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Speaker 1: If you've been watching headlines lately, you'd be forgiven for

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Speaker 1: thinking that the worst of the bond bear market is over.

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Speaker 1: Treasuries have been rallying recently. Interest rates for bonds have

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Speaker 1: been dropping. The market is pricing in rate cuts by

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Speaker 1: the Fed, and it seems like the only question is

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Speaker 1: when will they cut rates and how many times will

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Speaker 1: they cut rates. So the reality is the carnage in

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Speaker 1: the bond markets has just begun, and we are far

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Speaker 1: more likely in for many more years of higher rates

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Speaker 1: and higher inflation. And the US treasury market is about

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Speaker 1: to take another big hit. And the most urgent thing

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Speaker 1: that is happening in the short term for investors to

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Speaker 1: watch out for is the unwind of hedge funds trading

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Speaker 1: treasuries in what is called the basis trade. As of

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Speaker 1: right now, hedge funds are responsible for providing the necessary

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Speaker 1: liquidity in the US treasury market. This is because trading

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Speaker 1: firms have been engaged in something called the basis trade

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Speaker 1: for a couple of years now. This trade has been growing,

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Speaker 1: and it is a type of relative value trade in

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Speaker 1: which you buy one thing and you short another thing.

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Speaker 1: Those two things would be almost identical in terms of

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Speaker 1: their structure, but they would vary slightly in their price.

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Speaker 1: By buying one and shorting another, it gives you the

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Speaker 1: ability to take advantage of the difference in those prices,

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Speaker 1: and through leverage and repeating this trade many, many, many times,

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Speaker 1: you can make risk free money. Now, if your spidy

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Speaker 1: sense goes off whenever you hear the words risk free money,

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Speaker 1: then that means you're doing something right. Because there's no

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Speaker 1: such thing as the elimination of risk. You can only

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Speaker 1: transfer risk. And while these trading firms have been providing

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Speaker 1: a necessary service by providing liquidity for US treasuries, because

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Speaker 1: they are buying and selling so many of these, there's

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Speaker 1: no escaping the fact that this has built up a

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Speaker 1: ton of risk in the financial system by using so

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Speaker 1: much leverage. It is also true that when you try

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Speaker 1: to impose regulations to tamp down on that rich that

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Speaker 1: has already been built up, more often than not you

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Speaker 1: cause the very unwind you were trying to prevent in

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Speaker 1: the first place. More than likely, this is not going

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Speaker 1: to result in anything crazy like an overnight collapse of

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Speaker 1: the entire financial system, But what this is likely to

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Speaker 1: do is put more and more stress on an already

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Speaker 1: stressed treasury market by removing liquidity. And as we are

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Speaker 1: about to see, twenty twenty four is not exactly the

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Speaker 1: year in which you want to be removing liquidity from

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Speaker 1: the US treasury market, because this year the US government

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Speaker 1: is going to have to issue about ten trillion dollars

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Speaker 1: in new treasuries. You read that right, ten trillion dollars

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Speaker 1: in new treasury issuance just this year alone. Now, that

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Speaker 1: doesn't mean the national debt will be going up by

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Speaker 1: ten trillion dollars. So let's break this down. We've got

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Speaker 1: new borrowing and borrowing to replace old, existing debt. The

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Speaker 1: deficit for twenty twenty four is projected to be about

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Speaker 1: one point four trillion dollars. Remember, the deficit for the

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Speaker 1: US government is the difference between what they spend and

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Speaker 1: what they take in taxes. So if all goes according

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Speaker 1: to plan during this year, they will borrow an additional

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Speaker 1: one point four trillion dollars in order to cover the

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Speaker 1: difference between what they take in taxes and what they spend.

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Speaker 1: But one point four trillion dollars is a far cry

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Speaker 1: from ten trillion dollars. So where is the other money

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Speaker 1: coming from? Over the course of twenty twenty four, we

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Speaker 1: have about eight point nine trillion dollars worth of government

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Speaker 1: debt that is going to be maturing. This means when

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Speaker 1: you look at the total national debt of thirty four

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Speaker 1: trillion dollars, almost nine trillion of that is coming due

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Speaker 1: this year. We know they don't take enough in taxes

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Speaker 1: in order to be able to pay off that old debt,

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Speaker 1: which means they have to borrow new debt in order

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Speaker 1: to pay off that old debt. To put this into perspective,

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Speaker 1: that means that even if the government this year didn't

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Speaker 1: borrow anything extra and they ran a zero dollar deficit,

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Speaker 1: meaning every dollar they spent was not borrowed, but it

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Speaker 1: was taxed, and they didn't borrow it or spend any extra,

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Speaker 1: they would still need to borrow eight point nine trillion

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Speaker 1: dollars just to pay off eight point nine trillion dollars

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Speaker 1: that is due to get paid off. So when we

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Speaker 1: take the eight point nine trillion dollar debt that has

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Speaker 1: to be borrowed just to pay off maturing debt, and

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Speaker 1: add on top of that the one point four trillion

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Speaker 1: dollars in new debt that has to be borrowed to

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Speaker 1: cover the difference, between what they're spending and what they're taxing.

