Everyone serious knew that a trade war would set a recession in motion, and that it would be a trade war the US would lose because of the directionality of the trade. The thought has always been that the president was using a high leverage negotiating strategy (see https://www.newyorker.com/news/news-desk/for-trump-diplomacy..., for example) to extract maximal concessions from PRC. But in the end, most of the people involving in mid and long range investment decisions thought that they could model him as a rational actor. What we are seeing is the investment community's realization this might not be true. You can look for many recent examples of shifts in investment activity (https://www.autoblog.com/2019/08/13/ford-gm-preparing-for-ec...).
And things will be worse because China is also heading into recession.
You know, you need sell all these products to somebody... And when US consumer stops buying new iPhones (or what ever) combined with recession then situation is going be really really tough.
So this will be worse that 2008. Much worse. Back in 2008, China was growing and helping to ease the recession. I do not think China's economy will grow during this cycle.
The Fed does not have the tools at its disposal that it did in 2008, they have been exhausted. The leadership on either side of the 2008 transition was much better at every level. Also, 2008 was a balance sheet depression that was more tractable to fix with monetary approaches.
What is happening, right now, is literally what happened in the Great Depression (with the concurrent reemergence of nationalism) and is what led to two back-to-back world wars https://www.dartmouth.edu/~dirwin/Eichengreen-IrwinJEH.pdf
2008 was bad because the collective banks of the US realized trillions in mortgages were money on the books that wasn't real and was never going to be real. The correction involved resetting said books and taking a few banks and a trillion dollars of US taxpayer money along the way.
What is the correction this time? All it would really be is a run on confidence in global financial markets. This has happened many, many times (and did happen in 2008 but it was a response to the insolvency of banks). It happened in 2000, it happened in 1993, it happened in 1980, etc.
If its just a correction in overvalued stocks, futures, and a contraction in loans and interest rates thats just a normal recession. We're due to have one, they happen all the time, and since there shouldn't be an influx of millions of displaced / homeless suddenly because this isn't the result of mass foreclosures on defaulting home loans it shouldn't be as disruptive this time. A lot of theoretical stock value gets wiped out, some people lose a lot of money, and then you get to start the cycle over again with rates back under 1% and the DOW down a a few thousand points from its current cresting highs.
It certainly won't be worse than 2008. 2008 was a financial crisis, core parts of the banking system were suspect, nobody knew who they could trust or who was solvent and worse nobody had a clue how to solve it for a dangerously long period of time.
The financial system is not in that same position this time and as for China, China's growth is largely kept to china itself and guarded jealously, China did little or nothing to ease the 2008 financial crisis for the west.
much worse than 2008 how? Global debt markets nearly collapsed and the single largest investment of american consumers crashed. You are making a really bold claim there and it looks like cheap catastrophizing.
I get your general sentiment. I'm just not sure why everyone keeps using the iPhone example. China's value-add part in the iPhone building process is about 1%. Having iPhone built with China's manufacturing efficiency is a lot more about Apple's bottom line (as demonstrated by its ability to lobby Trump to delay the tariffs until after the holiday sales) than China.
and that it would be a trade war the US would lose because of the directionality of the trade
I expect the US to lose the trade war simply because China will have the fortitude to outlast it, but why would the direction of trade favor China in the trade war? Shouldn't China have more to lose due to being a net exporter?
Yeah China definitely has more to lose. The US will win if it goes on for long enough, but it's like chopping off your hand in order to chop off another guy's arm. You're technically winning, but you're also inflicting enormous pain on yourself.
I also agree that in reality China has more ability to withstand pain and the US will blink first if it comes down to it.
Not that I'm confident or knowledgable enough to put money on any of this, but I believe it's assumed that the US has a privileged position in the world because of its relative stability (the US infrastructure wasn't ravaged during the World Wars) and has the world's Reserve Currency. If things were more "equatable" the US would have a less privileged position. That also means any losses will be difficult or impossible to get back.
Regardless of the man himself, historically the "deep state" (for lack of a better phrase) has so much inertia that radical changes (even if desired) by the White House end up moderated.
I think it's more correct to say that people are realizing that the old order under the president is gradually eroding and its moderating effects are weakening, which adds compounding risks (directly in the trade war stuff but also hidden ones that may be lurking as that erratic behavior starts more directly impacting all aspects of US policy).
My question is what is the point of the trade war. What does trump get from initiating/escalating it, or who is directing him to do it. Seems to be a net negative for all sectors of the economy.
I would have guessed that it's an attempt to make other US-friendly countries (Vietnam, Phillipines, India, etc) relatively more attractive as places to set up factories, to move that manufacturing base out of China and reduce their geopolitical influence.
It seems to be aimed at bringing about a wealth transfer from the investor and management classes to the working classes - if global supply chains are forced to shorten, the value of unskilled labour locally will go up even if the economy as a whole loses.
There are two things China has been doing for years that the WTO hasn't put an end to. The stated goals of the trade war include stopping those, which I can - as anything but a fan of anything to do with Trump - actually agree need to stop. I'm far from certain the scale and breadth of tariffs involved are necessary to stop them, but I agree those two practices need to stop.
One of those is outright IP theft. One especially egregious form of that is by OEM manufacturers in China getting specs from foreign firms in the US and Europe then manufacturing knockoffs under their own brand name on the same lines as the ones they're making under contract. China has agreed to curtail this in their industries. Another form of outright IP theft is paying industrial spies to go to other countries and leak government and corporate documents back to China in an elaborate espionage system.
Another practice which China has already announced it is ending (and may have ended without the trade war eventually anyway) is forcing foreign companies to form foreign/domestic partnerships with Chinese companies in exchange for access to manufacture or sell goods in China. Often this involved cross-licensing agreements for IP, meaning companies like AMD had to license their patents and copyrights to Chinese companies or but shut out of the market.
I see at least three things: it was his election promise, he preempts the imminent cyclic recession, he gains leverage on federal reserve and transnational corps. Agriculture problem seems to be preceding the trade war. For instance the soybeans sales to China are down because the protein content is down in the US soybeans.
You are making the error people always make with personalities like Trump.
Assertive alpha signaling and mammalian dominance gestures tell the parts of our brain that haven't changed since we were small tree rats that "this person knows what they're talking about, trust them, follow them." These parts of the brain are primitive and emotional and can easily override the rational mind. This is why charisma tends to beat substance even with audiences that really do know better.
Trump is assertiveness and dominance gestures and nothing else. There is no "there" there. He has no special understanding, no strategy other than "assert dominance" which all he knows how to do, and no plan.
Our only salvation in this is that many of the leaders of other nations are similarly empty.
I wonder how the investors will model Matteo Salvini’s actions once he grabs full power in Italy. Afaik he had proposed a practically speaking parallel currency to the Euro a couple of months ago, which if it were to become true would practically kill the European currency. Italy is also too big to fail for the UE and they have one of the largest debs in the developed world (compared to GDP), not exactly the same as Japan’s but pretty consistent nonetheless.
I think his thought is to force an economic downturn in 2019 and then release the tension going into 2020 to have a smooth economy once the elections are due
I doubt the trade war has anything to do with that. That United States has been growing above potential for a long time, and that Europe has been unable to grow for many years, and that China has exhausted it's growth engines, have very little to do with threats of tariffs on a few electronics and grains.
