Hi Ken -
Six months ago, your forecast of a recession would have been prescient. Today, it's nothing more than a rear-view mirror.
The key to forecasting the health of the economy rests with understanding the term structure of the credit markets, whether it's the Treasurys, Agencies, or Corporates.
The relationship between short term interest rates and the yield on longer term debt can forecast the economy more accurately than any mortal.
For a number of months late last year, the Treasury yield curve was inverted. My explanation will be highly simplified, but suffice it to say that an inverted yield curve is the best predictor (with a lead time of about nine months) of an economic slowdown, never having failed once in the past forty years. Half a year ago, in September, the spread between the yields on 1-yr bills (6.1%) and 10-yr bonds (5.90%)were inverted, at negative 20 bps.
Today, the 1-yr bills are yielding 3.95%, with the 10 yr notes at 5.29%. That is a positive spread of 134 bps, which is not only historically wide, but more importantly, indicates that the economy is being supplied with a huge amount of liquidity. An overly steep yield curve may possibly indicate runaway inflationary expectations/fear, but in absolute levels, 5.29% on the 10-yr notes do not indicate that to be the case.
The bottom line is that the liquidity will not only heal today's weak economy, it will PROPEL the economy.
There is sufficient liquidity in the markets to inflate equities in a very significant way, and I strongly believe that the most profitable strategy now is to "buy on dips". |
