😴 'RECESSIONS DON'T HAPPEN WHEN EVERYONE IS EXPECTING ONE TO.'
I've seen this comment thrown around a lot on FinTwit (financial markets Twitter) recently...
Most people would know that things go up and down, even Joe Public, right?
If they didn't, we'd just have an infinite up only business cycle and everyone would be exorbitantly wealthy - absolutely no relativity theory of give and take at all.
I completely disagree with this notion that recessions don't happen if people are expecting them.
For one, if people are expecting it to happen, people turn defensive.
Secondly, Trichet (the ECB's President) in 2009, when referring to the underpricing of risk said, 'Warnings by the authorities about the possibility of an abrupt correction in financial markets date back to 2006.'
So clearly there were people expecting a downturn before the Great Financial Crisis happened. Duh.
One of his solutions to preventing another crisis was, 'Finally, a third factor that, in my view, needs to be addressed is the excessive pro-cyclicality of the financial system in its entirety, i.e., the tendency of the financial system to accumulate too much risk and leverage in good times, and to shed risks hastily in a downturn.'
I mean, consider the last two years.
In Q1 2021, retail piled more into stocks than the previous TWELVE YEARS COMBINED, with margin debt hitting records through 2020 and 2021...
When people in the financial sphere make these bold claims of 'priced in', especially when referring to recessions, we must remember that recessions are painful to the REAL ECONOMY, not just asset prices that we gamble in day in day out.
They hurt, and we are a very small sample size who are hyper focused on markets and economic data - we are not representative of the real economy, so what might seem priced in for us isn't necessarily by the 95% who experience recessions by living through them and not forecasting (or not) them.
Most people would know that things go up and down, even Joe Public, right?
If they didn't, we'd just have an infinite up only business cycle and everyone would be exorbitantly wealthy - absolutely no relativity theory of give and take at all.
I completely disagree with this notion that recessions don't happen if people are expecting them.
For one, if people are expecting it to happen, people turn defensive.
Secondly, Trichet (the ECB's President) in 2009, when referring to the underpricing of risk said, 'Warnings by the authorities about the possibility of an abrupt correction in financial markets date back to 2006.'
So clearly there were people expecting a downturn before the Great Financial Crisis happened. Duh.
One of his solutions to preventing another crisis was, 'Finally, a third factor that, in my view, needs to be addressed is the excessive pro-cyclicality of the financial system in its entirety, i.e., the tendency of the financial system to accumulate too much risk and leverage in good times, and to shed risks hastily in a downturn.'
I mean, consider the last two years.
In Q1 2021, retail piled more into stocks than the previous TWELVE YEARS COMBINED, with margin debt hitting records through 2020 and 2021...
When people in the financial sphere make these bold claims of 'priced in', especially when referring to recessions, we must remember that recessions are painful to the REAL ECONOMY, not just asset prices that we gamble in day in day out.
They hurt, and we are a very small sample size who are hyper focused on markets and economic data - we are not representative of the real economy, so what might seem priced in for us isn't necessarily by the 95% who experience recessions by living through them and not forecasting (or not) them.
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