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While browsing reddit a few days ago I forgot that I wasn't on TheMotte and tried to make a hypothesis post. This led to much screaming and crying and rending of clothes. So I decided to repost it here to see what people think. Am I crazy or am I right?
at leastEdited to "about" 20% within the next 6 months. I have about a 90% certainty in this.Reasoning: The current housing market as it stands is a mirage, not an indicator of growth. The market should have crashed in 2020, but it didn't because COVID. All of a sudden millions of people had the flexibility to move away from their place of employment because of work from home. Fully 60% of the home-buying surge was fueled by this trend according to the Fed, whose numbers I have no reason to mistrust. This sudden surge in home-buying has largely abated. According to RedFin, mortgage rates are their highest since 2002, searches for "homes for sale" are down 35% YoY, the Homebuyer Demand Index is down 25% YoY, and mortgage purchase applications are down 39% YoY. The market is cooling off. I believe the coming crash will be around 20% because historically that's a safe bet. The late-90s crash saw a drop in home prices of 14%, the 08 crash saw a drop of 27%, I think this crash will be somewhere in-between, hence 20%.
We are either in a recession right now, in which case I'm right, or we're about to be, in which case I'm right. Popular opinion defines a recession as two consecutive quarters of negative GDP growth. If that is the case the recession has already started. The National Bureau of Economic Research defines a recession as a "significant decline in economic activity that is spread across the economy and lasts more than a few months". So let's look at a few indicators. Ignoring inflation for the moment, retail and food services sales, total, peaked in May and have been on a slow but definite decline since. The Conference Board Leading Economic Index is down 2.7% since February. The S&P 500 is down 22% YTD. Oh, and almost every single CEO in the country believes there's gonna be a recession.
I predict that this recession will not be "mild", but nor will it be as bad as 2008. Somewhere between the Dotcom bust and 08 is my prediction, which I have about a 70% confidence in.
I predict unemployment will rise by more than 1%, but less than 5%. Somewhere in-between, with about 50% confidence.
These two predictions are functioning from the same basic premise. I'm pulling all my historical numbers from here. The 2008 Recession saw Real GDP fall 8.5%, unemployment reach 10% (a rise of about 6%), and the S&P500 drop 57%. The DotCom crash saw Real GDP fall by 1.6%, unemployment reach 5.9% (a rise of about 2%), and the S&P500 drop 62% (S&P drop pulled from here). I believe that the coming recession (if it happens - see above) will not be as bad as 08 because many of the co-factors that made 2008 so bad do not exist here, but that it'll probably be worse than the Dotcom crash because the Dotcom crash was largely caused by over-speculation on internet companies (hence "dotcom" crash) and low interest rates. We don't have low-interest rates anymore, but I think co-factors here (namely high inflation) will mean this one is going to be worse. My unemployment prediction is similarly predicated on this recession being somewhere between Dotcom and 08 in severity. If we're somewhere between those two numbers (2% and 6%) then a guestimate of between 1 and 5% is reasonable.
corporate, IPEDIT: specifically M&A (bankruptcy could be considered part of the "corporate" umbrella term, and I put IP here by mistake), and tech practice groups will have reduced or frozen hiring.Law firms have taken steps since 2008 to try and avoid mass layoffs. With that in mind, the legal practice has only just recovered from 2008 in terms of raw employment numbers. Recently firms have shifted their recruiting approach. To quote from the Reuters article:
Some practice groups are never busier than during a recession. Bankruptcies surged by just over 30% during the 2008 crash, and firms are preparing for this business to pick up. Similarly litigation is a counter cyclical practice that picks up during periods of a bad economy. It makes sense when you think about it. When the economy is good, people don't want to sue. When times are bad, they do. On the other hand, M&A tends to cool off in a recession.
I was accused of "LARPing as an economist" and "pulling these numbers out of my ass", so I thought I'd post them here for the Motte to give me a more rigorous examination.
I think there's an interesting phenomenon where if somebody says "I'm pretty sure X will happen" then people are like "yeah, okay, I could see that" or "nah, I don't think that's true" whereas if somebody says "I think there's an 80% chance that X will happen" people will respond with "WHOA there, look who's larping as an economist with his fancy percentage points"
The problem is cultural. Around here, when someone makes an 80% prediction of a specific event, we know they're publicly stating their priors to make themselves clear and so they can check / other people can check their rationality later. To general internet-goers, making a quantitative prediction that specific sounds ludicrously overconfident. (Not only will it happen, but you know down to the percentage point how likely it is? Mind showing your math, Mr. Silver?)
so that gets us to the question of how much of a difference in practice there is between "80% +-20% chance" vs "80% chance +- 0%" of a thing happening. I suspect in practice not much? Since anything that feeds into your meta-level uncertainty about a probability score should also propagate down into your object-level uncertainty of the actual thing happening.
Could somebody please convince me that "80% +-20% chance" is a coherent thought.
If I say "there's a 10% ± 5% chance AAPL will increase by $100 today" and you say "there's a 10% chance ± 30% chance AAPL will increase by $100 today" and then it happens, who do you trust more?
For the record I'm definitely not convinced that "80% +- 20% chance" is a coherent thought.
Here's a thought experiment: I give you a coin, which is a typical one and therefore has a 50% chance of landing heads or tails. If I asked you the probability it lands on heads, you'd say 50%, and you'd be right.
Now I give you a different coin. I have told you it is weighted, so that it has an 80% chance of landing on one side and 20% chance of landing on another (but I haven't told you whether or not it favors heads or tails.) If I asked you the probability it lands heads when flipped, you should still say 50%.
That's because probabilities are a measure of your own subjective uncertainty about the set of possible outcomes. Probabilities are not a fact about the universe. (This is trivially true because a hypothetical omniscient being would know with 100% certainty the results of every future coinflip, thereby rendering them, by a certain definition, "nonrandom". But they would still be random to humans.)
My first thought was that I agree with you. The second thought was that you can have a confidence in your confidence. My third thought was that that should baked into your primal estimation, and that if you're saying 80% +/- 20%, you're really saying something like 70%. Does it really make sense to be saying, hey, there's a chance I'm 99% sure, but it's only 10%??
These things really only make sense with repeated results anyway. A single event happens or it doesn't.
If you felt a real need to give more details on your prediction, I think it would be more interesting to give buckets, e.g. I expect the housing market to
5%: shrink > 15%
30%: shrink 5 - 15%
60%: stay flat, changing [-5, +5]
12%: grow 5 - 15%
3% grow > 15%
OTOH, thinking about this more (which makes me think that someone smarter and with more statistics has thought more about this), this still doesn't capture the idea of confidence. What if I don't know what a house is, and you ask me this? Can I really make any meaningful statement? I think I could say 50/50 grows or shrinks, or 90% doesn't change more than 95% (because few things do), but it's hard to capture what it means to have little certainty.
i think if it's a binary choice 50% is exactly right since if you don't know what a house is, no process of reasoning could get you better than a coin flip as to the right answer. Similar if you have N different choices where you can't distinguish between them in any meaningful way.
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