Inversion
US02Y/US10Y Uninversion & RecessionsThe dynamics of the US Treasury yield curve, particularly the spread between the 2-year and 10-year yields (US02Y/US10Y), have long been studied as potential indicators of economic health. One phenomenon that garners significant attention is the inversion and subsequent uninversion of this yield curve. Lets delve into what these terms mean, their historical significance concerning recessions, and how investors might interpret these signals.
What is the Yield Curve?
The yield curve is a graphical representation showing the relationship between interest rates and the maturity of US Treasury securities. Typically, longer-term bonds have higher yields than shorter-term ones due to the risks associated with time, such as inflation and uncertainty. This normal upward-sloping curve reflects investor expectations of a growing economy.
Yield Curve Inversion
An inverted yield curve occurs when short-term interest rates exceed long-term rates. Specifically, when the yield on the 2-year Treasury note surpasses that of the 10-year Treasury bond, it suggests that investors expect lower interest rates in the future, often due to anticipated economic slowdown or recession.
Historically, an inversion of the 2-year and 10-year yield curve has been a reliable predictor of upcoming recessions. Before the last several recessions, the yield curve inverted approximately 12 to 18 months prior.
An inversion indicates that investors are seeking the safety of long-term bonds, driving their prices up and yields down, due to concerns about future economic conditions.
Uninversion refers to the process where the inverted yield curve returns to a normal, upward-sloping shape. While an inversion is a warning sign, the uninversion phase can be even more critical.
In many cases, recessions have followed shortly after the uninversion of the yield curve. This occurs as the Federal Reserve may begin cutting short-term interest rates in response to economic weakness, causing short-term yields to drop below long-term yields again.
The uninversion can signal that monetary policy is shifting in response to economic stress, potentially validating the recessionary signals that the initial inversion suggested.
The uninversion of the US 2-year/10-year yield curve is a critical event that has historically preceded economic recessions. By understanding this phenomenon and considering it alongside other economic indicators, investors can make more informed decisions. It's important to approach such signals with a comprehensive analysis and a prudent investment strategy that aligns with individual financial goals and risk tolerance.
2yr Yield - FEDFUNDS "Inversion"Over the past ~25yr, we've seen 3 instances of 2yr Yield dropping below the FEDFUNDS rate set by the Federal Reserve.
All 3 instances coincide with Recessions.
On this chart, you see the Yield Differential (Yellow), the SPX (Candles), along with the time of said "Rate Cycle Inversions" (Blue Bar Counts Below Price).
As you can see, all 3 previous instances lead to significant corrections and/or volatility with notable downside.
Not since the 2008 "GFC" have we seen an "inversion" of this magnitude. While correlation is NOT causation...It can be a "warning light" signaling 'Danger Ahead'. It is certainly forewarning us that the probabilities of a recession/down-turn are gaining momentum.
Yes, people have been calling for Doom n Gloom, "Top is In", Recession imminent... for a couple years now. And I am not recommending you sell everything and hide under a rock. What I am recommending however, is that you reduce leverage if you have any, perhaps lock in some profits while you're "on top", and head into the coming days/weeks/months with eyes wide open, alert to potential quick corrections when this wild ride inevitably 'ends'.
Each instance resulted in the "recent lows" being violated. If history rhymes this time, that could mean low 3k's incoming for SPX. COULD. Can your portfolio/strategy/mindset handle that kind of volatility/drawdown? Just some food for thought.
As always, good luck, have fun, and practice solid risk management.
Thank you for your time and consideration.
Yield CurveThe 2/10 treasury yield spread is quickly flattening and an inversion could happen soon.
All of the previous yield curve inversions are associated with memorable market sell-offs and recessions.
I believe the ripple effect of the ongoing financial and economic sanctions against Russia will end up being the catalyst for the next meltdown.
The market conditions have been favorable to a disaster by many measurements for some time now.
Again, there are many unknown cross-currents beginning to work their way into the global economy. On top of that, the FED is raising interest rates in less than two weeks.
