This might be an obvious thing and I think I have been saying it in a roundabout manner but...
I have been concerned that the inverted yield curve would contribute to a recession because it restricts access to capital. While I still believe that the current slope of the curve does this it is clear that capital is readily available from many other sources, like the yen and Swiss franc nto name a couple.
The clearly is a tidal wave of liquidity out there fueling capital markets. The threat still remains anything that jeopardizes liquidity but the idea here is that it may not the yield curve that puts an end to the mania under way.
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11 comments:
Cover shorts...
Will it be the Yen carry trade collapsing that takes down everything else?
take down everything?
I view it simply as a threat. I don't think the reasonable worst case result is anything worse than a normal bear market.
This bull market has run on liquidity. There has been excess associated with this to be sure butwhen the liquidity dries up it makes sense that it could be a tipping point for a bear market if one has not already started.
To be clear I think the fallout is within the range of normal.
I was trying to archive a recent NBR video where a certain pundit said that China's stock market house of cards was about to take a tumble and I couldn't find it.
But I did find this: Here is another guy on the Nightly Business Report who is talking up the "Sell in May & walk away" recommendation, for this year anyway.
Click on "Street Critique" clip on the bottom of the page:
http://www.pbs.org/nbr/info/video.html
This is why I'm currently holding a 40% cash position and brought up the subject the other day. I might add that I was not the first poster in the "Sell in May" piece, that being Anon 6:32AM, who also has a 40% cash position. I do not deal in LEAPS at all.
I have most of my cash in Fidelity's FFRHX, currently yielding 6.35%.
Roger,
I'm showing the 2 year at 4.61% the 10 year at 4.63% and the 30 year at 4.81%
This is as of 04/30/2007.
Do you still look at this as an inverted yield curve?
Linda, i probably needed more context.
One the fed funds is higher than every thing else. The 90 day is at 4.75, obviously above the 2 year and ten year but not the 30 year. From that stand point it is still inverted. The middle of the curve has flattened.
It was/has been inverted for long enough to trigger a recession, remember there is a lag effect and the GDP going negative in the next quarter or two would be within normal, of course it may not go negative but I don;t think it is correct to say it has failed yet.
It may end up failing, but it is too soon to know, IMO.
Key Dollar Measure Hits All-Time Low / First-Quarter GDP Growth of 1.26%, GDP Deflator at 3.97% / Business Activity Tumbles as M3 Growth and Inflation Fears Soar / Inflationary Recession Can Trigger Massive Dollar Selling / The trade-weighted U.S. dollar hit a record low last week, as the markets increasingly recognized the downturn in economic activity, in conjunction with rising inflation that the Fed seems to be "fighting" with accelerating broad money growth. The faltering fundamentals for the greenback included the ongoing bottom-bouncing of the President's approval rating. The U.S. currency is at the precipice and shortly could come under massive selling pressure. Dollar dumping would create turmoil in the domestic U.S. markets, pressuring long-term interest rates to the upside and equity prices to the downside. Never before have the U.S. markets faced an economic crisis while being so heavily dependent on foreign capital for liquidity. - John Williams
http://www.shadowstats.com/cgi-bin/sgs?
Roger,
If not different, at least strange times.
The Fed has taken rates way too high, as you point out. This does directly reduce demand for money and thus economic activity. But the Fed's actions do not restrict liquidity. In fact, I argue that the Fed's actions are having the opposite of their intended effect.
So liquidity remains plentiful, which supports investment assets, but growth is slower.
The big danger is a protectionist shock that would remove all appetite for risk taking regardless of the liquidity level.
How exactly does an inverted yield curve trigger a recession?
there are a couple of things here tied to expectations of future yields and inflation expectations that are fuzzy.
The thing that is important to me, at least I think it is important, is that banks borrow short and lend long. If borrowing short cost more than what they bring in from lending long it doesn't make sense to lend. This limits access to capital.
Maybe that does not matter now, we don't know yet, well I don't think we have answer.
I had always understood that the yield curve was just a gauge of expected future interest and inflation rates, and thus the yield curve could be a sign of a coming recession based on the relationship between interest rates, inflation and growth. But I had never heard that the inverted curve could actually a recession.
The bank lending/liquidity argument makes some sense - I'll have to chew on that for a while.
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