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Speaker 1: Have you ever wondered what the most important macroeconomic indicators are?

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Speaker 1: In today's day and age, we are bombarded every single

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Speaker 1: day with news about what the Federal Reserve is doing,

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Speaker 1: about what the government is doing, geopolitical issues, what the

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Speaker 1: stock market is doing, what other assets like gold or

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Speaker 1: bitcoin or real estate are doing. It can very easily

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Speaker 1: become information overload. Don't worry because going into twenty twenty four,

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Speaker 1: there are six things that everybody should be watching. They

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Speaker 1: are the most important macroeconomic factors that everything else flows from,

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Speaker 1: and if you watch just these six things, you'll have

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Speaker 1: a very good idea of how the year will unfold.

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Speaker 1: The first thing to watch is the reverse repurchase facility

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Speaker 1: at the Federal Reserve. This facility currently has just over

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Speaker 1: one trillion dollars in it. You can think of this

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Speaker 1: facility as an overflow of excess reserves in the banking system.

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Speaker 1: Back in twenty twenty, when the Fed printed all that money,

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Speaker 1: they printed that money so that it could make its

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Speaker 1: way to the federal government, so the government could spend

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Speaker 1: it on things that they wanted, like stimulus checks. But

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Speaker 1: at the same time, the Federal Reserve was also spending

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Speaker 1: trillions of dollars to buy assets off the market, assets

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Speaker 1: like US treasuries. This meant that while the government was

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Speaker 1: spending newly created dollars into the banking system, the Federal

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Speaker 1: Reserve was sucking collateral like US treasuries out of the

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Speaker 1: banking system. For you and I, that might not sound

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Speaker 1: like a big deal, but for banks it is a

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Speaker 1: big deal because for a bank, every dollar they get

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Speaker 1: in deposit, they also have to have some sort of

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Speaker 1: offsetting collateral as an asset to offset that liability, and

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Speaker 1: so banks began to use the reverse repurchase facility at

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Speaker 1: the Federal Reserve that allows them to give the access

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Speaker 1: cash to the Federal Reserve overnight and get collateral back

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Speaker 1: in return. Without this facility, banks would have had to

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Speaker 1: go to the open market to get that collateral, and

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Speaker 1: rates were already so low it could have probably put

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Speaker 1: interest rates negative. So the Federal Reserve offered an interest

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Speaker 1: rate to attract cash to come into the reverse repo

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Speaker 1: facility instead. But as you'll notice, since May of twenty

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Speaker 1: twenty three, the facility has been getting drained, which means

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Speaker 1: that dollars are choosing to leave the reverse repo facility.

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Speaker 1: They're going somewhere else instead, and that place they're going

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Speaker 1: is United States tea bills. As starting in May of

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Speaker 1: twenty twenty three, the rate on tee bills finally exceeded

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Speaker 1: five point three percent, which is the rate the reverse

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Speaker 1: repo facility was paid. So the dollars simply got a

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Speaker 1: better return by getting taken out of the reverse repot

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Speaker 1: facility and getting lent to the US government in short

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Speaker 1: term tee bills instead. This means that while the reverse

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Speaker 1: repot facility still has cash, the US government can borrow

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Speaker 1: as much as they want with t bills. Now you

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Speaker 1: may be looking at this chart of the reverse repot

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Speaker 1: facility and thinking, hey, we were already down to six

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Speaker 1: hundred and eighty three billion in there, but now we've

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Speaker 1: skyrocketed back up to one trillion. What is going on?

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Speaker 1: Nothing out of the ordinary. This is simply a year

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Speaker 1: end thing that happens at quarter end and at year end.

