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Comment by JackFr | Hacker News Reader

The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions.

> The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions.

That is not the classic joke.

First off, inverted yield curves has accurately predicted recessions without false positives. Look up Campbell R. Harvey, who first published on this phenomenon in his dissertation:

* https://today.duke.edu/2019/07/its-official-yield-curve-trig...

Interview from 2019:

* https://www.youtube.com/watch?v=9sb1byR8Zx0

Its record is 7 for 7, with no false signals, using data since 1950. Of course people weren't looking at it closely until post-2008, so now it could (as mentioned in the interview @4m50s) become part of a feedback mechanism.

Second, the actual joke by economist Paul Samuelson (who wrote "the" textbook on economics) was about Wall Street:

> To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[18]

* https://en.wikipedia.org/wiki/Paul_Samuelson#Aphorisms_and_q...

One thing that make that statement less impactful is that we now have tools to prevent recessions. So maybe in those five a recession were coming but correct action was taken and it was all good.

Recessions are built into the system. They eliminate market inefficiencies and are the culling element in a system designed to efficiently allocate capital. They are small bush fires that cause minor damage but are ultimately healthy for the forest.

Without recessions credit risk becomes meaningless and is never tested - everything is endlessly going up so there is no leverage risk. People take on progressively riskier bets, zombie companies survive on loans, asset prices increase beyond reason because "you can't lose".

The system is incapable of monotonic growth and market intervention to take the sting out of recessions means the trees burn down not just the underbrush.

This is one of the most inane things I've read on HN in years, and that is a lot of competition.

Bush fires happening in forests throughout history happened due to lighting strikes and what have you, at least before modern times. Random natural events. Economic activity is a considered, thought out socialized activity - the central societal activity.

You're advocating the necessity of unnecessary problems due to other unnecessary problems - recessions are needed due to market inefficiencies, misallocated capital (cryptocurrency companies?), risky credit, leverage risk, riskier bets, zombie companies survive on loans, asset prices increase beyond reason, and a system incapable of monotonous growth. Your cure for this is all the maladies of a recession - higher unemployment, GDP actually shrinking etc. You list out many of the maladies of the current state of the relations of production and your solution is more maladies. This thinking is at best insular, unimaginative, limited and provincial. It is only tautological within a very limited view, where your solution for all the maladies you list out is self inflicting the malady of negative GDP growth and the maladies surrounding that.

I’m saying we can prevent them (or perhaps as you are alluding to make a bigger one in the future instead), not that we should.

Clearly the last years have shown that low rates, tax cuts and helicopter money does at least postpone recessions.

"In economics a prediction itself can alter the object of the prediction. Hence, for certain kinds of ecomomic phenomenon, forecasting can be a logical impossibility." - Kaushik Basu.

I think recession definitely falls under this category. And calling out a recession while we are already in it is not really a prediction.

There are absolutely no available tools to prevent recessions. There are tools to a) blunt the trauma while in a recession or b) kick the can down the road. Recessions are an integral part of the business cycle.

Perhaps, not sure if there is wide agreement on that.

Anyway, preventing and postponing both messes with predictions.

Preventing a recession would imply that one can see into the future and accurately predict when the next one will happen. This isn’t like watching someone about to get hit by a car and then saving their life by pushing them to safety.

Even if you did have hypothetical tools to do so, how would you know you prevented one anyways?

Let’s separate the two first. Clearly we can move the start date for recession by changing interest rates and pumping money into the economy. I think you agree on this? If so that would mess with predictions which is what I said.

Can recessions be prevented. I think it is believed they can. The theory is juice the economy on hard times and pump the brakes in good times. This the depends on two things, ability to know what is good and bad times which I personally depends to some extent on predicting the future. I think it also depends on being able to use the brakes in good times which we did not do, the Trump tax cuts clearly should not have happened if this was the goal.

So even though I believe in the Keynesian model I agree with you that it might not work in practice. But it is mostly working right now, although clearly not 100%.

But I think the evidence is quite clear that the timing and severity of a recession can be influenced by monetary policy, and if you agree with that you probably agree that predictions of recession are not going to work 100% even if there was a clear way of predicting them.

I’m a bit confused, when would we be in hard times but not in a recession? During the summer of 2020 we were already in a recession, and in response the stimulus and pumping was done. This is on top of the fact that not only are we not able to predict recessions accurately, we usually don’t even know we are in one until we are 3-6 months into it.

