It doesn't come with more government. It comes with less government Denied Denied Denied. This is at 0% interest rates. It's distorting.

the ability to create more goods and services is instead of going long the 10-year he actually went long with leverage on the 2-year I Never tried to figure out price Direction Never ever ever. The information that he's getting that he is not sharing with the general public is not good. He risks re acceleration inflation. He also risks being Arthur Burns He h the nail on the head.

It's it's all about. Insider Information Welcome back to another episode of the Meet Kevin Show today we have the honor of interviewing and confronting. George Thank you so much for being here. You know George was there for me when I was in Cordon California trying to fight Governor Gavin and you were behind the scenes in The Green Room ready to testify for me.

That's right, Thank you for that. No problem. But now you have a big warning and thank you. Something weird is happening right now in the economy and you just went live on it.

Catch us up. What's what's going on? Well it's all about something called the yield curve. So uh, for your viewers I'm sure they're probably somewhat familiar with this, but we look at the the treasuries and you've got the one Monon Treasury and you that goes all the way out to a 30-year treasury. So this is what we would call the treasury curve and what we have seen historically is when it when it inverts what that means is the long-term interest rates are actually lower than short-term interest rates.

which is the opposite of what they should be, right? Because if I'm going to lend you $1,000 for two weeks, sure, I'm going to charge you a much lower interest rate I might even do it for free, right? And unless compare that to if I'm lending you that ,000 for 30 years. Well, now of a sudden I got a ton of risk I've got inflation risk I've got uh, counterparty risk. and therefore I'm going to charge you a much higher interest rate. So that's why you almost always see longer term interest rates much higher, right? It's just like if you go to the bank and you have an adjustable rate mortgage.

okay, that's going to be a lower interest rate than if you have a fixed rate mortgage over 30 years. It's the exact same concept. Okay, so what happens is when the 10-year treasury yield goes lower than the 2-year treasury yield. Let's say this has always been a red flag and what we've seen going back to 1950 is almost every single time that you get an inversion.

It precedes a recession or in today's terms, a hard Landing How did they pull that off in 19? We had the inversion in 19, but the bond market couldn't have predicted Covid. so would there just have been another recession? I Think it did. Wow, Yeah, so there there's two. There's two ways of looking at that, but But this is a great point because the question becomes okay if the inversion of the curve has been so accurate.

how yeah? H H how has it been this accurate right? right? And so I think you hit the nail on the head. It's it's all about Insider Information Oh my Gosh. and so I just talked to uh Jeff Snyder about this and it makes a lot of sense. And I think that we can use Kenny Maoy who is just here as a perfect example.

So let's walk through this thought experiment right in 2019. the curve inverted in August Yeah yeah, it was like the sumary. Yeah, right. So if you look at now all the reports of when we likely got that leak out of Wuhan the lab if that's what happened I'm trying to keep it trying to keep it YouTube Friendly here.

Come on man it it was the B bro right? But assuming that that happened reports now and even reports that have come out by the the politicians in the government Peg that to August of 2019. So let's just think this through. okay and this is way I thought like December and and no, no people were getting sick then already in China You're right right because they had those game. the military games.

Remember the military games was supposedly the first you know super spreader event if you want to call it that so would have had to come out prior to that which you Peg it right around August or so so and you know this well from you know your attempt in in politics there is that. It's it's all about insiders and they have access Gavin Nome you We talked about this earlier today. he has access to all the bankers in uh in California is that F bailed out Silicon Valley Bank Well I think that, but we're but we're getting to a very crucial Point here. So let's think about this.

One of an example of a financial Insider would be a Stan dren Miller a Warren Buffett Paul Tutor Jones Something like that, right? So George Soros Another great example. Yeah, right. So these guys have tons of connections obviously all over the world and specifically in China. So let's think about this.

If it is true that this leaked from a lab, that scientist that knows what happened and know how bad that could be, he's going to get on the phone immediately with a local politician. Wow, right? That politician is going to call the next guy up. The next guy up is most likely going to know a lot of Bankers those Bankers are most likely going to know George Soros or they're going to know Paul Tutor Jones So what that what they're going to do is call Paul Tutor Jones Say dude, you need to really pay attention to this. So what's he going to do? He's going to hire or pay for one of his research analysts to go out there to Wuhan specifically and talk to that scientist, right? So his research analy or whoever works for him is going to go out there, talk to the scientist.

Then when he talks to the scientist, he's going to get on the phone with Paul and say dude, th this is real like like this could end the world. oh my God Okay so then if you're Paul Tutor Jones what do you do? You buy treasuries? You buy treasuries. Wow, Because you're going to buy the most safe and liquid asset available, which whether we like it or not, is the the the United States Treasury More specifically, the long end of the curve. So why would they buy the long end of the curve? Well, you know this.

your viewers might not. But if interest rates go down by 1% prices are going to go up by much more if you own a 30-year Bond compared to a one-month Bond right? So if you're out there looking for capital appreciation or if you're just hedging your portfolio, yeah, you're going to get far more juice the further you go out the yield curve. So all the Paul Tutor Jones types start buying the long end which makes interest rates come down lower than the FED funds rate because expecting lower, lower growth and inflation expectations, it go back to Irving Fiser right in the 1920s, 1930s. And so that's what this is all about.

And in my opinion, that's why the curve has such great predictive Powers it's because these these they're just trading on Insider information, right? And that's why it's always correct. So another example I Use is just our good buddy Ken Marroy or even you. You know how many doors do you have right now? Oh, we just started a real estate fund I think we're now. uh, in.

we're probably in total. will'll be like 4550 doors or something like that. Okay, fantastic. So let's just fast forward here 10 years and I'm sure you're going to be just as successful as Kenny Marroy.

So right now Kenny has 1.5 billion with a B under management. So let's just assume for a moment that he has 100,000 apartment units. Okay, well, if there's a guy that's going to have Insider information as far as what rents are doing, yeah, it's going to be Kenny Maroy, of course. All right.

