I was being serious that the inverted yield curve signals recession and stocks are headed down. I am also serious in that I do not think that anyone here pays it much respect (in terms of the overall significance to the economy as opposed to it being just another chart).
I asked Brian earlier today what he thought of your scenarios.
Here goes from Brian:
I agree with his potential counts, but I am giving the 3rd scenario a higher weighting here, and have positioned portfolios according. The reason? If the 3rd count is right, then we are about to head down rather quickly below SPX 1250 - probably for the rest of 2006. But if one of the two bullish scenarios are in play, it will be become very clear in the next few weeks, and there will be plenty of time to position for a further rally.
I do not like some of the breakdowns out there and a lot of individual charts look fairly bad. The Utilities index (weekly trendline from 2003), homebuilders, the HUI, H&S tops on the Dow, SOX, and others are all pointing to a liquidity-crunch decline this year. So, the burden of proof is on the bulls here, but if we do get a clear correction out of this current decline I'll be ready to adjust.
Brian
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I personally think that almost everyone (except us permabears) are finding some reason to discount the yield curve as well as the affect a serious decline in housing will have on the economy.
Yes, there is more room for that yield curve to invert further as the markets are still acting as if the FED will save the day. That makes the problem worse IMO.
The interesting thing is that it is even WORSE for the markets if the yield curve keeps wratching up with every hike. Every uptick on the long end is another nail in the housing coffin.
Housing is a supertanker. Once it turns it is not turning back IMO. I also think it has turned.
My prediction is that the next conundrum will be when mortgage rates do NOT follow the 10 yr lower. There is a ton of market risk on housing and when defaults start skyrocketing housing rates will be reluctant to follow the 10 yr lower because of credit risk and asset risk. That is just a theory and no one else that I am awar of has said that. I guess we will see. But my point is that treasury chart is not to be trifled with and it is far more important than any chart on any index.
I think the indicies will soon confirm the meaning of that inversion. Guess we will see.
Mish |
