Friday, November 25, 2022

Investment—Recession Watch

Figure 1.  Percent of 10-Yield Curve Inverted (Courtesy: Real Investment Advice)

The inversion of the yield curve is typically seen to herald a recession, as investors switch money to longer-term bonds due to pessimism over the economic outlook. Those fears are growing as policy makers around the world pledge further monetary tightening to tame rising consumer prices.

When the number of inverted yield curves exceeds 60%, as it is today (i.e., Nov 2022), a recession in the US is coming soon (see Figure 1).

History shows us that the Fed hasn’t been able to conclude its hiking cycle any time before inflation-adjusted policy rates reached a full 200 basis points. For the record, that rate is now (i.e., on 11/25/2022) -90 basis points.[48]


Video 1.  Possibility of a Soft Landing (YouTube link)

Recession Watch


Over the weekend of 12/03/2022, Bloomberg commented that:

Fed staff have put chances of a recession at almost 50-50. The global yield curve gave a different view of such risks though, inverting for the first time in two decades. 

Previously (i.e., on 11/28/2022) Bloomberg also reported that:[50]
Global bonds joined US peers in signaling a recession, with a gauge measuring the worldwide yield curve inverting for the first time in at least two decades.
Germany may already be in recession, while the US is likely to enter one by the middle of next year, according to Deutsche Bank AG strategists led by group chief economist David Folkerts-Landau in London.
Finally, Eric Basmajian’s blog provided the below analysis on 12/11/2022:
The money-price-wage spiral is well underway in the negative direction. The Federal Reserve shouldn’t ease monetary policy before the money-price-wage spiral is fully complete, but additional rate hikes will likely soon come to an end in the Q1 area as recessionary conditions intensify.


Figure 2.  Fed funds rate: timeframe between last rate hike and 1st rate cute (Courtesy: @SoberLook)

Figure 3.  Maximum EPS Drawdowns during Recessions (Courtesy: Real Investment Advice)

Figure 4.  S&P 500 12-Month Forward EPS Drawdowns & US Fed Tightening Phases (Source: Refinitiv Datastream)

Figure 5.  S&P 500 12m forward P/E and US 10y real yield (RHS, Inverted; Source [47])


Figure 6.  Bear Markets Only End After the Fed Has Cut Rates Aggressively

Figure 7.  After the Fed pivots, the market is already topping (or topped) and about to drop much lower (Courtesy: Elliott Wave International)


What Investors Normally Do during a Recession?


  • Some investors hold cash and buy the world's best blue-chips only at reasonable or attractive valuations[52]
  • Some investors rely on good dividend income which can grow in all economic and market conditions[52]
  • Investors are exiting hard-to-trade assets ahead of the possible recession next year[51]

