#008 - Heads up! The Yield Curve just inverted.

What is the Yield Curve?

The best leading economic indicator for predicting the US and Global Economy as the Global Economy feels all the ripple effects of the American Economy, the biggest Economy in the world.

If you are in Finance or Real Estate, you need to understand the Yield Curve, how it leads to high unemployment rates, and how it leads to low unemployment rates, and why.

What drives the yield curve to flatten, invert, flatten again, and become normal; Indicating and confirming the Four stages of the economic cycle (Expansion, Peak, Recession, Trough).

The why is the operative component.

The yield curve consists of the 1-month, 3-month, 6-month, 1-year T-Bill rates, 2-year, 3-year, 5-year, 7-year, 10-year T-Note rates, 20-Year, 30-Year T-Bond rates graphed on a plane. See the video below.

When rates are low, the yield curve is normal. Companies take advantage of this interest rate environment to issue bonds to finance Capex to deliver Pro-forma projections and earn high P/E multiples to grow their Equity organically instead of just Share buy-back programs.

Companies also issue short-term corporate debt for Working Capital which they partly use to hire new employees, keeping Unemployment low, this raises inflation, but the Economy (GDP & GNP) grows. Historically when inflation rises to a price where it no longer makes economic sense, the Central Bank Chairman raises rates to lower inflation, but it also slows down borrowing and the Economy.

Companies stop borrowing to expand or re-finance outstanding corporate debt at lower rates, and unemployment rises again. This process flattens the yield curve at first: signaling a recession, then it inverts the curve: confirming a recession.

When inflation drops, The Fed lowers rates again, re-flatening the yield curve: signaling the end of a recession, then the curve becomes normal: confirming a period of economic expansion. Companies again take advantage of this new interest rate environment to expand operations.

In short, this is the never-ending economic cycle.
Historically, Bull markets last 7 years, and Bear markets last 9 months.

More on this concept in the future, but please do your research as this is very interesting and integral to understanding the Global Economy.

Follow for more.

https://www.youtube.com/watch?v=-pauKvkwdcE