Cliff Asness on bonds and stock telling a different story

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Cliff Asness on bonds and stock telling a different story

Post by steve321 »

Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
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Re: Cliff Asness on bonds and stock telling a different story

Post by Taylor Larimore »

steve:

My answer to both questions is "I don't know."

Best wishes.
Taylor
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Re: Cliff Asness on bonds and stock telling a different story

Post by Tycoon »

I agree with both assessments.
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Re: Cliff Asness on bonds and stock telling a different story

Post by steve321 »

Taylor Larimore wrote: Fri Jun 02, 2023 9:47 am steve:

My answer to both questions is "I don't know."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I do not know of anybody who has done market timing successfully. I don't even know anybody who knows anybody who has done it successfully and consistently."
Thanks. I see your point but haw can markets be efficient and reflect the collective wisdom when stocks and bonds tell different stories?
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Re: Cliff Asness on bonds and stock telling a different story

Post by secondopinion »

steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
Maybe I am reading it wrong, but are these the same message?
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Re: Cliff Asness on bonds and stock telling a different story

Post by nedsaid »

steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
Boy, hard to say on each of the two questions. Normally, an inverted yield curve like we see now is a signal for recession. Markets are complex things and there are other things at work in the economy than an inverted yield curve, where short term interest rates are higher than long term interest rates.

Inflation is a big factor here, I suspect that good news on the inflation front would cause a vigorous market rally. The inverted yield curve could signal recession or it could signal that the bond market has higher inflation expectations for the short term than for the long term. It could be that inflation could fall back to 2% without the economy having to go into a deep recession or perhaps we could have a soft landing which means we avoid a recession altogether. So it is the old saying that two people can look at the same information and come up with different conclusions.

We are all worried about higher interest rates but what we are seeing is pretty normal, the very low interest rates in the aftermath of the 2008-2009 financial crisis was an anomaly. I remember money market rates being 6% in the early 2000's and we aren't there yet. Savers can actually get decent interest rates now.

The economy has continued to be relatively strong, which is something I didn't expect, the markets have taken note. So
hard to say whether or not markets have a long way to fall. Rising interest rates tend towards lower Price/Earnings ratios in the stock market so this interest rate trend should put downward pressure on stock prices. The market could also be saying that interest rates will soon be on the way down, particularly after the Fed Chairman hinted at a pause in interest rate hikes. In other words, the market is optimistic, pricing in good news they think will materialize in the future.

Markets are an expectations game, and expectations of the future are priced into the markets every day. The market expectations might be right or they might be wrong.
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Re: Cliff Asness on bonds and stock telling a different story

Post by N.Y.Cab »

Perhaps the curve is flat or not as badly inverted when factoring in expected inflation in short vs long term.
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Re: Cliff Asness on bonds and stock telling a different story

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I will note that the U.S. stock market is rallying significantly today. As of today, not much worry about an inverted yield curve. Monday, however, could be another story.
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Re: Cliff Asness on bonds and stock telling a different story

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secondopinion wrote: Fri Jun 02, 2023 10:11 am
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
Maybe I am reading it wrong, but are these the same message?
By 1. I was asking whether the yield curve signals a recession
by 2. I was asking whether the possibility or likelihood of a recession is not priced in stocks
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Re: Cliff Asness on bonds and stock telling a different story

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nedsaid wrote: Fri Jun 02, 2023 10:37 am I will note that the U.S. stock market is rallying significantly today. As of today, not much worry about an inverted yield curve. Monday, however, could be another story.
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Re: Cliff Asness on bonds and stock telling a different story

Post by nedsaid »

steve321 wrote: Fri Jun 02, 2023 10:38 am
secondopinion wrote: Fri Jun 02, 2023 10:11 am
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
Maybe I am reading it wrong, but are these the same message?
By 1. I was asking whether the yield curve signals a recession

Nedsaid: Yes, market experts often cite inverted yield curves as an indicator of impending recession. My understanding is that the predicted recession happens most of the time but not all of the time.

by 2. I was asking whether the possibility or likelihood of a recession is not priced in stocks

Nedsaid: In theory, the likelihood of recession is priced into the financial markets every day. Really the question is whether or not the market participants are too optimistic. They might be too optimistic, they might not be. As I mentioned upthread, the continued strength in the economy has been a surprise to me.

