January 5, 2024 • 20 mins
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Episode Transcript
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Speaker 1 (00:00):
Have you ever wondered what the most important macroeconomic indicators are?
In today's day and age, we are bombarded every single
day with news about what the Federal Reserve is doing,
about what the government is doing, geopolitical issues, what the
stock market is doing, what other assets like gold or
bitcoin or real estate are doing. It can very easily
(00:22):
become information overload. Don't worry because going into twenty twenty four,
there are six things that everybody should be watching. They
are the most important macroeconomic factors that everything else flows from,
and if you watch just these six things, you'll have
a very good idea of how the year will unfold.
(00:42):
The first thing to watch is the reverse repurchase facility
at the Federal Reserve. This facility currently has just over
one trillion dollars in it. You can think of this
facility as an overflow of excess reserves in the banking system.
Back in twenty twenty, when the Fed printed all that money,
they printed that money so that it could make its
(01:03):
way to the federal government, so the government could spend
it on things that they wanted, like stimulus checks. But
at the same time, the Federal Reserve was also spending
trillions of dollars to buy assets off the market, assets
like US treasuries. This meant that while the government was
spending newly created dollars into the banking system, the Federal
(01:24):
Reserve was sucking collateral like US treasuries out of the
banking system. For you and I, that might not sound
like a big deal, but for banks it is a
big deal because for a bank, every dollar they get
in deposit, they also have to have some sort of
offsetting collateral as an asset to offset that liability, and
so banks began to use the reverse repurchase facility at
the Federal Reserve that allows them to give the access
(01:47):
cash to the Federal Reserve overnight and get collateral back
in return. Without this facility, banks would have had to
go to the open market to get that collateral, and
rates were already so low it could have probably put
interest rates negative. So the Federal Reserve offered an interest
rate to attract cash to come into the reverse repo
facility instead. But as you'll notice, since May of twenty
(02:08):
twenty three, the facility has been getting drained, which means
that dollars are choosing to leave the reverse repo facility.
They're going somewhere else instead, and that place they're going
is United States tea bills. As starting in May of
twenty twenty three, the rate on tee bills finally exceeded
five point three percent, which is the rate the reverse
repo facility was paid. So the dollars simply got a
(02:31):
better return by getting taken out of the reverse repot
facility and getting lent to the US government in short
term tee bills instead. This means that while the reverse
repot facility still has cash, the US government can borrow
as much as they want with t bills. Now you
may be looking at this chart of the reverse repot
facility and thinking, hey, we were already down to six
(02:52):
hundred and eighty three billion in there, but now we've
skyrocketed back up to one trillion. What is going on?
Nothing out of the ordinary. This is simply a year
end thing that happens at quarter end and at year end.
Take a look at this spike that happened at the
end of twenty twenty two, exact same thing, and then
it came right back down to normal levels. So within
the first couple of weeks of January we will see
(03:12):
the exact same thing happen here, it will start to
decline again like it was before. And when the reverse
repo facility hits zero, that means there is no more
cash left to be taken out by market participants like
money market funds to be lent to the US government
with TE bills, which means the US government is either
going to have to start borrowing at the longer end
(03:34):
of the curve where interest rates are lower, like the
thirty years only at four percent or the ten year,
which is only at three point eight percent, or if
the federal government continues to want to borrow at the
short end with T bills, they're just going to have
to offer a higher interest rate in order to attract
new cash. Either way, the reverse repo facility hitting zero
means liquidity conditions have changed. It means there's no longer
(03:57):
a ton of excess reserves in the system, and the
United States government's excess borrowing at the short end at
least will have to change now. The second most important
macroeconomic factor to look at for twenty twenty four is
the Federal Reserve's balance sheet. You can see the Federal
Reserves balance sheet used to be under a trillion and
then to deal with the financial crisis. It exploded to
(04:19):
over two trillion, and then continue to increase to a
peak of about four and a half trillion in twenty
fifteen before they started their first round of quantitative tightening.
Quantitative tightening is the exact opposite of quantitative easing. Que
quantitative easing is when the Federal Reserve's balance sheet increases.
That means the FED is printing money in order to
buy assets out of the market. So the FED will
(04:41):
go to a bank and they'll say, hey, you have
a US treasury because you loaned money to the government.
