1 00:00:01,080 --> 00:00:05,039 Speaker 1: Welcome back, ladies and gentlemen, to another episode of financial Heresy, 2 00:00:05,080 --> 00:00:07,920 Speaker 1: where we talk about how money works so that you 3 00:00:07,960 --> 00:00:12,159 Speaker 1: can make more, keep more, and give more. There's a 4 00:00:12,200 --> 00:00:15,520 Speaker 1: lot going on in the world today. One of them 5 00:00:15,760 --> 00:00:19,880 Speaker 1: is the yield curve inversion. It's something that people have 6 00:00:19,960 --> 00:00:23,520 Speaker 1: been talking a lot about lately. It's something that actually 7 00:00:23,600 --> 00:00:27,040 Speaker 1: came up earlier in the year as well, and so 8 00:00:27,080 --> 00:00:29,400 Speaker 1: we are going to talk about a couple of things 9 00:00:29,440 --> 00:00:33,840 Speaker 1: regarding interest rates. Number One, um, we're gonna really take 10 00:00:33,880 --> 00:00:38,880 Speaker 1: a deep dive into interest rates, into bond prices, bond yields, 11 00:00:38,880 --> 00:00:42,319 Speaker 1: so that you can really understand the relationship between these 12 00:00:42,360 --> 00:00:46,560 Speaker 1: things how they work, because that's essential to understand Number two. 13 00:00:46,880 --> 00:00:50,840 Speaker 1: Then we're gonna use that knowledge to look at how 14 00:00:50,880 --> 00:00:55,000 Speaker 1: the yield curve works and what it means, if anything, 15 00:00:55,400 --> 00:00:58,520 Speaker 1: to see if it's important that the yield curve is 16 00:00:58,600 --> 00:01:01,400 Speaker 1: inverting right now, We're going to talk about what that 17 00:01:01,440 --> 00:01:04,800 Speaker 1: means that it's inverted, and then talk about the causes 18 00:01:04,959 --> 00:01:07,720 Speaker 1: of why it is inverting and what that means for 19 00:01:07,760 --> 00:01:12,200 Speaker 1: the future. Because many people have differing opinions about what 20 00:01:12,360 --> 00:01:16,760 Speaker 1: an inverted yield curve actually means for the state of 21 00:01:16,800 --> 00:01:21,559 Speaker 1: our economy. Uh So let's start off with interest rates. 22 00:01:22,160 --> 00:01:25,559 Speaker 1: The number one thing that people need to understand about 23 00:01:25,600 --> 00:01:29,600 Speaker 1: interest rates is that interest rates are the cost of money. 24 00:01:30,080 --> 00:01:32,880 Speaker 1: Interest rates are not, uh not what it costs to 25 00:01:32,959 --> 00:01:35,280 Speaker 1: borrow money. This is how the rich think of this. 26 00:01:35,400 --> 00:01:38,280 Speaker 1: They think of this as interest rates are the price 27 00:01:38,720 --> 00:01:45,240 Speaker 1: to purchase money. Interest rates are the cost of buying money. 28 00:01:45,280 --> 00:01:48,480 Speaker 1: So when you look at money, there are going to 29 00:01:48,560 --> 00:01:53,280 Speaker 1: be different interest rates associated with purchasing new amounts of 30 00:01:53,320 --> 00:01:55,600 Speaker 1: money depending on what you're going to be using that 31 00:01:55,640 --> 00:01:59,320 Speaker 1: money for, which makes sense, right. If you're going to 32 00:01:59,400 --> 00:02:02,120 Speaker 1: be purchased money and then you're going to be going 33 00:02:02,160 --> 00:02:05,760 Speaker 1: to use that money to buy toys, uh, that might 34 00:02:05,840 --> 00:02:09,240 Speaker 1: be a little bit more expensive. Now, if somebody is 35 00:02:09,320 --> 00:02:12,040 Speaker 1: going to allow you to buy money from them and 36 00:02:12,120 --> 00:02:15,320 Speaker 1: you're going to use that to buy something that they 37 00:02:15,400 --> 00:02:18,400 Speaker 1: have a legal right to get back if you don't 38 00:02:18,440 --> 00:02:22,080 Speaker 1: pay them back the money, like a house, meaning that 39 00:02:22,160 --> 00:02:25,519 Speaker 1: debt is collateralized, then you're gonna get a much more 40 00:02:25,680 --> 00:02:28,919 Speaker 1: favorable interest rate. The cost of buying is going to 41 00:02:29,000 --> 00:02:33,000 Speaker 1: be really low. Cost of buying that money. So that's 42 00:02:33,080 --> 00:02:36,320 Speaker 1: how we need to look at interest rates. Number one 43 00:02:36,400 --> 00:02:40,399 Speaker 1: is that they're they're the cost of purchasing money. Now, 44 00:02:40,480 --> 00:02:43,400 Speaker 1: what the rich do is they buy money and then 45 00:02:43,400 --> 00:02:47,200 Speaker 1: they use that money to buy assets, and those assets 46 00:02:47,240 --> 00:02:50,560 Speaker 1: then produce money that they use to pay back the 47 00:02:50,680 --> 00:02:54,680 Speaker 1: money that they borrowed that they bought. What the poor 48 00:02:54,760 --> 00:02:57,280 Speaker 1: do is they buy money and then they use that 49 00:02:57,320 --> 00:03:02,639 Speaker 1: money to buy toys, grocery liabilities, and then they don't 50 00:03:02,639 --> 00:03:05,120 Speaker 1: have anything left over and they go have have to 51 00:03:05,120 --> 00:03:08,200 Speaker 1: go work over time or work a side job in 52 00:03:08,280 --> 00:03:11,320 Speaker 1: order to pay back that money. Um. Now, this is 53 00:03:11,360 --> 00:03:14,079 Speaker 1: nothing new. This is you know, many many, many people 54 00:03:14,520 --> 00:03:16,920 Speaker 1: much smarter than I have talked about this many times. 55 00:03:17,680 --> 00:03:21,720 Speaker 1: But really that's the distinguishing factor here is that the 56 00:03:21,760 --> 00:03:24,080 Speaker 1: poor look at money and say, hey, I'd like to 57 00:03:24,120 --> 00:03:26,880 Speaker 1: borrow some so that I can go have fun. The 58 00:03:27,080 --> 00:03:28,880 Speaker 1: rich look at money and they say, hey, I'd like 59 00:03:28,919 --> 00:03:32,639 Speaker 1: to borrow some so that I can buy assets. Now. Uh, 60 00:03:32,680 --> 00:03:35,280 Speaker 1: The reason why it's important to understand this is because 61 00:03:35,920 --> 00:03:39,040 Speaker 1: for every for every bar where there's also a lender. 62 00:03:39,200 --> 00:03:43,480 Speaker 1: There's two sides to every piece of debt. Um there's 63 00:03:43,520 --> 00:03:45,720 Speaker 1: somebody who is doing the lending and somebody who's doing 64 00:03:45,720 --> 00:03:49,040 Speaker 1: the borrowing. When this debt is created, you actually have 65 00:03:49,120 --> 00:03:53,760 Speaker 1: a contract created a legal piece of paper, and many 66 00:03:53,800 --> 00:03:57,760 Speaker 1: times it is called a bond, and a bond is 67 00:03:57,920 --> 00:04:01,960 Speaker 1: literally just debt between ween two people. There's a borrower 68 00:04:02,040 --> 00:04:05,080 Speaker 1: on one side and a lender on the other side, 69 00:04:05,840 --> 00:04:08,280 Speaker 1: the same thing as when you swipe your credit card, 70 00:04:08,480 --> 00:04:12,200 Speaker 1: when you get a mortgage, as when the government borrows. 71 00:04:12,240 --> 00:04:14,760 Speaker 1: These are all forms of debt, and so some forms 72 00:04:14,800 --> 00:04:18,839 Speaker 1: of debt they're just called bonds. Um. Now, bonds are 73 00:04:18,920 --> 00:04:22,680 Speaker 1: piece are forms of debt that are uh, there's a 74 00:04:22,680 --> 00:04:25,440 Speaker 1: lot of demand for them, and so relative to others. 75 00:04:25,480 --> 00:04:28,320 Speaker 1: Like if you have you you oh, Bank of America 76 00:04:28,680 --> 00:04:31,000 Speaker 1: your you know, thousand dollars for your credit card bill 77 00:04:31,120 --> 00:04:35,160 Speaker 1: this month, um, chances are Chase doesn't want that, uh 78 00:04:35,600 --> 00:04:38,880 Speaker 1: doesn't want that debt from Bank of America. Chances are 79 00:04:39,000 --> 00:04:41,640 Speaker 1: your aunt Sally doesn't want that debt from Bank of America. 80 00:04:41,960 --> 00:04:44,359 Speaker 1: So that kind of debt isn't bought and sold. The 81 00:04:44,400 --> 00:04:46,279 Speaker 1: only time that kind of debt is bought and sold 82 00:04:46,360 --> 00:04:49,520 Speaker 1: is if you start, you know, being delinquent on your payments, 83 00:04:49,560 --> 00:04:52,200 Speaker 1: your default. The Bank of America packages all the bad 84 00:04:52,200 --> 00:04:54,600 Speaker 1: debt together and they sell it to somebody called a 85 00:04:55,080 --> 00:04:58,680 Speaker 1: you know, a collector, debt collector and they sell it 86 00:04:58,760 --> 00:05:02,000 Speaker 1: for ten cent so on the dollar, and then that 87 00:05:02,400 --> 00:05:05,120 Speaker 1: the collectors try and get as much as they can 88 00:05:05,640 --> 00:05:08,520 Speaker 1: once they own your debt. Apart from that, though, that 89 00:05:08,600 --> 00:05:10,760 Speaker 1: kind of debt is really not bought and sold a lot. However, 90 00:05:11,200 --> 00:05:17,520 Speaker 1: debt from entities like Google and UH, from companies like Apple, 91 00:05:17,760 --> 00:05:21,960 Speaker 1: and from governments like the United States government. Uh, this 92 00:05:22,040 --> 00:05:24,760 Speaker 1: debt is bought and sold a lot. It's a lot 93 00:05:24,839 --> 00:05:27,279 Speaker 1: more liquid, there's a lot more of it, and these 94 00:05:27,440 --> 00:05:31,920 Speaker 1: entities that do the borrowing and the lending are a 95 00:05:31,960 --> 00:05:34,040 Speaker 1: little bit have a little bit more of a track record, 96 00:05:34,520 --> 00:05:37,200 Speaker 1: and so there is a little bit more demand to 97 00:05:37,440 --> 00:05:41,159 Speaker 1: be buying and selling this debt. So what does it 98 00:05:41,279 --> 00:05:45,479 Speaker 1: mean when debt is bought? We're sold? Because, Um, we 99 00:05:45,760 --> 00:05:48,880 Speaker 1: just talked about how all debt, whether it's a bond 100 00:05:49,000 --> 00:05:51,440 Speaker 1: or not, is just one person borrowing from