Podcast Episode 57: The Dirty Word | Recession?

You’re hearing rumblings from all the big news outlets and all the big players in the world of finance. Whether they’re whispering like it’s a bad word or shouting it like Henny Penny – does the fact it’s being discussed endlessly make it a problem for a well-constructed plan? Listen to what Colin & Josh have to say in this week’s episode.

Episode Transcript

BARENAKED MONEY PODCAST: EPISODE 57

The Dirty Word| Recession

Announcer:

You’re about to get lucky with the Barenaked Money Podcast, the show that gives you the naked truth about personal finance with your hosts, Josh Sheluk and Colin White, Portfolio Managers with WLWP Wealth Planners, iA Private Wealth.

Josh Sheluk:

Barenaked Money here. Colin and Josh, your hosts as always. And we’re talking about a dirty word today, Colin, recession.

Colin White:

Ooh. Can we just call it the R word? Does that make it sound more mysterious?

Josh Sheluk:

Yeah. Well it totally does, and I think we’re even going to get into something called a vibe session today. I’m not sure if we’re going to get there, but yeah, I’m really excited to talk about that.

Colin White:

I’m not a leader, I’m a follower.

Josh Sheluk:

So, the reason we’re getting into this is because it’s been all over the media recently, the idea of a recession. There’s been multiple economists or organizations projecting that a recession is on the horizon. So Colin, what do you think? Is it there?

Colin White:

I think it’s super topical. I think everybody is talking about it. I can agree that everybody’s talking about it. Yeah. Are we in one? If I quote Wikipedia, which is the definition of everything, it’s supposed to be two quarters of negative economic growth. However, it’s been amended. I don’t know when this happened, like in the last six months and the last year, that somehow this has been amended to include other factors, so that countries are in control of declaring a recession or not a recession, which seems really political to me. But it is generally used to note a period of economic contraction or a negative growth, depending on how you want to look at it. So, based on that definition, I think we’re in one, or sorry, one has occurred because we never know where we are, because whenever we’re talking, there’s something new going on. But we can say one has occurred.

Josh Sheluk:

Yeah. And that-

Colin White:

Do you agree with that?

Josh Sheluk:

Well, that’s the US data. So first of all, US data is saying that based off of GDP numbers, yes, there were two consecutive quarters of negative GDP growth to start this year. So if you’re using that definition, then sure, you’re in a recession. But I think you hit-

Colin White:

One has occurred. One has occurred.

Josh Sheluk:

Okay.

Colin White:

One has occurred.

Josh Sheluk:

Yes. Because we’re here in August and we’re no longer in the first half of the year, so one has occurred. But you’ve been hinting at having some different definitions of what a recession is, so why don’t you fill me in, because I don’t even know.

Colin White:

Oh. Oh, well, according to Wikipedia, in the US, a recession is defined by the National Bureau of Economic Research, NBER, that’s a really odd acronym, “a significant decline in economic activity.” Not two quarters, “significantly declined, spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale retail sales.”

That sounds like a pretty political definition for me, because politically, recessions are a big deal. A lot of people get really concerned about recessions, and giving themselves the power to declare one or not declare one is pretty powerful. And I will grant them this, from a purely economic perspective. The jobs numbers don’t seem to be supporting that we’re in a recession or had a recession as it were.

And a brief note, editor’s note, if you want to know about the difference between something has happened and is happening, review Josh’s house buying experience in April, because we were looking at March numbers and the April experience is way different than March would indicate should have been. And it later became pretty apparent as to why, because where you are isn’t where you were. But I’ll leave it up to our trusty listeners to go back and find that. So Josh, I guess the short answer is employment numbers aren’t lining up so we don’t think this is one.

Josh Sheluk:

Yeah, I guess not. So some things suggesting maybe there was a recession, some things suggesting maybe we’re heading there. Certainly a lot of the economists are saying that that’s where we’re going. But another dirty little secret of our industry, economists absolutely suck at their jobs, because if their job is to tell us when a recession is coming, they get it wrong most of the time.