So let's just assume for a moment that there's an ETF where you can short rent rates at a national level. Okay, you can go short rent rates, right? So if Kenny with all of his 100,000 apartment units sees uh, rents going down, can't get the unit rented anymore, has to lower rents occupancy going down. He sees all this in real time. He has this Insider information that is legal but it's still information that Wall Street doesn't have yet.

and definitely the Re. They're just listening to these CNBC headlines where they're saying oh, the economy is booming and rents are going up. That's not what I'm seeing. So I'm going to go out there and hedge the portfolio of multif Family Properties that I have and I'm going to do so by buying that ETF that goes up in value when rents go down.

that's effectively the 10-year treasury yield. That's right. that's the 10-year treasury. That's that.

that the equivalent of the ETF that you would buy to go long rents going down. So and what have you today? So what we've seen today is the 2-year treasury yield plummet. And why I mean plummet. it's gone.

It's down maybe 10 15 basis points and I think it at the lowest point. Today it got down to about 4.1 which is massive because just two days ago is about 4.35 25 points. So it's a 25 basis points drop in two days now. Most people would see that say oh, I that's percentagewise.

it's not that big of a deal, but they have to realize in the treasury market that is huge and what's what ALS uh so this is abnormal. In other words, that movement Absolutely abnormal. And what makes it even more bizarre is that there's no news you know you had PPI come out today that I think was a little bit lower but that would not and CPI yesterday a little hotter So it's kind of like you. It's like a wash.

Yeah, exactly. Wash on. So it it really wouldn't explain the 25 basis point drop. Now what's happened because of that 25 basis point drop is it's gotten much closer to the 10-year treasury yield because all of us know that the curve has been inverted for the last.

You know? Whatever. let's say, 18 months or so right? So now what's happening is we're seeing that uninversity has preceded every single recession that we've had. But we don't usually have the recession when the curve is still inverted. We have the recession after the curve.

uninverted and we're about to so. Well, we got a lot closer over the last two days and it's looking like it's going to uninverted. Why that's important to retail investors is you realize that once that curve inverts. Now, what we also need to talk about is the bull steepener versus the bare steepener which we were discussing earlier because that would be a big signal that you this we're either confirming the action or it's disproving.

So I and I want to go into that if I can I want to pick up on this too. Is it possible? Uh, that the ten is falling because people are convinced our rates are going to come down so they want to lock in those rates longer So they're buying the 10 year more than they're buying the two? Or could there be a logical EXP explanation outside of recession? Um, well. let's think that through because. uh, long-term interest rates are future growth and inflation expectations which seem to be low now, right? So let's just assume for a moment that the 10-year treasury yield was coming down just simply because people thought that the FED did a great job and rates come right exactly.

and that rates are coming back down. Or excuse me, the CPI is coming back down to 2% The Fed's Target Mission Accomplished Mission accomplished. That's right, And therefore the FED is going to drop rates down to, let's say, 3.5% And we got unemployment at 3.5 And that's going to allow the economy to go ahead and boom Further, we got stock market at alltime highs. This is pretty much the narrative that you see.

Okay, well in that scenario, it is true that inflation would come down, but what would happen to growth expectations? Well, I guess longer term would probably stabilize lower. Uh, well, future growth expectations would increase. Uh, because because you're dodging a recession, you mean, sorry. I Was thinking the dropping of the 10-year uh, yield that? maybe we're not looking at the 5% GDP growth for example, we had estimated in last quarter.

But so there's two components there. There's two components. So what we've got to compartmentalize is the Uh, the the growth expectations and inflation expectations. So what you're talking about is inflation expectations going back down right to uh, 2% And this is what is allowing the FED to drop rates from 5.25% let's say down to 4 or 3.5 something that would be far more accommodative though the real tightness stays the same so to speak as those inflation, but those interest rates would be more accommodative.

Let's just say for the real economy, now of a sudden, people can get mortgages at a cheaper rate. People can borrow money for cars at a cheaper R pay later. Yeah, they can do all these things and it it really, uh uh, releases a lot of the pressure and some of the commercial real estate and maybe some of the banking issues that we saw in 2023 and March and whatnot. So in that scenario, it is true that the FED could drop rates if inflation is coming back down closer to their target.

but what's also going to happen in that environment theoretically is growth expectations would also go up right? right? Okay, I see what you're saying now? Yes, Yes, absolutely. So it's it's It's not just one or the other, it's the combination of both. Okay, you see. so so if yields are going down, which is what we're seeing on the 10year treasury and mind you, we talked about the 2-year tanking, Well yields on the 10year treasury have gone down as well, just at a slower rate I See Okay, okay so your argument to to streamline it for the viewers would be uh hey, what we're seeing right now is that the 10 years dropping while the two's dropping.

But wait a minute. If we thought the economy was about to Boom then we would think the 10 years should be going up boom. Now Counter question would be what if uh, people think the economy is going to Boom with next to zero inflation just to go extreme for a moment on on the argument. If people thought, well, we'll have you know, strong economy at maybe 2 and a half% growth or whatever with inflation at zero or half a percent below the Fed's target, Could you see both yields drop in that case? Yeah, What you'd see there is.

You'd see that you'd see a nice upward sloping yield curve. You'd see a normalization yeah, which we're kind of trending back towards now. No, the 10 years's going down. remember the 10e uh, this both going down still yeah.

I mean just a few couple months ago the 10e treasury was over 5% Yes and now it's at 3.9 B Did you see that play you know Bill Amman He he he did the what was it he's been. He's been complaining that the Uh tenure was going to go above 5% So what he did is he shorted treasuries uh, heavily and we talked about it nonstop on social and so he's like it's going to go well past 5% is what he said as soon as it got to 4.9 Wow, these are a deal covers goes long the treasuries. oh smart. well he I think he played it yeah yeah yeah I think you're better off kind of listen to Dren Miller than Atman but if you look at what Dren Miller did that was I think that was really genius as far as that trade and what he did is instead of going long the tenear he actually went long with leverage on the two-year ah because he expected the two would fall so much faster the yield therefore the bond price up.

Not only that, but he also saw a little bit more risk at the long end because of the deficits and because of the supply side of the treasuries. Yeah that's a good point so that that was really a kind of a genius as you would expect from from Dr And yeah of course yeah but it it goes back to if if the market the the bond market was expecting a no Landing type scenario. With what you're saying the 10year treasury yield would be going up as the as the FED funds rate comes down. so therefore You' get to that uninversity front end maybe coming down slightly but the long end going up more so than the front end.

which which so then what you'd have is let's just say the FED funds right around 4.5% right and then which would be 75 basis point cut and that's what they're saying. Three, Uh, three, Cuts right now. Sure. But then the 10e treasury would not be going sorry, five, or whatever.

