in REITs through the stock market. It worked really well and I doubled, but it turned out I just got lucky with exit timing because they were pump and dump schemes and I got out coincidentally just before the “dump”. I even got a payment from the class action lawsuit against them a few years later.
So, what’s an actual sound strategy if you think a recession is coming?
I'm in this boat. I've had too much cash sitting in a money market account for a couple of years in anticipation of a recession. I feel like the corporate tax cuts might have kicked the can down the road a little.
It's a weird spot to be in and I'm still not sure what to do. I've lost a decent amount of money to inflation and opportunity cost. The feeling is as strong as ever but I know that macro trends aren't things anyone can accurately predict.
I know there are better things I could do with the cash in the meantime, but I haven't done the research. I didn't really expect to be sitting on cash for such a long time. Would love to hear anyone's advice.
Everyone else is giving investing advice, so I'll throw in something different: pay off your debts. It's better to have some assets and some debts than it is to have no debts but low assets. But if you really think that your assets are about to decrease in value, you might as well use them now.
The standard approach of 60/40 stocks/bonds is not enough if you can't stomach 30% losses. And don't even think about going 100% stocks if you can't stomach 50% drops.
By the way, "recession" doesn't mean the same thing as "stock market crash". The definition of a recession requires GDP to go down for two consecutive quarters. Although there is some correlation it's still completely possible for GDP to go down while the market goes up. So even if you correctly predict a recession, you won't necessarily be able to predict the market.
Defensive ETFs (consumer staples, health care, utilities) along with diversified bonds. Investors also tend to migrate toward dividends during a recession. Note that health care is not as safe given the political climate.
A few funds from the above to consider: VDC, FUTY, BLV, BND, VIG
Here's the funny thing about recessions - they're usually predicated by some exuberance somewhere, and when it bursts it then ripples to the rest of the economy.
1930 was the stock market, 2000 was the dot com, 2007 was real estate (there's a bunch of recessions in between I'm skipping because I'm less familiar w/ them).
This time around...there's actually NOT a lot of exuberance. People are still scared and not getting ahead. Unemployment is at record lows but wage growth is stagnant, meanwhile people's basic expenses have exploded through the roof. Who has money to spare on stupid fads & bets? People are just trying to afford housing, healthcare, and education.
I feel like a lot of the talk around recession is simply people EXPECTING a recession and reacting accordingly, which will cause some downturn but won't impact the fundamentals of people buying shit in the economy.
I'm not saying we won't ever have a huge recession again, of course we will, but I don't see a current real indicator of it.
The newfound obsession with the yield curve could have interesting effects on the economy.
1. The Fed now pays attention to it, so its indicator value could be dramatically weakened, or erased. (Previous Feds continued to raise rates after an inversion before previous recessions, while this Fed has done the opposite lowered them.)
or...
2. Inversions become a self-fulfilling prophecy. Despite low inflation, low unemployment, and healthy profit growth, markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.
Low unemployment is not a useful metric for 2 reasons. First is it does not account for people who have dropped out of participating in the labour market. Second is the race to the bottom in many industries. The uberisation of everything is driving income inequality. Eventually if you stop watering the plants they stop bearing fruit. Our economy is all fruit (ie complex financial instruments generating even more dollars for rich people by moving money around) no water (livable income for the masses) these days.
> markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.
I don't think you are saying it is, just that the markets believe it is, but the funny thing is that it's not a perfect predictor of an oncoming recession.
While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.
The yield curve is an indicator of institutional investor expectations. There are other economic indicators that would cause them to be more bearish on bonds.
Slightly older poster here. This is exactly how it felt when the bad times started in 1999-2000 and 2007-2008.
People will tell you not to panic and justify why it's different. For the most part, nobody has a clue. Make sure you can meet about a year of expenses including health insurance. This is always a good idea.
Also, these always last longer than you expect. This is almost self-fulfilling, because unless most market participants capitulate a bottom can never be reached.
Re year of expenses, I had nothing for running room in 2008. It made the stress way worse, even though I ended up keeping my job. If anyone here hasn't built any savings, start cramming immediately. Even a few months of extra savings can make a huge difference.
Having lived through the 2000 mess, I don't think corporations are that over-valued and that capital isn't chasing complete and utter pipe dreams this time around. This is nothing like 2000, where Raleigh, NC had nearly full occupancy of all office space due to stupid little startups everywhere. Today's startups are VC-funded, but that VC requires a lot more demonstrated value and due diligence. Sure, there's lots of losers, but none of them are systemic risks.
