Inverted Yield Curves & Recession

In the Reeds report we did yesterday, we talked about how the yield curve in the United States and around the world is inverted. In fact, last month, I put out a chart that showed this was the one key indicator in the world and it was that basically all the yield curves in the world were inverted. The short term interest rates are higher than long term interest rates. What happens when we have an inverted yield curve is banks have no incentive to lend money. Lending stops, and when lending stops, businesses have a difficult time accessing credit. In the end, because businesses have a difficult time accessing credit, the economy usually slides into recession.

In the past year, we have a Federal Reserve and central banks around the world that are raising rates rapidly. They were very, very far behind, so they've been raising rates rapidly to try and get inflation under control. As a result, what's happened is shorter term interest rates and our favorite measurement is what we call the 210 yield curve. This is the interest rate over a two year note over the 10 year note. One of the things that we can see is that the 210 Yield Curve is inverted and so is the three month 10 year yield curve, and now is inverted, it's getting steeper and steeper. What this means is a two year interest rate is greater than a 10 year interest rate. When this happens, lending gets cut off, and it leads to recession. Typically, stocks don't bottom until the yield curve steepens above 100 basis points. That means that the ten year note, it's gotta go 1% over the two year note to basically indicate that stocks will bottom. While the yield curve is actually going the opposite way, it's actually getting steeper. The steeper it gets, the more likely we're going to have a recession. The steeper against the more likely the stock market is going to break. Mark does amazing work at this. You can see this in the report.

What this shows here is this shows it CPI, which is basically the standard measurement for measuring inflation in the US economy, versus the level that Fed Funds peak at. Fed funds is the overnight borrowing rate for banks. If we look here, what we see is that every tightening cycle, over the last 50 years, the Fed Funds peak went over CPI. Over CPI, but if we look at it right now, it's currently 3% under. That means the Fed needs to raise at least 4%. Now, inflation could come in and that's one of the things that people are banking on that inflation is going to come in faster than the Fed needs to raise, but if we look at last year, look at last year, last March, the Fed was 8% behind. 8% and they're catching up, but they’ve still got a long ways to go. Now, one of the things that we're seeing, for example, is the Conference Board measurement of us leading indicators, six months change is collapsing. We've never seen this collapse and not every recession and we can see if we do in fact, have a recession, the stock market has gone a lot further to go lower.

This is one of our key things that we're looking at for 2023. How much do the Fed needs to raise rates and the market is not agreeing with it, so there's a big disconnect. Is the Fed going to keep raising or is the market going to catch up? Is the Fed going to stop? Is the market going to catch up? There needs to be a conversion of some sort, the question is how will it happen? This is a key question for this year. We're seeing so many signs that we're headed for recession and that the market ultimately is going to go lower. Now the market can do anything it wants to do short term, this is something that we're watching for. I actually believe stocks will go lower this year, but I believe they're going to do so in a choppy fashion. So there'll be new lows versus 2022, but I'm not convinced to stay down and a lot of it is going to depend on what the Fed does. One thing we believe is that if the Fed raises, there's a scenario out there that they raise too far too fast and then there's a shot. There's some kind of economic event that shocks the economy and makes the Fed pivot very, very quickly. This is really, the likelihood of this is high, because we have so much debt in economy. As we raised interest rates, somebody is gonna get caught, somebody's going to have a major problem, because there's just too much debt and that could cause this sharp reversal on rates.

I'll be talking more about this next week, but I encourage you to do your own study on this and what are you going to do if we go into recession this year? We can't just bury your head in the sand and hope it doesn't happen or hope that the fed's gonna save us. If this happens, are you ready? Are you ready? Tune in next week when I'll share more tips with you like we talked about this week to help you take your performance to elite level. I'll see you next week. God bless. Bye.