Capital Distribution by Time and Portfolio - CryptoHey traders,
In this post, I'll be sharing a simple capital distribution strategy that I use for my crypto portfolio. This strategy is designed to help you allocate your capital across different timeframes and asset types in order to maximize your potential returns while minimizing your risk.
Capital Distribution Strategy
Here's how I break down my capital:
40% - HOLD (Monthly chart): This capital is allocated to long-term investments that I believe have the potential to appreciate significantly over time ( BITSTAMP:BTCUSD mostly). I typically enter these positions based on a combination of fundamental and technical analysis.
30% - Long Term (Weekly chart): This capital is allocated to assets that I plan to hold for a period of 3 to 6 months. I typically enter these positions based on technical analysis and market sentiment.
20% - Spot (Daily chart): This capital is allocated to short-term trades that I plan to hold for 1 to 2 weeks. I typically enter these positions based on technical analysis and market momentum.
10% - Futures (1-4 hourly chart): This capital is allocated to leveraged trades that I plan to keep for up to 3 days. I use futures trading to amplify my potential returns, but I also recognize that it comes with increased risk. I typically enter these positions based on technical analysis and market volatility.
Choosing Entry Points
As you can see, the entry points for my different capital allocations vary depending on the timeframe and asset type. This is because the risk tolerance and potential rewards associated with each type of trading are different.
HOLD and Long Term : For these long-term investments, I take a more conservative approach and focus on fundamental analysis to identify projects with strong potential. I also use technical analysis to confirm my entry points and manage my risk.
Spot and Futures : For short-term trades, I rely more heavily on technical analysis to identify trading opportunities. I use a variety of indicators and chart patterns to spot potential entry and exit points.
Benefits of this Strategy
This capital distribution strategy has several benefits:
Diversification: It helps to diversify your portfolio across different timeframes and asset types, which can help to reduce your overall risk.
Flexibility: It allows you to adjust your capital allocation based on your market outlook and risk tolerance.
Potential for Growth: It has the potential to generate significant returns over time, as you can benefit from both long-term and short-term trading opportunities.
Disclaimer
Please remember that this is just a general strategy, and it may not be suitable for everyone. It's important to do your own research and understand the risks involved before making any trading decisions.
Additional Tips for New Traders
Start small: Don't risk more money than you can afford to lose.
Learn the basics: Take the time to learn about technical analysis and fundamental analysis.
Practice on a demo account: Before you start trading with real money, practice on a demo account to get a feel for the market.
Manage your risk: Use stop-loss orders and other risk management techniques to protect your capital.
Be patient: Trading is a marathon, not a sprint. Don't get discouraged if you don't see results immediately.
I hope this post has been helpful. If you have any questions, please feel free to leave a comment below.
Happy trading!
An important chart you aren't aware ofThe calculation of the US10Y - US02Y has commonly been used to measure the yield curve inversion. Historically, when the curve inverts and then inverts back, it has led to a significant recessionary period globally.
And I know this information might be hard to understand for attention-deficient people like zoomers, so I included some helpful meme labels for them to understand.
Lesser Long PositionKing W. Harbmayg's Journal Entry #
Lesser Position
1. Pair & Position:
USDJPY— 1:5 RR
Long—
according to the Harbmayg Schematic, the market has successfully:
a. aligned with the daily template,
b. printed confirmation structure,
c. printed the inversion candle
2. Performance: (1 out of 5)
Confidence— 4
Discipline— 4
Execution— 5
How to position for yield curve un-inversions!It has been some time since we delved into the intricate world of interest rates and their prospective trajectories. With the yield curve experiencing significant movement in recent weeks, it's high time we reassess our stance. Following a staggering 500 basis points increase, we now find ourselves potentially nearer to the end of the rate hike cycle than ever before. The recent hawkish pause announced in the last meeting has left market participants on tenterhooks, pondering the future course of action in the ongoing battle against inflation.
