The Economy


Finance & Economics

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When math meets psychology, we get signals that could mean something or could mean nothing. Historically, when the yield curve inverts, a recession is looming. In layman's terms, the yield curve plots how much can be earned by investing in U.S. treasuries.

As an example, you'd expect that if you're investing in a 10-year treasury bond, you'd earn more than investing in a 2-year treasury bond. After all, you're putting your money away for a longer period of time and should be compensated accordingly, right? But when investors are concerned about the economy, a funny thing happens. They start piling money into long-term bonds for safety. As the demand for long-term bonds increases, so does the price, causing the expected return (yield) to come down. And that's exactly what's happening now. For a brief time, we saw that the 10-year treasury yielded less than a 2-year treasury. Here's the scary part: this inversion has accurately predicted every recession of the last 50 years.

But like I said, when math meets psychology something could mean nothing. The U.S. economy is stronger than it's ever been and is showing no signs of slowing down. Human psychology is a difficult thing to predict, and it's hard to say whether this historically accurate indicator still holds water in a market driven by outrageous headlines and nonsensical worries. So don't let the headlines scare you. Even if we do experience a recession, it's all part of the same old business cycle we've experienced over the past several decades. Nothing new under the sun.
5mo ago  •  4 comments

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