another. We 101 00:05:51,520 --> 00:05:55,440 Speaker 1: also talked about the interest rate being the price of money. Um, 102 00:05:55,480 --> 00:05:57,919 Speaker 1: but now things are getting a little bit convoluted because 103 00:05:57,920 --> 00:06:00,280 Speaker 1: we're talking about that debt itself being bought us old. 104 00:06:00,360 --> 00:06:03,559 Speaker 1: So let's break it down very simply. You've got Uncle Sam, 105 00:06:03,680 --> 00:06:07,640 Speaker 1: the United States government. They've got a military, they've got 106 00:06:07,680 --> 00:06:11,000 Speaker 1: a tax base, and they want to borrow some money 107 00:06:11,160 --> 00:06:12,919 Speaker 1: because they want to spend more than what they're getting 108 00:06:12,920 --> 00:06:16,000 Speaker 1: in taxes. At the end of the day, they can 109 00:06:16,080 --> 00:06:22,960 Speaker 1: always enforce through uh whatever means necessary, higher taxation in 110 00:06:23,080 --> 00:06:25,880 Speaker 1: order to pay off debt if they want to, if 111 00:06:25,880 --> 00:06:28,400 Speaker 1: they need to, if they have to. So they're a 112 00:06:28,400 --> 00:06:32,640 Speaker 1: pretty low risk lender. So if I'm sitting on a 113 00:06:32,640 --> 00:06:35,520 Speaker 1: fat pile of cash and I don't need to make 114 00:06:35,560 --> 00:06:38,880 Speaker 1: a large return, I just want to make a safe return, 115 00:06:39,160 --> 00:06:41,760 Speaker 1: I might lend some to the United States government. So 116 00:06:41,839 --> 00:06:44,640 Speaker 1: let's say I throw Uncle Sam a thousand bucks because 117 00:06:44,640 --> 00:06:47,240 Speaker 1: I want to earn a safe return on that. The 118 00:06:47,400 --> 00:06:50,600 Speaker 1: going right right now on that is about four percent, 119 00:06:51,720 --> 00:06:54,839 Speaker 1: So I give them. I give them a thousand bucks, 120 00:06:55,279 --> 00:06:57,960 Speaker 1: and then in one year from now, I get forty 121 00:06:57,960 --> 00:07:00,719 Speaker 1: bucks on top of my thousand bucks back. So I 122 00:07:00,760 --> 00:07:03,760 Speaker 1: made my made my four percent. So let's say I 123 00:07:03,839 --> 00:07:07,640 Speaker 1: give them my thousand bucks. But tomorrow something comes up 124 00:07:07,760 --> 00:07:10,080 Speaker 1: and I realized I'm not sitting on as fat of 125 00:07:10,120 --> 00:07:12,840 Speaker 1: a stack of cash as I thought I was. Suddenly 126 00:07:12,920 --> 00:07:17,040 Speaker 1: I am in need of some extra money and I 127 00:07:17,200 --> 00:07:20,800 Speaker 1: need that thousand dollars back. Well, the government has already 128 00:07:20,800 --> 00:07:23,200 Speaker 1: spent at Uncle Sam they've got, you know, he's got 129 00:07:23,320 --> 00:07:26,000 Speaker 1: holes in his pockets. That money is on fire the 130 00:07:26,080 --> 00:07:28,840 Speaker 1: moment it comes in. It's been spent last year, so 131 00:07:29,280 --> 00:07:32,120 Speaker 1: it's not there anymore. So what do I need to 132 00:07:32,200 --> 00:07:35,280 Speaker 1: do in order to get my money back? Well, what 133 00:07:35,320 --> 00:07:37,240 Speaker 1: I'm gonna do is I'm gonna go around and I'm 134 00:07:37,240 --> 00:07:40,240 Speaker 1: gonna ask anybody. I'm gonna say, hey, does anybody want 135 00:07:40,360 --> 00:07:44,040 Speaker 1: the United States Government to owe you money instead of me? 136 00:07:44,080 --> 00:07:46,400 Speaker 1: Because right now the United States Government owes me money. 137 00:07:46,560 --> 00:07:49,120 Speaker 1: Uncle Sam is going to pay me a thousand, forty 138 00:07:49,160 --> 00:07:52,160 Speaker 1: dollars next year. Does anybody else want to be in 139 00:07:52,200 --> 00:07:58,360 Speaker 1: that position? So there might be thousands of people who 140 00:07:58,400 --> 00:08:00,720 Speaker 1: want to be in that position. So let's say there 141 00:08:00,760 --> 00:08:02,400 Speaker 1: are a lot of you who all want to be 142 00:08:02,400 --> 00:08:06,280 Speaker 1: in that position. What will happen is I'll say, hey, okay, 143 00:08:06,480 --> 00:08:09,840 Speaker 1: well you can buy this debt from me for a 144 00:08:09,920 --> 00:08:15,240 Speaker 1: thousand dollars so that when you pay me a thousand dollars, 145 00:08:15,680 --> 00:08:18,560 Speaker 1: I walk away without taking a loss. I get my 146 00:08:18,600 --> 00:08:23,440 Speaker 1: thousand bucks back. You spent a thousand dollars. Now Here 147 00:08:23,560 --> 00:08:27,800 Speaker 1: is the key. How much money will Uncle Sam pay 148 00:08:27,840 --> 00:08:33,360 Speaker 1: you if you buy that debt? One thousand, forty dollars. Now, 149 00:08:33,480 --> 00:08:35,880 Speaker 1: let's say there are a lot of you who want this, 150 00:08:35,960 --> 00:08:37,560 Speaker 1: and so there's a little bit of an auction, A 151 00:08:37,600 --> 00:08:40,640 Speaker 1: bidding war goes for this debt that I that I own, 152 00:08:40,960 --> 00:08:43,560 Speaker 1: the government owes me money. Everybody wants in on it. 153 00:08:44,160 --> 00:08:46,600 Speaker 1: So instead of selling it for a thousand dollars, I 154 00:08:46,640 --> 00:08:50,319 Speaker 1: sell that debt for one thousand forty dollars. So you 155 00:08:50,360 --> 00:08:53,640 Speaker 1: buy this stept from me for one thousand forty dollars. 156 00:08:53,760 --> 00:08:57,360 Speaker 1: So a question how much does he does Uncle Sam 157 00:08:57,440 --> 00:09:03,080 Speaker 1: pay you in a year? One thousand forty dollars. So 158 00:09:03,200 --> 00:09:06,160 Speaker 1: Uncle Sam still has to pay four percent because Uncle 159 00:09:06,240 --> 00:09:08,880 Speaker 1: Sam borrowed a thousand from me, and at the end 160 00:09:09,160 --> 00:09:11,319 Speaker 1: of the loan he has to pay back a thousand 161 00:09:11,360 --> 00:09:15,160 Speaker 1: forty regardless of who he's paying that money back to 162 00:09:16,240 --> 00:09:18,560 Speaker 1: his interest rate. Uncle Sam's rate that he has to 163 00:09:18,559 --> 00:09:24,760 Speaker 1: pay is still four but the rates have changed because 164 00:09:24,800 --> 00:09:27,840 Speaker 1: of the demand for that debt in between when I 165 00:09:27,960 --> 00:09:30,360 Speaker 1: lent him the money and when you bought that debt 166 00:09:30,400 --> 00:09:34,959 Speaker 1: from me. So I sell you that bond for one 167 00:09:35,000 --> 00:09:38,800 Speaker 1: thousand forty dollars in one year, you are then going 168 00:09:38,880 --> 00:09:41,600 Speaker 1: to get one thousand forty dollars from Uncle Sam instead 169 00:09:41,640 --> 00:09:43,599 Speaker 1: of me, because now you own the debt instead of me. 170 00:09:44,480 --> 00:09:46,600 Speaker 1: I take my thousand forty bucks. I walk away with 171 00:09:46,640 --> 00:09:49,120 Speaker 1: my nice little four percent profit. In one day, you 172 00:09:49,160 --> 00:09:51,400 Speaker 1: pay a thousand forty dollars. Next year you get one 173 00:09:51,440 --> 00:09:53,719 Speaker 1: thousand forty dollars back from Uncle Sam. What is your 174 00:09:53,800 --> 00:10:00,120 Speaker 1: interest rate? Zero percent? You get you get zero on top, 175 00:10:00,280 --> 00:10:05,959 Speaker 1: zero loss, zero gain nominally speaking, so you get exactly 176 00:10:06,000 --> 00:10:08,400 Speaker 1: what you paid. Now we can see where this goes. 177 00:10:08,480 --> 00:10:11,800 Speaker 1: Let's go the uh. Let's go the an extreme. Let's 178 00:10:11,800 --> 00:10:14,079 Speaker 1: say you paid me two thousand dollars for it. Well, 179 00:10:14,240 --> 00:10:16,000 Speaker 1: when you get paid back, you're only going to get 180 00:10:16,000 --> 00:10:18,559 Speaker 1: a thousand forty. You're you're taking a loss. That's a 181 00:10:18,679 --> 00:10:22,720 Speaker 1: negative interest rate that you're getting. Still positive for Uncle Sam. 182 00:10:22,760 --> 00:10:25,080 Speaker 1: He borrowed a thousand pays back a thousand forty, But 183 00:10:25,280 --> 00:10:27,480 Speaker 1: you paid two thousand dollars in order to get a 184 00:10:27,480 --> 00:10:29,719 Speaker 1: thousand forty dollars back. That's a bad deal for you. 185 00:10:29,960 --> 00:10:32,640 Speaker 1: Let's go the other way. Let's say when I need 186 00:10:32,640 --> 00:10:35,680 Speaker 1: my money, so does everybody else. So there's nobody that 187 00:10:35,760 --> 00:10:39,000 Speaker 1: wants Uncle Sam's debt. That means that when I go 188 00:10:39,040 --> 00:10:40,880 Speaker 1: to sell it to you, you can say, hey, you 189 00:10:40,920 --> 00:10:42,600 Speaker 1: know what, I'm willing to buy it from you, but 190 00:10:42,720 --> 00:10:45,120 Speaker 1: I'm not gonna pay full price for it. I'll give 191 00:10:45,160 --> 00:10:48,679 Speaker 1: you fifty bucks. Um well, okay, well fifty bucks is 192 00:10:48,679 --> 00:10:51,120 Speaker 1: pretty extreme. So let's say five hundred bucks. You give 193 00:10:51,120 --> 00:10:55,960 Speaker 1: me five hundred bucks, and you get now in uh 194 00:10:56,000 --> 00:10:58,880 Speaker 1: in a year, one thousand forty dollars from Uncle Sam. 195 00:10:58,920 --> 00:11:03,120 Speaker 1: That's a hugely positive interest rate. You're making bank on that. 196 00:11:03,760 --> 00:11:07,560 Speaker 1: And so what we're watching here is once the debt 197 00:11:07,760 --> 00:11:13,200 Speaker 1: is created, once that loan is made, as that loan 198 00:11:13,360 --> 00:11:16,840 Speaker 1: gets bought and sold between people on the open market, 199 00:11:17,640 --> 00:11:21,280 Speaker 1: the as that price is being is going up and 200 00:11:21,320 --> 00:11:24,959 Speaker 1: going down. What that does is that means that the 201 00:11:25,000 --> 00:11:27,920 Speaker 1: interest rate that yields