Given the downward trend in inflation and the possibility of at least one more rate hike, 'real' yields have ascended beyond the 0% level, as depicted in the chart above. Since the 2010s, real yields have consistently struggled to surpass the 1.2% level. However, the recent lower inflation prints place the 'real' yield at a new decade high of 1.25%. So, how does the yield curve inversion behave during periods of real yields? Interestingly, in three of the past four instances, the curve 'un-inverted' once real yields exceeded 0.
Of greater significance is the yield curve's response after the Fed cuts rates. Since 1989, this has been a key signal of the yield curve un-inversion. Given this event's proximity and the current 2Y-10Y yield curve, we contemplate the optimal strategy to capitalize on this likely un-inversion.
One approach is to examine all possible inversion combinations between the 2, 5, 10, and 30-year yields. All these combinations present an inverted curve, except for the 10Y-30Y segment.
Upon dissecting the analysis to focus solely on 2-year inversions, we observe the following:
The 2-year inversion is generally the steepest, with the 2Y-10Y ranking as the most inverted segment of the yield curve. All inversions anchored with the 2Y are at their all-time highs, plunging us into uncharted waters.
In contrast, the 5-year and 10-year yields exhibit more subdued movements. Their inversions have yet to reach all-time highs, and the overall range of movement is relatively restrained.
Therefore, to maximize returns on the un-inversion move, one could position to short either the most inverted section of the curve, the 2Y-10Y, or the 2Y-30Y, which typically experiences the largest movement upon un-inversion.
Handily, CME has the Micro Treasury Yield Futures, quoted in yield terms, which allows us to express this view in a straightforward manner allaying the complications with DV01 calculation. By creating a short yield spread position, we are not merely speculating on the direction of individual yields but rather on the relative movement between them. Trading the yield spread instead of just an outright position in a single part of the curve also protects us from parallel shifts in the yield curve, especially in volatile times like these. This strategy takes advantage of the yield curve dynamics, particularly the inversion trend we've been observing. We create the short yield spread position by taking a short position in the Micro 2-Yr Yield Futures and a long position in the Micro 10-Yr Yield Futures or Micro 30-Yr Yield Futures to express the curve un-inversion view, with 1 basis point move equal to 10 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
www.cmegroup.com
www.cmegroup.com
www.cmegroup.com
4/10/2023 (Monday) SPY Analysis and Market Macro Deep DiveIn this Video I discuss The technical analysis of the SPY ETF which is a proxy the S&P500 that is often a tell on general market movements. I also discuss broader market Macros I have been watching including last week's and next weeks economic events. We also discuss some recession indicators, and other charts that show headwinds and tailwinds to equities.
In the Trading View App, You can use the links below and hit play, so you can see the action from the dates the charts were published. I will keep this going so we can follow outcomes to analysis.
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See you Next Monday for the next Market analysis!
3/27/2023 (Monday) SPY Analysis and Market Deep DiveMonday 3/27/2023 - In this Video I discuss The technical analysis of the SPY ETF which is a proxy the S&P500 that is often a tell on general market movements. I also discuss broader market Macros I have been watching including last week's and next weeks economic events. We also discuss some recession indicators, and other charts that show headwinds and tailwinds to equities.
In the Trading View App, You can use the links below and hit play, so you can see the action from the dates the charts were published. I will keep this going so we can follow outcomes to analysis!
03/20/2023 (Monday) SPY and Market Analysis and Deep Dive into cIn this Video I discuss The technical analysis of the SPY ETF which is a proxy the S&P500 that is often a tell on general market movements. I also discuss broader market Macros I have been watching including last week's and next weeks economic events. We also discuss some recession indicators, and other charts that show headwinds and tailwinds to equities.
You can use the links below and hit play to see the progression of these indicators from when I initially published them.
Please remember to like and subscribe in You Tube or Follow and Boost In Trading View. The feedback is very welcome also.
🔥 Bond Yield Curve Inversion Reaching -1%: Why It's ImportantAn inverted yield curve occurs when the yield on a 10-year Treasury bond falls below that of a 2-year Treasury bond. Normally, longer-term bonds have higher yields than shorter-term bonds. This is because investors demand a higher return for tying up their money for a longer period of time.