Bottom line, Cliff Asness believes that the U.S. stock market and the U.S. bond market are signaling two different things. The stock market is optimistic regarding the economy and the bond market is pessimistic.
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Re: Cliff Asness on bonds and stock telling a different story

Post by km91 »

We've been hearing about the imminent recession for a year and a half now. It wasn't that long ago that many were arguing that we were already in a recession because the the technical definition is two quarters of negative GDP growth. Yet here we are with a scorching job market, decent corporate earnings, strong consumer spending, and the NASDAQ up 35% YTD. Besides the inversion of the yield curve there aren't many signals that the economy is actually slowing down or that a recession is near
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Re: Cliff Asness on bonds and stock telling a different story

Post by secondopinion »

nedsaid wrote: Fri Jun 02, 2023 10:46 am
steve321 wrote: Fri Jun 02, 2023 10:38 am
secondopinion wrote: Fri Jun 02, 2023 10:11 am
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
Maybe I am reading it wrong, but are these the same message?
By 1. I was asking whether the yield curve signals a recession

Nedsaid: Yes, market experts often cite inverted yield curves as an indicator of impending recession. My understanding is that the predicted recession happens most of the time but not all of the time.

by 2. I was asking whether the possibility or likelihood of a recession is not priced in stocks

Nedsaid: In theory, the likelihood of recession is priced into the financial markets every day. Really the question is whether or not the market participants are too optimistic. They might be too optimistic, they might not be. As I mentioned upthread, the continued strength in the economy has been a surprise to me.

Bottom line, Cliff Asness believes that the U.S. stock market and the U.S. bond market are signaling two different things. The stock market is optimistic regarding the economy and the bond market is pessimistic.
Bonds (with TIPS yields as confirmation) are suggesting a drop in inflation and it will go back to normal. This could mean a recession in the short-term. If most of the market-weight of companies in the market is companies that are rather growthy in pricing yet have solid books, then recessions are not going to impact the share price as much. The market is not suggesting a recession will not happen; they are suggesting that the recession will not do much. Confidence despite a recession!
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Re: Cliff Asness on bonds and stock telling a different story

Post by exodusing »

km91 wrote: Fri Jun 02, 2023 11:14 am We've been hearing about the imminent recession for a year and a half now. It wasn't that long ago that many were arguing that we were already in a recession because the the technical definition is two quarters of negative GDP growth. Yet here we are with a scorching job market, decent corporate earnings, strong consumer spending, and the NASDAQ up 35% YTD. Besides the inversion of the yield curve there aren't many signals that the economy is actually slowing down or that a recession is near
"the the technical definition is two quarters of negative GDP growth". That's a common rule of thumb, but is not the technical definition. In the US, the official definition is the NBER saying it's a recession.

https://www.whitehouse.gov/cea/written- ... recession/
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Re: Cliff Asness on bonds and stock telling a different story

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I have no idea.
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Re: Cliff Asness on bonds and stock telling a different story

Post by km91 »

exodusing wrote: Fri Jun 02, 2023 11:36 am
km91 wrote: Fri Jun 02, 2023 11:14 am We've been hearing about the imminent recession for a year and a half now. It wasn't that long ago that many were arguing that we were already in a recession because the the technical definition is two quarters of negative GDP growth. Yet here we are with a scorching job market, decent corporate earnings, strong consumer spending, and the NASDAQ up 35% YTD. Besides the inversion of the yield curve there aren't many signals that the economy is actually slowing down or that a recession is near
"the the technical definition is two quarters of negative GDP growth". That's a common rule of thumb, but is not the technical definition. In the US, the official definition is the NBER saying it's a recession.

https://www.whitehouse.gov/cea/written- ... recession/
I'm aware. This was an argument repeated ad nauseum on this forum 6 months or a year ago. My point is that for the last 18 months many have been predicting an upcoming recession or declaring we're already in one, with little to no economic evidence to actually support the claim. So maybe the stock market and bond market are telling different stories. Or maybe those claiming to know what story the market is telling actually have no idea
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Re: Cliff Asness on bonds and stock telling a different story

Post by aj76er »

I think the stock market is pricing in the next big driver of growth: AI

But only a handful of stocks are really driving the rally. So if you look at the total stock market, then it may be telling a difference story than the majority of individual stocks. Therefore “most” stock prices are more aligned with the bond market (inverted yield curve) which is predicting a recession.
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Re: Cliff Asness on bonds and stock telling a different story

Post by garlandwhizzer »

I agree with Mr. Asness's observation and have made for some time the very same observation myself. Having said that, it's predictive value in terms of actionable certainty is very limited at least in the short term. The market has been pulled forward by this year by a small number of skyrocketing mega-cap tech stocks, while the rest of the market has gone nowhere and value stocks have actually gone down. AI is the new flavor of the month in hype. If you're a firm believer in reversion to the mean, you expect a strong reversal of this trend at least in the intermediate/long term. Timing when reversion to the mean will occur and to what extent it will occur when it does happen is quite uncertain. It depends more than anything on the extent of the how inflated the LCG bubble is. The LCG bubble in 1999 was vastly greater than the current one. The current one is limited to fewer names, most of which have considerable profits, cash, etc. In 1999, the bubble names mostly had no profits, lots of debt, only dot com dreams. The popping of that severe bubble is what launched SCV outperformance which at the time were profitable and dirt cheap. That SCV outperformance went on for 6 years starting in 2000.

