Wednesday, March 01, 2006


Inverted Yield Curve

I have told you of my plans to buy a house in Chicago and how those plans would be helped by lower housing prices.

My plan is to buy a home in Chicago in the next three years and I will be able to afford a lot more home if the market cools down; falling off a cliff would be nice, too. If this is the end of the housing bubble it will drag the economy into recession in the next eighteen months. All we need is an inverted yield curve. Hey Mr. Bernanke!

An inverted yield curve is an excellent predictor of recession and I cannot imagine any scenario in which housing prices held firm let alone rose before, or immediately after a recession. Real Estate tends to lag the rest of the economy, people will fight tooth and nail not to sell in a recession, so the housing market might cool but we should not see large drops in price until after the recession is over. Well the yield curve is now inverted so we should see that recession by the end of the year, first quarter 2007 at the latest. Recessions are, by definition, at least two quarters of negative growth. So the recession should be over in the summer of 2007 at the earliest. Housing prices should be soft for a year or more after that.

Of course, the new chief cheerleader doesn't see it that way.

Bernanke argues there's been a structural shift in the bond market.

Cash-rich foreign investors as well as U.S. pensions and insurance companies are willing to accept low long-term yields in exchange for the safety of U.S. assets, he said.

He also notes that inversions ahead of past recessions came at a time when overall rates were much higher than they are today.

Those low long-term yields make it harder for the Fed to keep the economy from overheating, thus forcing policymakers to raise short-term rates higher. [Emphasis added]

That's right, a "structural shift." So it is "different this time."

Raa-raa-raa, GO ECONOMY!


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