Updating to 20-25% based off:

@nsokolsky Off a tweet from a random VC guy?

@benshindel anyone might invite this guy to join manifold? Would be fun

@benshindel I have a poor Brier score for a reason

Kalshi traders have this at 8% - what am I missing? They are using a different statistic but both are trying to measure negative GDP growth. https://kalshi.com/markets/recssnber/recession

@KevinBurke I think Manifold has an unusually high risk-free interest rate at the moment—even for Manifold—because of the pivot to real money (e.g., smart traders losing liquidity or even leaving the platform). Keep in mind this "end of 2024" market actually might not resolve until 2026-01-01. Still, I'm not sure if that's a full explanation for a ~21% price.

Personally I basically just bet on EMH for basically of these economic and financial markets that aren't long-term enough for transformative AI to apply, and I'm mostly holding positions to rack up as many loans as I can before those are no longer available.

@Jacy I also just think kalshi is wrong here

8% is an absurdly low probability given the yield curve inversion, second spike in inflation, geopolitical risk, reliance of US fiscal deficits, inconsistencies of BLS employment measures, low PMI reads and banking risk from higher rates for longer

@IsarBhattacharjee Well, Kalshi's market is about negative GDP growth this year specifically. If I read into your suggestion about a second spike in inflation, the way that could cause a recession is if it forces the Fed to hike rates further, which would slow economic activity.

There are only a bit less than three quarters left in this year, and rate hikes affect output with a considerable delay. To get two negative prints this year, rate hikes (or the lack of cuts that might otherwise have happened) would have to be affecting output by Q3 at the latest. That's not far away - Q2 will be almost over by the time the FOMC next meets. So it's doubtful that an increase in inflation in the coming months and therefore rate hikes in the months following could affect the probability of having two negative GDP prints this year basically at all. Maybe next year.

That said, markets aren't pricing rate hikes at all, and Powell even made comments in the last presser saying they're not on the agenda given how things currently look. So the above is just to say that even if a second spike in inflation caused more hikes, it still wouldn't affect Kalshi's market much.

I think the same basic argument applies to any other definition of a recession too - that inflation → hikes → slowing whatever metric is slow and unlikely to affect things this year, but pointing to the specific requirement of two negative GDP prints in one year I think should clarify just how short the needed timeframe for that mechanism is in order for it to cause a recession.

As for your other points:

• Yield curve inversion is nothing but a market forecast for lower interest rates over the next ten years than two years, which you expect whether there's a recession or not. A soft landing would look like that too.

• Geopolitical risk is a claim you could make nearly every year that doesn't move us much away from base rates. I know it doesn't feel like it, it never does, but it's true.

• Inconsistencies in data ⇒ recession doesn't follow, sorry. In fact, jobs data is looking great, the Fed would have to be pretty happy about it.

• Low PMI, meh, the Fed wants some slowing, slowing is good unless it's too fast, merely pointing to slowing isn't enough. Some slowing is the point, and if we weren't seeing it you'd be pointing to the lack of slowing as a recession risk too (because it might necessitate more rate hikes).

@chrisjbillington totally fair view. I think we'll just disagree on this one.

Labour market revisions drive a lot of NBER decision making, and rates higher for even a bit longer can really stress banks and mortgage holders.

Jobs data - we've just had the biggest tick up in the sahm rule indicator (we're at roughly 0.4 and 0.5 normally indicates recession)

Guess we'll just have to wait and see.

Ultimately this markets pricing is much close to the true probability than the 8% on kalshi which still seems crazily confident to me

@IsarBhattacharjee

we've just had the biggest tick up in the sahm rule indicator

Biggest since when? Oct last year was a bigger increase, then it declined until January, then increased to now.

I rate it as a good indicator. But the way it works, you can expect a slowdown in its increases soon, or even a decline.

Its baseline (the 12-month-minimum of the 3-month-moving-average of unemployment) will start increasing this month, such that increases in the indicator will not be as large for the same increase in the unemployment rate. The three-month-moving-average of unemployment can get as high as 4.2% as of the September release without the Sahm rule triggering.

Most recessions in the past involved a decently faster increase in the unemployment rate than we're seeing now, they don't usually get to the point where the Sahm indicator's baseline starts increasing before the rule triggers.

Guess we'll just have to wait and see.

Indeed!

@chrisjbillington to be fair a lot of the uptick in unemployment data we see now from historic recessions are a result of revisions much later on. They normally don't look anywhere near that bad at the time and then they get revised worse.

Good discussion about this around halfway through this podcast: https://blockworks.co/podcast/forwardguidance/2e9b9bc8-080b-11ef-b1df-632d6d93c38c

A while back (back when I did my masters) I looked into the revision record and it's crazy how much u employment gets revised up to 12 months after

@KevinBurke A recession basically has to start within the next month for Kalshi to resolve yes, whlie it could start December this year for this market.

