Every financial mania in human history ended in financial collapse and this one won't be different in that regard. It will be different because this is bound to be a secular financial collapse, short nominal rates having been driven to zero, rather than just another interim collapse like 2000 and 2008. If history is any guide that means the better part of three decades will pass before valuations recover in inflation adjusted terms. You cannot buy and hold through a secular financial collapse.
For those who act ahead of the masses tangible assets offer refuge, particularly liquid tangibles (i.e. precious metals).
Hi Lau. Thanks for another great article. I really appreciate the way you educate us. Why does un-inversion cause a recession? Or is this the difference between causation and correlation?
So, the un-inversion in and of itself doesn't really cause the recession. They're both effects of the same thing: the Fed's rate manipulation eventually breaking the real economy.
It goes roughly like this. The Fed hikes to clean up the inflation mess it created in the first place. Those hikes hit the economy with a lag — credit tightens, delinquencies climb, businesses fail. Eventually the damage forces the Fed to cut. When it does, the 2-year drops faster than the 10-year, and the curve un-inverts.
The same damage produces the recession. So un-inversion and recession arrive together - not because one causes the other, but because they're both symptoms of the same Fed-made cycle breaking.
So, the bigger point here is that the boom-bust rhythm on that chart isn't a feature of the economy. It's a feature of central banking.
It's the old pushing on a string thing. Distortions caused by previous monetary ease result in inevitable collapse even as central banks push rates lower in an attempt to prevent collapse.
I think NBER are sleeping. I remember there were complaints about them being unwilling to claim a recession happened during the 1998 inversion, but they may have been right.
Great chart and insightful data, thank you!
A timely reminder as I had heard this before but forgotten it.
Possibly related: 2025 Q4 GDP was already revised down to 0.5%.
https://apnews.com/article/economy-gdp-jobs-iran-dcb9dbdea745ddf15bea9b8f79ee308c
Thanks, Lau. Hope I'm positioned well enough.
Every financial mania in human history ended in financial collapse and this one won't be different in that regard. It will be different because this is bound to be a secular financial collapse, short nominal rates having been driven to zero, rather than just another interim collapse like 2000 and 2008. If history is any guide that means the better part of three decades will pass before valuations recover in inflation adjusted terms. You cannot buy and hold through a secular financial collapse.
For those who act ahead of the masses tangible assets offer refuge, particularly liquid tangibles (i.e. precious metals).
Great lesson, insights.
Hi Lau. Thanks for another great article. I really appreciate the way you educate us. Why does un-inversion cause a recession? Or is this the difference between causation and correlation?
Hi Karen - good instinct.
So, the un-inversion in and of itself doesn't really cause the recession. They're both effects of the same thing: the Fed's rate manipulation eventually breaking the real economy.
It goes roughly like this. The Fed hikes to clean up the inflation mess it created in the first place. Those hikes hit the economy with a lag — credit tightens, delinquencies climb, businesses fail. Eventually the damage forces the Fed to cut. When it does, the 2-year drops faster than the 10-year, and the curve un-inverts.
The same damage produces the recession. So un-inversion and recession arrive together - not because one causes the other, but because they're both symptoms of the same Fed-made cycle breaking.
So, the bigger point here is that the boom-bust rhythm on that chart isn't a feature of the economy. It's a feature of central banking.
Hope this helps.
Thanks for your clarity Lau. It is greatly appreciated.
No prob!
It's the old pushing on a string thing. Distortions caused by previous monetary ease result in inevitable collapse even as central banks push rates lower in an attempt to prevent collapse.
I think NBER are sleeping. I remember there were complaints about them being unwilling to claim a recession happened during the 1998 inversion, but they may have been right.