for the new buyers of that debt, 202 00:11:28,679 --> 00:11:32,240 Speaker 1: it goes up and down. So this is how bonds 203 00:11:33,000 --> 00:11:38,120 Speaker 1: prices and yields are inversely correlated. So when the bond 204 00:11:38,240 --> 00:11:40,400 Speaker 1: price goes down, you get to buy that debt for 205 00:11:40,440 --> 00:11:43,760 Speaker 1: a lot cheaper. That means at the exact same time 206 00:11:43,880 --> 00:11:46,160 Speaker 1: that the interest rate paid on that debt is a 207 00:11:46,200 --> 00:11:50,720 Speaker 1: lot higher. Not the interest rate from the borrower's perspective, 208 00:11:50,720 --> 00:11:53,240 Speaker 1: because they borrowed a thousand and they're paying back a 209 00:11:53,240 --> 00:11:57,840 Speaker 1: thousand forty. But for the new buyers of that debt, 210 00:11:58,360 --> 00:12:01,760 Speaker 1: that interest rate has changed and constantly as supply demand 211 00:12:01,800 --> 00:12:05,280 Speaker 1: pushes the debt up and down. Now, the last thing 212 00:12:05,320 --> 00:12:09,679 Speaker 1: to know about this is that competition is at play. 213 00:12:09,760 --> 00:12:12,120 Speaker 1: I'm not the only one who lent Uncle Sam a 214 00:12:12,160 --> 00:12:16,400 Speaker 1: thousand bucks. There's millions of us, and since there are 215 00:12:16,440 --> 00:12:20,560 Speaker 1: so many, this pushes some sort of an equilibrium between 216 00:12:20,840 --> 00:12:26,800 Speaker 1: the new debt interest rates and the previously existing interest rates. 217 00:12:27,360 --> 00:12:29,439 Speaker 1: So if I go out to the open market, I say, hey, 218 00:12:29,440 --> 00:12:31,319 Speaker 1: I'd like to sell this debt. I you know I'm 219 00:12:31,320 --> 00:12:33,880 Speaker 1: gonna get a thousand forty dollars back. I would like 220 00:12:33,960 --> 00:12:37,160 Speaker 1: to sell it to you for two thousand dollars. Nobody 221 00:12:37,160 --> 00:12:39,719 Speaker 1: will buy it from me, because they're not going to 222 00:12:39,840 --> 00:12:42,800 Speaker 1: pay two thousand just to get a thousand forty if 223 00:12:42,800 --> 00:12:46,120 Speaker 1: they can make a new loan to Uncle Sam themselves 224 00:12:46,880 --> 00:12:50,880 Speaker 1: for a thousand and get a thousand forty. So there's 225 00:12:50,920 --> 00:12:54,280 Speaker 1: a supplying demand and equilibrium happening here from all of 226 00:12:54,320 --> 00:12:57,400 Speaker 1: the people buying and selling all the debt, many many 227 00:12:57,480 --> 00:13:02,000 Speaker 1: actors participating in this game lending to the government. Then 228 00:13:02,040 --> 00:13:05,240 Speaker 1: that debt being bought and sold from each other and 229 00:13:05,280 --> 00:13:07,600 Speaker 1: by the way, it's not just the government, it's all entities. 230 00:13:07,800 --> 00:13:12,000 Speaker 1: So the interest rates for more risky organizations will be higher, 231 00:13:12,240 --> 00:13:15,520 Speaker 1: for less risky organizations will be lower. And so it's 232 00:13:15,600 --> 00:13:19,080 Speaker 1: constantly being lent, so that those bonds are being created 233 00:13:19,120 --> 00:13:22,240 Speaker 1: every time money is loaned, and then those bonds are 234 00:13:22,240 --> 00:13:25,360 Speaker 1: being bought and sold on the open market um as 235 00:13:25,440 --> 00:13:28,040 Speaker 1: people want more of it and as people want less 236 00:13:28,040 --> 00:13:29,720 Speaker 1: of it, and the prices are going to go up 237 00:13:29,720 --> 00:13:32,400 Speaker 1: and down. And if the prices go down, that means 238 00:13:32,400 --> 00:13:34,600 Speaker 1: interest rates go up. That means if the government wants 239 00:13:34,640 --> 00:13:37,640 Speaker 1: to lend new money again, they're gonna be forced to 240 00:13:37,679 --> 00:13:41,560 Speaker 1: do it at the rate that the market is currently requiring. 241 00:13:41,840 --> 00:13:44,640 Speaker 1: Because if I go to sell my thousand, my thousand 242 00:13:44,640 --> 00:13:48,120 Speaker 1: dollars for a thousand forty dollars bond, which is four percent, 243 00:13:48,480 --> 00:13:50,480 Speaker 1: if I go to sell that to somebody and somebody 244 00:13:50,480 --> 00:13:54,800 Speaker 1: only wants to pay me for it, well, then the 245 00:13:54,960 --> 00:13:58,959 Speaker 1: government is not going to be able to borrow at 246 00:13:59,000 --> 00:14:04,560 Speaker 1: four percent because nobody's willing to buy debt for four 247 00:14:04,600 --> 00:14:07,280 Speaker 1: percent right now. The only price people are willing to 248 00:14:07,320 --> 00:14:09,679 Speaker 1: buy debt at pushes that interest right up to you know, 249 00:14:09,800 --> 00:14:12,880 Speaker 1: fift sixteen percent, whatever that is. And so if the 250 00:14:12,920 --> 00:14:15,640 Speaker 1: government wants to borrow more money in that situation, they're 251 00:14:15,640 --> 00:14:19,280 Speaker 1: gonna have to borrow at whatever that interest rate is. 252 00:14:19,560 --> 00:14:22,000 Speaker 1: So there's always going to be an equilibrium there between this. 253 00:14:22,160 --> 00:14:24,920 Speaker 1: But the bottom line is that as bond prices go down, 254 00:14:24,960 --> 00:14:28,200 Speaker 1: the interest rates go up, and as interest rates go down, 255 00:14:28,240 --> 00:14:32,440 Speaker 1: bond prices go up. There inversely correlated by math. It's 256 00:14:32,520 --> 00:14:37,600 Speaker 1: not just hey, these things sometimes move, uh, inversely correlated 257 00:14:37,600 --> 00:14:41,280 Speaker 1: to each other. No, it's just literally math. It's it's 258 00:14:41,320 --> 00:14:44,160 Speaker 1: it's the way that the math works out on how 259 00:14:44,200 --> 00:14:47,400 Speaker 1: it is paid back. So that's how a bond works. 260 00:14:47,920 --> 00:14:50,160 Speaker 1: So we've gone through kind of like a masterclass here 261 00:14:50,240 --> 00:14:53,480 Speaker 1: on on what interest rates are, how the rich use 262 00:14:53,880 --> 00:14:56,080 Speaker 1: debt to buy assets, what the poor do with it, 263 00:14:56,280 --> 00:14:58,120 Speaker 1: what it bond is, how in debt is created then 264 00:14:58,160 --> 00:15:01,200 Speaker 1: it's bought and sold, and how the interest rate versus 265 00:15:01,200 --> 00:15:04,160 Speaker 1: the price works. We have to understand that as the 266 00:15:04,200 --> 00:15:06,880 Speaker 1: foundation to get into the yield curve, because this is 267 00:15:06,920 --> 00:15:09,400 Speaker 1: where things start to get dicey, things start to get 268 00:15:09,440 --> 00:15:14,640 Speaker 1: spicy about the economy. So what is the yield curve? 269 00:15:15,440 --> 00:15:18,920 Speaker 1: The yield curve is a graph. It is a visual 270 00:15:19,040 --> 00:15:24,920 Speaker 1: representation of the price of debt the interest rates over time. 271 00:15:25,560 --> 00:15:28,000 Speaker 1: So think about it this way. Think about a mortgage. 272 00:15:28,200 --> 00:15:30,840 Speaker 1: If you've ever shopped for a mortgage, if you've ever 273 00:15:30,880 --> 00:15:33,680 Speaker 1: listened to somebody like Dave Ramsey, he says, hey, if 274 00:15:33,680 --> 00:15:35,520 Speaker 1: you're going to buy a house, buy it for cash. 275 00:15:35,560 --> 00:15:37,360 Speaker 1: But if you have to get a mortgage to a 276 00:15:37,400 --> 00:15:41,000 Speaker 1: fifteen year mortgage only, never go for a thirty year. Um. 277 00:15:41,040 --> 00:15:43,600 Speaker 1: What you'll notice if you ever looked at those is 278 00:15:43,720 --> 00:15:47,480 Speaker 1: the fifteen year mortgages are cheaper to have a lower 279 00:15:47,520 --> 00:15:50,840 Speaker 1: interest rate than the thirty year mortgages. So right now, 280 00:15:51,720 --> 00:15:57,280 Speaker 1: thirty year mortgage is somewhere around thirty percent I'm sorry, 281 00:15:57,440 --> 00:16:02,080 Speaker 1: at six seven eight percent is the interest rate on 282 00:16:02,200 --> 00:16:06,160 Speaker 1: a thirty year mortgage. Now, if we look at the 283 00:16:06,240 --> 00:16:10,200 Speaker 1: fifteen year mortgage rate, we know that it is going 284 00:16:10,240 --> 00:16:13,760 Speaker 1: to be cheaper than that. So the fifteen year mortgage 285 00:16:13,880 --> 00:16:17,280 Speaker 1: rate right now is going to be let me pull 286 00:16:17,320 --> 00:16:20,240 Speaker 1: it up right here, it's going to be slightly under that. 287 00:16:20,480 --> 00:16:26,000 Speaker 1: The reason for the fifteen year being cheaper, think about it, 288 00:16:26,120 --> 00:16:29,760 Speaker 1: Have any guesses the fifteen year mortgage there's less risk, 289 00:16:30,160 --> 00:16:32,840 Speaker 1: there's less time for something to go wrong. Okay, I 290 00:16:32,880 --> 00:16:35,040 Speaker 1: just pulled it up thirty year fix straight right now 291 00:16:35,120 --> 00:16:39,360 Speaker 1: seven percent, fifteen year six point three six percent. So 292 00:16:39,360 --> 00:16:43,000 Speaker 1: it's significantly cheaper over number one over the period of 293 00:16:43,040 --> 00:16:46,920 Speaker 1: time for the borrower number two because there's less time 294 00:16:46,960 --> 00:16:51,240 Speaker 1: that you're paying all that interest on. So when you 295 00:16:51,600 --> 00:16:54,120 Speaker 1: when when you look at debt that has a shorter 296 00:16:54,160 --> 00:16:57,560 Speaker 1: time frame on it, it's going to be cheaper for 297 00:16:57,600 --> 00:17:01,800 Speaker 1: the barrow war because there's less risk from for the lender. Um, 298 00:17:01,840 --> 00:17:03,680 Speaker 1: imagine it this way. Your buddy comes to you and 299 00:17:03,680 --> 00:17:05,920 Speaker 1: he says, hey, I need to borrow a thousand bucks. 