We want that. We'll buy it from you. Here's some
brand new cash, give us that treasury. And then at
that point, now the US government owes that money back
to the Federal Reserve instead of the bank who initially
made the loan. As the Federal Reserve does, this balance
sheet increases in size because they own more assets, just
(05:04):
as if your brokerage account were to increase in size
as you purchase more assets. The only difference is they
print the money to buy those assets. You first have
to come up with the money to put into your
brokerage account to buy those assets. So when the Federal
reserves balance sheet declines, the exact opposite is happening. The
Federal Reserve is either selling some of those treasuries back
out onto the open market, or they're just letting some
(05:25):
of those treasuries get paid back and they're not rolling
it over, meaning they're not taking that cash and buying
a new treasury of the same amount. Now. Because they
want the decline in their balance sheet to happen at
a consistent pace, they're likely doing a combination of both,
so that they're doing a little bit of buying, little
bit of selling, a little bit of letting it mature
so that the size their balance sheet overall declines at
(05:46):
a consistent pace. The last time they did this was
in twenty eighteen and twenty nineteen. The market couldn't handle it,
so they started not qy in twenty nineteen, right before
all the money printing in twenty twenty happened, and as
you can see, as of May of twenty the balance
sheet peaked and the balance sheet has been declining ever since.
If we zoom in here, we can see the exact
(06:07):
same thing is happening now as what was happening before,
which means quantitative tightening is still continuing. Now. Remember during QE,
the Federal Reserve takes a newly created dollar gives it
to a bank in exchange for an asset like a
US treasury. That increases liquidity conditions for banks. The banks
can take that money to do whatever they want with it.
They can do nothing. They can loan it to the
(06:29):
US government. Again, they can make a new loan like
a mortgage or an auto loan, but it increases the
bank's liquidity and their options on what they can do
with it. This means when the Federal Reserve's balance sheet
is declining, the exact opposite is happening. Instead of new
dollars entering circulation, dollars are actually leaving circulation and ceasing
to exist. This is because, again, when the Federal Reserve's
(06:49):
balance sheet is declining, that debt is getting paid back.
The Federal Reserve doesn't need to collect dollars as payment
in order to spend it on something else. When they
spend mon money, they create that money fresh. When money
gets paid back to them, it ceases to exist. So
when the US government pays back those US treasuries, those
(07:09):
loans that it owes to the Federal Reserve, those dollars
leave circulation, and so the longer the Federal Reserve continues
quantitative tightening, the less liquid markets become, the less dollars
there are available in the financial system. So quantitative tightening,
or the total size of the Federal Reserve's balance sheet
is absolutely the second most important thing to watch in
(07:30):
twenty twenty four because if this stops, if the pace
of QT increases, if the pace of QT decreases, this
has big significant effects on liquidity for banks, which translates
into liquidity for things like the stock market, and the
interest rates on loans for people like US, not to
mention interest rates on loans for the US government themselves.
(07:52):
The third most important macroeconomic indicator to look at in
twenty twenty four is going to be the total money supply.
This is a chart of the money supply going back
all the way to the nineteen eighties, and we can
see it increased at a fairly consistent pace up until
twenty twenty, when it started to skyrocket, zooming in on
the last couple of years. We can see the money
(08:14):
supply peaked in April of twenty twenty two and started
to decline from there. It bottomed in May of twenty
twenty three and has been moving sideways since. And if
you're wondering if the money supply is moving back up again,
don't worry. This is again just a year end type
of thing that happens. The same thing happened at year
end of twenty twenty two before it continued its decline. Now,
(08:35):
the money supply is going to be influenced by the
last couple of things that we looked at from the
Federal Reserve and some of the other things we're going
to look at later on in this video. But the
money supply itself has massive implications for everything going on
in the economy, from prices of assets like stocks and
gold and bitcoin to the cost of money itself for
(08:56):
lending and borrowing. And since the Federal Reserve has been
collecting this data, you can see that the money supply
has never actually decreased until recently. We can find alternative
sources of information that go back farther that show that
there have been sometimes in history when the money supply
has declined. This chart from long Term Trends shows the
(09:17):
money supply growth rate going back all the way to
the eighteen hundreds, and we can see based on this
measure of the money supply, we have not seen a
decrease in the money supply since the nineteen thirties. Based
on another measure of the money supply growth and decline rate,
we can see every time the money supply declines, it
(09:40):
is associated with banking panics, recessions, depressions, and even wars.
