Hey guys, it's sasha everyone out there saying that we're definitely absolutely going to get a recession later this year, pretty much every finance youtuber out. There is certain that a recession is coming and because it is a popular topic, it gets regurgitated over and over and over. Unfortunately, i don't share their theory that a recession is inevitable and i'm going to explain why that is in this video. It is important to first start by talking about what a recession is and why everyone cares so much a recession is a significant decline in the economic output that lasts for some prolonged period of time.

Now, a commonly agreed technical definition used to be that a decline in gdp over two consecutive quarters is how a recession is defined, but that definition has recently been upgraded to make it a bit more scientific, and it's now defined as a significant decline in economic activity. Spread across the economy lasting more than a few months, normally visible in rio, gdp, real income, employment, industrial production and wholesale retail sales. So we can now get recessions that last barely a few weeks like what we saw happen in 2020.. Now, recession is bad because, in order for the gdp to drop or real income to drop or production to drop, companies have to really suffer.

Businesses have to collapse. Businesses have to lose the amount of money that they're able to make. The total economic output needs to shrink. So as an investor, you won't normally like a recession very much, because the value of your investments are likely to drop and perhaps take some time to recover if they recover at all.

So as people get very keen to try and predict these recessions, they turn to short-term indicators to try and make the guess, i'm going to explain what the most popular ones are in a bit of detail. But the bottom line is that none of the people who tell you that they know exactly which way the market will move actually know and the more that they tell you that they do know the more evident it is or it should be that they have absolutely. No idea that inverse relationship has a very high rate of accuracy now, one of the most popular indicators of an inbound recession that people do talk about when they do make. These cases is the yield curve of government bonds.

The theory is particularly potent because people on youtube will tell you that every recession in the last 50 years was foreshadowed by the scary, yield curve, inversion yields and bonds. Is the relative return that those bonds will pay their investors and naturally, as with any economic product that pays your return in times of higher risk or a higher uncertainty? People want to be paid a higher premium if you're buying bonds that go 10 years out. You just don't know, what's going to happen, the economy could go into all sorts of trouble over such a long period of time, with events that you have no way of forecasting, so yields on long-term bonds tend to be higher than on short-term bonds in the short Term things are more predictable, more stable, so bond yields on shorter term treasuries are lower. The problem happens when this trend inverses.

This is when you can get a higher yield on short-term bonds, or at least a very similar yield than on long-term bonds, and that's scary, because that kind of means that the consensus out there is estimating that the short-term economy outlook has a higher risk than the Long term i.e, a recession is coming and it's going to be bad and hopefully, after that recession passes, things might return to some kind of normal. In march 2018 two-year treasuries began climbing towards their 10-year rate counterparts and while the inversion never really happened at that moment, the two peaked very close to each other in december 2018, before falling back. An inversion did technically happen for a few days in august 2019, but both yields were in the process of dropping at that point rather than spiking. So i guess, if you were wanting to prove the theorem, you would say that treasury bond traders in 2018 knew two years in advance.

The world would be hit by a deadly pandemic. Impeccable foresight, although, if you wanted to support the theory, you'd probably argue that a recession would have happened regardless, based on some other effect now in july 2005. The two-year curve also got very close to the 10-year yield, although the inversion proper only happened a year later, starting on the 8th of june 2006, and you could say that that was the leading indicator for the recession that started a year and a half after that. In december 2007., and even in the dot-com crash, the two-year and three-month treasuries inverted with the 10-year early in 2000, a year or so before.

The recession that followed so three out of three three out of the last three recessions. Had this yield curve inversion happen at some point a year or two before the recession hit, and here you see the first point. It doesn't even have to do anything with the theory, but if you do believe the theory, then you presumably based on this data, think that we still have at least a year to squeeze out of the stock market growing before any kind of recession happens or any Kind of market crash happens so the argument for a recession this year, based on even this data sort of kills itself, but the problem. The really big problem is that three data points doesn't make for good statistics, because if you just look a little bit further, you will notice things happening that work in a different way.

The yield curve, also inverted in june and july 1998, with no recession happening happening at any point immediately after there was a financial crisis happening in asia and russia at the time sure, but the us economy didn't have a recession. The s p 500 just went for a somewhat minor correction, interestingly enough, just like we have done at the beginning of this year, so you can see some parallels already in 1995 and 1996. The race also got very close to inverting light like what we're seeing today, but absolutely nothing happened afterwards. There was no recession and there was no market crash.

In fact, the late 1990s saw one of the biggest booms in the stock market ever so. The truth is, it is common for recessions to follow a bubble bursting of some type that is preceded by an inversion in treasury yield curves, but it absolutely does not follow from that argument that every yield curve inversion is followed by a recession or a market crash. It's a bit like saying that every thief caught in the last few months happened to wear shoes, so we're going to go out there and arrest everyone wearing shoes, because we are pretty certain that they're about to commit a crime. The next commonly cited indicator of a recession is jobs.

Data and the problem is that jobs data is a little precarious and because job losses typically occur as the recession takes hold. So the data only really shows up afterwards. Job losses happen. When companies collapse companies lose work, companies lay off staff in a bid to survive.

