Stock Market Woes

[HFWR]

Quote:

Originally Posted by kessef Quote: Originally Posted by HFWR As a contraindicator...* :P Bought 400 VWO, 300 VBR, and 100 TIP today... i've been looking at vwo and eem. any pros/cons between them or are you just a vanguard fan? (i am)

Fan of low expenses... 8)

[laurence]

Dow below 11k now, I'm starting to think a buying opportunity is just around the corner!

[brewer12345]

Quote:

Originally Posted by Laurence Dow below 11k now, I'm starting to think a buying opportunity is just around the corner!

I think the market is fishing around for a low, but no telling if it is here or lower. But I see an ominous sign: the 2-10 year treasury curve is now only 1 BP apart. Inversion is a hair's breadth away. Suggests we may be in for a recession next year.

[NinjaPigeon]

Yah, even though I got hit hard on the funds I bought on 5/12, I picked up another bundle of shares in NAESX, VFINX, and VIMSX on sale this week I hope it doesn't keep dropping though, as I have no spare cash to buy more!

[mb]

Brewer,

Help me understand the present thinking on the inverted yield curve.

I understand that an inverted yield typically indicates a recession but my understanding is that the hand-waving argument for why that happens is that the "smart money" realizes in advance that the economy is going to slow down and that they therefore go long on bonds so that they can capture the maximum capital gains when interest rates decline further.

So the inverted yield curve indicator is really a symptom of the forces that cause the slow down not a cause of the slowdown in and of itself.

However a big reason why the present yield on long bonds is low is because the Chinese and Japanese are buying them and they are doing this because they need to recycle their export profits somewhere not necessarily because they think long rates will go down.

So it seems to me that the forces that are driving the yield curve toward inversion are different this time (yeh, yeh I know that has been said before) and that therefore it may not be as good of an indicator of a slowing economy as it has been in the past?

Your thoughts?

MB

[brewer12345]

There are lots of potential explanations for why the yield curve does what it does, so I'll tell you what I think I see, but there are several plausible explanations (i.e. not involving space aliens).

I think the short end of the curve is being driven by exectations that the Fed will hike rates at least once more and sit still for a while once they actually stop (before cutting again). So the 2 year treasury incorporates expectations that for most of the next two years short term rates (fed funds, LIBOR, etc.) will be something starting with a 5. So that pushes up the short end.

I think the long end of the curve incorporates expectations that we are likely to see short term rates dropping in something like 12 to 18 months. This would be accompanied by a recession or slowdown, at which time longer term bonds will be a good place to hide for a while. This pushes the long end of the curve down.

I don't buy the central bank argument. After all, there is nothing keeping those banks from buying shorter term bonds, corporates, MBS, US equities, US businesses, US real estate, etc.