Talk:Economic Outlook
Strongest Correlation Yield Curve Invasion
@Magaly Do you agree that the yield curve is reacting mostly to interest rate expectations?
From my understanding the major factor which is influencing yield curves is interest rate expectations. Due to communication that Fed interest rates will go higher than previously expected there has been a sell-off in short term treasuries (-> higher short term interest rates + more inversion). Long term yields are reflecting the fact that interest rates are expected to go down. See inflation/dot plot. --PirateCaptain (talk) 20:55, 28 December 2022 (UTC).
- Yield curve will always be influenced by interest rate/policy expectations, thats pretty straigh forward, but what you need to understand is why those expectations exist, other the FED comunication, since the FED credibility is pretty bad at this moment. The inverted risk premium between maturities mean investors see greater risk for the economy in the short term, and hence requesting more return for the risks taken. Investors moving from short to long term bonds, is a sign of expected distress in the economy in the near future. This is the academic explanations, and I was just using the FED research in this matter, and is the explanation given in most articles you find. But I personally, also think of the yield curve in terms of economic activity/inflation expectations. --Written by Magaly
- @Magaly We both know that this explanation is complete bs when it comes to treasuries. There is zero risk of default. My goal for the wiki is doing our own proprietary research, focusing on the correlations we believe are strongest. If in doubt we will extensively study historical examples and correlations and using a system of logical cause-effect principles to get to a high conviction level of what is important. To me it is indeed very important to be ultra critical towards anything -no matter the source - which doesn't make sense. --PirateCaptain (talk) 21:25, 4 January 2023 (UTC)
@PirateCaptain IMO yield curve inversion is the expectation of future lower rates from FED due to the expectations of lower economy activity and hence lower inflation. I will stick to my opinion that yield curve inversion is a strong signal for a upcoming recession due to the historical data supporting the correlation, until you show me data that says otherwise -- Magaly
@Magaly I found your reply via my watchlist, but got no notification on it. In order for a notification be sent you need to sign your msg using the sign symbol. It is right to the "B" and "I" at the top and will include 4 "~" to the msg which will then translate to a signature with your username + timestamp. On the topic itself: I absolutely agree with your last statement "yield curve inversion is the expectation of future lower rates from FED due to the expectations of lower economy activity and hence lower inflation." I've glanced through the source and they also talk extensively about interest rate expectations. Therefore you should definitely add this to the article.
This has no priority right now but longterm i could see us having an own article for a topic like yield curve inversion in which we study and discuss different factors why the yield curve is inverted. The goal is like always to understand cause-effect relationships better and differ signal from noise. We can then come up with a list of factors and determine if they are mainly causing the effect which we are seeing, play a minor part or are detrimental to it.
In the end our goal is to develop a system of cause-effect relationships with a clear understanding of simple & most powerful relationships. --PirateCaptain (talk) 09:47, 8 January 2023 (UTC)
@Magaly Just another point: Without having read the full source, which part of it did you quote for this? https://www.investmentwiki.org/wiki/Economic_Outlook#:~:text=If%20investors%20see%20greater,odds%20of%20a%20recession.
In my opinion longer term corporate maturities are risker to hold if a certain company or industry is in trouble (might be caused by a recession) Therefore they should trade at steeper discounts compared to short term maturities of the same company. In treasuries the same effect does not exist as long as investors are certain that the U.S. government will pay it's debt. --PirateCaptain (talk) 09:53, 8 January 2023 (UTC)
@PirateCaptain Acording to the academics the same logic apply to the treasury market, longer term maturities should have more yield due to the risks premium, is not something I believe, is in what they based their models.
But the article I cited is not saying that, they talk about the yield curve inversion is a change in expectations. But they say there are 2 forces at play that contrarest each other.
1.When there are higher odds of recession, market expect less inflation risks and then monetary easing due to it. Inducing an inversion.
2.When there are higher odds of recession, investors appreciate liquidity, valuing more short term maturities due to this. This mean a inversion is actually good expectations for the economy.
Ultimately their point is that not all inversion points to a recession, like you are saying. That we need to understand the current enviroment and expectations to conclude if the markets are saying higher odds of a recession or not. I would say the 2 point is much less important that the first 1, and thats why historically when the inversion it is this prolong, like it has been in 2022, and levels that it has reached, it always end up in the same end result which is a recession in the future. Not the yield curve inversion causes it, but that the markets are pricing in that result.
