A Powerful Economic Indicator Just Triggered A MASSIVE Warning

Summary

The video script discusses the possibility of an impending recession, using economic indicators such as the yield curve, unemployment rate, and oil prices. It explains how an inverted yield curve typically precedes a recession and how recent changes in the curve, along with a rise in the S rule and a drop in oil prices, suggest a high probability of economic contraction. The script emphasizes the importance of considering multiple data points for a comprehensive economic outlook.

Takeaways

• 📈 The yield curve, which indicates short-term vs. long-term interest rates, has recently uninverted, suggesting a potential economic downturn.
• 🔍 Historically, an inversion followed by an unversion of the yield curve has often been followed by a recession.
• 📉 The 'bull steepener' phase, where short-term rates drop faster than long-term rates, is a key indicator of economic health.
• 💼 The unemployment rate, as indicated by the Sum rule, is another significant economic indicator, with a spread above 50 basis points often signaling a recession.
• ⏳ The Federal Reserve's (FED) rate decisions are closely watched, with rate drops often following the curve's unversion and potentially leading to a recession.
• 📊 The spread between the Fed funds rate and the two-year treasury yield is at an extreme, suggesting the market believes the FED has set interest rates too high.
• 📉 A significant drop in oil prices, along with OPEC's crisis-level production cuts, indicates a potential decrease in demand, which can be a sign of economic contraction.
• 📉 The price of oil is a reflection of economic activity, with a plummeting price suggesting a decrease in energy demand, which can indicate a slowing economy.
• 📊 Market signals, including stock market behavior and expert analysis, suggest that there is a growing belief in an impending recession.
• 🔎 It's crucial to consider a comprehensive set of economic indicators rather than relying on a single data point to make informed predictions about economic trends.

Q & A

What is the significance of the yield curve in predicting economic recessions?

The yield curve is a powerful economic indicator that reflects the difference between short-term and long-term interest rates. An inverted yield curve, where short-term rates are higher than long-term rates, has historically been a predictor of economic recessions.

How does the un-inverting of the yield curve relate to economic cycles?

The un-inverting of the yield curve, where the curve becomes steep again, typically follows an inversion and is often followed by a recession or economic contraction. This pattern has been observed throughout history.

What is the difference between a bull steepener and a bear steepener in the context of the yield curve?

A bull steepener occurs when the yield curve starts to un-invert due to short-term interest rates falling faster than long-term rates. In contrast, a bear steepener happens when the difference between short-term and long-term rates increases due to long-term rates rising faster than short-term rates.

Why is the recent un-inverting of the yield curve significant?

The recent un-inverting of the yield curve is significant because it indicates a shift in the relationship between short-term and long-term interest rates. This change often precedes a recession and is a signal that the market is anticipating economic slowdown.

What is the 'S rule' and how does it relate to unemployment and recessions?

The 'S rule' is a measure that uses the 3-month moving average of the current unemployment rate relative to its lowest point over the past 12 months. Historically, when the spread exceeds 50 basis points, it has indicated that the economy is in or heading towards a recession.

Why is the Federal Reserve's (FED) rate decision important in the context of economic cycles?

The FED's rate decisions are crucial because they can influence economic activity. Typically, after a period of rate hikes, the FED may lower rates in response to an economic slowdown, which often coincides with a recession.

How does the price of oil relate to economic health and potential recessions?

The price of oil is an indicator of economic health. A significant drop in oil prices, as mentioned in the script, can signal a decrease in demand, which may reflect a slowing economy and potentially a recession.

What does the term 'hard landing' mean in the context of economic cycles?

A 'hard landing' refers to a sharp and potentially severe economic downturn, often associated with a recession. It contrasts with a 'soft landing,' which is a more gradual and controlled slowdown.

Why is the difference between the Fed funds rate and the two-year treasury yield considered an extreme indicator?

The difference between the Fed funds rate and the two-year treasury yield is considered an extreme indicator because it reflects market expectations about the economy's health. A large spread can suggest that the FED has set interest rates too high relative to the economy's condition.

What does the statement 'energy is the economy' imply in terms of oil demand and economic output?

The statement 'energy is the economy' implies that the demand for energy, such as oil, is a good representation of economic activity. A decrease in oil demand can indicate a slowdown in economic output, which may be a sign of an impending recession.