2008 was caused by serious fraud in mortgage bonds coupled with no-doc, low-doc, neg-am mortgages being rated "AAA" inside of a massive housing bubble blown by Bill Clinton and abetted by GWB. Many banks and big investments firms were over-leveraged with risky bonds they didn't understand. There was also CDS all over the place. We don't have that this time around, either.
What are the Black Swans? Student loan debts, maybe. Otherwise, I can't think of much other than the total US Debt if that ever actually becomes a problem. No clue when that will be. Today's market action is just counter moves reacting to China's devaluation. Yawn.
I'm relatively young, so I wasn't responsible for expenses when the last crash happened. I had the great fortune of having only 1-2 months of savings early in my career when the startup I was working for went under. I was a software engineer with less than 6 months of experience, and had a hard time finding a job (essentially a first job with that experience level), and learned really early on that I want zero debts and a year of savings.
Right now I am down to only ~$150/month in 2% interest school loans (down from $450/month a couple years ago), $500 rent (when I initially lost my job this was up to $1,700!), and I'm about to lose my parents insurance. In all, I pay out roughly $1,000/month, and I make sure to have at least $10,000 on hand at any time. Everyone I know tells me this is probably too much emergency fund and I could get away with 3-6 months expenses and get more earning potential from that extra half a year, but I refuse to ever be caught off guard. The immense stress of trying to figure out how you will pay for rent this month is unlike anything I've experienced.
Even if a depression never comes again, I'll always aim to have nearly a year of runway in case I lose my source of income. But I say all of this to say that having a savings is more than just potential future security. I feel confident voicing my opinion at work, I am willing to stand by my principles and leave if I want to, and I'm willing to walk away from an environment that makes me unhappy. In my opinion, having this type of savings gives you a similar feeling as financial independence will feel---I'm working right now because I want to, not because I have no other options. That makes life a lot more pleasant.
He says the signal from the curve suggests money markets should be pricing in a higher probability of the Fed’s policy rate going to zero in the coming year.
Anyone with finance knowledge here? What's the take away, recession, no recession?
I'm worried about a self fulfilling prophecy. Keep in mind the yield curve represents how the market prices US treasury bonds at differing maturities. When the LT bond yields drop, it's because everyone is buying them. That could happen for a multitude of exogenous reasons. Then though, everyone sees that the yield curve is flattening, panics because it's a recession predictor, and buys LT bonds, thus lowering LT yields further and creating a cycle.
Translation: the markets are pricing in the expectation that the Fed will (need to) stimulate the economy by reducing interest rates from their already low (close to zero) levels
The fed can use the rate to effectively decrease the cost of borrowing money. The rational there is if economic activity is slowing, you decrease the cost of spending money. The rate is usually dropped when economic activity slows, and should be increased as economic activity increases. I'm sure people will disagree, but I don't think we've had the rate increase to levels prior to the last recession (though I didn't actually double check).
Effectively, anticipating a drop in the fed's rate is an expectation that economic activity will slow (recession behavior) and the fed will have to stimulate it by making money cheaper. To me, the interesting part of this is what the fed does after the rate reaches 0. Read up on Quantitative Easing and Ben Bernanke's response to the last major recession, it's a really interesting environment to learn a bit about.
I'm not a finance or economics expert, what I've gathered from various internet sources is that yes: the yield curve has been inverted for over 1 quarter, which historically should mean there will be a recession coming.
However there are questions about whether it will be right again. One reason is that when the US government implemented Quantitative Easing during the great recession, it did this by buying a bunch of treasuries. There is some question about whether the inverted yield curve we are seeing now may be a result of that, rather than solely a result of investors predicting below zero interest rates.
It's interesting to consider how much we all now simply assume that there will be no financial stimulus. 50 years ago, in similar circumstances, we could simply assume that a spending bill could be passed to offset any risk of recession. Nowadays we assume there is no hope of that. President Kennedy, and President Nixon, and President Carter and President Reagan, all of them pushed for more military spending at certain key moments, not always because they saw the need for more military spending, but because it was an easy way to get some extra stimulus to offset the risk of recession. But there is no way, nowadays, to put together a coalition that will vote for any kind of stimulus, even if that stimulus were given some non-obvious name such as "Modernize the Navy".
