We’ve mentioned the crystal ball-like qualities of the US yield curve a couple of times on this blog. In May Jim showed that it can be a good predictor of recession (read article here), and the San Francisco Fed has recently published this interesting piece that adds weight to the argument.
There is some statistical analysis within the article, but in short it concludes that the yield curve is a better predictor of recessions than the professionals. There’s the old joke about the bond market predicting 9 out of the last 5 recessions – but the fact is that the economists employed by the investment banks predicted none of them. Nobody on Wall Street likes a bearer of bad tidings – just unleash the Rally Monkey and everything might be alright.