So the fact that right now we are experiencing a
contraction in the money supply for the first time since
the FED has collected the data, and for the first
time since the Great Depression, is not an indicator of
economic success in the your future. Based on historical patterns,
(10:02):
we should expect some economic pain as a result of this,
But of course they could always fire up the money
printer again, which would also result in a resurgence in
the inflation rate. And so the money supply, which has
been declining since April of twenty twenty two, is definitely
one of the most important macroeconomic factors to be looking
at in twenty twenty four. The fourth most important macroeconomic
(10:26):
factor to look at this year is going to be
the federal funds rate. We hear talk all the time
about how the Federal Reserve controls interest rates, or they're
raising interest rates or their lowering interest rates, and how
that affects everybody's mortgages and credit cards and auto loans.
And the reality is the Federal Reserve does not control
any interest rates except its own, and they do this
by raising or lowering the Federal Funds rate. This is
(10:48):
the overnight rate that banks trade cash and collateral with
each other, and the Federal Reserve simply sets the upper
and the lower limit on this rate. If the interest
rate that is going between banks starts to exceed what
the Federal Reserve wants to be the cap, the Federal
Reserve will intervene and they'll either provide the collateral or
the cash necessary in order to keep it underneath the cap.
(11:12):
Same thing. If the interest rate starts to go below
the Federal funds target, the Federal Reserve will intervene in
order to make sure that interest rate stays in between
their tight range. But this, the Federal Funds rate, is
the only interest rate that the Federal Reserve actually controls.
When you hear about interest rates on mortgages going up
or down and you think, hey, I could sell or
buy a house, or you hear about auto loan interest
(11:34):
rates going up or down, or you hear about credit
card rates now they're currently at a record high for decades.
It used to be around fourteen to fifteen percent, and
now they're over twenty percent. None of these interest rates
are actually directly controlled by the Federal Reserve, but the
Fed funds rate does have an influence on those interest rates.
You may have noticed recently how there are some high
(11:56):
yield savings accounts offering four or even over five interest
on savings accounts. This is because banks can get this
amount or a little bit more directly from the Federal Reserve,
and after taking their cut, they can pass along that
interest to you. But if the Fed decides to cut rates,
then there won't be anybody out there offering those higher rates,
(12:16):
which means banks won't be able to offer that to you.
This also has an effect on longer term debt because
in a normal environment, if I can put my money
in the bank and I can get that money back
at any time, but I can earn five percent on it, well,
I'm gonna demand a much higher interest rate if I'm
gonna lock that money up for five or ten or
twenty or thirty years. And so while the Federal funds
(12:38):
rate is the only interest rate that the Federal Reserve
directly controls. It is absolutely important that you keep an
eye on it because it does have an influence on
the rest of the curve. Now, I mentioned there that
in normal environments that longer term debt is gonna have
a higher interest rate, and if you've been paying attention,
you know that's actually not the case right now, which
brings us to the fifth the most important macroeconomic indicator
(13:02):
to watch for twenty twenty four, which is the yield
curve itself that is currently inverted. This is what the
yield curve looks like as of the time of this recording,
and you can see that for short term government debt
is yielding well over five percent. This means you can
loan money to the government for just a couple of
months and get an annualized five point two to five
(13:25):
point five percent, But if you loan your money to
the government for longer, let's say five years, you can
only get three point eighty four percent. Now, at first glance,
this seems preposterous. Why would anybody loan the money to
the government for a lower interest rate for a longer
period of time. And the answer is because people expect
that between now and then, interest rates at the short
(13:47):
end are going to go lower. Yes, today you can
get five percent by loaning your money to the government
for one month. But if you think that in one
year that that five percent will go down to one percent,
then locking yourself into a five year contract at three
or four percent may actually be the better deal over
that five year time horizon. And an uninverting of the
(14:09):
yield curve like that, where the short end goes down
and or the long end goes up is exactly what
investors are expecting, which is why the yield curve is
so important to watch right now, because it's currently inverted
and investors expect it to uninvert. Problem with that is
that is almost always associated with a market crash and
(14:31):
or a recession. The inverted yield curve itself has an
almost unblemished record of being able to predict a recession
coming soon, but it usually starts once or right after
that yield curve uninverts. We can actually look at the
federal funds rate for examples of this, and you can
see the gray bars are all recessions. You can also
(14:53):
see that those gray bars all happen right when that
interest rate starts to move lower, or after that interest
rate starts to move lower. Those are almost all examples
of the yield curve uninverting because the federal reserve pushes
down on that short end, which then becomes lower than
the long end. So in twenty twenty four, it's going
(15:14):
to be very important to watch that yield curve and
watch for that un inversion. And finally, the last, the
sixth most important macroeconomic factor to watch in twenty twenty
four is going to be the federal government's deficit, specifically
the budget deficit, which as of the time of this
recording is currently up thirteen percent higher than the same
(15:39):
period last year. The budget deficit is the difference between
how much the federal government spends and how much they
take in taxes. And I use that word very intentionally
because governments can't make money, they can only take money. Now,
for pretty much the entire history of the United States,
the federal government has run a deficit, which is why
the total national debt can cotinues to just grow and
(16:00):
grow every year because just like you, if every year
you spent more than you earned in income, you'd have
to do that by one thing only, which is debt.