A very useful caveat from the insightful, and cautious, Howard Marks -
> In that regard, the Financial Times noted on June 1 that “the [yield curve] has ‘inverted’ before every US recession in 50 years.” (Note, however, that this is different from saying every inversion has been followed by a recession.)
Key recession indicator is flashing red. Unlike the stock market, which is both backward- and forward-looking, the bond market is myopically forward-looking.
When the yield between the 10-year and 2-year US treasury inverts, a recession is months away.
This chart, showing the difference between the yield (or spread), shows recessions in grey:
Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.
Point to consider is the effect of Quantitative Easing (QE). Here, the Fed buys long-term treasuries such as 10-years. This makes long-term rates appear lower than they would otherwise be.
The Fed only slightly unwound this policy, meaning it still holds most of the long-term bonds it bought to fix the 2008/2009 crisis.
The net effect is that the Fed could be triggering an early recession warning here.
Regardless, combining this leading indicator with others such as transportation weakness, manufacturing slowdowns, and other economies tipping into recession (despite the loosest central bank policies in modern memory) leads to only one conclusion.
Prepare for the inevitable recession. It's not different this time.
Edit: one way to play this as an investor is to buy long-term treasuries. The idea being that as interest rates fall, the value of these assets increases (bond prices move inversely with interest rates). Go as long out on the yield curve as you can. Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains. Or not. Instead, just continue to receive above-market rate interest payments. There's risk here because there's no way to know how low long-term rates will fall before reversing course (and eroding any capital gains you might have picked up).
I'd just like to point out that the yield curve inverted in 2018 [1] yet here we are.
> Prepare for the inevitable recession. It's not different this time.
This point is tautological. Of course there will eventually be a recession. No one can say when.
There are different factors in every cycle. The QE period is essentially unprecedented. The rise of tech stocks in the last 20 years is a once-in-a-century type structural change in the economy.
It's fair to say the market is currently closer to the top than the bottom and above the historical mean and a reversion to mean is inevitable but whether the current mode goes on for days, months or even years is anyone's guess.
> I'd just like to point out that the yield curve inverted in 2018 [1] yet here we are.
My understanding is that this inversion (the 2 year/10 year) is generally regarded as the most reliable indicator of recession. The media has really latched onto the yield curve this time around though, so any inversions have been getting reported as the indicator that a recession will start soon, which isn't really right.
For example, the article you linked from December 2018 was about 3 year and 5 year yields inverting, which tends to happen about 2.5-3 years ahead of a recession. Then the 3 month/10 year spread inverted at the end of May 2019, which tends to predate recession by about 12-18 months. Now the 2 year 10 year is inverted, which tends to happen about 18-24 months before a recession.
So what's happening is a pretty good indication that a recession is likely to occur closer and closer to the present, with each inversion providing another data point about the timeframe. It's just that the media's overhyping of every individual inversion is giving you the sense that these inversions don't tell us anything particularly interesting, when history shows the opposite to be true.
> I'd just like to point out that the yield curve inverted in 2018 [1] yet here we are.
As pointed out in the article you linked, what happened in late 2018 was a small section (3-5 year treasuries) inverted. When people talk about yield curve being a harbinger of recession, they're usually talking about the 2-10 year spread, which is what the parent post referred to.
You may argue "things are different this time", but you shouldn't be comparing apples to oranges.
Re: the yield curve inverted in 2018 yet here we are.
There are somewhat different ways to measure it, and by some metrics, it merely "touched" the zero line instead of went below. Bloomberg may have been using a dramatic flair.
Also, when it does drop below zero, the actual recession was roughly 12 to 18 months later. Thus, that occurrence, even if interpreted as an inversion, is not (yet) inconsistent with past patterns.
A recession will follow in 12-24 months, based on my understanding of the bond yield curve and close following of it in recent years. We can check in mid 2020 and see if that timeline holds.
You don't have a time machine. Economic indicators work every time - until they don't.
>Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.
Everything since the last recession is, on some timescale, followed by a recession. So, technically, you'll be correct. But so were the people saying this in each of the years since 2008. If you don't have an upper bound on this, it's unfalsifiable and, when taken as advice, can't be used for any concrete actions.
If investors were as certain as you, a recession would be happening now.
The main issue here is that events like these become a self fulfilling prophecy. Since 100% of inverting yield curves have resulted in recessions in the past, stock market investors will start behaving as if an recession is inevitable which in turn starts the recession.
The only way this would not turn into recession is if the tariff's are withdrawn or fed lowers the rate even further or with quantitative easing. Any of these would prolong the recession
"Past Performance Is Not Indicative Of Future Results".
I am not saying a recession ISN'T imminent - but to declare affirmatively due to a technical indicator that one IS in an environment which has differences from the past is equally egregious. This yield inversion is based on sentiment, not fundamentals (yet).
Also, suggesting folks buy long-term treasuries is literally following what the market is doing right now. Suppose the trade deal is fixed tomorrow and governments add surprise stimulus in the coming months. (by the way, you have a crystal ball as much as I do) If recession fears go away in a few months, those long term treasuries would lose value on the principal and you could very much experience capital losses (if you sell).
Also:
> Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains.
Are you suggesting you can time the market like this? There is abundant literature which says people can't. How are you able to?
Yeah, my gut is also telling me, that governments would let half the population starve then let a recession happen.. But if it hits. It will be huge... We might also hit incredible high inflation... Making cash worthless..
Do you really believe that's going to happen? The "cold war" with China is heating up.
>governments add surprise stimulus in the coming months
What happens to interest rates?
>If recession fears go away in a few months
What do you mean by "recession fears"? People are examining the data and seeing the global economy slowing down; it isn't arbitrary, it's data driven, with the caveat that no indicator is perfect.
>*those long term treasuries would lose value on the principal and you could very much experience capital losses (if you sell).
Yes, investing has risk. But I find it odd you criticize using simple indicators, then state that if recession fears subside, treasuries will lose value. The value of bonds fluctuates with interest rates, not "recession fears". We can very easily have a bull market with falling rates. It's happened before.
Those are some great points you have raised, I just want to add:
When actors are aware of the risks and exposures, they can sometimes inadvertently move the goal post further into the future due to their actions. In this case, the movements made by Central Banks and others may have led to the longest continuous economic growth in US history.
I would argue that the government's decision to delay the $150b tarifs was in part to delay the upcoming recession to help support retail & manufacturing numbers in the end of year sales.
I agree there is an inevitable recession, it is now a matter of how low it will get, how quick it can bounce back, its ramifications to the world, how it may impact your life and the strategy you intend to have to hedge the risks.
> When the yield between the 10-year and 2-year US treasury inverts, a recession is months away.
> Prepare for the inevitable recession. It's not different this time.
Just once can someone put their money where their mouth is? If you are going to say that with such certainty, I expect that you have pulled your money from the market. Perhaps you have even bought a few puts.
I think you are right but it won't really hit until 2020 when the administration changes. One thing really helping drive this market is that indexes are driven by a few huge mammoth companies. Additionally, the tax law changes let them bring home tens of billions that they spent on buybacks to drive the price even higher. That was a one time event. Interest rates are already too low and the Fed still has too much paper. There isn't nearly as much powder in the gun this time around. I think this time will be worse than 2008 but time will tell.
