BarroMetrics Views: An Indication of Things to Come?

When the yield curve inverted in 2006 in the USA, we heard the familiar catch cry: “This time it’s different!”. But it was not and the 2006 inversion preceded the 2008 recession. (see what-does-the-inverted-yield-curve-really-mean.aspx for a comment that was way off base) (see, for meaning of inverted yield curve, http://www.investopedia.com/terms/i/invertedyieldcurve.asp)

You will win no prize if you guess that the countries with the steepest inverted yield curve are Greece, Ireland and Portugal. But if you guessed that next in line are the darlings of the emerging markets, Brazil and India, you should. And their inverted curve signals problems for the rest of us.

One popular theory doing the rounds at the moment is that the world cannot go into recession because the BRICS will save us.

Only problem is the BRICS are holding a massive thorn: inflation is rampant, and, despite all efforts, continue to rise. If BRICS continue to tighten to stem inflation, then economic growth will stall to unacceptable levels; but if they don’t tighten, basic items will become an issue for social unrest. (see, for example, the latest incident in China, http://www.guardian.co.uk/world/2011/jun/13/china-riots-enter-third-day)

But of course ‘this time it’s different”: “Other analysts argue that the inverted yield curves in Brazil; and India are more of a statement about the near term direction of interets rates rather than a prediction of economic gloom” (Financial Times, June 15)

Like the US in 2006?

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