Corrigan:
“[T]he inverted [yield] curve loses its significance if it is not being driven from the short end…”
“[T]he fatal divide between entrained investment and the ex ante desire to save will all come to reveal the false premises on which the boom was launched.”
Hamilton: “Today gold investment demand is gold's primary driver, not dollar weakness.”
The Economist (9 December 2006, “The petrodollar peg – Economics focus”):
“Some economists have... suggested that oil exporters should link their currencies in some way to the oil price… This would help to boost countries’ external purchasing power and hence their imports when oil prices boom. It would also help to smooth the local currency value of oil revenues and hence government income, helping to avoid big deficits in bad times and huge surpluses in good times.”
1 comment:
In 1996, authors Estrella and Mishkin released a famous Fed study that developed a probability table about how likely a recession would be 4 quarters later, given a particular level of the yield curve spread. Their study accurately predicted the stock market crash in 2001 when the yield curve was inverted one year earlier.
The last few months, the spread between the 3-month & 10-year bonds has been -0.40% indicating a ~40% chance of a recession.
Every time a bearish set of economic data was released in late 2006, the stock market shrugged it off since it heightened expectations of a Fed rate cut in 2007 (which stimulates growth). On the other hand, when positive data was released, the market still rallied. Thus, the stock market was going to rally no matter what the news!!!
This year should be different due to (a dirty word for investors) STAGFLATION. Yesterday’s Fed minutes indicated the presence of this double whammy: slowing growth AND rising inflation. These 2 phenomena rarely work in opposition. What this means is that the economy is slowing, but the Fed is unlikely to cut rates as long as inflation is an issue. This is very bad for the stock market and, to a lesser extent, the bond market.
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