On the other hand, if you're a strong believer in the pricing efficiency of markets, the disparity now between growth darlings and value ugly ducklings may simply be insight into how the future will unfold in this tech disruptive economy and picking winners and losers accordingly. I'm personally a strong believer that I do not know up front which of these two opposing views is correct with any actionable accuracy. I therefore own TSM 75%/SCV 25% in the US, hopefully ready to benefit from whatever happens.

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Re: Cliff Asness on bonds and stock telling a different story

Post by exodusing »

km91 wrote: Fri Jun 02, 2023 12:14 pm
exodusing wrote: Fri Jun 02, 2023 11:36 am
km91 wrote: Fri Jun 02, 2023 11:14 am We've been hearing about the imminent recession for a year and a half now. It wasn't that long ago that many were arguing that we were already in a recession because the the technical definition is two quarters of negative GDP growth. Yet here we are with a scorching job market, decent corporate earnings, strong consumer spending, and the NASDAQ up 35% YTD. Besides the inversion of the yield curve there aren't many signals that the economy is actually slowing down or that a recession is near
"the the technical definition is two quarters of negative GDP growth". That's a common rule of thumb, but is not the technical definition. In the US, the official definition is the NBER saying it's a recession.

https://www.whitehouse.gov/cea/written- ... recession/
I'm aware. This was an argument repeated ad nauseum on this forum 6 months or a year ago. My point is that for the last 18 months many have been predicting an upcoming recession or declaring we're already in one, with little to no economic evidence to actually support the claim. So maybe the stock market and bond market are telling different stories. Or maybe those claiming to know what story the market is telling actually have no idea
"Or maybe those claiming to know what story the market is telling actually have no idea". I'll agree 100% with that.
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Re: Cliff Asness on bonds and stock telling a different story

Post by Artsdoctor »

The Fed, the equity market, and the bond market have been at odds for a while now and the past month in particular can't really be described as "financially stable" by any definition. I would be pretty skeptical of anyone trying to tie things together in a neat package. The US credit rating was downgraded in 2011 by S&P because, among other things, "the political brinksmanship of recent months highlights what we [S&P] see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed." Certainly sounds familiar today as well. Fitch recently downgraded France for similar reasons so I wouldn't be surprised if we see more of this conversation. I don't think that I would act on anything Asness says and I'd keep my long-term plans as they are, but I'd just be prepared for more short-term volatility.
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Re: Cliff Asness on bonds and stock telling a different story

Post by Lawrence of Suburbia »

I don't know; I'm retired.
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Re: Cliff Asness on bonds and stock telling a different story

Post by Cocoa Beach Bum »

steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but ...
Try this link to view the full Cliff Asness interview on Bloomberg from May 31: https://www.bloomberg.com/news/videos/2 ... iff-asness.
nedsaid wrote: Fri Jun 02, 2023 10:46 am Nedsaid: Yes, market experts often cite inverted yield curves as an indicator of impending recession. My understanding is that the predicted recession happens most of the time but not all of the time.
I think Campbell Harvey might have been the first to observe and report this phenomenon in his 1986 PhD dissertation (see https://people.duke.edu/~charvey/Term_s ... Harvey.pdf). So far, it's been completely accurate. Earlier this year he was thinking it might fail this time, but last week the WSJ reported he's now expecting a recession (see https://www.wsj.com/articles/pro-take-y ... _permalink).
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Re: Cliff Asness on bonds and stock telling a different story

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steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
What I want to know is, why would anyone ever listen to this guy?? Every single one of his fancy-schmancy equity funds are grossly underperforming the market. And he charges an arm and a leg.

I’ve never seen someone else with such a lousy record be put up on such a high pedestal.

Ignore him.
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Re: Cliff Asness on bonds and stock telling a different story

Post by km91 »

Cocoa Beach Bum wrote: Fri Jun 02, 2023 1:55 pm
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but ...
Try this link to view the full Cliff Asness interview on Bloomberg from May 31: https://www.bloomberg.com/news/videos/2 ... iff-asness.
nedsaid wrote: Fri Jun 02, 2023 10:46 am Nedsaid: Yes, market experts often cite inverted yield curves as an indicator of impending recession. My understanding is that the predicted recession happens most of the time but not all of the time.
I think Campbell Harvey might have been the first to observe and report this phenomenon in his 1986 PhD dissertation (see https://people.duke.edu/~charvey/Term_s ... Harvey.pdf). So far, it's been completely accurate. Earlier this year he was thinking it might fail this time, but last week the WSJ reported he's now expecting a recession (see https://www.wsj.com/articles/pro-take-y ... _permalink).
Yes, it's been an accurate indicator, it's predicted 4 of the last 4 recessions. I certainly wouldn't bet on it one way or the other based on a sample size of 4 though. Things that have never happened happen all the time in financial markets. If you really believe in the signal, what action should you take. Sell out of equities? If you did that when the curve first inverted last summer you've missed out in a 15% return for the S&P and 35% for the Nasdaq ytd. To change courses you need to make a lot of different decisions, to stay the course you just need to make one, it gives you much less opportunities to be wrong.
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Re: Cliff Asness on bonds and stock telling a different story