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Speaker 1: Take a look at this spike that happened at the

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Speaker 1: end of twenty twenty two, exact same thing, and then

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Speaker 1: it came right back down to normal levels. So within

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Speaker 1: the first couple of weeks of January we will see

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Speaker 1: the exact same thing happen here, it will start to

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Speaker 1: decline again like it was before. And when the reverse

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Speaker 1: repo facility hits zero, that means there is no more

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Speaker 1: cash left to be taken out by market participants like

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Speaker 1: money market funds to be lent to the US government

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Speaker 1: with TE bills, which means the US government is either

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Speaker 1: going to have to start borrowing at the longer end

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Speaker 1: of the curve where interest rates are lower, like the

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Speaker 1: thirty years only at four percent or the ten year,

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Speaker 1: which is only at three point eight percent, or if

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Speaker 1: the federal government continues to want to borrow at the

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Speaker 1: short end with T bills, they're just going to have

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Speaker 1: to offer a higher interest rate in order to attract

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Speaker 1: new cash. Either way, the reverse repo facility hitting zero

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Speaker 1: means liquidity conditions have changed. It means there's no longer

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Speaker 1: a ton of excess reserves in the system, and the

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Speaker 1: United States government's excess borrowing at the short end at

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Speaker 1: least will have to change now. The second most important

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Speaker 1: macroeconomic factor to look at for twenty twenty four is

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Speaker 1: the Federal Reserve's balance sheet. You can see the Federal

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Speaker 1: Reserves balance sheet used to be under a trillion and

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Speaker 1: then to deal with the financial crisis. It exploded to

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Speaker 1: over two trillion, and then continue to increase to a

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Speaker 1: peak of about four and a half trillion in twenty

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Speaker 1: fifteen before they started their first round of quantitative tightening.

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Speaker 1: Quantitative tightening is the exact opposite of quantitative easing. Que

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Speaker 1: quantitative easing is when the Federal Reserve's balance sheet increases.

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Speaker 1: That means the FED is printing money in order to

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Speaker 1: buy assets out of the market. So the FED will

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Speaker 1: go to a bank and they'll say, hey, you have

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Speaker 1: a US treasury because you loaned money to the government.

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Speaker 1: We want that. We'll buy it from you. Here's some

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Speaker 1: brand new cash, give us that treasury. And then at

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Speaker 1: that point, now the US government owes that money back

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Speaker 1: to the Federal Reserve instead of the bank who initially

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Speaker 1: made the loan. As the Federal Reserve does, this balance

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Speaker 1: sheet increases in size because they own more assets, just

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Speaker 1: as if your brokerage account were to increase in size

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Speaker 1: as you purchase more assets. The only difference is they

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Speaker 1: print the money to buy those assets. You first have

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Speaker 1: to come up with the money to put into your

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Speaker 1: brokerage account to buy those assets. So when the Federal

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Speaker 1: reserves balance sheet declines, the exact opposite is happening. The

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Speaker 1: Federal Reserve is either selling some of those treasuries back

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Speaker 1: out onto the open market, or they're just letting some

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Speaker 1: of those treasuries get paid back and they're not rolling

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Speaker 1: it over, meaning they're not taking that cash and buying

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Speaker 1: a new treasury of the same amount. Now. Because they

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Speaker 1: want the decline in their balance sheet to happen at

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Speaker 1: a consistent pace, they're likely doing a combination of both,

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Speaker 1: so that they're doing a little bit of buying, little

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Speaker 1: bit of selling, a little bit of letting it mature

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Speaker 1: so that the size their balance sheet overall declines at

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Speaker 1: a consistent pace. The last time they did this was

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Speaker 1: in twenty eighteen and twenty nineteen. The market couldn't handle it,

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Speaker 1: so they started not qy in twenty nineteen, right before

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Speaker 1: all the money printing in twenty twenty happened, and as

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Speaker 1: you can see, as of May of twenty the balance

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Speaker 1: sheet peaked and the balance sheet has been declining ever since.

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Speaker 1: If we zoom in here, we can see the exact

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Speaker 1: same thing is happening now as what was happening before,

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Speaker 1: which means quantitative tightening is still continuing. Now. Remember during QE,

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Speaker 1: the Federal Reserve takes a newly created dollar gives it

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Speaker 1: to a bank in exchange for an asset like a

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Speaker 1: US treasury. That increases liquidity conditions for banks. The banks

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Speaker 1: can take that money to do whatever they want with it.

