Inverted Yield Curve

Now it’s inverted. See the Java applet here, and my earlier post on this topic here.

It actually has inverted briefly a few times in the last few months, but if it stays inverted for a several months stretch, you may want to switch investment strategies to focus on…canned goods, say.

And as Chris Gibson points out, we’ll keep our eye on data switch sales (still healthy at the moment!)

How I Bought A Mattress (“Sears has Everything!”)

When our son Sean moved out, I immediately moved my office and my Bowflex into his old room, which was the larger of the non-master bedrooms in our house. But then there was the question of what to do with the old office room, “the littlest bedroom”.

We sometimes have friends who stay late into the night, and we’d like to be able to offer them a proper bed, in case they’d like to have another drink, or just don’t want to bother to tack against the traffic currents for 50-odd miles, this being Los Angeles. And we had a spare twin mattress left over from Sean’s youth. So, I moved some furniture around, and plopped the old mattress on the floor. “There!”, I said to myself, well-satisfied.

Unbeknownst to me, I was not to be the only well-satisfied creature in the house. Some errant cat, or cats, viewed the new mattress, resting gracefully on the floor, and thought, “Behold! Look at this fine, enormous cat box that The Human has seen fit to install. This is something more like it! I”m going to urinate on it immediately, as a kind of Baptism!”

So I sadly had to apply, and reapply, the magical enzymatic cat pee odor defuser solution, and even stood the mattress on its side (later leading to Queenie being briefly trapped), and eventually decided that if we had a real, new mattress, with box springs, and a frame, and sheets and all, the cats might conceivably pick one of their many, many other Official Cat Boxes for their ongoing cat box-related activities.

But first I thought that I’d check Consumer Reports, with which I have an on-again, off-again relationship, to see if they’d have anything useful to say this time. In fact, they said several interesting things: (1) People ask them more often about mattresses than about any other topic, save automobiles, (2) It’s pointless to give ratings on mattresses – I couldn’t even find any ratings – because people’s opinions are just too personal, (3) It’s important for the people who are going to be sleeping on the mattress to try laying on it, in a variety of positions, for at least 15 minutes. This is almost always good enough to make a decision that won’t vary from the decision that you would make after keeping it a month. (4) Department Stores very often have Huge Sales on mattresses, and you can save Big Time by waiting for one. This last is the big one: you can save $1,000, easy, easy, easy, by waiting for a sale.

This last caught my eye. I had been thinking of going to Sit ‘n’ Sleep, but then I thought: “Hell, Sears has Everything. And they probably don’t sell a lot of mattresses during the Christmas Buying Season. If I were going to have a sale, I’d have one now.” So I went to their web site, and Behold! They’re having a 50% off sale on most mattresses through 12/15/2006.

I went to a local Sears, and lay me down on plural twin mattresses, eventually choosing a Sealy Union SE Plush Pillowtop II Twin Mattress and associated box springs, frame, and headboard, for $625. I picked that mattress because some of the others felt crazy soft and unsteady when you sat on the edge, and some felt a little firm even to me, and it’s my thinking that a lot of the individual variations have to do with a person’s weight, and I weigh more than many, many other people. So, I picked one that, at least, didn’t feel Too Firm to me.

The headboard that I liked was discontinued, but they had one at the store, and it was 10% off for being not-quite-new. I walked back to the car with it, and was amazed (and relieved) to find that it fit into the Saturn easily.

The delivery cost me $65 and was non-refundable, and the date, for some reason, didn’t take, either because I was shopping on a Sunday, or had requested a Sunday delivery, or perhaps had an inept salesman. I’ll call tomorrow to try to arrange the delivery. They’re supposed to take away the old mattress, too.

But hey, $500 saved, supposedly, by finding a department store that was selling the thing On Sale, instead of unluckily blundering in during one of the rare times when they weren’t. That pays for a lot of years of Consumer Reports.

Fun with the Yield Curve

The bond yield curve is an economic predictive tool that only began to be generally appreciated in the 1990’s, and there’s a great Java Applet that allows you to look at the yield curve for any time during the last several years here.

A short course on using the applet: The right-hand graph shows the S&P 500, and there is a movable vertical line (red), that you can drag left or right to pick a moment in time.

The left graph displays the Yield Curve for the point in time selected by the slider on the right graph. Its Y axis shows interest rates, and its X axis has the term length of the Treasury bill: short-term bills on the left, stretching out to 30-year bills on the right). You can also adjust the “Trail Length” slider on the left graph, which controls “the length of the comet’s tail” — how many days’ worth of preceding yield curves show up as shadows. If you drag that “Trail length” slider all the way left, you get just a sharp line, and as you drag it more to the right, you see a more fuzzy area showing you where it had been in the few days before the time shown.

Now, when we speak of a “flat yield curve”, or an “inverted yield curve”, we usually are comparing, say, the 3-month Treasuries with 10-year Treasuries, or perhaps 2-year vs. 10-year.

So, drag the slider on the right-hand (S&P 500) graph to 3 August 2000 or so (the date is displayed on the left graph, while you’re selected it on the right graph), near the S&P peak. Now look at the yield curve on the left graph. Compare the short-term yields to the 10-year yields. It’s become flat, actually a little downward-pointing. That’s bad: 5 out of the last 6 times, that’s meant recession, starting 2 to 6 months out. Officially, the recession started in March 2001 (6 months later), but I know that data switch sales fell off a cliff in December 2000 (3 months later), so that was a pretty good indicator.

As you drag the date/time slider on the right graph towards the right, the yield curve (looking only at the short-term to 10y segment) doesn’t start looking more normal until about a year later, around August 2001, and by 18 January 2002 is looking very positive. The recession didn’t officially end until November 2002, though, so that’s much more of a lag.

Now, let’s look at the spread between the shortest-term bills and the longer term bills on several different dates:

              Short vs. 10Y
08/03/2000        -0.25% First Inversion
12/08/2000        -0.50% Data Switch Sales Plummet
01/02/2001        -0.75% Recession Still Quite Not Official
03/19/2001        +0.25% Recession Official
(But Note That S&P 500 Had Already Fallen About 300 Points Aug-Mar)

04/05/2002        +3.50% After several aggressive Fed Moves
Much of 2002-2003 +2.00% S%P sputtering up and down here.
Last part of 2003 +3.00% Gaining Steam
05/11/2004        +4.00% Wow! Pre-election Impetus?
02/18/2005        +1.25% Much Flatter, But Still Positive
12/07/2006        Oh, it's flat.

Oog, flat yield curve, housing bubble popping – be wary, and if it inverts for a sustained period, look out below!

(Edited to reflect Chris Gibson’s corrections)