Post by Cocoa Beach Bum »

km91 wrote: Fri Jun 02, 2023 2:41 pm Yes, it's been an accurate indicator, it's predicted 4 of the last 4 recessions. ...
It is 8 for 8 in forecasting recessions since 1968 — with no false alarms.
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Re: Cliff Asness on bonds and stock telling a different story

Post by nisiprius »

(Already noted above by exodusing, above...)
km91 wrote: Fri Jun 02, 2023 11:14 am...the technical definition is two quarters of negative GDP growth.
That is not "the technical definition of a recession," and it is only used when people are grinding an axe, and want to say "we are in a recession" when the truth is that it is too soon to tell. The definition of a recession is the determination by the National Bureau of Economic Research, and as far as I know this is generally accepted by economists.

To quote from Jeremy Siegel, Stocks for the Long Run:
It is commonly assumed that a recession occurs when real gross domestic product, the most inclusive measure of economic output, declines for two consecutive quarters. But this is not necessarily so. Although this criterion is a reasonable rule of thumb for indicating a recession, there is no single rule or measure used by the NBER. Rather the bureau focuses on four different series to determine the turning points in the economy: employment, industrial production, real personal income, and real manufacturing and trade sales....

The Business Cycle Dating Committee is in no rush to call the turning points in the cycle. Never has a call been reversed because of new or revised data that have become available—and the NBER wants to keep it that way. As Robert E. Hall, current chair of the seven-member Business Cycle Dating Committee, indicated, “The NBER has not made an announcement on a business cycle peak or trough until there was almost no doubt that the data would not be revised in light of subsequent availability of data.”
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Re: Cliff Asness on bonds and stock telling a different story

Post by Vtsax100 »

Im glad I don’t worry about this stuff any more. The stock market is not the economy.
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Re: Cliff Asness on bonds and stock telling a different story

Post by arcticpineapplecorp. »

steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
what are you looking to accomplish with this information?

do people ever confuse information for knowledge?

are you market timing acting on an indicator?

if you get out of the market because of this indicator, what other indicator tells you to get back into the market? Does Campell Harvey have an indicator for that? If not, then what do you do? Buy back in when the market falls 20%? You ok with that if then the market falls another 20% after that? Let's say there will be a recession. How far will the market fall so you'll know when to get in, but not too soon (before markets are done falling) and not too late (after markets start recovering)?

i always expect stocks to fall 50% at any time. If you do that, you plan on how much you can tolerate losing:

Image

otherwise you are asking if you should get out of the market, then you'll ask if you should get into the market, then you'll ask if you should get out of the market again, ad nauseum. Doesn't it seem better to just pick an allocation that allows you to sleep at night and not worry about whatever the market will do?
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Re: Cliff Asness on bonds and stock telling a different story

Post by Mr. Buzzkill »

Whether we enter a technically defined recession or not, I believe the yield curve suggests that we are headed for a downturn in the economy.

Job growth announced suggests wages continue to rise in near future, adding inflationary pressure to which the Fed might, should, or will respond with higher interest rates.

That would slow lending on homes and for business even more. That sequence suggests eventual declining macroeconomic conditions and ultimately downturn in market indicators. How far down? Nobody knows nothin’

I’m doing nothing but rebalancing as my IPS warrants.
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Re: Cliff Asness on bonds and stock telling a different story

Post by nisiprius »

The story makes favorable remarks about some AQR funds I can't identify.
AQR, like other multistrategy funds, thrived last year as inflation spiked. Its longest-running strategy, Absolute Return, surged 43.5% after fees in 2022, its best performance since the firm’s inception and a change from poor returns in recent years starting in 2018
Any idea which specific fund it is referring to?

There's a reference to "absolute return" and "multistrategy" here, but it's hard for me to pick out which specific fund is considered an "absolute return" fund.

Alternatives

As a pioneer in alternative investing, AQR has a long track record of managing the complexities of these types of strategies. By investing long and short, and balancing exposure to factors and asset classes, our alternative strategies are built to seek returns in both up and down markets. We offer both absolute return strategies, which target zero exposure to traditional markets, either at all times, or on average, and total return strategies, which maintain some exposure to traditional markets.

