I guess I've got it wrong. Caroline Baum, a veteran columnist at Bloomberg, tells us realists pessimists that Double Dippers Are All Wet Ignoring The Yield Curve. After pointing out that the Housing Market is crashing again despite mortgage interest rates being at historic lows, Caroline schools us in how economic indicators work—
... The steep yield curve is the most powerful thing the economy has going for it right now.
Not that there’s anything magical about two points and a line connecting them. It’s just that the yield curve, or what it represents, is possibly the best leading indicator of the business cycle...
There’s “absolutely no possibility” of the nominal yield curve inverting with short rates at zero, says Arturo Estrella, professor of economics and department head at Rensselaer Polytechnic Institute in Troy, New York. Investors aren’t going to pay the government to hold their cash for 10 years...
Just because nominal long rates can’t go below zero, does that mean the U.S. won’t go into recession? The yield curve has inverted prior to all of the last seven recessions, with no false signals since 1967, according to Estrella, whose website provides all kinds of research and data for the uninitiated.
Estrella uses the monthly average spread between the 3- month Treasury bill and the 10-year Treasury note to filter out the noise...
The current yield curve on Treasuries is not inverted. Learn far more than you ever wanted to know about yield curves here. The yield curve is inverted if shorter term rates are higher than longer term rates (e.g. the 3-month is higher than the 10-year).
From the tone of your article, Caroline, it seems you think we're all far too Stupid to understand the way things work, so can I ask a simple question? If there's nothing magical about two points and a line, but the yield curve is also a flawless leading indicator of recession since 1967, doesn't that imply that there is indeed something magical about two points and a line? You seem to think so. So which is it? Magical? Or not magical?
But beyond this quibble about magic, I have a more fundamental question. (Remember, Oh-So-Wise One, I am a mere Grasshopper sitting at the feet of a Master.) If the yield curve can not possibly invert, given that the 10-year can not go negative, how can the yield curve be a predictor of anything under current circumstances? Doesn't your so-called "argument" boil down to this?
Did everybody follow that? That's some stunning logic. Thus we receive Pearls of Wisdom from the Financial Press. Let's continue, shall we?The yield curve can't possibly invert, and a recession is coming if and only if it inverts (i.e. it is magical). Therefore, we can not possibly have another recession (assuming we ever left the first one).
While a steep yield curve is a sign of an expansionary monetary policy, the Fed needs the banks to get in the game. Instead they’re content to earn the equivalent of the funds rate on the $1 trillion of excess reserves they are holding in their accounts at the Fed.
In this way, the current cycle resembles the aftermath of the 1990 recession when banks, burdened with losses on commercial real estate, weren’t able to expand their balance sheets.
So the best thing the Fed can do if it is concerned about a faltering recovery is keep the funds rate at zero. The short rate is the more powerful tool when it comes to moving the economy. (If it weren’t, why does every central bank in the world target a short rate?) That’s true even though most of us can’t borrow at the interbank lending rate of 0 to 0.25 percent.
[My note: Such a pity, that The Great Unwashed—those not initiated into the Secrets of Money & Finance—can not borrow money for essentially nothing, buy Treasuries somewhere along the yield curve, and pocket the difference between the interest rates.]
“If corporations and banks can fund themselves at zero, credit would not be a problem,” Estrella says. “You could have slowdown for some other reason.”
Slowdown, yes; recession, no. That’s the message of the yield curve. Its track record is impeccable. It beats forecasters, econometric models, even the Fed, which seems to resist the inherent message in the spread.
For all those double-dippers still splashing around in the pool, it’s time to get out, towel off and learn to love a slow recovery.
Slowdown, not recession. That's the message of the Magic Yield Curve, which beats forecasters, econometric models, and even the almighty Fed, which is chiefly responsible for its current shape.
By the way, the difference between a slowdown and a recession is the phony GDP measurement.
I guess I better stop splashing around in the pool, towel-off and learn to love a slow recovery. Better yet, Caroline, why don't you teach the long-term unemployed, and the 40 million people receiving food stamps, and those underwater on their mortgages—people on Main Street—to learn to love a slow recovery?
And how will you teach them to love a slow recovery? It's simple, Caroline, you've already paved the way. Just show them the yield curve! I'm sure they'll understand right away why their sacrifice has not been in vain.
Related Stories from Business InsiderA Quick Primer On Why Everyone Thinks The Economy Is Headed Into The Toilet Again
24 Depressing Pieces Of Evidence That Difficult Economic Times Lie Ahead
The yield curve is influenced by market forces at the long end..and manipulative (ie, Fed) at the short end. Since the Fed has already determined that DEFLATION is very..very serious they are keeping low end rates as low as possible..essentially 0%...
The long end is declining in rate as de-leveraging takes place. You'll notice that every time (!!!) the market goes down the US 20 year T-Bond goes up (rate decreases)..that means money moving out of the Market is moving into something more liquid.
This is how (I believe) this will work itself out..
1. The Market (including European and some Asian) will decline because Deflation becomes more and more inevitable....
2. Long rates will continue to decline towards the March 2009 2.2% level..like it or not this is classic deflation..
My tone may put some off..BUT..the State always likes deflation more than inflation..contrary to popular press and commenter opinion. Inflation..ALWAYS..works against State control. And the State is nothing if it is not controlling.
Helicopter Ben is a nice little picture..but a fantasy. Money won't be pouring out..it will be sucked down a disappearing rat hole....
Posted by: Greg Pinelli | 07/15/2010 at 09:37 PM