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YIELD CURVE AS A PREDICTOR

The yield curve has incredible predictive power.  An inverted yield curve has predicted every major economic downturn over the last 50 years and has always foreshadowed a profits recession.  I first became cautious on the markets over the holidays in late 2006 when the yield curve inverted.  Although it took 18 months for disaster to strike it paid off as I avoided the declines in the major indices entirely.  What we’re seeing now is a very different scenario, however.  The yield curve has once again normalized and currently predicts a very low probability of a recession 12 months out.

Unfortunately, a normalized yield curve does not carry the same predictive power that an inverted yield does.  The following charts show the long-term and current yield curve.  Although a normalized yield curve does not equal economic recovery I do believe the economy will be in substantially better shape one year from now than it is today.

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