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Speaker 1: They can do nothing. They can loan it to the

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Speaker 1: US government. Again, they can make a new loan like

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Speaker 1: a mortgage or an auto loan, but it increases the

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Speaker 1: bank's liquidity and their options on what they can do

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Speaker 1: with it. This means when the Federal Reserve's balance sheet

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Speaker 1: is declining, the exact opposite is happening. Instead of new

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Speaker 1: dollars entering circulation, dollars are actually leaving circulation and ceasing

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Speaker 1: to exist. This is because, again, when the Federal Reserve's

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Speaker 1: balance sheet is declining, that debt is getting paid back.

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Speaker 1: The Federal Reserve doesn't need to collect dollars as payment

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Speaker 1: in order to spend it on something else. When they

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Speaker 1: spend mon money, they create that money fresh. When money

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Speaker 1: gets paid back to them, it ceases to exist. So

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Speaker 1: when the US government pays back those US treasuries, those

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Speaker 1: loans that it owes to the Federal Reserve, those dollars

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Speaker 1: leave circulation, and so the longer the Federal Reserve continues

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Speaker 1: quantitative tightening, the less liquid markets become, the less dollars

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Speaker 1: there are available in the financial system. So quantitative tightening,

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Speaker 1: or the total size of the Federal Reserve's balance sheet

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Speaker 1: is absolutely the second most important thing to watch in

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Speaker 1: twenty twenty four because if this stops, if the pace

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Speaker 1: of QT increases, if the pace of QT decreases, this

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Speaker 1: has big significant effects on liquidity for banks, which translates

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Speaker 1: into liquidity for things like the stock market, and the

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Speaker 1: interest rates on loans for people like US, not to

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Speaker 1: mention interest rates on loans for the US government themselves.

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Speaker 1: The third most important macroeconomic indicator to look at in

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Speaker 1: twenty twenty four is going to be the total money supply.

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Speaker 1: This is a chart of the money supply going back

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Speaker 1: all the way to the nineteen eighties, and we can

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Speaker 1: see it increased at a fairly consistent pace up until

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Speaker 1: twenty twenty, when it started to skyrocket, zooming in on

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Speaker 1: the last couple of years. We can see the money

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Speaker 1: supply peaked in April of twenty twenty two and started

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Speaker 1: to decline from there. It bottomed in May of twenty

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Speaker 1: twenty three and has been moving sideways since. And if

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Speaker 1: you're wondering if the money supply is moving back up again,

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Speaker 1: don't worry. This is again just a year end type

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Speaker 1: of thing that happens. The same thing happened at year

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Speaker 1: end of twenty twenty two before it continued its decline. Now,

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Speaker 1: the money supply is going to be influenced by the

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Speaker 1: last couple of things that we looked at from the

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Speaker 1: Federal Reserve and some of the other things we're going

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Speaker 1: to look at later on in this video. But the

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Speaker 1: money supply itself has massive implications for everything going on

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Speaker 1: in the economy, from prices of assets like stocks and

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Speaker 1: gold and bitcoin to the cost of money itself for

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Speaker 1: lending and borrowing. And since the Federal Reserve has been

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Speaker 1: collecting this data, you can see that the money supply

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Speaker 1: has never actually decreased until recently. We can find alternative

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Speaker 1: sources of information that go back farther that show that

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Speaker 1: there have been sometimes in history when the money supply

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Speaker 1: has declined. This chart from long Term Trends shows the

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Speaker 1: money supply growth rate going back all the way to

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Speaker 1: the eighteen hundreds, and we can see based on this

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Speaker 1: measure of the money supply, we have not seen a

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Speaker 1: decrease in the money supply since the nineteen thirties. Based

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Speaker 1: on another measure of the money supply growth and decline rate,

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Speaker 1: we can see every time the money supply declines, it

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Speaker 1: is associated with banking panics, recessions, depressions, and even wars.

