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).