> Point to consider is the effect of Quantitative Easing (QE). Here, the Fed buys long-term treasuries such as 10-years. This makes long-term rates appear lower than they would otherwise be.
It's not just that. The reason yield curve inversions tend to imply recessions is that it's an indication people are taking their money out of stocks and putting it into long-term treasuries. But China just announced a round of currency devaluation. With what's happening in Hong Kong on top of that, it makes people want to dump assets denominated in Chinese currency in favor of ones (like treasuries) denominated in other currencies like USD and GBP. So you get low supply and high demand and what happens? Low long-term bond yields.
Consider that recessions are typically caused by something. A decade ago it was the housing crisis, in the 1990s it was the dot com bust, in the 1980s it was savings and loan, in the 1970s it was the oil crisis, etc.
So what's the cause supposed to be? It can't be a trade war with China. Some tariffs on a few hundred billion in imports is tens of billions of dollars, which is a rounding error against a $20T economy.
There is also too much debt sloshing around which something has to be done about at some point (probably printing a lot of money), but that's been true for years and nothing about it is likely to change overnight one way or the other.
So what's the thing that's supposed to be causing this? Because without that it looks a lot like a misleading indicator.
QE is unprecedented. If you look at the absolute yields, we're talking about rates below inflation (1.8%). It's an inversion but the magnitude is so low it's hard to compare it to past inversions.
Equity valuations are pretty much in line with earnings with the S&P 500 index as a whole trading around 20x earnings. Considering how low the risk free rate is (US treasuries), that's not a booming valuation and is probably undervalued if interest rates stay this low considering most of these companies return at least 10% on tangible equity.
Unemployment is low right now, but so are wages and so is inflation so it's not like we're booming there either.
Regarding precedent: the Bank of Japan began QE in 2001 and has expanded it beyond sovereign bonds to also buy equities and ETF’s. Could the day come when the Fed bids up $BYND?
10y/2y inverted also in 1998, but recession only came in 2001. so 3years later.... it can be long time until recession ;)
note that the 10y/3m already inverted though. its more reliable....
Also worth noting that if you go long, and there is a stimulus required, you may be in trouble as rates are low enough that you can lose money to inflation. No free lunch.
If a stimulus is required (which it definitely will be when the next downturn hits, unless we want the worst depression in history), we'll be begging for inflation. But there will be massive deleveraging and the resulting deflation to compete with. All the while, there will be fools crying for austerity, and business men thinking a sovereign government with the power to issue currency should be run like a business (i.e. tightening the belt during a downturn).
At some point I have to better understand the weird relationship between bonds and bond funds. If rates are low then bonds are a low performing investment, but apparently bond funds go up.
I'm surprised that everyone blindly cites the inverted yield curve as a recession indicator without considering the "why". Seriously, if you were to ask ten people why an inverted curve predicts recession, you'd get ten completely different answers.
I personally don't think this is necessarily the inversion that is going to be predictive of a recession because the inversion is occurring at the long end (the 10/30 years spiking as opposed to the 3 month/2 year selling off). I think the short end is far more important than the long end because the short end tells you about monetary conditions in the economy. If the short end yields start moving up, that means that it's going to become more expensive to borrow money so spending and capex contracts, which is what can bring on a recession. Even that depends on the degree to which monetary conditions deteriorate.
Why are long bonds spiking? Because other central banks around the world are even more dovish than the US Fed, so money that is looking for long-term safe haven investments is coming aggressively into US long bonds.
Three month commercial paper rates represent the cost at which businesses are currently borrowing for short-term expenses on the open market. That cost is going down, too. I take that to mean monetary conditions are very good in the sense that there is no shortage of money floating around the economy looking for a return. Without some major fundamental change in economic conditions I don't see how equities can be expected to drop a whole lot from here. I think this is a blow off the top for rates that is going to be short-lived, especially if other central banks start tightening policy which nobody seems to consider a possibility. But if inflation starts creeping up, then they will likely start raising rates or keeping them where they are. Ironically, when central banks raise rates that is usually an extremely bearish indicator. It's a bit puzzling to me that everyone seems convinced that lower rates are bearish.
Also, I can't think of a time when literally everyone focused on a single indicator at the same time, used said indicator as a predictive tool, and were proven correct. That's just not how markets work. People get scared and excited at the worst times tactically.
I agree. For the two recessions I’ve lived through, we didn’t arrive at them with everyone well aware it was going to happen. They snuck up and took the country by surprise. The tech bubble burst, and the real estate subprime bubble burst.
We may go into a slump because everyone is expecting a splump to happen because it’s been 10 or so years of a bull run. But I don’t see a full-on recession without a large bubble bursting somewhere in the economy, causing a panic.
Of the two recessions you lived through, both were expected. Many people decried the tech boom. Many people thought there were warning signs pre-2008. The problem was that nobody knew the depth of the 2008 recession.
The question is, what is the bubble? I'd argue the entire stock market is the bubble right now, with boomers throwing everything they have into the market to get some of that free money before they retire. Once they start pulling back it's going to be a sad day. Right now US household "wealth" is sitting at >500% of GDP. That's not sustainable.
This is what I've been seeing, too. If everyone is expecting a recession, then the recession gets "priced into" the current valuations. The big trouble comes if the expectations/pricings are off in some sector.
For one thing, inverted yield curves are bad for banks and for investors who do the same thing as banks.
That is, the main thing banks do is borrow short-term (demand deposits, 2-year CD) and lend long-term (5 year car loan, 30 year fixed mortgage.) Conventionally long-term interest rates are more than short-term interest rates so you can make money this way.
With an inverted yield curve you can't make money that way.
Since banks are important to the flow of capital in the economy, something that hurts the banks can hurt the wider economy.
I remember the dot-com crash of 2001 and seeing companies close so fast, they didn’t their employees a final paychecks; I remember one day, after the dot-com collapse a position I was qualified for got filled within three hours.
As someone who has seen this before, things are looking ominous: The stock market drop of late 2018 reminded me of the stock market drop we had in 2000, about a year before everything fell apart. The yield curve inversion doesn’t look good, nor does the problems with the German economy. Uber posting a multi-billion dollar loss and Tesla having a hard time getting income remind me of the very same issues during the dot-com bubble, where highly valued companies weren’t actually earning money. Moviepass’s debacle reminds me of Webvan; a company which tried to get VC by having a business model which was hemorrhaging money.
I hope I am wrong, but I predict a tech sector crash in late 2019 or early-to-mid 2020.
First of all predicting a crash is a fool’s errand. It as much about emotions as it is about fundamentals. There’s a perfectly valid explanation for the valuation of Startups and the availability of capital for startups in the last 9 or so years. After 2008 crash, markets were stagnant until 2012. At the same time capital was being eased by govts worldwide. This capital has to flow somewhere. Tech startups were ripe at this crucial juncture for investments - we had seen enough successes with the likes of Facebook, Amazon and Google - and tech had a major point in its favour in terms of being able to scale easily. Now, in hindsight (personally i never thought it could work as claimed) this is emphatically not true for the sharing economy.
Plenty of articles have been written about it 2-3 years ago. We all have short term memory and are forgetting this. Every major tech publication predicted a crash in the startup economy. It never came about.