So the deficit represents how much the government borrows every
year to cover its extra spending, which means that every
year that they run a deficit, the national debt increases
by that amount. Now, there are a number of reasons
why the deficit is important, number one, and increasing deficit
(16:24):
leads to conditions like we have today with interest rates
at multi decade highs. Many people think that if the
stock market experiences a correction or a crash, all that
money will rush into US government treasuries, which will push
interest rates down. That assumes, of course, the government doesn't
have an appetite for borrowing larger than the amount of
money being willing to lend to that and all else
(16:44):
being equal, The more the US government borrows, the higher
those interest rates go. And if you can get let's say,
hypothetically ten percent by lending money to the US government,
you're probably not going to keep that money in the
stock market. You're probably not going to lend that out
in the form of a mortgage or put it in
a CD with a bank. So the more the government borrows,
(17:06):
the less money there is available for everybody else to borrow.
On top of that, the deficit contributes to the national debt,
which by itself isn't a very useful number. But when
you look at the national debt compared to something like
the GDP, you get a more accurate picture of where
our economy stands. Going back all the way to the
late seventeen hundreds, we can see there is only one
(17:27):
time in history where the national debt compared to GDP
was as high as it is today, and that was
at the peak of World War Two. Now obviously World
War II. When it ended, we ended a ton of
spending and a bunch of people came home and started
working and producing again. So GDP went up and debt
went down relative to all the wealth. But we're back
up to one hundred and twenty percent debt to GDP levels,
(17:50):
and we don't have all of our working force age
men overseas fighting in a war somewhere that will just
stop one day. We have this debt, and we have
this debt deficit. We have this spending because of a
massively bloated government, and trying to shut down anything meaningful
in terms of spending or borrowing is political suicide, which
(18:10):
is why nobody does and know the last administration did
not do it either. Go take a look at the
national debt and the deficit under the last administration, and
all you'll find is broken promises. So the deficit is
absolutely the sixth most important macroeconomic indicator to be watching
in twenty twenty four because it contributes to higher rates,
crowding out, and a debt load that our economy can
(18:32):
eventually not handle. Now, these conditions are very likely to
bring in a chaotic year investing. And that doesn't necessarily
mean everything going down in price, just to collapse of everything.
It means exactly what chaotic means, just highly volatile, unpredictable.
I have my thoughts and opinions about which assets will
do and which assets will not do well. That doesn't
(18:53):
influence how I position my entire portfolio, and it shouldn't
influence how you position your portfolio either. There are three
pillars to investing and beating the averages in any market conditions.
Number one, you need eight to twelve assets that are
highly uncorrelated, meaning when one goes up, they don't all
go up, and when one goes down, they don't all
go down. Number two, you need to learn how to
(19:15):
hedge cost effectively, meaning that you purchase fire insurance on
your assets so that if they go down in price,
your insurance or your hedges pay you off an equal amount.
The issue is you have to do it in a
cost effective way so your portfolio doesn't decline simply from
buying that hedging over and over again. And then the
third pillar of investing successfully beating the averages in any
(19:36):
market is making many small asymmetric bets because there will
always be opportunities to make massive amounts of money. But
if you commit too much of your portfolio to one
of those bets and it doesn't pay off, maybe you
just lost five to ten percent of your portfolio not goods.
So you need to learn how to make many small
bets that if they pay off, they pay off big,
(19:58):
so it's meaningful to your portfolio, but if you're wrong,
you lose a very very very tiny amount. If you
can master those three pillars of investing, you will beat
the averages in any market. And if you need help
with that, that is exactly what I teach members of
Heresy Financial University. So if you're interested, link is in
the description below. As always, thanks so much watching have
(20:19):
a great day.
