Recession Reschmession

Listening to financial media commentary lately you could easily come away with the impression that it is both important and controversial whether there will soon be a recession. Veteran readers already know Financology thinks the term itself is somewhere between worthless and worse. Even if you’re concerned with policy or its implications, it’s economic garbage, as we detailed in our last rant on the question back on April Fool’s Day. If you’re an investor, it’s even still worse, since whatever it is, it’s only acknowledged after it has already affected your investments, much too late to be anything but a useless distraction.

So investors might attempt to anticipate one? Alas, the markets will already have done that too. It’s not even a thing … no more than the wind is a physical object. Yet it gets even more ludicrous. Playing the economic equivalent of the Keystone Kops, some supposedly serious economic analysts are now speculating on the potential for development of a recession … after two consecutive quarters of negative economic growth, once considered the objective definition of a recession. That squabble is political theater, not science.

Anyone care to predict whether there will be a pandemic in 2020? War in Eastern Europe in 2022? You can bet this same crowd will be debating whether a recession is on the way well after the date the NBER Business Cycle Dating Committee ultimately concludes one has begun … which also generally occurs well after the fact.

What about the inverted yield curve? As we also discussed back on April 1, there is more than one way to define an inverted yield curve. But assuming we have seen an inverted yield curve by virtually all the widely cited measures (we have), you could reason that an inverted yield curve foreshadows a recession, and that a recession implies a bear market in stocks.

But as an investor, why not just leave out the middle man? What value is added? You can’t invest in “recession”; you invest in stocks, bonds, currencies, commodities, etc. Why not just go straight from your observation of an inverted yield curve to handicapping the markets? Not only can you sidestep a lot of useless noise, but the depth, breadth and duration of the yield curve inversion can shed some light on the likelihood and scale of declines to expect, and the location can shed some light on when to expect it. The simplistic on-or-off “recession” determination obliterates all such nuance as your analysis passes through.

We hope readers will understand if Financology doesn’t waste much space talking about whether or not there will be a recession, and that such lack doesn’t imply a sunny outlook on the economy. To the contrary, we’re expecting a decrease in consumer price inflation, a decrease in employment, a decrease in retail sales, a decrease in corporate profits, a decrease in stock prices … concrete, measurable things which exist along a continuum from lower to higher … we just won’t be distracted with binary pigeonholing.

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