Yeah, the 10year treasury would not be going down to 3.9% It would be going from 5% You know, higher it would be going higher. You know it would be going up six. Maybe 6.5% if if if it was projecting even lower inflation, but yet much more growth. That is interesting.

So so maybe a more normal curve might look like that. Okay Fed funds. the two-year aligns with that. You go four and a half.

You go, say six and a half on the 10. So we've got a two spread here, and 30 would be higher. Yeah, exact, even higher. exactly.

So you've got your normal yield curve now. and if it was infl and now let's talk about if it was predicting a No. Landing Okay, with a reacceleration in inflation. Okay, then you would see it even steeper, even steeper of that curve.

That's right. Then the 10 year, it would be screaming higher. Sure, because it's now. Uh, you've got.

You've got the growth expectations higher and then you've got the inflation expectations higher. Is there a chance that so we have this, like you mentioned, would be normal? Let's say 4 and a half to 6 and a half? Let's say yeah. Is there a chance we just to go extreme Pull both sides down 4% and so you're half% on the two and 2 and a half on the 10e. And that's what we're marching towards, right? So it's always possible.

You know I like to remind people that there are no certainties that's in this world. There're only probabilities. What would that mean deflation? Uh, no. Now what I mean what you're talking about there is.

First of all, the FED funds rate is at what 5.25% It have to go to zero. Yeah, well, it would have to go down to uh. Let's just say the 10e goes from 3.9 because when the FED is decreasing rates it I I Don't know that there has been a time in history where the 10 years's actually gone up. You know, straight up as the Fed's dropping rates.

Because usually when the Fed's not, usually when the FED is dropping rates, it's doing so to prevent a recession, a recession or crisis, right? They're always behind the curve. Oh, for sure. I think if they miss here on jobs and we start having a self-fulfilling layoff cycle, we're deep in a recession. Yeah, and remember that that jobs is always a lagging indicator.

Super laggy. That's the problem Once you have that it's too late. Yeah, if you actually look at the Lei uh, which is the leading economic index and that was the the conference board or some I forgot the entity that puts that out. But you see that when it gets past Ne4.

We've always been in a recession, not just predicting one, and now we're at Nega 8. And then if you look at GDI compared to GDP, we see that g In fact, E I Did a video on this the other day that the FED I went to their website and saw a report that they gave in 2016 where they themselves argued that the GDI was a far better predictor of economic growth or economic recession than the GDP itself. And right now you have GDI negative and you have GDP going up. There's a there's a there's um, uh, there's a Delta there.

Sure, right. And the only time that we've seen that Divergence with GDP and GDI was just prior to uh, the GFC Wow, that's that's a a pretty big crash that's not even a as they say, the shallow recession. Yeah. But another thing I think your viewers might want to contemplate is you know this whole Drome pal pivot thing.

Yeah, okay. I I think we need to and a lot of people assume that hey, well, if interest rates are coming back down, well, that's going to be fantastic. That's going to be great for the economy. That's going to be great for the stock market.

But what they're forgetting to ask themselves is wire rates coming down? Well Jerome Pow's argument would be that inflation is falling right? EX exactly. But let's think that one through. Okay, okay, okay, so if you're Jerome pal, you're 65. You're 70 years old.

You're worth $100 million. The only thing that you're really cared about you really care about right now, or your number one priority would be your legacy. Yeah, Reputation. Absolutely right.

So you know that history is going to remember you one of two ways: Aaron Burr or Paul Vulker? Yeah, No. Well, you're either going to be um, uh, a hero or a loser. That's right. Yeah, that's right.

Simple. So you want to be uh Paul Vulker? Yeah, exactly. you do not want to be Arthur Burns Arthur Burns I Said Aon My bad. No problem.

you don't want to be Arthur Burns right? So let's think about the scenarios here. You've got No. Landing you've got soft landing and you've got hard. Landing Well, what's interesting is if you look at the incentives involved here.

Drome Pal has every incentive for a hard Landing What? Because Well, if if we have a hard Landing then history remembers him as Paul Vulker who solved inflation and comes and bails it out. Well, that solved inflation by creating a recession, right? Yeah, ex. Terrible. That's how history remembers Paul Vulker.

He had the balls to do what no one else was willing to do and make the tough decisions to take rates high enough to break the back of inflation even though it created an economic recession. That's now, right or wrong. That's how history remembers. Yeah, that's true Paul Vulker.

But it's also scary because it creates that hardship of joblessness. And it does. But let's just look at it through the lens of Legacy and the incentive Just for one man that at the end of the day is a human being and is flawed just like any of us. So you think he's incentivized to cause a recession when? But then we had such high inflation expectations which we don't today.

But but let okay, now you're getting on. You're getting to the next Point here. Okay, so that's the the the the hard Landing Okay Paul Vulker if we just look at it through that lens is remembered as a hero. Yes, okay, we can age yes, so soft.

Landing He's most likely also remembered as a hero. but where he's got risk is the No Landing because the No Landing What he risks is a reacceleration in inflation. And if he risks re acceleration inflation, he also risks being Arthur Burns Yes, Yes, yes. So let's just assume for a moment that that's his main driver, that's his.

Don't be Arthur Don't be Arthur Burns So then you got to ask yourself, what would it take to Pivot when inflation is still above your 2% Target right right on the on the annual basis? Yeah, What? That in my view, that means that the information that he's getting that he is not sharing with the general public is is not good I Agree, Because you're You're essentially arguing He's seeing that softness at small business contacts that Insider information he calling up the Warren buffets, the business owners, the owners of whatever all The Insider info. he's on the phone going. Oh, we may have gone too far. Yeah, and they've got the Beige Book I Don't know if you've done a video on that, but the the most recent, uh, Beige book.

And if that's their surveys and talking to people with the regional? Yeah, with the regional Banks right? Uh, that's their surveys. So it's all anecdotal. but that's The Insider information that you're talking about. And if you that too, if you look at the well, but did you look at the summ area New York Philadelphia You look at the most recent summaries, they're all.

