Welcome Gary Scott! – It’s Inverted

Good morning, I’m very pleased to announce the addition of Gary Scott as a guest author here at the blog.  Beginning today, I’ll be posting selected editions of his daily newsletter in addition to some original content Gary may post from time to time.  Gary Scott is an economist and author of 36 international books and reports on investing.  For years, his World Reports newsletter was read by thousands of readers in 82 countries.  Gary began preaching the importance of global investing more than 30 years ago and wrote a monthly column under the bi-line “The Global Guru”, for “On Wall Street”, a large US circulation magazine for stockbrokers.

Ted Nicholas, one of America’s best selling self-publishers and foremost entrepreneurs, wrote “Gary Scott enjoys a worldwide reputation. He is an entrepreneur, author and investment advisor extraordinaire. While today it’s commonplace, Gary Scott was the first advisor 30+ years ago who recommended international diversification for the small investor. At first, many thought he was crazy. Of course, today the establishment advisors are on the bandwagon. Gary’s investment tips have probably helped more investors get rich than any advisor in the world!"

Gary’s “big picture” posts will prove to be a great compliment to the shorter term technical analysis of the markets and specific companies that I have provided here for the past couple years.

It’s Inverted by Gary Scott

In classical economics there is an economic cycle that normally swings from boom to bust and back again. Three different parts of the cycle create opportunity. 

One opportunity appears at the top of the cycle when the economy is at its peak. Business is booming. Everyone is getting rich. Share prices are high and racing upwards. There is rising inflation, short term interest rates are being pushed up, bond yields rise, unemployment falls and PE ratios expand. This is a good to time to sell shares and hold cash (CDs and short maturing bonds) that generally pay high interest.

Then the good times end. The economy peaks, inflation slows down, interest rates rise, there is depressed demand, rising unemployment and PE multiples contract. This offers the second opportunity as a good time to use that cash you are holding to invest in longer term bonds.

The economy slides towards recession. The yield curve inverts (short term rates are higher than long term rates) and finally reaches the bottom of the cycle. The economy has slowed way down. There is a rush for liquidity, , authorities relax monetary supply, there is high unemployment and a high level of uncertainty. Share prices have dropped and PE ratios are high. This, (when everything looks bleakest) is the third opportunity, a good time to buy shares.

Then the economy spurred by low cost labor and money picks up and works upwards into the next boom.

I share these facts because recently the yield curve on US Treasury bonds has inverted.

The yield curve measures the yield on interest-bearing instruments at various dates of maturity, from one day to 30 years. It compares the short-term rate with the long-term rate. For example right now, three-month US Treasury notes are yielding 4.35% and 6 month 4. 36% and one year notes 4.37%. This is as it should be. What is out pf place is that these rates are higher than the two-year to 8 year notes. At this stage there are only a few basis points and this could have little meaning.

However, if the trend becomes stronger it could be a warning that tougher economic times are ahead. This would suggest shifting emphasis from shares to cash.

This can also warn of a US dollar dip. Let’s keep our eye on the yield curve and enjoy good investing!


If you’d like to see more about Gary or sign up for his daily newsletter, check out his personal site at www.garyascott.com

Currently, Gary and his wife Merri spend summers and conduct seminars at their 250
acre farm in the Blue Ridge Mountains (www.littlehorsecreek.com)  and
winters at their 800 acre hacienda in Ecuador (http://www.garyascott.com/archives/2003/01/27/index.html)

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