Single Strategy

AQR Diversified Arbitrage Fund
AQR Equity Market Neutral Fund
AQR Long-Short Equity Fund
AQR Macro Opportunities Fund
AQR Managed Futures Strategy Fund
AQR Managed Futures Strategy HV Fund
AQR Risk-Balanced Commodities Strategy Fund
AQR Sustainable Long-Short Equity Carbon Aware Fund

Multi-Strategy

AQR Alternative Risk Premia Fund
AQR Diversifying Strategies Fund
AQR Style Premia Alternative Fund
AQR Alternative Risk Premia Fund returned +25.26% in 2022
AQR Diversifying Strategies Fund returned +14.69% in 2022
AQR Style Premia Alternative Fund returned +30.64% in 2022

So none of them fits the description of "multi-strategy" and "+43.5% in 2022."
Last edited by nisiprius on Fri Jun 02, 2023 5:39 pm, edited 1 time in total.
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Re: Cliff Asness on bonds and stock telling a different story

Post by km91 »

nisiprius wrote: Fri Jun 02, 2023 5:29 pm The story makes favorable remarks about some AQR funds I can't identify.
AQR, like other multistrategy funds, thrived last year as inflation spiked. Its longest-running strategy, Absolute Return, surged 43.5% after fees in 2022, its best performance since the firm’s inception and a change from poor returns in recent years starting in 2018
Any idea which specific fund it is referring to?

There's a reference to "absolute return" and "multistrategy" here, but it's hard for me to pick out which specific fund is considered an "absolute return" fund.

Alternatives

As a pioneer in alternative investing, AQR has a long track record of managing the complexities of these types of strategies. By investing long and short, and balancing exposure to factors and asset classes, our alternative strategies are built to seek returns in both up and down markets. We offer both absolute return strategies, which target zero exposure to traditional markets, either at all times, or on average, and total return strategies, which maintain some exposure to traditional markets.

Single Strategy

AQR Diversified Arbitrage Fund
AQR Equity Market Neutral Fund
AQR Long-Short Equity Fund
AQR Macro Opportunities Fund
AQR Managed Futures Strategy Fund
AQR Managed Futures Strategy HV Fund
AQR Risk-Balanced Commodities Strategy Fund
AQR Sustainable Long-Short Equity Carbon Aware Fund

Multi-Strategy

AQR Alternative Risk Premia Fund
AQR Diversifying Strategies Fund
AQR Style Premia Alternative Fund
It's one of their private hedge funds. AQR Absolute Return Strategy Institutional Fund, it's unlikely there's much public performance data
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Re: Cliff Asness on bonds and stock telling a different story

Post by nisiprius »

km91 wrote: Fri Jun 02, 2023 5:38 pm It's one of their private hedge funds. AQR Absolute Return Strategy Institutional Fund
Where can I find a tabulation of the annual past performance since inception for this fund?
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Re: Cliff Asness on bonds and stock telling a different story

Post by km91 »

nisiprius wrote: Fri Jun 02, 2023 5:39 pm
km91 wrote: Fri Jun 02, 2023 5:38 pm It's one of their private hedge funds. AQR Absolute Return Strategy Institutional Fund
Where can I find a tabulation of the annual past performance since inception for this fund?
See my above addition. I doubt there's much public performance data beyond the occasional mention in Bloomberg or Institutional Investor by "sources familiar and with fund"
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Re: Cliff Asness on bonds and stock telling a different story

Post by DoctorE »

He’s just another Roubini fearmonger pushing their trend following dream funds. One good 2022 after 10 years of nothing… yay !
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Re: Cliff Asness on bonds and stock telling a different story

Post by Beensabu »

km91 wrote: Fri Jun 02, 2023 12:14 pm
exodusing wrote: Fri Jun 02, 2023 11:36 am
km91 wrote: Fri Jun 02, 2023 11:14 am We've been hearing about the imminent recession for a year and a half now. It wasn't that long ago that many were arguing that we were already in a recession because the the technical definition is two quarters of negative GDP growth. Yet here we are with a scorching job market, decent corporate earnings, strong consumer spending, and the NASDAQ up 35% YTD. Besides the inversion of the yield curve there aren't many signals that the economy is actually slowing down or that a recession is near
"the the technical definition is two quarters of negative GDP growth". That's a common rule of thumb, but is not the technical definition. In the US, the official definition is the NBER saying it's a recession.

https://www.whitehouse.gov/cea/written- ... recession/
I'm aware. This was an argument repeated ad nauseum on this forum 6 months or a year ago. My point is that for the last 18 months many have been predicting an upcoming recession or declaring we're already in one, with little to no economic evidence to actually support the claim. So maybe the stock market and bond market are telling different stories. Or maybe those claiming to know what story the market is telling actually have no idea
Real gross domestic income (GDI) has decreased for the last two reported quarters (22Q4 and 23Q1). This is a thing that has tended to happen during recessions (which are officially declared once they are over).

https://fred.stlouisfed.org/series/A261RX1Q020SBEA
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Re: Cliff Asness on bonds and stock telling a different story

Post by billaster »

Beensabu wrote: Fri Jun 02, 2023 6:24 pm Real gross domestic income (GDI) has decreased for the last two reported quarters (22Q4 and 23Q1). This is a thing that has tended to happen during recessions (which are officially declared once they are over).

https://fred.stlouisfed.org/series/A261RX1Q020SBEA
GDP and GDI are two measures of the same thing. GDP counts total spending and GDI counts total income. These two values should be equal since once person's or company's spending is another person's or company's income. Although theoretically they should be the same, in practice they sometimes diverge in what is called the "statistical discrepancy" which has to do with methodology.