300 00:17:06,000 --> 00:17:08,080 Speaker 1: I'll literally give it to you tomorrow, but i'll give 301 00:17:08,080 --> 00:17:10,720 Speaker 1: it back to you tomorrow. My paycheck got delayed, my 302 00:17:10,800 --> 00:17:13,359 Speaker 1: rent is due, blah blah blah. Please just spot me 303 00:17:13,400 --> 00:17:15,840 Speaker 1: a thousand bucks. I'll give it back to you tomorrow. Uh. 304 00:17:15,880 --> 00:17:18,199 Speaker 1: You're probably gonna do it as long as you can 305 00:17:18,280 --> 00:17:20,520 Speaker 1: trust him. Uh, and you're not going to charge him 306 00:17:20,520 --> 00:17:22,720 Speaker 1: for it. But you've got somebody who comes to you 307 00:17:22,840 --> 00:17:25,040 Speaker 1: and says, hey, I need a barrow a thousand dollars. 308 00:17:25,320 --> 00:17:28,679 Speaker 1: I promise i'll give it back to you in three years. 309 00:17:30,520 --> 00:17:33,280 Speaker 1: What is the likelihood that you're going to do that? 310 00:17:33,720 --> 00:17:36,840 Speaker 1: Maybe it's probably a lot lower and if you do that, 311 00:17:36,880 --> 00:17:39,199 Speaker 1: you might say, okay, well, sure I'll give you a 312 00:17:39,200 --> 00:17:42,639 Speaker 1: thousand dollars, but look at the look at the the 313 00:17:42,720 --> 00:17:45,240 Speaker 1: inflation rate right now. So if you give me a 314 00:17:45,280 --> 00:17:49,040 Speaker 1: thousand dollars back in three years, the stuff that costs 315 00:17:49,080 --> 00:17:51,639 Speaker 1: me a thousand dollars right now is going to cost 316 00:17:51,680 --> 00:17:57,679 Speaker 1: me like hundred hundred, fourteen hundred dollars in three years. 317 00:17:58,080 --> 00:18:00,960 Speaker 1: So you'll say, sure, I'll lend a thousand bucks, you 318 00:18:00,960 --> 00:18:02,879 Speaker 1: pay me back in three years, But you have to 319 00:18:02,880 --> 00:18:06,920 Speaker 1: pay me back instead of a thousand dollars because while 320 00:18:07,119 --> 00:18:09,639 Speaker 1: you have my money, prices are going up, and by 321 00:18:09,640 --> 00:18:11,479 Speaker 1: the time you give me back that money, it's not 322 00:18:11,520 --> 00:18:15,400 Speaker 1: worth as much anymore. And so the longer the time 323 00:18:15,440 --> 00:18:20,000 Speaker 1: period of the debt in a normal environment, the longer 324 00:18:20,040 --> 00:18:23,200 Speaker 1: the time period for the debt, the higher that interest 325 00:18:23,320 --> 00:18:27,359 Speaker 1: rate is going to be. Normally, because number one, there's 326 00:18:27,400 --> 00:18:29,760 Speaker 1: more risk, like what happens if your buddy gets hit 327 00:18:29,840 --> 00:18:31,840 Speaker 1: by a car, what happens if he dips out and 328 00:18:31,920 --> 00:18:34,119 Speaker 1: leaves the country, and what happens if he does something 329 00:18:34,160 --> 00:18:36,480 Speaker 1: where he's not able to pay you back that money. 330 00:18:36,640 --> 00:18:40,200 Speaker 1: There's a lot higher chance of something like that happening. 331 00:18:40,760 --> 00:18:45,119 Speaker 1: If we go three years out versus tomorrow um. And 332 00:18:45,200 --> 00:18:49,359 Speaker 1: so the longer the debt is the maturity the time 333 00:18:49,359 --> 00:18:52,600 Speaker 1: frame until that debt is paid back, the higher the 334 00:18:52,720 --> 00:18:55,119 Speaker 1: interest rate is going to be because of things like 335 00:18:55,240 --> 00:19:00,600 Speaker 1: potential inflation and risk of default. And that that's nor Mole, right, 336 00:19:00,800 --> 00:19:03,159 Speaker 1: that's very clear for most people to be able to 337 00:19:03,240 --> 00:19:07,520 Speaker 1: put wrap your minds around. It seems intuitive and that 338 00:19:07,520 --> 00:19:11,800 Speaker 1: that's the way that things should be. So the yield 339 00:19:11,920 --> 00:19:16,080 Speaker 1: curve is a graphical visual representation of this, where you 340 00:19:16,119 --> 00:19:18,320 Speaker 1: have a graph, you have your x axis and your 341 00:19:18,440 --> 00:19:22,280 Speaker 1: y axis. And as the debt becomes longer and longer, 342 00:19:22,320 --> 00:19:24,399 Speaker 1: as it goes from one year to five years, at 343 00:19:24,400 --> 00:19:27,280 Speaker 1: ten years to fifteen to thirty, you're going to see 344 00:19:27,320 --> 00:19:30,119 Speaker 1: the interest rate on that debt become more and more 345 00:19:30,119 --> 00:19:32,000 Speaker 1: and more expensive. It's going to go higher and higher 346 00:19:32,000 --> 00:19:35,960 Speaker 1: and higher. This is normal. This is what you would 347 00:19:35,960 --> 00:19:42,040 Speaker 1: expect to see in a normal environment. So what is 348 00:19:42,480 --> 00:19:47,479 Speaker 1: an inverted yield curve? Because that is what everybody is 349 00:19:47,520 --> 00:19:52,000 Speaker 1: talking about right now. What is an inverted yield curve? 350 00:19:52,000 --> 00:19:54,720 Speaker 1: And inverted yield curve is going to be the exact opposite, 351 00:19:54,800 --> 00:19:59,160 Speaker 1: and it is strange. An inverted yield curve is where 352 00:19:59,160 --> 00:20:03,160 Speaker 1: you look at debt that's let's say five years, and 353 00:20:03,359 --> 00:20:06,520 Speaker 1: it has a higher interest rate than debt that is 354 00:20:06,560 --> 00:20:10,080 Speaker 1: further out at let's say ten or fifteen years. So 355 00:20:10,200 --> 00:20:13,280 Speaker 1: think about that. If you're looking at the choice between 356 00:20:13,280 --> 00:20:17,439 Speaker 1: two mortgages, a fifteen year and a thirty year, and 357 00:20:17,480 --> 00:20:19,359 Speaker 1: the fifteen year, it's already going to be higher payments 358 00:20:19,400 --> 00:20:20,800 Speaker 1: because you have to pay back the whole thing within 359 00:20:20,840 --> 00:20:23,200 Speaker 1: fifteen years versus thirty year gives you more time, right, 360 00:20:24,000 --> 00:20:28,400 Speaker 1: So you're looking at this, uh, these two mortgage options. Normally, 361 00:20:28,760 --> 00:20:31,880 Speaker 1: you'd have some incentive to go for the fifteen because 362 00:20:31,880 --> 00:20:34,320 Speaker 1: it's a cheaper interest rate, But you'd also have some 363 00:20:34,400 --> 00:20:36,520 Speaker 1: incentive to go to the third year because it's longer, 364 00:20:36,560 --> 00:20:39,840 Speaker 1: so it's cheap, so it's you know, lower, lower monthly payments. 365 00:20:40,119 --> 00:20:44,080 Speaker 1: But what if it was flipped and the interest rate 366 00:20:44,119 --> 00:20:46,600 Speaker 1: on the third year was cheaper than the interest rate 367 00:20:46,640 --> 00:20:51,040 Speaker 1: on the fifteen Here you would have zero incentive to 368 00:20:51,119 --> 00:20:54,000 Speaker 1: choose the fifteen. Now, maybe for a mortgage because of 369 00:20:54,040 --> 00:20:56,480 Speaker 1: the way that the interest has calculated, because you want 370 00:20:56,480 --> 00:20:59,440 Speaker 1: to pay pay it off faster than befced two that 371 00:20:59,520 --> 00:21:01,720 Speaker 1: then maybe there's still a little bit of incentive there, 372 00:21:01,760 --> 00:21:03,960 Speaker 1: but most of the incentive comes in the form of 373 00:21:04,000 --> 00:21:08,080 Speaker 1: the interest rate. That money costs more to buy normally 374 00:21:08,760 --> 00:21:11,880 Speaker 1: at the longer end than it does at the cheap rent. 375 00:21:12,080 --> 00:21:15,120 Speaker 1: But when the yield curve is inverted, this is all 376 00:21:15,320 --> 00:21:18,920 Speaker 1: flipped upside down. It's all on its head. It means 377 00:21:19,040 --> 00:21:25,760 Speaker 1: borrowers are able to borrow at longer dates, longer maturities, 378 00:21:26,119 --> 00:21:27,720 Speaker 1: debt that doesn't have to be repaid for a longer 379 00:21:27,720 --> 00:21:31,520 Speaker 1: amount of time, and it's cheaper than doing it in 380 00:21:31,560 --> 00:21:36,480 Speaker 1: a short amount of time. Now, specifically, regarding the yield 381 00:21:36,560 --> 00:21:40,360 Speaker 1: curve that everybody talks about. Normally, what people are referring 382 00:21:40,400 --> 00:21:45,000 Speaker 1: to is the United States government debt. They're called treasuries, 383 00:21:45,160 --> 00:21:48,120 Speaker 1: their bonds, they're called treasuries. They're looking at the two 384 00:21:48,200 --> 00:21:51,639 Speaker 1: year treasury versus the ten year treasury. This is the 385 00:21:51,840 --> 00:21:55,120 Speaker 1: normal measure of the yield curve, is the two year 386 00:21:55,119 --> 00:21:57,800 Speaker 1: treasury versus the ten year treasury. So the government borrows 387 00:21:57,840 --> 00:22:01,000 Speaker 1: for two years, government borrows for ten years. You look 388 00:22:01,000 --> 00:22:03,400 Speaker 1: at the interest rates on those and normally the ten 389 00:22:03,480 --> 00:22:05,840 Speaker 1: years more expensive. That interest rate is higher than the 390 00:22:05,880 --> 00:22:09,399 Speaker 1: two year, And when it's inverted, it's flipped. Now this 391 00:22:09,560 --> 00:22:15,880 Speaker 1: happened earlier. In UH, this happened already. But when it happened, 392 00:22:16,000 --> 00:22:18,840 Speaker 1: the Federal Reserve came out and said, no, no, no, no, no, 393 00:22:18,920 --> 00:22:21,400 Speaker 1: that's not really the indicator that we like to use 394 00:22:21,720 --> 00:22:23,600 Speaker 1: for an inverted yield curve. We like to use the 395 00:22:23,720 --> 00:22:28,520 Speaker 1: three month bill versus the ten year. UH. Really just 396 00:22:28,640 --> 00:22:31,520 Speaker 1: changing the game. And part of the backstory for why 397 00:22:31,560 --> 00:22:36,480 Speaker 1: they want to change the game is because the inverted 398 00:22:36,520 --> 00:22:39,680 Speaker 1: yield curve is a measure of the likelihood of a 399 00:22:39,720 --> 00:22:43,200 Speaker 1: recession coming soon. We're going to get into that UM. 400 00:22:43,240 --> 00:22:46,399 Speaker 1: But the yield curve inverted that everybody normally watches the 401 00:22:46,440 --> 00:22:49,040 Speaker 1: two and the ten FED came out and said, no, 402 00:22:49,160 --> 00:22:51,280 Speaker 1: that doesn't mean a recession is coming. We don't actually 403 00:22:51,280 --> 00:22:52,720 Speaker 1: like to look at the two in the ten. We 404 00:22:52,840 --> 00:22:55,160 Speaker 1: like to look at the three month and the ten um. 405 00:22:55,240 --> 00:22:57,720 Speaker 1: And so you know that was you know, they're constantly 406 00:22:57,720 --> 00:22:59,880 Speaker 1: doing things like that. And then when we had two 407 00:23:00,080 --> 00:23:04,600 Speaker 1: quarters in the first two quarters had declining g d P, 408 00:23:05,040 --> 00:23:08,240 Speaker 1: typically people say, hey, that's a recession. Like that's what 409 00:23:08,520 --> 00:23:12,920 Speaker 1: the typical UM UH definition of recession has been for 410 00:23:12,960 --> 00:23:15,159 Speaker 1: a long time is two consecutive quarters of a decline 411 00:23:15,160 --> 00:23:17,400 Speaker 1: in GDP. When that happened, they came out and said, 412 00:23:17,400 --> 00:23:19,199 Speaker 1: oh no, no, no, no, no, or not really in 413 00:23:19,240 --> 00:23:22,240 Speaker 1: a recession because the jobs market is really strong and 414 00:23:22,280 --> 00:23:25,280 Speaker 1: there's some other things. So, uh, they're always trying to 415 00:23:25,359 --> 00:23:28,080 Speaker 1: change things. Same same thing with how they change the 416 00:23:28,080 --> 00:23:31,880 Speaker 1: measurement of inflation. There's some private websites you can look 417 00:23:31,920 --> 00:23:34,879 Speaker 1: at that estimate that the inflation rate right now is 418 00:23:35,280 --> 00:23:39,439 Speaker 1: probably somewhere around sixteen eighteen percent and not the you 419 00:23:39,480 --> 00:23:42,720 Speaker 1: know eight percent that the official numbers say. It's because 420 00:23:42,800 --> 00:23:48,040 Speaker 1: the uh, the statistics that the government uses, they massage 421 00:23:48,080 --> 00:23:50,760 Speaker 1: the data and they do things to make prices look 422 00:23:50,800 --> 00:23:53,000 Speaker 1: like they're not going up as much. They have adjustments 423 00:23:53,040 --> 00:23:55,800 Speaker 1: built in, like, for instance, when the new iPhone comes out, 424 00:23:56,600 --> 00:23:58,760 Speaker 1: it's a lot more powerful, and so even though the 425 00:23:58,760 --> 00:24:00,760 Speaker 1: price of the iPhone went up, they say the price 426 00:24:00,800 --> 00:24:04,640 Speaker 1: of the iPhone actually went down because the chips inside 427 00:24:04,640 --> 00:24:07,400 Speaker 1: the new iPhones are so much more powerful, so you're 428 00:24:07,400 --> 00:24:09,080 Speaker 1: getting more for your money, and so they count that 429 00:24:09,160 --> 00:24:13,040 Speaker 1: as deflation, not inflation. So we got off on a 430 00:24:13,080 --> 00:24:16,240 Speaker 1: little bit of a bunny trail. They're back to the 431 00:24:16,280 --> 00:24:19,560 Speaker 1: yield curve inverted earlier this year, the two and the ten. 432 00:24:19,640 --> 00:24:22,360 Speaker 1: They said no big deal. Well, recently within the last 433 00:24:22,359 --> 00:24:26,720 Speaker 1: few weeks during October of the three month and the 434 00:24:26,800 --> 00:24:30,480 Speaker 1: ten flipped and it inverted. So the measure that the 435 00:24:30,520 --> 00:24:34,840 Speaker 1: Federal Reserve likes to use for the UH for whether 436 00:24:34,960 --> 00:24:39,280 Speaker 1: the invert yield curve is signaling a soon recession that 437 00:24:39,320 --> 00:24:42,840 Speaker 1: flipped as well. So we have to we have to 438 00:24:42,920 --> 00:24:47,399 Speaker 1: ask in order to understand why it signals a coming recession. 439 00:24:48,000 --> 00:24:53,560 Speaker 1: We have to understand UH why it inverts. And there 440 00:24:53,600 --> 00:24:59,440 Speaker 1: are two reasons why a yield curve would invert. One 441 00:24:59,480 --> 00:25:02,000 Speaker 1: of them has to do with intervention, and then one 442 00:25:02,040 --> 00:25:06,520 Speaker 1: of them has to do with UH intervention causing natural, 443 00:25:07,119 --> 00:25:10,080 Speaker 1: natural things to happen. So we're gonna take this slowly, 444 00:25:10,800 --> 00:25:15,240 Speaker 1: but let's deal with the first one. First intervention across 445 00:25:15,280 --> 00:25:19,159 Speaker 1: the board. If we look back throughout history, back since 446 00:25:19,280 --> 00:25:22,959 Speaker 1: the let's say the late nineties, we've had a history 447 00:25:23,080 --> 00:25:25,800 Speaker 1: of the Central Bank intervening more and more to rescue 448 00:25:26,080 --> 00:25:30,520 Speaker 1: our economy in UH in the dot com bubble burst, 449 00:25:30,840 --> 00:25:34,439 Speaker 1: the Greenspan put came in even before that. When we 450 00:25:34,480 --> 00:25:36,480 Speaker 1: look at this is a little known story. There's a 451 00:25:36,480 --> 00:25:40,879 Speaker 1: great book at about it called When Genius Failed Highly 452 00:25:40,920 --> 00:25:44,840 Speaker 1: recommend it um. It's about the fall of a hedge 453 00:25:44,840 --> 00:25:50,600 Speaker 1: fund called Long Term Capital Management. These were Nobel Prize winners, 454 00:25:50,600 --> 00:25:54,080 Speaker 1: supposed to be the smartest people in the world, and uh, 455 00:25:54,119 --> 00:25:57,480 Speaker 1: they invented a new way to make money risk free 456 00:25:57,600 --> 00:26:00,119 Speaker 1: and more than anybody. And we all know when that 457 00:26:00,200 --> 00:26:02,800 Speaker 1: happens that they're, you know, one move away from a 458 00:26:02,840 --> 00:26:06,000 Speaker 1: blow up. And blow up they did. Uh, they almost 459 00:26:06,000 --> 00:26:08,400 Speaker 1: took down the financial system. And so the FED got 460 00:26:08,400 --> 00:26:10,680 Speaker 1: together and got the big banks together and said, hey, look, 461 00:26:11,000 --> 00:26:13,399 Speaker 1: we're orchestrating this work, putting me on the room together. 462 00:26:13,760 --> 00:26:16,200 Speaker 1: You guys need to bail out this hedge fund because 463 00:26:16,240 --> 00:26:19,280 Speaker 1: if you don't, bad things could happen. And so that 464 00:26:19,359 --> 00:26:22,280 Speaker 1: was the first little uh opening of the door. The 465 00:26:22,320 --> 00:26:26,240 Speaker 1: Bible says, do not underestimate the day of small beginnings. 466 00:26:26,640 --> 00:26:29,840 Speaker 1: It's like a mustard seed, something very small grows into 467 00:26:29,880 --> 00:26:33,000 Speaker 1: something strong and big. Do not underestimate the day of 468 00:26:33,040 --> 00:26:37,159 Speaker 1: small beginnings because compounding interest and compounding growth impacts everything, 469 00:26:37,200 --> 00:26:39,320 Speaker 1: whether you're headed to heaven or hell. So when we 470 00:26:39,359 --> 00:26:41,960 Speaker 1: look at the Federal Reserve and we look at them 471 00:26:42,080 --> 00:26:45,640 Speaker 1: orchestrating that first bailout, they paid no money, they printed 472 00:26:45,680 --> 00:26:50,000 Speaker 1: no money. They just slightly cracked the door, and that 473 00:26:50,080 --> 00:26:53,520 Speaker 1: paved the way, set the precedence for going a little 474 00:26:53,520 --> 00:26:56,200 Speaker 1: bit further next time, and a little bit further next time, 475 00:26:56,440 --> 00:26:58,080 Speaker 1: and a little bit more until we get to where 476 00:26:58,080 --> 00:27:01,560 Speaker 1: we are today. So that happened late nineties. Then dot 477 00:27:01,600 --> 00:27:05,440 Speaker 1: Com bubble burst, Greenspan put comes in and he lowers 478 00:27:05,480 --> 00:27:09,320 Speaker 1: interest rates to save the economy from the stock market crashing. Well, 479 00:27:09,640 --> 00:27:12,240 Speaker 1: that adds fuel to the fire for the housing bubble, 480 00:27:12,960 --> 00:27:17,920 Speaker 1: housing bubble booms. We all know how that ended, massive crash. 481 00:27:18,480 --> 00:27:21,399 Speaker 1: They then stepped in again to bail out the economy 482 00:27:21,440 --> 00:27:23,640 Speaker 1: because they didn't learn their lesson the time before that, 483 00:27:24,000 --> 00:27:26,679 Speaker 1: and lowered interest rates again. And that wasn't enough, so 484 00:27:26,720 --> 00:27:30,240 Speaker 1: they had to do more, which was UH TARP, Troubled 485 00:27:30,240 --> 00:27:33,000 Speaker 1: Asset Relief Program, Toxic Asset Relief program, print a bunch 486 00:27:33,000 --> 00:27:36,960 Speaker 1: of money, bail at the banks, and so that that worked. 487 00:27:37,520 --> 00:27:39,240 Speaker 1: They printed a bunch of money, build at the banks 488 00:27:39,280 --> 00:27:42,639 Speaker 1: and bailed out a few large corporations, a bunch of people, 489 00:27:42,680 --> 00:27:46,800 Speaker 1: a bunch of UH CEOs got their fat paychecks, and 490 00:27:46,920 --> 00:27:51,080 Speaker 1: they were able to stop the economy from imploding that way. Well, 491 00:27:51,560 --> 00:27:55,960 Speaker 1: fast forward twenty nineteen, stuff starts to go wrong again 492 00:27:56,680 --> 00:27:59,959 Speaker 1: and UH many people don't realize this, but in twenty nine, 493 00:28:00,040 --> 00:28:04,480 Speaker 1: team financial market started to show big troubles. Um, there's 494 00:28:04,520 --> 00:28:06,400 Speaker 1: this thing called the repo market, which will dive into 495 00:28:06,480 --> 00:28:10,000 Speaker 1: at a later in a later episode. That started to 496 00:28:10,359 --> 00:28:12,800 Speaker 1: blow up, so the Federal Reserve had to step in 497 00:28:12,920 --> 00:28:16,000 Speaker 1: and start lending overnight into this repo market so that 498 00:28:16,040 --> 00:28:20,520 Speaker 1: banks had enough cash. The yield curve actually inverted then 499 00:28:20,680 --> 00:28:24,800 Speaker 1: in in August or September nineteen, and then fast forward 500 00:28:24,840 --> 00:28:27,480 Speaker 1: just a few months, everything started to fall apart in 501 00:28:27,520 --> 00:28:33,919 Speaker 1: about February one. Uh, that's when everything started to crash. 