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.
Ouch! That’ll leave a mark.
“A guy who peddles himself as a market timer...”
Anyone who does that is an historically ignorant fool.
Yield curve is pretty steep!
Dont see the Houses falling from the sky when he introduces tha one guy anymore either.
I’ll bet that the closest Brinker ever got to military service was when he played Army with a GI Joe.
I already had a securities license before I first heard Brinker so I can’t say that I find him all that informative, I tend not to pay attention to material I’m familiar with. I do marvel at his shameless self promotion mixed with convenient omission of his blown calls. For connoisseurs of snake oil Brinker is entertaining.
Brinker voted for Obama.....
“There was a good reason for that.”
Lol. Sure, if you were utterly blind to the trillions of dollars teetering in the ever more unstable real estate bubble and its derivatives monster. Of course that’s precisely what took down Lehman.
“Brinker voted for Obama.....”
As did Art Laffer. Laffer was another Dr Pangloss of the Kudlow variety. There’s an amusing video of Laffer crossing wits with Peter Schiff on Kudlow back in 2006:
Says alot....about the reliability of these “prognosticators”
Do you have ‘07?
I think they were upside down that year
and you are a 1 trick pony. illegals have nothing to do with this thread. stop trying to hijack it to prove your bigotry.
Permabears ALWAYS have another falling sky to warn you about. Every economic weak spot is future soup lines in the making to these people. And when disaster fails to materialize, they simply move on and pick the next one.
The number of analysts who forecast the mortgage crisis of that magnitude were tiny. Bubbles happen in free markets, it’s just a fact of life.
But stopped clocks who never change their forecasts will by definition score big predictive wins sometimes. The problem is if you had consistently heeded their advice rather than the bulls over the past 30-50 years, market correction and all, you’d be a hell of a lot poorer.
Well...maybe Palin can walk on water.
I think the GOP, and the conservatives are in for a long dry spell. hope we all have plenty of lube.
1 trick pony???
Do YOU have a problem?
Because I don’t want illegal aliens in my country, it doesn’t make me a bigot. It makes me smart and patriotic. If you want them here, I can assume the opposite of you.
And I have a right to express my opinion here about Kudlow. The thread relates to him.
“The number of analysts who forecast the mortgage crisis of that magnitude were tiny. Bubbles happen in free markets, its just a fact of life.”
I guess that’s one excuse for missing the biggest bubble since Japan blew up. It was too much effort to examine what was going in the fastest growing part of the economy, the part that dominated all growth after the NASDAQ bubble and 9-11.
You had lenders offering half million dollar no doc loans to strawberry pickers. You had real estate agents giving seminars on how to flip houses. You had seminars on how to buy multiple houses for no money down. You had lenders fighting each other to offer mortgage equity withdrawal loans. You had brokers cracking jokes about NINJA clients, No Income No Job no Assets. And they gave loans to these NINJAs, because Wall Street bought the paper.
You had mortgage brokers popping up like mushrooms. Brokers with pipelines to Wall St, where investment banks bought all the subprime paper that the brokers could push and cried for more. You had investment banks whose main income became the securitizing of mortgages, and the exploding industry of derivatives built on those securities.
The evidence was there, in full sight. It wasn’t doomsayers pointing out this stuff, it was in the business press if you bothered to look.
Wow that’s astounding hindsight you have there. For purposes of discussion, I’ll assume you were one such insightful person pre-crash and would have singlehandedly saved people trillions if only they’d followed your wisdom. And actually I’m a prodigious consumer of the “business press” as a financial advisor.
There was, and is, always a handful of people who sieze on a negative trend or economic indicator and proceed to tell us of the tsunami to come. They were a minority voice in the “business press” at the time.
My point to you is that their correct call this once doesn’t make them infallible oracles going forward. If they were bears 3 years ago, bears 10 years ago, bears 20 years ago, and are still bears after a selloff of that magnitude, it ought to raise some questions about their thought process.
If you’re so certain, why don’t you buy a bear market fund right now, then let’s consult again in a year and see who’s the happiest?