None of this related to the macro environment we are at. Trade wars wreak havoc on the sentiment of business than the actual supply chains themselves. Which is what seems to be happening now.
I am pretty sure recessions will at least be good for ridesharing companies, since they will get more drivers, which will lower driver pay. Since they can treat the prices consumers are willing to pay as sticky, this could help them solve profitability issues. I am not sure how much a recession would affect demand or consumers' willingness to spend on ridesharing though, but I think overall a recession is actually good for ridesharing
For Airbnb, it's a bit harder to say. More people will probably try to airbnb their places out, which will bring average costs down but increase the supply a lot. Demand may also increase as people unfortunately may turn to short term housing due to being in financially precarious situations. Since it's theorized that the American dollar will strengthen in the recession, this could also boost Airbnb's presence in international markets
Wework will probably gain too. More unemployment probably means more people trying to work out of weworks in startups or as freelancers. For the buildings they rent from non-executives, they could see a lower rent which would also help profitability.
So in summary I think the sharing economy is actually going to do ok. What do people do when they're unemployed? They try to make ends meet, and that means participating in the sharing economy
The reason why tech has done so well in the past 10 years is partially due to luck. While investment dollars continued to pile up post-2008, tech was one industry who had recently shown really impressive returns. As such, that's where the dollars flowed.
My concern is what happens when a few of those unicorns fail (e.g. Uber)? If sentiment shifts enough, you might see tech suddenly become the ugly duckling. Companies that in reality are doing reasonably well will be painted with the same brush.
When people start to see Uber failing and other unicorns struggling, it just become a self-fulfilling prophecy - "I knew a recession was coming". People get risk adverse, company's stop hiring and it spreads to the economy as a whole.
The bond yield curve inversion mentioned in the article has led every recession in the last 70 years by 12-24 months. It's an indicator, because we don't know the future, but it's historically accurate to a T. On some level it is self fulfilling but the evidence of past crashes is there too.
Auto loan defaults are at a high, as is student and household debt (higher than 2007). Those auto loans are often bundled almost exactly like junk mortgages in 2007 leading to a similar investment risk. More americans live paycheck to paycheck than ever before possibly increasing the number needing support should unemployment jump back up to 12%, where it was when Obama took over in 2009. It won't be as bad but the federal government under Trump/GOP has cut taxes and drastically pumped up the deficit putting us in a worse position to weather a recession of any length. Cuts to social programs will also extend a recession or at least increase it's effects as people will still need food and affordable housing. The number on social security will increase while less will be employed to pay in and as SS was used as a piggy bank for GOP spending decades ago that system could go from failing in a few decades to gone.
It could be 6-12 months of job losses and stock market falls like the .com bubble but it could quickly complicate as the government may be slow or unable to respond in traditional ways due to lack of funding, lack of staffing (an existing issue in the current admin), lack of experience of the current staffing, and continued conservative/GOP attacks on social programs and minority groups most likely to be hit hard by any recession.
It's like Jenga. In 2007 a core lower block was pulled and a lot of pieces went with it but we had the leverage federally to hold some in place or put back others like auto manufacturers. This time, the piece may be much higher up but automakers are already suffering under tariffs and the federal government won't have the funding capacity or push by the GOP led government to react in time and, like midwest farmers, that could be the end of an era for some industries.
I'm not sure whether to feel vindicated to see someone else echoing my own internal thoughts, or to feel nauseous about reliving those years. I was fortunate enough to have been at a company that was making money, but I still remember growing from 500 employees to 4000 or so in 2 years...and then dropping back down to 1500 two years later. We bought a small software company for the talent, and 3 months later was told to layoff the entire team.
Many great colleagues left tech at that point to become Realtors, landscapers, accountants. This is not to say that we are destined to relive exactly the same fate, but it's good to remember that rapid change is always a possibility.
Most my friends went back to grad school and retrained for other professions, too, like attorneys and some optometrists.
I think what's a bigger risk these days is just how much tech talent if off-shored to other parts of the world, even at fast growing startups. Serious risk for engineers, likely in the Valley, where I don't know if you remember all of the billboards going from having ads on them, to pretty much being blank for several years.
I think the difference this time around is that the largest tech companies (Apple, Google, Facebook, Microsoft, to a lesser extent Amazon) are generating healthy profits. So while there is likely an issue with a lot of the unprofitable unicorns, the industry as a whole won't collapse.
If anyone has done a comparison of the size of profitless companies in the (tech) market, today and before the dot-com crash, that would be incredibly valuable.
My gut feeling is that they constituted a larger portion of the market back then, but I've never seen a direct comparison.
However, the collapse of unprofitable unicorns will propagate across tech. Reduced investments in start-ups and tech companies with risky ventures translates to increased labor supply, which means downward pressure on compensation across the industry (even at the healthy big-5 tech).
Housing prices near tech hubs will also pop. Here in Seattle, housing prices are propped up by tech-couple mortgages with high stock-based compensation - which will suffer even at companies with healthy fundamentals. SFO housing is further inflated by IPO speculation.
It seems like one of the key characteristics in a crash is a domino effect. Whereby companies' financials that previously looked solid are suddenly cast as untenable in a new economic light. Usually because of an underappreciated correlation with a substantially removed market.
E.g. most recently, banks and leveraged junk mortgages
As you noted though, the biggest tech companies today aren't really externally dependent. They generate substantial cash flow, have relatively modest debt loads (better than heavier industry!), and don't have easy substitutes.
The strongest case I could make for a tech crash: retail activity substantially slows and/or freezes (Apple & Amazon), advertising follows suit as advertising budgets plummet (Google & Facebook)
But it's hard to see that happening with any rapidity in the US with unemployment where it is.
(I can't see a strategic corporate debt crisis as long as the Fed keeps rates low?)
There's lots of relationships whereby the fortunes of one company can be effected by another. For example Tesla and Uber are total dogs snd I could see them imploding. Are there smaller startups that sell services to Tesla and Uber in a significant enough way that they could get hurt too?
Another relationship that has been mentioned before is that of mobile games and google and facebook advertising services. A recession and/or anti-lootbox legislation could harm mobile games, which would reduce ad spend on platforms like facebook/google.
While they will survive, there's a ton more people in the rest of tech, and if they don't have jobs and are desperate that's going to change the lives of Google employees.
During the dot com bust that was part of the problem. As the startups started dying, it turned out that the big companies had started to rely on them for their profitability.
Well, two of those companies survive largely on the basis of advertising, which is in turn financed through the Silicon Valley Venture Capital Machine. If that dried up, it would be Bad News.
The hyper growth of the dot-com crash was way different than today. Are there companies that are outrageously unprofitable today and over-valued? Yes. But it's nowhere near the dot-com hysteria. I doubt a tech sector 'crash' is going to occur but I wouldn't be surprised if a correction happens.
I'm not 100% sure this is true, there are a few big high profile companies that will need to substantially restructure to achieve profitability, however there are loads of companies with lots of customers and growth that can be turned into profit.
I would actually argue that this recession is hugely policy based and we should worry that The Donald in charge of these systems will lead to more instability. It isn't tech being over valued that will bring the system down.
I'm not sure software will stop eating the world in a recession, the almost religious belief that more software will make your business better is something everyone has bought into. There might not be any other jobs however.