It's getting bad. It's getting bad. It's that's pretty much the summary from every single one of these: Regional Banks Is that unemployment? it it's getting Or the employment picture? It's all these things are turning. So when you combine that with the Lei and I Also think that Drone Pal is looking at their markets because we have to understand that this is a globally connected economy and the probability that we have a recession in Europe a recession in Japan A recession in China and we somehow avoid a recession.

That the probability is incredibly incredibly low because of how Global the economy is right now and I would argue how Global the monetary system is Yes, right? because we have to understand coordinated. Yeah, the banks create liquidity, right? So if you have a problem in the the the global banking Network that we call the Euro dollar system and if that problem is created by China well that's still going to spill over into the United States economy you say, Well, George why should we care about liquidity? Well ask Silicon Valley Bank If they care about liquidity, you see? Yeah, well and and drum power turned on the money printer for that pretty fast, huh? Well, they look at the Btfp. That's another great point, right? 13 40 m billion now and it's going straight up and they're They're saying that it's because of an Arbitrage but always half the explanation they're giving. Yeah, so what they're saying because the interest rate on Btfp is is some esoteric spread I Think it's the one year forward swap spread.

something like that. The cost on that. Yeah, yeah. okay and it so it's that interest rate plus 10 basis points.

That's what the FED is charging for Btfp, but on I which is what they pay on Bank Reserves it's still 5.25% So what's happen is inflation or excuse me when interest rates the expectation for Fed funds goes down now of a sudden in November there was this Arbitrage opportunity because the the Btfp rate went down to let's say 4.9% but they could still get 5.25 at I. So why not just borrow from the Fed and just park the funds there and pocket the spread? It's a one-year loan and so uh, and and the program expires soon too, so you may as well use it. Now the question is, and it's a question for you. Are they just going to extend it because they're certainly not going to call it all due at that moment and just have a banking crisis again.

Drone doesn't want that? I Absolutely agree. Okay, well that if he was worried about inflation, that would be one way to tackle it. Yeah, just collaps the banks. Kind of crazy to think they have the power to do that, but uh, yeah.

but but let's focus because I want to focus on that just for a moment because if you listen to the mainstream media, you'll hear that it's all about this. Arbitrage Which could be true, but the reason I'm skeptical there is because when Silicon Valley Bank and First Republic and signature. uh and let's not forget about credit s when they when they went busted back in March of 2023, they set up this Btfp and the utilization went straight to about 60 billion about two weeks. Yeah, and so then what you would expect if you listen to the mainstream media is that it went straight back down to zero.

Because obviously the problem was solved right. The the clever Fed came in and with their all their tools and whatnot and magically just kind of papered over the problem. Yeah, so then what happened is November the Arbitrage opportunity. So the big question in my mind is okay.

What what happened between April and November M Uh, did the Btfp go down? No to your point, it went straight up still. So you cannot explain the parabolic move in the Btfp lately. just through the Arbitrage when it was going up between April to November when there was no Arbitrage opportunity. In other words, probably some additional residual stress is occurring or starting to occur where banks that weren't part of the program.

which honestly probably looks like a little bit like a black mark. Like if you're a bank and you're showing up at the Btfp window or whatever. it's like the discount window. Yeah, it's like that's embarrassing.

Yeah, that's right. there's a stigma to it. Yeah, and and that stigma is not good. Moving forward when you need to do business with all these other Banks and your liquidity needs will be provided by these Banks Obviously, when you look at the risk reward, it's not just about the Arbitrage of course.

Yeah, no kidding. So that's really interesting. So um, okay. well in that case, uh, there are now estimates that forget, uh, you know, waiting on rate Cuts You know we're going to start getting them in March Uh, and who says they have to be 25 bips? We could be three rate Cuts but they could be 50 each.

What's your take of of that point of view that we're actually going to get larger, more rapid Cuts quickly and then that would obviously suggest more problems. Yeah, yeah, because what people don't understand is that most often lower interest rates means tighter money. Yeah, not looser money. Well sure because Banks stop Lending That's right.

Well everybody thinks oh, I'm going to get rich again when when there's a recession. In fact, like you have this like Tik Tock mentality where everybody is like begging for a depression which I I I don't know I want your opinion on but I think it's crazy because you know we look at like the last depressions were you know, the early 1920s and the end of the 1920s? horrible Economic Times Sure, we had the social Awakening of the Roaring 20s in the middle, but depressions are horrible for people. but prices come down and I think that's what people are focusing on. Now it's like oh, we want prices to come down again Yeah, you got to be careful what you wish for.

Yeah, right. Because we had interest rates come down during the GFC and that didn't exactly stimulate Demand right? because you had a job and and by the way, it's not like uh, you know credit was free flowing. I'll give you an example: I I Got into real estate investing in 2012 and uh I retired and I just wanted to manage my own money. So I thought okay well what's cheap right now you know my favorite investor is Jim Rogers still is So one of Jim Rogers rules is just buy low sell High which sounds easy but it's actually kind of hard to.

it's extrem hard. So I looked around I thought that real estate was cheap. so what I did is I basically took my my life savings and I started buying all these rental properties in the midwest. wow and I was buying these literally for about 50 Grand and then my models i' and this is in good neighborhoods which Kansas City okay yeah, on the Missouri side of Kansas City and Le Summit and uh and Blue Springs and whatnot would you still buy there today? um no because I've been selling since 2018 because that that goes to my rule that you I never try to figure out price Direction okay okay, never ever ever okay I just start by asking myself, is it cheap or is it expensive if it's cheap I buy it if it's expensive I sell it.

even if I think prices are going to continue to go up, it doesn't matter CU I'm not trying to time the bottom I'm not trying to time the top and we can get into what I bought in March of 2020 the exact same concept I bought oil but I thought in this was maybe was at 20 I thought it was going a lot lower I thought it was going down to 10, maybe even five. but I started buying around 20 because the rule is you buy when it's cheap. negative for a period of time that's Nega 38. That's right and so.

but then I started selling around 80 85 even though I thought the prices were going to continue to go up. sure could go 12 at that point, you know, ad justed for inflation. Historically speaking, it got to the point where it was expensive. But my point there is I bought all these properties Kevin cash.

