 Good day, fellow investors. I hope you're doing great today because we are going to discuss something today that's not doing that great at the moment and that's the yield curve. We're going to explain what is the yield curve, how it affects the economy, how it forecasts precisely a recession and what to do about it. So the yield curve is a line that shows on the x-axis we have treasury maturities for the US in this case from one month, three months, six months, one year to 30 years. And the green line is the yield curve from 2015 where the yield for short-term maturities was 0.25% and going into 30 years was around 2.5 to 0.7%. Now two and a half years later we have short-term maturities yielding from 1. something to 2% and the long-term yield on the 20 year, 30 year bonds haven't changed much which you can see that the yield curve is flattening. So it was steeper two years ago now it's becoming flatter and flatter. The black line is from February of this year and the blue line is from April 9, 2018. What the yield curve is practically showing is the borrowing cost for the US government or for any other government company whatever it shows the cost of borrowing money spread across different maturities. The yield curve can be flat inverted or steep. You see here the gray line is a steep yield curve and that's usually the curve at the beginning of an economic cycle. Then the curve flattens and that's usually the curve at the end of an economic cycle. In this case the gray line is 2010, April 2010 and the flat line is January 2007. What happens? A steep yield curve is usually at the beginning of an economic expansion. Investors fear future higher inflation and demand a higher return for the long-term but the central bank still keeps short-term rates low. Thus the yield curve is steeper. A flat yield curve shows that long-term investors are willing to take an equal yield as short-term investors in order to lock in the yield for the long-term. This means they are expecting lower yields in the future and historically it has been the case that economic recessions follow a flat yield curve. If we deduct the two-year treasury yield from the 10-year treasury yield and check for recessions in the past we can see that a flat curve or inverted curve when the 10-year treasury yield is lower than the short-term two-year treasury usually isn't a good sign as it leads into a recession. Here you can see it with the tightening cycles when the Fed starts increasing rates the blue line you can see that sooner or later the curve flattens, inverts and then you have a recession following. In the past nine occasions from 1960 each time the yield has inverted we are not there yet but if the Fed continues to increase interest rates up to 3% we might see an inverted yield curve soon even this year and whenever that happened in the last 70 years there has been a recession in the following six to 24 months. The Federal Reserve Bank of San Francisco recently published a research putting all this into a statistical model showing that the yield curve is very accurate and when you attach it to valuations you can see that the current level has passed the critical threshold for a point of no return for a recession. Of course we are not there yet and many say that this time is different and that's the most dangerous words you might hear when investing. This time is different they say that the current yields are very very low and that the increases in the yield will not dampen the economy will not be a burden to the economy and we won't see what happened nine out of nine times in the last 60 years. I'll leave the decision to you whether we'll see a recession coming soon probably if the Fed increases interest rates three times in 2018 then 2019 we'll probably see an inverted curve and then six to 24 months you have a recession but the market is already anticipating that. So what to do? Well a recession is not something you want to hear especially if you're long stocks but after nine years of a bull market it's normal it's natural it's cyclical and remember a stock market crash is bad for those who are long but it's a great opportunity for those who patiently wait. Stay in cash take the 2% yield as we have seen short-term yields are rising and then start buying on the downturn in the downturn on the chip. So it's always weighing something hedging yourself be prepared if so if you are 100% long or even more than that stocks understand that the yield is that understand that the yield curve is flattening which increases the probability of a recession and whatever comes next stock market crash etc etc tomorrow we'll discuss the psychological preparation for a stock market crash how to be prepared what to do because what you think you will do now might be very very different when you actually feel the pain of a stock market crash. Thank you for watching looking forward to your comments what do you think about the yield curve will it predict correctly the recession again like it did in the past or this time is different see you in the next video