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Speaker 1: Just this year, it means the US government will be

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Speaker 1: borrowing ten trillion dollars plus just this year alone. It

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Speaker 1: is true that United States government bond interest rates dropped

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Speaker 1: over the end of twenty twenty three, but looking at

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Speaker 1: the longer term trend and considering how much more they're

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Speaker 1: going to have to continue to borrow into the near future,

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Speaker 1: it is almost a certainty that rates go up from here.

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Speaker 1: That is true whether we're looking at short term debt

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Speaker 1: like the two or whether we're looking at something in

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Speaker 1: the middle like the ten year, or long term debt

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Speaker 1: like the thirty year. And this is of course, assuming

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Speaker 1: that there's no recession this year or no unexpected spending

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Speaker 1: that the government has to do, because if there's a

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Speaker 1: financial crisis, if there's a banking collapse, if there is

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Speaker 1: a recession, usually what happens is tax revenues plummet, which

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Speaker 1: means they have to borrow even more to spend just

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Speaker 1: what they are planning on spending, and even more than that,

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Speaker 1: if they plan on spending even more. Now, very few

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Speaker 1: people take a look at the situation and think, oh,

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Speaker 1: this is sustainable, this can just continue forever. So where

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Speaker 1: does this leave us over the next five years, over

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Speaker 1: the next ten years, Well, counterintuitively, we are likely going

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Speaker 1: to see two things that look like they can't exist

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Speaker 1: at the same time. Number one, we're going to see

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Speaker 1: the Federal Reserve cut rates and return to quantitative easing.

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Speaker 1: On the other hand, we're actually going to see higher

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Speaker 1: interest rates and higher inflation for everybody. So how does

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Speaker 1: that work. This is a chart of the Federal Reserve's

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Speaker 1: balance sheet, which has been declining ever since it peaked

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Speaker 1: in April of twenty twenty two. If we continue on

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Speaker 1: the current pace, eventually the government will need to borrow

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Speaker 1: more money. Then they'll be able to actually borrow either

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Speaker 1: because there won't be enough dollars available to lend to

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Speaker 1: the government, or because their expenses will be so high

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Speaker 1: that they'll just be broken. They won't be able to

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Speaker 1: borrow enough. But obviously it won't come to this. The

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Speaker 1: Fed's balance sheet here, instead of moving down, we'll start

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Speaker 1: moving back up again. The Federal Reserve is the central bank,

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Speaker 1: and when they buy assets, they're primarily buying US treasuries

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Speaker 1: from the open market, buying treasuries like the thirty year

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Speaker 1: or the ten year from banks. What banks do with

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Speaker 1: this cash most often is they turn around and lend

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Speaker 1: that new cash back to the US government by buying

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Speaker 1: a new treasure. In this way, banks operate as the

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Speaker 1: middlemen between the Federal Reserve and the federal government. So

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Speaker 1: when the Fed's balance sheet goes up from something called

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Speaker 1: quantitative easing, even though banks are in the middle of

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Speaker 1: this process, it essentially means the Federal Reserve is printing

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Speaker 1: money money, loaning it to the federal government, and then

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Speaker 1: the federal government owes those dollars back to the FED.

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Speaker 1: This is a way for the government to get cheaper

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Speaker 1: debt because they're able to borrow at lower rates when

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Speaker 1: the Federal Reserve is doing this. Most often, quantitative easing

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Speaker 1: like this is also happening during times or the Federal

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Speaker 1: Reserve lowers the Federal funds rate. Now, I said before

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Speaker 1: that this would likely result in higher rates for everybody.

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Speaker 1: So if the Federal Reserve is lowering rates, why would

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Speaker 1: that mean higher rates for people like you and I?

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Speaker 1: So far, in the air of twenty twenty four, the

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Speaker 1: US government has spent one point six trillion dollars five

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Speaker 1: hundred billion dollars of that has been borrowed. But this

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Speaker 1: is happening while interest rates are historically hot, and the

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Speaker 1: longer interest rates for the government stay high, the more

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Speaker 1: expensive that spending becomes for them. But if the Federal

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Speaker 1: Reserve steps in and starts printing money to loan to

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Speaker 1: the government again, then that borrowing for the government actually

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Speaker 1: gets cheaper. As the cost of borrowing goes down for

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Speaker 1: the government, it makes spending more cheaper and cheaper as

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Speaker 1: the government is able to spend more and more from

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Speaker 1: borrowing money that's been printed into existence by the Federal Reserve.

