The Yield Curve is Un-Inverting (Stocks Crash Every Time)
Summary
TLDRThis video script delves into the complexities of the yield curve and its implications for wealth management. It explains the concept of an inverted yield curve and its historical correlation with recessions, highlighting the current inversion and potential for a market crash. The presenter offers insights on financial strategies outside mainstream advice and invites viewers to a free master class on asymmetric trading to navigate market volatility and recessions effectively.
Takeaways
- đ The speaker discusses the yield curve and its significance in financial markets, particularly how an inverted yield curve is often a precursor to a recession.
- đ The relationship between bond prices and interest rates is inversely correlated; as bond prices fall, interest rates rise, and vice versa.
- đ The Federal Reserve's actions on interest rates influence the shape of the yield curve, which in turn affects all existing debt in the market.
- đ An inverted yield curve typically shows higher yields for short-term debt and lower yields for long-term debt, which is the opposite of the normal situation.
- âł The speaker notes that yield curves can stay inverted for extended periods, and recessions usually occur after the curve has 'un-inverted' and returned to normal.
- đ The video script includes a chart analysis showing the historical correlation between yield curve inversions, un-inversions, and subsequent recessions.
- đ The speaker predicts a potential market crash and recession, suggesting that the current yield curve is signaling such an event, especially given its prolonged inversion.
- đ Two types of yield curve movements are discussed: 'bear steepeners' where long-term bond yields rise, and 'bull steepeners' where short-term bond yields fall.
- đĄ The speaker emphasizes the importance of being prepared and positioned to take advantage of market downturns, rather than fearing them, as they present opportunities for profit.
- đŒ The economic implications of both bear and bull steepeners are explored, including potential impacts on government borrowing costs and the broader economy.
- đ The video script concludes with an invitation to a free master class on asymmetric trading, suggesting further education on how to navigate and profit from market volatility.
Q & A
What is an inverted yield curve and why is it significant?
-An inverted yield curve occurs when short-term interest rates are higher than long-term rates, which is the opposite of the normal situation. It is significant because historically, an inverted yield curve has often preceded a recession, signaling that investors expect lower interest rates in the future, possibly due to economic downturns.
How does the price of a bond relate to its yield?
-The price of a bond and its yield are inversely correlated. When the price of a bond goes down, its yield (the interest rate it pays) goes up, and vice versa. This is because if a bond is sold at a discount to its face value, the yield to the new buyer will be higher to compensate for the lower purchase price.
What is the normal shape of the yield curve and why does it invert?
-A normal yield curve is upward-sloping, with longer-term debt having a higher yield than shorter-term debt. It inverts when investors expect future interest rates to fall, often due to anticipated economic weakness, leading them to demand lower yields on long-term bonds, thus pushing their prices up and yields down.
How does the Federal Reserve's actions affect the yield curve?
-The Federal Reserve's decisions to raise or lower interest rates can affect the entire yield curve. When the Fed lowers rates, it can lead to a bull steepener, where short-term rates fall, and the yield curve becomes more positively sloped. Conversely, if the Fed raises rates, it can lead to a bear steepener, where long-term rates rise, potentially inverting the yield curve.
What is the relationship between an inverted yield curve and recessions?
-An inverted yield curve is often seen as a leading indicator of a recession. While not every inversion leads to a recession, historically, recessions have followed yield curve inversions, suggesting that the market anticipates economic slowdowns.
What are the two types of yield curve un-inversions mentioned in the script?
-The two types of yield curve un-inversions are a bull steepener and a bear steepener. A bull steepener occurs when short-term rates fall, making short-term bonds more attractive and causing the yield curve to steepen positively. A bear steepener happens when long-term rates rise, often due to selling pressure on long-term bonds, also leading to a positively sloped yield curve.
How does the script suggest one should prepare for a potential market crash?
-The script suggests being intelligently hedged and positioned to take advantage of market downturns. This includes having dry powder to invest at discounted prices after a crash and possibly holding positions that increase in value during market declines to offset losses elsewhere.
What is the significance of the 10-year Treasury versus the 2-year Treasury yield curve?
-The 10-year Treasury versus the 2-year Treasury yield curve is one of the most closely watched indicators for predicting recessions. When the yield on the 10-year Treasury is lower than that on the 2-year, it indicates an inverted yield curve, which has historically been a reliable predictor of economic downturns.
