Tuesday, December 27, 2005

Recession On The Horizon?

From the Associated Press:

NEW YORK - Stocks tumbled Tuesday, as the bond market gave signals that in the past have preceded economic slowdowns. The Dow Jones industrial average, which lost more than 105 points, chalked up its worst single-day performance since late October.

The yield curve, the spread between the yields of short-term and long-term bonds, inverted for the first time in five years. That means short-term interest rates were higher than long-term interest rates. Investors have been watching the yield curve closely because, in the past, inverted yield curves have preceded recessions.

But the bond market could be signaling no more than a harmless slowing in the economy, said Jon Brorson, head of growth equities at Neuberger Berman in Chicago.

“We’ve never seen a recession without the yield curve inverting, but the corollary is not true: Just because the yield curve inverts does not mean we’re going to have a recession,” he said.

Volume in equity markets was light, exaggerating the effect. Some of the decline might also be attributed to investors’ clearing out their portfolios for the end of the year.


The last time the yield curve was inverted was 2000 noted Charles H. Blood Jr., senior financial markets analyst at Brown Brothers Harriman & Co. At the time, “it served its classic function of a warning,” he added.


Investors have been watching for months as bonds’ long-term yields and short-term yields grew closer. “Although an inverted yield curve does not always imply an economic recession, it has predicted a profit recession 100 percent of the time,” Merrill Lynch’s North American Economist David R. Rosenberg said earlier this month.

I'm not smart enough or knowledgeable enough about the "business of business" to know if this inverted yield curve means a recession is on the horizon, but I do know that the economy is not on as strong a footing as the Bush administration or its apologists would like us all to believe.

Between the record U.S trade deficit, the record U.S. government debt, the record American consumer debt, the miniscule U.S. savings rate, and the Housing Bubble, I don't think it takes a Milton Keynes to figure out something's got to give in the American economy.

Obviously Uncle Alan Greenspan created the Housing Bubble by lowering interest rates in 2001 to diminish the effects of the Bush Recession.

Now we've got an economy that's propped up on the cheap money the American government has been printing hand over fist the last couple of years and lending out to anyone with a Social Security number.

But eventually, as we all know in our own lives, the bill for the spending spree comes due and must be paid.

Don't you kinda get the feeling the bill is coming due right about now?

Which is not to say that we're heading for a recession next quarter.

But you have to wonder how much longer the Bush administration, Wall Street, and some of the other financial wizards can keep this economy pasted together with smoke, mirrors, and consumer spending.

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