The Sound of One Hand Clapping

Well, today the market made a fool out of Greenspan and the geniuses at the Fed (with the exception of Mark Olson, bless him), and the gap between short term and long-term rates narrowed some more. Why does this matter? The inversion of the yield curve has never failed to predict a recession.

Inverting the yield curve is a neat trick. It requires the Fed, which is in charge of short-term rates, to believe that the economy is humming along and that inflation is a serious threat. It also requires that about 46 gillion bond traders disagree, and continue to buy long bonds.

Tada! The US bond market, circa 2005.

Yep. The 10-year bond actually rose today, fairly strongly. This indicates a couple of things: one, that bond traders are people, and since consumer sentiment is at its lowest level since the first 6 months of the Reagan Administration, bond traders like everyone else believe the economy is in trouble; two, that bond traders watch the news and can see that New Orleans, Gulfport, and Biloxi are missing, and that a newly-minted category 4 hurricane is about to strike the Astrodome, where all the refugees from the Superdome are living; and third, that bond traders can read the inflation reports, which at this point are about a paragraph long, and essentially say “it’s oil. Nothin’ else here to look at.”

Further, the Fed indicates that it’s going to keep on raising rates. That means another rate increase on November 1 (All Saints’ Day) and December 13. As Ray points out, at that point the Prime Rate will be roughly 1.5% higher than the rate for a 30-year fixed mortgage. Guess what? We’ll do a 30-year fixed loan for you at 1 point below Prime!

The US has become a nation of idol worshippers. I’m not talking here about the worship of Eva Longoria or the almighty dollar or the Ford Thunderbird. I’m talking about the worship of Alan Greenspan and George Bush and heck, even city councilmen and mayors. It’s as if nobody is willing to say sorry, dude, but if you want to do that you’re going to have to arrest me. Greenspan says he wants to get “rates to a neutral point” before he retires. Except for the sainted Mark Olson, everyone goes along. We reached a neutral point in February. But the Fed governors just nod and say okay to every increase. And analysts across the country point out how smart the Fed is, so it must know what it’s doing.

Hooey. The Fed is no smarter than any full-time bond trader. It is galactically less smart than the entire world market of bond traders, almost all of whom are saying “what the *%#((&*&*#$%!?!?!

I don’t trade bonds. But I’m saying it too.