How does the script describe the potential impact of an inverted yield curve on the stock market?
-The script describes that every time the yield curve has inverted and then un-inverted over the last 40 years, it has been followed by a recession and a market crash, with declines ranging from 20% to 57%. It suggests that being prepared for such an event can lead to significant investment opportunities.
What is the 'asymmetric trading master class' mentioned in the script and what will it cover?
-The 'asymmetric trading master class' is an event hosted by the speaker to teach strategies on how to profit from various market conditions, including election chaos, geopolitical events, yield curve inversions, and market crashes. It aims to not only protect wealth but also to grow it through intelligent positioning and trading strategies.
What economic indicators does the script mention to support the potential for a market crash?
-The script mentions several economic indicators such as full-time employment numbers going down, initial jobless claims going up, labor force participation rate being flat or slightly down, and retail sales showing zero growth. These indicators suggest a weakening economy, which, combined with the yield curve un-inversion, could potentially lead to a market crash.
Outlines
đ Understanding the Yield Curve and Its Inversion
This paragraph explains the concept of the yield curve and its inversion, which is a significant financial indicator. The speaker discusses how the yield curve, which typically shows a higher interest rate for longer-term bonds compared to shorter-term ones, becomes inverted when short-term rates exceed long-term rates. This inversion has historically been a precursor to recessions. The paragraph also describes how the Federal Reserve's actions can influence the yield curve and how an inverted yield curve can stay inverted for a considerable time before a recession occurs. The speaker uses the 10-year versus 2-year Treasury yield curve as a common example to illustrate the concept and its implications.
đ The Impact of Yield Curve Uninversion on the Market
The second paragraph delves into the effects of the yield curve's uninversion on the financial market. It discusses two types of steepeners: bear and bull. A bear steepener occurs when long-term bond yields rise, while a bull steepener happens when short-term bond yields fall. The speaker anticipates a mix of both, influenced by the Federal Reserve's potential rate cuts and market reactions to inflation and government borrowing costs. The paragraph also addresses skepticism around the 10-year versus 2-year yield curve as a recession indicator and invites viewers to a free trading master class for further insights.
đïž Economic Implications of Yield Curve Movements
This paragraph explores the broader economic implications of the yield curve's movements, focusing on how they affect borrowing costs for the government and the private sector. It discusses the potential for the Federal Reserve to cut rates, leading to a bull steepener that reduces government borrowing costs but may increase costs for corporations and individuals. The speaker also touches on employment trends, job losses, and the weakening economy, suggesting that these factors, combined with yield curve movements, could contribute to a market crash.
đ Historical Correlation of Yield Curve Uninversions and Market Performance
The final paragraph examines the historical relationship between yield curve uninversions and stock market performance. It provides a series of examples from the past 40 years, showing that each time the yield curve has inverted and then uninverted, it has been followed by a recession and a market crash, with declines ranging from 20% to 57%. The speaker emphasizes that these market downturns present opportunities for savvy investors, allowing them to profit from volatility and reinvest at discounted prices after a crash. The paragraph concludes by encouraging viewers to prepare and position themselves to take advantage of such market conditions.
Mindmap
Keywords
đĄYield Curve
đĄInverted Yield Curve
đĄFinancial Adviser
đĄBond
đĄFederal Reserve (FED)
đĄInterest Rate
đĄBull Steepener
đĄBear Steepener
đĄRecession
đĄAsymmetric Trading
đĄMarket Crash
Highlights
The yield curve has been inverted for over 2 years, signaling potential economic concerns.
An inverted yield curve occurs when short-term bonds have a higher yield than long-term bonds, which is the opposite of the normal situation.
The price of bonds and their yield are inversely correlated, affecting the interest rates paid on bonds when sold before maturity.
A normal yield curve shows the lowest yield for the shortest-term debt and the highest yield for the longest-term debt.
The current yield curve is mostly inverted, with short-term debt paying higher rates than long-term debt.
An inverted yield curve is historically associated with a recession, but recessions usually occur after the curve uninverts.
The 10-year Treasury vs. the 2-year Treasury is a commonly used yield curve to predict recessions.
There are two types of yield curve un-inversions: bear steepeners and bull steepeners, which affect the curve differently.
A bear steepener occurs when long-term bond yields rise, while a bull steepener happens when short-term bond yields fall.
The speaker predicts a mix of both bear and bull steepeners in the upcoming yield curve un-inversion.