“It is believed they can”…by who? Other than you of course.

The severity of a recession is determined by what is done in the early days of the recession, not before.

>One thing that make that statement less impactful is that we now have tools to prevent recessions.

Such as? We seem to be pulling all possible levers and are still barreling into a recession at full speed.

> We seem to be pulling all possible levers and are still barreling into a recession at full speed.

The Fed is pulling fairly hard (but far from maximally hard, because there is considerable concern about policy overshoot) on the anti-inflation monetary policy levers. Those are also the ones that cause, rather than fight, recessions. They are doing this because pulling hard on the anti-recession levers due to the hard and fast COVID recession lead to an equally hard and fast rebound with skyrocketing inflation.

Congress is basically sitting on its hands on major fiscal policy levers, having returned to a basic neutral stance after fairly heavy anti-recession stimulus during the COVID recession. (If we really wanted to manage inflation while avoiding recession, we’d probably want Congress taking more targeted anti-inflation fiscal action aimed at the specific sectors driving overall inflation, so that the Fed could take a lighter hand on broad-focus anti-stimulative measures; if we just wanted to avoid recession in the near term period, we’d focus on stimulus and damn the torpedoes of inflation; but I don't think that would be wise.)

We are very, very far from pulling all possible levers to prevent a recession.

The solution is austerity, but no one wants to cut spending and risk losing votes. Large spending packages contributed to inflation and were partly a calculated giveaway by both parties.

What? This is a created recession as I see it.

If we wanted to avoid this recession we would reduce the loan rate and increase the money supply. Not saying that would be smart.

> we now have tools to prevent recessions.

We have nothing that didn't exist in 2001 or 2008 or 2020.

It is kind of weird to see Millennials whose economic awareness starts roughly in 2008 think that economics is fundamentally different now than it was 20 years ago.

There is something fundamentally different now than 2009-2020 -- but it is that the Boomers are retiring, COVID took people out of the workforce, and reduced immigration means that there's now fewer job seekers than jobs. This is causing sticky wage increases that have policymakers worried. They want to keep workers in check and contain wage inflation, so will throw on the brakes. The levers that they have are crude and the only real way to do this is to create pain which drops the number of job openings.

The current commodities inflation surge isn't even that out of line with the past. We had higher oil prices in 2008 before the bust, we also had similar prices, particularly on an inflation-adjusted basis in 2014 at the height of the last commodities boom (which did not end with a recession). And the current commodities boom is clearly associated with the pandemic. Two years ago we had negative oil prices. It is wild to see all the people in this thread not understanding the cyclical nature of commodities prices and the very clear bullwhip effects that are unfolding right now.

I've been predicting that since everyone expects inflation that just on contrarian logic alone the bulk of the people have to be wrong and that we're due for a strong recessionary crash / depression. That logic seems to keep on getting better. The fact that people believe the Fed can land the economy softly, without a recession, and get inflation under control is also pretty wild though.

I think you are putting a lot of emphasis on the word now and assuming I’ma lot younger than you.

Anyway, can they feed fight inflation and avoid a recession? Who knows but it seems if they have to choose they are choosing a recession. A string crash/recession definitely seems like a real possibility.

I find it funny that this joke seems to imply getting 5/12 false positives means that it's an obviously bad model.

I'm not a statistician, but if something is ~50% accurate in predicting a recession does that not make it roughly equivalent to a coin flip?

It's a big topic. But 5/12 false positives tells you nothing about accuracy. You also need to measure the number of true negatives and false negatives and what not. Accuracy tends to be worthless for most use cases when the event being predicted is rare. If you're predicting a 1 in a million event always predicting NO gives you a 99.9999% accurate model.

Many medical tests are 99%+ accurate, but the false positive rate, meaning the probability that you don't have the disease given a false positive test is still extremely high. Like 90%+. Bayes law fucks us all.

For those interested, a bit more background on false positives of rare events

https://math.hmc.edu/funfacts/medical-tests-and-bayes-theore...

Medical tests are often designed that way. For example cheap/quick hiv tests have a low false negative and a high false positive. They are still useful, you filter out most people safely and the ones with a positive test can take a more expensive test to check.

