Last summer when the curve inverted, troops were called up and substantial funds were allocated for the war effort. That fiscal stimulus usually improves both the economy and the stock market...as it did last fall. Chapter 19 of TIMING THE MARKET goes into this investment philosophy of "Buy at the sound of cannon."
This time, however, the inverted curve is not being bailed out by such activity; so conservative investing may be in order.
5 comments:
I understand that the beginning of wartime fiscal stimulus happens when Congress approves a spending bill. But how do you MEASURE the end of that stimulus? For instance, Congress approved ~$95B for war spending on May 25th. How does one determine a sell signal effectively indicating that the funds have made it's way through the economy?
A retired general reminded me once that all wars are economic. Apparently this concept is not lost to the Chinese.
"China threatens 'nuclear option' of dollar sales"
If China had the will to do this, and the US leadership did not back down, what would be the effect on US equities?
I suspect that Treasury yields would collapse, and the US equities market would follow suit. China would be forced to scale out of the $ and move to the Euro over time, further strengthening those currencies relative to the US dollar. Large US investors might move more money into foreign equities to negate the exchange risk. Is this realistic?
The good news would be the Government might actually have to cut spending.
The Yield Curve once again clearly predicted the stock market's behavior, according to prophesy.
Prediction: Next several days will show stock indexes that move in step with current yield curve interpretation, according to prophesy.
Dear Clarification Please,
Interesting question!
The shape of the yield curve is one indicator of the movement of funds through the system. For example, the commercial paper curve was steelply inverted in early Aug. when that market dried up. Defense spending had not made its way through the system.
I use a simpler signal: the callup of troops. It happens less often and is easier to track and usually preceeds a stock market rally.
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