502 00:28:34,160 --> 00:28:38,440 Speaker 1: Everybody started becoming aware of this little, uh, little thing 503 00:28:38,600 --> 00:28:42,880 Speaker 1: called COVID and Uh. They decided that they needed to 504 00:28:42,880 --> 00:28:45,080 Speaker 1: build the economy out again. But what they did last 505 00:28:45,120 --> 00:28:47,720 Speaker 1: time wasn't good enough. Still, they had to do way more. 506 00:28:47,840 --> 00:28:50,800 Speaker 1: So they lowered interest rates to zero, and they printed 507 00:28:50,800 --> 00:28:52,760 Speaker 1: a bunch of money about the banks, and they printed 508 00:28:52,760 --> 00:28:54,360 Speaker 1: a bunch of money to bail out all the all 509 00:28:54,400 --> 00:28:56,560 Speaker 1: the businesses instead of just a few. And they printed 510 00:28:56,560 --> 00:28:58,080 Speaker 1: a bunch of money to bail out all the people 511 00:28:58,280 --> 00:28:59,920 Speaker 1: so that they could stay home and not have to work, 512 00:29:00,560 --> 00:29:02,680 Speaker 1: and print a bunch of extra money to give to 513 00:29:02,720 --> 00:29:04,360 Speaker 1: the government so they could spend it on whatever they 514 00:29:04,400 --> 00:29:08,400 Speaker 1: want just for good measure, and so we had this massive, 515 00:29:08,640 --> 00:29:12,520 Speaker 1: massive bailout. So we can see this trend here of 516 00:29:12,760 --> 00:29:16,840 Speaker 1: increasing these bailouts and these interventions along the way. And 517 00:29:16,920 --> 00:29:20,600 Speaker 1: every time you lower interest rates, you print money, prices 518 00:29:20,920 --> 00:29:23,440 Speaker 1: prices go up, you stop prices from falling at least 519 00:29:23,520 --> 00:29:25,800 Speaker 1: or prices go up. That's what's happened for the last 520 00:29:25,800 --> 00:29:28,280 Speaker 1: twenty years. So what does this have to do with 521 00:29:28,320 --> 00:29:32,320 Speaker 1: the yield curve? Well, when you have something that indicates 522 00:29:32,320 --> 00:29:36,800 Speaker 1: a recession is coming, and that indicator says that debt 523 00:29:37,000 --> 00:29:39,240 Speaker 1: is cheaper in the future than it is right now, 524 00:29:40,120 --> 00:29:44,600 Speaker 1: that that the two year treasury is more expensive than 525 00:29:44,640 --> 00:29:48,920 Speaker 1: the ten year treasury, the reason for that is intervention. 526 00:29:49,960 --> 00:29:54,480 Speaker 1: Because the market has now come to expect that if 527 00:29:54,560 --> 00:29:59,400 Speaker 1: we have trouble, the Fed will lower rates, that if 528 00:29:59,440 --> 00:30:03,520 Speaker 1: things start to implode, rates will drop to zero. Because 529 00:30:03,600 --> 00:30:07,240 Speaker 1: those central bankers that are here to rescue us. As 530 00:30:07,360 --> 00:30:10,000 Speaker 1: Ronald Reagan said, you know, I'm the scariest words are 531 00:30:10,160 --> 00:30:13,560 Speaker 1: I'm the government and I'm here to help. When they 532 00:30:13,600 --> 00:30:17,040 Speaker 1: come in and they lower interest rates and they bail 533 00:30:17,080 --> 00:30:19,720 Speaker 1: out the economy, that pushes rates down, they print a 534 00:30:19,760 --> 00:30:21,960 Speaker 1: bunch of money that pushes prices up. They do this 535 00:30:22,040 --> 00:30:25,800 Speaker 1: to try and stimulate economic activity. So when the market 536 00:30:26,000 --> 00:30:29,880 Speaker 1: sees a recession around the corner, that's how debt responds. 537 00:30:30,560 --> 00:30:33,880 Speaker 1: It responds with the anticipation that rates are going to 538 00:30:33,960 --> 00:30:37,720 Speaker 1: get shoved down. Now step back just for a second 539 00:30:37,800 --> 00:30:42,120 Speaker 1: and think about this. Logically, if you, as a lender, 540 00:30:42,280 --> 00:30:45,240 Speaker 1: are looking at something in the economy and saying we 541 00:30:45,280 --> 00:30:49,520 Speaker 1: have a high likelihood of a recession happening soon, there's 542 00:30:49,520 --> 00:30:52,200 Speaker 1: a higher likelihood of recession happening within the next ten 543 00:30:52,280 --> 00:30:54,200 Speaker 1: years than there is within the next two years. The 544 00:30:54,240 --> 00:30:56,000 Speaker 1: more time we put in front of us here, things 545 00:30:56,040 --> 00:30:58,040 Speaker 1: are going to get worse and worse and worse. So 546 00:30:58,360 --> 00:31:00,840 Speaker 1: we've got more risk of something crazy bad happening in 547 00:31:00,840 --> 00:31:03,120 Speaker 1: ten years and we do in two years. If you 548 00:31:03,160 --> 00:31:08,400 Speaker 1: are a lender in that environment, would you logically go 549 00:31:08,480 --> 00:31:12,040 Speaker 1: to a borrower and say, hey, because of this, would 550 00:31:12,120 --> 00:31:15,640 Speaker 1: you like to borrow in for a ten year time 551 00:31:15,640 --> 00:31:18,520 Speaker 1: frame at a cheaper rate than for a two year 552 00:31:18,520 --> 00:31:24,080 Speaker 1: time frame? Of course, not be ludicrous. You would absolutely 553 00:31:24,120 --> 00:31:27,080 Speaker 1: not do that. You do the exact opposite. Rates would 554 00:31:27,080 --> 00:31:30,120 Speaker 1: go up as lenders would get tighter. Uh, it would 555 00:31:30,120 --> 00:31:33,160 Speaker 1: be harder and harder to borrow without paying more and more, 556 00:31:33,400 --> 00:31:36,400 Speaker 1: because anybody who has their money looking ahead, thinking things 557 00:31:36,440 --> 00:31:38,920 Speaker 1: are gonna get tough, would start to save and would 558 00:31:38,960 --> 00:31:40,360 Speaker 1: start to say, hey, we need to have a risk 559 00:31:40,400 --> 00:31:42,280 Speaker 1: off environment. We need to make sure that we're not 560 00:31:42,560 --> 00:31:45,200 Speaker 1: being overly aggressive because times are about to get tough. 561 00:31:45,400 --> 00:31:47,720 Speaker 1: We need to make sure, you know, we're batting down 562 00:31:47,720 --> 00:31:49,960 Speaker 1: our hatches and make sure that everything is tight and 563 00:31:50,000 --> 00:31:52,520 Speaker 1: we're not We're not lending unless we know for sure 564 00:31:52,840 --> 00:31:55,120 Speaker 1: it's gonna be a good borrower and they're gonna pay 565 00:31:55,200 --> 00:31:56,720 Speaker 1: us back, and it's going to be worth at the 566 00:31:56,760 --> 00:31:59,720 Speaker 1: interest rate. Uh, it'll be worth us not having that 567 00:32:00,000 --> 00:32:04,160 Speaker 1: hash on hand. So that would be normal. But because 568 00:32:04,160 --> 00:32:08,440 Speaker 1: of the expectations of intervention given a coming recession, well 569 00:32:08,640 --> 00:32:13,040 Speaker 1: you have things like an inverted yield curve. Now that's 570 00:32:13,080 --> 00:32:15,920 Speaker 1: not unfortunately, because I love to be able to point 571 00:32:15,960 --> 00:32:18,880 Speaker 1: fingers and say, hey that you know, everything wrong in 572 00:32:18,920 --> 00:32:21,160 Speaker 1: the world is because of these you know, these a 573 00:32:21,160 --> 00:32:24,720 Speaker 1: few people that are in charge of these few things. Unfortunately, 574 00:32:24,760 --> 00:32:28,360 Speaker 1: that is not the only reason why yield curve would invert. 575 00:32:29,000 --> 00:32:30,800 Speaker 1: So we're gonna have to put on our thinking caps 576 00:32:30,800 --> 00:32:33,800 Speaker 1: here because this one gets a little bit more technical. 577 00:32:35,440 --> 00:32:37,440 Speaker 1: That's not the reason, the only reason to yield curve 578 00:32:37,480 --> 00:32:41,320 Speaker 1: would invert. So let's take a look at what happens 579 00:32:41,640 --> 00:32:44,800 Speaker 1: when interest rates go up. We've talked about this a 580 00:32:44,800 --> 00:32:48,239 Speaker 1: few times in past episodes. When interest rates go up, 581 00:32:48,360 --> 00:32:52,240 Speaker 1: debt gets more expensive. Right, obviously, that's what That's what 582 00:32:52,320 --> 00:32:54,960 Speaker 1: it is. Two ways to say the same thing. When 583 00:32:55,000 --> 00:32:57,520 Speaker 1: deck gets more expensive. Let's say you have a lot 584 00:32:57,560 --> 00:32:59,760 Speaker 1: of debt. You've got credit card debt, you've got a car, 585 00:33:00,000 --> 00:33:02,280 Speaker 1: and you've got a mortgage, you've got a personal loan, whatever, 586 00:33:02,880 --> 00:33:04,840 Speaker 1: you've got a lot of debt. Interest rates start to 587 00:33:04,840 --> 00:33:07,640 Speaker 1: go up. You watch, let's say you're not even adding 588 00:33:07,680 --> 00:33:10,200 Speaker 1: to your debt because times are tough, so you've just 589 00:33:10,280 --> 00:33:13,600 Speaker 1: kind of been chilling at your minimum payment. But interest 590 00:33:13,680 --> 00:33:16,520 Speaker 1: rates just ticked up. That means your minimum payment went up. 591 00:33:17,200 --> 00:33:19,640 Speaker 1: Interest rates just ticked up again, minimum payment goes up 592 00:33:19,640 --> 00:33:22,760 Speaker 1: again and again and again. It's happened a few