I flew to Washington DC last week and while waiting at the gate was reading an article about the previous day’s market in the Wall Street Journal (“Rise in Rates Jolts Markets,” 5/28/09, A1).
Apparently the yield curve was widening causing mortgage rates to go up. Markets fell as investors feared the increase in borrowing costs would result in an economic slow down.
The article defined the yield curve as the difference in the yield between a 2 year and 10 year US Treasury note.
Without blinking I put down the paper and started looking for a computer: let me go on-line and find out what the significance of the yield curve is again.
There were no computers in the airport, I didn’t bring my personal computer for the weekend trip, and I don’t have a Blackberry.
For a moment I felt quite annoyed: how can I finish this article without understanding the significance of the yield curve?
Then it dawned on me: why not try to deduce what the significance is without the aid of the web?
And so I did: theoretically a spread should exist between the 10 year and 2 year notes with the yield on the 10 year higher as people have a preference to consume economic goods & services sooner rather than later.
If there is no spread something is wrong: the market is valuing money received 10 years from now on par with money received 2 years from now when the former investment entails more risk (hence the higher yield).
I also decided that if the yield curve is flat (no spread) or inverted that is a great time to buy stocks.
Of course, when I turned to the continuation page of the article the journalist duly defined the significance of the yield curve and even provided a graph showing the yield curve from about 2005 to the present (the curve was inverted in 2007; definitely not the time to buy; so much for that part of my theory).
But whether I got the theory right or wrong is not the point.
What struck me was how quickly I turned to the web for information and how doing so prevented me from engaging in a useful activity: thinking for myself.
Easy access to the collective knowledge of human civilization is a great thing.
But maybe before we instinctively turn to the web for the answer we should pause and try to solve the problem on our own.
Our reasoning may prove erroneous but in the end we’ll be better prepared to add to the collective knowledge of human civilization instead of just accessing it.