"Tech" is another way of saying "risk" in the eyes of investors. When the yield curve inverts, it means investors - as a herd - are turning away from risk in the short term. Tech being a manifestation of risk is going to take a short term hit in the form of more difficult capital raising.
It's probably too early to roll this out, but for those who didn't live through 2008, I present Sequoia Capital's "RIP Good Times" deck from that period:
For me that Deck basically says what I think will happen now and what happened in 2008. Some people will lose money, governments will panic, people with normal jobs will have a harder and harder time and people in IT will get richer as if there is no recession even happening.
It will also push automation to happen much faster meaning an even bigger underclass of people.
And finally you will still be able to raise shedloads of money (if your business is good) but it will cost you more of your business. Poor you.
I heard a few key thinkers predicting a larger recession due to our inability of getting more energy out.
GDP and energy seemed to be correlated so far, as if our growth is directly or indirectly fueled by the cheap labor of machines and automation.
Gas and electricity production reached a peak which can only go down in a finite world. With a constrained energy supply, GDP should go down. At least that's what happened so far since the 1800s.
Germany and UK entered recession the last quarter.
That model seems incomplete given the lack of efficiency as a variable. Home energy usage went down in spite of growth in electronics and power mainly due to better lighting efficiency alone. While it can help it doesn't drive all.
One common mistake in economic growth modeling is thinking only in terms of bulk. We are far richer than bronze age herdsmen but very few of us have tens of thousands of livestock.
I don't think it's a tech crash at all. Sure, we've got companies being propped up by VCs that are doomed to fail (Uber, etc), but the fundamentals of other big tech companies are sound. They have customers, they sell products, and demand for some of those (advertising and support services) are and will be perpetual. The signals for the downturn don't really seem to have anything to do with tech in particular.
In a crash, I'd expect the VC money to become more cautious... for a bit. But that can be a good thing, too, because it means you aren't competing with garbage companies that are always operating at a loss.
Question: While I'm sure economists have been studying this effect for decades, or maybe even way longer for all I know, it seems like this metric has been popularized as the key thing everyone looks at just in the last decade -- after the last recession that we had.
Given the popularization, any chance of an increased observer effect? In either direction, I mean, positive or negative.
That's absolutely not the case The Yield Curve is now talked about on nightly news shows and it used to be only known about by economists and people in finance.
It's completely legitimate to question whether this increase in publicity for this one metric might be causing it to be less useful.
Something can both be a historical pattern and popularized as something we pay attention to. There are also historical patterns that many people don't talk about frequently or pay attention to.
Aside from that, I'm not sure how you're so confident that there is no observer effect. Markets, particularly in the short term, are influenced by human perception and emotion. It is plausible to me that, in particular, the stock market could dip because everyone observes the yield curve inversion, gets nervous about a coming recession, and then moves money out of the market in fear of it. This could happen even if a recession does not, and I don't find it impossible that such a move could help contribute to an actual recession. Again, human perception is an enormous component of markets, and perception is influenced by emotion.
That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up. People who buy securities for the purpose of re-selling, rather than holding, bid prices up, based not on fundamental valuation but on the thought that it will become more popular.
Stock markets aren't the same as the economy as a whole, but stock market bubbles boost the economy when irrational exuberance increases the total apparent wealth. And when enough people decide that it's peaking, it does, and the same process works in reverse, causing a recession.
So yeah, it's a self-fulfilling prophecy, but that doesn't mean there's a way to avoid it. The market prices are already high; they must eventually revert to something closer to a true valuation. But since that time is determined almost entirely by consensus, nobody knows when. Indicators like this one are a sign that people are changing their minds, but it's been that way for a while. They're just indicators of public perception, and the public takes them into account, too.
I don't think this is strictly true, though. As you said, "Stock markets aren't the same as the economy as a whole". The financial part of our current economy seems to have an outsized perception/participation rate. If the rules of the game changed to reduce the appeal of financial activity, there might be less second- and third-order "betting on bets (on bets)" and less of the self-fulfilling prophecy you're talking about.
This may not be feasible in the world we live in: it would take a very different political climate, and of course there would be knock-on effects for society. But imagine that we turned our income tax rationale inside-out and policy shifted so that wages had very very low rates and investment income very high rates. Note I'm not advocating this, just offering it as a "what if".
> That's partly because the market boom is itself a self-fulfilling prophecy. Stock markets go up because other people think they're going up.
I'm really curious how the index funds will behave in the upcoming recession, afaik that was one of their main mantras and selling points, so to speak, i.e. that the market only goes up (or a certain part of the market, the most important part of the market) and that you'd be a fool not riding the wave by investing in said index funds which were in turn investing in that part of the market "assured" to always go up.
In other words, what will people do when they'll see their index funds go down 10 or 20% yoy? Will they take their money out of said index funds? Will they wait for the next uptick?
You could also reverse that and say "all it takes to cause a boom is to convince everyone there's a boom". People think the markets are rational and maybe over decades they are but in the short term half of it is sheer psychology and herd mentality.
Gross exports represent 46% of EU GDP, up from 39% in 2008.
For China, gross exports are 20% of GDP, down from 33% in 2008.
For the US, gross exports are 12% of GDP, the same as in 2008.
A trade war is a nightmare for the EU. It's amazing they've stayed above water this long with 46% of GDP dependent on exports. They'll get economically thrashed if it keeps getting worse.
There are articles all over the internet stating matter-of-factly that the US-China trade war has had a hand in the German recession. Why is that the case? At first blush it seems like newly un-fulfilled demand in the US and newly available supply/capacity in China would be a boon for other countries. What am I missing?
Germany exports mostly industrial goods, such as machines (for manufacturing). As such, China is a far more important market than the US. The overlap of things both China and Germany manufacture is relatively small.
Or, in economists' terms: Germany's and China's goods are complementary more than competitive.
What would you expect? Brexit fears and almost every EU government banning ICE vehicles ten years from now. Good luck selling those Volkswagens. Add to that Trump's trade war with China. The EU is probably next.
Readit News
You know, you need sell all these products to somebody... And when US consumer stops buying new iPhones (or what ever) combined with recession then situation is going be really really tough.
So this will be worse that 2008. Much worse. Back in 2008, China was growing and helping to ease the recession. I do not think China's economy will grow during this cycle.
What is happening, right now, is literally what happened in the Great Depression (with the concurrent reemergence of nationalism) and is what led to two back-to-back world wars https://www.dartmouth.edu/~dirwin/Eichengreen-IrwinJEH.pdf
2008 was bad because the collective banks of the US realized trillions in mortgages were money on the books that wasn't real and was never going to be real. The correction involved resetting said books and taking a few banks and a trillion dollars of US taxpayer money along the way.
What is the correction this time? All it would really be is a run on confidence in global financial markets. This has happened many, many times (and did happen in 2008 but it was a response to the insolvency of banks). It happened in 2000, it happened in 1993, it happened in 1980, etc.
If its just a correction in overvalued stocks, futures, and a contraction in loans and interest rates thats just a normal recession. We're due to have one, they happen all the time, and since there shouldn't be an influx of millions of displaced / homeless suddenly because this isn't the result of mass foreclosures on defaulting home loans it shouldn't be as disruptive this time. A lot of theoretical stock value gets wiped out, some people lose a lot of money, and then you get to start the cycle over again with rates back under 1% and the DOW down a a few thousand points from its current cresting highs.
