On Inverted Yield Curves and Recessions - Yay!

OK, this will be one more economics-related post, and then we can shift back to discussing more important topics, like old movies I've watched lately. Hey, they don't call economics the dismal science for nothing!

I've been thinking lately that all is right in the world of economics, or at the very least, I think that's a true statement. It would be interesting to get a reading from an actual economist on this. See, there is a very accurate predictor for the U.S. economy entering a recession: the inverted yield curve. According to whoever* wrote the entry on Wikipedia, an inverted yield curve accurately predicted worsening economic situations two to six quarters into the future five out of six times since 1970.

* Whoever or whomever? Whomever probably sounds right to more ears, but since the preposition in question does not indicate a person to whom or on whom an action was performed, I think whoever is correct. We're talking about the person who wrote the page, or the person who performed the action. Whoever.

A normal yield curve, in which the long-term rates are higher (and usually significantly more so) than short-term rates, appears below:



You can see that long-term yields (on the 30-year and 10-year Treasuries, for example) are significantly higher than those for the short-term Treasuries.



An inverted yield curve is exactly what it sounds like. Short-term bond rates spike to higher levels than long-term rates; Wikipedia indicates this is partly due to expectations that inflation will be low during a time of recession in the economy. The graphic below shows what happened mostly in 2006 and 2007 between the 2-year Treasury and 10-year Treasury rates:



You can see that the 2-year notes had significantly higher yields than did the 10-year notes, in some cases approaching 200% of the yield on the longer-term bonds.

Why is an inverted yield curve so bad, you ask? In normal situations, people require a higher expected payout (in the case of bonds, a higher interest rate) for tying up their money for longer periods of time. Keep in mind that with bonds, price and yield always move inversely to each other: when prices on bonds go up, the yield automatically goes down, and vice versa. What drives the price of a bond up? The same as anything else: demand. In the case of an inverted yield curve, no one wants to purchase the short-term bonds, driving the price down and the yield up.

A lot of what happens in the relationship between long-term and short-term yields also has to do with investors' expectations, as mentioned before, and with what types of Treasuries are being offered for sale (usually at Treasury auctions). Between 2001 and 2006, the Treasury Department didn't auction 30-year notes at all. The longest term bond a person could buy from the Federal government was just 10 years, and that was partly what led to the inverted yield curve.

Another factor that led to the inverted yield curve was the Federal Reserve aggressively raising interest rates* in 2004-06 when worries of inflation gripped the new Fed Reserve Chairman, Ben Bernanke. I have to laugh at this article from February 2006, when Bernanke said "the inverted yield curve would not bring recession this time." Think he would like a mulligan on that one? How quickly did they reverse course and lower rates, trying to avoid the pending recession? (WSJ article, registration may be required) Here's a graphic from that article showing the target overnight rates since 2000:


* I really shouldn't fall into this same trap that all the news media does when discussing the Federal overnight lending rate, or target Fed rate. The Federal Reserve does not directly set what interest rate Federal Reserve banks use to lend to each other. Rather, the Fed does change how much cash a Federal Reserve bank needs to keep on hand at any one time, which then has an influence on what interest rate they use when lending to other banks. That's why it's called a target interest rate, not a definitively set or effective interest rate.

One reason why economists pay attention to the yield curve and any oddities thereof is because recessions typically cannot be forecast with any certainty. The official definition of a recession is a minimum of two consecutive quarters of negative GDP growth. Because everything is backwards-looking, by definition, the economy has to already be in a recession for at least six months before you know it. An inversion of the yield curve is one of a very few economic indicators that can predict trends in the future, rather than waiting and looking back at the data.

So, back to my original point, where I said that everything was right in the world of economics these days. At first, it appeared that the inverted yield curve of 2006 was not going to forecast a recession in the U.S. economy. 2007 was still a fairly happy year for consumers and investors alike. The crap didn't really hit the fan until 2008, when Wall Street melted down after home values fell off the cliff and banks had to start writing off their bad loans. Was that still within the typical two- to six-quarter window mentioned above? I think the recession probably hit within that window, despite the yield curve returning to normal, so all must be right in the world.

Sad to say.

Russian Help on Afghanistan

No, the headline above is not a non-sequitur, as much as it may seem like one. It springs from this article I just read on Yahoo!'s news aggregation service.

