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Yield Curve Flipped

by Flexo on December 27, 2005

in Economy

Earlier today, the yield on long term Treasury notes was lower than that on short term Treasury notes, creating an “inverted yield curve.” This is a fairly popular economic indicator, and just about every time this has happened in the last thirty years, the U.S. economy headed into a recession.

It’s likely not a cause-effect relationship; usually there are other factors to could cause both the inverted curve and the recession, but the two situations are tightly linked. Most economists seem to think that this time we’re not headed for a recession.

If we do enter a recession, we could always unload our huge properties for spending cash… Then again, I don’t see that happening.

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Flexo, the owner and creator of Consumerism Commentary, has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow him on Twitter.

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  • FMF
    Did you somehow turn into Alan Greenspan when I wasn't looking? I can't understand this a bit. Is there an English version of it for the common man? ;-)
  • Hmmm, I'll break it down a little.

    Almost every time red light flashes, economy goes bad. Red light flashes for a few minutes. Will economy go bad? Most people say no.

    Bond yields are based on what people think interest rates will be throughout a bond's maturity. When long bond rates go down while short bond rates go up and they pass each other, it sends a signal that people aren't thinking too highly about the economy in the long term.

    More info from Investopedia
  • FMF
    Ok, thanks for the translation.

    Thoughts on what people think:

    *This year's high Christmas spending seems to indicate people are ok with the economy for now.

    *I never pay attention to what people think. They're usually wrong. ;-)
  • I agree that people are generally wrong (except in examples of mob wisdom), and I tend to go for the contrarian approach. But what to do when both opinions are more or less evenly divided or the prevailing trend of opinion claims to be contrarian?
  • FMF
    What do you mean "what to do"? Do you mean as far as investments, cash savings, or what?

    As you might guess, I have an opinion, but just need clarification to give you the "right" answer. ;-)
  • Well, it was more of a rhetorical question, but the question is whether to side with the "contrarian mob" or the "non-contrarian mob."
  • FMF
    Side with them on what? Do you mean just philosophically?
  • Basically. :> I'm talking about the broad issue ... or in this case, the course of the general economy in 2006 ... for the people like me who believe that the consensus is generally wrong and it pays off to bet against popular opinion (while hoping everyone else follows popular opinion), the issue arises of what to do -- go against the grain or with it -- when the popular opinion is believed by the masses to be contrarian.
  • FMF
    Ok, so when you say you're deciding to go against the grain or not, you mean just as an intellectual pursuit? I don't mean to be dense, I'm just wondering.

    If this is indeed the case, I'd simply say "what does it matter?" It doesn't have any real practical application (in other words you've said -- or at least implied -- it's not going to influence anything you do) to your finances, so move on. Focus instead on working to save more, spend less, and the like and you'll be better off no matter what happens.

    Then again, maybe that's just the "practical Polly" in me coming out and you should go back to theorizing. ;-)
  • I must admit, this is one of the more interesting "comments" discussions I've seen in a while! Just to interrupt the back and forth you two have had - the inversion of the yield curve scared me to death! I have had a great momentum play on Google stock and sadly it wasn't included in the S&P yesterday. So, I feared that the inversion of the yield curve coupled with the failure of the S&P to include it would be terrible! Thankfully, no such trouble!
  • FMF
    Will --

    THAT'S what I was looking for!!!! A reason to care about this!!!

    Alas, I'm an index fund investor and as such ignore "momentum plays" and the like. It helps me sleep better at night. ;-)
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