Stock Market Downside Scenario Increasingly Likely

 |  Includes: IEF, IWV, SHY, SPY, TLT
by: Richard Shaw

The yield curve went from normal in January 2006 to inverted by late 2006. By January 2007, Bill Gross at PIMCO was telling us that unless the Fed lowered short term rates by 150 basis points soon, we’d have significant asset price reductions with problems in real estate and stocks.

Unfortunately, the yield curve only got worse. Short term rates are higher and long term rates are lower. Bill Gross is still sounding warnings. He repeats that either short term rates or asset prices will come down.

Maybe the yield curve has more to due with the recent stock market sell-off than China. China may have been the catalyst, but the yield curve may be the driving force.

The bold blue line is for Jan 2006. The dotted black line is for Jan 2007. The bold red (good color choice don’t you think) line is for today Feb 28, 2007.

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