Outlines

00:00

📈 Economic Indicators and Recession Predictions

The speaker discusses how an economic indicator, specifically the yield curve, has recently un-inverted, which historically has been followed by recessions. They explain that an inverted yield curve, where short-term interest rates are higher than long-term rates, is typically a sign of an impending economic downturn. The speaker reviews historical data from 1990 to the present, noting that each time the yield curve has 'un-inverted', followed by a recession. They also mention that the recent un-inversion of the yield curve, where the 2-year treasury yield fell below the 10-year, is a significant event that could suggest we are moving closer to a recession. The speaker emphasizes that while there are no certainties, the probabilities of a recession are increasing based on these economic signals.

05:02

📊 Cycles of Yield Curve and Unemployment Rate

The speaker continues by detailing how economic cycles typically play out, starting with the inversion of the yield curve. They explain the concept of a 'bull steepener', which occurs when the curve starts to un-invert due to short-term interest rates falling faster than long-term rates. This is contrasted with a 'bear steepener', where long-term rates rise faster than short-term rates. The speaker then discusses the 'S rule', which is a derivative of the unemployment rate, indicating that when the current 3-month moving average of the unemployment rate is more than 50 basis points above its lowest point in the past 12 months, it has historically signaled a recession. The speaker also mentions that the National Bureau of Economic Research (NBER) often only confirms recessions after they have already occurred, advising viewers to focus on market indicators rather than official announcements.

10:04

📉 The Impact of Oil Prices on Economic Outlook

The speaker shifts focus to the price of oil as an economic signal, noting a recent collapse in oil prices despite production cuts by OPEC. They suggest that this drop in prices indicates a decrease in demand, which is a sign of economic contraction. The speaker also references a tweet by Dave Rosenberg, highlighting the extreme difference between the Fed funds rate and the two-year treasury yield, suggesting that the market believes the Federal Reserve has set interest rates too high relative to the economy's health. The speaker concludes this section by emphasizing the importance of considering multiple economic indicators to assess the likelihood of a recession or economic downturn.

15:07

🚨 Preparing for a Potential Recession or Financial Collapse

In the final paragraph, the speaker wraps up the discussion by urging viewers to consider a broad range of economic data points to form their own conclusions about the economic outlook. They reiterate that while there are no certainties, the combination of yield curve movements, unemployment rate indicators, and commodity prices suggest a high probability of a hard landing or recession. The speaker also humorously references a statement by Jim Cramer, a financial commentator, to illustrate the potential for a financial collapse. The video concludes with a call to action for viewers to educate themselves on economic indicators and prepare for possible economic challenges.

Keywords

💡Yield Curve

The yield curve is a graphical representation of the interest rates on debt for a range of maturities. It is a key economic indicator used to predict economic conditions. In the video, the speaker discusses how the yield curve's inversion (short-term rates higher than long-term rates) historically precedes recessions. The script mentions that the curve has recently uninverted, which could indicate a change in economic outlook.

💡Inverted

When the yield curve is 'inverted,' it means that short-term interest rates are higher than long-term rates. This is typically seen as a sign of an impending recession, as it suggests investors are expecting lower returns in the future. The script describes how the curve was inverted two years prior but has recently uninverted.

💡Uninverted

To 'uninvert' refers to the situation where the yield curve shifts from being inverted to a more normal state where long-term rates are higher than short-term rates. The script indicates that the recent uninverting of the yield curve might suggest a change in economic trajectory, although it's not a definitive indicator.

💡Recession

A recession is a significant decline in economic activity that lasts more than a few months. In the video, the concept is central to the discussion, with the speaker analyzing various economic indicators to assess the likelihood of a recession occurring. The script suggests that current economic signals are pointing towards a potential recession.

💡Treasury Yield

Treasury yields refer to the return on investment from U.S. government bonds. The script discusses how changes in the yield of 2-year and 10-year treasuries can signal economic conditions. For instance, when the 2-year yield goes below the 10-year yield, it can indicate an inverted yield curve.

💡Bull Steepener

A bull steepener refers to a situation where the yield curve becomes steeper as short-term interest rates decrease more rapidly than long-term rates. The script uses this term to describe a phase in the economic cycle that typically follows an inversion of the yield curve.

