The Inverted Yield Curve Distorting The Financial Markets And Your Portfolio

Sep 11, 2024

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Historically, every time the yield curve inverts, a recession follows, but don't fret just yet, this could be correlation, not causation. Recession tends to follow when the yield curve reverts back to normal after inversion, rather than during the inversion itself. The Federal Reserve's themselves and their actions have impacted the yield curve over the year and shifts in banking behavior can slow the economy. Changes in economic conditions and market behaviors suggest a potential recession is forthcoming, but don't panic yet, you can't predict the market.

Today we discuss...

The inverted yield curve occurs when short-term interest rates exceed long-term rates, which is generally considered abnormal.
The Fed's recent rate hikes caused the short end of the yield curve to increase sharply, resulting in an inversion.
Banks are less likely to lend during periods of an inverted yield curve because lending at a lower rate than they borrow leads to losses.
Changes in how money is created may alter the predictive power of the yield curve inversion as a recession indicator.
Household allocation to stocks has recently hit an all-time high, indicating extreme market complacency.
Fixed income, traditionally seen as a conservative investment, became the worst-performing asset class in 2022 due to interest rate volatility.
Many investors may be unaware of their true risk tolerance, having not experienced significant capital loss since the 2008-2009 financial crisis.
Risk in investing includes not just losing money but also the loss of time, as shown by the S&P 500's negative performance from 2000 to 2013.
Confidence in the American Dream has significantly eroded since 2012, with fewer people believing hard work will lead to success.
Credit card defaults are reaching record highs, surpassing previous peaks seen during the dot-com bubble and the financial crisis.
U.S. government spending is projected to increase significantly, with 87% allocated to interest expenses, Social Security, and healthcare.
Food prices have reached new highs, contributing to financial stress for consumers.
The cost of U.S. federal debt interest has skyrocketed, reaching $1.1 trillion annually, or $3 billion per day.
There is concern that the Federal Reserve is not truly independent, with its actions influenced by government, banks, and other powerful entities.

For more information, visit the show notes at https://moneytreepodcast.com/inverted-yield-curve-641