Imminent Recession · 7:54am Mar 25th, 2019
So what does this chart mean?
This is showing that return on investment for one-year bonds is officially higher than ten year bonds.
This happening has predicted every recession of the last sixty years.
Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession.
A simple rule of thumb that predicts a recession within two years when the term spread is negative has correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession. The delay between the term spread turning negative and the beginning of a recession has ranged between 6 and 24 months.
So yeah. If there's anything you can do to prepare yourself for that situation, now's the only good time to do it I think. Personally, I think I'm absolutely up shit creek when this probably causes the Australian housing bubble to finally burst, but what are you going to do?
so I should set my 401.k to Old People Mode? (more cash, bonds, etc, less stock)?
I barely know finance stuff. Obviously.
Oh shid
We fucked up.
Did anyone doubt that?
A recession is exactly what you get few years after 1.5 trillion crack-cocaine tax cut injection. And then they're gonna blame the next US president for it.
Jokes on you I’m dirt poor and stupid~!
Welp. Guess I'm probably staying unemployed for a while then. Engineering is not a recession proof industry.
If either of us could accurately predict the economy, we would not be writing pony fiction, we'd be sitting on top of a giant pile of money as people begged for our wisdom, 24/7.
Yes, the Australian housing market has a sizable bubble. The US housing market in 2008 had a bubble that made yours look like a hiccup, made only worse when the government put into place policies that *directly* went straight against any rational method of regaining control over the market plunge. (Ex. Mark to Market means when a bank's assets shrink due to a plunge in real estate prices, they have to sell mortgages to maintain their asset/liability ratio. Which makes the market drop more. Which makes the banks have to sell more mortgages. etc...)
Yes, the one year bond is higher than the ten year bond. Zero percent interest rates for eight years in a failed attempt to stimulate the economy will do that. A period of actual economic growth suddenly makes those short-term bond prices hop.
5032520 Depends on how many years you have before retirement. First, you should have gone through Dave Ramsey's plan up to Baby Step #4. If you haven't, stop reading right now and take his course.
Ok, welcome back. If we're talking thirty years to retirement, 100% of your 401k should be in a no-load index fund that you keep your fingers off, ignore, and never touch. No borrowing from it to shingle the house, no dipping into it between jobs. Period. As you get closer to that magic 10 years to retirement, shift some (but not all) into government bonds. Even *at* retirement, I'd keep about 3/4 in the market, because if you're careful and save every freaking year (it hurts, but you need to), and you've followed Dave's plan, you're only dipping into 3-5% of the 401k every year (while it's averaging 8%), and you will need that long-term income growth if you plan on hittting 80 or 90. Trying to time the markets will only murder your assets.
Two “when?”s—
WR Post on this
TMWoLoTM print
5032600
We haven't had economic growth. My 401k is in stocks. I lost 81% last year.
I really really like you Georg. Please don't be a Trumpeter.
5032600
That history has nothing to do with it, or at least has nothing more to do with it than the way it factors into investor expectations. Ten-year yield is what you'd get buying a ten-year bond from the US Treasury right now. It's not averaged over history.
And, uh … did you even look at the graph? Both 1-year and 10-year rates have been shooting up over the last ~18 months —
so yes, the influx of tax-cut cash into the economy is having its entirely predictable short-term effect[1] — and what happened to make the 1-year pass the 10 is that the 10 has lost 1/3 of its value since December.Anyway, high short-term bonds are bad news in two ways. First, there's the traditional macroeconomic supply/demand issue: higher rates means fewer loans means less people going into debt to spend and keep money flowing through the economy. Also, the higher that short-term bond prices are, the more people are going to hedge/save instead of invest. If you can get 2% in a year in the stock market and take on the risk of economic nosedive, vs. 2% in a Treasury bond and your only risk is the US government defaulting for the first time in history, all the smart money's going to flee for safety.
EDIT:
[1] … actually, if the tax cut is stimulating the economy, it sure isn't being reflected in markets. The Dow had a meteoric jump in 2016-2017, and since the tax cuts passed they've just been bouncing between 24k and 26k. The trend's not quite as pronounced in the consumer confidence index, but you can certainly see it climbing steadily over the past 6-8 years and then apparently getting swingier and flatter starting last year.
