Recession risk is rising

2020 @PredictIt recession prediction market probabilities are now above 40% amid #Coronavirus concerns.

That is from Jon Hartley, and here is his closely related new paper “Recession Prediction Markets and Macroeconomic Risk in Asset Prices.”  Here is the prediction market page, at 47 as I am writing.

Comments

Given that "coronavirus as a threat" was obvious for a while, at least for a month, see TC's previous post, what does this say about the usefulness of prediction markets? Perhaps they are as flawed as asking an expert?

First pictures of sold out can of beans on Amazon, then numerous pandemic blogs, then stock market doom and gloom, and now recession. You love to knock Trump down. This site has a liberal bias.

Sorry you got triggered, hun.

More likely recession in the Eurozone where interest rates already are broadly negative - CB's have no 'arrows' and will need to pursue to massive asset purchases - QE on steriods. If German growth turns negative, look out.

Will that and a number of other negatives crater the US? Maybe.

Positive: the Dems can't agree on how they will wreck the economy.

Friday Fed Chair comments were comforting. A March rate cut could be in the offing. The Fed has 175 basis points (just saw the 10 years at 1.06% record low) to cut before it resorts to QE/asset purchases.

About 50%: Which half are the smart half? :-)

Soon we will not need economists to predict recessions.

We will rely instead on "Animal Spirits" found in the prediction market.

oh yes, the infamous 'Boom & Bust' economic cycle.

someday economists will become interested in this cycle -- and perhaps determine its causes (I smell a Nobel)

Is this comment supposed to be ironic? This recession is about as clear a case of ‘real business cycle’ as it gets. We don’t need economists to tell us why plagues are bad for the economy, not can we fault the economists for failing to predict plagues (on that front blame the epidemiologists if you must blame someone).

It's hard to believe we avoid a recession if we have to close schools and businesses and severely limit travel within the country. I acknowledge that that's still an "if", and not a certainty. The positive angle is that this would be a weird recession in that it's not really caused by doing anything wrong from a policy perspective - arguably rates went too high too soon and left us more vulnerable, but even that's a stretch. It's a bit of a random shock, and it will presumably eventually come to an end. The market is also reacting to the democratic primaries, and it's a bit tough to disentangle that and get a clear understanding.

Yeah.

It is usually thought that cycles are caused by demand or supply shocks, either positive or negative. A public health problem causes a demand AND a supply shock! Alas, both are negative, less consumption and less work.

More expansionary monetary policy would mitigate the negative demand shock, but cannot mitigate the negative supply shock. Would go into the price level.

@Dismalist - you might enjoy the below blog post, feel free to comment. I found it not intuitive and possibly based on priors like sticky prices.

https://www.themoneyillusion.com/demand-vs-aggregate-demand/ (Sumner: "The Black Death killed 1/3 of all the people in Europe. The demand for almost every single commodity probably fell, in the sense that demand curves shifted to the left. Supply curves also shifted to the left, and hence relative prices stayed about the same, on average. (In a supply and demand diagram, the “price” on the vertical axis is the relative price, the price relative to the overall CPI.) And yet the Black Death probably had little or no impact on aggregate demand. How can that be? There were far fewer people, and the demand for virtually every single commodity fell. Why wouldn’t aggregate demand also fall?")

From what I gather, Sumner assumes "sticky prices" so AD did not shift much if at all.

Yup, thank you. He's more precise than I was. It's sticky nominal wages, not prices, good enough in the short run.

And that's what I meant! :-)

@Dismalist - thanks for the confirmation.

If it is any comfort Canada has been hovering on the verge of recession for a few months now.

Actually, since they elected Trudeau.

You mean since 2015?

Canada, whose sovereign is QE 2, apparently likes the mediocre offspring of prominent family dynasties, having welcomed Harry and Meghan and voting in the son of a previous long serving PM.

That's nonsense...last time Canada was in recession was 2015 during Harper's reign...https://www.google.com/amp/s/www.macleans.ca/economy/economicanalysis/how-canadas-economy-went-from-boom-to-recession-so-fast/amp/
And Alberta is in recession only becay of low oil prices, what would Harper have done?

In Tyler's Bloomberg column, linked in the prior post, he asks, "Does anyone really know how potent monetary policy will prove in limiting the costs of a coronavirus-driven economic slowdown?"

As Scott Sumner has written about recently, the right question is whether piling tight monetary policy on top of the coronavirus supply shock would make a recession much worse and more likely? The answer is an obvious yes. As Scott has explained, the coronavirus shock has lowered the natural rate of interest so, if the Fed does not lower interest rates commensurately, that constitutes a negative monetary (demand) shock in addition to the coronavirus supply shock. Implied expected inflation in inflation markets have fallen precipitously. That can't be attributed to the coronavirus supply shock as supply shocks *increase* expected inflation. The fact that markets predict falling inflation shows that markets think the Fed demand shock will cause even more impact (on inflation at least) than the coronavirus supply shock.

Lower interest rates are grand, but I'm not sure how fast they would communicate to a contracting retail sector.

If fewer people go to restaurants, then restaurants will reduce worker hours, and the pain begins there.

Modern, big data, creditors are more likely to reduce available credit to those workers than to expand it.

. . . the right question is whether piling tight monetary policy on top of the coronavirus supply shock would make cows quit giving milk, corn fail to sprout, the sun fade and rain turn to camel urine.

Why would anyone place recession bets on a prediction market rather placing bets in the actual market? If the real chance of recession is 40% the upside of long term puts is way higher than winning the predicit bet.

Can anyone recommend a book/blog/ source that talks in depth about market distortions?

Yeah, Ty, I don't know man.... you can pray for the recession all you want, but even you favorite Butt guy just dropped out of the race.

It's time to concede that neither the Communist Who Just Had Heart Surgery nor the Enfeebled Dementia Patient are going to beat DJT. And those are your only options.

Yeah so? It's going to be funny watching experts like you get it wrong again in 2020? #WrongAgain2020

+1

It is truly amazing what people will wish for in order to win an election. I think it might be the power of the disgust mechanism - some people are so disgusted by Trump's personality they would trash the economy and delight in the suffering of many people. That is TDS manifested.

You did the same in 2012 and 2016.

How do we know what is assumed about the Fed's reaction function? Is it really committed to continuing to restore the PL that would have resulted if they had not let it drift below 2% pa in 2008-20019? What IS its policy?

Interesting. On Betfair Exchange, where real people bet real money, the implied probability of a US recession in 2020 is over 50% (better than evens odds), and spiked at 70% last night - it's quite an illiquid market, though (and probably unavailable in the US).

Markets certainly aren't pricing in a 50% chance of a recession.

Who's right?

"Markets certainly aren't pricing in a 50% chance of a recession."

Are you sure? The markets are well into correction territory. How much would you expect them to drop for a mild recession?

Wall Street Journal has an op-ed on prediction markets: https://www.wsj.com/articles/why-wont-the-cftc-let-you-take-a-position-on-the-election-11582933734

The pandemic could easily cause a recession, but big picture I’m optimistic that it will be a minor one, not due to fundamentals, and that overall it will avert a bigger recession due to the usual late bulk market mania and bad decisions. I’m more concerned about the Fed easing to prop up the stock market. Is anyone else concerned about how quickly they seem to have been coopted?

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