Macroeconomics: Yield Curve, Inflation, Unemployment, Stocks, and Recessions

Hey everyone and thanks for jumping back Into the macroverse today we're going to Discuss several macro economics Indicators and how we can use them to Better navigate financial markets if you Guys like the content make sure you Subscribe to the channel give the video A thumbs up and check out the Black Friday sale on into the crypto versus Premium at into the Where you can get access to all of these Charts that you will see me show or at Least the ones on my own website so make Sure you check that out check that out We have launched several different tiers That you can look look at we will Continue to run that sale for a few more Days so in this video we're going to go Through several things okay so we're Going to first talk about real GDP or Gross domestic product the unemployment Rate headline and core inflation Expectations for both of those next Month we're then going to talk about the United States interest rate expectations For the interest rate going forward Um the treasury yield curve and the Inversion of it treasury yield curve Spreads and then we're going to look at When the S P 500 normally bought items With respect to recessions Or they're going to take a close look at The current state of the S P 500 the NASDAQ and the Dow Jones and then we're

Going to try to combine everything Together to try to understand how it all Fits together Hopefully that makes sense we're going To try to take it one step at a time I Know these are not necessarily the most Popular videos but I I choose to believe There are dozens of people that care About this stuff so we'll try to go Through this and again forgive me I am Sick right now so you probably will hear Me cough throughout this video but I'm Going to do my best so U.S real GDP is one of these things that A lot of people have pointed to in early 2022 as the reason that the United States was in a recession and to be fair There is at least evidence for that to Be the case if you look at the quarterly Change here which shows you when you Have two neck two consecutive quarters Of negative GDP like we did in q1 and Q2 There has not been a recession declared For that time despite the fact that Normally when you see two consecutive Quarters of negative GDP it corresponds Or it coincides with a recession and the Reason why that's important is because The S P 500 normally sees a macro bottom During the recession however according To this we actually haven't actually Gone into a recession yet why is that Well you could argue that it's just Political right and that might be the

Easy way out But you could also argue that there were Still a lot of metrics to suggest that The United States economy has remains Relatively strong in 2022 now as Investors we might not always feel that Way especially if your portfolio is down Significantly however we also had a bear Market in in other years right where They did not always correspond to a Recession it's just that recessionary Bear markets tend to last a lot longer Than bear markets that do not include a Recession so real GDP has actually put In new highs over the last two quarters So if you were to argue that Two consecutive quarters of negative GDP In early 2022 put us into a recession You can't even use that argument anymore Because we've been putting in new All-time highs we took out sort of that Brief pullback that we had and we've Actually accelerated back up to new All-time highs Now If we look at another metric so again This two consecutive quarters of Negative GDP typically corresponds to Recession which is this gray shaded Region not this time The reason I think and as made clear Before Is that unemployment the unemployment Rate Still Remains relatively low right

So despite the fact that real GDP was Down in q1 and Q2 the unemployment rate Has remained relatively low and Therefore the labor market has remained Extremely tight this is not generally a Good thing if you're trying to slow the Economy down which is what the fed's Trying to do why are they trying to slow The economy down because they want to Bring inflation back they want to bring Inflation back down to earth so that it Doesn't continue to hurt hurt you know Every day everyday people who can no Longer afford certain things just Because they've continued to go up up in Price and you might have noticed that With your grocery bill uh things things Of that nature but if you look at this It's not historically until the Unemployment rate actually starts to go Up that we find ourselves in a declared Recession it's just that normally when You see two consecutive quarters of Negative GDP You also tend to see the unemployment Rate go up it just simply has not gone Up yet right it just simply has not gone Up and You know this is likely an artifact of Of some of the major world events that Have happened over the last over the Last couple of years but it just simply Has not really budged yet now we could Argue the relevance of this data and and

The validity of it all we want but at The end of the day the unemployment rate Has still remained relatively low Throughout 2022. now we are starting to See layoffs coming especially in the Tech sector Um I mean I think that makes the most Amount of sense since these are the Companies that really shut off over the Last couple years we also know that the NASDAQ has been performing pretty weak Relative to some other major indices and Again that's mostly that's just made up Of of tech stocks but we have Real GDP putting in new highs we still Have the unemployment rate really low But inflation is still relatively High Headline inflation is now at about 7.7 Percent year over year Core inflation is it about 6.3 percent Year over year You can see that when inflation goes up We tend to find ourselves at some point In a recession why is that why why do All of these high inflationary periods Tend to correspond to recessions is it Just because inflation is high No right that's not necessarily what Just pushes us into a recession It's the response by the Federal Reserve Right it's the response by the Federal Reserve that ultimately does it now we Should understand what our expectations For inflation going into next month

