Originally Posted by SHELLY
LESSON #3: Inverted Yield Curve (Condensed )
Sorry for the long post folks, I usually hate these...
Folks who think the Fed is going to lower interest rates to fight a recession rush to "lock in" long-term interest rates by buying (in this case) 10-year treasuries sending the yields lower. The bond's price and the yield are inversely related, so when folks "demand" more bonds, the price goes up and the yield goes down (or if they rush to unload them, the price goes down and the yield goes up -- same situation as stock prices and their dividends). Hold this thought for now.
Who are "folks" and why are they rushing to buy bonds...Hint, its not to lock in yield...Identify "folks" and then you'll know why they buy...Addl'ly, are you really suggesting that bond yields somehow interact similiarly to divs?..
This situation worked pretty well in the past, but here is the rub.
Why did it work well?...Because if it worked, you loose the majority of your "Greenspan's an idiot" argument...
Foreign countries are holding over $2.4 Trillion in US debt. The foreigners are feeding the US money so we can buy their oil to put in our SUVs, their plasma TVs and their plastic junk from the Dollar Trees. We take out HELOCs or use credit cards to buy their stuff, and most all of the money finds it way to Japan and China (the #1 & #2 holders of our debt) so they can pass it back to the US in return for treasuries where it ends up in banks for us to borrow
Wrong, Japan and China do it because their own debt situation is so bad they can't put that much money into their own system...
They want the citizens to stop spending like maniacs and put something into savings. Raising the rates is supposed to raise the long-term rates in tandem and make putting money into savings an attractive option.
This stmt is just false...
Underestimating the greed of the nation, he kept going and going...people kept spending and spending. When mortgage rates got a little too high in one type of loan, they came up with other "exotic loans" to make the ever-increasing housing prices affordable to all the masses--"Don't worry about that 1-year ARM, you'll have this condo sold in the blink of an eye and have $50,000 profit with no risk at all--just sign here. GREAT! Psst...we've got another tower going up, how about a preconstruction--just take out an equity loan on your primary residence, you won't need to worry about a mortgage, when it's finished people will be lined up to throw money at you to take it off your hands....sign here."
This is just class envy...
Now the short-term yields are higher than the long-term yields (and the yield curve is inverted),
When was the last time the curve was inverted and by how much?
foreigners are still buying up the US debt because they've got tons of US money laying around collecting dust to lend and 4%+ which is a pretty good deal.
What is the current debt sit. in China...What % is Chinese bad debt to GDP?...Now why do they buy?...see above
businesses aren't picking up the economic slack like they were supposed to do. Corporations are FLUSH with cash from the economic boom, but instead of buying all sorts of capital goods and opening up new businesses to keep the economy humming along, they're using the cash to buy up their stocks, raising CEOs compensation and paying SEC fines.
Wrong again;
Ind. Production stands @ 4.9% yoy as of 8/16/06...Capacity use @ 82.4%-same date-Factory order are 8% yoy as of 8/24/06...Inventory to sales ratios lowest ever...
What % of publicly traded companies paid SEC fines and Boards of Directors approve pay packages...Thereby what % of Boards have been prosecuted for CEO comp?
The world is a troubled place and there is a flight to quality...why?
(At the same time, other central banks around the world are also starting to raise their interest rates as well.
Have been for awhile, whats different now?...
What is the FED to do if there is a recession? Most people think that they'll ride to the rescue, as in the past, and lower interest rates and start the machine back up again.
You stated that this strategy works...
Now there is a problem though...globalization has happened. Foreign countries hold a good deal of their reserves in US dollars (our debt) and if they think the US is going to start dropping interest rates (which will cause their investments in US dollars to lose value)
This stmt. rides contrary to your little lesson of price/yield inversion
they will seriously consider diversifying out of US dollars and into other currencies (that pay higher interest) and/or into gold.
Why didn't they do it in '94, '98, '00...
Now, do you remember the part of the lesson from above about the inverse relationship between the price and yield of bonds?--if China floods the markets with a slew of treasuries that outstrip demand...bond prices will drop like a rock, causing yields will soar (that inverse relationship) and the cost of borrowing money will skyrocket.
What will happen to the redeeming country's currency if this happens...Why haven't they done it...see above
If people think "oh goody" the interest rates are dropping, so mortgage rates will drop and the real estate market will come roaring back bigger and better than ever...I'm here to say that it just isn't that easy. (IMO)
By the way, What biz are you in?...I hope it ain't economics...
