Like the illusion of Wall Street, with its vast and powerful investment banks, now shuttered, China too is an illusion perpetuated by the Globalists that gave us the 15,000 mile Caesar salad, poisoned cat food and lead based paint on babies' pacifiers. Like the illusion that money would come from thin air to always push housing prices higher, China has spent a generation pursuing its illusion. Pursuing an unattainable dream to be like the West, while 6000 years of its carefully shepherded top soil blows into the sea.
Joined: Jun 13, 2005 Posts: 1206 Location: Western US
Posted: Sun Feb 26, 2006 5:51 pm Post subject: Re: anyone watching the yield curve?
MrBill wrote:
Don't be too cruel. Most journalists have to write an article whether they have anything to say or not. The same as with analysts. Either say the same as everyone else or take a risk and make outrageous predictions. That is why you will often see what I call J curve predictions from these experts. These predictions state that the underlying trend goes a bit further, followed by a regression to the mean. i.e. things are bad this year, but we forecast growth next year. It is a very safe prediction.
I didn't mean to be seeming to make fun of them. I'm really mystified. If it's well-known and accepted that economic slowdowns USUALLY follow inverted yield curves, why do so many people who understand this more than I do believe all will be rosy? Of course these predictions were made before the yield curve fully inverted, and before it has maintained an inversion. But still... it makes me wonder if I'm being a total flake seeing a recession coming.
Joined: Sep 06, 2004 Posts: 5315 Location: Smalltown New Zealand
Posted: Sun Feb 26, 2006 6:02 pm Post subject: Re: anyone watching the yield curve?
LadyRuby wrote:
But still... it makes me wonder if I'm being a total flake seeing a recession coming.
Don't worry, you are not alone in your fears WHY YIELD INVERSION FORETELLS RECESSION _________________ "Complex problems have simple, easy to understand, wrong answers." - Henry Louis Mencken
Posted: Mon Feb 27, 2006 2:04 am Post subject: Re: anyone watching the yield curve?
LadyRuby wrote:
MrBill wrote:
Don't be too cruel. Most journalists have to write an article whether they have anything to say or not. The same as with analysts. Either say the same as everyone else or take a risk and make outrageous predictions. That is why you will often see what I call J curve predictions from these experts. These predictions state that the underlying trend goes a bit further, followed by a regression to the mean. i.e. things are bad this year, but we forecast growth next year. It is a very safe prediction.
I didn't mean to be seeming to make fun of them. I'm really mystified. If it's well-known and accepted that economic slowdowns USUALLY follow inverted yield curves, why do so many people who understand this more than I do believe all will be rosy? Of course these predictions were made before the yield curve fully inverted, and before it has maintained an inversion. But still... it makes me wonder if I'm being a total flake seeing a recession coming.
It is generally accepted that European bourse did well in 2005 from a stronger USD weaker EUR. Now it looks like the JPY will appreciate against the USD and the EUR.
It is just my observation that the world seems very happy with a USD/JPY of between 110-120, but starts to get nervous anytime it moves outside of that range. When the JPY was under 100 Japanese manufacturers were nervous and investors started questioning the wisdom of holding US treasuries. Above 120 and American manufacturers start complaining about currency manipulation from the BOJ and about unfair competition.
This past week we have moved from 118-119 in the USD/JPY to around 116. I guess a test of 115 is quite likely, which is comfortably in mid-range. But as the BOJ starts to increase real interest rates in Japan it wil either put pressure on US yields to also move higher or on the USD to weaken. As I said, no one seems to get too worked up before 110, but if we reach 110 and say Fed funds are by then 5% (May'06), and the Japanese are just getting started with their rate hikes (can imagine they will be very cautious, but that the market might get ahead of them in their anticipation of further rate hikes), then the dollar will come under more pressure.