References

  1. Cleveland Financial Stress Index
  2. Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?
    • The report failed to mention the most practical of practical issues: It's damn hard for the 3-month to invert with 10-year treasuries when the Fed has artificially held short-term yields closet to zero.
  3. The Yield Curve as a Leading Indicator: Some Practical Issues (New York Fed)
  4. The Yield Curve as a Leading Indicator (New York Fed)
  5. Looking Beyond Circular Feedback Loops In The Market
  6. On The Dispersion, Or Lack Thereof, of Economic Weakness (Tim Duy's Fed Watch)
  7. So You Think A Recession Is Imminent, Yield Curve Edition  (Tim Duy's Fed Watch)
  8. So You Think A Recession Is Imminent, Employment Edition (Tim Duy's Fed Watch)
  9. 3 Charts All Investors Should See
    • US credits
    • Global sector earnings momentum 
    • Global manufacturing activity
  10. VIX Outside of `Red Zone' Indicates No Recession, Goldman Says
    1. The “Red Zone” happens when the VIX is above 25 and climbing, which historically coincides with flat or negative U.S. gross domestic product.
  11. A hedge fund manager shares the 10 things that could surprise the market this year (good)
  12. A Recession Is On My Mind (Steven Hansen)
  13. The Yield Curve Says No Recession
  14. Labor Indicators: Some of Today's Trends Pre-Date the Great Recession (Fed Reserve Bank of St. Louis)
  15. Why Is Economic Growth So Slow?
  16. Portion of US Treasury Yield Curve Inverts
  17. Altitude Adjustment: Investing During a Period of Lower Returns and Higher Volatility (PIMCO)
    • We expect less consistency in the negative correlation between stocks and bonds relative to the past decade.
    • We believe currency movements will play a much larger role in determining portfolio outcomes. 
    • We suggest investors not ignore the reduction in market liquidity and its potential consequences.
    • Our outlook for the global economy is for sideways growth with an uptick in inflation.
    • Are we nearing the threshold of the next global recession? At PIMCO, we don’t think so.
  18. Currency Wars and a Job Gain Recession?
  19. The yield curve still works and 5s10s is one measure that is less influenced by the Fed. 
  20. Worthy Of Investor Attention: The Long-Term Debt Cycle
  21. 22 Signs That The Global Economic Turmoil We Have Seen So Far In 2016 Is Just The Beginning
  22. Smelling the Recession
  23. Voluntary Job-Quitting Hits Highest Level in Nine Years
  24. 13 Charts On The Likelihood Of A Recession
  25. Inflation And GDP Growth Rise; Bond Yields Must Follow
  26. The 10 Largest “Relative” Trade Networks (EAST ASIA, EUROPE, INDIA, NORTH AMERICA )
  27. Singapore's export slump is a worrying sign for the global economy
    • As a global barometer for the health of the global economy, Singapore continues to paint a bleak picture at present.
  28. Dual Risk Out Of China (04/24/2016)
  29. Weak Eurozone Manufacturing Data Reinforces ECB's Impotence
  30. These 9 charts explain the global slowdown and why central banks are powerless
  31. An Arbiter of Recessions Sees ‘Clouds on the Horizon’ for the U.S. Economy
  32. One of the biggest warning signs of the financial crisis is flashing again — but this time is different
    • An increase in the Libor, the typical thinking goes, means that banks see lending to their fellow financial institutions as more risky and signals the possibility of financial instability.
  33. Surge in Global Economic Surprises, Business Confidence Continues
  34. Hard-Boiled vs Soft-Boiled Economic Egg Debate: Cracking the Shells
  35. Closing In On ZERO Growth
  36. Sotheby's As Economic Indicator
    • While Sotheby's caters mostly to people who have too much money lying around that they feel the need to spend it on paintings and pricey tchotchkes, in the past the stock's performance has been cited as a relatively good predictor of the business cycle. 
  37. Taking Stock (Tim Duy)
  38. Here's The Biggest Threat To The Economy And The Bull Market (good)
  39. Are Recession Risks Increasing In The U.S.?
  40. Why The Stock Market Will Peak On May 10, 2019 At 4:00 PM EST
  41. Investment Basics: Yield Curve (Pimco)
  42. Why Does the Yield Curve Typically Invert before Recessions?
    • St. Louis Fed Director of Research Chris Waller discusses two reasons why: if people expect real interest rates to fall (which is usually viewed as a pessimistic outlook for the economy) and/or if they expect inflation to fall.
  43. Prepare For A Deep Recession And Bear Market
  44. Leading Indicators Suggest Recovery in 2020
  45. The World's Top Experts On Money & The Markets
    • Jim Grant, Lacy Hunt, Luke Gromen, James Rickards, Danielle DiMartino Booth, Brent Johnson, Lance Roberts, Tavi Costa, Rick Rule
  46. What Will Break First As The Fed Continues To Tighten: Financial Giants Duke It Out
  47. A few observations on rates
  48. Treasury Curve Inversion Has Even More To Come Than Feared
  49. The Next Secular Bear Market May Be Upon Us
  50. Global Yield Curve Inverts in Signal a Recession Is Brewing
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