” And actually Im a prodigious consumer of the business press as a financial advisor.”
And you’ve already told us your excuse for not seeing the bubble.
“Wow thats astounding hindsight you have there. For purposes of discussion, Ill assume you were one such insightful person pre-crash and would have singlehandedly saved people trillions if only theyd followed your wisdom”
It’s hardly hindsight. I just paid attention to what was going on around me. I had customers who were mortgage brokers, I had a neighbor who was a mortgage broker, I had friends who were real estate agents. But most of what learned from them was also being reported in the press. I suspected we were in a bubble as early as 2003 when the affordability index for southern California fell below 18%, and of course prices escalated wildly from there. A bit of investigating led to how all of this was being funded. It doesn’t take rocket science to figure out that bad loans aren’t going to get better simply because they are bundled and tranched. When I heard one reporter say that the CDO market was in the trillions of dollars I knew we had a recipe for major trouble. There were analysts detailing what was going on, all you had to do was look for them.
“If youre so certain, why dont you buy a bear market fund right now, then lets consult again in a year and see whos the happiest?”
I may. I think the coming surprise will be the dollar strengthening.
Always admire a man willing to put his money where his mouth is. We shall see.
I predicted Chicago's condominium price crash in the late 1990's. I was proven correct nearly a decade later. In other words, I was wrong.
Precisely! I don't wish to needle Pelham any more, but plenty of folks come online today and describe in painstaking detail how the mess unfolded a year or more after the fact and hold themselves out as a junior Nostradamus or something.
If he had intel on the ground a few years ago and thought to himself, "Wow, this is unsustainable. I wonder how much higher it can go, and when it will fall," then kudos to him. He saw something many of us didn't.
But that doesn't mean it's prudent to follow the perpetual economic sourpusses whose opinion never changes moving forward. I personally would guess about a 10-15% return in the S&P 500 next year and GDP growth in the 4% range. (No thanks to you, Mr. President, it's simply U.S. resiliency.) Dollar likely continues a slow long term decline, but I don't think people who buy gold today when every other commercial on FNC is by a gold broker is going to be happy this time next year.
Yeah, the gold thing has me chuckling. I’m not a precious metals expert, but when every third commercial on TV and radio is yelling “buy buy buy!” it’s time to take a step back. And weren’t we just talking about unscrupulous mortgage brokers?
Gold is certainly in a bubble here and one sign is the ommipresent advertising. But gold is a risky market to play in because it’s relatively small and gold could still have a major spike up from here. The adage that a market can stay irrational longer than you can stay solvent is something shorts have to consider.
With near zero interest rates there’s no opportunity cost in holding gold. A strengthening dollar and a rise in interest rates would change that and maybe pop the gold bubble, but until there is some sign of that happening I’d leave gold alone.
The article said "...it was inverted or flat for most of 2006, 2007, and the early part of 2008, it correctly predicted big trouble..." So we're supposed to be impressed with a signal flashing in 2006 that says trouble, but not that year and not the year after. It's not until when the signal turns off, that's when we have trouble.
So whatever Larry Kudlow knows or doesn't know about economic indicators, it's for sure that he knows all about getting his dribble published and studied.
Ah, ZULU always brings something up if it's important to him. That means he doesn't have a problem at all with child molestation.
That’s what I thought. There is an event, but not much of a signal
You are a really disgusting piece of human offal and that comment should not even be dignified with a response.
Obviously you are either an illegal alien yourself, are connected to one, or employ them.
expat_panama only brings up something if its important to him.
Interesting web page you creep. I see you are from Panama, not the U.S.
No wonder you approve of Kudlow and the globalists who have no problem with a nation without borders.
Panama wouldn’t even exist if it weren’t for Teddy Roosevelt, Yankee Gunboat Diplomacy and the Canal America built.
Time to lighten up and all be on the same side, everyone knows you're a good guy, just like everyone knows Bert and I don't want illegals either.
Enjoy the Holidays all the best to you and yours ;-). Cheers!
Have a nice Holiday also. :)
LOL! Thanks, and God bless you for starting my day with your cheer!