Here’s what rising inflation and an inverted yield curve mean for the market.
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Are we headed toward a recession? In many economic circles, experts look toward the inversion of the yield curve as an indicator of a recession during the next 12 to 18 months.
What’s an inverted yield curve? Simply put, this occurs when long-term interest rate projections from the 10-year bond are higher than short-term interest rate projections from the two-year bond. An inverted yield curve is when the short-term rate becomes higher than the long-term one.
In the last few months, we've seen the spread between the two narrow. If we continue to follow that trajectory, the yield curve will invert, signaling a recession in the next 12 to 18 months. If you look at the graph in the video above at 1:08, an inverted yield curve has predicted the past seven recessions.
How did we get here? Back in 2018, the yield curve temporarily inverted, but all of a sudden, COVID hit, and the government started pumping tons of money into the economy while artificially lowering interest rates. Now the problem is inflation; it’s getting out of hand. How does the Federal Reserve handle inflation? They increase short-term interest rates.
I believe that the inverted curve is not as much of an indicator but the cause of recessions. We give our Fed members way too much credit. In the lens of history, they’ve made some of the worst financial decisions ever, regardless of which party is in charge.
"The Federal Reserve handles inflation by increasing short-term rates."
I look at the U.S. economy as steering the largest ocean vessel in the world. If you’ve ever seen Titanic, you know it takes forever to make a turn. It’s not like you’re driving a jon boat that you can turn on a dime. The Fed keeps raising rates without realizing that those results will only be seen later down the road, and it will eventually shock the economy into a one-to-three-year recession.
What does this have to do with the housing market? Sometime in the next year, we’ll see things start to cool. I don’t think we’ll see prices go down because inflation is too high, but we may see home values start to stagnate. This presents a great opportunity for home sellers to cash in on their equity and get out of the market. It’s also a great entry point for buyers because, during inflationary cycles, real estate historically keeps pace with rampant inflation just like gold and other commodities do.
In the long-term, I think we’ll see a significant increase in prices over the next few years. If you have any questions for me about inflation, the inverted yield curve, or anything else I discussed in today’s blog, don’t hesitate to reach out via phone or email. I look forward to hearing from you soon.