Indicators - Everyone has their favorite crystal balls, aka metrics and indicators, that they like to use to predict the future or build their sight picture for whatever is going on in the world.
For inflation, the Fed doesn't like CPI; Daddy JPow prefers the personal consumption expenditures price index. The difference? PCE captures changes in consumer behavior and not just price levels on a set basket of goods.
Another popular recession indicator that you've heard so much about lately (from me included) is an inverted yield curve.
An inversion has precluded every recession in this country since 1955, so it's pretty likely that it's a decent indicator to predict a recession.
We saw another temporary inversion earlier this week, and some of you might be wondering what that means.
A steep yield curve basically means that yields for longer-term treasuries are higher than yields for shorter-term treasuries. A flat yield curve means that yields are not much different, regardless of the time horizon of the underlying.
An inverted yield curve, as some of you may already know (gold bananas for all my friends!), means that a shorter-term treasury has a higher yield than a longer-term treasury bond.
Why should you GAF? Well, as short-term rates rise, things like credit cards, personal loans, and business lines of credit also show up with higher rates; this makes borrowing more expensive in the short term.
As you can guess, this is bad for consumption and has secondary and tertiary effects in cooling off the economy.
But who does it help? Well, higher lending costs mean more profits for lenders and in capital markets. Our WSO Alpha Lead Investor has already placed a big bet on the $KCE SPDR S&P Capital Markets ETF, as we have been predicting higher rates and bank profits for some time now.
Generating any sort of alpha in your personal long-only book, as many of you are trying to do, is hard when markets pass out haircuts for all participants. Hopefully, you can find some alpha before it becomes tomorrow's beta.