Have you ever wondered what the most important macroeconomic indicators are?
In today's day and age, we are bombarded every single
day with news about what the Federal Reserve is doing,
about what the government is doing, geopolitical issues, what the
stock market is doing, what other assets like gold or
bitcoin or real estate are doing. It can very easily
(00:22):
become information overload. Don't worry because going into twenty twenty four,
there are six things that everybody should be watching. They
are the most important macroeconomic factors that everything else flows from,
and if you watch just these six things, you'll have
a very good idea of how the year will unfold.
(00:42):
The first thing to watch is the reverse repurchase facility
at the Federal Reserve. This facility currently has just over
one trillion dollars in it. You can think of this
facility as an overflow of excess reserves in the banking system.
Back in twenty twenty, when the Fed printed all that money,
they printed that money so that it could make its
(01:03):
way to the federal government, so the government could spend
it on things that they wanted, like stimulus checks. But
at the same time, the Federal Reserve was also spending
trillions of dollars to buy assets off the market, assets
like US treasuries. This meant that while the government was
spending newly created dollars into the banking system, the Federal
(01:24):
Reserve was sucking collateral like US treasuries out of the
banking system. For you and I, that might not sound
like a big deal, but for banks it is a
big deal because for a bank, every dollar they get
in deposit, they also have to have some sort of
offsetting collateral as an asset to offset that liability, and
so banks began to use the reverse repurchase facility at
the Federal Reserve that allows them to give the access
(01:47):
cash to the Federal Reserve overnight and get collateral back
in return. Without this facility, banks would have had to
go to the open market to get that collateral, and
rates were already so low it could have probably put
interest rates negative. So the Federal Reserve offered an interest
rate to attract cash to come into the reverse repo
facility instead. But as you'll notice, since May of twenty
(02:08):
twenty three, the facility has been getting drained, which means
that dollars are choosing to leave the reverse repo facility.
They're going somewhere else instead, and that place they're going
is United States tea bills. As starting in May of
twenty twenty three, the rate on tee bills finally exceeded
five point three percent, which is the rate the reverse
repo facility was paid. So the dollars simply got a
(02:31):
better return by getting taken out of the reverse repot
facility and getting lent to the US government in short
term tee bills instead. This means that while the reverse
repot facility still has cash, the US government can borrow
as much as they want with t bills. Now you
may be looking at this chart of the reverse repot
facility and thinking, hey, we were already down to six
(02:52):
hundred and eighty three billion in there, but now we've
skyrocketed back up to one trillion. What is going on?
Nothing out of the ordinary. This is simply a year
end thing that happens at quarter end and at year end.
Take a look at this spike that happened at the
end of twenty twenty two, exact same thing, and then
it came right back down to normal levels. So within
the first couple of weeks of January we will see
(03:12):
the exact same thing happen here, it will start to
decline again like it was before. And when the reverse
repo facility hits zero, that means there is no more
cash left to be taken out by market participants like
money market funds to be lent to the US government
with TE bills, which means the US government is either
going to have to start borrowing at the longer end
(03:34):
of the curve where interest rates are lower, like the
thirty years only at four percent or the ten year,
which is only at three point eight percent, or if
the federal government continues to want to borrow at the
short end with T bills, they're just going to have
to offer a higher interest rate in order to attract
new cash. Either way, the reverse repo facility hitting zero
means liquidity conditions have changed. It means there's no longer
(03:57):
a ton of excess reserves in the system, and the
United States government's excess borrowing at the short end at
least will have to change now. The second most important
macroeconomic factor to look at for twenty twenty four is
the Federal Reserve's balance sheet. You can see the Federal
Reserves balance sheet used to be under a trillion and
then to deal with the financial crisis. It exploded to
(04:19):
over two trillion, and then continue to increase to a
peak of about four and a half trillion in twenty
fifteen before they started their first round of quantitative tightening.
Quantitative tightening is the exact opposite of quantitative easing. Que
quantitative easing is when the Federal Reserve's balance sheet increases.
That means the FED is printing money in order to
buy assets out of the market. So the FED will
(04:41):
go to a bank and they'll say, hey, you have
a US treasury because you loaned money to the government.