Now, there are many ways of reading this fairly short news article from Reuters. On the surface, it appears like the incoming Obama administration is already fostering hope in renewed or strengthened relations with the international community. That could be one way of looking at it, since the U.S., NATO, and Russia had a bit of a falling-out after Russia's war with Georgia last summer. Perhaps Big Bad Vlad Putin and Russian President Dmitry* Medvedev felt like they could mend relations with the new Obama administration better than they could with the outgoing Bush administration.**

* I still can never think of a Russian President/Soviet Premier named Dmitry without thinking, of course, of Stanley Kubrik's all-time classic Dr. Strangelove, or How I Learned to Stop Worrying and Love the Bomb (1964). Dmitri Kissoff... ha! Still makes me laugh! There are not many Peter Sellers roles that even begin to approach the hilarity of the three he had in this one movie.

** This, despite Bush's famous quote about meeting with Putin and seeing into his soul.

Another way of looking at the news is that Russia, perhaps, sees another opportunity to exert its influence in a region it has long coveted (unless coveted is too strong a word) during a time of leadership transition in the U.S. government. Russia's offer to "help" us in Afghanistan comes hard on the heels of Tuesday's Inauguration, you have to admit. This honestly could be Obama's first foreign-policy test, but it is too early to tell the true intent of the Russians here.

I loved this quote taken directly from the Reuters article:

"Let us hope the new U.S. administration will be more successful in the Afghan settlement than its predecessor," Medvedev told a news conference after talks with Uzbek President Islam Karimov.

Or did he mean, "...more successful than WE were in suppressing the Islamic Mujahideen resistance during our decade-long entanglement in Afghanistan"?!! Which raises a great deal of questions all on its own.

I was old enough to remember the nightly news covering the Soviet invasion of Afghanistan when I was a child. I clearly remember President Jimmy Carter boycotting the 1980 Summer Olympics in Moscow in retalliation for the invasion, which then was repaid in kind by the Eastern Bloc countries boycotting the 1984 Summer Olympics in Los Angeles, CA.

One thing I was never fully clear on, and I don't think the nightly news programs* ever answered on their own, was WHY the Soviets felt compelled to invade Afghanistan in the first place. It was pretty clear why the U.S. responded the way it did, and the movie they made starring Tom Hanks and Julia Roberts on Charlie Wilson's War (2007) provided a nice historical perspective, even if it wasn't 100% true. On this topic, the Wikipedia page provides some information related to the events leading up to the Soviet invasion, but it should not be trusted as a source for a deeper understanding of the Soviet rationale.

* The one we probably watched over any others at the time was Dan Rather on the CBS Nightly News, and oh, how long ago does that seem now! Who watches the evening news any more these days?

So, before I go off to the library in search of more scholarly tomes on the Soviet invasion of Afghanistan, I thought I would post the question here: does anyone know which book(s) are the best one(s) on this topic? Wikipedia actually does a decent job of listing source material for the footnotes, all of which are found at the bottom of the page linked above. I could sift through those footnotes to find books on the topic, I suppose. Even then, you always want to be reading the right books, right?

All I know is this: the rationale for the Soviet invasion I remember as being provided at the time, that the Soviets were looking to secure a warm-water port outside their Black Sea fleet, is completely bogus.

Another College Football Season Finished, but Not Without Controversy

I'm sure that anyone with an interest in college football probably took the time to watch last night's BCS National Title Championship Game Sponsored by FedEx between Florida and Oklahoma University. It was perhaps not a pretty game, owing to the layoff between conference championship games and the last game of the BCS bowl season. Still, the game was interesting for many different reasons.

The first example is that last night's game pitted the past two Heisman Trophy (the award that annually goes to the player voters deem to be the best overall player in all of college football) winners, Tim Tebow of Florida (the 2007 Heisman winner) and Sam Bradford of OU (the 2008 Heisman winner). There have been many players who won the Heisman as underclassmen, certainly. I would venture that last night's game was the first to have two Heisman winners opposing each other* in a game with national title implications on the line.

* When Matt Leinart and Reggie Bush were playing Texas in the BCS Title game after the 2005 season (Leinart being the 2004 Heisman winner, and Bush being the 2005 Heisman winner), they were on the same side of the ball.

The announcers also made a comment that I took to be a real, "Well, duh!" statement during the game. They made sure to point out how Bradford was also named to the AP First Team All-American roster.* If a person has been voted as the best all-around player in all of college football, why wouldn't he be named to the First Team All-American squad?

* Tebow, by the way, was only named to the Third Team All-American list, with UT QB Colt McCoy being named to the Second Team list. Forget that he was the 2007 Heisman winner, and that he outplayed Bradford by a large margin in the BCS Title game itself.

