World's Most Powerful Economic Indicator Just Gave Extreme Warning Sign
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The yield curve uninversion and banking system unrealized losses indicate a high probability of a hard landing recession in 2024-2025, driven by deteriorating credit conditions in a debt-based monetary system that depends on sustained bank lending.
- U.S. bank unrealized losses ($500-700B) are approaching GFC-era levels, forcing asset sales that convert unrealized to realized losses
- The yield curve is exhibiting a 'bad' bull steepener (short-end falling faster) rather than economic strength, historically preceding recessions
- Money supply contraction (M1/M2 decline—first since Great Depression) reduces lending capacity; combined with debt fixed in nominal terms, this triggers defaults and systemic fragility
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Unrealized losses on bank balance sheets only become economically significant when they become realized losses, which occurs through deposit flight (forcing asset sales to meet withdrawal demands) or rising funding costs on short-term debt that exceed yields on long-term assets.
“no matter how scary this chart looks the unrealized losses don't really matter unless they become realized”
Curve steepening comes in two forms: a 'bear steepener' (long-end yields rise faster, indicating economic optimism and reduced safe-asset demand) and a 'bull steepener' (short-end yields fall faster, indicating economic pessimism and flight to quality), and the current steepening is a bull steepener, which is economically negative.
“there's more than one way we can have a bare steepener or a bull steepener and the two of them give you completely opposite signals about the overall economy... a bare steepener that's when the long end of the curve goes up the yields at the long end of the curve goes up at a faster Pace than the yields at the front end”
In the current debt-based monetary system, money is lent into existence by commercial banks rather than printed by central banks, so the majority of dollars in circulation are bank deposit liabilities created through the loan origination process.
“we have to understand that money nowadays especially the dollar isn't really printed into existence it's actually lent into existence the majority of Dollars around the world are lent into existence this is why you always hear people say we have a debt based monetary system”
When banks reduce lending due to increased risk perception, the money supply contracts, creating downward pressure on the monetary aggregates (M1, M2), which in a debt-based system where debts are fixed in nominal terms leads to defaults as wages and prices fall but debt payments remain constant.
“in that debt-based monetary system if Bank lending goes down then the money supply is also going to go down it's going to put downward pressure on the overall money supply or supply of dollars”
The yield curve has been inverted for over two years, and historically recessions do not materialize until the curve un-inverts (steepens), at which point problems predicted by the inversion manifest.
“the yield curve and we'll focus on the twos and 10 has been inverted for over two years and usually the stuff doesn't hit the fan in other words a recession hard Landing financial crisis Etc until the curve is no longer inverted in other words when the curve starts to un invert that's when you usually see the big big problems”
The modern banking system is fundamentally more fragile than the pre-1950s system because banks are now interconnected to the point where they function as a single aggregate balance sheet, so a failure in one institution cascades to all others, as demonstrated by Long-Term Capital Management's near-collapse in 1998 and the 2008 GFC triggered by only a 2-6% mortgage default rate increase.
“back in the 1800s the banking system was very similar to a bike race where the Riders are spread apart so if one of the Riders let's say gets a flat tire and crashes it doesn't really impact all of the other writers... then in the 1950s the banking system became far more interconnected in fact money itself just became Commercial Bank deposit liabilities... we have a tour to France type of race where instead of the Riders being completely separated now they're kind of bunched up in areas so if one riter goes down it takes out let's say 5% of the other writers”
U.S. bank unrealized losses on balance sheets have grown from approximately $100 billion at their worst during the 2008 global financial crisis to between $500 billion and $700 billion in the present day, indicating the banking system is in the middle of a crisis that is nowhere near the end.
“we're probably around 550 600 and you say oh well George that's no big deal... at the worst point they were right around a100 billion”
Financial institutions like banks reduce lending to the real economy when they perceive abundant opportunities in the financial asset markets (treasuries) to be more profitable than business lending, signaling economic weakness despite apparent financial market strength.
“if the financial institutions we'll go back to the banks using them as an example if they see a lot of opportunities to lend into the real economy because the real economy is doing well then they're not going to buy the safest and liquid assets because they're going to get a better return by lending into the real economy... so instead of buying treasuries they're going to say no no absolutely not I'm going to use that balance sheet capacity to go lend to that business that's creating more goods and services because I'm going to get a higher yield”
George Gammon's base case forecast is a hard landing recession (similar to 2008-2009 GFC severity) rather than a mild garden-variety recession, driven by banking system fragility and the debt-deflation dynamics of a contracting money supply.
“so now we have to ask the question is the probability highest that we will see just a mild Garden variety recession or a hard landing something like we saw in 2008 2009 called a GFC 2.0 o well my base case is we will see a hard Landing for a variety of reasons but one of the main reasons is because of the banking system the monetary system and how money impacts the economy”
The 2-year and 30-year Treasury yields recently converged, with the 30-year (4.46%) trading slightly higher than the 2-year (4.45%), signaling early uninversion of the yield curve, a pivotal moment historically preceding major economic contractions.
“we start off by looking at the two-year treasury which was at 4.45 s% okay well let's look at the 30 year the 30 year 4.46 to so the thir 30-year treasury was trading the yield slightly higher than the 2-year treasury this is massive because it shows us that the yield curve is starting starting to uninverted”
George Gammon is a co-founder of Rebel Capitalist Pro investment membership site with Lynn Alden and Chris McIntosh.
“I'm going to do a webinar in Rebel capitalist Pro this is the investment membership site that I have with my good friends Lynn Alden and Chris McIntosh”
The speaker will be conducting a webinar on Friday at 2 PM Eastern within the Rebel Capitalist Pro investment membership site, where he will present his personal portfolio allocation strategy in response to the economic indicators discussed in this video.
“well unfortunately I can't give you any personal investing advice but what I can do is tell you what I'm I'm doing in my own portfolios so this Friday 2 p.m Eastern I'm going to do a webinar in Rebel capitalist Pro this is the investment membership site that I have with my good friends Lynn Alden and Chris McIntosh and this Friday at 2 p.m Eastern I'm going to be going over exactly what I am doing with my own money my own personal portfolio as a result of everything that we're seeing with not only the yield curve but all these powerful economic indicators”