The Federal Reserve's actions will likely cause a bull steepener by cutting rates, affecting short-term borrowing costs.
A crash in long bonds is expected, leading to higher yields as investors sell off long-term debt with lower interest rates.
Economic indicators such as employment and retail sales suggest a weakening economy, which may influence the yield curve.
Yield curve un-inversions have historically correlated with stock market crashes, ranging from 20% to 57% drops.
The speaker suggests that market crashes following yield curve un-inversions present opportunities for profit and wealth building.
The video discusses strategies for taking advantage of market volatility and crashes, including hedging and positioning.
The speaker is hosting a free asymmetric trading master class to teach viewers how to profit from market events.
Transcripts
the yield curve is uninverted
[Music]
the top 1% on how to manage their wealth
and after making enough money to leave
the corporate world behind I've now
turned my attention to teaching people
Financial strategies that exist outside
the mainstream things you'd never hear
from a typical broker or financial
adviser and if you don't believe me call
up your financial adviser and ask him to
explain the yield curve to you let alone
the inverted yield curve and what causes
it for over 2 years now our yield curve
has been inverted so what does that mean
well when you take a look at a bond the
price and the interest rate that that
Bond pays those are inversely correlated
imagine I borrow $100 from you and it's
at a 1% interest rate I owe you $101
back but something happens between now
and the time that I'm supposed to pay
you back and you want to sell that
contract that debt to somebody else
you're not able to get $100 for it so
somebody else buys it from you for $99
so you initially lent $100 you got back
$99 you lost money but now I owe the
money to the new person instead but I
don't owe them $100 I don't owe them 1%
on their 99 I still owe back the full
$11 that means he's getting a 22%
interest rate because he gave up $99
he's getting $101 back so roughly 2% so
that's what people mean by the price of
bonds and the yield on bonds being
inversely correlated as people sell off
bonds for lower and lower prices the
interest rate that they pay goes higher
and higher also at the same time when
the FED lowers or raises interest rates
that causes all existing debt to either
be bought up or sold down so that all of
the yields match at least for the same
maturity so a normal yield curve would
show debt with the shortest maturity
like a couple of months or a couple of
years has the lowest yield on it whereas
debt with the longest maturity like 20
years or 30 years has the highest
interest rate or the highest yield
looking over at the inverted yield curve
this is when the opposite of what's
normal is going on meaning the short end
of the curve has the highest yield and
the long end of the curve has the lowest
yield right now most of the yield curve
is inverted where we have debt that pays
the highest rate at the short end of the
curve like the 6month US Treasury paying
over 5% whereas debt at the longest end
of the curve like the 30-year US
Treasury currently only pays
4.28% now you may have heard before that
an inverted yield curve always signals a
recession coming and that is true but
the recession almost always occurs after
the yield curve uninverted meaning it
goes back to normal so that's the signal
that we're looking for because the yield
curve can stay inverted for a long time
like it has right now this is a chart of
the 10-year treasury versus the 2-year
Treasury and it is one of the most
commonly preferred yield Cur curves to
look at when the blue line is below the
black zero line that means that the
yield curve is inverted in other words
the 10-year treasury has a lower yield
than the 2-year treasury when the blue
line is above the black zero line that
means it's a normal curve with the
10-year having a higher yield than the
2-year what you will notice is that
following every single inversion there
is a gray bar on the chart and those
gray bars indicate a recession it
happened in 19 80 it happened in 1982 it
happened in 1990 it happened in 2001 it
happened in 2008 it happened in 2020 and
as I will show you it's about to start
happening now but one thing that I want
you to pay particular attention to on
this chart is that it usually happens
after the yield curve pops back up above
that zero line You'll see here this
recession is correlated with the
uninverted
in 81 the uninverted
in 2001 every single time you get the
yield curve inverting and then after it
steepens again then you get the gray bar
then you get the recession at this point
anybody who has done any amount of
research on this you're probably already
typing in the comments that there are
two types of a yield curve un inverting
there's two different ways that this can
happen this can happen from the long end
of the curve going up meaning something
like the 30-year trip treasury gets sold
off sending the interest rate kening
higher this would have the effect of
uninverted the yield curve if the short
end stays the same but the long end
shoots up higher that becomes normal
again that's referred to as a bare
steepener because the thing that's
moving is the long end of the curve and
the prices of those bonds are selling
off so it's bearish for those long Bond
holders the second way that a yield
curve can unvert is through a bull
steepener which means something like
like the 2-year starts rallying as
everybody buys the 2-year bonds and the
yield on the two-year starts to fall off
a cliff if the long end of the curve
stays the same but the short end starts
getting lower the interest rate goes
down then the yield curve un inverts it
steepens again and because that happens
from the price of those short-term bonds
going up it is bullish for those
short-term Bond holders so it's a bull
steepener now I'm going to show you here
why we are likely to have a mix of both
a bull and a bear steepener on this
yield curve un inversion but we have to
talk about the elephant in the room
which is that a lot of people don't like
the 10 versus the 2-year yield curve
this is the 10 versus 2 which is what I
was showing you and it's what people
have been using for decades to predict
recessions now if you want to know how I
do this I am hosting a completely free
asymmetric trading master class tomorrow
this is your last chance to sign up it
is tomorrow this Thursday at 700 p.m.