Which then got me to thinking about whether there had been times in the past where the Heisman Trophy winner has not been voted First Team All-American. I know that the voters for each award are different, but as I started to do some research on the topic, I was blown away just at the sheer number of All-American lists put out every year. I'm not even going to touch on all the other awards out there in big-time college football, such as the Bronco Nagurski (awarded annually to the best defender), Chuck Bednarik (ditto), Dick Butkus (best LB), Outland Trophy (best lineman), Doak Walker (best RB), Lou Groza (best K), Ray Guy (best P), etc. etc.

In terms of All-American rosters alone, there are 12 different entities that annually select a team of All-American players, to wit: the Associated Press, the Football Writers Association of America, the American Football Coaches Association, the Walter Camp Foundation, the Sporting News, Sports Illustrated, Pro Football Weekly, ESPN, CBS Sports, College Football News, Rivals.com, and Scout.com. Whew! I'm tired from typing all of that! Trying to choose just one All-American team to compare against the list of Heisman Trophy winners, I wanted to go with just the best known of all rosters, the annual AP list of All-Americans.

While it was easy to pull up a comprehensive list of Heisman Trophy winners from the www.heisman.com website, I had a much harder time finding resources on the Internet for the history of AP All-American teams. Finding historical records for AP All-Americans might be one of those traditional trek-to-the-library-and-pore-over-microfiche tasks. Normally, putting more search terms into a Google search helps to limit the results somewhat. When I googled for "first team ap all-american history", I received 102,000 hits. When I added the word "records" to the search string, that narrowed down the list somewhat, but only to 74,800 hits. Unfortunately, whenever a writer pens a story about someone from his or her school being named to the AP All-American team, he almost always includes the word "history" or "records" in the story itself. The end result was I couldn't find historical records of AP All-American teams, not even on the AP's own website.

Which brought me back to using the ol' standby, Wikipedia. I actually really like and generally trust the information I find available on Wikipedia, even though I know it is ripe for abuse by people who push a singular point of view. On balance (or should I say "by and large," in honor of Wall-E [2008]?), I feel the people behind Wikipedia do a very good job of moderating revisions to the point where it is no less accurate than any other encyclopedia out there. It's a reference, and any information on it should be treated like it's coming from any other reference: Trust but verify.

Sadly, on the Wikipedia page for College Football All-American Teams, they have data basically covering the modern Internet plus a few scattered years in history (1998-2008, plus 1970, 1931, 1925, and 1910). For comparison's sake with the list of Heisman winners, only those years since 1935 are relevant. Here are the Heisman winners for the years on which we do have AP All-American roster data:

• 1970 - Jim Plunkett, QB, Stanford
• 1998 - Ricky Williams, RB, Texas
• 1999 - Ron Dayne, RB, Wisconsin
• 2000 - Chris Weinke, QB, Florida State
• 2001 - Eric Crouch, QB, Nebraska
• 2002 - Carson Palmer, QB, USC
• 2003 - Jason White, QB, Oklahoma
• 2004 - Matt Leinart, QB, USC
• 2005 - Reggie Bush, RB, USC
• 2006 - Troy Smith, QB, Ohio State
• 2007 - Tim Tebow, QB, Florida
• 2008 - Sam Bradford, QB, OU

That's it, that's the list! Going through all the current years (1998-2008), it certainly appears that every single Heisman Trophy winner was named to the AP First Team All-American roster. In 2000, only AP named Chris Weinke to its list of All-Americans; all the other rating entities chose Josh Heupel, QB, OU over Weinke, which is interesting in and of itself.

Going back to 1970 reveals something different, however. Jim Plunkett, voted as the best player in all of college football that year, was named only to the AP Second Team of All-Americans. None other than Joe Theisman, QB, Notre Dame beat out Plunkett for First Team honors. Which meant the AP voters didn't think Plunkett was the best QB in college football, much less the best overall player that year. As Spock would say, "Fascinating!"

All of this gets right back to what's wrong with Big Time College Football and the BCS, naturally! Too many opinions are thrown around, and you know what they say about people's rear ends and opinions. Voters chose to elevate undefeated Utah up to the #2 spot in the final AP poll of the season, and 16 of those voters selected Utah as the #1 team in the country.

Utah head coach Kyle Whittingham even broke ranks on the USA Today coaches' poll, voting his own team #1 even though coaches are typically bound to vote for the winner of the BCS National Title Championship Game. As of yet, there is no word whether Whittingham will be disciplined for his action by the American Football Coaches Association, but the better question may be why only 61 coaches vote in the USA Today coaches' poll when there are 120 universities playing Division 1-A football?

