November 28, 2005
From the desk of Jane Galt:The sky is falling!
Well, no, but the yield curve may be inverting, which is almost as bad.
What does an inverted yield curve mean? It means that the yield on short term debt is higher than the yield on longer term debt. Historically, this has been a harbinger of recession, and for good reason, since the markets are telling you that they have very dim expectations indeed for the future.
Posted by Jane Galt at November 28, 2005 11:16 AM | TrackBack | Technorati inbound linksIsn't it "Not all inverted curves have indicated a recession and not all recessions have come after inverted curves", though?
This is a very weird situation. The reason US and municipal long term interest rates is so low is that the demand for those long term instruments is higher than the supply.
This signals an overwhelming optimism in the long term future of the economy by foreigners and US investors.
No single economic indicator has a perfect record. What you should do is watch a basket of various indicators and when the bulk of them are sending a message act accordingly -- either bullish or bearish.
The almost perfect rule for predicting a negative yield curve in the US is when the inflation rate is higher then the unemployment rate and that is not the current situation.
Spenser,
And the basket of leading indicators you refer to has predicted 7 of the last 5 recessions.
I don't care I don't have any money in bonds. All my money's in gold; the guy from LA Law convinced me.
I do not use the conference board index of leaading indicators. But I do use some of the componenets.
I do not do the economy. Rather I do the stock market and have my own set of leading indicators of the stock market PE that has almost a perfect record over the last 50 years -- 25 years live time -- of leading the stock market PE.
The correlation between the change in earnings and the change in the stock market is essentially zero while the correlation between the change in the market PE and the change in the market is about 0.9.
This means that the relationship between the change in earnings and the change in the market is almost perfectly random. Even if you have perfect knowledge of what earnings will do it is of no help in telling you what the stock market will do.
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