Hey guys, Brian here. I hope your week’s going great.
In this video, I just want to do a quick update on the yield curve in the United States because it’s about to cross an important threshold.
Stay with me.
All right guys, welcome back.
The yield curve: the most popular way to view it is to subtract the tens from the twos. Under normal conditions, the tens yield more than the twos, and that keeps this line above zero.
The inverted condition is when the twos yield more than the tens. That puts the line below zero.
We care about this curve because it has been a reliable indicator of recession, and it’s been inverted since July 5, 2022. We’re pushing 780 some days here. There was an inversion in the late ’70s. That one lasted 624 days. So, this inversion has exceeded that by a long shot.
What we’re watching is a pattern since the ’80s where economic turmoil waited, right? It didn’t occur when the curve was inverted, it waited until the curve returned to normal. So, the curve inverts, nothing remarkable happens. Then, long yields rise back above short yields, and then the economy suddenly starts falling apart.
The first step in that progression, like I said, happened over two years ago now. The second step appears likely to happen soon, which is why I’m putting out this video now. I’m recording this on the morning of August 14. The tens are yielding 3.8 and change, twos around 3.9.
So, we are a whisker away from getting back to the normal condition.
Now, the press is framing things in an interesting way here. Reuters, I think, captured it best. Yes, longest inversion in history. But this time, the jury is out. This time, there is debate. This time, there’s optimism that the economy will escape contraction.
That optimism, in our view, is purely a function of the stock market, which is still near all-time highs. Maybe this time is different. We’re simply saying that the countdown to recession begins when the curve normalizes, and that clock is ticking.
Let me know what you think in the comments, and I’ll see you in the next video.
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