The market's orderly panic

As a blithely written post on the interest rate yield curve was being written, the equity market began falling apart. We're back where we were two weeks ago(see 2/27 post). Uncertainty is in control, if that makes any sense, and damage is being assessed.

Today's significant downturn had two interesting aspects. First, on average, it was remarkably uniform. Look at this. Fidelity's big low cost index funds were down as follows: S&P 500 - 2.00%; Total Market - 2.02%; Extended Market - 2.05%; and International - 2.05%. On top of that, while not an index, the Fidelity Emerging Markets Fund was down 2.27%. This kind of uniform capitulation does not bode well for the next few days but once done, it should actually be over and set up a climb out of the abyss. Second, and somewhat more worrisome, is the fact that financials were leading the way down. On the surface this is clearly due to the continued implosion of the sub-prime mortgage market, and today's payment news which indicates that issues are developing that are not just in sub-prime. Understandable. But markets have a sixth sense for trouble and the real worry would be if there was a break of some sort in the credit derivatives markets.

It's time to watch an old movie.

Yield curve prophecies

The bond market has, historically speaking, generally predicted an outlook for the economy through the shape of the yield curve. Today we have in the U.S. an inverted yield curve in which short term interest rates are higher than long term interest rates. Since 1960 there have been seven periods with an inverted yield curve, and six of these periods were followed by a recession. This is well known but since the consumer has not yet heard the news, the equity markets, however edgy now, remain reasonably resilient.

A positive yield curve, on the other hand, indicates a healthy outlook for the economy and this of course seems like common sense. Shouldn't an investor in a 10 year Treasury or corporate bond get paid a higher interest rate for taking that longer term risk than, say, someone buying a 6 month CD or stashing their cash in a money market account. But today, with an inverted yield curve, the bond market is saying one of two things: either the economy will slow significantly and those short term rates that seem like such an easy choice today for safety will begin to stairstep down until they are below long term rates; or the globalization of markets and the U.S. trade deficit have created such strong demand for U.S. securities that this inverted yield curve is an anomaly and cannot be seen to have the same predictive power.

Which is it? You won't find the answer here, but looking at global markets there are patterns in yield curves today. Along with the U.S., those countries with similar inverted yield curves are Britain, Canada, Australia, Singapore, and Thailand. The Euro area has, roughly, a flat yield curve. So does Hong Kong. Countries with modestly positive yield curves are China, Mexico, Taiwan, India, Norway, Sweden, and Switzerland, and countries with distinctly positive yield curves are Japan, the Czech Republic, and Poland. Excluded from this list are countries like Brazil, Venezuela and others in emerging markets that issue long term debt in dollar denominated form. Russia, with a radically inverted yield curve, is an outlier.

By traditional standards of yield curve predictive power, the above would suggest that the English speaking financial powers are headed for a slowdown, Europe and emerging Europe will maintain some slow, maybe even sluggish, growth, and Asia will continue to maintain, while not uniformly, a higher growth rate. Russia is fine if energy prices stay high but will collapse if they do not.

And how does this post conclude. It really doesn't.

Busker Vitality

New York City's subway buskers are today in a new golden age. It took several years for the busker trade to revive after the Guiliani administration's picky attitude about everything and once revived it has continued to evolve. Today it's special. All major Manhattan subway stations and significant platform interchanges have activity now. The quality is so good and varied that it seems to be self policing. No self respecting individual/individuals would set up unless they had talent. This is New York.

The extent of this evolution became apparent several months ago. I have always been one to wait for the next train when something special is happening in a subway performance, and that choice has been made more frequently in the last year. What had never happened before was being on one platform headed North listening to something good, and then peering across double tracks, seeing something else really good, walking up the stairs and across to go to the South platform for another performance. That was a first. It happened again today.

It's not just quality music; it's not just variety(blues, jazz, country, international etc.); it's also the incredibly unusual permutations, if that's a word that can work here. How about a Japanese man playing acoustic rhythm and blues guitar, some kind of cymbals tied around both ankles, and wearing some sort of Merlin outfit with stars on his shirt and socks. Or a tall young Carribean woman with wild hair tap dancing on a board to a rocking reggae guitar and an overturned can beat. Maybe a slight white Brooklyn kid in a porkpie hat playing Mississippi John Hurt. Can you imagine an overweight double amputee veteran in a wheel chair singing unaccompanied in a way that you can only hear on an Otis Redding album. And the great Central American bands with their pipes and all are now going fusion at times it seems, having seen a harmonica player with a Little Walter sound join in for a few songs under Grand Central two weeks ago.

There's something happening here...