Think the EUR will get caught in the crossfire between USD and YEN and not likely move of its own accord. If investors sell EUR/JPY then the EUR will likely remain under pressure against the USD unless the ECB gets a whole lot more concerned about run away growth prospects in the eurozone than they currently are. My feeling is that growth in Europe is picking up, but it is mighty fragile and depends on a steady hand from the ECB, and follow through reforms in Germany to keep the expansion moving. I do not see Europe as the driver. More Asia and therefore keep an eye on the YEN and the YUAN for clues as to what will happen to US rates and the strength of the US dollar.
Events in 2005 all pointed to a stronger US stock market like benign inflation, a strong housing sector, relatively low interest rates, good corporate profits and yet the industrial averages remained flat on the year. Quite hard to understand fully why other than the market seemed to be pricing in an event that never happened (i.e. a fall in housing prices for example that dented consumer spending). So going forward, if the market could not manage a rally in 2005 then I somehow suspect that 2006 will be a difficult year as well?
Recession? I don't know? Growth still seems to be strong, but the yield curve seems to be pricing in higher short term rates, but lower growth prospects farther along the curve. Maybe just slower growth rather than a technical recession (2 quarters of negative growth in a row)? _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
And yet it looks (to me, but I could be mistaken) the difference between the 3 month bill and 10 year note continues to increase, signaling a slowdown.
Is there market manipulation going on, people wanting to insist that our economy is booming, booming I tell you! And maybe it is, but can people continue ignoring these other indicators? Maybe it's because so far the yield curve hasn't been inverted for a very long time.
One day it's strong. The next day it's weak. At least that's the view from the front row.
Seen from a comfortable distance, the $11.3 trillion U.S. economy doesn't change course that quickly. The noise eventually floats to the surface, leaving behind a clear, solid trend.
With the bond market, not to mention the Federal Reserve, hungry for good intelligence, it may be an appropriate time to take the economy's temperature.
After a sharp deceleration in fourth-quarter real gross domestic product growth to 1.6 percent, the consensus marked up its first-quarter forecast to something on the order of 4 percent or 4.5 percent, with outliers as high as 6 percent.
The idea that one quarter's loss is the next quarter's gain -- or the corollary, that strong growth in one quarter steals from the subsequent one -- is popular on Wall Street, if not in economics. It assumes growth is a fixed quantity, to be distributed equally among quarters at the whim of the weather and natural disasters.
Not all weather effects can be recouped. An unseasonal April blizzard might find a mismatch between consumer demand (snow- blowers) and retail supplies (spring wear). Sometimes what looks like weather can be a new trend reasserting itself.
So let's see where we are.
...
Putting it all together -- C + I + G + X - M -- what does it add up to?
Any way you slice it the letters spell ``slowdown.''
Posted: Mon Mar 06, 2006 4:03 am Post subject: Re: anyone watching the yield curve?
Lehman Bros. upped their forecast for Fed funds to 5.5% in August/September this year from their earlier forecasts of 5.0%. Tried to post the article this weekend, but had troubles with the site timing out. In any case, as with any inverted yield curve, you have to look at both ends of it to arrive at its slope. Therefore, be careful to keep in mind 'how high' the front end gets, which is pricing in inflation expectations in the short term, to 'how low' the long end gets which may be pricing in a slowdown in the future, but not a recession if yields in the long end remain robust.
i.e.
S/T 4.50% - L/T 4.0% base scenario
S/T 5.50% - L/T 4.0% is less bearish the recession scenario as
S/T 5.00% - L/T 3.5% even though the slope of the curve is the same.
the L/T rate of 3.5% indicates more of a slowdown and therefore lower rates than a long term rate of 4.0% _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Don't look now, but the yield curve appears to be twisting back toward its normal positive slope. Now the question becomes: is this good news or bad news?
The answer: it all depends on who you are.
If you're looking to take out a fixed-rate mortgage, the recent jump in long-term interest rates to multi-year highs is clearly bad news. It's also bad news for homebuilders, or anyone looking to sell a home, for that matter.
