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In this video, we explore the historical significance of the 10YR3M spread, highlighting its accuracy in predicting economic downturns. We examine the current yield curve inversion, which is of historic depth, rivaling the double recession of 1980.

While the 10YR3M spread has an impressive forecasting track record, effectively capitalizing on this information requires patience and discipline. We discuss the challenges involved in interpreting the indicator’s signals and the wide range of outcomes for recession timing, stock market performance, and labor market data.

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DISCLAIMER: This video does not provide investment or economic advice and is not professional advice (legal, accounting, tax). The owner of this content is not an investment advisor. Any securities, trading, or market discussion is incidental and solely for entertainment. Nothing herein shall constitute a recommendation, investment advice, or an opinion on suitability. The information in this video is provided as of its initial release date. The owner of this video expressly disclaims all representations or warranties of accuracy. The owner of this video claims all intellectual property rights, including copyrights, of and related to this video….(read more)

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Why This Curve Predicts Every Recession

In the field of economics, there is an interesting phenomenon known as the yield curve that has gained considerable attention among experts and investors. This curve, which plots the relationship between interest rates and the maturity of government bonds, has proven to be highly predictive when it comes to forecasting recessions. It is often referred to as an indicator of economic health, and its accuracy in anticipating downturns has earned it a remarkable reputation.

The key concept behind the yield curve is quite simple. Generally, when the economy is doing well, the demand for long-term bonds tends to decline, causing their prices to drop and, consequently, their yields to rise. This creates a situation where short-term interest rates are lower than long-term interest rates, resulting in an upward-sloping curve. Conversely, when the economy is heading towards a recession, the demand for long-term bonds increases significantly, causing their prices to rise and, consequently, their yields to decline. This leads to a situation where long-term interest rates become lower than short-term interest rates, resulting in a downward-sloping or flat yield curve.

Historically, every recession in the United States since the 1950s has been preceded by the inversion of the yield curve. An inversion occurs when short-term interest rates exceed long-term interest rates, resulting in a negative slope on the yield curve. The average time lag between the occurrence of a yield curve inversion and the beginning of a recession has been around 12 to 18 months. This means that the yield curve can serve as a valuable tool for economists and investors to anticipate an economic downturn well in advance.

The predictive power of the yield curve can be attributed to various factors. Firstly, it indicates market expectations of future interest rates. When the yield curve inverts, it suggests that investors are less confident in the short-term prospects of the economy and are seeking safer long-term investments. Additionally, the yield curve reflects the supply and demand dynamics of government bonds. A surge in demand for long-term bonds drives their prices up and, consequently, their yields down. This increased demand can be seen as a flight to safety by investors who anticipate a forthcoming recession.

It is important to note that while the yield curve has proven to be an accurate predictor of recessions in the past, it is not foolproof. There have been instances, such as the mid-1960s and the late-1990s, where brief inversions occurred without being followed by a recession. Moreover, the yield curve is not a cause of the recession itself but rather a reflection of market sentiment and economic conditions.

Nevertheless, the consistent track record of the yield curve in forecasting recessions should not be disregarded. Economists and policymakers pay close attention to its movements and take them into account when formulating monetary and fiscal policies. Investors also use the yield curve as a valuable tool to make informed investment decisions and adjust their portfolios accordingly.

In conclusion, the yield curve has proven to be an invaluable indicator when it comes to forecasting recessions. Its ability to predict economic downturns with a reasonable degree of accuracy is a testament to its relevance and importance in the field of economics. While it may not be infallible, the yield curve serves as a crucial tool that aids economists, policymakers, and investors in their understanding of the overall health of the economy and in preparing for potential economic downturns.