If a prediction of a recession causes the market to crash, can it be said that the prediction itself is part of the cause of the recession? Like a self-fulfilling prophecy?
In: Economics
Doesn’t that mean the SEC needs to sue the media?
When people make those types of predictions they aren’t staring into a crystal ball or reading the bones.
They tend to be looking at certain economic indicators. And those indicators can show trends that lead to certain economic situations.
Somewhat like if you see someone drunkenly speeding you can predict that they will soon get into a car crash.
Sure, there was a prediction, but that prediction didn’t cause that event.
Not really. If the prediction is based on data that matches historical trends, many people will have access to the same predictions.
The reason it doesn’t happen is because the first one to flinch before a bubble pops will miss out on the bubble gains. All traders are essentially bullish because if the market didn’t consistently increase in value over the long term, there’d be no point to trading.
Think of this example. Say profits are good, but there’s fear of a recession in the air. You decide to stop hiring and cut marketing spends. Your competitor keeps expanding and making sales. If a recession hits, they might have to fire some of the new hires, but they are still better prepared since they landed some more sales while you were cutting back. The first one to start acting like there’s a recession will lose because the business can still respond to a recession if one happens. If there’s no major recession, then you cut back for no reason.
The drive to make more money is always a push back against bearish behaviors. Don’t get me wrong, we will inevitably have another recession at some point, but there’s an old joke that the news has predicted 10 of the last 3 recessions. The predictions themselves don’t cause them.
In addition to a lot here, the timing of a recession is difficult to predict with one metric. The 10-2 yield inversion being used to “predict” a recession typically occurs 2 years before a recession and we’re only talking about a handful of times it’s happened so it’s not as simple as due to X, Y will follow. It’s something to watch for sure but don’t assume because it happened 5 times previously that it’s inevitable now.
The definition of a recession is two or more quarters of retarded economic development, keep that in mind. Media is frenzied with throwing the word around. Also, we can’t really tell b/c the elephant in the room that we all see of course in this example is too big to take other economic variable conditions at the moment. So we are left with yo-yoing volatility and a lot of speculation.
People have been predicting a recession for 2 years now, at what point did they call it?
It gets even deeper. Most people that respond to a recession prediction are responding to how they think others will view the recession prediction (by selling).
This time it is very unnerving though, especially considering we’re in one of the longest periods of economic stability/growth EVER. Statistically we are way waaaaay overdue for some kind of recession.
You are correct. Many people don’t realize that the stock price is determined by whether people are buying or selling it. If everyone says sale, the price will drop regardless of any fundamental flaw or issue with the company. We assume that people’s actions will accurately reflect the value of the company, but often that is not true and can be influenced by outside factors, such as the news, other event, or perception. People can be irrational.
On the surface it only appears that way. In reality the recession/depression is caused by economic realities that run far deeper than it being merely a perception of coming economic crisis.
Let me give an example. Let’s say that there are two companies: A and B. Both make a very similar product that are in competition with each other, however they produce them under different conditions. Company A produces 1 million units of the product per year using 10,000 workers. Company B also produces 1 million units but requires 15,000 workers to do so (their technology and productive techniques are inferior).
Over time it is easy to see that Company A will be able to undercut the prices of the product they are each producing. If there isn’t demand in the system for all 2 million units produced per year, then it is highly likely that Company B will be left with units unsold.
A successful prediction would determine that Company B needs to modernize its productive capacity to be better able to compete with Company A or be forced into bankruptcy.
However let’s assume that the management at Company B doesn’t realize this. Let’s say that their suppliers and creditors don’t realize this either. Company B continues to produce 1 million units per year as if nothing is wrong: perhaps they see their poor market performance as merely a ‘temporary blip in ‘the market.’ Their inventory of unsold units keeps increasing.
Rarely in large scale production are suppliers and creditors paid immediately. Instead they have ‘accounts’ that are ‘promises to pay later.’ In the case of Company B there is a huge supply chain that provides Company B with the materials they need to produce their units. In turn each of these suppliers employs many people and get their resources from their own suppliers and creditors. Many thousands of people are employed and have investments along this chain.
And then it happens.
Company B is no longer selling enough units to pay their employees, their suppliers or their financial creditors. They file for bankruptcy which effectively writes off most or all of their debts. Their productive assets aren’t worth much (it’s not modernized, remember?) so it doesn’t count for much when paying off the long line of people that are owed money. They also lay off their workers.
Their workers, now unemployed, have
debts of their own: mortgages, student loans, car leases, lines of credit, credit card debt, etc. Many of these debts now won’t be repaid, creating the potential for crisis in other sectors of the economy.
Company B’s suppliers not only have to write off the money they were owed by Company B, but they no longer have new orders to fill from Company B. If they don’t scale back their own production in time, they too might suffer the same fate as Company B. These suppliers in turn have their own suppliers of resources. In short: it is quite easy to see that a company going bankrupt can wreak havoc all along its supply-chain.
The financial institutions that lent money to Company B will likely not recoup all of their money (or perhaps even any of it). They too have employees and suppliers with debt obligations of their own.
Generalizing this scenario across the economy is known as economic crisis, or recession/depression. Due to the large amount if unsold goods prices tend to drop as companies are forced to sell off their over production. Employment drops too which exacerbates the possibility of crisis. Wages/salaries drop as the army of unemployed grows and people are willing to accept less pay just in order to have a job. And last, production drops as companies are forced to slash production.
If everyone were to pretend that nothing is wrong, the problem would only get worse. While there are some conditions in which it is mere perception that can launch a recession, in most cases economic crisis is the result of actual economic conditions. These conditions are inherent to competitive market economies.
Only because a handful of “experts” will ALWAYS predict a recession. It might not be the same experts every time, but there will always be a few who predict it, and law of probability states eventually they’ll be right.
Absolutely. The recession happens because people lose faith in the market. Articles telling you to lose faith in the market cause panic and make people sell. Prices drop, which makes more people sell. Suddenly everyone’s selling and no ones buying. The rich make money by floating and the common people buy high and sell low.
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