I'm not sure that it is ok to just paste content from RM in this blog but I can tell you that he believes that since more financing is done with floating rate debt, the old notion of un-profitable lending is not the same as it once was. One thing that I think he mis-understood from my comments (which I will paste below) was about flat yield curves. The curve was flat during most of the bubble inflation. Flat can mean slowing is coming but my concern on this blog and in my RealMoney posts was just about inversion.
11/28/2005 10:38 AM EST
I've been concerned about inversion for a while and I have been writing about on my blog as well. For what it's worth I am not concerned in and of itself of an inversion of the two year and the three year. Inverted curves making bank lending un-profitable. Most banks don't borrow for two years to lend at three.
I see one of two outcomes given that the Fed looks like it is going to at least 4.5%. Either the ten year will yield less than t-bills (inversion) or the curve will normalize and the yield of the ten year will be much higher than it is now.
Both outcomes create big headwinds, at a minimum, for equities. I've been formulating a thesis for a rough 2006 based on this and a few other things.
We'll know soon enough.
11/28/2005 11:19 AM EST There is no way I'm going to out-debate Howard on anything and I certainly hope he is right.
While I'm not trying to outguess the market on this, that this yield curve inversion (should it happen) could be different is not a bet I am willing to make with client money.
11/28/2005 12:01 PM EST I'm sure you're sick of hearing from me!
I have no concern about a flat curve. The curve was horizontal for a while in the late 1990s. I am not aware of precedent for bad things coming from just flat.
When the curve inverts it makes accessing needed capital more difficult. Lack of that access is what causes problems.
To be clear my concern is if the curve actaully inverts (and I hope I'm wrong) not threatens to invert.
I got an email after the fact from my editor saying they are not sick of me. That's always nice (insert smile).
6 comments:
First off - thanks for your response regarding Canada. I'll look into it.
You might want to point out to your debater every time the curve inverts and the market tanks someone was saying "This time it's different".
Google Greenspan's comments prior to the 87 market crash or the 2000 market crash and he's there saying "It doesn't matter anymore".
And here he is again, saying "It doesn't matter anymore".
Yeah, I hear conflicting measurements for an inverted yield curve. I heard somebody use a 3-month vs. a 30-yr. More to think about... It is always bad, though.
The markets are confusing as
always!
I believe that for the next few months any new money I use will go into
T-bills.
This is a very strange environment!
Best Regards,
HLPettine,Jr.
This time is not different; it is indeed very similar to 1995. The curve came close to inversion and then the stock market took-off. There is not much difference in a flat curve and an inverted curve. The FOMC puts a lot of pressure on other governments and on the markets by jacking up short rates. The reason the curve is not as powerful as it used to be is that now the banks lend mostly at cost plus a nice spread. They now rarely borrow short to lend long. Corporate borrowers are accustomed to prime plus or minus lending. Now most consumer loans and even most mortgages are floating rate instruments; real pain is being felt by millions of mortgage holders, behaviors are adjusting quickly. The bottom line is that investors are tiring of earning money market rates; fear is strong but it will soon turn to greed.
I loved the columnist conversation between you and Howard. He is one smart guy, I had the pleasure of meeting him this summer and his market acumen is equally impressive in person as it is on paper.
I tend to agree with Howard Simons that the vast majority of flattening has occured-with no ill effect.
no ill effect from the flattening?
I'm probably on board with that. I am concerned with what happens if it inverts.
thanks for the comment
Post a Comment