You're absolutely right that over the long term the smart move is just to ride the market. If you'd bought an $8000 ten-year bond in 2009 vs. investing, you'd have about $9000 instead of $26000. But by the same token, if you'd bought a one-year bond last year you'd have been doing just about as well as the stock market. That's the sort of thing that spooks investors.
Well, my retirement fund was wiped out in 2008, so I don't have anything to lose. So far nobody's wrecked my Work or Starve plan.
5032654 What in the *world* did you invest in? The yearly return for a no-load indexed mutual 401k for the last 5 years has been:
2013: 32.45%
2014: 13.78&
2015: 1.46%
2016: 12.01%
2017: 21.82%
2018: (4.41%)
----- 5 year straight average: 15.42% 10 year average with compounding: 13.17%
Using MoneyChimp as a calculator, given $1000 principal with $100 deposited every year at 13% gives $5,476 for example.
5032694 2008 murdered a lot of people's real estate holdings. I know people who wound up having to move to get a job and found themselves upside-down, because the market had been so good to that point and they over-bought their new house just a few years before. Then Boom. Worse, I had a friend get divorced around that time and he found out that the 401k got divided 40 to her, 1 to him, and she got the house free and clear. Be very nice to the spouse.
5032661 Like I said, if we were real money people, we wouldn't be doing pony. I've tried to anticipate the market a few times with my 401k, and I've been pretty happy to *not* have screwed up too bad and just broke even. My general economy theory is that the Trump election freed up a lot of investment from people going "Whew" (Can you imagine AOC with her hands on the tax mechanism? Brrr...) Then the natural slump that should have followed was muted by the tax cuts (which did not cut taxes for the ultra-rich on the coasts, to their great dismay). So we're in the 'now what?' phase where investors are looking overseas and saying "Ours doesn't look too terribly good, but I'm not putting my money in those impending disasters" So I expect a slowing of our current peppy economic growth as unemployment settles down (seriously, it's at a thirty year low, so people are going to get pulled out of retirement back into the workforce for a few years at least).
Mind you if we have some sort of major Korea/Ukraine/Brexit explosion, all bets are off. Again.
5032778
Yeah... but that isn't what happened to me at all, nor does it much resemble the clusterfuck as it unfolded among my circle of friends. I had an S&P top-rated fund for security and steady yield. I'm not the sort who micro-manages because most people I know who do that lose their asses. At that time I had no idea what a credit default swap was, nor did I want to. I trusted a top authority to pick investments for me that would be very secure at the cost of larger returns. I was all set for a long and enjoyable retirement.
Then 2008 changed the definition of "AAA rated" to "bag of dog feces" and I discovered that I would have been better off investing in tulip bulbs. And all the lying shit-swine who colluded to deceive just about everybody? They got bailed out by taxpayer dollars. And I... am now being threatened with having my Medicare and Social Security stolen to pay for the New Maginot Line and a dozen foreign wars in places most Americans don't even know exist.
So when your "trusted sources" tell you everything is just fine and don't worry your little head about it... forgive me if I think you're foolish to believe them and their rationalizations of why it really happened last time, and their assurances that it couldn't possibly happen again. Clearly, the system as it now stands still rewards deception and manipulation far above honest effort, so the chances are very high that any official analysis of the economic future is deceptive and manipulative.
But I could be absolutely wrong. Maybe Wall Street and the government really do have my best interests at heart. But I sure as hell aren't going to bet on it. Again.
5032778
T.Rowe Price index fund. I just throw money at them and let them handle it since I'm gonna kick it around 50-55. It's a stock/market heavy index, so I lost a lot of money last year. It's not literally Trump's fault, it's just the natural cycle of Republican president -> tax cuts on the rich -> slumping economy. The market has shown over time to take about two years to fully respond to a new administration, and about eight to fully develop- you can look at the numbers and see the market gradually implode until Obama took office, slowly regain strength and then fully develop from the Obama administration until about two years into Trump's administration where we're again seeing the market heading towards a crash.
