Kit, Rates were often inverted during my career, though not for long when I switched to bonds out of equities (I was really always the options and futures geek, so I wasn't pedantic about the underlying Maguffin). It is the common result of inflation in credit and the money supply and it always catches the Fed by surprise. You know, how could there be an inverted yield curve when there is no inflation? <g>
How does it get resolved? In the days when we had grownups running the Fed and realists on Wall Street, the Fed would tighten until the credit demand slacked off bigtime. That isn't likely with this Mickey Mouse crew. So, my guess is that it ends with a huge currency crisis. Hence my strategic long calls on the Swissie and the Euro and, occasionally, the Yen. However, there are other ways it could end, such as huge wage rises, consumer price inflation, a stock market crash (ending the wealth effect and the ability to service and willingness to take on debt burdens) etc.
Someone is always getting crushed on the spread. Usually those who borrow short to lend long. Read Fannie Mae and Freddie Mac.
The Dow is so ripe for puts it smells like BananaRama. <g> There is no haven in equities when there is a flight to quality. Folks go for short term paper or physical stuff. True, they may buy resource stocks, but that doesn't work every time. |