💡Unemployment Rate

The unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment. The video discusses the 'S rule', which is based on the unemployment rate, as a predictor of economic downturns. The script mentions that an increase in the unemployment rate can signal a recession.

💡FED

The Federal Reserve, or the FED, is the central banking system of the United States. The script discusses how the FED's decisions on interest rates can influence economic conditions. The speaker anticipates that the FED will likely drop rates, which is often a response to economic contraction.

💡Oil Price

The price of oil is a significant economic indicator that can reflect global economic health. The script notes a recent collapse in oil prices, which, along with production cuts by OPEC, suggests a potential decrease in demand that could be indicative of an economic slowdown.

💡OPEC

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of oil-exporting nations. The script mentions that OPEC's decision to cut production is a crisis-level move, suggesting that the recent drop in oil prices might indicate a significant decrease in demand.

💡Financial Collapse

A financial collapse refers to a sudden and severe failure of financial institutions or markets. The video script ends with a mention of a potential financial collapse, suggesting that the economic indicators discussed point towards a more severe downturn than a typical recession.

Highlights

A powerful economic indicator suggests a high probability of an upcoming recession.

The yield curve is no longer inverted, which historically has been followed by recessions.

The 2-year treasury yield has gone below the 10-year treasury yield, indicating a change in the yield curve.

The yield curve's un-inversion is sustained over several days, increasing the likelihood of a recession.

The cycle of the yield curve typically involves inversion, bull steepener, unemployment rate spike, and then un-inversion before a recession.

The unemployment rate, or the S rule, is a significant indicator of economic health and potential recession.

The Fed funds rate compared to the two-year treasury yield is at an extreme, suggesting high interest rates relative to economic health.

The price of oil has collapsed, indicating a potential slowdown in demand similar to a mild recession.

OPEC's production cuts are at crisis levels, restricting supply and impacting oil prices.

The combination of interest rates, unemployment levels, and commodity prices suggests a hard landing for the economy.

Jim Kramer's opinion on the lack of an upcoming recession is noted, but the overall data points to a different conclusion.

The video encourages viewers to consider all available data to form their own conclusions about the economy.

The yield curve's behavior is a critical signal of the treasury market's view on economic health and Fed's future actions.

The Fed's rate decisions are typically reactive to economic conditions rather than preventative of recessions.

The official announcements of recessions are often delayed, and should not be the sole indicator of economic concern.

The video provides a comprehensive checklist of economic indicators to assess the likelihood of a recession.