Colin White:

Oh, easy now, you with the big broad statements. Do you have any numbers to back that up, Josh?

Josh Sheluk:

Oh, I’m glad you asked, Colin. I certainly do.

Colin White:

Hey, hey. Listen, for those who have accused us about this being scripted, I had no idea that Josh actually had numbers to back this up. I was just making an educated guess. So Josh, what do you have?

Josh Sheluk:

Yeah. So I did just a bit of reading on the internet, just a bit, just a bit. So you and I are both familiar with FiveThirtyEight, which is a pretty popular sort of data stats kind of website. But anyway, he, Nate Silver, or one of his authors wrote a few years ago about the track record for economists in actually predicting recessions. And there was a study done on this not too long before, and they looked at 153 recessions across 63 countries and the ability, I shouldn’t say ability, but the track record of economists in actually predicting these recessions.

And I’m just going to read for you the excerpt from this or one small portion of the excerpt. “The main finding is that while forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over. Our second finding is that forecasts of the private sector and the official sector are virtually identical, thus both are equally good at missing recessions.”

Colin White:

I think you need to look at what popular means, Josh. But yes, it’s a website that people like us read. And that is typically Nate Silverish in it’s tone. But yeah, the running expression that we use is “Economists have predicted 12 of the last eight recessions.” And there are numbers to support all kinds of different magnitudes of difference. But also, again, as to how big, long a recession could be is very, very definable after you’re through it. We can measure them to four decimal points 10 years later.

Josh Sheluk:

Well, this is startling. And when I was looking through the actual data that they compiled, so supposedly we got slightly better at, and when I say we, I’m talking about economic consensus has got slightly better at forecasting recessions, after the 2008 period. But it’s not hard to get slightly better because before they missed 70 out of 70 recessions. Honestly, that’s almost impossible to do that. It’s almost impossible to do that.

So it is absolutely startling how bad and poor the track record is. So this article did say one thing that was interesting, is that they tend to be a little bit better, if they forecasted a recession, it tends to be a little bit more reliable that a recession actually happens. The problem is we tend to miss the forecasting when the recession has actually happened. So anyway, I guess the bottom line here is that if you’re reading about a bunch of economists that are talking about a recession that may or may not be coming, you should probably not listen to it and just stop reading.

Colin White:

Well, I think the important thing at this point is why we do this, because we often come on this podcast and we just try to dispel commonly held wisdom. And the reason we’re doing this is that unfortunately, people will read some of these kind of commentaries and think this is an investible idea or this is information you can use to make a decision on to get further ahead.

And when something is as wrong as God awful always as these kind of projections are or can be, then you’re doing yourself a lot of harm with that, because the whole thing kicks in. It happens. It’s like, “Oh I knew this was going to happen. So-and-so said it was going to happen.” And then you rewrite history and then you feel bad that you didn’t anticipate this and you start trying to anticipate harder. And when you try to anticipate harder, it doesn’t get any better.

So trying to use this as any kind of a decision-making tool or to guide your financial decisions in your own life is fraught, to say the least. There’s not a whole lot in the public discourse and what everybody’s talking about now that’s in a macro scale going to help your micro world. You have to live your micro life based on what you can afford for a house right now. Again, the macro number of what housing is generally doing is not as relevant to what your own situation is.

And we’re really fighting the good fight and trying to get people to stop thinking they need to respond to these things and include some kind of, “Here are the three things you need to do for your portfolio during that looming recession. Ooh, that sounds like something I should read.” Well, there’s no efficacy to behaving that way. Sorry. I was just wanted to make sure we put this in context, because otherwise it looks like we’re just making fun of smart people.

Josh Sheluk:

Well we are, kind of.

Colin White:

Well, that too, but that’s only part of what we’re doing.

Josh Sheluk:

Yeah. Well, it’s also one of those things where, okay, so if economists start to deciding that we’re in a recession or we’ve defined a recession, investment markets are tending to move well ahead of where that recession is. So if we’re in a recession today, it’s actually an awesome time to start buying into the stock market, because the stock market tends to be forward-looking, it tends to decline ahead of a recession. And by the way, we’ve seen a 23, I think, percent decline this year so far, so maybe that was the decline already ahead of this recession that they’re forecasting now. And by the way, just because they’re saying that a recession is coming, these economists, doesn’t mean that a recession is coming. It’s just we don’t know. That’s the point.

