The recession that never came

James Gettinger
5 min readJun 8


Starting in February of 2022, the popular opinion in venture capital has been that a recession is coming. Leading the charge of doomsayers was David Sacks, who took to Twitter¹ with an important message: the end is near. By July 2022, economists surveyed by the WSJ put the chance of a recession within 12-months at 50%. Former Treasury Secretary Larry Summers declared a recession “almost inevitable.”

Since those early predictions, we've proceeded to have an unprecedented 14-months of the jobs report beating expectations.

Via Bespoke Investment Group

“The end” we were promised never came. Off Twitter, the economy is strong. Real GDP grew 2.6% in 2022, compared to an average of 1.7% since the global financial crisis. The unemployment rate touched 3.4%, the lowest it has been since 1968 and unemployment for African Americans is the lowest it's ever been. Corporate balance sheets are healthy, layoffs are not increasing, wages are rising at a rate of 4.4% per year and inflation is cooling.

At Gutter, we ask ourselves “what are we missing?” We aspire not to be right, but to be better every day. In the spirit of serious discourse, we have strained to understand this pessimistic view. After all, how could such smart people get it so wrong?

There are two common rationales for why a recession was imminent 14-months ago, which remain popular today: the yield curve inversion, and rising interest rates. I’ll share our findings on both here, in the hopes that it may aid others who engage earnestly to make sense of macro that is admittedly difficult to predict.

The yield curve turned negative last year and yield curve inversion has predicted the last ten recessions.

This statement is true based on a small sample of ten data points. It doesn’t take much digging to see that it is a poor guide to predict a recession. In fact, in the past 150 years the yield curve has been inverted about half of the time. From 1871 to 1931, while under the gold standard, the curve was inverted for 54 years of that 60 year period. Far from an era of constant recession, the US fared well with moderate annual growth and 15, not 54 economic contractions.

Even in the frequently cited recent sample, zooming out ever so slightly highlights the poverty of the yield curve’s predictive power. For the 10th most recent recession, the yield curve first dipped negative in 1965 only for a recession to hit at the end of 1969. For the last recession, it’s hard to imagine that the yield curve turning negative in 2019 had any insight that COVID would strike 9 months later.

Still, what’s been happening the past couple of recessions looms large in the imagination of market participants, pattern matching based on their lived experience. When you read an article confidently stating that there’s a 90% likelihood the US is entering a recession, it’s almost certainly based on a model heavily weighting the past 10 data points. Ignore it.

The Fed raising rates is going to cause a recession

The influence of interest rates on the real economy is commonly exaggerated, and stems from a misdiagnosis of the cause of enthusiasm in public and private markets. If you believe that the Fed lowering rates is responsible for the boom then it only makes sense that raising rates must create a bust. Regretfully, the world is not so simple that the Fed can set the short term interest rate and expect the rest to fall into place. While they can lower rates, they can’t force banks to offer credit, or for firms to borrow that money and invest it.

The premise that interest rates have a strong influence on markets is contingent on the belief that markets are rational. If valuations are based on a present value of an investment’s future cash flows, with interest rate in the denominator, as rates go up, rational actors would pay less for the same investment. Spending nearly a decade as a professional gambler taught me that people aren’t rational. While incentives matter, at best they can only explain a small percent of individual behavior.

Market history shows the same. Since 1871 there has been no correlation between interest rates and stock market multiples. The lowest P/E multiple of the last hundred years occurred in 1949 when long dated government bonds yielded 2.3%. The highest occurred during the dot-com-bubble when similar bonds yielded 5%². See by decade averages below:

It makes sense when you consider how the real economy functions. We just went through a decade-long period of close to 0% short term rates. However, firms in many sectors of the economy, motivated by fear and undue conservatism, failed to borrow and invest in highly profitable projects, planting the seed for the supply shortages we saw during COVID. Cyclical industries were particularly affected including miners, material producers, manufacturers, and oil producers. We’ve previously highlighted the pernicious effect that this has had on the housing market.

No one should understand how little interest rates matter better than venture investors. With early stage companies, investment decisions are highly elastic to the assumed probability of success. The interest rate is basically immaterial unless a company’s business model relies on a steady stream of cheap capital. At Gutter, we often underwrite investments using a 70% discount rate (finance-speak for the breakeven interest rate). The idea that a 4% change in the risk-free interest rate would drastically alter decisions is absurd. Yet somehow the idea that low interest rates drive returns is prevalent among venture capitalists. It is clear to me that 50-years of 20% average VC fund returns has made there little incentive to think. It's easier to do nothing and assume you’re a genius.

What can we conclude when, after 14-months of being wrong, recession-callers have resisted introspection and instead have turned to insinuating that the government is to blame? “Trust me, don’t trust the facts,” is not a novel proposition. It is at best ignorance, and at worst the whisper of political aspiration. Follow blindly, and you may quickly find yourself in the company of cryptocurrency promoters, domestic con-men, and their sycophants; at war with the facts themselves.

Our recommendation: don’t assume that models or multiples are correct. When investing, talk to every stakeholder, read the primary sources, consider the market pressures, get to conviction and bet big. If you aren’t comfortable doing that, put your trust in a manager who does. Or buy the S&P.

Tune out the punditry of unserious people. Their motives are not your motives. As Charlie Munger says “when they’re talking they’re lying, and when they’re quiet they’re stealing.” Let them talk, but when it comes to your own money, don’t bet against America.

For another point of view, consider Drunkenmiller’s recent comments

All analysis is based on data from Robert Schiller’s “Irrational Exuberance”, FRED, and publicly quoted market data.

¹As seen here, here, here, and here

²Ignoring 2008 as an outlier



James Gettinger

managing partner @ gutter capital / former pro-DFS, pro-poker, current investor.