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Me when I say “Internet capital markets” instead of meme coins https://t.co/XR9tdmGBds
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Me when I say “Internet capital markets” instead of meme coins https://t.co/XR9tdmGBds
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Offshore
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EndGame Macro
The Curve Has Turned And The Clock Is Running
At its core, this is the yield curve…the gap between long term and short term borrowing costs. Most of the time, longer money pays more. When it doesn’t and when short term rates rise above long term ones the bond market is signaling something fundamental: policy is tight, credit is under pressure, and the economy can’t live like that indefinitely.
That inversion isn’t a timing tool. It’s a pressure gauge. It tends to show up when borrowing costs bite, lending standards tighten, and growth starts to strain. Historically, recessions don’t begin the moment the curve inverts, they usually follow 6–18 months later, with about a year as a rough midpoint. That’s why the gray recession bars almost always show up after the curve flips, not at the moment it does.
Why The Resteepening Isn’t A Victory Lap
This is where people often misread the signal. The 10Y–3M curve turned positive again in late December 2024, after being inverted since late 2022. To some, that looks like confirmation that the danger has passed. Historically, it’s often the opposite.
Before the 2008 financial crisis, the curve inverted in 2006, then began to resteepen as the Fed started easing. Stocks didn’t collapse at inversion. They cracked later when the underlying economic damage showed up in jobs, housing, and credit. The curve didn’t prevent the downturn. It warned that the stress phase had already done its work.
That’s usually what an exit from inversion means. The pressure period has already happened. The lagged effects are now in play.
There isn’t a clean, universally cited uninversion hit rate the way there is for inversion. It depends on which spread you use, how you define the exit, and whether you look at monthly or daily data. Still, the record is clear that many recessions begin during or after the resteepening phase, because that phase typically reflects the Fed easing into weakening growth. A simple way to put it is that it works more often than not, but it’s not flawless or guaranteed. Conceptually, something like 70% probability with wide error bars is reasonable. The mechanism matters more than the exact number.
Why COVID Complicates The Stats
COVID muddies the clean math because it was a non economic shock that caused an instant recession and forced policy to move faster than any normal cycle. The downturn didn’t arrive after a long credit grind, it arrived via a shutdown. At the same time, the Fed responded immediately and aggressively, compressing the usual lag between inversion, uninversion, and recession. That makes 2019–2020 harder to use as a textbook example, even though the underlying signal still worked.
Where That Leaves Us Now
This isn’t a future risk anymore, it’s the phase we’re in now. Historically, when the yield curve exits inversion, the economy doesn’t reset; it absorbs the damage with a lag. The stress doesn’t vanish, it shifts forward, and from here the risk tilts into 2026 rather than back toward 2024.
Using the late 2024 uninversion as the reference point, we’re already in the historical risk window. With the front end of that lag behind us as 2025 ends, a longer cycle would shift the stress into 2026.
My Takeaway
The curve is telling you the system has shifted from restriction toward relief and relief usually arrives for a reason. If this were a truly healthy expansion, the curve would be steepening because long term growth expectations were rising, not because short term rates are expected to fall.
So when people point to this chart and say, “see, things are improving,” I’d push back gently. What it’s really saying is that tight policy has already done its job, stress has built beneath the surface, and the economy is now moving through the lagged phase. Historically, that phase doesn’t arrive because everything is fine, it arrives because something is starting to bend.
tweet
The Curve Has Turned And The Clock Is Running
At its core, this is the yield curve…the gap between long term and short term borrowing costs. Most of the time, longer money pays more. When it doesn’t and when short term rates rise above long term ones the bond market is signaling something fundamental: policy is tight, credit is under pressure, and the economy can’t live like that indefinitely.
That inversion isn’t a timing tool. It’s a pressure gauge. It tends to show up when borrowing costs bite, lending standards tighten, and growth starts to strain. Historically, recessions don’t begin the moment the curve inverts, they usually follow 6–18 months later, with about a year as a rough midpoint. That’s why the gray recession bars almost always show up after the curve flips, not at the moment it does.
Why The Resteepening Isn’t A Victory Lap
This is where people often misread the signal. The 10Y–3M curve turned positive again in late December 2024, after being inverted since late 2022. To some, that looks like confirmation that the danger has passed. Historically, it’s often the opposite.
Before the 2008 financial crisis, the curve inverted in 2006, then began to resteepen as the Fed started easing. Stocks didn’t collapse at inversion. They cracked later when the underlying economic damage showed up in jobs, housing, and credit. The curve didn’t prevent the downturn. It warned that the stress phase had already done its work.
That’s usually what an exit from inversion means. The pressure period has already happened. The lagged effects are now in play.
There isn’t a clean, universally cited uninversion hit rate the way there is for inversion. It depends on which spread you use, how you define the exit, and whether you look at monthly or daily data. Still, the record is clear that many recessions begin during or after the resteepening phase, because that phase typically reflects the Fed easing into weakening growth. A simple way to put it is that it works more often than not, but it’s not flawless or guaranteed. Conceptually, something like 70% probability with wide error bars is reasonable. The mechanism matters more than the exact number.
Why COVID Complicates The Stats
COVID muddies the clean math because it was a non economic shock that caused an instant recession and forced policy to move faster than any normal cycle. The downturn didn’t arrive after a long credit grind, it arrived via a shutdown. At the same time, the Fed responded immediately and aggressively, compressing the usual lag between inversion, uninversion, and recession. That makes 2019–2020 harder to use as a textbook example, even though the underlying signal still worked.
Where That Leaves Us Now
This isn’t a future risk anymore, it’s the phase we’re in now. Historically, when the yield curve exits inversion, the economy doesn’t reset; it absorbs the damage with a lag. The stress doesn’t vanish, it shifts forward, and from here the risk tilts into 2026 rather than back toward 2024.
Using the late 2024 uninversion as the reference point, we’re already in the historical risk window. With the front end of that lag behind us as 2025 ends, a longer cycle would shift the stress into 2026.
My Takeaway
The curve is telling you the system has shifted from restriction toward relief and relief usually arrives for a reason. If this were a truly healthy expansion, the curve would be steepening because long term growth expectations were rising, not because short term rates are expected to fall.
So when people point to this chart and say, “see, things are improving,” I’d push back gently. What it’s really saying is that tight policy has already done its job, stress has built beneath the surface, and the economy is now moving through the lagged phase. Historically, that phase doesn’t arrive because everything is fine, it arrives because something is starting to bend.
tweet