Colin White:

Yeah. And the other thing is, we’ve said this before, the market will price in expectations and it is an expectations game. So if people expect something, they can make it happen if enough people expect it. But in the near-term, it’s going to move on whether those expectations are met or exceeded. In the near-term, what’s going to involve, drive.

Now notwithstanding that, we had a big announcement here just last week from the US Federal Reserve, which was a little bit more dour than many people were expecting. And again, it was an expectations game, but he was pretty emphatic in his willingness to throw out the baby with the bathwater to get his job done. I’m not sure why he felt the need to be quite so intense with his messaging, but the market did react sourly to that. And that’s the market reacting on something that they felt was going to be a little bit more dovish than what it actually was. But again, that’s not investible. You can’t run an investment strategy based on those short-term moves because again, they’re completely unknowable and there’s not much you can do.

Josh Sheluk:

Yeah. You’re talking about J. Powell and the Chairman of the Federal Reserve. And if you knew ahead of time what he was going to say, which there was probably a very select few people that were able to front run that in the room with him. Other than that, exactly what you said, it’s not an investible idea because you can’t know with any certainty ahead of time what’s going to happen out of that conversation.

Colin White:

And if you tell me you knew what he was going to say, shut up. No, you didn’t. You just know. You might have convinced yourself you knew what he was going to say, but no, no, you didn’t.

Josh Sheluk:

Yeah. You’ve been at this game longer than I have, Colin. Have you seen this much chatter about recessions in the past? Is it just me having a bit of recency bias thinking that this has got a little bit crazier than normal? Or has there been always been this much chatter around it?

Colin White:

Yeah. Again, remembering the eighties and the nineties and seventies, I was in those timeframes. So yeah, there’s always been this level of concern over recessions and it’s largely driven the public policy. It’s something that a government can be run out of office on, so you can lose an election over a recession when things are going bad, whether or not it’s the government’s fault, and it isn’t. 99.99% of the time, it’s where the economy is and it’s not based on the policy they passed last week.

Governments rise and fall on recessions. They rise and fall. So there’s a lot of political power at stake over the declaration of a recession or the declaration of killing a recession. So it’s always been a hugely and meaningful thing. And you go all the way back to what the actual raison d’etre of central banks was to beat inflation. But again, that was coming out of a time where there was a lot of recessionary issues and inflationary issues. These things are very politically powerful, so they always have a seemingly disproportionate volume to the conversation. So no, I don’t see this as being any different in other conversations I’ve witnessed in my career, based on a purely emotional reaction and no data points whatsoever.

Josh Sheluk:

Well, let me ask for another emotional, non-data point reaction from you. The conjecture and discussion of an inverted yield curve, is this something that is fairly new in more popular media? Because I’ve had groups of my friends that are not in the finance sector whatsoever start to talk about an inverted yield curve and what that means.

Colin White:

Well, it would be difficult for it to be less popular. No. When was the last time we actually experienced one? When was the last instance of that, Josh?

Josh Sheluk:

2019.

Colin White:

Yeah. So I think it kind of came into the lexicon then, and the fact that it’s happening again so quickly, again, yeah. This is louder for sure, but again, I don’t know what groups you hang out with. I haven’t bumped into that socially. But then again, you and I run in different social circles.

Josh Sheluk:

Yeah. Well again, it’s something that’s interesting. I think people start to glean certain aspects of this stuff without really going to the next level, the second level or the third level. And so, as we try to do in this business, we try to go to those second and third levels. And the inverted yield curve is an interesting one.

So just for our listeners’ sake, an inverted yield curve is when long-term bonds are offering lower interest rates than short-term bonds, which is a bit unusual. That’s why they call it inverted. And there’s some thought that this sort of precedes recessionary times and peaks and stock markets and all that fun stuff. And there’s certainly a pretty good track record of it having some, I don’t want to call it, predictive power, but it does tend to happen ahead of those periods of time.