eastern time and last time I hosted one
of these things we had more people
register for the event then could
actually fit on the zoom call we're
going to cover things like how to use
asymmetric trades to profit from
election chaos geopolitical events yield
curve on inversions and Market crashes
not only how to use them to protect your
wealth but also to grow your wealth and
I'm even going to do a live Q&A at the
end of the call to answer any of your
questions remember this master class is
completely free but spots are limited
and they're filling up fast all you have
to do is click on the link in the
description below submit your name and
email to sign up and the only thing I
ask is that you show up early I'd
recommend just about 12 minutes early so
you can make sure you save your spot
before everybody starts trying to Pile
in at the last second really looking
forward to it and I'll see you there but
over the last couple of years especially
led by the Federal Reserve people have
not liked looking at this one as a
recession indicator so don't worry about
it we're going to look at all of the
different ones right now we're looking
at long-term trends. net we're looking
at the US treasury bond yield spreads
and we can see that when the blue line
is down here below zero in the red
section that particular section of the
yield curve is inverted so this first
one is the 10-year versus the onee
currently inverted and it is steepening
you can see it's rising and getting
closer to becoming uninverted this next
one here is the 10 versus the two which
is what we were looking at earlier which
is inverted but it's rising and
steepening this next one is the 10e
versus the thre month and you can see
the exact same thing this next one is
the 2ear year versus the onee same thing
this next one is the 30y year minus the
10 year and it never quite got inverted
but it is steepening and this last one
here is the 30-year versus the 5year and
you can see it did get inverted it is
uninverted now and it is still
steepening so it really doesn't matter
which area of the yield curve we look at
we are seeing the same thing across the
board it was or still is inverted but it
is steepening it is uninverted now at
the end of this video I'm going to going
to show you why this is not something
that you should be afraid of why yes the
market is probably going to be
experiencing some severe volatility
maybe a big market crash not something
to be afraid of this is something to
take advantage of if you get him to
position for it now but before we look
at why this is likely to result in a
market crash we have to understand the
implications of both the bare steepener
and the bull steepener because we are
probably going to get both here number
one the Federal Reserve is almost
certainly going to cut rates you know
I've been saying forever that we are in
a higher for longer period of time and
that is true I'm not changing my tune
because as I've pointed out time and
time again that in these higher for
longer decades like in the 1940s through
1980 where interest rates and inflation
were both moving higher you had long
periods of time where the FED did
actually cut like they cut back here in
58 they cut back here in 60 they cut
back here in ' 67 they cut here in
around 1970 they cut here in 74 so
multiple times in this higher for longer
stag as a longterm cycle you get periods
of time where they do cut they're
absolutely going to do that again and
it's just going to ignite the fuel it's
going to make them have to get higher
later even more but for right now we're
going to get that bull steepener at the
short end of the curve from the FED
cutting this means the US government
gets cheaper borrowing costs because
instead of them paying over 5% for t-
bills they're going to pay less and less
if the FED Cuts multiple times or more
than a quarter of a percent so the price
of short bonds Rises while the FED Cuts
interest rates at the short end of the
curve and that primarily is going to be
a driving force for cheaper borrowing
costs for the US government number two
though we get a crash in Long bonds
meaning investors and institutions sell
off longdd us treasuries and debt that
has a lower interest rate they sell it
off and that yield that rate Rises with
the FED cutting rates they're signaling
an end to the inflation fight and
they're fueling the government's deficit
spending through monetary expansion in
an environment like this nobody wants to
hold long-dated bonds that give you a
negative real return so the price sells
off as the rate shoots up until it has a
positive real return this means that
borrowing costs for the free market for
corporations and individuals actually
goes up as the government gets cheaper
borrowing cheaper deficit spending
through monetary expansion that drives
up prices that drives up interest rates
for free market debt that means
borrowing costs go up and it puts the
squeeze on everybody else this also
means higher employment costs for
corporations which is already becoming a
problem this is a chart of full-time
employment in the United States and you