times 593 00:33:22,760 --> 00:33:25,600 Speaker 1: this year. And so you're watching your payments go up 594 00:33:25,600 --> 00:33:28,160 Speaker 1: and you're saying, this debt is getting more expensive without 595 00:33:28,200 --> 00:33:31,760 Speaker 1: me even adding to it. So in a good environment, 596 00:33:31,840 --> 00:33:34,920 Speaker 1: let's say everything is peach, everything is cheap, your income 597 00:33:35,000 --> 00:33:37,080 Speaker 1: is going up every month, you're getting pay raises, blah 598 00:33:37,160 --> 00:33:40,040 Speaker 1: blah blah. You're gonna be loading that thing up. If 599 00:33:40,080 --> 00:33:42,720 Speaker 1: you're the average American, you're going to be spending more 600 00:33:42,720 --> 00:33:44,520 Speaker 1: and more, getting more and more into debt because you're 601 00:33:44,520 --> 00:33:47,080 Speaker 1: gonna say, who cares, I'm adding a little bit more debt, 602 00:33:47,120 --> 00:33:49,040 Speaker 1: I'm going to make so much more money by the 603 00:33:49,080 --> 00:33:50,760 Speaker 1: time I have to pay this back that it will 604 00:33:50,800 --> 00:33:54,400 Speaker 1: it will be inconsequential. You're gonna be loading that thing up. 605 00:33:54,920 --> 00:33:57,440 Speaker 1: What do we know about debt that is loaning money 606 00:33:57,480 --> 00:34:00,320 Speaker 1: into existence? When you swipe your credit card, are that 607 00:34:00,360 --> 00:34:02,960 Speaker 1: money didn't exist before you swiped it. That money that 608 00:34:03,080 --> 00:34:05,480 Speaker 1: was deposited into the grocery stores bank account did not 609 00:34:05,520 --> 00:34:08,200 Speaker 1: exist before you swipe that card. So that new debt 610 00:34:08,400 --> 00:34:10,840 Speaker 1: loaned money into existence. And now there are new dollars 611 00:34:10,880 --> 00:34:15,239 Speaker 1: in circulation that we're not in circulation before. So the 612 00:34:15,320 --> 00:34:19,120 Speaker 1: opposite is true. As well, times get tough, interest rates 613 00:34:19,160 --> 00:34:23,080 Speaker 1: start to go up, you stop paying back, stop loading 614 00:34:23,160 --> 00:34:25,879 Speaker 1: up on debt. At the very least, what are you doing. 615 00:34:26,040 --> 00:34:28,839 Speaker 1: You're keeping your debt, but the minimum payments are going up, 616 00:34:29,360 --> 00:34:34,520 Speaker 1: so you're paying more money too to your bank, Your 617 00:34:34,560 --> 00:34:39,239 Speaker 1: credit card just for the minimum payments. You're sucking dollars 618 00:34:39,680 --> 00:34:45,040 Speaker 1: out of circulation paying them back. You're working, you're taking 619 00:34:45,080 --> 00:34:49,319 Speaker 1: from savings. Those are dollars that are slowly dripping and 620 00:34:49,320 --> 00:34:52,040 Speaker 1: bleeding out of circulation. Now let's say things get really 621 00:34:52,080 --> 00:34:54,239 Speaker 1: tight and you say, man, if I don't pay this 622 00:34:54,360 --> 00:34:57,560 Speaker 1: debt off, soon things are going to be really tight. 623 00:34:57,760 --> 00:34:59,719 Speaker 1: I gotta pay this debt off so I don't have 624 00:34:59,800 --> 00:35:03,920 Speaker 1: these payments anymore. So you tap your savings, you sell 625 00:35:04,040 --> 00:35:07,600 Speaker 1: some assets, you go work a second job, you do 626 00:35:07,640 --> 00:35:11,640 Speaker 1: everything you can button down, get financially responsible. You start 627 00:35:11,719 --> 00:35:15,319 Speaker 1: paying off that debt. Well, now the money supply is 628 00:35:15,480 --> 00:35:20,320 Speaker 1: really going down, right, because the money was loaned into existence, 629 00:35:20,320 --> 00:35:22,640 Speaker 1: So when that debt is paid off, that money ceases 630 00:35:22,680 --> 00:35:26,320 Speaker 1: to be in existence. You're sucking dollars out of circulation 631 00:35:26,400 --> 00:35:31,800 Speaker 1: to pay off that debt. So money supply goes down 632 00:35:32,160 --> 00:35:35,520 Speaker 1: as interest rates go up because the debt pile starts 633 00:35:35,520 --> 00:35:39,560 Speaker 1: to get smaller, money gets sucked out of circulation just 634 00:35:39,760 --> 00:35:43,000 Speaker 1: to pay the higher and higher interest rates on that debt. 635 00:35:43,800 --> 00:35:46,920 Speaker 1: So that's not and that's not even saying anything about defaults, 636 00:35:46,920 --> 00:35:49,160 Speaker 1: because defaults, you know, that's a whole another set of 637 00:35:49,200 --> 00:35:50,960 Speaker 1: problems that we don't even need to get into. That's 638 00:35:50,960 --> 00:35:54,360 Speaker 1: just very basically. Interest rates go up, it starts to 639 00:35:54,480 --> 00:35:57,360 Speaker 1: push down the money supply. Now, it doesn't happen immediately. 640 00:35:57,440 --> 00:36:02,000 Speaker 1: So when UH the Feds arted tightening at the beginning 641 00:36:02,000 --> 00:36:05,520 Speaker 1: of the money supply at that point stopped expanding. So 642 00:36:05,560 --> 00:36:07,320 Speaker 1: you can look at them two. It's the measure of 643 00:36:07,360 --> 00:36:10,560 Speaker 1: the money supply, the money the amount of money in circulation. 644 00:36:11,280 --> 00:36:13,680 Speaker 1: It was growing, growing, growing, growing, growing at a fast rate, 645 00:36:13,719 --> 00:36:18,200 Speaker 1: and then in December of boom stopped growing and it 646 00:36:18,320 --> 00:36:21,799 Speaker 1: is flatlined since then, and it is now within the 647 00:36:21,880 --> 00:36:24,720 Speaker 1: last few months starting to trend a little bit down. 648 00:36:25,040 --> 00:36:28,000 Speaker 1: They don't release this data very often, unfortunately, about once 649 00:36:28,040 --> 00:36:31,240 Speaker 1: a month, and when they release the next one for 650 00:36:31,560 --> 00:36:34,520 Speaker 1: UH for October, it looks like it is going to 651 00:36:34,600 --> 00:36:37,160 Speaker 1: be even further down. We're about to start to see 652 00:36:37,520 --> 00:36:40,799 Speaker 1: a big drop in the total money supply as a 653 00:36:40,840 --> 00:36:44,359 Speaker 1: result of all of the tightening. What do we know 654 00:36:44,760 --> 00:36:50,000 Speaker 1: about the money supply in relation to inflation and deflation. 655 00:36:50,760 --> 00:36:53,919 Speaker 1: Money supply goes up, that means prices go up, money 656 00:36:53,920 --> 00:36:57,000 Speaker 1: supply goes down, prices go down. It's very simple. Why 657 00:36:57,080 --> 00:37:00,000 Speaker 1: is that? Well, because the prices of all the stuff 658 00:37:00,000 --> 00:37:03,799 Speaker 1: are like the pizza, and the money is like the slices. 659 00:37:04,200 --> 00:37:07,719 Speaker 1: You've got one large pizza with eight slices. You say, oh, 660 00:37:07,840 --> 00:37:10,160 Speaker 1: we've got more people coming over. We need more pizza. 661 00:37:10,200 --> 00:37:12,000 Speaker 1: So you go over, you take your knife, and you 662 00:37:12,040 --> 00:37:13,880 Speaker 1: cut each slice into two. So now you have sixteen 663 00:37:13,880 --> 00:37:17,239 Speaker 1: slices of pizza. Did that help Absolutely not, because now 664 00:37:17,280 --> 00:37:18,719 Speaker 1: in order to get the same amount of pizza, you 665 00:37:18,800 --> 00:37:21,040 Speaker 1: have to have two slices instead of just one. You 666 00:37:21,080 --> 00:37:23,600 Speaker 1: don't create more pizza by cutting more slices, just like 667 00:37:23,640 --> 00:37:26,080 Speaker 1: you don't create more wealth by printing more money. All 668 00:37:26,120 --> 00:37:28,319 Speaker 1: it means is now it takes more money to get 669 00:37:28,360 --> 00:37:31,920 Speaker 1: the same amount of stuff. That's it. You're not printing wealth, 670 00:37:32,000 --> 00:37:36,880 Speaker 1: you're printing money. Money measures wealth. So when the money 671 00:37:36,880 --> 00:37:40,080 Speaker 1: supply goes up, prices go up. When the money supply 672 00:37:40,120 --> 00:37:42,480 Speaker 1: goes down, prices go down. It's a little bit harder 673 00:37:42,480 --> 00:37:44,040 Speaker 1: to wrap your head around. But when the money supply 674 00:37:44,040 --> 00:37:48,520 Speaker 1: goes down, dollars become more scarce. The value of anything 675 00:37:48,800 --> 00:37:52,320 Speaker 1: is just the relationship between that thing and everything else, 676 00:37:52,920 --> 00:37:55,680 Speaker 1: and so when money becomes more scarce, it becomes more 677 00:37:55,760 --> 00:38:00,640 Speaker 1: valuable relative to everything else. If money becomes more valuable 678 00:38:00,680 --> 00:38:04,080 Speaker 1: relative to your car. That means that it takes less 679 00:38:04,200 --> 00:38:06,759 Speaker 1: money to equal the value of your car. Because the 680 00:38:06,840 --> 00:38:10,640 Speaker 1: money became more valuable than your car. That means less 681 00:38:10,719 --> 00:38:13,239 Speaker 1: money to equal the value of your car. That's the 682 00:38:13,280 --> 00:38:16,319 Speaker 1: other way of saying. Price just went down. So when 683 00:38:16,320 --> 00:38:18,920 Speaker 1: the money supply goes down, money becomes more scarce. That 684 00:38:18,960 --> 00:38:21,400 Speaker 1: means money becomes more valuable. That means prices of everything 685 00:38:21,440 --> 00:38:25,960 Speaker 1: go down. So we get deflation when interest rates go 686 00:38:26,080 --> 00:38:30,760 Speaker 1: up and the money supply collapses. Why does that matter 687 00:38:31,360 --> 00:38:35,520 Speaker 1: about regarding the yield curve? Because right now, for the 688 00:38:35,600 --> 00:38:37,759 Speaker 1: last almost year now, we've been in a mode where 689 00:38:37,760 --> 00:38:40,359 Speaker 1: the Federal Reserve has