But it’s a pretty wide range of periods that it could preclude a recession or market peak. So as an example, in the past, it’s inverted as little as five months before a recession or as long as 17 months before recession. So if you’re sitting there and you say, “Well, yield curve is inverted, I should sell a whole bunch of stuff and sit on the sidelines for a while,” you could be sitting there for a year before the market even peaks. And after 12 months of sitting there watching the markets go up, sitting in cash or wherever you’re sitting, you’re probably going to be kicking yourself and thinking, “Well, what the hell did I just do? Maybe I should buy back in.” Boom, right at the wrong time. So it’s just one of those things where it’s always more nuanced than… It’s not as black and white as people think just because of the headlines that they’re gleaning out there.

Colin White:

Well, so people want it to mean something. And again, you’re talking correlation versus causation. So we understand that there’s a wide correlation here. It’s not a very specific one, but it’s not necessarily clear that it’s a causal relationship. Now the other thing to make sure our listeners understand is that those are market-driven rates. So this isn’t the government setting rates this way, this is just what… So this is again, basically the fixed income market voting. And they’re voting in such a combination of ways to make this happen. It’s not that they set up and go, “Now’s the right time to invert the yield curve, let’s go do that.” No, no. It’s the grand sum of a whole bunch of actions and we’re trying to glean from that what it’s really foretelling.

I won’t say that it’s chicken entrails, but it’s a bit like that. You’re trying to figure out what are the chicken entrails telling me? Well, maybe nothing. Yeah, maybe the chicken didn’t have much to eat. I don’t know. But we constantly search for these things because there’s so much… And again, I think I go back to the whole political thing. There’s so much political weight behind defining a recession, blaming a recession, fighting a recession, defeating a recession. These are all super, super, super powerful things and there’s a lot of power that swings with that, so that’s why the NBER gets such focus at times like this, for sure.

Josh Sheluk:

Yeah, chicken entrails, that’s a new one and a good one, so we’ll have to put that one in the bank for another time. But let me ask you another question, because you’ve been also through a few more of these recessionary periods than I have career wise. What is it, do you think, that people struggle with the most when we’re actually going through a recession? And when I say people, I’m talking about your average person, your average investor, your average client. Is it market-related stuff? Is it more personal stuff, job related, housing? What do you think?

Colin White:

Well, thanks for the lead in. And again, for the audience’s edification, Josh doesn’t know I have this in my back pocket. So one of the things I was reading before we came onto record this podcast was a different take on the reaction of people to recessions. It is actually a therapist who was talking about recession anxiety. And recession anxiety is a thing, not as much the actual, again, the old expression, a recession is when your neighbor loses their job. A depression is when you lose yours, right? So recession anxiety is a thing, because people hear about this at a very loud volume. The policy makers will make a big issue out of it, and it does affect some people negatively because economic slowdowns can affect people negatively. But it produces anxiety, and what do you do with that?

Well, the therapist that I was reading an interesting article on about what to do about that, I’ll point out that again, one of the issues with the recession is it’s largely beyond your control. And the lack of control is a very anxious provoking thing, especially when it’s something that’s a negative, right? So it can bleed into a lot of different aspects of your life if you let it. If you’re consuming a lot of news on this and reading about this and reading the bad news stories that the media will put before you, it can generate a large level of anxiety.

And when you are anxious, you can be more likely to make bad financial decisions or bad life decisions. Anxious people are not known for making good decisions. So there really is, from a psychological standpoint, a real thing here that is completely not necessarily calculable from a, “Jobs number is this. Therefore, people feel X bad.” It can bleed into many, many different things.

But one of the things they highlighted and the key is to try to avoid making really large momentous decisions while you’re feeling anxious, because you’re not making decisions putting your best foot forward. The more anxious and the more distraught or more upset you are with something, the less likely you are to make any kind of life decision in a positive way.