Transcripts

a powerful economic indicator has just

been triggered and this dramatically

increases the probabilities that were

headed straight towards a recession I'm

going to explain this to you in three

simple fast Steps step number one let's

go over how the yield curve is no longer

inverted which sounds like a good thing

until you go back and study how these

Cycles typically play out throughout

history and then you

realize it might not be so good let's

start by looking at a chart going all

the way back to 1990 to today's date on

the left we go from neg3 up to positive3

Middle here

0% if the blue line goes beneath zero or

is negative this tells us the curve is

inverted and all that means is that

short-term interest rates are higher

than long-term interest rates when we

look at the treasury curve okay but then

what happens is when we go through this

cycle it's highlighted by these red

arrows the curve un inverts and starts

to become steep again but you'll notice

whenever we get one of these red arrows

or an unversioned the curve it is

followed by a recession a hard Landing a

crisis nobody knows how it plays out but

a contraction in real economic growth so

this begs the question well okay George

I get this is how it played out in the

early 1990s recession there.com GFC

seresa sickness but where are we right

now well the curve inverted about two

years ago but now more recently in fact

just the other day the curve uninverted

meaning the 2-year treasury yield went

below the 10-year treasury yield instead

of the 10-year treasury yield going

above the two-year that's a very

important distinction more on that in

just a moment but this just happened and

what's interesting is it seems as though

this is going to be

sustained because it's been two three

four days and the 2-year treasury yield

is still lower now we could see a head

fake where it pops back up and goes back

and forth for a while but usually when

this happens over the span of two three

4 days and then sustains over two three

4 weeks then we know that we're getting

closer or again the probabilities are

increasing there are no certainties only

probabilities but the probabilities are

increasing that we're coming closer

getting closer to that recession so now

let's go over how these Cycles typically

play out and by the way when we were

talking about the inversion of the curve

that was the Delta between the 2-year

Treasury and the 10-year treasury so

getting back to these Cycles usually the

curve starts by inverting of course that

would make a lot of sense because it has

to be inverted to un

invert you don't need me to tell you

that and then usually you start to get a

bll steepener what is this this means

that the curve is starting to uninverted

as a result of shortterm interest rates

going down faster

than long-term interest rates now if we

had a bare steepener that would mean

that the Delta is decreasing between the

two but it's happening as a result of

long-term interest rates going up faster

than short-term interest rates and it's

a huge difference as far as the signal

that the treasury market is giving us

about the overall health of the economy

then after you get this bull steepening

usually you get the unemployment rate

spiking and we can see that in the P

rule more on that in Step number two and

then the curve uninverted like we've

seen more recently it stays uninverted

meaning we get past that point where we

have those head fakes and then you see

the FED drop rates which we're likely

going to have here in the next week or

two and this is when we typically get

the recession after after after the FED

drops rates now it's key that we realize

that the

nbe and this is just the official

government agency that comes out and

says yes we are in a recession but

what's interesting is they never really

say we are in a recession because that

would imply they're telling us what's

happening right now they always say oh

we

were in a

recession and this recession started oh

I don't know uh about a year ago so all

that stuff we were telling you about not

worrying about a recession just go ahead

and disregard

that in fact let's use 2008 oh right

here as an example when we had the

recession start right around here the

official recession start this was

January of 2008 right around that time

but the NB didn't actually announce that

we had been in recession until December

of 2008 so my point is just because

they're not coming out and saying that

we are in or headed toward a recession

that doesn't necessarily mean there

isn't anything to worry about we've got

to completely disregard what the

government the central planners are

saying shocker right and we've got to

focus on what the actual treasury market

is telling us about the amount of risk

in the system and what they think the

FED is going going to be doing with

interest rates in the short term not

because they are preventing a recession

but because they are responding to a

recession step number two now let's go

ahead and look at that cycle we were

just talking about through the lens

specifically of the unemployment rate or

the S rule which is a derivative of the

unemployment rate we're going to go

right over to the Fred website and look

at a real time chart now what the Som

rule is is simply a 3-month moving

average of the current unemployment rate

relative to its lowest point over the

past 12 months so what this has shown is

when you get above 50 basis points of a

spread meaning the current 3-month

moving average unemployment rate is

higher than 50 basis points above of the

lowest point over the past 12 months

this has told us in the past

definitively we are in or headed toward

a recession so what we have to do is we

can't just look at one of these metrics

or data points we have to compile all of

these data points to tell us all right

are the probabilities leaning more

towards a hard Landing or recession or

are the probabilities leaning more

towards a soft Landing or no Landing so

looking at this chart we go all the way

back to

1960 and we can see sure enough every

single time we get above a 50 basis

point spread we see a corresponding gray

shaded area which of course is a

recession and now if we combine this

with what we were just talking about in

Step number one one and that was the

yield curve you can see that this is

very powerful but it's not entirely it's

not

100% accurate so as an example A lot of

people will point out that right here in

the uh late to Mid

1990s we had an inversion that did not

result in a

recession and then a lot of people right

here point out that we had a Fed rate

hiking cycle in the mid 1980s and that

didn't correspond to a recession that's

