Skip to comments.The Yield Curve Signals Bigger Growth
Posted on 12/23/2009 7:39:21 AM PST by SeekAndFind
What's a yield curve and why is it so important?
Well, the curve itself measures Treasury interest rates, by maturity, from 91-day T-bills all the way out to 30-year bonds. It's the difference between the long rates and the short rates that tells a key story about the future of the economy.
When the curve is wide and upward sloping, as it is today, it tells us that the economic future is good. When the curve is upside down, or inverted, with short rates above long rates, it tells us that something is amiss -- such as a credit crunch and a recession.
The inverted curve is abnormal, the positive curve is normal. We have returned to normalcy, and then some. Right now, the difference between long and short Treasury rates is as wide as any time in history. With the Fed pumping in all that money and anchoring the short rate at zero, investors are now charging the Treasury a higher interest rate for buying its bonds. That's as it should be. The time preference of money simply means that the investor will hold Treasury bonds for a longer period of time, but he or she is going to charge a higher rate. That is a normal risk profile.
The yield curve may be the best single forecasting predictor there is. When it was inverted or flat for most of 2006, 2007, and the early part of 2008, it correctly predicted big trouble ahead. Right now it is forecasting a much stronger economy in 2010 than most people think possible.
So there could be a mini boom next year, with real GDP growing at 4 to 5 percent, perhaps with a 6 percent quarter in there someplace. And the unemployment rate is likely to come down
(Excerpt) Read more at realclearmarkets.com ...
Has this cokehead ever been pessimistic on the economy?
Good for him. I’m going to take another look on the last day of the year and will likely move everything to the general fund. Last time I researched it looked like the dead cat was going to apex at the end of the year.
I bailed at 10,390. In bond funds for now.
Are they anticipating real growth or inflation/hyperinflation?
Listening to Brinker last Saturday I was wondering if Kudlow was the unnamed pundit he was mocking.
Epithet aside, that’s a good question and no I cannot recall that he has.
Well he did insist that there was no recession until he was like Baghdad Bob with the tanks of the great recession visible behind him.
Larry Kudlow is a globalist - supports illegal aliens.
Look again Larry...
I can’t imagine why. Brinker missed calling the recession just as much as Kudlow.
It just doesn’t get more amusing than that. A guy who peddles himself as a market timer misses the biggest credit collapse of his life.
Not for a couple of hours (from the column):
So as good as 2010 may be, with investors moving to beat the tax man, it could be a false prosperity at the expense of 2011.Great knee-jerk reaction, though. +1
The epithet was well earned. Kudlow went through a major portion of his wealth enriching the drug lords.
ping for later.
KarInOhio has the right question. Mr. Kudlow’s interpretation of the yield curve is unsound. If the market expects higher inflation in the future, future rates will be higher because of it. So when the yield curve is steeply-sloped it means that either the market expects higher growth in the future, or it expects greater inflation, or both.
The same applies to the run-up of stock prices. The stock market is a good predictor of the near economic future. It reliably rises when it sees something coming which will be good for the economy, and falls when it sees something harmful coming—except in the area of inflation. When the market anticipates inflation, stocks go up, in expectation of higher asset prices. Whe the market expects inflation to drop, stocks go down, expecting lower asset prices. So in the are of inflation, the market rises on bad news, and drops on good news.
My guess is that both the stock run-up, and the yield curve, are due to inflationary expectations, rather than any expectation that the economy will recover. The government is spending about twice as much money as it’s taking in, and some of the debt is being monitarized. On the other hand, Congress isn’t done hurting the economy yet. Health Care “Reform” looks likely, and Cap-and-Trade is still a threat. “Stimulus” projects, to pull resources away from individual people, and take them for government purposes, are ongoing, and may increase. Tax increases are still planned (in addition to those in “reforms”). The government is definately pushing for higher inflation, and a weaker economy.
Usually it's the pessimists who're delusional, but in this case Kudlow's acting like a moron. He wrote: When the curve is wide and upward sloping, as it is today, it tells us that the economic future is good.
Here's today's yield curve right next to the curve we had in Sept. 08.
The curve was "wide and upward sloping" back in Sept. 08 too.
Brinker himself is kind of a mystery, but I’ve probably learned more from listening to him than in any single semester at graduate school. It’s a matter of picking the diamonds from the rubble. One thing that intrigues me about Brinker personally is the military service. For such a tough talking guy, I’d expect him to have volunteered for a tough assignment in the service, since when he was a young man those his age were compelled to do something typically. I’d be shocked to find he didn’t take up the challenge.
There was a good reason for that. Until Lehman Brothers failed the data was quite mixed. Plenty of indexes like ISM were simply not at levels analysts associate with recessions. The BEA called this recession start in December of 2007 a full year later, and they did so primarily on employment rather than GDP.
The main voices howling about recession before then were either partisan Democrats who wanted campaign fodder and the permabears and gold bugs have never had a POSITIVE forecast in their lives.
The Street consensus said no recession, not just Kudlow. And just because Kudlow was too optimistic then doesn't make the permanent doomsayers right now.
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