Numbers
- Thread starter nitro
- Start date
If the curve was inverted at higher rates, I would agree. IMO, here it is a sign of short and long term liquidity ratios and does not signal recession. People forget what the DOW and IRs were pre 9/11, when the FED was forced to lower IRs to near zero due to a massive external shock to the entire world markets. By pre 9/11 standards, we are more or less on par.
Go back and compare and do the math. The one variable that is a worry is Gold. You have to coordinatize wealth by the price of gold [inverse] proportionally in both epochs to get the math correct.
Gold is the "right" coordinate system.
nitro
I have. Never discount the yield curve. Commodities and stocks also going down. That doesn't bode well for economic growth. Everybody is now predicting an economic slowdown. Not necessarily recession, but slower growth.
I'm not predicting recession either (if it sounded that way, sorry). But the economy will slow considerably and we may get negative growth.
re the yield curve going fwd http://www.elitetrader.com/vb/showthread.php?s=&postid=1099874#post1099874
When I worked on the floor in the Treasury Bill pit at the MERC, we all had to read this book:
http://www.amazon.com/gp/product/1556231229/104-0544876-9521507?v=glance&n=283155
This book may be must reading again soon.
nitro
http://www.amazon.com/gp/product/1556231229/104-0544876-9521507?v=glance&n=283155
This book may be must reading again soon.
nitro
People keep saying that the FED may over do it by raising IRs too much and thereby causing a recession.
IMO people that say this don't understand why the FED must overshoot, even at the risk of recession:
No one knows when inflationary pressures have subsided. If you overshoot, the FED can lower rates and get the economy going again. But consider the alternative, allowing inflation to stay ahead of the FED and the FED finally catching up to it too slowly. The problem is that once this happens, service oriented costs (remember, the biggest recurring cost to a business are wage related) rarely come down again even if inflation backs off and the economy slows down, so that you have inneficient prices in markets as a result of not keeping these prices in check. Price stability is the FEDs modus operandi.
I don't know if this is true in practical or even theoretical economics, but the logic of it seems clear.
Therefore I now believe that FFFs probably at 5.75 by Y/E, with maybe one pause, even though I believe that 5.25 is too high.
One thing though, read Stigum. Remember, the FED can be taking away liquidity one way, by raising IRs, but by adding liquidity from the other end. These two together are what matters. Markets are too focused on just the IR part of the FED. The FOMC can effect monetary policy by:
#1 Open market operations--the buying and selling of U.S. government securities.
#2 Altering reserve requirements--the amount of funds that commercial banks must hold in reserve against deposits.
#3 Adjusting the discount rate--the interest rate charged to commercial banks. <-- markets way too focused on this.
nitro
IMO people that say this don't understand why the FED must overshoot, even at the risk of recession:
No one knows when inflationary pressures have subsided. If you overshoot, the FED can lower rates and get the economy going again. But consider the alternative, allowing inflation to stay ahead of the FED and the FED finally catching up to it too slowly. The problem is that once this happens, service oriented costs (remember, the biggest recurring cost to a business are wage related) rarely come down again even if inflation backs off and the economy slows down, so that you have inneficient prices in markets as a result of not keeping these prices in check. Price stability is the FEDs modus operandi.
I don't know if this is true in practical or even theoretical economics, but the logic of it seems clear.
Therefore I now believe that FFFs probably at 5.75 by Y/E, with maybe one pause, even though I believe that 5.25 is too high.
One thing though, read Stigum. Remember, the FED can be taking away liquidity one way, by raising IRs, but by adding liquidity from the other end. These two together are what matters. Markets are too focused on just the IR part of the FED. The FOMC can effect monetary policy by:
#1 Open market operations--the buying and selling of U.S. government securities.
#2 Altering reserve requirements--the amount of funds that commercial banks must hold in reserve against deposits.
#3 Adjusting the discount rate--the interest rate charged to commercial banks. <-- markets way too focused on this.
nitro
You mean the $200+ book edition?
