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.