LESSON #3: Inverted Yield Curve (Condensed )
Sorry for the long post folks, I usually hate these...
Folks who think the Fed is going to lower interest rates to fight a recession rush to "lock in" long-term interest rates by buying (in this case) 10-year treasuries sending the yields lower. The bond's price and the yield are inversely related, so when folks "demand" more bonds, the price goes up and the yield goes down (or if they rush to unload them, the price goes down and the yield goes up -- same situation as stock prices and their dividends). Hold this thought for now.
Who are "folks" and why are they rushing to buy bonds...Hint, its not to lock in yield...Identify "folks" and then you'll know why they buy...Addl'ly, are you really suggesting that bond yields somehow interact similiarly to divs?..
This situation worked pretty well in the past, but here is the rub.
Why did it work well?...Because if it worked, you loose the majority of your "Greenspan's an idiot" argument...
Foreign countries are holding over $2.4 Trillion in US debt. The foreigners are feeding the US money so we can buy their oil to put in our SUVs, their plasma TVs and their plastic junk from the Dollar Trees. We take out HELOCs or use credit cards to buy their stuff, and most all of the money finds it way to Japan and China (the #1 & #2 holders of our debt) so they can pass it back to the US in return for treasuries where it ends up in banks for us to borrow
Wrong, Japan and China do it because their own debt situation is so bad they can't put that much money into their own system...
They want the citizens to stop spending like maniacs and put something into savings. Raising the rates is supposed to raise the long-term rates in tandem and make putting money into savings an attractive option.
This stmt is just false...
Underestimating the greed of the nation, he kept going and going...people kept spending and spending. When mortgage rates got a little too high in one type of loan, they came up with other "exotic loans" to make the ever-increasing housing prices affordable to all the masses--"Don't worry about that 1-year ARM, you'll have this condo sold in the blink of an eye and have $50,000 profit with no risk at all--just sign here. GREAT! Psst...we've got another tower going up, how about a preconstruction--just take out an equity loan on your primary residence, you won't need to worry about a mortgage, when it's finished people will be lined up to throw money at you to take it off your hands....sign here."
This is just class envy...
Now the short-term yields are higher than the long-term yields (and the yield curve is inverted),
When was the last time the curve was inverted and by how much?
foreigners are still buying up the US debt because they've got tons of US money laying around collecting dust to lend and 4%+ which is a pretty good deal.
What is the current debt sit. in China...What % is Chinese bad debt to GDP?...Now why do they buy?...see above
businesses aren't picking up the economic slack like they were supposed to do. Corporations are FLUSH with cash from the economic boom, but instead of buying all sorts of capital goods and opening up new businesses to keep the economy humming along, they're using the cash to buy up their stocks, raising CEOs compensation and paying SEC fines.
Wrong again;
Ind. Production stands @ 4.9% yoy as of 8/16/06...Capacity use @ 82.4%-same date-Factory order are 8% yoy as of 8/24/06...Inventory to sales ratios lowest ever...
What % of publicly traded companies paid SEC fines and Boards of Directors approve pay packages...Thereby what % of Boards have been prosecuted for CEO comp?
The world is a troubled place and there is a flight to quality...why?
(At the same time, other central banks around the world are also starting to raise their interest rates as well.
Have been for awhile, whats different now?...
What is the FED to do if there is a recession? Most people think that they'll ride to the rescue, as in the past, and lower interest rates and start the machine back up again.
You stated that this strategy works...
Now there is a problem though...globalization has happened. Foreign countries hold a good deal of their reserves in US dollars (our debt) and if they think the US is going to start dropping interest rates (which will cause their investments in US dollars to lose value)
This stmt. rides contrary to your little lesson of price/yield inversion
they will seriously consider diversifying out of US dollars and into other currencies (that pay higher interest) and/or into gold.
Why didn't they do it in '94, '98, '00...
Now, do you remember the part of the lesson from above about the inverse relationship between the price and yield of bonds?--if China floods the markets with a slew of treasuries that outstrip demand...bond prices will drop like a rock, causing yields will soar (that inverse relationship) and the cost of borrowing money will skyrocket.
What will happen to the redeeming country's currency if this happens...Why haven't they done it...see above
If people think "oh goody" the interest rates are dropping, so mortgage rates will drop and the real estate market will come roaring back bigger and better than ever...I'm here to say that it just isn't that easy. (IMO)
By the way, What biz are you in?...I hope it ain't economics...
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