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Speaker 1: So the fact that right now we are experiencing a

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Speaker 1: contraction in the money supply for the first time since

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Speaker 1: the FED has collected the data, and for the first

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Speaker 1: time since the Great Depression, is not an indicator of

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Speaker 1: economic success in the your future. Based on historical patterns,

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Speaker 1: we should expect some economic pain as a result of this,

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Speaker 1: But of course they could always fire up the money

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Speaker 1: printer again, which would also result in a resurgence in

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Speaker 1: the inflation rate. And so the money supply, which has

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Speaker 1: been declining since April of twenty twenty two, is definitely

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Speaker 1: one of the most important macroeconomic factors to be looking

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Speaker 1: at in twenty twenty four. The fourth most important macroeconomic

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Speaker 1: factor to look at this year is going to be

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Speaker 1: the federal funds rate. We hear talk all the time

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Speaker 1: about how the Federal Reserve controls interest rates, or they're

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Speaker 1: raising interest rates or their lowering interest rates, and how

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Speaker 1: that affects everybody's mortgages and credit cards and auto loans.

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Speaker 1: And the reality is the Federal Reserve does not control

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Speaker 1: any interest rates except its own, and they do this

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Speaker 1: by raising or lowering the Federal Funds rate. This is

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Speaker 1: the overnight rate that banks trade cash and collateral with

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Speaker 1: each other, and the Federal Reserve simply sets the upper

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Speaker 1: and the lower limit on this rate. If the interest

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Speaker 1: rate that is going between banks starts to exceed what

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Speaker 1: the Federal Reserve wants to be the cap, the Federal

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Speaker 1: Reserve will intervene and they'll either provide the collateral or

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Speaker 1: the cash necessary in order to keep it underneath the cap.

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Speaker 1: Same thing. If the interest rate starts to go below

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Speaker 1: the Federal funds target, the Federal Reserve will intervene in

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Speaker 1: order to make sure that interest rate stays in between

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Speaker 1: their tight range. But this, the Federal Funds rate, is

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Speaker 1: the only interest rate that the Federal Reserve actually controls.

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Speaker 1: When you hear about interest rates on mortgages going up

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Speaker 1: or down and you think, hey, I could sell or

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Speaker 1: buy a house, or you hear about auto loan interest

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Speaker 1: rates going up or down, or you hear about credit

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Speaker 1: card rates now they're currently at a record high for decades.

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Speaker 1: It used to be around fourteen to fifteen percent, and

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Speaker 1: now they're over twenty percent. None of these interest rates

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Speaker 1: are actually directly controlled by the Federal Reserve, but the

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Speaker 1: Fed funds rate does have an influence on those interest rates.

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Speaker 1: You may have noticed recently how there are some high

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Speaker 1: yield savings accounts offering four or even over five interest

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Speaker 1: on savings accounts. This is because banks can get this

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Speaker 1: amount or a little bit more directly from the Federal Reserve,

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Speaker 1: and after taking their cut, they can pass along that

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Speaker 1: interest to you. But if the Fed decides to cut rates,

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Speaker 1: then there won't be anybody out there offering those higher rates,

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Speaker 1: which means banks won't be able to offer that to you.

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Speaker 1: This also has an effect on longer term debt because

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Speaker 1: in a normal environment, if I can put my money

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Speaker 1: in the bank and I can get that money back

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Speaker 1: at any time, but I can earn five percent on it, well,

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Speaker 1: I'm gonna demand a much higher interest rate if I'm

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Speaker 1: gonna lock that money up for five or ten or

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Speaker 1: twenty or thirty years. And so while the Federal funds

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Speaker 1: rate is the only interest rate that the Federal Reserve

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Speaker 1: directly controls. It is absolutely important that you keep an

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Speaker 1: eye on it because it does have an influence on

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Speaker 1: the rest of the curve. Now, I mentioned there that

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Speaker 1: in normal environments that longer term debt is gonna have

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Speaker 1: a higher interest rate, and if you've been paying attention,

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Speaker 1: you know that's actually not the case right now, which

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Speaker 1: brings us to the fifth the most important macroeconomic indicator

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Speaker 1: to watch for twenty twenty four, which is the yield

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Speaker 1: curve itself that is currently inverted. This is what the

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Speaker 1: yield curve looks like as of the time of this recording,

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Speaker 1: and you can see that for short term government debt

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Speaker 1: is yielding well over five percent. This means you can