In my own humble opinion, no one who is a fan of college football would lose interest in early- or mid-season games if the NCAA were to switch to a playoff system. No one would talk around the water cooler any less, and sportswriters still would provide their opinions at the same rate if we had a true champion in college football. Last time I checked, everyone LOVES March Madness, with the only gripes coming just after the Selection Show. People still love to debate who got dissed and/or who should be in the NCAA Tournament, and in that format, 65 teams earn the right to play for a national title in mens' college basketball. At least the outcome of the season is decided on the court, with every team having a chance to win. In Big Time (Division 1-A, or Bowl Subdivision) College Football, everything is subject to opinion. This year, many of the voters never saw Utah play a game until they destroyed Alabama in the Sugar Bowl.

I think I'll go back to supporting my second alma mater, the College of William & Mary, who plays big time (albeit Division 1-AA, or Championship Subdivision) football. When they made the playoffs in 2004, it was terribly exciting going to the playoff game between the Tribe and James Madison, the eventual champ. Even as a grad student, I thoroughly enjoyed the playoff atmosphere. The Division 1-A guys could learn from that.

A Quick Review of Film Noir

I've been chewing on this in my mind* for a little while, ever since renting and watching the movie Brick (2005) in mid-November. Brick was the debut film from Rian Johnson, or at least was the first full-length feature movie he finished after completing a short called Evil Demon Golfball from Hell!!! (1996) in film school. You can see that it took Rian the better part of a decade to find a producer or distribution company to support his debut film, which speaks more to the glut of new movies produced annually by Hollywood than it does to his talent.

* Initially, I thought I would create a top five list of my favorite film noir movies. Then, I thought stopping at just five would be silly; why not fill out a full top ten list? Then, I worried that any top ten list would by necessity unfairly exclude some great noirs out there. Plus, I have to admit I haven't seen that many of the classic film noirs, so any list I pulled together would be incomplete. So I scrapped that idea.

Brick, simply put, is nothing short of brilliant! As I watched it for the first time, I could tell instantly that it was a debut film. There's something about watching a really good movie that often marks it as a director's first movie. I can't even artfully describe those indicators; perhaps it is the movie's outstanding dialog; perhaps it is the cinematography that borrows shots from classic movies and great directors; perhaps it is simply a gut feel that says the director poured his or her heart and soul into the film. A parallel exists in the world of novels: the debut novel from an author often surpasses any subsequent work, no matter how excellent the following books may be.

Ah, so what makes the movie Brick so excellent? Here is where I wanted to compare it to other film noirs I love. Brick contains all the essential ingredients for a film noir: in the cast of characters, it has the intrepid detective (our hero!), the informant, the cops/authority figure, the femme fatale, the equally brainy antagonist, and the antagonist's muscle; it has the snappy, quick-witted dialog derived from the works of Dashiell Hammett*; it has the requisite dark settings and interesting interplay between light and shadows; and it has the twisting, turning plot that includes a mystery our hero must unravel. It does have the intrepid detective getting beat up by the muscle, a characteristic of most but not all film noirs. It does have the long reveal at the end of the movie, where our hero exposes the true criminal mastermind behind the plot.

* By the way, I know that many people give Wikipedia a hard time, and no encyclopedia should be used as the only reference for source material. No less a reknowned blogger than Curt Schilling advocates all bloggers refrain from using Wikipedia links in posts. To which I say, find other quick-to-grab reference material on the Web that is any more trustworthy than Wikipedia, and I'll use it.

As I thought more about Brick and other film noirs, I knew that I've been a fan of film noir for a very long time. Brick is similar to another noir that was the debut feature from my favorite film makers, Joel and Ethan Coen, the Coen Brothers: Blood Simple (1984). Like Blood Simple, Brick can be rapid-paced at times, while also being maddeningly slow-paced at other times. I was always very impressed with how the Coen Brothers allowed the storyline to develop in Blood Simple, and how the characters in the story never knew fully quite what was going on, not completely.

That characteristic set up the final line of Blood Simple by M. Emmet Walsh (who played a PI, yet wasn't the intrepid detective of the story), and also played a huge role in another film noir by the Coens, Miller's Crossing (1990). Brick probably borrows more from Miller's Crossing than Johnson would like to admit. Much of the dialog is very similar ("dangle," for please excuse us), the interplay of suspicion and distrust between the antagonist and the muscle is the same, and the intrepid detective gets a little lucky when facing his accusers and imminent death. If anything, the hero in Brick solves the riddle quicker than does Gabriel Byrne's Tom Reagan character in Miller's Crossing; Reagan ends the movie by being better lucky than good.

