Vigilant Investor

For more than a few months now we’ve been calling for a back-off in the equity markets and the second leg of a recession in 2006. How severe is to be seen — as is if such a prediction should come to pass.

As for the call for a recession, bond yields seem to confirm that a recession is around the corner when the yield of 10-year treasuries fell below the yield of those for two-year treasuries for the first time since 2000. Ordinarily yields for 10-year’s are higher, reflecting the cost of uncertainty when lending money for longer periods of time. What we have today, instead, is what’s called an inverted yield, and only twice in the last 40 years has such an inversion not delivered a recession in their wake. All of the last six recessions we preceded by such an inversion.

In response, U.S. stocks reacted .

Given our Economic Storm Cloud list, we suggest folks act with caution vs. defaulting you way along on autopilot, as if our times are ordinary. Of course, nobody has a crystal ball. But why pretend nothing is wrong??

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