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Speaker 1: What do you think that does to prices? It pushes

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Speaker 1: them up, which means a return to more inflation. And

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Speaker 1: for anybody who cannot borrow directly from the Federal Reserve,

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Speaker 1: it means you're borrowing from private lenders who actually care

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Speaker 1: about getting a profit on their money, which means that

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Speaker 1: when inflation continues to move higher from the increased spending,

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Speaker 1: private lenders like mortgage lenders, auto loan lenders, credit card

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Speaker 1: interest rates are all going to be moving higher in

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Speaker 1: order to compensate for the increased inflation. Just to put

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Speaker 1: it very simply, when the Fed lowers rates and restarts

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Speaker 1: QI as a way to make sure the government doesn't default.

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Speaker 1: It will mean that the government can actually borrow and

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Speaker 1: spend more. As the government borrows and spends more, they're

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Speaker 1: actually spending money that has been printed into existence. All

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Speaker 1: that new money pushes prices higher as inflation soares yet

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Speaker 1: again again. Private lenders for forms of debt like mortgages

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Speaker 1: and auto loans and credit cards will demand higher and

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Speaker 1: higher interest rates so that they're not getting burned on

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Speaker 1: their purchasing power, and those interest rates will go high.

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Speaker 1: This is in line with the forty year debt cycle

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Speaker 1: which started in nineteen forty, with inflation and interest rates

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Speaker 1: moving higher for forty years until nineteen eighty until they

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Speaker 1: peaked out when the next phase of the debt cycle

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Speaker 1: started and interest rates and inflation started moving lower for

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Speaker 1: the next forty years until they bottomed out again in

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Speaker 1: twenty twenty, again forty years later, which means we have

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Speaker 1: now started the next phase of the long term debt

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Speaker 1: cycle with inflation and interest rates moving higher yet again.

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Speaker 1: This lines up with the long term US debt to

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Speaker 1: GDP cycle as well, with the early forties showing the

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Speaker 1: US debt to GDP ratio peaking at about one hundred

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Speaker 1: twenty percent and then moving down for the next forty years,

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Speaker 1: bottoming in nineteen eighty at around thirty one percent. For

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Speaker 1: forty years after that, the debt to GDP ratio rose

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Speaker 1: yet again, peaking again around one hundred and twenty percent,

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Speaker 1: which means another deleveraging is do which only happens through

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Speaker 1: deflation as a death spiral, or through inflation. And if

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Speaker 1: the first couple years of this phase that started in

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Speaker 1: twenty twenty are any sign, we know that the people

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Speaker 1: who are in power are going to choose the inflationary

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Speaker 1: route again like they did the last time. So buckle up.

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Speaker 1: Interest rates are moving higher. Even if we do experience

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Speaker 1: a short term drop, treasuries will continue their move down

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Speaker 1: and inflation will be going up for longer as well.

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Speaker 1: Like I said earlier, you cannot eliminate risk. You can

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Speaker 1: only transfer risk. But the nice thing is in financial

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Speaker 1: markets there are unlimited ways to transfer risk away from

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Speaker 1: your portfolio. If you do not know how to head

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Speaker 1: yourself and protect your portfolio from the risks of inflation,

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Speaker 1: of deflation of market crashes, then you are susceptible and

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Speaker 1: you may be in the position of the average person

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Speaker 1: that has to wait years, sometimes decades, for markets to recover.

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Speaker 1: It happened to the S and P five hundred just

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Speaker 1: twenty years ago, where the market peaked in two thousand

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Speaker 1: and didn't recover until twenty thirteen. It happened again in

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Speaker 1: the seventies, and it also happened in the thirties. It

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Speaker 1: also happened most famously when the market peaked before the

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Speaker 1: Great Depression in nineteen twenty nine and didn't make a

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Speaker 1: new high until nineteen fifty four. Fortunately, with a little

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Speaker 1: bit of financial education, anybody can learn how to protect

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Speaker 1: their portfolios from inflation, from deflation, from rates moving up,

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Speaker 1: rates moving down, from market crashes, being able to hedge

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Speaker 1: their portfolios and their positions, and not having to wait

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Speaker 1: and just hope that someday it will come back. And

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Speaker 1: if you like my help with that, join Heresy Financial University,

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Speaker 1: linked is in the description below. As always, thanks so

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Speaker 1: much for watching, have a great day.