Yeah, Cash Cash cash. So I had this portfolio of let's say 15 rental properties that I put renters in. You know I'm in it for maybe 75,000 a pop I'm collecting $1,100 a month in rent I have no debt, none. It's all well with the exception of the EXP property taxes.

and yeah, that's 30% whatever. All positive cash flow. exactly right? So now let's it's maybe mid 2013 or something like that. I I am the perfect borrower.

the perfect borrower. Oh of course. credit score. You know, whatever it is.

and so I go to the banks I'm like look, I've got all this Equity can I at least get just maybe like a line of credit I don't even know if I'll use it. No, no, Just denied, Denied Denied Denied denied. I'm like, how about just like a 40% LTV Yeah yeah, no Denied Denied denied, This is at 0% interest rates. So this is an example of how interest rates can be very, very.

Money can be cheap, but it can also be extremely tight. Of course, money is tight. It's very difficult to have an an expansion or a substantial, significant suspension in, uh, expansion in the overall economy. And so that's what people.

You got to be careful what you wish for. Uh, if interest rates go back to zero, people think that it's going to be boom time, but they forget to ask the question. Well, why are rates at zero? Interesting? Well, because inflation's going to go away and we're going to fight deflation, right? But so then my argument Believe Well, so here's my argument there. If okay, so people assume that 0% interest rates are normal well, and they also assume that that, let's say, fed funds right now at 5.25% They also assume that that's high interest rates, right? right? Just based on recent memory.

Sure, No. What are you? No, this is normal. This is normal. So if inflation comes back down to 2% right? and the economy is doing well, why would the FED drop rates Has to be a problem? That, why would they? They wouldn't drop rates.

They'd keep rates right about where they are, because historically, this is about average. So if you've got a nice, a good, structurally sound economy that was growing at a nice clip, if you got unemployment at let's say 3.5% If you've got all these things that are acting as Tailwinds for the economy and the economy is very, very healthy, you know, running on all eight cylinders, cut exactly you would expect you would expect fed funds to be right around 5 or 5.25% So what if they see 2% deflation and that's why they're cunning. Okay, so then you have to ask yourself if we have 2% def not disinflation, right? Correct deflation. What does that mean for asset prices and what does that mean for the economy? keep in mind we have not seen 2% deflation since the Great Depression right? This is true, right? actually.

I I Take that back We I We saw it 1949 because in the 1940s going into the War Um, it was just prior to that. So what happened is we got out of the war, we had price controls and then when they lifted the price controls, uh in 47 the CPI went to 19% and then it went just just parabolic straight up to 19% and then two years later was actually negative. Yeah, but like you go up 20% and down 2% Like, who cares? Yeah, so prices are still a lot higher Agate total. But we did have a period of not just disinflation and that would imply that you have lower and lower rates of inflation.

But we actually saw prices go down and it was right right around 3% But if you go to 2009, right? people forget that. We did have a quarter of actual deflation in 2009, but it is very, very quick. So I Do not expect uh, 2024. Overall, even if we do have a hard Landing to result in in massive deflation because I think the central planners will come in and do more of what they did in uh yeah, in 2020 or something like that.

Which takes us to the next wave of consumer price inflation. And that's why my good friend and business partner Lynn Alden Uh, she's been talking about this for a couple years. That her base case is that the 2020s isn't necessarily the 1970s, but it looks a lot more like the 1940s. Oh interesting, where inflation is just this big roller coaster ride depending on what fiscal policy looks like.

Oh well, they're so good at balancing the budget right now, we should be wait. Yeah no. I mean it's I Think we went from stimulus checks in the 20 1920 or sorry, uh, in the 2020 year in 2021 to basically corporate stimulus checks. Now it's all the you know.

the inflation Reduction act, the chips act. here. we'll subsidize the factories I mean what do you think about that? Yeah, I mean the Btfp is is basically a stimy check for for banks. Yeah, Gav's Bank Yeah, but I I think that people will probably see stimy checks again.

Oh really, you think they they'll go back to that y uh like Ubi or just straight I think where this leads now, whether it's 2024 in the next 5 years I Have no clue but my base case again, just probabilities here is that we land with in Ubi territory. Uh, we land in price controls. Oh wow, and we land in in Cbdc because I think that's how they they issue the uh the Ubi because the Fed's balance sheet is is infinite and I think that they're going to try to control inflation through the extension of credit. Uh, because if you have, if you're doing uh PPP and Stimy checks, let's say right, you know that that's going to create inflation if you don't offset it with a decline in Bank lending.

Okay, another way to look at it. Yes, sure that's interest because we're just looking at through the lens of M2 So if M2 is going up as a result of the FED we'll just call it. You know I don't like the term but printing money. You know because they're giving Stimy checks and it's it's basically on the Fed's balance sheet.

the liability of the FED uh. then you see M2 more currency units chasing goods and services. This is inflationary. The way that you combat that.

say Okay Banks You are going to start lending less sure, right? So you tighten the velocity. basically. yeah, so veloc. Well, velocity would probably uh increase but you'd have M2 money supply go up because what you're doing in the stemy checks is is you're increasing velocity because you're putting a lot more of the M2 money supply into checking accounts which are a lot like a lot more likely for people to go out there and spend than Investments Investments have a velocity of like two whereas money in your savings is like four or five.

Yeah, the way. And I Know that gets a little complex for for the viewer, but the easiest way to look at this is let's just say that uh, the treasury deficit spends by uh, not doing um, you know, the Fed's balance sheet or something like, but printing money. But let's just say they do that by borrowing money. Sure.

Okay, so you're an investor. You want to buy a 10-year treasury something like that. So so you've got an excess of of your your your productivity, You've got savings, right? Well, that savings. You're not using that to buy Big Macs or buy your kids diapers or anything like that, right? You're that's your savings.

So by definition it's very low velocity. y So you say look, I'm getting 2% on my savings. Why would I not want to get 5.5% in a 3-month treasury and just roll it over? So I'm going to go ahead and take this money from my savings and I'm going to lend it to Janet Yellen right? I'm going to lend it that buying a treasury? Exactly Okay, So then Janet Yellen takes that money and says, okay, what we're going to do is we're going to spend this on stimulus checks. So what has happened is that let's just say ,000 has gone from your savings account with zero velocity and it's ended up in someone's checking account with very high velocity.

