George Gammon is a successful investor, entrepreneur and macro teacher. He has a gift for explaining complicated financial concepts in a simple way. He recently explained the US Yield Curve Inversion to Robert Kiyosaki. And the Rich Dad Poor Dad author was “blown away” by the central concept. That the US Treasury Yield Curve Inversion is a “Financial Tsunami Warning System”.
Learn from the best. George Gammon explains the US Yield Curve Inversion, what it means, when it will hit and what you can do about it.
Here are a few highlights.
- The US Treasury Yield Curve Inversion is a “Financial Tsunami Warning System”.
- An inverted yield curve predicts that a recession or depression is coming
- Since 1950, the yield curve inversion has predicted almost every recession (12 in total). And in most cases, the financial-economic tsunami hits the shore after the curve is no longer inverted.
- The economic tsunami is predicted to hit in the fall of 2023. Or the Winter, Spring 2024.
Feel free to click through and jump ahead or come on a journey.
Who is George Gammon?
George Gammon stands for freedom, liberty, and free market capitalism. His George Gammon and Rebel Capitalist Youtube channels are fantastic and insightful. He keeps good company with various financial experts such as Rick Rule, Lynn Alden, and Robert Kiyosaki. Gammon has been pounding the table on the US Yield Curve Inversion. It has been largely ignored by the media but it blew Kiyosaki’s “brain apart” in this Rich Dad video.
What is the Inverted Yield Curve?
The Yield Curve is a health check on the economy. It charts the quoted yield (or return) for Government bonds. The Yield Curve can tell us “what is coming next”, which George calls the “Tsunami Warning System”.
Currently, the year curve is inverted (which is bad). This is where we see the two-year Treasury yield is higher than the ten-year Treasury Yield. George explains why this is important.
“If you’re going to lend someone money for 30 years, are you going to charge them a higher or lower interest rate than if you lend them money for three weeks? Well, the answer is it’s going to be a higher interest rate because there’s a lot more risk for the longer term (30 years).”
And he continues…
“When we see the short-term interest rates higher than the long-term interest rates, that’s the economic tsunami warning signal. It is saying “hey, something is really, really wrong”. And most likely, we’re going to have a significant recession or depression in the near future.”
As Gammon explains above, the Yield Curve has inverted. The 2-year is higher than the 10-year and this is an Economic tsunami warning. That yield curve inversion is a signal that the economic tsunami could be 100 miles away. We need to be aware of that signal and also prepare for the impact.
What Does the Inverted Yield Curve Tell Us?
George believes that the inverted yield Curve tells us that the “whole global economy is very vulnerable.” But the real damage happens when the yield curve goes back, as he explains below:
“Once the yield curve has inverted, the next thing to do is to wait for the curve to no longer be inverted. This means the two-year Treasury yield going back down below the 10-year Treasury Yield.”
This is when the Financial Tsunami Warning System should really start ringing, because…
“It means that the tsunami is not 100 miles away. That means that the tsunami is here. 100 feet away.”
If you look at the history of the yield curve, you will see why this is important.
What is the History of the Yield Curve Inversion?
Gammon warns his viewers (and Kiyosaki) about the yield curve inversion. He knows what has happened in the past when the yield curve went from inverted back to not inverted. And it’s not good.
“If you go back to 1950, you see that nine times out of 10, that financial economic tsunami hits the shore after the curve is no longer inverted. So that’s what people really need to focus on.”
Because…
“…When the two-year yield goes back down below the ten-year and the yield curve is no longer inverted… That’s when we usually get the recession or economic depression.”
What is the Impact of the Yield Curve Inversion So Far?
The 2-year and the 10-year treasury yield officially inverted in March 2022. Since that time, the first shockwave has been felt with the collapse of Silicon Valley Bank, the biggest bank to fail since 2008. And other banks such as Signature Bank and Credit Suisse have collapsed. George calls these failures “cracks” in the dam:
“So when the yield curve inverts, meaning the yield on the two years is higher than the 10 year… that’s the financial system warning us that there’s a big problem. And this financial tsunami is coming at the shore very, very quickly. So it’s not there yet.”
But when is it likely to hit?
When Is the Financial Economic Tsunami Likely to Hit?
