John:
Somewhat O.T.<g>
Re: The Inverted Yield Curve.
As you said: "If nothing else maybe its food for thought." But it is some kind of a heavy food that, at least for me could cause some indigestion.<g>
The "Inverted Yield Curve" is sort of a complex subject, which in my opinion, is usually better left to economists and mathematicians to discuss and elucidate among themselves.<g>
As I understand it, the yield curve is inverted when short term debt instruments are yielding more than long term debt instruments. One time that happen in October several years ago, Greenspan had to take some action to bail out some heavy players that were caught on the wrong side of the curve and almost caused a financial crisis.
When short term rates increase and longer term bonds don't increase proportionately, economic growth slows down and eventually longer term bond yields also come down.
The level of interest rates determines where funds will flow, and when they are declining usually money flows out of money market funds into equities, or into real estate as we have seen recently.<g>
At present we have a big problem with the large imbalance on international trade. I remember when Ike was president that some people worried about our deficit on the balance of trade which at that time was around 18Bs/year (if I remember correctly.<g>) Of course that was at a time when the dollar was pegged at $35/ounce, and they were calling it "a barbaric relic.".
In spite of the trade deficit, the dollar has remained strong and some speculators have lost a good mount of $$ selling it short (Soros among them.<g>)
How long will Japan, China, etc. will continue to support it ? What will happen if the dollar falls heavily ?
Does the rise in gold, which has almost doubled from the 2000's level will continue to test the $800 level again?
The DOW has been having problems going through the resistance at the 11,000 level and as I mentioned today in another thread, it seems it may retest the 10,600
Message 22007618
But I guess we will have to wait and see. I have had enough guessing lately trying to deal with the hurricanes that have been in this area.
I have increased my cash position while I wait for a better picture of what the 2006 is going to bring us.<g>
In January 2000 the yield curve inverted and the NAZ peaked a couple of months later, but it took the economy several more months to enter into a recession.
I will rather leave the economists and mathematicians to deal with the "Super Bell Curve" and the Nelson-Siegel & Svenson models to calculate forward rates and par yield values.<g>
Bernard |