So that's how you can get an increase of consumer price inflation even though you're not doing. You know, even though you're not quote unquote money printing? Yeah, that's fair. I I Guess if you tighten lending though, there's going to be a limit to how often probably that same dollar can roll over because you can't leverage it supposedly. But I see what you're saying Like it should, it should go up.

So then the question is, is there huh? Is it So really, this all starts with a two-year the twoyear plummeting and there are really I See two choices. Uh, one is something's really wrong, which probably things have started to turn I Agree with that. Uh, the second is there's It's a combination where things have started to turn and maybe through whatever lens the FED is looking at it, they see inflation as solved. Is is that a possibility? In your opinion it is definitely a possibility.

but again, we we look at it through the lens of Arthur Burns and Paul Vulker. So even if the FED thinks that inflation is solved, why would they drop rates? Interesting If the economy was healthy and they're and and in their view, they're looking out into the future and saying, well, this is fantastic. Look at this: Trend We've gone from 9% CPI all the way down to 3% and you know PPI Today comes in a little bit low, so we can assume that it's going to continue down to 2% But the economy is running on all eight cylinders in that environment. There is no need to drop rates.

Interesting: Why would you drop rates? The The: The only reason you drop rates is because the economy is not healthy. Now now now if interest rates were 15 %, then I Think you got a great argument because interest rates are high, but 5.25% That's not high interest rates, that those are normal interest rates. So do you believe that a stronger economy will definitely induce inflation when they cut rates again? So let's our hypothetical is that they cut rates and we have a strong economy. Yeah, Why why would it produce Consumer Price Inflation? Well, the main reason that's going to produce Consumer Price Inflation is or at least inflation would re accelerate, right is because what's happening there is.

You've got the banks now saying this is fantastic. Okay, we were worried about this whole disinflation. We are worried about recession. Now we have this bailout.

This is great news. So we're going to start lending again and we're going to start lending into the economy. We're going to start lending into the financial economy and then what you would expect is something like the 1970s where the M2 money supply goes up and up and up because future growth and inflation expectations are going up and up and up. Now, if that was the case again, the 10-year treasury yield would be getting ahead of that.

It should be showing that Now it should be showing that now right by going. That's absolutely right. So I I think again that that's that's a a possibility. Yeah, right that we somehow have this uh Magic like Cinderella Story where growth Immaculate disinflation.

Yes, yeah, yeah, where growth just starts to to boom and then inflation at the same time does come down. Let's just say that was all supply side stuff. But then again that the FED would not drop rates in that environment because he's risking Arthur Burns and a re acceleration of inflation. It's a risk.

It doesn't mean that it would happen or it would pan out, but it's You're risking that. So is it. Is there this weird possibility that I and I try to look I Always try to think about the business and like the individual, uh, individual participants in the economy. There were a lot of businesses that were really frustrated during Covid that they had all of this demand that they couldn't fill.

Yeah, because the supply chains are too tight, but they were set for a normal, you know 2018 economy, not a 2021 economy. So then over the 22 3, 4 period, we see this massive expansion essentially of manufacturing capabilities with substantially lower demand. Doesn't that mean we have this potential empty ballast almost to where you could substantially increase demand for Supply chains that are now substantially stronger and more stable. hopefully potentially so that you can actually have real GDP growth without inflation? Well, first of all, I think if they solve the supply side issue that uh, CPI wouldn't be at 3% I see I Think it' already be quite, uh, a bit lower so it'd be falling a lot faster.

You think? Yeah, because we have more goods and services. Okay, right, let's remember that that deflation can be a bad thing, but it can also be a great thing. Sure, and in a free market, well, everything should deflate. That's right, that's absolutely right.

But I Don't think they want that because that makes their debt more expensive to pay off. Yeah, it makes their debt more expensive. I I Don't know. That's a whole separate topic.

I I Don't know if we're at a point right now, even though the debts at 34 trillion? I I Don't believe it or not. I I I Don't know that. Uh, the debt in and of itself is a problem for the government right now. Why? Because there's plenty of demand for treasuries if there wasn't a lot of demand for the treasuries.

the 10e wouldn't be at 3.9 Twoyear wouldn't be collapsing in yield. In other words, skyrocketing in price. Yes, good point. So there's obviously a ton of demand.

And it's not like the Bond market doesn't know that we're running these wartime deficits. It's not like the Bond market doesn't know about all the off-balance sheet liabilities. It's not a meme stock. You're saying no.

no. PA Jones George Soros They get it. Yeah, Yeah, exactly. They the financial insiders.

They get it. and they're still, uh, buying the long. And you're saying they're not worried about the debt. So we don't need to worry about this like imminent debt collapse.

It's bad, but we don't have to worry about today. Yeah, so what people need to realize is what's bad about the debt isn't necessarily the debt. it's the government spending. See the the.

The way the example I always use is it's like a heroin addict. Okay, okay so a heroin addict can have a credit card and run up the balance on the credit card to 100,000 Buying heroin which destroys their body, destroys their mind, and destroys their soul, right? So we could come in to that heroin addict and say, guess what, We're going to take your balance all the way down to zero so you no longer have any debt I Just spend it again. So is that a a problem solved? Or is that an even bigger problem? Because now he's going to go and do more of the same. What ruined him to begin with? You see, that's exactly like government spending.

It's not necessarily the debt that's bad. it's the government spending which distorts the overall economy. Let me give you another statistic here that I think you'll find interesting. In the late 1880s, we were on a gold standard.

Okay, so let's take a 15-year time frame from 1880 to 1895. Okay, we had about 30 right? thought my head. 30 to 40% deflation deflation. Think about the benefit that Acrs to the poor and middle class if we had prices going down by 40% over a 10 or 15E period.

Even if their incomes aren't going up, their purchasing power is increasing massively. And by the way, during that time, nominal wages went up. Sure, not down well at the low end. Yeah, so if nominal wages are going up and prices are going down best, their purchasing power for the poor middle class is just going absolutely through the roof, right? So this is 1880 to 1895.

Now, let's fast forward Gold Standard. Let's fast forward to when the Fiat standard went bananas, right? Peak Fiat Insanity from 2008 Q 2020 QE Infinity QT QE The Fed's balance sheet to 89 trillion, you know M2 money supply went up by 25% in 2020. Yada you know s y y together? Well no, we did have inflation expansion of the money supply inflation but not no. Consumer Price inflation if you look compound nomal.