We know the warning system has been sounded, but when is the economic tsunami likely to hit? George believes that based on the inverted yield curve…
“…we are most likely to feel the impact “going into the fall of 2023. Or the Winter, Spring 2024.”
What Happens If the Fed Cuts Rates?
Gammon believes that the Federal Reserve (The US banking system) will start dropping rates at some point. And this is when the yield curve will likely revert back to normal. However, Gammon warns us not to celebrate when this happens. Although we all want interest rates to be low, when rates are dropped very quickly, we still need to be vigilant with a likely scenario that will be played out in mainstream media.
“The Fed came in, they saved the day, they’re dropping rates back down to zero, we’ve got nothing to worry about. We were going to have a recession and now we’re not…“
Because that is when “it” hits the fan…
“…and then that’s when that wave is going to impact the shore. And for those people who aren’t prepared, that’s when they’re going to get financially destroyed.”
When the Fed Cuts Rates – Beware of Free Fish
Kiyosaki adds his own angle to the “Financial Tsunami Warning System”. When the Fed drops rates, people will celebrate that “Inflation is over, happy days are here again”. But Kiyosaki grew up in Hawaii and experienced two tsunamis as a boy. And he recounts the story:
“Before the wave hits, it has to suck all the water out of the bay. And what happens then, all these fish are jumping around out there because all the water is gone. And all the Yo-Yos go running out to catch the fish. Then the wave hits them and tears everything apart…”
And Gammon weaves this into his Tsunami analogy…
“Don’t go chasing the free fish. The parallel is when you’re talking about that water going out. And the people think that’s free fish. That’s the Fed dropping rates because when the Fed drops rates, most likely people are going to be Oh great. That’s free fish. I’m gonna go buy stocks. I’m gonna buy all these risk assets and get rich… and it takes them out.”
But it’s not all doom and gloom, as Gammon goes on to share some good news, and how he’s preparing for what is coming.
How to Prepare for the Financial Tsunami
With a warning system in place, Gammon believes that we just need to pay attention and “head for the hills” and wait. After the tsunami hits, that’s when you can be in a good position to consider new opportunities at a very low price.
“Don’t chase the fish. Make sure you’re up in the hills. Right. So that’s what I’m doing in my portfolio. It’s not all in cash, but I have the largest cash position in T bills and gold and I’m just waiting for the Fed to start dropping rates… not so I can buy.”
“I know that that’s really when I need to get ready with my watch list. Because I’m going to try to do my best to take advantage of the opportunity that this crisis will present. And, again, the good news is that the larger the crisis the larger the opportunity.”
Notice Gammon says “Not so I can buy” when the Fed starts dropping rates. He believes in patience, having a well-researched watchlist and not rushing in for any deal. He’s looking for the best deals.
Final Thoughts
George Gammon is a fantastic teacher of macroeconomics. His YouTube channels deliver daily insights into the macro world that can give you an edge. He covers news and information that mainstream media won’t touch. And he has access to the brightest minds in economics. Subscribe to his channels and be blown away. Just like the granddaddy of financial education, Robert Kiyosaki was. And remember, don’t chase the fish.
For George Gammon’s latest video on “the Recession Countdown” and the inverted Yield Curve, follow the link. Another fantastic example of explaning what no one else is talking about.
Let me know what you think and drop a comment below. Or take a look at my review of Robert Kiyosaki’s latest book The Capitalist Manifesto. It’s a great read.
M. Moneyman
FAQs
George Gammon also gave a fantastic explanation of the Tsunami Detection System. It is included here for context and because it was a great explanation to set up his tsunami analogy and story.
What is a Tsunami Detection System
George Gammon uses an example of a Tsunami Detection System to paint a perfect mental picture of the inverted yield curve. When the detection system goes off, something is coming you just don’t know when or where it will hit. As Gammon explains simply:
“We know that a tsunami when it’s way out at sea is this powerful force that’s coming at land at 100 miles per hour. You can’t see it. They can go right under a boat and they wouldn’t even know.
But what happens is there are these detection buoys. Advanced countries have them 100 miles out offshore. They can feel that force coming toward the shore. And so then it sends a signal up to a satellite. That signals the scientists that are on the shore to warn the general public.
They don’t know exactly when it’s going to hit. They don’t know where it’s going to hit or how it’s going to play out. But they just know this thing is headed at you at 100 miles per hour.
That is basically what the yield curve does for us.”
