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Strategies & Market Trends : IPO and Other Stock Plays
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To: david777 who wrote (12628)6/5/2005 2:26:10 PM
From: Rarebird   of 13331
 
" The bond YIELD CURVE is flattening with the spread between the 10 year and short term treasuries near 100 basis points. That is close to flat, but it is not. It is also not INVERTED. Inversion equals recession. We are not there yet, but that is what has many concerned, the stock and bond market included."

The US does not yet have an inverted yield curve. But Australia and the UK DO.

When long-term rates fall below short-term rates, the first cause is that the demand for longer-term loans has dried up. This reflects directly on the fact that consumers are "tapped out" and that the valuation gap which has grown up between buyers and sellers is too big to bridge without a drastic change - downwards - in valuations. But what an inverted yield curve also shows is that the remaining demand for loans is all at the short end. The reason for this is that indebted businesses and consumers need short-term loans to tide them over the "temporary" economic slowdown they can see coming. Finally, in the business sector, many businessmen are staring at falling revenues and have two choices, either shut down unproductive capital projects or try to keep them going and sell them before the economy slows further. To keep them going, they need funds, but because they know that they cannot keep them going for long, they only want to borrow short-term.

Inverted yield curves are infallible predictors of recessions because they result from the expectation of economic slowdown. They happen when everybody wants to sell but nobody can afford to borrow enough to meet the valuations placed on the items for sale. They are a precursor to a collapse in valuations, which in turn is the death knell for any economy which has relied on credit expansion.
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