Roger Nusbaum submits: I have been thinking about the inverted yield curve lately, and I have a theory about how it could, ahem, be different this time. This is just a theory and I am not making any portfolio decisions based on this, well not now anyway.
The thing about an inverted curve is, as you read everywhere, it indicates a slowdown, or worse, is coming. The fundamental behind this is that lending money is not profitable when the curve is upside-down. This inability to access capital contributes significantly to the slowdown.
Enter the HELOC, home equity line of credit. This obviously is a part of the home-as-ATM issue that, rightly, concerns many. The growth in HELOCs has been huge, and the yield curve for these adjustable loans is still very positive. Passbook, money markets and CD rates are in the fours and fives, while rates charged for HELOCs are in the eights - for people with good credit.
The chart is not so great nor is it very timely, but it shows almost a tripling in HELOCs. The theory would be that now that HELOCs are more popular and presumably more available, they may become a source of capital to the retail banking client, muting or even negating any potential slowdown due to the favorable lending environment for HELOCs.
There are of course several flaws here. Many believe that the quality of these loans is poor; that consumers are already over-leveraged and more consumer debt would be a negative; that this is not a product used by companies, and it would not take too long to come up with a couple of others. As I said I am not making portfolio changes around this.
The idea with this is to seek out a more plausible explanation of what we may be hearing if this time turns out to be different...