another powerful metric that people

usually look at is just the fact that

the FED is going to an extreme rate

hiking cycle so when you combine the

fact that we have had a Fed rate hiking

cycle also we have a huge inversion of

the curve and in addition to that we've

not only triggered the S rule but it's

gone from 50 basis points to 57 basis

points see we're looking at more and

more data points that point no pun

intended in the direction of a hard

Landing or a

recession oh time out I want to go over

another come to bonus data point before

we get to step number three and this is

a chart I found recently on Twitter from

Dave Rosenberg and on Twitter he goes by

econ guy

Rosie he points out right now we are at

an extreme that we very rarely have seen

in the past and this extreme

specifically is the Fed funds rate

compared to the two-year treasury yield

so when the curve is inverted or

uninverted you would expect the two-year

treasury yield to be under fed

funds but Jeffrey gunlock always points

out that the FED funds rate usually just

follows the two-year treasury yield so

where the two-year treasury yield is now

can be an indicator for where the FED

funds rate is headed over the near to

midterm so if we look at this chart we

see that we are in fact this chart is a

little outdated because now the Delta

between fed funds and the two-year

treasury yield is at an all-time extreme

see right here it was only about 140

basis points but we had a bigger spread

during the GFC but now this spread has

increased to a level that that's more

extreme than what we saw prior to the

global financial crisis in 2008 and 2009

and this just tells us the market

believes the FED has interest rates way

too high relative to the health of the

overall

economy step number three but there's

more economic signals we have to pay

attention to now before we get to this

chart of the price of oil let's go

through our little

checklist based on how the Cycles have

played out in the past so the curve

inverts check we've had that we get a

bull steepener check we have had that in

fact editor you can go ahead and throw

up the last year of what the two-year

treasury has done as far as the yield

gone down relative to the 10-year and

the viewers can see the 2-year has gone

down a lot more again Bull steepener and

we can see based on what we went over in

Step number two that the labor market is

deteriorating quickly so go ahead and

add another check mark and based on what

we went over in Step number one we see

the curve has uninverted and we know

next week the FED is going to drop rates

so check mark there and check mark there

so what we have to do is say what are

the

probabilities that this will lead to

recession and this cycle will play out

the exact same way that it's played out

90% of the time going back to let's just

say the

1960s so we have to collect as many data

points as possible that's pretty much

what this video is all about so we're

going to look at that chart of oil going

back to well just before July of

2022 to today's date we go from $70 up

to

$115 and we can see starting off we're

right around 95 and we get this huge

Spike up that was when Russia invaded

Ukraine but then it absolutely plummets

down to a point where it was just above

$70 in the q1 beginning of Q2 of

2023 it goes up kind of back and forth

but look at what it's done recently it's

absolutely collapsed in price

to the point where now it's under

$70 per barrel now usually this in and

of itself wouldn't be a big deal but

what we also have to consider are the

production cuts that we've had along the

way from OPEC ironically trying to prop

up the price editor go ahead and cut to

this clip from a recent macro voices

episode

the current amount of Supply that OPEC

is withholding from the market roughly 4

million barrels a day of realized

tangible Cuts relative to October 2022

levels when this new cutting cycle

restarted again that's the most crew

that that OPEC and OPEC plus is

withholding from the market since the

2008 2009 financial crisis these are

crisis level production

Cuts so we know the price of oil is

simply a result of supply and demand and

that Supply y has been massively

restricted in fact to use their term we

have never seen this type of restriction

outside of a

crisis so we have to ask ourselves okay

well then what's happening with demand

if they're pulling back the production

and this would even include the increase

in production that we've seen in the

United States so on net balance it's

still a decline and just being overly

optimistic it would be flat but then we

say okay well if the price is plummeting

like this what does it actually tell us

about the demand side of the equation

well to answer that question editor go

ahead and throw up this recent article

from CNBC where Morgan Stanley Cuts oil

forecast and says that Traders are

pricing in a demand slowdown similar to

a mild recession and I'd like to remind

everyone watching this video that energy

is the economy and therefore the amount

of energy we are using or the demand for

the energy is a very good

representation as to what's happening

with economic output and whether it's

accelerating or

Contracting so when you put all of these

things together and I could give you a

list of another probably 100 items that

we could say would lead you to believe

the odds are favoring a recession but

when you just look at what interest

rates are telling you when you look at

what the unemployment level is telling

you the Som rule as an example and you

look at what commodity prices are

telling you you have to say the base

case is a hard landing and not a soft

Landing or a no Landing

although it's just a matter of

probabilities and there are no

certainties but I did forget one data

point and it's probably the most

important data point of all that would

suggest we're not only headed for a

recession but we could even be headed

for a financial collapse editor go ahead

and play the video a lot of stocks are

trading as if we're going to have a big

recession and we're not going to have

big recession so if Jim Kramer is in the

no recession Camp you you know that just

based on that data point alone we're

likely headed or on the brink of an

economic

collapse ah now in all seriousness guys

this video is all about encouraging you

to not just look at the beish data or

the bullish data but look at everything

that we have access to and come to your

own

conclusions as to what you think the

most likely outcome is going to be

for more content that'll help you build

wealth and thrive in a world of out of

control central banks and big

governments check out this playlist

right here and I will see you on the

next video