We want that. We'll buy it from you. Here's some
brand new cash, give us that treasury. And then at
that point, now the US government owes that money back
to the Federal Reserve instead of the bank who initially
made the loan. As the Federal Reserve does, this balance
sheet increases in size because they own more assets, just
(05:04):
as if your brokerage account were to increase in size
as you purchase more assets. The only difference is they
print the money to buy those assets. You first have
to come up with the money to put into your
brokerage account to buy those assets. So when the Federal
reserves balance sheet declines, the exact opposite is happening. The
Federal Reserve is either selling some of those treasuries back
out onto the open market, or they're just letting some
(05:25):
of those treasuries get paid back and they're not rolling
it over, meaning they're not taking that cash and buying
a new treasury of the same amount. Now. Because they
want the decline in their balance sheet to happen at
a consistent pace, they're likely doing a combination of both,
so that they're doing a little bit of buying, little
bit of selling, a little bit of letting it mature
so that the size their balance sheet overall declines at
(05:46):
a consistent pace. The last time they did this was
in twenty eighteen and twenty nineteen. The market couldn't handle it,
so they started not qy in twenty nineteen, right before
all the money printing in twenty twenty happened, and as
you can see, as of May of twenty the balance
sheet peaked and the balance sheet has been declining ever since.
If we zoom in here, we can see the exact
(06:07):
same thing is happening now as what was happening before,
which means quantitative tightening is still continuing. Now. Remember during QE,
the Federal Reserve takes a newly created dollar gives it
to a bank in exchange for an asset like a
US treasury. That increases liquidity conditions for banks. The banks
can take that money to do whatever they want with it.
They can do nothing. They can loan it to the
(06:29):
US government. Again, they can make a new loan like
a mortgage or an auto loan, but it increases the
bank's liquidity and their options on what they can do
with it. This means when the Federal Reserve's balance sheet
is declining, the exact opposite is happening. Instead of new
dollars entering circulation, dollars are actually leaving circulation and ceasing
to exist. This is because, again, when the Federal Reserve's
(06:49):
balance sheet is declining, that debt is getting paid back.
The Federal Reserve doesn't need to collect dollars as payment
in order to spend it on something else. When they
spend mon money, they create that money fresh. When money
gets paid back to them, it ceases to exist. So
when the US government pays back those US treasuries, those
(07:09):
loans that it owes to the Federal Reserve, those dollars
leave circulation, and so the longer the Federal Reserve continues
quantitative tightening, the less liquid markets become, the less dollars
there are available in the financial system. So quantitative tightening,
or the total size of the Federal Reserve's balance sheet
is absolutely the second most important thing to watch in
(07:30):
twenty twenty four because if this stops, if the pace
of QT increases, if the pace of QT decreases, this
has big significant effects on liquidity for banks, which translates
into liquidity for things like the stock market, and the
interest rates on loans for people like US, not to
mention interest rates on loans for the US government themselves.
(07:52):
The third most important macroeconomic indicator to look at in
twenty twenty four is going to be the total money supply.
This is a chart of the money supply going back
all the way to the nineteen eighties, and we can
see it increased at a fairly consistent pace up until
twenty twenty, when it started to skyrocket, zooming in on
the last couple of years. We can see the money
(08:14):
supply peaked in April of twenty twenty two and started
to decline from there. It bottomed in May of twenty
twenty three and has been moving sideways since. And if
you're wondering if the money supply is moving back up again,
don't worry. This is again just a year end type
of thing that happens. The same thing happened at year
end of twenty twenty two before it continued its decline. Now,
(08:35):
the money supply is going to be influenced by the
last couple of things that we looked at from the
Federal Reserve and some of the other things we're going
to look at later on in this video. But the
money supply itself has massive implications for everything going on
in the economy, from prices of assets like stocks and
gold and bitcoin to the cost of money itself for
(08:56):
lending and borrowing. And since the Federal Reserve has been
collecting this data, you can see that the money supply
has never actually decreased until recently. We can find alternative
sources of information that go back farther that show that
there have been sometimes in history when the money supply
has declined. This chart from long Term Trends shows the
(09:17):
money supply growth rate going back all the way to
the eighteen hundreds, and we can see based on this
measure of the money supply, we have not seen a
decrease in the money supply since the nineteen thirties. Based
on another measure of the money supply growth and decline rate,
we can see every time the money supply declines, it
(09:40):
is associated with banking panics, recessions, depressions, and even wars.