The financial system is not in that same position this time and as for China, China's growth is largely kept to china itself and guarded jealously, China did little or nothing to ease the 2008 financial crisis for the west.
It can only get worse if there is something that was NOT present in 2008 will manifest itself.
I've heard that the US mostly sells stuff to itself, i.e., trade is a relatively small component of its GDP. I haven't looked into it, yet, though.
Took them a while to see what everyone else can see in plain daylight...
Automotive, luxury, finance, etc... None of these benefit from recessions.
These people need to sell you, that you will have a job tomorrow.
I expect the US to lose the trade war simply because China will have the fortitude to outlast it, but why would the direction of trade favor China in the trade war? Shouldn't China have more to lose due to being a net exporter?
I also agree that in reality China has more ability to withstand pain and the US will blink first if it comes down to it.
That's more optimistic than 'let's assume spherical cow in vacuum'
Whose thought? The people who didn't know that trump was an incompetent nutjob?
I think it's more correct to say that people are realizing that the old order under the president is gradually eroding and its moderating effects are weakening, which adds compounding risks (directly in the trade war stuff but also hidden ones that may be lurking as that erratic behavior starts more directly impacting all aspects of US policy).
Dead Comment
Kudos from his base, enhances his "tough guy" image, helps his 2020 campaign.
One of those is outright IP theft. One especially egregious form of that is by OEM manufacturers in China getting specs from foreign firms in the US and Europe then manufacturing knockoffs under their own brand name on the same lines as the ones they're making under contract. China has agreed to curtail this in their industries. Another form of outright IP theft is paying industrial spies to go to other countries and leak government and corporate documents back to China in an elaborate espionage system.
Another practice which China has already announced it is ending (and may have ended without the trade war eventually anyway) is forcing foreign companies to form foreign/domestic partnerships with Chinese companies in exchange for access to manufacture or sell goods in China. Often this involved cross-licensing agreements for IP, meaning companies like AMD had to license their patents and copyrights to Chinese companies or but shut out of the market.
Assertive alpha signaling and mammalian dominance gestures tell the parts of our brain that haven't changed since we were small tree rats that "this person knows what they're talking about, trust them, follow them." These parts of the brain are primitive and emotional and can easily override the rational mind. This is why charisma tends to beat substance even with audiences that really do know better.
Trump is assertiveness and dominance gestures and nothing else. There is no "there" there. He has no special understanding, no strategy other than "assert dominance" which all he knows how to do, and no plan.
Our only salvation in this is that many of the leaders of other nations are similarly empty.
Deleted Comment
well, not just the US. China also loses, the whole world economy basically goes down too.
As Rick Wilson says... "Everything Trump Touches Dies".
> In that regard, the Financial Times noted on June 1 that “the [yield curve] has ‘inverted’ before every US recession in 50 years.” (Note, however, that this is different from saying every inversion has been followed by a recession.)
https://www.oaktreecapital.com/docs/default-source/memos/thi...
"It only rains on my birthday. It's raining today - it must be my birthday."
At least I'm not aware of any inversions of the 10-2 bond yield curve in the last 50 years that was not followed by a recession, however minor.
When the yield between the 10-year and 2-year US treasury inverts, a recession is months away.
This chart, showing the difference between the yield (or spread), shows recessions in grey:
https://journal.firsttuesday.us/using-the-yield-spread-to-fo...
Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.
Point to consider is the effect of Quantitative Easing (QE). Here, the Fed buys long-term treasuries such as 10-years. This makes long-term rates appear lower than they would otherwise be.
The Fed only slightly unwound this policy, meaning it still holds most of the long-term bonds it bought to fix the 2008/2009 crisis.
The net effect is that the Fed could be triggering an early recession warning here.
Regardless, combining this leading indicator with others such as transportation weakness, manufacturing slowdowns, and other economies tipping into recession (despite the loosest central bank policies in modern memory) leads to only one conclusion.
Prepare for the inevitable recession. It's not different this time.
Edit: one way to play this as an investor is to buy long-term treasuries. The idea being that as interest rates fall, the value of these assets increases (bond prices move inversely with interest rates). Go as long out on the yield curve as you can. Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains. Or not. Instead, just continue to receive above-market rate interest payments. There's risk here because there's no way to know how low long-term rates will fall before reversing course (and eroding any capital gains you might have picked up).
> Prepare for the inevitable recession. It's not different this time.
This point is tautological. Of course there will eventually be a recession. No one can say when.
There are different factors in every cycle. The QE period is essentially unprecedented. The rise of tech stocks in the last 20 years is a once-in-a-century type structural change in the economy.
It's fair to say the market is currently closer to the top than the bottom and above the historical mean and a reversion to mean is inevitable but whether the current mode goes on for days, months or even years is anyone's guess.
[1] https://www.bloomberg.com/opinion/articles/2018-12-03/u-s-yi...
My understanding is that this inversion (the 2 year/10 year) is generally regarded as the most reliable indicator of recession. The media has really latched onto the yield curve this time around though, so any inversions have been getting reported as the indicator that a recession will start soon, which isn't really right.
For example, the article you linked from December 2018 was about 3 year and 5 year yields inverting, which tends to happen about 2.5-3 years ahead of a recession. Then the 3 month/10 year spread inverted at the end of May 2019, which tends to predate recession by about 12-18 months. Now the 2 year 10 year is inverted, which tends to happen about 18-24 months before a recession.
So what's happening is a pretty good indication that a recession is likely to occur closer and closer to the present, with each inversion providing another data point about the timeframe. It's just that the media's overhyping of every individual inversion is giving you the sense that these inversions don't tell us anything particularly interesting, when history shows the opposite to be true.
As pointed out in the article you linked, what happened in late 2018 was a small section (3-5 year treasuries) inverted. When people talk about yield curve being a harbinger of recession, they're usually talking about the 2-10 year spread, which is what the parent post referred to.
You may argue "things are different this time", but you shouldn't be comparing apples to oranges.
There are somewhat different ways to measure it, and by some metrics, it merely "touched" the zero line instead of went below. Bloomberg may have been using a dramatic flair.
Also, when it does drop below zero, the actual recession was roughly 12 to 18 months later. Thus, that occurrence, even if interpreted as an inversion, is not (yet) inconsistent with past patterns.
>Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.
Everything since the last recession is, on some timescale, followed by a recession. So, technically, you'll be correct. But so were the people saying this in each of the years since 2008. If you don't have an upper bound on this, it's unfalsifiable and, when taken as advice, can't be used for any concrete actions.
If investors were as certain as you, a recession would be happening now.
The only way this would not turn into recession is if the tariff's are withdrawn or fed lowers the rate even further or with quantitative easing. Any of these would prolong the recession
I am not saying a recession ISN'T imminent - but to declare affirmatively due to a technical indicator that one IS in an environment which has differences from the past is equally egregious. This yield inversion is based on sentiment, not fundamentals (yet).
Also, suggesting folks buy long-term treasuries is literally following what the market is doing right now. Suppose the trade deal is fixed tomorrow and governments add surprise stimulus in the coming months. (by the way, you have a crystal ball as much as I do) If recession fears go away in a few months, those long term treasuries would lose value on the principal and you could very much experience capital losses (if you sell).