However, when short-term interest rates rise above long-term interest rates, it can indicate that investors believe the economy will weaken in the future. This is because investors are willing to accept lower yields on long-term bonds if they believe that interest rates will fall in the future as a result of weak economic growth. Essentially, they are willing to lock in a lower yield now, in the hopes that it will be higher in the future.
An inverted yield curve can lead to a number of problems. For example, it can make it more difficult for banks to make money. This is because banks borrow at short-term rates and lend at long-term rates. When the yield curve is inverted, the interest rates that banks earn on loans are lower than the interest rates they pay on deposits. This can squeeze bank profits and make them less willing to lend. And we all know, less money in the market means less potential (risky) investments.
An inverted yield curve can also be a sign of a potential recession. Historically, an inverted yield curve has preceded every recession in the United States since WW2. This is because an inverted yield curve can indicate that investors are pessimistic about the future of the economy. They may be selling off stocks and other assets, which can lead to a downturn in the stock market and a decline in consumer confidence.
In conclusion, an extremely inverted yield curve like now is a situation in which short-term interest rates on government bonds are higher than long-term interest rates. This can indicate potential economic problems, including a recession and difficulties for banks. While an inverted yield curve is not a guarantee of a recession, the probability of the current yield inversion suggesting a coming recession is very high.
It's going to be an interesting year.
2/27/2023 (Monday) SPY Analysis and Market Deep DiveMonday 2/27/2023 - In this Video I discuss The technical analysis of the SPY ETF which is a proxy the S&P500 that is often a tell on general market movements. I also discuss broader market Macros I have been watching including last week's and next weeks economic events. We also discuss some recession indicators, and other charts that show headwinds and tailwinds to equities.
In the Trading View App, You can use the links below and hit play, so you can see the action from the dates the charts were published. I will keep this going so we can follow outcomes to analysis!
SORRY I RAN OUT OF TIME, I ONLY HAD a minute to go and I would have had to start from scratch as TV tools dont edit. Sorry!
2/20/2023 (Monday) SPY Analysis and Market Deep DiveMonday 2/20/2023 - In this Video I discuss The technical analysis of the SPY ETF which is a proxy the S&P500 that is often a tell on general market movements. I also discuss broader market Macros I have been watching including last week's and next weeks economic events. We also discuss some recession indicators, and other charts that show headwinds and tailwinds to equities.
In the Trading View App, You can use the links below and hit play, so you can see the action from the dates the charts were published. I will keep this going so we can follow outcomes to analysis!
The yield curve has to un-invert eventually… right? (Part 2)This week, we thought it will be interesting to review the trade from last week given the reaction post-FOMC, as well as discuss an alternative way to set up this trade.
Firstly, let’s review the post-FOMC/employment data reaction.
- Nonfarm Payrolls surprised to the upside, as over half a million jobs were added way above the estimates of a sub 200K number.
- Unemployment rate continues to fall further, reaching a 53-year low of 3.4%
A clear re-pricing has occurred since last Friday’s better-than-expected jobs data and Wednesday’s Federal Reserve meeting. With markets now expecting 1 more rate hike in May, bringing the peak rate up from the 475 -500 bps range to the 500-525 bps range.
Keeping this in mind, we go back to our analysis last week to understand this situation and historical precedence.
While the time for a pause in rate hike seems to be pushed back, in the grand scheme of things, we think that this has only kept the window of opportunity for this trade open for longer and at a more attractive entry point now.
Without repeating ourselves too much, we encourage readers to take a look at our idea last week which explores the historical correlation between the peaking of yield curve inversion and the pause in Fed rate hikes.
Link to our last week’s idea:
This week, let’s tap into a different instrument. Here, we aim to take a short position on the 2Y-10Y yield differential by creating a portfolio of Treasury futures to express this view.