So the fact that right now we are experiencing a
contraction in the money supply for the first time since
the FED has collected the data, and for the first
time since the Great Depression, is not an indicator of
economic success in the your future. Based on historical patterns,
(10:02):
we should expect some economic pain as a result of this,
But of course they could always fire up the money
printer again, which would also result in a resurgence in
the inflation rate. And so the money supply, which has
been declining since April of twenty twenty two, is definitely
one of the most important macroeconomic factors to be looking
at in twenty twenty four. The fourth most important macroeconomic
(10:26):
factor to look at this year is going to be
the federal funds rate. We hear talk all the time
about how the Federal Reserve controls interest rates, or they're
raising interest rates or their lowering interest rates, and how
that affects everybody's mortgages and credit cards and auto loans.
And the reality is the Federal Reserve does not control
any interest rates except its own, and they do this
by raising or lowering the Federal Funds rate. This is
(10:48):
the overnight rate that banks trade cash and collateral with
each other, and the Federal Reserve simply sets the upper
and the lower limit on this rate. If the interest
rate that is going between banks starts to exceed what
the Federal Reserve wants to be the cap, the Federal
Reserve will intervene and they'll either provide the collateral or
the cash necessary in order to keep it underneath the cap.
(11:12):
Same thing. If the interest rate starts to go below
the Federal funds target, the Federal Reserve will intervene in
order to make sure that interest rate stays in between
their tight range. But this, the Federal Funds rate, is
the only interest rate that the Federal Reserve actually controls.
When you hear about interest rates on mortgages going up
or down and you think, hey, I could sell or
buy a house, or you hear about auto loan interest
(11:34):
rates going up or down, or you hear about credit
card rates now they're currently at a record high for decades.
It used to be around fourteen to fifteen percent, and
now they're over twenty percent. None of these interest rates
are actually directly controlled by the Federal Reserve, but the
Fed funds rate does have an influence on those interest rates.
You may have noticed recently how there are some high
(11:56):
yield savings accounts offering four or even over five interest
on savings accounts. This is because banks can get this
amount or a little bit more directly from the Federal Reserve,
and after taking their cut, they can pass along that
interest to you. But if the Fed decides to cut rates,
then there won't be anybody out there offering those higher rates,
(12:16):
which means banks won't be able to offer that to you.
This also has an effect on longer term debt because
in a normal environment, if I can put my money
in the bank and I can get that money back
at any time, but I can earn five percent on it, well,
I'm gonna demand a much higher interest rate if I'm
gonna lock that money up for five or ten or
twenty or thirty years. And so while the Federal funds
(12:38):
rate is the only interest rate that the Federal Reserve
directly controls. It is absolutely important that you keep an
eye on it because it does have an influence on
the rest of the curve. Now, I mentioned there that
in normal environments that longer term debt is gonna have
a higher interest rate, and if you've been paying attention,
you know that's actually not the case right now, which
brings us to the fifth the most important macroeconomic indicator
(13:02):
to watch for twenty twenty four, which is the yield
curve itself that is currently inverted. This is what the
yield curve looks like as of the time of this recording,
and you can see that for short term government debt
is yielding well over five percent. This means you can
loan money to the government for just a couple of
months and get an annualized five point two to five
(13:25):
point five percent, But if you loan your money to
the government for longer, let's say five years, you can
only get three point eighty four percent. Now, at first glance,
this seems preposterous. Why would anybody loan the money to
the government for a lower interest rate for a longer
period of time. And the answer is because people expect
that between now and then, interest rates at the short
(13:47):
end are going to go lower. Yes, today you can
get five percent by loaning your money to the government
for one month. But if you think that in one
year that that five percent will go down to one percent,
then locking yourself into a five year contract at three
or four percent may actually be the better deal over
that five year time horizon. And an uninverting of the
(14:09):
yield curve like that, where the short end goes down
and or the long end goes up is exactly what
investors are expecting, which is why the yield curve is
so important to watch right now, because it's currently inverted
and investors expect it to uninvert. Problem with that is
that is almost always associated with a market crash and
(14:31):
or a recession. The inverted yield curve itself has an
almost unblemished record of being able to predict a recession
coming soon, but it usually starts once or right after
that yield curve uninverts. We can actually look at the
federal funds rate for examples of this, and you can
see the gray bars are all recessions. You can also
(14:53):
see that those gray bars all happen right when that
interest rate starts to move lower, or after that interest
rate starts to move lower. Those are almost all examples
of the yield curve uninverting because the federal reserve pushes
down on that short end, which then becomes lower than
the long end. So in twenty twenty four, it's going
(15:14):
to be very important to watch that yield curve and
watch for that un inversion. And finally, the last, the
sixth most important macroeconomic factor to watch in twenty twenty
four is going to be the federal government's deficit, specifically
the budget deficit, which as of the time of this
recording is currently up thirteen percent higher than the same
(15:39):
period last year. The budget deficit is the difference between
how much the federal government spends and how much they
take in taxes. And I use that word very intentionally
because governments can't make money, they can only take money. Now,
for pretty much the entire history of the United States,
the federal government has run a deficit, which is why
the total national debt can cotinues to just grow and
(16:00):
grow every year because just like you, if every year
you spent more than you earned in income, you'd have
to do that by one thing only, which is debt.