Over the past few months, with most of the increases in interest rates at the short end of the curve, the market for new and existing homes has already begun to weaken, so you can imagine what higher long-term rates will do.
Of course, if you're in the market to buy a home, and you have the financing all lined up, you are in the driver's seat, able to strike a better deal than, let's say, this time last year. In other words -- housing's already become a buyer's market, and these recent increases in bond yields only make it more so.
...
For the banks, it's a mixed bag.
On the one hand, those institutions that have a huge mortgage department will find that it will soon get more difficult to make loans. On the other, if and as long-term rates rise above short-term rates, the pressure on their profit margins for other types of loans will ease.
As you know, the rates banks pay for their deposits are akin to those on the short end of the curve. Their loans are priced at rates found on the long end.
When the curve inverts, as it did a number of weeks ago, it squeezes the banks' profitability on a lot of the loans they make. That's why most banks prefer to operate in an environment that contains a positively-sloped yield curve, which it looks like they might get.
But the best news of all is for the economy. That's right; the jump in bond yields is actually good for the U.S. economy.
First of all, by twisting the yield curve back to a positive slope, it puts the banks back into the money-creation process, thus reducing, if not eliminating, the possibility that a recession might develop.
In the past, whenever the curve has inverted, for whatever the reason and at whatever level of interest rates, a recession has followed within months.
Second, and just as important, rising bond yields make the Federal Reserve's job of slowing the economy easier. This means that Ben Bernanke and his band of merry central bankers will not have to raise the federal funds rate as much as they might have had the curve remained inverted.
As long as bond rates continue to rise, I'll stick with my forecast of just two more quarter-point hikes to five percent.
Posted: Tue Mar 07, 2006 10:26 am Post subject: Re: anyone watching the yield curve?
I personally think that 5% interest rates will not be too high for the US to endure. The yield curve is quite flat now at 4.72-4.77% with a couple more interest rate hikes in the pipeline. Of course, interest rates could be lower if the US would reduce its budget deficit and close some of its current account deficit. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
For his third speech as Fed chairman, Bernanke chose as his topic the yield curve and its role in making monetary policy. He outlined two different scenarios, with different implications, under which the yield curve could have arrived at its current flat slope. And in terms of the conduct of monetary policy, he said it ``depends critically'' on how or why long-term rates have behaved so abnormally, refusing to rise in the face of the Fed's 14 rate increases.
Ben's Choice
Option No. 1: If low long rates are the result of a decline in the term premium -- the extra yield investors demand for the risk of holding long-term assets -- ``the effect is financially stimulative and argues for greater monetary restraint, all else being equal,'' he said.
Option No. 2: If long long-term rates reflect current or prospective economic conditions, the implications for policy may be ``quite the opposite.'' If the natural rate, or the rate consistent with full employment, has declined, the antidote would be a lower real funds rate and a steeper yield curve.
To translate, while the narrowing slope of the yield curve historically has been a good harbinger of recession, this time is different. It's our job to figure out whether option No. 1 or No. 2 is the operative scenario.
Face Value
I've never understood attempts to deconstruct the yield curve. It is what it is. A is A. It matters very little why long rates have resisted the pull of short rates higher. The fact that the policy rate (the overnight federal funds) rate is 350 basis points higher than it was in June 2004 while the market rate (the 10-year Treasury note) is virtually unchanged is all the information one needs.
The flat or inverted yield curve suggests the central bank is holding its pegged rate too high relative to the rate set in the marketplace by borrowers and lenders.
In the old days, the Fed had to throw the economy into recession in order to bring down inflation. That isn't the case today. So the yield curve message should be particularly troublesome since the goal is only to normalize rates, not restrain growth to any significant degree.
Posted: Fri Jul 21, 2006 4:13 am Post subject: Re: anyone watching the yield curve?
LadyRuby wrote:
Mr. Bill or others, any thoughts on the current state of the inverted yield curve?
having trouble to post my response, so this is just a test? _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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