Brick even borrows heavily from Blade Runner (1982) which, although it is a sci fi movie first and foremost, is also a film noir in the best definition. I remember the very first time I saw Blade Runner, and how impressed I was that the hero got the snot kicked out of him in every single fight*, no matter the opponent. Joseph Gordon-Levitt's (the teen kid from "3rd Rock from the Sun", who looks surprisingly like a young Heath Ledger in this movie) Brendan also gets beat up by the muscle in most scenes, even though he has an early victory against the stud football player, Brad Bramish. I can't prove it, but I also swear that Johnson used the same music in Brick for a scene between Brendan and Laura, the femme fatale, as Ridley Scott used during a scene in Deckard's apartment with his femme fatale played by Sean Young. It's a lilting little jazz number, and it sounds like the same song in both movies.

* That might seem funny, but think about it: how often did John Wayne get physically beat up in his movies? How often did Clint Eastwood? Sylvester Stallone? OK, bad example; Rocky (1976) was all about getting beat up. But given that most Hollywood heros can fight off hordes of goons without a scratch, and that the Stormtroopers in Star Wars (1977) couldn't hit the broad side of a barn, the simple fact that Deckard in Blade Runner had his butt handed to him by the replicants was significant, even if replicants had super-human strength.

Johnson also borrowed heavily from the classic film noirs, and specifically mentioned Hammett in his discussion of deleted scenes on the DVD. He wanted his dialog to be witty and snappy, like the works of Hammett, who gave us Sam Spade and Nick and Nora, the heroes of the Thin Man franchise. What's funny is that I recently read The Thin Man the novel, after which we watched The Thin Man (1934) the movie, all because of the movie that started the successful rebirth of Robert Downey Jr. as an actor. No, not Iron Man (2008). While that was a great movie, and while Downey Jr. was an inspired choice for Tony Stark, the movie that resurrected his career was Kiss Kiss Bang Bang (2005). What a great film that was! The actors specifically referenced the great pulp fiction novels that served as the basis of film noir without actually giving credit to Hammett, but the reference was clear.

In terms of the classics, Johnson borrowed heavily from Orson Welles' seminal movies, using low shots looking upward at the actors for dramatic effect (borrowed from Citizen Kane [1941]) and the general look and feel of Touch of Evil (1958).

Given that Johnson borrowed heavily from other film noirs for Brick, what makes Brick stand out on its own? Why did it win eight awards from such notable film festivals as Sundance and the Independent Spirit Awards? The answer is that Johnson set all of these classic film noir staples mentioned above in a high school setting! The premise is brilliant, and it's hard to believe no one thought of it before. All of the main characters save for the cop/authority figure Assistant Vice Principal (played by none other than Richard Roundtree, the original Shaft!) are high schoolers, although they certainly aren't shown attending classes. Notes are passed between lockers. Who eats lunch with whom and where plays a significant role in the plot. All the usual teenage drama and histrionics that go along with high school heighten the danger and suspense of the plot line. Brendan has to navigate the treacherous waters of band geeks, drama queens, dopers, jocks, and brains, all while being an outsider and loner. It's brilliant!

As a coworker of mine told me after I let him borrow the DVD, he and his wife were smiling all the way through the movie. It's a very simple concept, setting a film noir in high school, but executed to perfection with this movie. What's old is new again. There are sequences of dialog between characters that could only happen with high schoolers.

Oh, and for all the drama and intrigue that goes along with film noir, there is also room for levity. I laughed my butt off when the high schoolers faced off over the kitchen table while the quite clueless suburban mom served up country-style orange juice in the same country-style juice glasses my grandmother had at her farm! Simply brilliant.

Given that the box office numbers listed on IMDB are quite low for Brick, it is clear that not many people have seen this movie. I "discovered" it when I rented The Constant Gardener (2005), another film from Focus Features that had the trailer for Brick on the disc. Ever since we saw Bill Murray and Scarlett Johansson in Lost in Translation (2003) from Focus Features, they have been one of my favorite movie distributors. Up soon on my Netflix list will be another Bill Murray film by Focus, Broken Flowers (2005). Here's hoping it is as good as the rest.

If you get the chance to rent or watch Brick, take it. It is well worth the time.