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The Yield Curve has predicted every recession since the 70's. It has NEVER been this inverted...

by Rachel MillsDecember 27, 2023

Only a crystal ball could be more accurate. Or a newspaper from the future... Look at this chart.

Every time the purple line dips below the red line, a gray bar follows. What does this mean?

The purple line is the spread between short term and long term bonds, referred to as the yield curve. The red line is 0.00% yield. Anything below that is negative, or an inversion.

The gray bars are the recessions.

Now look all the way to the left where the purple line is today. 2024 is shaping up to be one heckuva ride. Are you prepared?

Yield Curve Inversion: An Important Indicator

A yield curve inversion is alarming because it is often seen as a reliable predictor of an impending economic recession. The yield curve is a graphical representation of interest rates on bonds of the same credit quality but with different maturities. It shows the relationship between the interest rate (or yield) and the time to maturity of bonds. In a normal yield curve, longer-term bonds have higher yields than shorter-term bonds, reflecting the expectation that investors typically demand higher compensation for tying up their money for a longer period.

When a yield curve inverts, it means that short-term interest rates are higher than long-term interest rates. In other words, the yield on, say, a 2-year Treasury bond is higher than the yield on a 10-year Treasury bond. This inversion is unusual because it goes against the normal pattern of the yield curve.

Here’s why a yield curve inversion is considered alarming:

  1. Historical Precedent: In the past, yield curve inversions have often been followed by economic recessions. Historically, the yield curve has inverted prior to nearly every U.S. recession over the past several decades. This track record has made it a reliable leading indicator for economic downturns.
  2. Expectation of Rate Cuts: An inverted yield curve suggests that investors are anticipating lower interest rates in the future. They may be shifting their investments to longer-term bonds in anticipation of economic uncertainty and lower returns on other investments. Central banks may also respond to an inverted yield curve by cutting short-term interest rates to stimulate the economy.
  3. Investor Sentiment: The inversion of the yield curve can trigger negative sentiment among investors and businesses. It often reflects concerns about economic growth, inflation, and the overall health of the economy. As a result, it can lead to reduced consumer and business spending, contributing to an economic slowdown.
  4. Impact on Financial Markets: A yield curve inversion can lead to a sell-off in the stock market and reduced lending by banks. When investors perceive economic risks, they may shift their assets away from riskier investments like stocks to safer assets like bonds or precious metals. Banks may become more cautious about lending, which can constrain economic activity.
  5. Lending and Borrowing Behavior: Banks rely on the spread between short-term and long-term interest rates to make a profit. An inverted yield curve can compress this spread, potentially reducing the profitability of lending. This can lead to a reluctance to extend credit, which can further hamper economic growth.

A yield curve inversion doesn’t guarantee a recession, but the only false alarm in the last 70 years was all the way back in the mid-1960's, and today's inversion is more severe and deep than any other on this chart.

Yield curves are closely watched by economists, policymakers, and investors because they have accurately predicted economic downturns in the past. The yield curve is sending us a big red flashing  warning signal today. Will you heed this warning? Should you flee to the safety and tangibility of precious metals to protect the purchasing power in your portfolio from the ravages of a deep recession? The Big One could be just around the corner. Are you ready?

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