For that reason, the NBER prefers to use the average of GDP and GDI, which they call GDO for Gross Domestic Output. GDP and GDI are only published quarterly while the NBER dates recessions by month. This is one reason they do not rely on GDP (or GDI) as a primary indicator.

You can see the six primary indicators that the NBER uses to date recessions in one convenient dashboard (in addition to GDP, GDI and GDO):
1. real personal income less transfers
2. nonfarm payroll employment
3. real personal consumption expenditures
4. wholesale-retail sales adjusted for price changes
5. employment as measured by the household survey
6. industrial production.

https://fredaccount.stlouisfed.org/publ ... oard/84408
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Re: Cliff Asness on bonds and stock telling a different story

Post by Elysium »

steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
No and No.

1. Inflation is falling, slow but sure and steady 2. Rates are high enough to break inflation but not cause a recession 3. Job growth is still good, signaling no major recession 4. Growth stocks and specifically Tech stocks have gone up a lot, valuations look full now, some may fall but not as a group, other stocks including value is pretty flat for the year, no reason to fall a long way. Overall, everything is set for stocks to rally and bond rates to fall next year. Oh and don't fight the Presidential election year too. Anyone staying on sidelines will miss out.
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Re: Cliff Asness on bonds and stock telling a different story

Post by nisiprius »

From the Bloomberg article:
Unlike stocks, the bond market is telegraphing that the Federal Reserve will make aggressive interest-rate cuts over the next year or two, Asness, co-founder and chief investment officer of AQR Capital Management, said on an episode of “Bloomberg Wealth with David Rubenstein.” That would trigger a recession that wouldn’t be mild, he said.
Why would aggressive interest rate cuts trigger a recession?
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Re: Cliff Asness on bonds and stock telling a different story

Post by billaster »

nisiprius wrote: Fri Jun 02, 2023 8:23 pm From the Bloomberg article:
Unlike stocks, the bond market is telegraphing that the Federal Reserve will make aggressive interest-rate cuts over the next year or two, Asness, co-founder and chief investment officer of AQR Capital Management, said on an episode of “Bloomberg Wealth with David Rubenstein.” That would trigger a recession that wouldn’t be mild, he said.
Why would aggressive interest rate cuts trigger a recession?
I don't know what Bloomberg article you are referring to but whenever a journalist writes "he said" as a paraphrase without an accompanying direct quote, I assume the journalist likely got it wrong.
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Re: Cliff Asness on bonds and stock telling a different story

Post by Beensabu »

billaster wrote: Fri Jun 02, 2023 7:19 pm
Beensabu wrote: Fri Jun 02, 2023 6:24 pm Real gross domestic income (GDI) has decreased for the last two reported quarters (22Q4 and 23Q1). This is a thing that has tended to happen during recessions (which are officially declared once they are over).

https://fred.stlouisfed.org/series/A261RX1Q020SBEA
GDP and GDI are two measures of the same thing. GDP counts total spending and GDI counts total income. These two values should be equal since once person's or company's spending is another person's or company's income. Although theoretically they should be the same, in practice they sometimes diverge in what is called the "statistical discrepancy" which has to do with methodology.

For that reason, the NBER prefers to use the average of GDP and GDI, which they call GDO for Gross Domestic Output. GDP and GDI are only published quarterly while the NBER dates recessions by month. This is one reason they do not rely on GDP (or GDI) as a primary indicator.
Yes. Real GDO growth rate was -0.5 for 23Q1.
You can see the six primary indicators that the NBER uses to date recessions in one convenient dashboard (in addition to GDP, GDI and GDO):
1. real personal income less transfers
2. nonfarm payroll employment
3. real personal consumption expenditures
4. wholesale-retail sales adjusted for price changes
5. employment as measured by the household survey
6. industrial production.

https://fredaccount.stlouisfed.org/publ ... oard/84408
This is cool. Thanks!
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Re: Cliff Asness on bonds and stock telling a different story

Post by billaster »

Beensabu wrote: Fri Jun 02, 2023 9:55 pm Yes. GDO was -0.5 for 23Q1.
If you look at the dashboard, you will see that GDO was down the last two quarters -- GDI was strongly down and GDP was up a bunch, but not as much. That is a really wide divergence. Likewise, look at the employment numbers on the dashboard. The establishment survey for May, announced today, was up 339,000 while the household survey was down 310,000. Crazy!