Some people will say that there are other measures like the number of hours worked that come in earlier than the actual job losses, but the data just simply doesn't support that either again. If you look at just the last two recessions, it is easy to find data where two points will match unfilled. Job vacancies, for example, peaked in the run-up to each of those two scenarios, so perhaps that could be a leading indicator, but the problem is that this absolutely does not transpire. If you look at all the previous recessions going before, and even if it did, how would we know if we're at the peak right now, if you were looking at this particular graph at any point from 2012 to 2019, you could argue that we are at the Peak in exactly the same way for every one of those points, so unfortunately, job data, interesting as it may be, is not a really good leading indicator at all.

Now some people will be looking at predictions by various parts of the u.s financial system, because if anyone knows that a recession is coming, surely those guys do right. Well, here is one of the more popular predictive models that the federal reserve bank of new york uses to predict a likelihood of a recession. They use a month ahead, treasury spread as the indicator and, if you just look at the graph quickly, it almost looks like these guys are really good. Every time that the likelihood chart spikes, a recession goes and hits right at the peak of the curve, except the last peak was back in 2020 when we had the two-month recession after the arrival of covet and the indicator here.

According to this, chant has a very low chance of a recession happening in the next two years. You only have to look left to 1960 to see the recession can still happen, though, even when the graph looks particularly low and also on the very same chart. If you look a bit more closely, there are multiple peaks on that graph. When no recession happened, so the indicator does have a fair amount of false positives as well.

Now the macroeconomic indicators over longer time scales are probably a more appropriate way of trying to guess. When a recession is going to arrive or not arrive, gdp is the obvious measure. Seeing as a drop in gdp is pretty much the definition of a recession. But then again, there is precious little in anticipation of a recession that gives away that an imminent drop in productivity is about to arrive.

There are lots of people who spend years telling you that the biggest recession, the biggest market crash, is about to happen. You see these personalities over and over year after year, telling you that now is the time when it absolutely will happen, and when it does happen, they will proudly announce that they were obviously right all along because you know recessions do happen and they happen with some Kind of regularity, the problem is that the market will have grown all the way through, while all those predictions did not come true, and if you go and follow those predictions and sit around on cash and not invest in the market during those times, your investments are Not going to grow by very much now, high inflation, high rates have previously led to a recession true, but we have such an incredibly thin data set that it makes absolutely no statistical logic and the economics of the last time that we were in this situation with Very high inflation in the late 1970s are vastly vastly different to today everything from the way that the us vs global economy operates through to the unprecedented situation that we've had over the recent times with exceptionally low interest rates. Sure the same thing has happened then, could happen today. But then again, almost everything about the macroeconomic situation today is in such a different place.

That inflation alone is just not a very reliable. In fact, it is not at all a reliable indicator recession. The two major recessions we've had in the last 20 years had no inflation indicator at all, and we have only had four occasions where inflation ever in any modern history ran over 10, which is now becoming extremely likely to happen this year. Two of those occasions were the second world war and the immediate post-war period which bear no real resemblance to the situation we're on today.

So to some degree they are sort of irrelevant in terms of analysis. So the only real examples that we have from the past and the 1973 oil crisis and the 1980 inflation spike, where paul volcker raised rates to 20. And yet, in both cases a recession did happen and it might happen again, but i certainly wouldn't deduce an absolute hard economic truth, a basic economic foundational rule based on two very specific points in history, which happened to both land heads. I certainly wouldn't expect it to land heads every single time afterwards.

This is an extremely limited data set for me. The truth is this: when i look at the top 10 or 20 companies in the s p 500, i fundamentally do not see a gross overvaluation of stocks and even if i look further down, i don't see a pattern like you perhaps would at certain other points In time sure i personally think that there are some undervalued companies and others may be overvalued, but i do not see a systemic share price bubble like so many other people claims uh to exist. I am not a subscriber to the buffett indicator either or any other crude way of drawing a straight line and saying the global economy must, for some unknown. Weird reason adhere to this completely made-up line.

It makes no sense to me whatsoever. Why should a non-linearly, growing economy with a non-linearly advancement in technology follow some kind of weird linear relationship between market value and gdp? I don't see a basic reason why that has to hold over the long term. I see an economy that is in the relatively early stages of massive generational changes in several big industries. We have a step change and transport that we have only just started working through with electric cars, with everything else that's coming along with that.

We have a step change in artificial intelligence development and we're only just scratching the surface of that one. With things like self-driving and various different system tools, we have a step change with the way that we are using processing and analyzing data. We have an incredibly strong employment data situation and a step change in a way that people are able to access work remotely, which is going to be an incredibly important factor in the long term, growth of the economy and the growth of productivity. We have had two years of turmoil with the world being turned upside down by the pandemic, and now this crisis in ukraine.

But, given that the outlook for the next five years for me from where we are today, looks likely to be more of a bounce based on the situation today and a period of innovation and growth rather than stagnation, because, typically, stagnation follows a period of stable growth And a relatively positive outlook now remember that a recession is a marker of stored productivity and we have, in my opinion, at the moment, a once in a generation set of changes that are exploding our levels of productivity, rather than indicating they may decline. These are happening right now and i am not saying that lightly. I don't know if we're going to have a technical recession happen or not. The likelihood for me is that this year it will not, and even in the next two years the likelihood is exceptionally low, but i sure am not going to sit around on cash waiting for it or betting one way or another in some kind of way, to Gamble my way through, if you want a deeper dive on why i generally ignore inflation.

Panic in my investment decisions feel free to check this video out right here. If you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you so much for watching and i'll see you guys later.