Thursday, June 30, 2005

The Coming Recession: The Inverted Yield Curve: A Warning (6-30-2005)

The Wall Street Journal of 6-30-2005 has a arcane headline about "The Inverted Yield Curve." Not too jazzy of a headline, but the article does contain some sobering thoughts about the recession the author sees ahead.

The Inverted Yield Curve discussion refers to the spread between what the banks get charged for the money they lend and the interest they charge the consumer. Why worry? Well, the pattern is that when the yield curve spread goes toward zero, the banks are probably are not charging enough for the risk involved and may be making bad loans to worsen the situation. Kind of like a last final gold rush of the good times before the recession comes.

Each time this has occurred in the past, a recession has followed. And each time, the Federal Reserve has denied that a recession was coming. It continues to raise interest rates. The actual market rates for the 30 yr treasury are 50 basis points lower than the fed suggestion ---which in itself says that the market sees lower growth than Greenspan and his mavens.

The future is unknown. However, speculation about it is endless. What do you think about the coming recession? You make the call.