So the deficit represents how much the government borrows every
year to cover its extra spending, which means that every
year that they run a deficit, the national debt increases
by that amount. Now, there are a number of reasons
why the deficit is important, number one, and increasing deficit
(16:24):
leads to conditions like we have today with interest rates
at multi decade highs. Many people think that if the
stock market experiences a correction or a crash, all that
money will rush into US government treasuries, which will push
interest rates down. That assumes, of course, the government doesn't
have an appetite for borrowing larger than the amount of
money being willing to lend to that and all else
(16:44):
being equal, The more the US government borrows, the higher
those interest rates go. And if you can get let's say,
hypothetically ten percent by lending money to the US government,
you're probably not going to keep that money in the
stock market. You're probably not going to lend that out
in the form of a mortgage or put it in
a CD with a bank. So the more the government borrows,
(17:06):
the less money there is available for everybody else to borrow.
On top of that, the deficit contributes to the national debt,
which by itself isn't a very useful number. But when
you look at the national debt compared to something like
the GDP, you get a more accurate picture of where
our economy stands. Going back all the way to the
late seventeen hundreds, we can see there is only one
(17:27):
time in history where the national debt compared to GDP
was as high as it is today, and that was
at the peak of World War Two. Now obviously World
War II. When it ended, we ended a ton of
spending and a bunch of people came home and started
working and producing again. So GDP went up and debt
went down relative to all the wealth. But we're back
up to one hundred and twenty percent debt to GDP levels,
(17:50):
and we don't have all of our working force age
men overseas fighting in a war somewhere that will just
stop one day. We have this debt, and we have
this debt deficit. We have this spending because of a
massively bloated government, and trying to shut down anything meaningful
in terms of spending or borrowing is political suicide, which
(18:10):
is why nobody does and know the last administration did
not do it either. Go take a look at the
national debt and the deficit under the last administration, and
all you'll find is broken promises. So the deficit is
absolutely the sixth most important macroeconomic indicator to be watching
in twenty twenty four because it contributes to higher rates,
crowding out, and a debt load that our economy can
(18:32):
eventually not handle. Now, these conditions are very likely to
bring in a chaotic year investing. And that doesn't necessarily
mean everything going down in price, just to collapse of everything.
It means exactly what chaotic means, just highly volatile, unpredictable.
I have my thoughts and opinions about which assets will
do and which assets will not do well. That doesn't
(18:53):
influence how I position my entire portfolio, and it shouldn't
influence how you position your portfolio either. There are three
pillars to investing and beating the averages in any market conditions.
Number one, you need eight to twelve assets that are
highly uncorrelated, meaning when one goes up, they don't all
go up, and when one goes down, they don't all
go down. Number two, you need to learn how to
(19:15):
hedge cost effectively, meaning that you purchase fire insurance on
your assets so that if they go down in price,
your insurance or your hedges pay you off an equal amount.
The issue is you have to do it in a
cost effective way so your portfolio doesn't decline simply from
buying that hedging over and over again. And then the
third pillar of investing successfully beating the averages in any
(19:36):
market is making many small asymmetric bets because there will
always be opportunities to make massive amounts of money. But
if you commit too much of your portfolio to one
of those bets and it doesn't pay off, maybe you
just lost five to ten percent of your portfolio not goods.
So you need to learn how to make many small
bets that if they pay off, they pay off big,
(19:58):
so it's meaningful to your portfolio, but if you're wrong,
you lose a very very very tiny amount. If you
can master those three pillars of investing, you will beat
the averages in any market. And if you need help
with that, that is exactly what I teach members of
Heresy Financial University. So if you're interested, link is in
the description below. As always, thanks so much watching have
(20:19):
a great day.
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