I'm very good at money, I'm just too poor for the initial capital expense and have no credit, and am currently slowly building capital and credit following about an eight year series of unfortunate events.
5032600
Fortunately, I'm highlighting papers from the San Francisco Federal Reserve, who do literally sit on top of a giant pile of money as people beg for their wisdom.
The Median Home Price in the US is about $189,000 now, and peaked in the bubble at under $350,000. In 2019 dollars, that's about $420,000. Median price is about $538,668 right now in Australia. In Sydney, including apartments, it's around $833,000. Ours isn't a hiccup.
Horizon took the rest.
5032804 The minute you said "credit-default swap" I had to turn away from the monitor and bite my bottom lip. If there is justice after this world, the people who used those for mortgage based 'securities' along with 'tranches' will burn in deep, deep pits.
No, I don't have trusted sources. (those would be the slimy people who would be marketing CDO's anyway) And most of the smart lying (words censored to prevent damage to sensitive ears) who set those up, bailed *early* in the process with stacks and stacks of cash. The *dumb* ones believed their own lies and ran their companies so deep into the ground they hit magma. Yeah, I'm not a big fan of investment bankers. Kansas got off fairly light, since our real estate market didn't skyrocket, then plunge. A friend of ours in Florida, though... It seems the genius-es who put together the CDOs there bought the mortgages from the banks, then passed them onto other CDO makers, who mixed up those CDOs with other CDOs, and split them into tranches, etc... In the end, there were hundred-million dollar investments rated AAA that had *no* trackable assets, no physical or electronic claims on the mortgages they supposedly had portions of, and banks got pantsed when the auditors tried to find out where the money went. Then to make matters worse, they hired 'fixers' who would go through the piles of mortgages trying to figure out which ones they owned, which ones had gone into forclosure, and which ones were paid off. A lack of deeds was no problem, because they had companies who would just print up a deed with forged chain of custody on demand. The Florida courts foreclosed on thousands of people who had fully paid off their mortgage or were current in a fraud that even Estee could not write.
No, I'm not a fan of investment bankers. I'm sure, deep down they're nice people. Six feet or so deep.
5032694 I suffered the same setback at the same time, and it lasted for years. I've only been recovering (slowly, meagerly) over the past 5 years. So it's "work till I drop" for me. Hopefully I can squeeze an early pension out of my last telecom job (unlikely).
5032944
Good luck, brother!
5032995 Thanks! Every ounce of good will helps. Best of luck to you as well.
Where's that utopian dream world of The Culture when we need it, huh?
Is a housing bubble bursting necessarily a bad thing?
5033076
It is when owning an investment property is how most Australians have been trained to prepare for retirment, and will be saddled with mortgages worth twice as much as the property it was taken out for.
5033078
Well, I see how that can ruin someone's life, but it's called a bubble for a reason. Everyone knew it was gonna burst one day. People's willingness to spend increasingly exorbitant prices to assert their independence is a part of what got us into this mess (because there's a similar bubble where I live). I'm no conservative and I hold no illusions about multiple-generation households being optimal, but even I have to admit that the modern pipe dream of every single independent adult/couple/family living on their own has become unsustainable. But just like it's become commonplace to take loans just to spend them on consumer goods or even more ephemeral stuff like a vacation, people who have no business taking out a mortgage felt compelled to it.
5033106
yeah but it's still going to ruin a whole bunch of people's lives so it's still bad
5033110
It's bad for that reason, but also good because the situation can finally start to normalize. I'm not saying I want a recession, or even for the bubble to burst, but the longer the bubble is inflated, the worse the impact when it bursts. Not to mention all the people it hurts while it's being sustained - several of my friends' families are trapped in jobs and places they don't wanna be because it's impossible to find housing in the city that leaves them with any meaningful disposable income, and impossible to move to a better paying job because finding housing that leaves them with *any* disposable income at all was hard enough. Little to no disposable income results in little to no savings. Little to no savings result in loans taken whenever a sudden expense comes up. People who aren't financially literate end up in debt cycles, sometimes bankrupt, or homeless. Lives get ruined while the bubble holds.