Though, if you look at compounded inflation, the CPI from uh, 2008 to 2023, it went up by right around. let's say 30 or 40% So about in total in total? Sure sure. So on an annual basis, What? it was like 1.8% what? So let's say 2 3% compounded. You're going to get 30 or 40% after 15 years, right? or whatever the math is.

But in and let's rewind to the late 1800s where you saw a about the same amount of deflation. Let's just say 30% 30% Now what's fascinating about that is that the M2 money supply, the amount of currency units chasing goods and services went up in the 1800s that 15year time frame by 150% Wow. Okay, but what will blow people's mind is that from 2008 to 2023 on this Fiat standard runam, Muk it went up up by 150% the exact same. That's very interesting, the exact same.

So then what you have to do is you have to ask yourself, okay, what was the Catalyst Why did one 15-year time frame have deflation versus have deflation versus inflation? Or said another way. Why did one period benefit the poor in middle class and the other period hurt the poor in middle class? Yes, I agree. I've done a lot of research on this and the one main variable that I can find fat is no is government spending as a percentage of GDP Oh interesting. So if we look at the 1800s, federal government spending was about 5% of GDP Said another way: the overall output of the entire Society came from the private.

95% of it came from the private sector right where. Now it's 50/50 So who spends money more efficiently? Oh, is it the government or is it going to be the private sector? Always the private sector. Always the private sector. So is it any surprise that if the private sector represents 95% of the economy, we have more goods and services being created to the extent where prices are going down even though the money supply is going up at the exact same rate? See? That's very interesting you see.

So the main takeaway here is what you have to do. if we want to create this: Society that's going to be more. Uh, let's say friendly to the poor and middle class. It doesn't come with more government.

It comes with less government because that 50% of government spending to GDP All that's doing for the most part is is distorting the economy. It's distorting the ability to create more goods and services which will drop prices. and that's that benefit that Acrs uh, disproportionately to the poor and middle class, right? So so that's why the debt in and of itself isn't really the big problem. it's the government spending.

Okay, so is this a a a maybe depressing but potentially real scenario to think of the government won't fix its spending problem. The debt won't lead our economy to collaps anytime in the near future, so instead the money printer continues to circulate. Yeah, we see the wealth Gap substantially widen and if you don't have assets, you're getting left behind. Yeah, yeah, yeah, that's depressing.

And I think you look at Japan Japan is kind of a Playbook you know. So what's really interesting here is you say Okay, Well I I I get the reference to Japan Japan's at what uh, 230% debt to GDP Right now the United States is about 110 or 120 and I understand that 34 trillion in debt is is huge. but could we be the next? Japan Or what a lot of people would argue is is the dollar going to turn into toilet paper and we're going to go the way of Argentina Yeah. so I think it's a very fascinating juxtoposition because if you look at the two central banks and the two policies, you know, not now, but back.

Uh, when the hyperinflation in Argentina was just getting started, they had very similar policies. Oh, so how is it that one economy produces deflation and the other produces hyperinflation? Sure, is it a loss? How do you know if the US is headed towards Argentina or Japan I Know it's weird to think of like trust in in Fiat but is it Rel it's Al relative? Is it because, uh, of a loss of trust in the institutions in Argent versus maybe those of the bank of Japan I think that has a lot to do with it? Okay, and then you have to ask yourself, why does that happen? Well, corruption or spending? Yeah and I think another thing that's I've been wrestling with quite a bit and I I Haven't come to a definitive conclusion on this, but I think a large part of it could be the way the currency was created to begin with. So hear me out on this one. Your your viewers may find this, uh, an interesting thought experiment.

Let's let's say that I lend you a dollar and I do so by just taking a a dollar bill out of my pocket and giving it to you and then the next day you're like, you know what? George I don't need this dollar I'm going to go ahead and pay you back. So you give me that dollar and we still have a dollar that that we still have $1 So when I gave you that money or lent it to you M2 Money supply did not change and when you paid it back it didn't change, It still won. Now let's think about this a different way. Let's Sam I'm your bank No, no, okay, fractional.

Reserve Bank And you say Okay George I I Want to borrow a dollar? Yeah, and I say Okay Kevin I lent you that dollar. How did I do that I didn't give you a green piece of paper I Simply added a digit to your checking account. right? Zero. So so now instead of having zero in your checking account, you have $1 right? right? What did we just do to M2 Money Supply: Well, I mean you just doubled it.

It increased. Yeah, it increased by $1 and it's like 10x probably. So then so then what happens is the next day going through the exact same example you say, you know what I don't want the dollar anymore I'm going to pay you back. So then when you pay me back, you don't give me a green piece of paper I Just simply change the balance on your bank account from $1 back down to zero where it started.

So you see what's happened. Is those two scenarios I lent you a dollar One scenario didn't do anything to M2 Money supply. The other scenario increased M2 and then it decreased. M2 So money was created and money was destroyed.

Yes, just by the process of lending and paying it back. So now let's think about it in terms of a pie chart. Let's say this pie chart represents 100% of the currency. So 100% of the Yen in existence or 100% of the Argentinian Pesos in existence.

And let's just take into extreme for the thought experiment and assume that 100% of the Yen that exist were lent into existence. Now let's assume that 100% of the Argen pesos that exist were printed literally printed into existence. So if demand goes down for those Argentinian Pesos there's still the same amount of pesos. Yeah, it's just you have the same amount of Supply demand goes down.

so the value theoretically most likely goes down as well. But with the Japanese Yen if demand goes down for the Yen what happens? The debt is paid off. Therefore, the supply goes down with the amount of demand. Interesting.

So as demand goes down, Supply goes down as well because you're assuming that if there was less demand for the Yen the people still have the Yen debt. They're going to go ahead and pay off that debt which decreases the amount of currency units. So you see how it's a complete night and day difference based on the pie chart and how much of the overall currency has been lent into existence compared to how much of the overall currency was printed into existence. if you look at Argentina the majority of it especially lately, was them literally just printing like like P pieces of paper to send out where with Japan the majority of it I would argue was was lent into existence by the banking system itself.