When market expect economy weakness, they are known to flee to safe assest, especially the 10 year bond. If I am expecting significant rate cuts in the future due to this, owning a longer term bond can be very valuable, whith a higher yield and capital gains too with lower risks. Yes, they could be expecting inflation to come down signicantly even to allow the FED to cut rates, without a recession. But historically that is not a very likely outcome.
Also I dont think the market is pricing rate cuts due to the FED projections, the markets at the moment are pricing very different outcomes compare to the FED projections, especially pricing rate cuts already in 2023. Unfortunately, the FED credibility is still not good. I will probably rewrite the whole part so it is best understood. --MagaNH6 (talk) 21:26, 24 January 2023 (UTC)
User:MagaNH6 I think i understood the whole part well. My overall point is that we should not get into academic/theoretical but practical discussions and predictions. Your goal should not be citing an article and presenting different possible correlations but analyzing the weight and importance of correlations and present the most meaningful ones. This is different compared to Wikipedia at which the author of the Wikipedia article does not present his opinion and research and is just citing sources. In this case the argument is completely meaningless as there is a standing reverse repo facility. I think once we have a bit more time we could study the financial system a bit more to understand short term liqudity options better (See also Federal funds rate but not now as this is low prio. --PirateCaptain (talk) 23:18, 24 January 2023 (UTC)
Wrong Correlation
@Magaly Refering to the part above. Last sentence unclear. Overall this correlation does not exist (?) esp. since there is a reverse repo facility. --PirateCaptain (talk) 21:30, 4 January 2023 (UTC)
Overall Feedback
User:MagaNH6 I finally read the whole article. It is interesting and good overall. As of the data points i liked in particular Housing and New Orders as it's "hard data" showing significant deteriorations. My goal in the Wiki is eventually weighing different indicators to give our readers and investors (including me) an indication at which ones they should focus on most. It is also particularly important trying to figure out how deep a recession might be if there is a recession. To me it does not matter if GDP is 0% or -1% for 1 or 2 years. It starts to matter if a recession could be way steeper than currently believed. Eventually we should also habe sub-articles for most important indicators and use the Main Page as a "heatmap/tracking" page that gives Investors an very fast overview over the current state (regularly updated with new incoming data) while it also allows him to dive deeper via the linked sub-articles. --PirateCaptain (talk) 19:55, 24 January 2023 (UTC)
@PirateCaptain Since then there have been other hard data deteriorating like industrial production and retail sales. Liquidity is also pretty dire at the moment too, Money growth is negative for the first time ever, and QT is still going. Which I will probably be including in the article, I mentioned this in Linear.
But Hard data is more difficult to use as leading indicator, because usually it is lagging or coincident, or the lead is pretty short. You would need to use some soft data to support the idea initially.
Those indicators like yield curve and the LEI have been pretty good at predicting coming weakness in the economy, and were the first ones in 2022 to give the signal, thats why they should not be ignored as long as it makes sense. If we would have pay attention to these indicators in 2022, along with housing, we could have already be able to predict the weakness we are seeing now.
As for the severe of a possible recession, that's really difficult to predict, I have not even seen any economist making forecast, no specific ones, more than the forecast of a possible recession, or that it will be mild or not. It is always unknown how it will unfold, a recession could bring to light some weak spot that was not expected before, and if the central bank don't intervene on time it could make it more severe too. This will only become more clear as the data continue to come out, and the FED reaction to it. You always have the IMF or world bank forecast, but I dont think their models are that accurate, they only adjust when it is evident in the data, same as FED models.
Also, dont think GDP should be the only focus, GDP has been very volatile this lasts quarters due to inventory level and trade balances, as an example, data coming this thursday will show positive GDP, giving the impression the economy is stil very strong, but as Eric pointed out this will be due to inventory changes and trade, not the core economy being strong. https://twitter.com/EPBResearch/status/1617902574644137991
And the NBER dont clasify the recessions based on GDP, they instead use a basket of coincident indicators. Also important to point out that NBER dont call a recession until almost the very end, so it we could that we will be entering the recession at some point, but we wont know the official dates until much later this year or next year.
As I mentioned in the article, due to some numbers being so bad, I could think this could be more than a mild recession, and 0% growth. But I dont have tools or models to have high confidence in that opinion. --MagaNH6 (talk) 22:04, 24 January 2023 (UTC)