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Does this line predict America鈥檚 next recession? - YouTube
Channel: The Economist
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this graph makes a lot of people nervous
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why it appears to predict that America
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is about to go into a recession it's
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based on an economic indicator called
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the yield curve so if you care about the
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economy you should probably care about
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what's going off with the yield curve
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that's Alice Fullwood The Economist's
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Wall Street correspondent and the reason
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people get sort of so het up about this
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is that each time the yield curve has
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inverted it has immediately preceded a
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recession in America in fact only on one
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occasion in the last 70 years has there
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been a false alarm and here's the thing
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inverted in March of this year so what
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is it about this curve that seems to
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make it such a good indicator of where
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the economy is heading the lion
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illustrates the return or yield
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investors get from investing in
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government bonds from short-term
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investments on the left to longer-term
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ones on the right
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usually the longer the time frame the
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higher the interest rate as investors
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demand a bigger return if they're to
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lock their money up for longer however
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if investors fear the economy is slowing
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down then the long-term rates can drop
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below short-term rates the curve inverts
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so when the yield curve inverts
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something strange is going on here's why
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when the outlook is gloomy investors are
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more likely to buy safe assets like
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long-term bonds pushing their price up
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so the interest rate for holding them
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falls higher bond prices are also a
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signal that there are fewer exciting
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investment opportunities elsewhere such
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as the stock market of course there are
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plenty of other indicators you could
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look at to get a sense of what's
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happening to the economy a lot of people
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look at the stock market survey data so
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you can go out and ask businesses what
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they feel you can look at consumer
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behavior you could also look at sort of
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various metals prices like if copper
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price is a very high copper is an
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industrial metal it implies that lots of
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manufacturing companies are buying
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copper to make goods
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then there's the rate of change in
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unemployment which correlates closely
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with recessions and even monitoring the
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number of times that newspapers
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published the word recession can help to
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anticipate a downturn but bear in mind
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that when you're trying to predict a
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downturn you're often trying to get a
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read on people's expectations of where
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the economy is heading which is why that
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curve is so useful
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everyone invests in the US Treasury
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market from the Chinese central bank to
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pension funds in Canada and Europe hedge
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funds in America everyone is exposed to
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and invests in the US Treasury market so
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if you're looking for an aggregate
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opinion of everyone in the world what
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they think might happen to the US
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economy and by extension the global
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economy you'd be very hard for us to
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find something more important to look at
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than the Treasury market and the yield
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curve but these are extraordinary times
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for the US economy which is always a
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dangerous thing to say but it really
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could be different this time the US
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economy has undergone a lot of very
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experimental and sort of extraordinary
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monetary policy over the last 10 years
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in particular people highlight
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quantitative easing quantitative easing
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was a policy to stimulate the economy
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after the 2008 financial crisis whereby
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the Federal Reserve bought Treasuries to
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reduce long-term interest rates some
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experts believe it's distorted the yield
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curve and some people argue that that
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that means that longtime interest rates
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can't quite signal what they used to in
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the past they're no longer this sort of
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clean look at what investors are
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thinking about growth and inflation
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because quantitative easing and that
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process has sort of systematically or it
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sort of fundamentally changed what
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long-term interest rates show you
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so should investors worried about the
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inverted yield curve well you can debate
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whether the yield curve inverting in the
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u.s. in March of this year necessarily
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means that there'll be a recession in
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the US soon what you probably can say is
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that it's not a great signal that growth
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next year will be will be strong the
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flattening that's taken place over the
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last year suggests that growth should
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slow from 3 percent next year to 2
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percent in other words predicting
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America's next recession just got a
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little harder but the indicators are
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starting to flash red
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