The chart that predicts recessions

A crisis of confidence. Automobile production dropped 37 and a half percent. Wall Street reacted very badly. 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! And then not long after that… Boom. The 1980 recession. It happened again a few months later. The line curved downward. Then, boom, another recession. And it happened again in 1988. Again in 2000. And again in the mid-2000s. This line is called the “yield curve.” And that’s why some experts freaked out
when this happened … “A recession warning.” “Inverted yield curve.” “An inverted yield curve.” “Inverted yield curve.” So. What the hell is this line? It all starts with a US treasury bond. 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 back. And the longer you let the government keep
your money, the higher the interest rate. So you get more money. 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.” And normally, it points upward. 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 is coming, in the near future. 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. So they start selling for cheaper. 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 will be over. So that bond gets more popular. But it also gets more expensive. So investors start yielding less money. 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. It inverts. In other words, when this chart looks like
this, it means investors think an economic downturn is probably coming in the near future. And that’s what’s happening now. So, is a recession coming? Not necessarily. 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.

100 thoughts on “The chart that predicts recessions

  1. It takes 18 mos for a presidents policies to take effect. Trump despite calling GW Bush idiotic for Iraq, Trump did GW economic policies on taxes despite how it crashed the economy.

  2. Based on the way the bars look during the recession (they all seem very positive(like this /) it would be wise to invest during a recession, no?

  3. Let’s hope there are national warnings in the future for when trends that matter (like this) happen. Also I’m Canadian so I may be ignorant to wether or not this is already a thing.

  4. So ONE month a a recession is coming!?!?!?!?!?
    From what is saw there was 8 months or more of inversion, then a year to 18 months later a recession!!!!!!!!!!!
    Chicken little and the falling sky!!!

  5. So how does the average joe make money in a recession? Invest! Sad fact but more people invest in a bull market than a bear market. Direct opposite of buy low / sell high. Emotions!

  6. Wait but the yield curve was positive during the 2008 recession so how does it always predict recessions

  7. Hey bud,check out Owen Lucas channel if it is true Christmas came early this year…is Canada. Crimes against humanity….god speed

  8. I don't want to be a negative person here but that'd be great for the housing market in The Netherlands right now. We have way too many people and not nearly enough affordable housing

  9. Leave it to the left-leaning Vox to jump-start a recession through the analysis of empirical data.

    Far better to just make up "facts" and call it a day!!



  10. Funny how when the stock market grows nothing changes for your average American but when it crashes we all lose our jobs and rich people get bailout money

  11. I know Vox is left wing, but even as a right winger, I rely a lot on them for my standard news and information. Really good content and actual quality stuff. Good work.

  12. But why would you sell your bond for less than what you paid for it? Just to have money now instead of later? Even if the return is less, you’ll still get your money back plus interest

  13. If you have an interest in US politics/economics & just 10 mins, I wrote this article: "How To Fix America" by Rahul Shivaram

  14. people have literally been saying this for 3 years now every august actually, in fact the market for me has been going up im almost at my alltime

  15. So, basically, the chart doesn't predicts anything. It only shows to people who don't understand, that other people that do understand, have predicted a recession.
    What I mean, is that presidents don't get alerted from this graphic that a recession is coming. When you see this graphic, the president, the markets, companies, etc. know that there is a probable recession since a considerable time.

  16. It's Bonkers,why would you wish for a recession,won't be happening any time soon.Trump promised and delivered a fantastic economy,this videomis problematic.

  17. I will make a guess: They will talk about the treasury yields, which everyone who made a decent life decision (learn basic economics) will know but everyone else won't.
    Edit: Fixed the word Treasury

  18. This video should be longer. It was so short I had to watch it twice. When referring to yield curve, they are referring to bond yield curve. This measurement isn’t totally accurate because 1982 and 2000 were hardly a recession not to mention the 1982 recession started in 1981. Vox mention these things in their video but they’re so hard pressed on getting their viewers to believe in this measurement being the sole predictor of recessions. The 1982 and 2000 minor economic downturns were hardly recessions especially compared to what occurred in 1988 and 2008. That’s why I don’t like this measurement as being totally prophetic. It’s a good measurement but it’s not fair to compare all economic downturns as equal recessions. Recession is a strong word that should only be used during times like 1988 and 2008. Nobody ever tells themself…you remember that Great Recession in 2001? Nobody.

  19. OK. The curve above 2008 was really pointing upwards. Was that an animation error or was the curve right and the claim wrong? Somethings off there.

  20. Can someone confirm this for me? If a 2-year bond yield is high, the 5-year bond yield is low and the 10-year bond is high, is that classified an inverted yield curve?

  21. If we have the power to predict economic downturns or even recessions, do we have the collective power to make sure it doesn’t happen

  22. Great video, but a couple things that could have been clearer. One is that the longer term bonds (generally) pay out more per year than short term bonds. Not just pay out more overall. Like, a 2 year bond may pay out 2% per year while a 10 year bond may pay out 3% per year. Your graphics made it look more like a 10 year bond just paid out more in total compared to a 2 year bond.

    The second thing is there is no mention of why a longer term bond generally pays out a higher rate than a shorter term bond.

  23. Inverted yield curve reflects investor’s sentiment but it does not necessarily mean there’s a recession in the near term.

  24. This is one of the most misunderstood things in finance. The 2-10 yld is what the financial talking cheerleaders on tv use, the actual prediction indicator found by Prof. Harvey was between the 3mo-10yr staying inverted over 3 mo. and that has been forgotten about on tv, even though it has been inverted since may 2019. Also, it has always taken 400 basis points to kick start a recovery, the US will not have that this time. After the great depression there was a hard stop of interest rates at 0 for awhile until markets shot up, like now after gfc, but the next drop – think double crash, it took WW2 and being the industrial production hot spot of the world 17 years for markets to recover. Could the US, that no longer manufactures a lot, have 3-4 lost decades surpassing japan, I hope not.

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