And I guess narrow that down to the financial world, that is something that we talk about all the time, is making emotional financial decisions is a certain way to destroy wealth in any circumstance. So I think looking at this, framing it as recession anxiety, I think, is actually very salient to talking to people about their financial planning. Because again, if they’re feeling anxiety over the perceived imminent recession or current recession or past recession, you’ve got to make sure you find a way to compartmentalize that and move it out of the way so it doesn’t bleed into all your decision-making.

Josh Sheluk:

Dr. Colin here, give you a little bit of advice on life.

Colin White:

Look at me quoting a therapist. Who would have thunk it.

Josh Sheluk:

Yeah, not me. That’s not what I expected today. Anyway. You made a good point to me the other day. Just very simply, after a recession comes a recovery. And it always has. And I was going through some of the same NBER, National Bureau of Economic Research document stuff that you were, and I just went through the list. And they go back to 1850 and there’s 34 business cycles listed there. So going back 170 years, 34 business cycles. You’re looking at a business cycle on average once every five years.

And then I started going through the numbers a little bit more. Okay, the shortest time between cycles is one year, the longest time between cycles is 13 years, pretty wide range even though you get one on average every five years. Right now, the last recession we had was in 2020, so if we have one now, this year, 2022, that’s one of the shortest timeframes we’ve ever had between recessions. So that’s again, not predictive, it’s just demonstrating that, “Hey, we’ve been through this. We’ve been through it a lot. Some have been worse than others, but we’ve always come through and come through to a better point at the end of it all.”

Colin White:

So just to point out how obvious this is to the untrained mind, when my children were quite young, my daughter would come home from school and I’d ask her how her day was and she would say, “Fine.” But I said, “No, no, that’s not good enough. You have to tell me a story. Who’d you talk to? What did you play or what did you learn?” And being a kid, of course, she turned that around on me. I’d come home at the end of the day and she’d go, “How would your day?” And I’d say, “Fine.” She goes, “Oh no, no, no. You have to tell…”

So she always would challenge me to tell her more. And when I was able to get to a shortcut, because again, raising a family and doing all the rest of it, limited energy, it came down to, “Was the market up or the market down?” So I would tell her if the market was up that day, or the market was down that day. And one day I came home and she said, “How was your day?” And I said, “Oh, I had a good day. The market was down.” And she goes, “Oh, that’s okay, daddy. Whenever you tell me the market is down, the next day you tell me it’s up. So it’ll be okay tomorrow.” She was about six years old when she lept that conclusion on the limited data I had been providing her. And if we could all channel just a little bit of that, the whole world would be a happier place.

Josh Sheluk:

Yeah. Very astute. And I started thinking, “Okay, if you’re a 50-year old, you’ve been through four recessions in your adult life. If you’re 60, you’ve been through six. And you’re probably in a better spot today than you have been at most points financially anyway, investment wise, than at most points throughout your life, most likely.” So we’ve been through this before, we’ll be through it again, and we are going to come out on the other side whether this next recession is a week from now, a month from now, a year from now, whatever it is.

Colin White:

Well, I will challenge you and I will channel some of our listeners right now, Josh, who are yelling at you, because they’re going to tell you that going through a recession when you’re 60 is way different than going through a recession when you’re 30.

Josh Sheluk:

Yeah.

Colin White:

And you know what? I’ll give them that. You’re right. But the other thing is, if you’re 60, it’s a good chance you’re around for another 30 years. So it’s not as if all of a sudden your entire world became low risk. You still have a long life ahead of you, thank you medical science. So stop treating it like you’re 60 years old and you’ve only got five years left because that’s not likely.

Josh Sheluk:

Yeah. So are you saying our 85-year old client should panic then, Colin?

Colin White:

Why panic at 85? What good is that going to do?

Josh Sheluk:

Hopefully your financial advisor has been moving you to an age-appropriate and risk tolerance-appropriate portfolio.

Colin White:

Yes. You invested per your situation.