Assuming what you say is true (I’m not convinced, though), it didn’t work. There were recessions in 1958, 1960-61, 1969-70, 1973-75, 1980, 1981-1982 [0]. And actually, yes there is broad support for stimulus. Bush #2 gave out helicopter money, and we had Quantitative Easing where the Fed bought treasuries for a few years after 2008. And, in fact, the current Fed chair just lowered interest rates on recession fears.
> Al-Hussainy expects investors to turn to even more aggressive positioning for rate cuts. He says the signal from the curve suggests money markets should be pricing in a higher probability of the Fed’s policy rate going to zero in the coming year.
Not just zero, but beyond.
The yield out to 30 years on German bonds recently fell below zero. Several other advanced industrial countries are in a similar negative-yielding boat. These are economies that are technically not even in recession.
The amount of negative yielding debt now exceeds $13 trillion:
That's not a negative real rate (rate - inflation) which is not uncommon, it's an absolute (nominal) interest rate.
No country wants to be left with the currency that appreciates. All countries will pull out the stops to find a way to devalue.
The only thing industrialized countries fear more than an appreciating currency is deflation. The first whiff of that monster and the big guns come out and never stop firing.
At this point it's not unreasonable to expect the following possibilities (in order of first appearance):
0. zero short term rates to follow much quicker than consensus
1. shock-and-awe QE (first implemented, but in a way that will look quaint by comparison, in 2008-2009 crisis)
2. direct purchase of stocks by the Fed and the ECB (Bank of Japan has been doing this for a long time)
3. debt forgiveness for college loans (regardless of the party in power)
4. debt forgiveness for mortgages (discussed in 2008-2009 but never tried)
5. credit card debt forgiveness (because why not, every other debt is being forgiven)
Oddly enough, the later phases start to look like the systemic debt repudiation brought about through the "jubilee year":
> Ancient Near Eastern societies regularly declared noncommercial debts void, typically at the coronation of a new king or at the king’s order.
Has debt forgiveness ever been used in a modern industrialized economy? The only instance I am aware of was of the Allies doing it in occupied Germany post-WWII
This is why I don't dare to be a starting entrepreneur right now. I'm afraid I'll definitely fail and cannot afford living expenses and have nothing to show for it in the end.
Or do people consider 2 years coding at your own startup as 2 years of programming experience? I know some people who say that they don't.
The S&P 500 didn't exceed 1929 highs until 1954. Not saying it's a perfect parallel, but there are definitely precedents of stocks not working well for decades.
Sometimes corrections do matter. If you bought at the peak in 2000, including dividends and adjusting for inflation it would have taken 13 years to get back to the initial level. Maybe it’s nothing, maybe the S&P 500 won’t get back to 3000 in a while. Probably it’s nothing...
Article is paywalled so I didn't read it, but I went and looked at the federal reserve's yield curve page[1] and indeed it does look quite inverted.
3 month has been performing better than 10 year for awhile now, but now the 10 year yield has dropped to where it's below the 1 month, 2 month, and 6 month as well and is only slightly better than the 1 year. That's interesting.
[+] [-] _bxg1|6 years ago|reply
"Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month. Enough to live off for life and retire.
You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!”
Is this a sensible way to think about it?
No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster.
Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks...There’s only one time you care if one of your shares is down: on the day you sell it."
https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-...
[+] [-] jedberg|6 years ago|reply
Two recessions ago (2001-2002) i invested in REITs through the stock market. It worked really well and I doubled, but it turned out I just got lucky with exit timing because they were pump and dump schemes and I got out coincidentally just before the “dump”. I even got a payment from the class action lawsuit against them a few years later.
So, what’s an actual sound strategy if you think a recession is coming?
[+] [-] datpuz|6 years ago|reply
It's a weird spot to be in and I'm still not sure what to do. I've lost a decent amount of money to inflation and opportunity cost. The feeling is as strong as ever but I know that macro trends aren't things anyone can accurately predict.
I know there are better things I could do with the cash in the meantime, but I haven't done the research. I didn't really expect to be sitting on cash for such a long time. Would love to hear anyone's advice.
[+] [-] sp332|6 years ago|reply
[+] [-] rglover|6 years ago|reply
Warren Buffett's 3 Favorite Books (light technical): https://www.amazon.com/Warren-Buffetts-Favorite-Books-Intell...
Warren Buffett Accounting (heavy technical): https://www.amazon.com/Warren-Buffett-Accounting-Book-Statem...
Podcast by the guys who wrote these: https://www.theinvestorspodcast.com/
[+] [-] H8crilA|6 years ago|reply
https://www.portfoliovisualizer.com/backtest-asset-class-all...
