I'm gonna talk to ya about
one of the warning sings
we're seeing for the
stock market right now.
And ignore the background.
We're in the middle of
renovations right now.
This'll be fixed very shortly.
But I wanna talk to you about
something that's screaming
warnings that the stock market
is in a little bit of trouble
and that we're on the cusp of a recession.
It is the tilting of the yield curve.
You may have heard about
that expression before,
and you may understand
that it is dangerous
for the outlook for the economy.
But, you're not, maybe,
understanding it totally.
I'm gonna tell ya all about it right now.
Check this out.
(sign whirring)
(coins chinking)
(metal clanking)
The way yields on investments
are supposed to work
is that if you invest $1,000 for a year,
maybe you make 2% on that.
These are all really simplified examples,
but just to prove the
point or explain the point.
Say you invest for a year, your money,
then you get 2% on it.
But if you invest for 10 years,
maybe you're getting five, 10, 15 percent.
So, the longer you invest,
the more that investment
should pay off in terms
of the value of the time
that you've put into that investment.
Explained super simply,
the longer an investment is going to take,
in terms of a bond,
the more it should pay.
If you're gonna invest for twice as long,
it should, theoretically,
pay twice as much.
When those longer-dated
payments start declining,
what happens is that that yield curve
of the short-term bonds
compared to the long-term bonds,
flattens out, where you're
not getting more money
from a long-term bond than
from a short-term bond.
And that is typically what's referred to
as a flattening yield curve or
a tilting of the yield curve,
and it can invert, where
you're actually getting
less money for a 10-year bond
than you would be getting
for a one-year bond.
This implies that we are
about to enter a recession,
because a tilting of the yield curve
or an inverting of the yield
curve almost always leads to
or identifies an approaching recession.
So it's not just the amount
of cash you put into,
for example, say, you buy a bond.
Then there's the cash you
put in, and then return
will be a reflection of how
much cash that you put in,
but also, it's gonna be based
secondarily on the time value.
If you're gonna invest
for 10 years, then, yeah,
it should pay off a lot more compellingly
to get you to invest for that long.
Here's the thing.
The tilting of the yield
curve is that longer-term
investments actually are
diminishing in their returns.
So if the outlook for the
longer term is more negative,
but maybe the shorter-term
isn't affected that much yet,
maybe you'll still get one or two percent
on your one-year investment of a bond,
but maybe now the 10-year
bond is only paying 1% or 2%
instead of 10% which you would
typically theoretically expect.
That is the tilting of the yield curve.
Short-term payouts compared
to long-term payouts,
which should be greater,
normalize, or equating more likely,
so that the longer-term bonds
or longer-term interest
payouts are diminishing
in relation to or in comparison to
the shorter-term timeframes.
That's the tilting yield curve.
When that happens, it almost always
precedes a big recession.
It implies that investors are having
a much more negative longer-term outlook.
They're not so confident
in the next 10 years.
There's more uncertainty.
So they're willing to get
less of a return for it,
because they're expecting
the world to go to hell,
so to speak.
So, long story short, what
we're talking about is
there is a tilting of the yield
curve right now, big time.
It's implying there'll be a recession.
It'll probably be a great
warning sign for you
that things may turn around the economy.
As I wrote yesterday, until
I couldn't write anymore,
my hands were completely numb,
for subscribers of PeterLeeds.com,
I wrote the State of the Market report,
and we were talking about the fact
that we could potentially be on the cusp
of a very bad market, beginning very soon,
rather than in 2018 like
anybody else'll tell you.
The point is that there's
people who don't think
that the stock market will ever slow down,
and then there's the people who think
that the stock market
will correct, will crash,
they understand that that's inevitable,
but that they're talking
about: "Oh, maybe in 2018."
The reason that they're doing that,
they're putting it out further and further
they can get away with putting it out,
then the more likely they are to be right.
So you could say, anyone could say
there will be a stock-market
crash the next three years.
You can say that and be right,
and, wow, you're the
greatest person in the world.
But, very few people are
actually expecting it
to happen before the end of this year.
A lotta times what I've learned in my
short but complicated career is that,
two and a half decades,
so it's not that short,
but I've been around since I
was a little kid, basically.
Anyways.
The few decades I've
been in this industry,
leading this business, it's taught me that
when the stock market
does go the wrong way,
when things do go badly,
it is always when no one is expecting it.
If you have your eye on the ball,
then that probably won't be a problem.
If you expect a problem,
you'll probably deal with that problem.
We won't go to war with North Korea.
They're talking about
nuclear war with North Korea
because everybody from here to Malaysia
is watching this situation.
Everybody's watching it.
It's not the fire that gets outta control,
the fire that you're
watching the whole time;
it's the one that you walk away from
that then burns into the tent
and kills all the campground
and a whole bunch of bears
and burns down the local town,
and everyone has to run away and all that.
So, the point is, if there
is a point to this, at all.
You can tell I'm discombobulated
with all this construction around me.
Maybe a worker might wanna walk by
in the background in a second.
But the point is that no one is expecting
a stock-market correction
to happen really soon.
And I still, as I said, back
in, I think it was March,
I said that, "Be cautious
of February this year."
Excuse me, not February.
November.
I was making a joke, "Be
careful on the 5th of November"
because that was a joke
about my favorite movie,
V for Vendetta, where they're like:
"Remember, remember, the 5th of November."
I was like: "Oh, it's the 6th of November.
"You got it wrong, yay!"
Anyways, so, those are the literal idiots
who had to call me out
on the 5th of November.
I said that the date wasn't literal,
the date is based on the movie,
but that we're expecting that,
at this point of the year,
right as we roll into the
very end of this year,
when everyone's distracted,
taking their snowblowers outta the garage
or with sex scandals going on with
all these major Hollywood
people, then they're distracted.
They're watching the wrong things.
No one's got their eye on the ball.
This correction, if it does happen,
and I'm wrong 100% of the time,
if it does happen, it
may happen very soon,
and when it does, I do
believe that it will be
significantly more serious and much longer
than people are prepared for right now.
I'm not hoping this happens.
I am a very optimistic guy.
I make the most money,
my company does the best
if we are optimistic and that we expect
everything to be rainbows
and golden roads.
I dunno, bad analogy.
I don't even know what
I was trying to say.
But, things could get bad
when no one's watching.
Right now, no one's watching.
People are expecting it for next year;
that's why there probably
won't be a crash next year,
but there'll be one before
that, in my opinion,
which is wrong 100% of the time.
I have no idea if any of that made sense
or if any of that helped you, at all.
(chuckling)
Take it easy.