Yes, but also no. If your test only flags a false positive 1 in a million times, searching for a disease that affects 1 in 100 million people, you'll get a ratio of 100:1 false positives. Still very useful as you explain, but I think it's misleading to imply that's what they're aspiring to. It's hard to make a test that never returns false positives.

I don’t disagree with you, merely said that for some reason it was possible to make a cheaper and quicker HIV test that has a high false positive and a low false negative.

I have myself tested positive twice without actually being positive when being deployed with the army, so agree on all your points that this is not great and not an intended goal,. Just what we get when we try to make the cheapest possible test today.

> does that not make it roughly equivalent to a coin flip?

No.

Intuition: predicting the outcome of a coin flip correctly 50% of the time is unimpressive, but predicting the outcome of a D20 dice roll correctly 50% of the time is incredibly impressive.

In this case the outcome is binary though, "Recession" or "No recession"

Rollong a 20 vs not 20 is binary, but that doesn't mean it happens 50% of the time.

Recession or not is binary, but that doesn't mean we have a 50% chance of entering one on a given day.

The sides of the dice are financial quarters. The roll is the financial quarter that a recession starts.

If recessions happened every other financial quarter then the outcome would be binary. But historically recessions not that common; they happen in less than 1 in 20 financial quarters. So the D20 analogy is actually something of an understatement.

It’s binary, but not balanced. Specifically, it’s predicting the beginning of a recession, and very few time periods are the beginning of a recession.

So it’s like predicting that you’ll roll a 1 on a die. Flipping a coin for your prediction would say you’ll roll the 1 50% of the time, which is obviously wrong.

It's not binary, it's "is the recession going to happen in the next few months/years", so the prediction is a number. More like D20 in one of the neighbour threads. But not necessarily a D20, could be a D6 so less impressive.

Over thousands of periods. And each time the prediction was no the outcome was no, and among the few times the predictions was yes it happened 50% of the time.

Recessions are forecast on a quarterly basis, so not thousands, but more than 20 between each recession (typically, historically). That's why I chose a D20 -- out of coin/dice/D6/D20/Roulette, it's the RNG that's most reasonably close to the number of quarters between recessions.

How long have we been forecasting? More than 50 years or more than 200 quarters. 5/12 would be 7 misses out of 200, that means it was right 193 out of 200 times.

That doesn't include false negatives of course. Actuals vs positive predictions tells you nothing interesting.

Yeah there are many additional reasons this is different from a coin clip, but the confusion of predicting correctly 50% of the time in a 50/50 event versus 50% of the time for a 1/20+ event was the most glaring issue so I started with that one...

"Precision" is the right word, that's the probability that you identified a recession but there wasn't a recession.

You can get very high accuracy (more like 95%) by predicting that there will not be a recession because recessions are less common than expansions.

An indicator that flashes occasionally but it even if it wrong half of the time (you do the coin flip after the warning) it is giving useful information about an unusual event.

Only if the probability of the true positive is 50%. If I had a model that told me with 50% certainty that a black swan event was about to occur, that would be pretty valuable.

What type of bet you make with the market matters a lot. If your play is very convex and it gives you the opportunity to risk $1 to make $10 then that's a worthwhile bet to make provided that losing $1 10 times doesn't wipe you out. Since market crashes tend to be violent and volatile there are instruments out there that benefit from higher volatility and can give you 100x returns.

So when you combine a 5/12 accuracy indicator with a play that is low probability, little fee to entry, but huge reward you have a decent strategy.

If you flipped a coin every day to determine if a recession started, you'd have a way worse record than 50/50.

Well if your coin says "no recession" on one side and "recession" on the other, you'd get 50/50.

I can't tell how serious, but just in case.

Probability of recession ('how often do you check?' question aside) is fairly low. If you can guess what specific number comes up on a dice roll 50% of the time, you're good at predicting dice rolls.

Only if you throw it twice as many times as there are recessions.

if you throw a coin every day, and it's 50% accurate in predicting recessions that only happen every few years, that's a hell of a signal.

It really depends. If you count 100 times where the yield was not inverted and no recession was predicted, the odds get a lot better.

it's a _necessary_ but _not sufficient_ condition for a recession. so it does provide you information. if the yield curve does not invert, it is unlikely there will be a recession.

haha, I had to read that three times to get the joke.

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