The standard approach of 60/40 stocks/bonds is not enough if you can't stomach 30% losses. And don't even think about going 100% stocks if you can't stomach 50% drops.
[+] [-] OscarCunningham|6 years ago|reply
[+] [-] alecb|6 years ago|reply
A few funds from the above to consider: VDC, FUTY, BLV, BND, VIG
[+] [-] xivzgrev|6 years ago|reply
1930 was the stock market, 2000 was the dot com, 2007 was real estate (there's a bunch of recessions in between I'm skipping because I'm less familiar w/ them).
This time around...there's actually NOT a lot of exuberance. People are still scared and not getting ahead. Unemployment is at record lows but wage growth is stagnant, meanwhile people's basic expenses have exploded through the roof. Who has money to spare on stupid fads & bets? People are just trying to afford housing, healthcare, and education.
I feel like a lot of the talk around recession is simply people EXPECTING a recession and reacting accordingly, which will cause some downturn but won't impact the fundamentals of people buying shit in the economy.
I'm not saying we won't ever have a huge recession again, of course we will, but I don't see a current real indicator of it.
[+] [-] nostromo|6 years ago|reply
1. The Fed now pays attention to it, so its indicator value could be dramatically weakened, or erased. (Previous Feds continued to raise rates after an inversion before previous recessions, while this Fed has done the opposite lowered them.)
or...
2. Inversions become a self-fulfilling prophecy. Despite low inflation, low unemployment, and healthy profit growth, markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.
[+] [-] rorykoehler|6 years ago|reply
[+] [-] JamesBarney|6 years ago|reply
But they also look at heaps of other data like manufacturing indices which is one of the first signs of a coming slow down.
[+] [-] H8crilA|6 years ago|reply
[+] [-] superfrank|6 years ago|reply
I don't think you are saying it is, just that the markets believe it is, but the funny thing is that it's not a perfect predictor of an oncoming recession.
While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.
[+] [-] ryacko|6 years ago|reply
[+] [-] whatok|6 years ago|reply
[+] [-] lbotos|6 years ago|reply
[+] [-] throwaway5752|6 years ago|reply
People will tell you not to panic and justify why it's different. For the most part, nobody has a clue. Make sure you can meet about a year of expenses including health insurance. This is always a good idea.
Also, these always last longer than you expect. This is almost self-fulfilling, because unless most market participants capitulate a bottom can never be reached.
[+] [-] akeck|6 years ago|reply
[+] [-] turk73|6 years ago|reply
Having lived through the 2000 mess, I don't think corporations are that over-valued and that capital isn't chasing complete and utter pipe dreams this time around. This is nothing like 2000, where Raleigh, NC had nearly full occupancy of all office space due to stupid little startups everywhere. Today's startups are VC-funded, but that VC requires a lot more demonstrated value and due diligence. Sure, there's lots of losers, but none of them are systemic risks.
2008 was caused by serious fraud in mortgage bonds coupled with no-doc, low-doc, neg-am mortgages being rated "AAA" inside of a massive housing bubble blown by Bill Clinton and abetted by GWB. Many banks and big investments firms were over-leveraged with risky bonds they didn't understand. There was also CDS all over the place. We don't have that this time around, either.
What are the Black Swans? Student loan debts, maybe. Otherwise, I can't think of much other than the total US Debt if that ever actually becomes a problem. No clue when that will be. Today's market action is just counter moves reacting to China's devaluation. Yawn.
[+] [-] nscalf|6 years ago|reply
Right now I am down to only ~$150/month in 2% interest school loans (down from $450/month a couple years ago), $500 rent (when I initially lost my job this was up to $1,700!), and I'm about to lose my parents insurance. In all, I pay out roughly $1,000/month, and I make sure to have at least $10,000 on hand at any time. Everyone I know tells me this is probably too much emergency fund and I could get away with 3-6 months expenses and get more earning potential from that extra half a year, but I refuse to ever be caught off guard. The immense stress of trying to figure out how you will pay for rent this month is unlike anything I've experienced.
Even if a depression never comes again, I'll always aim to have nearly a year of runway in case I lose my source of income. But I say all of this to say that having a savings is more than just potential future security. I feel confident voicing my opinion at work, I am willing to stand by my principles and leave if I want to, and I'm willing to walk away from an environment that makes me unhappy. In my opinion, having this type of savings gives you a similar feeling as financial independence will feel---I'm working right now because I want to, not because I have no other options. That makes life a lot more pleasant.
