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There are not many reliable stock market indicators out there. Some work some of the time. There is one however that has a far more reliable history: the interest rate inversion.

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Part of the reason that an inversion is such a strong signal is that when bank assets (longer-duration loans) generate less income than bank liabilities (short-term deposits), the incentive to make new loans dries up along with the money supply. And when asset bubbles are starved of that monetary fuel they burst. The severity of the recession depends on the intensity of the asset bubbles in existence prior to the inversion.

So the yield curve has not yet inverted, but it increasingly looks as if it will in the near future.

Are assets, stocks, overvalued? Not the easiest question to answer as there are so many different valuation methods that one can use. My money would be on a drawdown though. Markets don’t move in only one direction forever. They may move far further, for far longer than any rational explanation can explain, but at some point the ride is over.

The good thing about an inversion signal is that it generally gives you advance warning and time to act.

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