can see over the last year it has
steadily been going down meaning people
are losing their full-time jobs this is
a chart of us initial jobless claims and
you can over the last year this has
started to go up as well this is a chart
of the US Labor Force participation rate
which is flat to mildly down in fact the
only Employment Number that looks better
is part-time work which means people are
losing their full-time jobs and going
and getting multiple part-time jobs and
this is shown when we take a look at the
BLS headline report for employment
versus the household survey the
household survey shown in green here is
the one that gives you an indication of
how many jobs individuals have the blue
section that shows the BLS headline
report is the one that shows how many
employees companies have which means
that most jobs that are being reported
right now are from individuals working
multiple jobs and over the last year
both of these numbers have deteriorated
and now the household survey is negative
on top of that retail sales for
companies are flat over the last 6
months they're up
0.15% total not per month just total
it's basically zero growth so the
economy is weakening rapidly the Federal
Reserve is going to cut rates we're
going to get the bull steepener and the
throughput to inflation is going to
cause the bare steepener as well now at
this point you're thinking this is all
about recessions it's all about the
economy and the stock market is not the
same thing as the economy and you are
absolutely right so let's take a look at
how yield curve un inversions correlate
and translate to stock market
performance first what happened to the
market during the invers and steepening
of 1980 well after markets topped in
November of 1980 they fell approximately
28% over the following 2 years and that
takes care of the in the subsequent
inversion and
uninversity 9 and then the uninversity
recession happening in 90 you can see
here during this time frame there is
really no market crash to speak of maybe
you could say that this move which was a
20% move down from July to October of
1990 was the market crash that counted
and that's certainly some volatility we
did rebound very shortly after and it
was the least severe out of any of these
that we're going to look at and so you'd
be forgiven for just ignoring this one
even though there was a 20% draw down
the next inversion that we have happened
in 2000 and then the unversioned
happened in 01 and this one was a doozy
with a 50% draw down from the peak in
March of 2000 to the bottom in October
of 02 this next yield curve inversion in
2006 and then subsequent un inversion
and recession starting in '08 Saw just
about the exact same performance of the
market a little bit worse at about 57%
down though it happened a lot quicker
with the peak happening in October of 07
and the bottom happening in March of 09
now this next recession gray bar is very
small and so is the yield curve
inversion happened in August of 2019 so
you might not have noticed it but this
was obviously the market crash that
happened in 2020 and that one was
extremely rapid with a
35% market crash starting on February
20th of 2020 ending on March 20th taking
just one month to drop 35% of its value
so we just took a look at the last 40
years and every time the yield curve
inverts and then un inverts we do have a
recession we also have a market crash
ranging anywhere from 20% to 57% and
given the fact that this stock market is
basically still at an all-time high we
have a perfect setup for at least a
somewhat significant correction now like
I said earlier this is absolutely not
something to be afraid of I would never
recommend selling everything going to
cash because it could be different this
time you never know and these things
take time to unfold every single one of
these Market crashes didn't start the
day the yield curve uninverted you can
never nail the timing on these things
perfectly but it does mean that it pays
to be intelligently hedged to be
prepared and positioned to take
advantage of these things because you
can make insane profits on the way down
but that's not even the best part if you
even just stop your self from most of
the bleeding on the way down by having
certain positions that increase in value
while everything falls then you have dry
powder to buy these assets at fire sale
prices after the crash has already
happened that's where the real wealth
building occurs when you're able to buy
things at the bottom if you have to
watch everything bleed on the way down
and just hope and pray it recovers on
the way back up you're not making up any
ground you're just getting back up to
break even after Wasted Years but if you
can at least make some money on the way
down making some profits on that crash
then you have dry powder to reinvest at
those value prices at those discounts
that's where the saying comes from that
you can make money in Bull markets but
you make your fortunes during bare
markets if you know how to take
advantage of them as always thanks so
much for watching have a great day
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