Consumer confidence drops to 21-month low due to worries about food and gas prices - MarketWatch

Q1 GDP comes in much weaker than expected, PCE deflator suggests hotter inflation than expected. Deffo think this market is still underpriced

If sovereign default/restructuring risk is high, would the fed balk at raising rates because failed attempts would reveal low demand for Treasury bonds?

Higher gas and rents keep US inflation elevated, likely delaying Fed rate cuts

There is a large discrepancy between the 18% here and some probabilistic models:

https://www.newyorkfed.org/research/capital_markets/ycfaq.html#/interactive
https://fred.stlouisfed.org/categories/33120

@schlongenheim Thanks for the second link. The first I think is pretty well known.

@schlongenheim the Sahm indicator is declining because unemployment is falling. Unemployment has to rise quickly for the Sahm indicator to increase, and it is doing the opposite of that. Just because it's high now doesn't mean a recession is imminent - it's not getting higher at the moment.

Don't know what that probabilistic model is or how it works, but there's no way there's a >50% chance of a recession. Is it just predicting rate cuts based on the yield curve? We know there will be rate cuts, but rate cuts are sometimes because the Fed is done dealing with an inflationary crisis and doesn't want to cause a recession by leaving rates high, they're not always because a recession is actually happening.

@chrisjbillington Does it look like inflation will come down enough to cut rates without a recession after the last 3 months? Also forward looking indicators such as NFIB hiring plans suggest a rapid cooling of the labor market, and the oil price spike will further add pressure for producers to cut costs.

@riverwalk3 what do you mean "cut rates without a recession"? Cutting rates decreases the chances of a recession. Cutting rates is what you do when the risk of a recession is high, or after one has already started. Cutting rates is the treatment for recessions, not the cause.

If inflation isn't coming down fast enough, they'll hold off cutting rates. Holding off for too long indeed can cause a recession. But if you agree that inflation being higher than expected warrants holding off on rate cuts, then you presumably agree that the risk of holding rates high causing a recession is not too high.

If you think a recession is coming, you should be arguing for rate cuts!

@chrisjbillington I mean that the only scenario where the Fed cuts rates is a recession with inflation remaining high and commodities skyrocketing.

Oil starting the squeeze, up 8.4% this month

@IsarBhattacharjee inflation hotter than expected- fed likely to keep rates up for longer

@IsarBhattacharjee Whilst this is true it doesn't really point to a recession. Inflation falling faster than expected would mean demand had collapsed. Inflation being higher than expected at the moment is likely pointing to the economy running too hot - the opposite of a recession.

It's true that high rates can cause a recession if they're held too high or high for too long. But given the economy is still running somewhat hot (I mean - 3.5% inflation is is not that bad), it's clear the fed has not (yet) done that. It remains to be seen if they can stick the landing, and today's inflation print doesn't really tell us anything except that they have not overcooked the rate hikes yet.

@chrisjbillington it's supply driven cost push (oil) combined with services inflation

Will drive big repricing over the next 2 months

We won't have to wait too long to see

@chrisjbillington Stagflation is possible

@IsarBhattacharjee Commodities are rising very quickly but the CPI still shows goods deflation right now. They will eventually show up as goods inflation. Even if services inflation such as shelter comes down this will still lead to inflation too high this year to cut rates.

@riverwalk3 yep agree

I already have positions on these two markets

https://manifold.markets/JonathanRay/will-the-next-change-to-the-fed-fun?r=SXNhckJoYXR0YWNoYXJqZWU

https://manifold.markets/jacksonpolack/will-the-us-enter-stagflation-by-th?r=SXNhckJoYXR0YWNoYXJqZWU

@IsarBhattacharjee I caution that stagflation by the market description is hard. 4% inflation is possible, but 1.5% GDP is hard simply because of all the momentum in the last few quarters (which feed into this year’s GDP). Even if GDP comes at 0% for all 4 quarters this year, we get 1.4% growth, and first quarter is likely around 2.5%, meaning that we would have to be at like -1% for the rest of the year for this to happen.

@riverwalk3 isn't the NBER Business cycle set quarterly? in that case the description would warrant resolving yes at is says enter a recession at any point which a -1% in Q4 would certainly be

@LeonardoKr or was it two consecutive negative quarters needed to qualify for recession,don't remember

@LeonardoKr Yeah it would be a recession but 2024 GDP growth would still be at least 1.5%

@riverwalk3 which isn't the question we're betting on, or what was the point you we're trying to make?

@LeonardoKr I am talking about the stagflation market that Isar linked.