To do so, we would have to first select the 2 instruments, the 2-Yr Treasury futures is a straightforward choice for the short end. But for the 10-Yr leg, we have a choice of the '10-Yr Treasury Note Futures' vs the 'Ultra 10-Yr Treasury Note Futures'. Digging into the contract specification, the 'Ultra 10-Yr Treasury Note Futures' provide a better proxy for the true 10-year duration exposure as the delivery requirements are for Treasuries with maturities between 9year 5 months and 10 years. In comparison, the underlying of '10-Yr Treasury Note Futures' has a maturity between 6 year 6 months and 10 years.
With contract selection out of the way, the next step is to calculate the Dollar Neutral spread. This requires us to identify the DV01 of the front and back legs of the spread and try to match them. This is to ensure that the entire position remains as close to dollar neutral as possible, so we can get a 'purer' exposure to the yield difference between the front and back legs, and parallel moves are negated. CME publishes articles on this topic to explain the setting up of a DV01 spread clearer than we can explain. You can find them attached in the reference section below.
You can handily find the DV01 of the Cheapest To Deliver (CTD) securities on CME’s website.
In this case, we are looking at the 2Yr and Ultra 10Yr Treasury Futures to set up the trade. With the DV01 of the 2Yr at 34.04 and the DV01 of the Ultra 10Yr at 96.26.
The spread ratio can be calculated as 96.26/34.04 = 2.83. Rounding this to the nearest whole number, we would need 3 lots of2-Yr Treasury Future and 1 lot of Ultra 10-Yr Treasury Future, to keep the DV01 equal (neutral) for both legs of this portfolio.
Given our view of the 2Yr-10Yr yield spread turning lower, we want to short the yield spread. Yield and prices move inversely, hence, to short the yield spread, we long the Treasury Futures spread as it is quoted in price. We can long 3 ZTH3 Futures (2Y Treasury Future) and short 1 TNH3 futures (Ultra 10Y Treasury Future) to complete 1 set of the spread. However, since the 2-Yr Treasury Futures has a notional value of 200,000 while the Ultra 10Y Treasury Futures a notional of $100,000, the price ratio will be 6:1 when the position/leg ratio in the spread trade is 3:1. As such the current level would provide us with an entry point of roughly 494 with a minimal move in Ultra 10yrs representing 15.625 USD and that in 2Y representing 7.8125 USD.
While slightly more complex in setting up, this trade allows us another alternative to express the same view on the yield curve spread differential. Being able to execute the trade via different instruments allows you to pick the most liquid markets to trade or take advantage of mispricing in the markets.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference
www.cmegroup.com
www.cmegroup.com
www.cmegroup.com
www.cmegroup.com
US 10Year - 02Year - Yield Inversion (Posted 01FEB23)In this chart you can see how inverted we are and for how long on the 10-2year. I also have the 10-03mo chart that I will link to this also. This is a recession indicator. It will be interesting to follow this chart as the FOMC tries to bring the curve back under control. I will return frequently to run the "Play" and see how they do over the months!
The yield curve has to un-invert eventually… right?Those who have been reading our past 2 ideas will know we’ve been harping on and on about expected rate path and policy timelines. Why the recent obsession you ask? Because we think we’re on the cusp of major turning points.
So, for the third time, let’s look at the market’s expected policy rate path.
With FOMC coming up this week, we are expecting a 25bps hike followed by some commentary/guidance on the next cause of action. Based on CME’s Fedwatch tool, markets are expecting a last hike of 25bps in the March FOMC before a pause in the hiking cycle. Now keep that in mind.
One interesting relationship we can try to observe is how the 2Yr-10Yr yield spread behaves in relation to where the Fed’s rate is. We note a few things here.
Firstly, the ‘peak’ point of the 2Yr-10Yr spread seems to happen right around the point when rate hikes are paused. With the Fed likely to pause as soon as March, we seem to be on the same path, setting up for a potential decline in the spread.