5033134
5033110
So here is the special issue with Australia. The bubble does need to burst, if only because neither party has the intellect or ability to lower it slowly, but the following issue makes it so much worse.
So Australia has 2 really bad policies that ecourage investing in housing. The first is negative gearing and the second is the capital gains tax discount.
So the first goes like this. Lets say I own a house, and I collect rent equal to half the Interest being applied to the loan. That meas I am loosing money every year from this rental property.
Good news however. Due to negative gearing I can claim that as a loss againest my income and thus get a bigger tax return.
If you own a few dozen houses, you can shave thousands off your taxable income. As you can imagine the wealthy love this.
The capital gains discount is easier to explain. When you buy, then sell a house, the profit uppity made from flipping that house obviously will be taxed.
BUT due to a law on the books, it will be taxed at a far lower rate than it should.
These two factors combine make housing a SUPER atractive investment, something the government should always try to avoid, as its an investment that doesn't generate economic growth, or employ essentially anyone.
But successive governments haven't done anything about it.
And so a large part of our investment portfolio as a nation (including our 401k equivalent) is tied up in this housing.
This means 2 things.
1) When the bubble breaks it is LIKELY to drag the ecconomy with it, and ruin people's retirement plans.
2) When the bubble breaks, the rivh will snap up the cheap houses looking to explot the capital gains discount
Untill this bits of public policy are removed, housing will always be fucked
5033150
I did an article on all this a while ago, but Jonathon Sri did it way better
5033151
Its a very good article. It does miss the fact that Stamp Duty laws in the states incentivize governments to encourage both a continuous increase in property price AND houses being sold as often as possible.
Thus not only do private developers want prices to remain high, so do the state governments.
And thus we should move to a landtax system.
But overall a good article.
5033151
The situation here is pretty similar. Housing projects pop up all over the place, but most are snatched up by (or straight-out tailored for) housing market speculators who either treat them as an investment, rent them out to tourists or rent/sell to yuppies sitting on money. Most of the middle class are either left hanging onto inherited houses/apartments for dear life or living/preparing to live from paycheck to paycheck until retirement in exchange for a place of their own. Lower wage and socially excluded folks are generally getting screwed over by landlords who rent out dilapidated hovels for disproportionate prices, making perfect use of the knowledge that for these people it's either that or the street.
Hey man, I love your stories, but all this politics and stuff in my feed seriously brings me down. I check MarketWatch for this shit and avoid the news. I don't need it here.
The very-short-term bond rates are up, but the 2 and 3-year bonds are not. I think that means people expect a fall in the market over the next year, but not a recession, which would last at least 2 years.
5033206
The thing is, many people who were encouraged to save for their retirement unwittingly bought mortgages as part of an investment plan. (As I learned the hard way.) Even people who would avoid buying over-priced properties have them deliberately "hidden" in their pension funds, and when the housing bubble bursts, so does their plans for retirement.
With greed being the driving force behind ridiculous housing prices (sub-prime mortgages were designed for "house-flippers", and oversold by brokers who got their commissions no matter how unqualified the applicant was) , there doesn't seem to be any way to stop this harmful cycle of boom and bust.
5033281
Definitely something worth keeping an eye on, I agree. I can't (won't) make any predictions on that one.
5033304 I have a 401K that's managed by a big investment firm, and every time I turn my back on them, they move my money into some obviously stupid investment that they're probably trying to dump on some sucker. Don't let big firms manage your 401K; roll it over into an IRA that you control.
5033825
Well, as I no longer have a 401k, that's not a problem for me.
But yes, all of my investments are now under my direct control... or as much control as anyone can reasonably expect to exert in these times.
LoL, 'imminent'.
This aged well.
5336661
Thank you for reminding me of ths. I was really worried about the predictions I was making last year because they sounded so hyerbolic and alarmist. It's been a real double-edged sword to learn I wasn't crazy.
5128661
I'm glad both of us can now look back at this prediction and laugh.