Economic indicators have been really wild in this recession recovery which is contributing to the uncertainty for Federal Reserve policies. And the NBER is certainly not going to make a call on a new recession until they see some consistency in multiple indicators.

These are interesting times for economists.
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Re: Cliff Asness on bonds and stock telling a different story

Post by steve321 »

km91 wrote: Fri Jun 02, 2023 2:41 pm
Cocoa Beach Bum wrote: Fri Jun 02, 2023 1:55 pm
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but ...
Try this link to view the full Cliff Asness interview on Bloomberg from May 31: https://www.bloomberg.com/news/videos/2 ... iff-asness.
nedsaid wrote: Fri Jun 02, 2023 10:46 am Nedsaid: Yes, market experts often cite inverted yield curves as an indicator of impending recession. My understanding is that the predicted recession happens most of the time but not all of the time.
I think Campbell Harvey might have been the first to observe and report this phenomenon in his 1986 PhD dissertation (see https://people.duke.edu/~charvey/Term_s ... Harvey.pdf). So far, it's been completely accurate. Earlier this year he was thinking it might fail this time, but last week the WSJ reported he's now expecting a recession (see https://www.wsj.com/articles/pro-take-y ... _permalink).
Yes, it's been an accurate indicator, it's predicted 4 of the last 4 recessions. I certainly wouldn't bet on it one way or the other based on a sample size of 4 though. Things that have never happened happen all the time in financial markets. If you really believe in the signal, what action should you take. Sell out of equities? If you did that when the curve first inverted last summer you've missed out in a 15% return for the S&P and 35% for the Nasdaq ytd. To change courses you need to make a lot of different decisions, to stay the course you just need to make one, it gives you much less opportunities to be wrong.
Why what you need many different decisions not to stay the course? For example one could sell now that Professor Harvy has confirmed that his indicator is working and Invest again in stocks when the yield curve normalises.
I have a lot of stocks in taxable accounts unfortunately so that is a complication for me
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Re: Cliff Asness on bonds and stock telling a different story

Post by HomerJ »

steve321 wrote: Fri Jun 02, 2023 11:08 pm
km91 wrote: Fri Jun 02, 2023 2:41 pm
Cocoa Beach Bum wrote: Fri Jun 02, 2023 1:55 pm
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but ...
Try this link to view the full Cliff Asness interview on Bloomberg from May 31: https://www.bloomberg.com/news/videos/2 ... iff-asness.
nedsaid wrote: Fri Jun 02, 2023 10:46 am Nedsaid: Yes, market experts often cite inverted yield curves as an indicator of impending recession. My understanding is that the predicted recession happens most of the time but not all of the time.
I think Campbell Harvey might have been the first to observe and report this phenomenon in his 1986 PhD dissertation (see https://people.duke.edu/~charvey/Term_s ... Harvey.pdf). So far, it's been completely accurate. Earlier this year he was thinking it might fail this time, but last week the WSJ reported he's now expecting a recession (see https://www.wsj.com/articles/pro-take-y ... _permalink).
Yes, it's been an accurate indicator, it's predicted 4 of the last 4 recessions. I certainly wouldn't bet on it one way or the other based on a sample size of 4 though. Things that have never happened happen all the time in financial markets. If you really believe in the signal, what action should you take. Sell out of equities? If you did that when the curve first inverted last summer you've missed out in a 15% return for the S&P and 35% for the Nasdaq ytd. To change courses you need to make a lot of different decisions, to stay the course you just need to make one, it gives you much less opportunities to be wrong.
Why what you need many different decisions not to stay the course? For example one could sell now that Professor Harvy has confirmed that his indicator is working and Invest again in stocks when the yield curve normalises.
I have a lot of stocks in taxable accounts unfortunately so that is a complication for me
So wait, the signal alone is not good enough to make changes? (happened a year ago). You have to wait for Professor Harvey to confirm it? So you're basically just waiting for that one guy to tell you when you should get out of the market?
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Re: Cliff Asness on bonds and stock telling a different story

Post by steve321 »