Also:
> Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains.
Are you suggesting you can time the market like this? There is abundant literature which says people can't. How are you able to?
Do you really believe that's going to happen? The "cold war" with China is heating up.
>governments add surprise stimulus in the coming months
What happens to interest rates?
>If recession fears go away in a few months
What do you mean by "recession fears"? People are examining the data and seeing the global economy slowing down; it isn't arbitrary, it's data driven, with the caveat that no indicator is perfect.
>*those long term treasuries would lose value on the principal and you could very much experience capital losses (if you sell).
Yes, investing has risk. But I find it odd you criticize using simple indicators, then state that if recession fears subside, treasuries will lose value. The value of bonds fluctuates with interest rates, not "recession fears". We can very easily have a bull market with falling rates. It's happened before.
When actors are aware of the risks and exposures, they can sometimes inadvertently move the goal post further into the future due to their actions. In this case, the movements made by Central Banks and others may have led to the longest continuous economic growth in US history.
I would argue that the government's decision to delay the $150b tarifs was in part to delay the upcoming recession to help support retail & manufacturing numbers in the end of year sales.
I agree there is an inevitable recession, it is now a matter of how low it will get, how quick it can bounce back, its ramifications to the world, how it may impact your life and the strategy you intend to have to hedge the risks.
> Prepare for the inevitable recession. It's not different this time.
Just once can someone put their money where their mouth is? If you are going to say that with such certainty, I expect that you have pulled your money from the market. Perhaps you have even bought a few puts.
If by "months" you mean nearly two years.
"The last inversion of this part of the yield curve was in December 2005, two years before a recession brought on by the financial crisis hit."
"A recession occurs, on average, 22 months following such an inversion, according to Credit Suisse."
https://www.cnbc.com/2019/08/13/us-bonds-yield-curve-at-flat...
It's not just that. The reason yield curve inversions tend to imply recessions is that it's an indication people are taking their money out of stocks and putting it into long-term treasuries. But China just announced a round of currency devaluation. With what's happening in Hong Kong on top of that, it makes people want to dump assets denominated in Chinese currency in favor of ones (like treasuries) denominated in other currencies like USD and GBP. So you get low supply and high demand and what happens? Low long-term bond yields.
Consider that recessions are typically caused by something. A decade ago it was the housing crisis, in the 1990s it was the dot com bust, in the 1980s it was savings and loan, in the 1970s it was the oil crisis, etc.
So what's the cause supposed to be? It can't be a trade war with China. Some tariffs on a few hundred billion in imports is tens of billions of dollars, which is a rounding error against a $20T economy.
There is also too much debt sloshing around which something has to be done about at some point (probably printing a lot of money), but that's been true for years and nothing about it is likely to change overnight one way or the other.
So what's the thing that's supposed to be causing this? Because without that it looks a lot like a misleading indicator.
Cool, so have you bought puts on SPY? What terms did you go with / how much did you buy?
Dead Comment
I personally don't think this is necessarily the inversion that is going to be predictive of a recession because the inversion is occurring at the long end (the 10/30 years spiking as opposed to the 3 month/2 year selling off). I think the short end is far more important than the long end because the short end tells you about monetary conditions in the economy. If the short end yields start moving up, that means that it's going to become more expensive to borrow money so spending and capex contracts, which is what can bring on a recession. Even that depends on the degree to which monetary conditions deteriorate.
Why are long bonds spiking? Because other central banks around the world are even more dovish than the US Fed, so money that is looking for long-term safe haven investments is coming aggressively into US long bonds.
Take a look at three month commercial paper rates, which are actually in a major downtrend (not surprising given Fed policy): https://ycharts.com/indicators/3_month_aa_financial_commerci...
Three month commercial paper rates represent the cost at which businesses are currently borrowing for short-term expenses on the open market. That cost is going down, too. I take that to mean monetary conditions are very good in the sense that there is no shortage of money floating around the economy looking for a return. Without some major fundamental change in economic conditions I don't see how equities can be expected to drop a whole lot from here. I think this is a blow off the top for rates that is going to be short-lived, especially if other central banks start tightening policy which nobody seems to consider a possibility. But if inflation starts creeping up, then they will likely start raising rates or keeping them where they are. Ironically, when central banks raise rates that is usually an extremely bearish indicator. It's a bit puzzling to me that everyone seems convinced that lower rates are bearish.
Also, I can't think of a time when literally everyone focused on a single indicator at the same time, used said indicator as a predictive tool, and were proven correct. That's just not how markets work. People get scared and excited at the worst times tactically.
We may go into a slump because everyone is expecting a splump to happen because it’s been 10 or so years of a bull run. But I don’t see a full-on recession without a large bubble bursting somewhere in the economy, causing a panic.
[1]https://money.cnn.com/2007/02/26/news/economy/greenspan/inde... [2]https://thinkprogress.org/alan-greenspan-warns-of-coming-rec... [3]http://www.marketoracle.co.uk/Article297.html
That is, the main thing banks do is borrow short-term (demand deposits, 2-year CD) and lend long-term (5 year car loan, 30 year fixed mortgage.) Conventionally long-term interest rates are more than short-term interest rates so you can make money this way.
With an inverted yield curve you can't make money that way.
Since banks are important to the flow of capital in the economy, something that hurts the banks can hurt the wider economy.
As someone who has seen this before, things are looking ominous: The stock market drop of late 2018 reminded me of the stock market drop we had in 2000, about a year before everything fell apart. The yield curve inversion doesn’t look good, nor does the problems with the German economy. Uber posting a multi-billion dollar loss and Tesla having a hard time getting income remind me of the very same issues during the dot-com bubble, where highly valued companies weren’t actually earning money. Moviepass’s debacle reminds me of Webvan; a company which tried to get VC by having a business model which was hemorrhaging money.
I hope I am wrong, but I predict a tech sector crash in late 2019 or early-to-mid 2020.
Plenty of articles have been written about it 2-3 years ago. We all have short term memory and are forgetting this. Every major tech publication predicted a crash in the startup economy. It never came about.
None of this related to the macro environment we are at. Trade wars wreak havoc on the sentiment of business than the actual supply chains themselves. Which is what seems to be happening now.
For Airbnb, it's a bit harder to say. More people will probably try to airbnb their places out, which will bring average costs down but increase the supply a lot. Demand may also increase as people unfortunately may turn to short term housing due to being in financially precarious situations. Since it's theorized that the American dollar will strengthen in the recession, this could also boost Airbnb's presence in international markets
Wework will probably gain too. More unemployment probably means more people trying to work out of weworks in startups or as freelancers. For the buildings they rent from non-executives, they could see a lower rent which would also help profitability.
So in summary I think the sharing economy is actually going to do ok. What do people do when they're unemployed? They try to make ends meet, and that means participating in the sharing economy
The reason why tech has done so well in the past 10 years is partially due to luck. While investment dollars continued to pile up post-2008, tech was one industry who had recently shown really impressive returns. As such, that's where the dollars flowed.
My concern is what happens when a few of those unicorns fail (e.g. Uber)? If sentiment shifts enough, you might see tech suddenly become the ugly duckling. Companies that in reality are doing reasonably well will be painted with the same brush.