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Speaker 1: loan money to the government for just a couple of

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Speaker 1: months and get an annualized five point two to five

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Speaker 1: point five percent, But if you loan your money to

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Speaker 1: the government for longer, let's say five years, you can

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Speaker 1: only get three point eighty four percent. Now, at first glance,

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Speaker 1: this seems preposterous. Why would anybody loan the money to

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Speaker 1: the government for a lower interest rate for a longer

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Speaker 1: period of time. And the answer is because people expect

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Speaker 1: that between now and then, interest rates at the short

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Speaker 1: end are going to go lower. Yes, today you can

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Speaker 1: get five percent by loaning your money to the government

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Speaker 1: for one month. But if you think that in one

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Speaker 1: year that that five percent will go down to one percent,

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Speaker 1: then locking yourself into a five year contract at three

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Speaker 1: or four percent may actually be the better deal over

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Speaker 1: that five year time horizon. And an uninverting of the

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Speaker 1: yield curve like that, where the short end goes down

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Speaker 1: and or the long end goes up is exactly what

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Speaker 1: investors are expecting, which is why the yield curve is

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Speaker 1: so important to watch right now, because it's currently inverted

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Speaker 1: and investors expect it to uninvert. Problem with that is

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Speaker 1: that is almost always associated with a market crash and

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Speaker 1: or a recession. The inverted yield curve itself has an

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Speaker 1: almost unblemished record of being able to predict a recession

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Speaker 1: coming soon, but it usually starts once or right after

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Speaker 1: that yield curve uninverts. We can actually look at the

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Speaker 1: federal funds rate for examples of this, and you can

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Speaker 1: see the gray bars are all recessions. You can also

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Speaker 1: see that those gray bars all happen right when that

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Speaker 1: interest rate starts to move lower, or after that interest

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Speaker 1: rate starts to move lower. Those are almost all examples

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Speaker 1: of the yield curve uninverting because the federal reserve pushes

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Speaker 1: down on that short end, which then becomes lower than

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Speaker 1: the long end. So in twenty twenty four, it's going

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Speaker 1: to be very important to watch that yield curve and

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Speaker 1: watch for that un inversion. And finally, the last, the

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Speaker 1: sixth most important macroeconomic factor to watch in twenty twenty

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Speaker 1: four is going to be the federal government's deficit, specifically

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Speaker 1: the budget deficit, which as of the time of this

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Speaker 1: recording is currently up thirteen percent higher than the same

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Speaker 1: period last year. The budget deficit is the difference between

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Speaker 1: how much the federal government spends and how much they

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Speaker 1: take in taxes. And I use that word very intentionally

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Speaker 1: because governments can't make money, they can only take money. Now,

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Speaker 1: for pretty much the entire history of the United States,

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Speaker 1: the federal government has run a deficit, which is why

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Speaker 1: the total national debt can cotinues to just grow and

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Speaker 1: grow every year because just like you, if every year

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Speaker 1: you spent more than you earned in income, you'd have

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Speaker 1: to do that by one thing only, which is debt.

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Speaker 1: So the deficit represents how much the government borrows every

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Speaker 1: year to cover its extra spending, which means that every

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Speaker 1: year that they run a deficit, the national debt increases

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Speaker 1: by that amount. Now, there are a number of reasons

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Speaker 1: why the deficit is important, number one, and increasing deficit

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Speaker 1: leads to conditions like we have today with interest rates

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Speaker 1: at multi decade highs. Many people think that if the

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Speaker 1: stock market experiences a correction or a crash, all that

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Speaker 1: money will rush into US government treasuries, which will push

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Speaker 1: interest rates down. That assumes, of course, the government doesn't

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Speaker 1: have an appetite for borrowing larger than the amount of

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Speaker 1: money being willing to lend to that and all else

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Speaker 1: being equal, The more the US government borrows, the higher

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Speaker 1: those interest rates go. And if you can get let's say,

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Speaker 1: hypothetically ten percent by lending money to the US government,

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Speaker 1: you're probably not going to keep that money in the

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Speaker 1: stock market. You're probably not going to lend that out

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Speaker 1: in the form of a mortgage or put it in

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Speaker 1: a CD with a bank. So the more the government borrows,

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Speaker 1: the less money there is available for everybody else to borrow.