[+] [-] H8crilA|6 years ago|reply
Yield curves help predict economic growth across the rich world.
https://www.economist.com/graphic-detail/2019/07/27/yield-cu...
[+] [-] marktangotango|6 years ago|reply
Anyone with finance knowledge here? What's the take away, recession, no recession?
[+] [-] formercoder|6 years ago|reply
[+] [-] asplake|6 years ago|reply
[+] [-] jerf|6 years ago|reply
[+] [-] nscalf|6 years ago|reply
Effectively, anticipating a drop in the fed's rate is an expectation that economic activity will slow (recession behavior) and the fed will have to stimulate it by making money cheaper. To me, the interesting part of this is what the fed does after the rate reaches 0. Read up on Quantitative Easing and Ben Bernanke's response to the last major recession, it's a really interesting environment to learn a bit about.
[+] [-] apalmer|6 years ago|reply
Now the quoted folks might be wrong, or they might be right but sometimes the textbook scenario doesn't play out...
[+] [-] TheSoftwareGuy|6 years ago|reply
However there are questions about whether it will be right again. One reason is that when the US government implemented Quantitative Easing during the great recession, it did this by buying a bunch of treasuries. There is some question about whether the inverted yield curve we are seeing now may be a result of that, rather than solely a result of investors predicting below zero interest rates.
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] lkrubner|6 years ago|reply
[+] [-] prewett|6 years ago|reply
[0] https://en.m.wikipedia.org/wiki/List_of_recessions_in_the_Un...
[+] [-] megous|6 years ago|reply
[+] [-] javagram|6 years ago|reply
Stimulus is already happening.
[+] [-] pastaking|6 years ago|reply
[+] [-] apo|6 years ago|reply
Not just zero, but beyond.
The yield out to 30 years on German bonds recently fell below zero. Several other advanced industrial countries are in a similar negative-yielding boat. These are economies that are technically not even in recession.
The amount of negative yielding debt now exceeds $13 trillion:
https://www.marketwatch.com/story/value-of-debt-with-negativ...
That's not a negative real rate (rate - inflation) which is not uncommon, it's an absolute (nominal) interest rate.
No country wants to be left with the currency that appreciates. All countries will pull out the stops to find a way to devalue.
The only thing industrialized countries fear more than an appreciating currency is deflation. The first whiff of that monster and the big guns come out and never stop firing.
At this point it's not unreasonable to expect the following possibilities (in order of first appearance):
0. zero short term rates to follow much quicker than consensus
1. shock-and-awe QE (first implemented, but in a way that will look quaint by comparison, in 2008-2009 crisis)
2. direct purchase of stocks by the Fed and the ECB (Bank of Japan has been doing this for a long time)
3. debt forgiveness for college loans (regardless of the party in power)
4. debt forgiveness for mortgages (discussed in 2008-2009 but never tried)
5. credit card debt forgiveness (because why not, every other debt is being forgiven)
Oddly enough, the later phases start to look like the systemic debt repudiation brought about through the "jubilee year":
> Ancient Near Eastern societies regularly declared noncommercial debts void, typically at the coronation of a new king or at the king’s order.
https://en.wikipedia.org/wiki/Jubilee_(biblical)
[+] [-] umeshunni|6 years ago|reply
[+] [-] mettamage|6 years ago|reply
Or do people consider 2 years coding at your own startup as 2 years of programming experience? I know some people who say that they don't.
[+] [-] sudosteph|6 years ago|reply
Also, if you save up now, there's a chance that a recession could bring housing prices back down... so at least you have that going for you?
[+] [-] webninja|6 years ago|reply
[+] [-] jorblumesea|6 years ago|reply
[+] [-] neural_thing|6 years ago|reply
[+] [-] tabtab|6 years ago|reply
[+] [-] kgwgk|6 years ago|reply
[+] [-] tempsy|6 years ago|reply
[+] [-] elihu|6 years ago|reply
3 month has been performing better than 10 year for awhile now, but now the 10 year yield has dropped to where it's below the 1 month, 2 month, and 6 month as well and is only slightly better than the 1 year. That's interesting.
https://www.treasury.gov/resource-center/data-chart-center/i...
[+] [-] gingabriska|6 years ago|reply
[+] [-] kitten_smuggler|6 years ago|reply
[+] [-] HNisCurated|6 years ago|reply
[deleted]
[+] [-] JohnJamesRambo|6 years ago|reply