So I haven't that? That's not yet conclusive. it's just something I've been thinking about. I've started to research it and it seems that I could be on to something there. but that may explain the difference between Japan and arent.

and if it does, then you have to look at the pie chart for the United States and the US dollar which would be even more extreme. Sure sure than Japan but it's an argument against stimulus checks and for Bank lending theoretically, uh, well, stimulus checks, you know. So how where are they coming from right? They could be coming from just uh, issuing debt that's taking savings and turning into checking right if we were giving stimi checks by by what we did in 1862 and so I go back to that cuz that the of the Civil War we had the legal tender act and that was the last time. As far as I can tell that the United States government actually printed green pieces of paper to pay for bombs or bullets or whatever they were they were paying for.

Right now the process is the government would just go ahead and uh, and they would issue the debt and if they if there was no one there to buy the debt, then the Federal Reserve would come in like they did during World War II and then they would go ahead and and buy that. So then the base money would go up. but then you're assuming broad money goes up as well which may or may not be true depending on who uh, the the FED is buying those treasuries from. That gets a little bit complex.

but the bottom line is is they in World War II They weren't literally printing green piece of paper to buy bombs like they were in 1862 It's All Digital now on a spreadsheet and the FED just absorbs it all basically. And and that that that can make all the difference in the world that can make all the difference in the world. That little thing you think could be the difference between Japan and Argentin? Yeah, Ah That's very interesting. Wow.

Uh, that's so okay. Then, um, brief. Uh. outlooks.

Just what do you do? What does somebody do? Listen. Listen, Who's listening right now. You buy real estate. You wait.

Uh, for the real estate crash? Do you you know, buy stocks at alltime highs? Or do you wait? What do you do? Yeah. So my favorite investor of all time is Jim Rogers and one of the reasons he's my favorite is because he has a knack for just putting things in the most simple terms possible. which at the beginning when you first hear it, it sounds oversimplified. But when you think about it, it's actually very profound.

Okay, the very first interview that I heard with Jim Rogers it was in the I believe the original Market Wizards books with Jack Schwager which I'm sure you've read many, many times and he was talking to Jim about his investment philosophy and how he's made. He's been so successful he says all I do is just sit in my chair and do nothing and the guy says okay, well well how does that work he goes I He says what the retail investor does is they're always trying to do stuff. Yeah, they don't have enough patience. So what I do is I just sit my chair I do nothing and I wait for a big pile of money sitting in the corner and when I see it I go pick it up and then I go back to my chair and I just wait for the next pile of money to appear in the corner and I'll go pick that up as well and the interim I don't do anything okay and I think that's a great Philosophy for people right now.

And the good news Kevin is that we're we're in this time when the curve is inverted. So to time this and to know what to do, it's actually pretty easy. Okay if if you believe if your base case after listening to me and looking at the yield curve is that this time is not different. Yep, and it'll likely play out like it has pretty much every single time since the 1950s.

All you have to do as a retail investor is sit back, wait, do nothing personally. Uh, I'm just in gold and t- bills. Okay, just the t- bill and chill type. That's a little different from the 801010 though, you've Yeah.

So I I'm waiting to increase and add to that 801010 by buying, You're waiting to strike. You're 100% essentially liquid because both gold and T bills are essentially liquid to make your Investments to go pick up the pile. Yeah, with my cash position, you've got the the main positions that you built. But with that cash position, you're just you're You're building up a lot of dry powder.

You're getting paid 5.5% on that. and then what happens is I I'm looking at the yield curve and it's not complex. All your viewers need to do is watch two numbers: the yield on the 2-year Treasury and the yield on the 10e treasury and subtract. That's it.

That's it. And all you have to do is is just wait for that 2-year treasury yield to go down lower than the 10-year treasury. Now Is it going to immediately hit the fan? No, of course not. There's some timing there, but once you see that kind of, it might just dip and then go back down.

But once it stays there for let's say a month or two, you know that that's the trend. At that point in time, you have to realize that that's usually when you have the hard Landing That's usually month. No, not within a month. It could be 3 months, 6 months.

Something like that. But we're getting real close time to when the FED will have to start and I said have to start dropping rates I Didn't say choose to start dropping. That's a big difference. I Think the FED is going to have to drop rates.

they not going to choose to drop them and then what you do is you sit back you You ask yourself, okay, why is the Fed dropping rates? Is it or why are we having this hard Landing Is it because of a war? Is it because unemployment's going up? Is it because of the Middle East Is it? You know, Why? Is it here? Why is this happening? And then you make a decision, You analyze and you make a decision on what is cheap. Yep, and what is expensive. and that's the pile of money that's just sitting in the corner. So right now it it seems like all this stuff is happening and it's so complex.

But in my view this is the easy easiest time. uh to be an investor because all you have to do is look is just sit back. You know, build your cash position, have the dry powder, be liquid, be patient, watch the yield curve, and then assess once it's no longer inverted and then take action. Wow, that's really interesting.

Yeah. I I Agree with you that that's very interesting, but you know what's interesting Kevin is is I spend. Um, I'm very fortunate that I've got a lot of good friends of mine uh that are in a place called St Barts Okay and a lot. Most of these guys were very very successful hedge fund managers and they've quite literally made billions of dollars for themselves and their clients.

and uh, in in going there I I've just gained a wealth of knowledge and the last time that I was there I had a conversation with with one of my good good buddies that uh was just crushed it in Japan and the com bus and the GFC I mean he is one of the most famous hedge fund manag. I'm not going to say his name, but he's one of the most famous hedge fund managers that we've had in the last 40 years, right? And so when he speaks, you know obviously I'm listening and uh, we went through all of these trades he's made where he's made all this money and he said, you know what, Every 10 years or so you get a generational opportunity and then every two or maybe three years you get a good opportunity and then in between those, you're kind of doing nothing he says. But what I found is that with those generational opportunities that I have had, whether it's Japan, whether it's doc, whether it's GFC whether it's 2020, those have always been the best investments of my life as far as return, but those have always been the hardest to buy. those have always been the hardest to pull the trigger and so I'll I'll give you and you can relate to this cuz we were both doing YouTube during the the pandemic and you know prior to that I'm this is my Mantra buy things when they're cheap, sell them when they're expensive, buy them when they're cheap, sell them when they're expensive, buy them when they're cheap, sell them they expensive.

and I'm sitting there doing YouTube channel or YouTube videos on this daily, right? But then when oil actually gets cheap, was it easy to pull the trigger? Absolu