Following
up from my recent WSJ op-ed with Andy Puzder, "Recession Fears Are Overblown" from two
weeks ago (where we outline reasons why yield curve inversion may be a broken
recession indicator [Fed balance sheet weighing on the long-end, T-bill
issuance pushing up short-rates, and foreign pension demand amid
negative yielding foreign debt] and why macroeconomic conditions
continue to be strong [unemployment below 4%, GDP growth above 2%), here is an interesting graphic I put together
which depicts the recent "recession"
narrative: there has been a decline in Google search traffic for
"recession" since the initial 10-year/2-year yield curve inversion on
08/14/2019 (when Google searches for "recession" spiked).
Interestingly it very closely follows what a Kermack-McKendrick type model
predicts:
Prediction market recession
odds from PredictIt were also up at the time of the yield curve inversion as
well and have remained somewhat anchored there. Betters were paying to receive
a near 46% chance of a recession by 2020—which is above the 21% historical mean
a recession occurs over any 1.5 year period implied by the historical 15%
post-war average probability a recession happens in a given year. Those
elevated prediction market recession probabilities have fallen slightly to
around 40% (this also assumes prediction markets are unbiased estimators and
don’t pay some hedging premium etc). It’s interesting to note how the simple breach of a single
financial folktale rule-of-thumb, that being the 10s2s yield curve inversion,
could alone be so influential in generating generate a massive media narrative
surrounding recession that semi-permanently increases recession expectations
(the 10-year minus 3-month yield curve first inverted back in March 2019–not to
say that’s in any way a better indicator; our WSJ piece argues they are both
broken). Interestingly, U.S.-based Google searches for "recession" spiked in 2008 ahead of the Great Recession. All very fitting given the upcoming release of Bob Shiller’s “Narrative Economics: How Stories Go Viral And Drive Major
Economic Events” to be released October 1.