HomerJ wrote: Fri Jun 02, 2023 11:14 pm
steve321 wrote: Fri Jun 02, 2023 11:08 pm
km91 wrote: Fri Jun 02, 2023 2:41 pm
Cocoa Beach Bum wrote: Fri Jun 02, 2023 1:55 pm
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but ...
Try this link to view the full Cliff Asness interview on Bloomberg from May 31: https://www.bloomberg.com/news/videos/2 ... iff-asness.
nedsaid wrote: Fri Jun 02, 2023 10:46 am Nedsaid: Yes, market experts often cite inverted yield curves as an indicator of impending recession. My understanding is that the predicted recession happens most of the time but not all of the time.
I think Campbell Harvey might have been the first to observe and report this phenomenon in his 1986 PhD dissertation (see https://people.duke.edu/~charvey/Term_s ... Harvey.pdf). So far, it's been completely accurate. Earlier this year he was thinking it might fail this time, but last week the WSJ reported he's now expecting a recession (see https://www.wsj.com/articles/pro-take-y ... _permalink).
Yes, it's been an accurate indicator, it's predicted 4 of the last 4 recessions. I certainly wouldn't bet on it one way or the other based on a sample size of 4 though. Things that have never happened happen all the time in financial markets. If you really believe in the signal, what action should you take. Sell out of equities? If you did that when the curve first inverted last summer you've missed out in a 15% return for the S&P and 35% for the Nasdaq ytd. To change courses you need to make a lot of different decisions, to stay the course you just need to make one, it gives you much less opportunities to be wrong.
Why what you need many different decisions not to stay the course? For example one could sell now that Professor Harvy has confirmed that his indicator is working and Invest again in stocks when the yield curve normalises.
I have a lot of stocks in taxable accounts unfortunately so that is a complication for me
So wait, the signal alone is not good enough to make changes? (happened a year ago). You have to wait for Professor Harvey to confirm it? So you're basically just waiting for that one guy to tell you when you should get out of the market?
Yeah makes sense. For starters he's the expert on yield curves. Also I was not very aware of this till I listened to Asness so I did not sell when it first inverted (luckily😅).
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Re: Cliff Asness on bonds and stock telling a different story

Post by Northern Flicker »

steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
To expropriate and modify a quote from Paul Samuelson, a famous economist...

An inverted yield curve has predicted 9 of the last 5 recessions.
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Re: Cliff Asness on bonds and stock telling a different story

Post by steve321 »

Northern Flicker wrote: Fri Jun 02, 2023 11:23 pm
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
To expropriate and modify a quote from Paul Samuelson, a famous economist...

An inverted yield curve has predicted 9 of the last 5 recessions.
Lol So every recession has an inverted yield curve but not every inverted yield curve has a recession, right?
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Re: Cliff Asness on bonds and stock telling a different story

Post by secondopinion »

Northern Flicker wrote: Fri Jun 02, 2023 11:23 pm
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
To expropriate and modify a quote from Paul Samuelson, a famous economist...

An inverted yield curve has predicted 9 of the last 5 recessions.
Well, it at least gave no false negatives I think... :P

But yes, I do not quite buy the inverted yield curve story. Short-term rates more or less follow from Fed actions, so that is more of a Fed action prediction priced in the market. Why they need to lower rates might not be related to recessions.
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Re: Cliff Asness on bonds and stock telling a different story

Post by Northern Flicker »

steve321 wrote: Fri Jun 02, 2023 11:32 pm
Northern Flicker wrote: Fri Jun 02, 2023 11:23 pm
steve321 wrote: Fri Jun 02, 2023 9:33 am Cliff Asness recently said on Bloomberg that the inverted yield curve is telling a very different story from the way stocks are priced. I will try to fond it online to share it but basically:
1. Do you agree that bonds are signaling a recession?
2. Do you agree that stocks have a long way to fall?
To expropriate and modify a quote from Paul Samuelson, a famous economist...

An inverted yield curve has predicted 9 of the last 5 recessions.
Lol So every recession has an inverted yield curve but not every inverted yield curve has a recession, right?
Right. Inverted yield curves are common during Fed tightening campaigns. But an inverted yield curve can cause a recession if it goes on for too long. That's because it tends to make lending unprofitable for a lender that borrows short and lends long. This can lead to over-tightening of credit.
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Re: Cliff Asness on bonds and stock telling a different story

Post by freyj6 »

What are everyone's thoughts on what the market *does* expect with stocks?

I've found the current period very strange. 2020 and 2021 were wild but made an odd kind of sense: there was a lot of of free money flying around and a lot of speculation, then most of the speculative stuff came crashing down in 2022.

Right now, there seems to be far less speculation and a lot more fear, but people are looking for "safety" in big companies selling for 35x earnings or more.

Meanwhile, international, emerging and value are all relatively and absolutely cheap.

So in your opinion, what is the market signalling? Other than big tech keeps winning so let's keep riding the train.
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Re: Cliff Asness on bonds and stock telling a different story

Post by nyejos11 »

This is the narrative I never understood as a reason to raise interest rates to fight inflation:
“Job growth announced suggests wages continue to rise in near future, adding inflationary pressure to which the Fed might, should, or will respond with higher interest rates.”

Shouldn’t it read:

“Job growth announced suggests PRODUCTIVITY continues to rise in near future, adding DEFLATIONARY pressure to which the Fed might, should, or will respond with LOWER interest rates.
Or do the jobs we create in this country not contribute to productivity further contributing to the supply side anymore? Hmmm?
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