When people start to see Uber failing and other unicorns struggling, it just become a self-fulfilling prophecy - "I knew a recession was coming". People get risk adverse, company's stop hiring and it spreads to the economy as a whole.
Auto loan defaults are at a high, as is student and household debt (higher than 2007). Those auto loans are often bundled almost exactly like junk mortgages in 2007 leading to a similar investment risk. More americans live paycheck to paycheck than ever before possibly increasing the number needing support should unemployment jump back up to 12%, where it was when Obama took over in 2009. It won't be as bad but the federal government under Trump/GOP has cut taxes and drastically pumped up the deficit putting us in a worse position to weather a recession of any length. Cuts to social programs will also extend a recession or at least increase it's effects as people will still need food and affordable housing. The number on social security will increase while less will be employed to pay in and as SS was used as a piggy bank for GOP spending decades ago that system could go from failing in a few decades to gone.
It could be 6-12 months of job losses and stock market falls like the .com bubble but it could quickly complicate as the government may be slow or unable to respond in traditional ways due to lack of funding, lack of staffing (an existing issue in the current admin), lack of experience of the current staffing, and continued conservative/GOP attacks on social programs and minority groups most likely to be hit hard by any recession.
It's like Jenga. In 2007 a core lower block was pulled and a lot of pieces went with it but we had the leverage federally to hold some in place or put back others like auto manufacturers. This time, the piece may be much higher up but automakers are already suffering under tariffs and the federal government won't have the funding capacity or push by the GOP led government to react in time and, like midwest farmers, that could be the end of an era for some industries.
Many great colleagues left tech at that point to become Realtors, landscapers, accountants. This is not to say that we are destined to relive exactly the same fate, but it's good to remember that rapid change is always a possibility.
I think what's a bigger risk these days is just how much tech talent if off-shored to other parts of the world, even at fast growing startups. Serious risk for engineers, likely in the Valley, where I don't know if you remember all of the billboards going from having ads on them, to pretty much being blank for several years.
Markets have corrections, if your company is providing something of value I'm sure things will be okay.
My gut feeling is that they constituted a larger portion of the market back then, but I've never seen a direct comparison.
Housing prices near tech hubs will also pop. Here in Seattle, housing prices are propped up by tech-couple mortgages with high stock-based compensation - which will suffer even at companies with healthy fundamentals. SFO housing is further inflated by IPO speculation.
E.g. most recently, banks and leveraged junk mortgages
As you noted though, the biggest tech companies today aren't really externally dependent. They generate substantial cash flow, have relatively modest debt loads (better than heavier industry!), and don't have easy substitutes.
The strongest case I could make for a tech crash: retail activity substantially slows and/or freezes (Apple & Amazon), advertising follows suit as advertising budgets plummet (Google & Facebook)
But it's hard to see that happening with any rapidity in the US with unemployment where it is.
(I can't see a strategic corporate debt crisis as long as the Fed keeps rates low?)
Another relationship that has been mentioned before is that of mobile games and google and facebook advertising services. A recession and/or anti-lootbox legislation could harm mobile games, which would reduce ad spend on platforms like facebook/google.
I would actually argue that this recession is hugely policy based and we should worry that The Donald in charge of these systems will lead to more instability. It isn't tech being over valued that will bring the system down.
I'm not sure software will stop eating the world in a recession, the almost religious belief that more software will make your business better is something everyone has bought into. There might not be any other jobs however.
It's probably too early to roll this out, but for those who didn't live through 2008, I present Sequoia Capital's "RIP Good Times" deck from that period:
https://www.dropbox.com/s/2m3d0s0n2q8a23z/RIP%20Good%20times...
It will also push automation to happen much faster meaning an even bigger underclass of people.
And finally you will still be able to raise shedloads of money (if your business is good) but it will cost you more of your business. Poor you.
GDP and energy seemed to be correlated so far, as if our growth is directly or indirectly fueled by the cheap labor of machines and automation.
Gas and electricity production reached a peak which can only go down in a finite world. With a constrained energy supply, GDP should go down. At least that's what happened so far since the 1800s.
Germany and UK entered recession the last quarter.
One common mistake in economic growth modeling is thinking only in terms of bulk. We are far richer than bronze age herdsmen but very few of us have tens of thousands of livestock.
In a crash, I'd expect the VC money to become more cautious... for a bit. But that can be a good thing, too, because it means you aren't competing with garbage companies that are always operating at a loss.
Given the popularization, any chance of an increased observer effect? In either direction, I mean, positive or negative.
It's completely legitimate to question whether this increase in publicity for this one metric might be causing it to be less useful.
Aside from that, I'm not sure how you're so confident that there is no observer effect. Markets, particularly in the short term, are influenced by human perception and emotion. It is plausible to me that, in particular, the stock market could dip because everyone observes the yield curve inversion, gets nervous about a coming recession, and then moves money out of the market in fear of it. This could happen even if a recession does not, and I don't find it impossible that such a move could help contribute to an actual recession. Again, human perception is an enormous component of markets, and perception is influenced by emotion.
Stock markets aren't the same as the economy as a whole, but stock market bubbles boost the economy when irrational exuberance increases the total apparent wealth. And when enough people decide that it's peaking, it does, and the same process works in reverse, causing a recession.
So yeah, it's a self-fulfilling prophecy, but that doesn't mean there's a way to avoid it. The market prices are already high; they must eventually revert to something closer to a true valuation. But since that time is determined almost entirely by consensus, nobody knows when. Indicators like this one are a sign that people are changing their minds, but it's been that way for a while. They're just indicators of public perception, and the public takes them into account, too.
> that doesn't mean there's a way to avoid it
I don't think this is strictly true, though. As you said, "Stock markets aren't the same as the economy as a whole". The financial part of our current economy seems to have an outsized perception/participation rate. If the rules of the game changed to reduce the appeal of financial activity, there might be less second- and third-order "betting on bets (on bets)" and less of the self-fulfilling prophecy you're talking about.
This may not be feasible in the world we live in: it would take a very different political climate, and of course there would be knock-on effects for society. But imagine that we turned our income tax rationale inside-out and policy shifted so that wages had very very low rates and investment income very high rates. Note I'm not advocating this, just offering it as a "what if".
I'm really curious how the index funds will behave in the upcoming recession, afaik that was one of their main mantras and selling points, so to speak, i.e. that the market only goes up (or a certain part of the market, the most important part of the market) and that you'd be a fool not riding the wave by investing in said index funds which were in turn investing in that part of the market "assured" to always go up.
In other words, what will people do when they'll see their index funds go down 10 or 20% yoy? Will they take their money out of said index funds? Will they wait for the next uptick?
UK economy shrinks : https://metro.co.uk/2019/08/09/pound-plummets-uk-economy-shr...
Gross exports represent 46% of EU GDP, up from 39% in 2008.
For China, gross exports are 20% of GDP, down from 33% in 2008.
For the US, gross exports are 12% of GDP, the same as in 2008.
A trade war is a nightmare for the EU. It's amazing they've stayed above water this long with 46% of GDP dependent on exports. They'll get economically thrashed if it keeps getting worse.
Or, in economists' terms: Germany's and China's goods are complementary more than competitive.
https://www.reuters.com/article/us-usa-trade-europe-autos/tr...