The Yield Curve is Un-Inverting (Stocks Crash Every Time)

Summary

This 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

• 📈 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.
• 🔄 The relationship between bond prices and interest rates is inversely correlated; as bond prices fall, interest rates rise, and vice versa.
• 🌐 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.
• 📉 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.
• ⏳ 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.
• 📊 The video script includes a chart analysis showing the historical correlation between yield curve inversions, un-inversions, and subsequent recessions.
• 📉 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.
• 📈 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.
• 💡 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.
• 💼 The economic implications of both bear and bull steepeners are explored, including potential impacts on government borrowing costs and the broader economy.
• 📚 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

00:00

📈 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.

05:02

📉 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.

10:03

🏛️ 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.

15:04

📊 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.

Keywords

💡Yield Curve

The yield curve is a graphical representation of the interest rates, or yields, on debt for a range of maturities. In the video, it is central to understanding financial market behavior, as it typically shows a positive slope where longer-term debt yields more than shorter-term debt. The video discusses an 'inverted yield curve', which is abnormal and historically has been a predictor of economic recessions.

💡Inverted Yield Curve

An inverted yield curve occurs when short-term interest rates are higher than long-term rates, which is the opposite of the normal upward-sloping yield curve. The video script highlights that an inverted yield curve has been a reliable signal of impending recessions, as it reflects investor sentiment about future economic growth.

💡Financial Adviser

A financial adviser is a professional who provides guidance and advice on matters of investment, insurance, and other financial planning. In the video, the speaker challenges viewers to ask their financial advisers about the yield curve to emphasize the complexity and importance of understanding such financial instruments.

💡Bond

A bond is a debt security, under which the issuer owes the bondholders a debt and, depending on the terms of the bond, is obliged to pay interest or dividends. The video explains how the price of a bond and the interest rate it pays are inversely correlated, which is a fundamental concept in understanding how yield curves work.

💡Federal Reserve (FED)

The Federal Reserve, often referred to as the FED, is the central banking system of the United States. It plays a key role in setting monetary policy, including interest rates, which in turn affects the yield curve. The video discusses how the FED's actions can lead to changes in the yield curve and potentially influence economic conditions.

💡Interest Rate

An interest rate is the percentage of an amount loaned which a lender charges as interest to the borrower. It is a critical component in the pricing of bonds and other debt instruments. The video script explains how changes in interest rates can affect the yield curve and the economy.

💡Bull Steepener

A bull steepener refers to a situation where short-term interest rates decrease while long-term rates remain the same or increase less, causing the yield curve to become steeper. The video suggests that a bull steepener could occur if the FED cuts rates, leading to lower yields on short-term bonds.

💡Bear Steepener

A bear steepener is the opposite of a bull steepener, where long-term interest rates increase relative to short-term rates, also steepening the yield curve but in a manner that is typically bearish for long-term bond holders. The video script mentions that a bear steepener could happen if long-term bonds are sold off, increasing their yields.

💡Recession

A recession is a period of negative economic growth that lasts for at least two consecutive quarters of a fiscal year. The video script repeatedly connects the yield curve's behavior, particularly inversions and subsequent un-inversions, with the onset of recessions.

💡Asymmetric Trading

Asymmetric trading refers to strategies that aim to profit from market volatility or specific events, such as geopolitical events or economic indicators like yield curve inversions. The video offers a free masterclass on asymmetric trading, indicating that it can be used not only to protect wealth but also to grow it amidst market chaos.

💡Market Crash

A market crash is a sudden and significant drop in market value, often triggered by investor panic. The video script discusses historical correlations between yield curve inversions and market crashes, suggesting that the current situation could lead to a similar downturn.

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