Yield Curve Inversion: The Beginning of the Great Recession
Yield Curve Inversion: The Beginning of the Great Recession
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One of the charts that has historically been most frequently used to represent a recession is the inversion of the yield curve.
For those unfamiliar with this term, it means that governments offer higher returns on their short-term debt than on their long-term debt. This might not mean anything to you, but it implies that investors, and the market, consider it riskier to invest in your country's debt over a shorter period (1-5 years) than over a longer period (20-30 years).
But, is the inversion of the yield curve really a precursor to a crisis? Let's see below.
As you can see, there always has to be a period of time before the recession occurs. Normally, the charts have a much larger time scale, which makes it seem like the recession occurs at the moment of inversion, but this is not the case.
If you are under 35 years old, your mindset is totally biased by what you have experienced, and you do not understand what this can mean.
Therefore, I recommend to all those who do not know how to manage it, or even those who have been in the markets for many years, to keep reading.
As you can see, and as we have been saying for a long time, it is most likely that in 2024 we will continue to see the liquidity cycle expand and the markets will not suffer major falls. Moreover, as it is an election year, generally, none of the candidates will allow the FED to make any outrageous decisions. This is very different from what many investors have predicted, but as happened in 2023, this should not scare us ('expert' predictions vs reality).
The other day, talking to a professional in the industry, a real expert who loves what he does, he told me that young people are not aware of what a bear market entails.
These young people have never experienced 50% drops or gone through several years (10-20) with flat returns.
Do you not wonder why people aged 50-60 are so risk-averse? Precisely because of what I just described, they have gone through a cycle that many have not.
During these periods, there is a lot of uncertainty in the minds of investors, which can lead them to make very bad decisions, either due to overconfidence and being 100% invested (we have had 15 years of rising markets), or due to total inactivity and having 100% of their wealth in cash.
Ideally, as we have always said, is to be prepared for any event and have a part of your portfolio ready for the unknown.
In this industry, no one is a fortune teller. If someone claims they always predict correctly, they are lying, and don't even believe me. What we do is try to see the macro cycles that occur over and over again, bringing opportunities and the chance to make a lot of money.
As you know, money is just a tool to buy freedom, and that is what we intend to do.
Of all this, perhaps the most important thing is that we must always be prepared for the unknown. Those who have suddenly lost a family member know this, in a second your life changes. This happens in all aspects of your life: personal, financial, professional, sports, ... whatever you do, be prepared for the unknown.
In the markets, the easiest (and safest) way to do this is through options. Obviously, there are many other ways, but you don't have the leverage opportunity that you have with this asset.
Finally, I would like to emphasize that it is never a good time to stop paying for your insurance. Some call it Murphy's Law, but really when you expose yourself to something, there is a possibility that it will happen. Therefore, as a final lesson, always be protected.
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