Q: Hello Peter,
What a difference a month makes! In August you wrote an article on reasons to be bullish and a short month later you identified reasons to be bearish. It is now up to us to navigate in those cross currents. At the end of August, I had decided to raise some cash in my RRIF portfolio (I’m 71); it now stands at 15%. If a correction occurs and some of my holdings pull back, I will take advantage of opportunities.
But what worries me are the doom and gloom scenarios that some pundits elaborate and that forecast cataclysmic crashes. So I decided to research for the principal reasons that caused the tech bubble in 2000/01 and the more recent 2008/09 crash. I found out that the answer lies in the bond market, specifically in the yield curve. In the period prior to the tech bubble, the yield curve had flattened and reversed and in the period prior to the recent crash, the yield curve had flattened.
Why is that fact significant? Financial institutions borrow money on the basis of short term bond (lower) rates and, in turn, lend out on the basis of long term bond (higher) rates; they make their money on the differential. But if the yield curve flattens or reverses, these institutions will cease to borrow and lend; as a result, the liquidity in the economy will dry up leading to stagnation and crash.
Knowing very well that there must be other reasons for the downturns, I take comfort in falling back on the KISS principle.
So, I routinely (daily) make it a point to take a look at the yield curve and then move on.
I appreciate your comments,
Tony
What a difference a month makes! In August you wrote an article on reasons to be bullish and a short month later you identified reasons to be bearish. It is now up to us to navigate in those cross currents. At the end of August, I had decided to raise some cash in my RRIF portfolio (I’m 71); it now stands at 15%. If a correction occurs and some of my holdings pull back, I will take advantage of opportunities.
But what worries me are the doom and gloom scenarios that some pundits elaborate and that forecast cataclysmic crashes. So I decided to research for the principal reasons that caused the tech bubble in 2000/01 and the more recent 2008/09 crash. I found out that the answer lies in the bond market, specifically in the yield curve. In the period prior to the tech bubble, the yield curve had flattened and reversed and in the period prior to the recent crash, the yield curve had flattened.
Why is that fact significant? Financial institutions borrow money on the basis of short term bond (lower) rates and, in turn, lend out on the basis of long term bond (higher) rates; they make their money on the differential. But if the yield curve flattens or reverses, these institutions will cease to borrow and lend; as a result, the liquidity in the economy will dry up leading to stagnation and crash.
Knowing very well that there must be other reasons for the downturns, I take comfort in falling back on the KISS principle.
So, I routinely (daily) make it a point to take a look at the yield curve and then move on.
I appreciate your comments,
Tony