📈Something Something DANGER ZONE!
The new trailer for Top Gun 2 dropped this week. I know because I’ve had a Google alert set up for anything Top Gun-related since this movie was announced, and, after what felt like an interminable delay, WE’RE F*CKING BACK, BABY. We’re going to talk about finance sh*t but first, just watch the whole thing. Go on, I’ll wait:
GOODNESS GRACIOUS GREAT BALLS OF F*CK YEAH!
Alright, done hyperventilating about TOP GUN 2 (only in theaters May 3). Why bring this up? Cuz, based on that trailer, lots of planes get inverted lots of times and today, we’re talking about an inverted yield curve.
So, we’re going to talk about three things: what is a yield, what does it mean when the yield curve inverts, and why does this matter to you.
First up, yield curve: what is it, why does it matter
A yield curve is a visual representation of the yield offered by bonds issued by the US Treasury Department at different maturities. Under normal circumstances, longer maturity bonds offer more income to compensate the investor for having to wait longer to get their money back.1
Think of it this way: suppose two friends – let’s call them Mav and Goose – ask you to loan them some money. Mav tells you he’ll pay you back in a week while Goose says he’ll pay you back in a year. I’d feel a lot better about the chances of seeing the money again if knowing I’ll be repaid in days instead of months. In the bond market, we attach a number to that confidence in the form of yield. Commonly, longer repayment periods call for higher yields to compensate you for having to wait longer to get your money back.
A healthy bond market reflects an upward-sloping relationship between how long you must wait to be repaid (maturity) and the confidence you will be repaid (yield). The longer you need to wait, the more you should get paid for your patience.
Sometimes though, the yield curve gets inverted. When that happens, the yield goes down on longer-dated loans, which, if that sounds whacky, is cuz it is.
But I mean, what are the odds not everyone comes back?
Much like we have more confidence in Mav paying us back than Goose (RIP), an inverted yield curve means the bond market has more faith in the current economy than the future economy. This is why it has traditionally been an indicator of a recession.
Now, three caveats here are worth mentioning.
It needs to stay inverted (below zero) for at least a month or so to be relevant.
Second, it’s not an instantaneous relationship, like ‘if inverted, then recession.’ It takes around 18 to 24 months before we see a recession.
Third, it’s an awful sell signal. There’s no reason to move out of stocks just because the yield curve is inverted, especially if you’re managing a retirement account. You already know what we’re going to say: use the dip as a buying opportunity to plow more money into the market and ride the recovery back up… not unlike how an F-14 Tomcat might execute a zoom climb after raking the bogey with the Vulcan in a high side gun pass to restore kinetic energy before repositioning for lead pursuit (don’t @ me)
What’s the Upside
An inverted is just one indicator. Granted, it’s a reliable one, but it is just one indicator. It matters because it’s an indication of the health of the bond market, which is, at its core, about how orderly money changes hands in the economy. Healthy bond market, healthy lending. Inverted bond market, not so healthy lending. The market isn’t going to take your breath away on the highway to danger zone. Not yet.
HIT IT KENNY!
(watch to the end)
For Your Weekend
Our round-up of essays, podcasts, and streaming shows to check out over your weekend. We cast a wide net so you don’t have to.
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Morbius Is A Portrait of a Very Annoying Weirdo by David Sims (The Atlantic)
Indisputably, our cinemas are clogged with superheroes. Griping about a trend that’s just a Hollywood fact of life is almost trite, but in the case of Morbius, the dark and gloomy Jared Leto vehicle finally making it to theaters this weekend, I have to register a complaint. Morbius, a “living vampire” who can fly and has super-strength and -reflexes, is the least helpful superhero I have ever seen in a movie. He causes many problems, resolves almost none of them, and at no point does anything particularly altruistic.
Every Ben Affleck Performance, Ranked by Derek Lawrence (The Ringer)
With the release of Deep Water—the erotic thriller that neither Affleck nor Ana de Armas will ever acknowledge the existence of—it’s the right time to go full accountant and crunch the numbers to rank every single Affleck performance. To be clear, this will be an examination of the actor’s performance, not the movies overall, which means Pearl Harbor—as a very, very hypothetical example—could be higher than expected! But most of all, assessing what Affleck has done with each of these performances should forever prove how baffling it is that this winner of Best Original Screenplay and Best Picture has never been nominated for an acting Oscar. Good hunting to us!
Watch:
Image: The Ringer
UNC vs. Duke (TBS)
From SI.com
You might have heard by now that Duke and North Carolina are playing this weekend. It’s also possible that you heard these two storied programs are rather heated rivals that are playing in the NCAA tournament for the first time ever in Duke coach Mike Krzyzewski’s final game. It’s kind of a big deal.
Chuckle:
Since these bonds are issued by the US Treasury Department, we’re going to assume there’s no repayment risk