been tightening. They've been raising rates, 690 00:38:40,880 --> 00:38:43,120 Speaker 1: they've been letting assets bleed off their balance sheet, they've 691 00:38:43,120 --> 00:38:47,520 Speaker 1: been sucking cash out of circulation. UH. Conditions financially speaking, 692 00:38:47,560 --> 00:38:49,600 Speaker 1: have been becoming tighter and tighter and tighter. That just 693 00:38:49,680 --> 00:38:53,080 Speaker 1: means there's less money going around. Money is harder now 694 00:38:53,280 --> 00:38:57,680 Speaker 1: it used to be easier. When that happens, prices start 695 00:38:57,800 --> 00:39:00,320 Speaker 1: to go down, we start to get the che ants 696 00:39:00,440 --> 00:39:03,600 Speaker 1: of major deflation hitting us soon. We already got a 697 00:39:03,600 --> 00:39:06,680 Speaker 1: bunch of deflation and asset prices we're looking forward to 698 00:39:06,719 --> 00:39:11,960 Speaker 1: deflation in goods and services. When we have deflation and 699 00:39:12,360 --> 00:39:16,279 Speaker 1: ahead of us, what does that do to debt prices 700 00:39:16,320 --> 00:39:19,720 Speaker 1: ahead of us? Well, just like we talked about earlier, 701 00:39:19,760 --> 00:39:22,080 Speaker 1: if you expect your your gonna your friend. Let's go 702 00:39:22,120 --> 00:39:23,640 Speaker 1: back to your friend. Example, they want to borrow a 703 00:39:23,640 --> 00:39:25,440 Speaker 1: thousand bucks for you and pay you back in three years. 704 00:39:25,800 --> 00:39:27,640 Speaker 1: You say, the rate of inflation is eight percent right now. 705 00:39:27,640 --> 00:39:29,399 Speaker 1: Blah blah blah. So if you're gonna borrow a thousand 706 00:39:29,440 --> 00:39:32,120 Speaker 1: dollars from me, I want four dollars from you in 707 00:39:32,280 --> 00:39:35,600 Speaker 1: three years instead of just a thousand, because prices are 708 00:39:35,640 --> 00:39:36,920 Speaker 1: going to go up, so you need more money to 709 00:39:36,960 --> 00:39:38,440 Speaker 1: be able to buy the same amount of stuff. Otherwise 710 00:39:38,440 --> 00:39:41,200 Speaker 1: you're gonna lose by letting him borrow money for that long. 711 00:39:42,080 --> 00:39:45,239 Speaker 1: Deflation is the exact opposite. Let's say you give your 712 00:39:45,280 --> 00:39:48,919 Speaker 1: buddy a thousand bucks. Three years go by, he gives 713 00:39:48,920 --> 00:39:51,520 Speaker 1: you back exactly a thousand dollars. But prices of everything 714 00:39:51,560 --> 00:39:54,120 Speaker 1: I've gone down. Did you win or lose? You won 715 00:39:54,239 --> 00:39:57,880 Speaker 1: big because prices went down, so you gained purchasing power. 716 00:39:58,360 --> 00:40:03,879 Speaker 1: Deflation means that he than zero percent interest rates are 717 00:40:04,480 --> 00:40:09,200 Speaker 1: real positive interest rates even though you're getting back the 718 00:40:09,200 --> 00:40:12,560 Speaker 1: exact same dollar amount no more. Those dollars go way 719 00:40:12,560 --> 00:40:15,640 Speaker 1: farther than they did before, so you're purchasing power went up. 720 00:40:16,040 --> 00:40:19,160 Speaker 1: So adjusted for inflation or adjusted for deflation, in this case, 721 00:40:19,680 --> 00:40:22,680 Speaker 1: you have a positive rate of return on your money. 722 00:40:24,440 --> 00:40:28,399 Speaker 1: If you know or if there's a good chance that 723 00:40:28,520 --> 00:40:32,640 Speaker 1: there's deflation coming in the future, you will be willing 724 00:40:32,680 --> 00:40:36,839 Speaker 1: to accept a lower interest rate on that debt. If 725 00:40:36,880 --> 00:40:39,399 Speaker 1: we look at two years from now versus ten years 726 00:40:39,440 --> 00:40:42,160 Speaker 1: from now, and we look at the FED continuing to 727 00:40:42,160 --> 00:40:46,359 Speaker 1: get tighter and tighter and tighter, what we are expecting 728 00:40:46,920 --> 00:40:50,759 Speaker 1: is that deflation is going to be more likely to 729 00:40:50,920 --> 00:40:53,279 Speaker 1: hit within the next ten years than it is within 730 00:40:53,320 --> 00:40:57,280 Speaker 1: the next two years. And if we expect that prices 731 00:40:57,800 --> 00:41:01,000 Speaker 1: may fall and may fall to it, and they have 732 00:41:01,040 --> 00:41:04,000 Speaker 1: a greater chance of falling in ten years than two years, 733 00:41:05,000 --> 00:41:07,719 Speaker 1: we will be willing to accept a lower interest rate 734 00:41:08,000 --> 00:41:11,680 Speaker 1: on ten uere debt than to your debt, especially given 735 00:41:11,719 --> 00:41:14,759 Speaker 1: the fact that we currently have inflation. So if we 736 00:41:14,800 --> 00:41:18,640 Speaker 1: have inflation now where your money is becoming worth less, 737 00:41:19,320 --> 00:41:22,120 Speaker 1: and we think deflation is coming into future where your 738 00:41:22,120 --> 00:41:25,200 Speaker 1: money will be worth more than that short term debt 739 00:41:25,320 --> 00:41:29,160 Speaker 1: it would be logical to demand a higher interest rate, 740 00:41:29,520 --> 00:41:31,840 Speaker 1: and the long term debt it would be logical to 741 00:41:31,960 --> 00:41:35,680 Speaker 1: be okay with a lower interest rate. And so that 742 00:41:35,880 --> 00:41:41,560 Speaker 1: is kind of the free market um approach to understanding 743 00:41:41,800 --> 00:41:45,000 Speaker 1: why the yield curve may invert. Now, it's not completely 744 00:41:45,040 --> 00:41:47,799 Speaker 1: free market, I will give you that, because it all 745 00:41:47,880 --> 00:41:50,280 Speaker 1: stems from the fact that we have this giant debt 746 00:41:50,280 --> 00:41:53,520 Speaker 1: bubble blown up by intervention in the first place. But 747 00:41:53,960 --> 00:41:56,759 Speaker 1: it is not all just expectations about a FED bailout. 748 00:41:56,920 --> 00:41:59,279 Speaker 1: A lot of it has to do with the expectations 749 00:41:59,280 --> 00:42:01,960 Speaker 1: of conditions get tighter and harder and a recession coming 750 00:42:02,000 --> 00:42:04,640 Speaker 1: in prices falling and collapsing as a result. Well, then 751 00:42:04,880 --> 00:42:09,000 Speaker 1: lower interest rate debt becomes very positive in real terms, 752 00:42:09,320 --> 00:42:13,360 Speaker 1: even if it's not very positive in nominal terms. So 753 00:42:14,040 --> 00:42:18,120 Speaker 1: that is why the yield curve is such a big deal, um, 754 00:42:18,160 --> 00:42:22,000 Speaker 1: and why it inverting is something that everybody's watching because 755 00:42:22,480 --> 00:42:26,040 Speaker 1: it signals ahead whether or not we expect to have 756 00:42:26,200 --> 00:42:29,759 Speaker 1: hard times or easy times. And UM, some of the 757 00:42:29,840 --> 00:42:33,200 Speaker 1: reasons behind that are debated, and I gave you kind 758 00:42:33,239 --> 00:42:35,160 Speaker 1: of both sides of the coin, and they both have 759 00:42:35,440 --> 00:42:39,480 Speaker 1: validity there Um, it's it's due to intervention and we 760 00:42:39,520 --> 00:42:42,319 Speaker 1: would not have the boom bus cycle without it. And 761 00:42:42,360 --> 00:42:44,200 Speaker 1: if you doubt that, go back and listen to the 762 00:42:44,239 --> 00:42:47,480 Speaker 1: first three episodes of this podcast where you go through 763 00:42:47,520 --> 00:42:50,320 Speaker 1: the entire history of money UM. The first three episodes 764 00:42:50,360 --> 00:42:52,680 Speaker 1: are kind of like a tour through history of how 765 00:42:52,719 --> 00:42:54,719 Speaker 1: we got to where we are today, and that will 766 00:42:54,760 --> 00:42:59,279 Speaker 1: explain it. But it's uh, it's a very good indicator 767 00:42:59,600 --> 00:43:01,880 Speaker 1: due to the intervention and due to central planners and 768 00:43:01,920 --> 00:43:03,719 Speaker 1: do to central bankers and the debt bubble that we 769 00:43:03,760 --> 00:43:06,319 Speaker 1: have and the money printing that we have about what's 770 00:43:06,320 --> 00:43:08,680 Speaker 1: going to happen in the future. So the yield curve 771 00:43:08,719 --> 00:43:12,560 Speaker 1: inverting gives us a heavy indication that we do have 772 00:43:13,239 --> 00:43:16,600 Speaker 1: UH deflation ahead of us, we have a recession ahead 773 00:43:16,640 --> 00:43:19,040 Speaker 1: of us, we have hard times coming now. The only 774 00:43:19,160 --> 00:43:22,600 Speaker 1: question is what will the central bank do as a 775 00:43:22,719 --> 00:43:26,960 Speaker 1: result of that. Will they do what they have done 776 00:43:26,960 --> 00:43:29,880 Speaker 1: for the last twenty years and lower interest rates again, 777 00:43:30,080 --> 00:43:34,000 Speaker 1: will they start printing money again, or will they say, hey, 778 00:43:34,040 --> 00:43:37,320 Speaker 1: you know what, we actually can't risk doing that because 779 00:43:37,560 --> 00:43:40,360 Speaker 1: what if we get hyper inflation, because last time we 780 00:43:40,440 --> 00:43:43,759 Speaker 1: have the highest inflation you know, in forty years. So 781 00:43:43,800 --> 00:43:46,520 Speaker 1: the question is will they Will they have learned their 782 00:43:46,560 --> 00:43:50,360 Speaker 1: recent lesson, or will they fall back into the habits 783 00:43:50,440 --> 00:43:54,000 Speaker 1: of the past. I really appreciate you guys, Thank you 784 00:43:54,080 --> 00:43:57,719 Speaker 1: so much for sticking around for another episode. Got a 785 00:43:57,719 --> 00:44:01,680 Speaker 1: lot more great episodes coming up coming down the pipeline here. 786 00:44:02,080 --> 00:44:06,279 Speaker 1: And I really appreciate you guys listening always, and thank 787 00:44:06,320 --> 00:44:07,799 Speaker 1: you so much. I have a great day.