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NEW YORK (MarketWatch) — A critical indicator is flashing red in a couple of key emerging markets, and that could be bad news for the global economy and U.S. investors who have retained a touching but puzzling faith in these recent overachievers.

The yield curve — the spread between short- and long-term interest rates — has turned upside down, or inverted, in both India and Brazil at various times of late. In the past, that has been a harbinger of recessions or bear markets.

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It’s far from a perfect indicator — which one is? — but when it happens, attention must be paid. If an inverted yield curve takes hold in both those countries and spreads to others, that would signify trouble.

Emerging markets would certainly be hit and we wouldn’t be immune either as some of the world’s largest multinationals do more and more business in those fast-growing countries.

The yield curve tracks the spread between two- or three-year Treasury notes on the short end and the 10-year note on the long side and their equivalents in other countries.

Most of the time, long rates are much higher than short rates, because bond investors demand higher rates to compensate for the long-run risk of inflation. The U.S. Treasury yield curve is comfortably steep now.

But occasionally short-term rates top long-term rates because either bond investors think the economy is so weak that they don’t see much inflation ahead or the threat of inflation pushes the central bank to raise short-term rates above long-term rates.

In any event, the inverted yield curve usually means a weak economy. When short-term rates rise, borrowing money becomes much more expensive and businesses don’t expand, or they might even cut back. That’s how tight monetary policies lead to recessions and bear markets.

Since the early 1950s, a yield-curve inversion has preceded all but one official recession, according to academic research cited by Vanguard. And since 1960, the Treasury yield curve has inverted 13 times, anticipating 10 bear markets.

“Practitioners take this seriously. Traders use it, too. That’s why the stock market tends to reset so quickly to changes in the yield curve,” said Deborah Weir, a Wall Street veteran and instructor at the New York Institute of Finance who wrote extensively about the yield curve in her 2005 book “Timing the Market.”

“It’s very rare that you get a period of equity return [outperformance] following an inverted yield curve,” says Richard Bernstein, chief executive officer of New York-based Richard Bernstein Advisors LLC.

‘Fish flopping on the deck’

You might remember Bernstein from the days when he cut a distinctly independent profile amid the thundering herd at Merrill Lynch, where he served as chief investment strategist.

He’s still contrarian in spirit, this time about emerging markets, on which he has been bearish for some time. In April he wrote a commentary in the Financial Times warning that they were where the real inflationary pressures lay.

He says the money supply in some of these countries is growing at a 15% to 25% annual clip, versus a below-average 6% growth in M2 here. He’s definitely not in the U.S. hyperinflation fantasyland inhabited by Marc Faber and Peter Schiff.