The Infallible Indicator, and What It Means For Your Investments
It's a remarkable indicator, and one you simply can't ignore!
It has made only six predictions since 1970. And all six predictions were exactly right.
The predictions were for recession. There were six predictions, and there have been six recessions since 1970. And that's a perfect record for 35 years.
While this indicator has a perfect record for predicting bad times, it can be used to forecast good times as well. And best of all, it's simple to track, and should be included among your cache of investment tools. Knowing how to use this indicator to forecast a coming recession - or the lack of one - can keep you from rearranging your portfolio needlessly in anticipation of a market shift that never comes.
The last time this indicator said that a recession was just around the corner was from July, 2000 to January, 2001. And according to the National Bureau of Economic Research (NBER), the organization that dates recessions, the last recession lasted from March, 2001 to November, 2001. So the predicition gave us a signal well in advance of the coming uneasiness.
The other five recessions occurred in 1970, 1974, 1980, 1982 and 1990. And each of these recessions was preceded a few months in advance by a prediction from this indicator.
So what is this indicator? It's when short-term interest rates rise above long-term interest rates.
There is a good reason why this is such a rare occurrence. In a world with little inflation, long-term interest rates should be higher than short-term interest rates. It all comes down to risk... If someone lends you a dollar that you're going to pay back tomorrow, the lender isn't worried about risk and won't demand much, if any interest. But if you're going to pay that dollar back in 30 years time, then it makes sense for the lender to ask for more in the way of interest.
Why do short-term rates ever rise above long-term rates? It's generally because of actions taken by the Federal Reserve in trying to slow down the economy. After all, the main weapon that the Fed has available to use in slowing down the economy is short-term interest rates. And if the Fed raises them significantly to levels above long-term interest rates, it usually results in recession a few quarters down the road. And this seems to happen every time.
Right now, Alan Greenspan is trying to slow down the econony, and we can see that the spread between short-term interest rates and long-term interest rates has been narrowing. And while it doesn't happen very often, whenever short-term interest rates do rise above long-term interest rates, then watch out.
One would think however that with his coming departure from the Chairmanship of the Federal Reserve slated for right after the New Year in 2006, Alan Greenspan will do whatever is needed to forestall any recession from happening while it is still his watch!
* * * * *
It has made only six predictions since 1970. And all six predictions were exactly right.
The predictions were for recession. There were six predictions, and there have been six recessions since 1970. And that's a perfect record for 35 years.
While this indicator has a perfect record for predicting bad times, it can be used to forecast good times as well. And best of all, it's simple to track, and should be included among your cache of investment tools. Knowing how to use this indicator to forecast a coming recession - or the lack of one - can keep you from rearranging your portfolio needlessly in anticipation of a market shift that never comes.
The last time this indicator said that a recession was just around the corner was from July, 2000 to January, 2001. And according to the National Bureau of Economic Research (NBER), the organization that dates recessions, the last recession lasted from March, 2001 to November, 2001. So the predicition gave us a signal well in advance of the coming uneasiness.
The other five recessions occurred in 1970, 1974, 1980, 1982 and 1990. And each of these recessions was preceded a few months in advance by a prediction from this indicator.
So what is this indicator? It's when short-term interest rates rise above long-term interest rates.
There is a good reason why this is such a rare occurrence. In a world with little inflation, long-term interest rates should be higher than short-term interest rates. It all comes down to risk... If someone lends you a dollar that you're going to pay back tomorrow, the lender isn't worried about risk and won't demand much, if any interest. But if you're going to pay that dollar back in 30 years time, then it makes sense for the lender to ask for more in the way of interest.
Why do short-term rates ever rise above long-term rates? It's generally because of actions taken by the Federal Reserve in trying to slow down the economy. After all, the main weapon that the Fed has available to use in slowing down the economy is short-term interest rates. And if the Fed raises them significantly to levels above long-term interest rates, it usually results in recession a few quarters down the road. And this seems to happen every time.
Right now, Alan Greenspan is trying to slow down the econony, and we can see that the spread between short-term interest rates and long-term interest rates has been narrowing. And while it doesn't happen very often, whenever short-term interest rates do rise above long-term interest rates, then watch out.
One would think however that with his coming departure from the Chairmanship of the Federal Reserve slated for right after the New Year in 2006, Alan Greenspan will do whatever is needed to forestall any recession from happening while it is still his watch!
* * * * *
posted by Bob Moser at
5:06 PM
1 Comments:
I think you need 3 quarters of negative GDP growth to make an offical recesssion.
In 2001 we only 2 quarters of negative GDP growth.
I lost my job so for me it was a depression.
By
erik, at 10:14 PM
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