Why We Were So Wrong About 2005

The Key Question

But I have to question how willing investors will be to take on eight more years of risk if the spread closes to 0.2 percentage points or vanishes completely. When short-term rates exceed long-term rates, it's called an inverted yield curve. The bond market traditionally gets very nervous when the yield curve inverts, because this has often signaled bad times ahead. There are still enough traditionalists in today's bond market to put the brakes on falling long-term yields when we get close to an inverted yield curve.

Where does that leave investors?

The predictions from the beginning of 2005 that look so wrong today are likely to still look wrong for the next six months: The dollar is likely to be strong for a while longer, interest rates don't look headed up at the long end, the bond market is more likely to move up than down, and economic growth will remain solid.

But as we move into 2006, those predictions from early 2005 are likely to seem more and more correct. The trends set by the economy, interest rates and currencies so far this year are closer to their end than to their beginning. And many of the strategies that have made money in the first half of 2005 will look increasingly risky as the year's second half plays out.

In other words, we market prognosticators weren't wrong in January 2005. We were just very, very early.