Since the yield curve is inanimate, it feels no emotions. Its predictive capability bears ZERO relationship to what anyone may think of it. We, on the other hand, do have emotions. We try as hard as we can to set them aside in analyzing economic, financial, and market phenomena. We will admit, however, to a fondness for the yield curve. Reason: it has been an outstanding forecaster. Its prescience contrasts with the ineptitude of the generality of economists and Wall Street sages; it is crystal clear, in contradistinction to the compound jargon and contrived murkiness of economic forecasts; and, it is not in the slightest bit demagogic, as it makes no appeal to our emotions.
The yield curve has in recent years lost its following among "professional" economists and Wall Street "seers." We attribute this to the fact that the structure of the yield curve has frequently sent a message no one wishes to hear. This message, as even the most ardent detractors and ignorers of the curve must now admit, is being vindicated with greater and greater emphasis with the passing of every day.
We note, with more than a scintilla of amusement, that the yield curve is now being "rehabilitated" by "mainstream" economists, forecasters, and Wall Street gurus. Our amusement derives from what we consider a confirmation of our cynicism: the yield curve's popularity is ascending NOW THAT IT IS TRANSMITTING A FORECAST WHICH ALL WISH DESPERATELY TO HEAR.
We believe that two cautionary notes are in order here. First, the yield curve is generally 12-18 months ahead of the economy. This translates into miserable, and possibly frightening, economic and financial statistics over the coming year to year-and-a-half.
Second, the curve remains positive ONLY AS LONG AS LONG-DATED TREASURIES DO NOT RALLY FURTHER, AND ONLY AS LONG AS THE FED STAYS ON ITS NEWFOUND COURSE OF AGGRESSIVE EASE.
