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Back to blogging…  Much of the recent talk of “green shoots” in the economy can be accurately dismissed as noise.  Noise in that we do not know what numbers coming from housing and unemployment are fuzzy math or adequate measures of the real economy.  There is no doubt that there will not be significantly better numbers in jobless claims for a long while and the effects of those numbers will drag on (foreclosures, retail spending).  However, the financial markets have continued to prove resilient.  Despite last week’s setback, the S&P 500 is up approximately 30% since the beginning of March, and financials are leading the way.   One forward indicator we may be overlooking but just as important, if not more, than equity indices is the steepened yield curve.  A steepened yield curve is historically a proven leading indicator of a strong economy moving forward.  As Caroline Baum from Bloomberg notes, the yield curve is a very good predictor of future economic conditions, regardless of the Why?.  For instance, as she writes, between 2006 and 2008 policymakers were terribly vexed as to the reasons that there was an inversion in the yield curve and longer term rates were being dragged lower than shorter maturity treasuries.  The most widely given reason was increased purchases of the longer term securities by Chinese investors.  Regardless of the reason, the inverted yield curve predicted a major economic disruption that equity indices were late in the game to acknowledge.  So, taking history as a clue, one could discount the barrage of news stories that pundits are claiming as green shoots and simply look at these ever-so-important spreads.


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