Josh Sheluk:

Look. Ultimately, what we’re talking about here is you just are consistently, continuously going to re-evaluate your plans, your financial ones, and you’re not going to panic or scrap your plan altogether. And I’ve been thinking of this a lot like Google Maps. If you hit some traffic or an accident along the way, it’s not like you just say, “Oh, screw it,” turn around and go home. Right? Google Maps is automatically going to adjust and going to give you a little bit of a detour around here. You get off the highway, because we plan for rush hour traffic just like we plan for these recessions. As I said, we expect this once every five years on average. More frequently, sometimes, less frequently, sometimes. But we explicitly plan for this in our business. And that’s just like the traffic that you experience going home during rush hour. You plan for it. It’s pretty normal. It doesn’t always feel good when you’re there, but you’re going to get through it. It might just be a little bit slower than normal.

Colin White:

Well, that’s why when we’re in periods of the markets going up double-digits, again, I was looking at client statements last January where we had seen double-digit returns for a period of time. But when we’re doing projections it’s like, “Well, we’ll project this at 5% or 6%.” It’s like, “Well, what do you mean?”

“Because it doesn’t always do this. You don’t assume double-digit returns in markets over long periods of time, because exactly this. You plan for, from time to time, it’s going to drop.” And again, to steal the thunder, these people say, “Well, why don’t you get it out of the way?” It’s like, “It’s not foreseeable. It’s not a predictable thing. It’s just part of the process that you have to go through.” So stay humble in your ability to predict things, stay liquid so that you can get through things, and make sure your expectations are reasonable, and then maybe you can reduce some of that recession anxiety.

Josh Sheluk:

Yeah. And I think as we look at the data today, whether we’re poo-pooing this idea of economists predicting a recession or whatever we’re doing, we are seeing data that are suggesting that we’re closer to the end of this business cycle than the start of it. But that’s pretty much all we can say, at least that’s all I can say with a reasonable level of confidence. I don’t know how close we are towards the end. I just think that we’re probably further through it than we are at the beginning, that’s all.

Colin White:

Yeah. And you know what comes in the next part of the cycle? The next part of the cycle. It just keeps cycling. That’s why we call them cycles.

Josh Sheluk:

The philosophy that you spewed on us today, Colin, next level.

Colin White:

I’m just feeling it today, Josh. The spirit has moved me. Well, thanks everybody for joining us for this edition of Bearnaked Money. If you’re having a good time and you’re still listening, so I guess that means you kind of are, I encourage you to subscribe or share with your friends, because again, hey, the more people at the party, the more fun we can have. And the more feedback we get, the more exciting this can be.

Announcer:

This information has been prepared by White LeBlanc Wealth Planners, who is a portfolio manager for iA Private Wealth. Opinions expressed in this podcast are those of the portfolio manager only and do not necessarily reflect those of iA Private Wealth, Inc. iA Private Wealth, Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth, Inc. operates.

Colin White:

We’ve noticed something. It seems there are a lot of people who would rather try to figure out their lives with an online calculator than airing your finances to a human. Stop doing that. You need to talk to someone who can help direct you, tell you where to start with what you’ve got to make the biggest impact on your future. You can’t figure that out at doIhaveenoughcash.com, but you can figure it out by chatting with us. Call us. It’ll be okay, you’ll see.

Announcer:

The content of this presentation including facts, views, opinions, recommendations, descriptions of or references to products or securities, is not to be used or construed as investment advice, as an offer to sell, or the solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any kind. Although we endeavor to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. This should not be construed to be legal or tax advice, as every client’s situation is different.

This podcast has been prepared for information purposes only. The tax information provided in this podcast is general in nature, and each client should consult with their own tax advisor, accountant, and lawyer before pursuing any strategy described here, as each client’s individual circumstances are unique. We’ve endeavored to ensure the accuracy of the information provided at the time that it was written. However, should the information in this podcast be incorrect or incomplete, or should the law or its interpretation change after the date of this document, the advice provided may be incorrect or inappropriate. There should be no expectation that the information will be updated, supplemented, or revised, whether as a result of new information, changing circumstances, future events, or otherwise. We are not responsible for errors contained in this podcast or to anyone who relies on the information contained in this podcast. Please consult your own legal and tax advisor.