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
The man who sold very good hot dogs
There was once a man who lived by the side of the road and sold hot dogs. He was hard of hearing so he had no radio – he had trouble with his eyes, so he read no newspapers and of course he didn’t look at television. But he sold very good hot dogs. He put up signs on the highway telling everyone how good they were, he stood on the side of the road and cried out to all that past ‘buy a hot dog, they are the best in town’.
And people bought his hot dogs and he increased his meat and bun orders. He bought a bigger stove to take care of all the extra business. He finally got his son to come and help him out with his business.
But then something happened, his son who had been well educated said . . . ‘ Father, haven’t you been listening to the radio or reading the newspapers or watching television? There’s a big recession happening right now. The current business situation is terrible in this country – we have problems with unemployment, high living costs, strikes, pollution, the influence of minorities and majorities, the rich, the poor, drugs, alcohol, capitalism and communism ‘.
Where upon his father thought, ‘ well my son’s been well educated, he reads the papers, listens to the radio and watches television, so he ought to know ‘.
So his father cut down on his meat and bun orders, took down all his advertising signs and no longer bothered to stand by the side of the road to promote and sell his hot dogs, . . . . and his hot dog sales fell almost overnight.
The yield curve inverts based on the bond markets expectations of future short-term rates.
Future short-term rates are basically determined by the health of the economy. Essentially low rates = low growth.
So once the bond market thinks that the economy is slower the future than it is now, the shorter-visioned stock market participants get scared.
So we can circular reference ourselves into a market crash but not a recession, which is hard GDP data. Unless consumers consume less + companies spend less + etc the economy won’t actually shrink 2 quarters in a row, which is the definition of a recession.
You might find this interesting:
**Level 1 chaotic systems** are systems which are chaotic but can be measured without changing the results.
This is different from **Level 2 Chaotic Systems** which are changed as you measure them. For example, the cryptocurrency markets that we all deal with — if you perfectly predict the next few days of activity, then post those predictions in a post on your steem blog, the act of posting the prediction will change the end result.
[https://steemit.com/chaos/@heymattsokol/level-1-vs-level-2-chaotic-systems-steem-is-level-2](https://steemit.com/chaos/@heymattsokol/level-1-vs-level-2-chaotic-systems-steem-is-level-2)
a recession in general is an economic retraction mostly brought on by a reduction in spending, typically people use it to describe the entire country as two consecutive quarters of a reduction in GDP. the stock market is people buying and trading equities. the stock market can be an indicator of a recession but doesn’t mean that people aren’t going to build an apartment building for example or hire an extra employee, or buy a car. there are multiple indicators , people right now are concerned with an inverted yield curve on bonds, the 2 year bond is paying more than the 10 year, that means people think we’ll have a recession in 2-3 years, not tomorrow, people in anticipation of that or whatever reason, no one knows why investors do anything and anyone that says that is flat out lying, want to divert out of stocks that pay dividends based on revenue because they think revenue will be down due to decreased spending and convert into cash or whatever. again, all this is based of historical patterns and analysis , which after the “great recession” i don’t think investors or analyst know what’s going on or how to act in this economy.
In a liquid marketplace for goods and services, not really. If you can nail down the fundamental value of something, or even a range, that is where the other side of a trade will come in and protect whatever level. Ie if a crazy consumer reports article says THE PRICE OF CARS IS GOING BANANAS, and it manages to force the price up (as you suggest) at a certain point people will start buying bus passes and selling cars. The market corrects. Shitty example, granted.
In a niche, financially-settled market controlled by a collection of spec players (not producers of anything, not consumers of anything)…. sure!!
The technical definition of recession is 2 consecutive negative gdp quarters.
The market is basically how much people will be paying for expected earnings of companies and dividends.
The first affects the second, but only really becomes causal if people and businesses and governments actually stop spending money.
So if market actually scares people it can contribute to a recession; but there’s a lot of stuff that goes into the gdp calculation (consumer spending, business spending, investment, govt spending) so it probably wouldn’t ever be the primary factor if an economist would make a write up.
There is a theory that when it comes to large scale human behavior as soon as you start to measure something, the measurement loses some of its value. You want to measure how well your business is doing? Measure quarterly profit and instantly the company will start to do weird shit to boost quarterly figures in the short term.
However just because measurements corrupt things doesn’t mean that they are useless. Everyone has been eyeing the market thinking that it is behaving oddly. Valuations on assets are sky high, unemployment is low, yet inflation is low and wages are not rising. People have been watching these bond yield numbers for a year now seeing them flashing danger signs and this is just the straw that broke the camel’s back in terms of convincing people there is a real challenge here.
The fundamentals of the market are fucked up right now.
Say you have a magic crystal to accurately see into the future, and say you do see a recession.
You could always claim that your prophecy itself caused the recession as most people believe in the truthfullness of your magic crystal. But it could equally also be the recession occurred independently of your prophecy.
There is no way to know which scenario happened, unless you do experiments and won’t prophesize when you do see the recession. But all this does is tinting your own crystal, making it less reliable, and losing in competition against other guys with other crystals. You cannot do that experiment unless you effectively burn your crystal.
The answer to that paradox is simple: not the crystal or the prophecy causes the recession, but the nervous state of the economy causes the recession, when small changes in opinion have a large impact.
The prediction is a sort of self fulfilling prophecy. However a prediction of a recession will not do much unless all the analysts in the market also make the same prediction. In addition people will be looking for some sort of trigger in addition to having predicted the recession. So if there is some sort of trigger and nobody predicts a recession then there will not be one yet. However if at some later point you get the same trigger but the majority of the market does predict that the recession is close it will trigger it and cause a recession.
Doesn’t that mean the SEC needs to sue the media?
Latest Answers