Name: The chart that predicts recessions
Uploaded: 2019-10-03T18:05:06.000Z
Duration: 3 min 53 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

Automobile production dropped 37 and a half percent.

Adverbs of manner

If you were looking at a very    specific type of line.

You see, normally, this line points slightly upward — like here, in September 1977.

But about a year later, it started pointing the other way, just slightly!

This line is called the “yield curve.”

And that's why some experts freaked out when this happened ...

A bond is basically an agreement saying: If you lend the federal government, say, a hundred

dollars... … they'll pay you interest while they hold

onto your money... … until the date they agreed to pay you

And the longer you let the government keep your money, the higher the interest rate.

Next you need to understand that most people don't buy bonds from the government.

They buy and sell them from each other, in the secondary market.

And the prices change, based on how much demand there is for a bond.

This basically means that the amount of profit you can make on each bond changes every day.

Trace these bars on any given day, and you get a curved line, showing the yields of different

bonds — or what people call "the yield curve."

Now here's where it gets even more complicated.

Let's say you're an investor... and you have a hunch that an economic downturn

If your hunch is correct, that means that if you buy a two-year bond, you might get

your money back in a bad economy, and there might not be anything good to re-invest in.

That makes a two-year bond a lot less attractive to you.

And if lots of other people think this way, then the demand for two-year bonds plummets.

But because the two-year bond now costs less, it yields a better return, relative to that low cost.

And at the same time, investors who think a downturn is coming might think, I'd rather

invest in a 10-year bond that pays out way later — when I think the economic downturn

And if enough investors are acting on this expectation, the yield on a long-term bond,

which is almost always higher than on a short-term bond, can actually dip lower.

And if you draw that yield curve... … you can see it goes in the other direction.

In other words, when this chart looks like this, it means investors think an economic

downturn is probably coming in the near future.

But when re-design the chart so we can see all the years on a single screen…

… it's pretty safe to say: When the yield curve inverts… it's not a good sign.