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Speaker 1: On top of that, the deficit contributes to the national debt,

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Speaker 1: which by itself isn't a very useful number. But when

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Speaker 1: you look at the national debt compared to something like

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Speaker 1: the GDP, you get a more accurate picture of where

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Speaker 1: our economy stands. Going back all the way to the

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Speaker 1: late seventeen hundreds, we can see there is only one

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Speaker 1: time in history where the national debt compared to GDP

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Speaker 1: was as high as it is today, and that was

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Speaker 1: at the peak of World War Two. Now obviously World

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Speaker 1: War II. When it ended, we ended a ton of

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Speaker 1: spending and a bunch of people came home and started

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Speaker 1: working and producing again. So GDP went up and debt

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Speaker 1: went down relative to all the wealth. But we're back

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Speaker 1: up to one hundred and twenty percent debt to GDP levels,

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Speaker 1: and we don't have all of our working force age

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Speaker 1: men overseas fighting in a war somewhere that will just

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Speaker 1: stop one day. We have this debt, and we have

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Speaker 1: this debt deficit. We have this spending because of a

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Speaker 1: massively bloated government, and trying to shut down anything meaningful

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Speaker 1: in terms of spending or borrowing is political suicide, which

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Speaker 1: is why nobody does and know the last administration did

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Speaker 1: not do it either. Go take a look at the

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Speaker 1: national debt and the deficit under the last administration, and

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Speaker 1: all you'll find is broken promises. So the deficit is

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Speaker 1: absolutely the sixth most important macroeconomic indicator to be watching

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Speaker 1: in twenty twenty four because it contributes to higher rates,

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Speaker 1: crowding out, and a debt load that our economy can

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Speaker 1: eventually not handle. Now, these conditions are very likely to

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Speaker 1: bring in a chaotic year investing. And that doesn't necessarily

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Speaker 1: mean everything going down in price, just to collapse of everything.

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Speaker 1: It means exactly what chaotic means, just highly volatile, unpredictable.

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Speaker 1: I have my thoughts and opinions about which assets will

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Speaker 1: do and which assets will not do well. That doesn't

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Speaker 1: influence how I position my entire portfolio, and it shouldn't

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Speaker 1: influence how you position your portfolio either. There are three

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Speaker 1: pillars to investing and beating the averages in any market conditions.

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Speaker 1: Number one, you need eight to twelve assets that are

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Speaker 1: highly uncorrelated, meaning when one goes up, they don't all

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Speaker 1: go up, and when one goes down, they don't all

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Speaker 1: go down. Number two, you need to learn how to

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Speaker 1: hedge cost effectively, meaning that you purchase fire insurance on

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Speaker 1: your assets so that if they go down in price,

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Speaker 1: your insurance or your hedges pay you off an equal amount.

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Speaker 1: The issue is you have to do it in a

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Speaker 1: cost effective way so your portfolio doesn't decline simply from

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Speaker 1: buying that hedging over and over again. And then the

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Speaker 1: third pillar of investing successfully beating the averages in any

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Speaker 1: market is making many small asymmetric bets because there will

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Speaker 1: always be opportunities to make massive amounts of money. But

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Speaker 1: if you commit too much of your portfolio to one

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Speaker 1: of those bets and it doesn't pay off, maybe you

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Speaker 1: just lost five to ten percent of your portfolio not goods.

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Speaker 1: So you need to learn how to make many small

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Speaker 1: bets that if they pay off, they pay off big,

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Speaker 1: so it's meaningful to your portfolio, but if you're wrong,

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Speaker 1: you lose a very very very tiny amount. If you

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Speaker 1: can master those three pillars of investing, you will beat

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Speaker 1: the averages in any market. And if you need help

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Speaker 1: with that, that is exactly what I teach members of

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Speaker 1: Heresy Financial University. So if you're interested, link is in

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Speaker 1: the description below. As always, thanks so much watching have

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Speaker 1: a great day.