Secondly, the average of the past 3 inversions lasted for around 455 days, and if you count just the start of the inversion to the peak, we’re looking at an average of 215 Days. Based on historical averages, we are past the middle mark and have also likely peaked, with current inversion roughly 260 days deep.
Looking at the shorter end of the yield curve, we can apply the same analysis on the 3M-10Yr yield spread.
The ‘peak’ point of the 3M-10Yr yield spread is marked closer to the point when the Fed cuts, except in 2006, while the average number of days in inversion was 219 days and the average number of days to ‘peak’ inversion was 138 days. With the current inversion at 105 days for the 3M-10Yr Yield spread, we are likely halfway, but the peak is likely not yet in. (Although eerily close to when the Fed is likely to announce its last hike, March FOMC, 51 days away).
Comparing the 2 yield curve spreads, we think a stronger case can be made for the 2Yr-10Yr spread having peaked and likely to un-invert soon.
Handily, CME has the Micro Treasury Yield Futures, quoted in yield terms, which allows us to express this view in a straightforward manner allaying the complications with DV01 calculation. We create the short yield spread position by taking a short position in the Micro 2-Yr Yield Futures and a long position in the Micro 10-Yr Yield Futures, at an entry-level of 0.623, with 1 basis point move equal to 10 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
www.cmegroup.com
www.cmegroup.com
long term bond yields still bear, but go toward bottomim in favor of smashind long term bond yield curve, and inverting the front years more for obvious reasons, namely boj inflation/interest rate planning for example. the bottom is obviously not here for TLT, but i would look towards these boxes in this order.
Yield curve inversion, CPI, GDP and DOWHistorically, an inverted yield curve has been viewed as an indicator of a pending economic recession; hence the inversion of the yield curve might be perceived as a leading indicator.
Once the yield curve is inverted, it may be several months before we see GPD contracting; and it is not guaranteed that we will see a sharp drop in GDP.
First pane: You can see the development of GDP and the associated development of the Dow Jones Index (log-scale). The area below you shows the US 10-year/2-year yield (bubbles indicate a yield curve inversion). As you can see, it might be some time before we see a GDP contraction after the yield curve inverts.
The last area shows the core CPI that drove the Fed and expected higher dot plot medians in December. Nonetheless, recent data suggests that the core CPI may have peaked (to be confirmed).
There is no bottom in the stock without a bottom in the bond
My Dashboard on Tradingview
www.tradingview.com
where I am monitoring the entire bond market in the world with my magma indicator, country by country.
When investing for the long term I first look the bond market before leaping in the stocks.
There are few simple and important rules to follow in this market.
1. Higher Bond yields = Lower Bond Prices = Bottom in the bond market is more bottom
2. Short-mid term bond yields is closing to long-term yields (example 2-Years yield = 10-Years yield) = This means flattening = not good for long-term investment, stay alerting for your paper profits.
3. Short-mid term bond yields is greater than long-term yields (example 2-Years yield is greater than 10-Years yield) = This means inversion = not good, imminent fear of recession (remember: stock market does not perform well during recessions)
4. Short-mid-term bond yields is less than long-term yields (example 2-Years yield is less than 10-Years yield and going lower) = That's fine, economics sounds good for long-term investments
What I see now: United States, Canada, Brazil are countries with the most prolongated inversion areas (highlighted with red circles in the figure above).
5. More prolongated inversion = not good, even more.
Flattening areas (yellow circles) have to be carefully monitored.
Few examples currently are showing good news (green circles) : Japan long-term and mid-term yield curves are fine and in the good direction. Same as in Australia.
10yr-2yr Inversion VS Stock market bottomThe last two times of market recessions, Dotcom and the Great Recession both times the stock market did not hit bottom until 3yrs after the inversion happened.
Meaning we are only 129 days into this one. I would take advantage of this current rally and not get overly long on positions, but sell out of positions into strength.
The FED has made it clear there will be more pain ahead, and they will only strengthen their resolve next meeting.
Either way, a .50 basis or a .75 move is on the table stocks will not bottom until the inversion starts to un-invert, as proven in the past.