Sorry going into next month and you can See this this website is forecasting 6.2 Percent for next month their their prior Forecasts have sort of been hit or miss I mean you're not going to get it Exactly But if it ends up still staying above if Core inflation stays above six percent The FED is still going to want to Tighten right they might not they might Not go the full 75 basis points but they Still reserve the right to do that Headline inflation could still be coming In at seven to eight percent which is Still not a good thing I mean it's going In the right direction at least so far But it still is not down to where the FED wants it to be Now I've heard a lot of people say that The FED will change their target rate to Three to four percent and I've heard This throughout all of 2022 just like I've also heard that they won't never They'll never raise the federal funds Rate above three and a half percent look The Federal Reserve I mean Powell has Been fairly clear as to what his mission Is going has been and that is to get Inflation back down to two percent uh no Matter what it takes okay no matter what It takes he is often cited volcker Um many times in order to you know During his fight against inflation and Not only does he cite volcker but I also

Think he doesn't want to mistake take Make some of the same mistakes that were Made in previous you know under under Previous Um under previous chairs and that would Be to loosen monetary conditions too Quickly okay What would happen if they were to do That Well if they were to do that you could Get a period like the 70s and 80s where Inflation comes back down but then it Just goes straight back up right you Might see it come back down but then it Just starts to accelerate again because In you know because monetary conditions Were loosened before they should have Been loosened and that is why you'll Often hear Powell say things like higher For longer right like we will eventually Go to these higher interest rates but Once we get there they're likely not Going to bring the interest rates back Down as quickly as a lot of people want Them to and the reason for that is Because they know that if they do that Like they did in in in Cycles past it Could just lead to inflation coming Right back now you might want them to Pivot and go to QE quickly however History shows us that if they do that Sort of stuff and pivot too quickly then You could go you could see a stock Market that goes sideways for 10 to 15

Years okay during stationary decade I would prefer for them to just for them To rip the Band-Aid off and so we don't Actually have to deal with that I would Prefer for us to just get it over with And and get this fight against inflation Back under control So again It's not It's not inflation that By itself push pushes us into a Recession it's the federal reserve's Response and you can see that is Partially raising interest rates it's Also rolling off assets from the balance Sheet right going through a period of Quantitative tightening QT but when they Raise interest rates This is going to naturally make Companies who were very dependent on Cheap cash They're going to go under right these Are zombie companies and you know I mean It's not good for the people that are in Those companies it's not good for the People to get laid off but in in the Grand scheme of things it does help to Cleanse the space of of unneeded Companies that are not actually Profitable and and therefore Focus the Money back onto the companies that are Actually doing something more useful Right So I think that's something important to

Consider when looking when considering The effects of higher rates So the federal funds rate is already at Four percent right it's already at four Percent they're likely going to continue Going higher and if you look at Expectations for the December meeting We're currently looking at a 75 76 Percent chance of a 50 basis point rate Hike and about a 24 Chance of a 75 basis Point rate height So far markets are expecting it to only Be 50 basis points which would still get Us to four and a half percent by the end Of the year My general expectation as I've said for The last I mean I've said for the entire Year I think that they'll get to at Least that four to five percent range I Now think they will get at least a five Percent and and maybe they'll pause Somewhere between the five to five and a Half percent range but that doesn't Necessarily mean they're gonna have to Cut from that level I mean if inflation Doesn't come back down they still Reserve the right to eventually go Higher Now why is this so important and how Does it relate back to recessions well Remember When the when the Federal Reserve raises Interest rates it does offer new types Of Investments for people that may have

Otherwise not considered them fixed Income so things like you know Certificates of deposit you know these Types of things that you may not have Considered for the last decade because You were only going to get like a Quarter of a percent or something in as A return now you can get four to five Percent and while four to five percent Might not be much for a lot of people Especially if they're used to chasing Higher gains It has proven to be a better option this Year such stacking cash and just putting In some of these you know CDs that That's actually proven to be a fairly Attractive way to go this year as Opposed to writing down risk assets 20 30 50 80 90 percent So again it's just a it's just one Alternative and it and it can be a Useful part of a portfolio now when the Federal Reserve raises interest rates That affects the yield curve okay the Yield curve shows you what type of yield You can get annualized of course At various treasuries like at various You know lengths right so if you were to Hold it for one month you're looking You're looking at 4.1 percent 4.16 Percent this is annualized though she Would you would get like you know 112th Of that but you can see that One the one year

Is actually offering the highest rate No this doesn't really make a whole lot Of sense During normal times during normal times You would expect to see something like This Like in 2016 where the longer you have Your money locked up The higher yield you should get right This makes sense But Before you go into a recession Like this like the 2000 you know like The recession that occurred in in 0809 You will see the inversion of the yield Curve and that's where you can actually Get a higher rate For shorter duration yields or for Shorter duration treasuries you can Actually get a higher rate Now We're seeing that right now as well You can get a higher rate For these shorter term treasuries than Longer term treasuries and one of the Reasons for that is because in the short Term the FED fund rate is still four Percent right it's still four percent And markets are still thinking they're Going to raise by 50 basis points Furthermore in February the market Thinks it'll be up another 50 basis Points but to five percent by February So even though there could be a

Recession coming and even though the FED Might eventually have to have to lower Interest rates Doesn't mean you can't get four to five Percent in the short term one month two Months three months six months in a year It only starts to go back down as you Get further out because Banks are not as as sure that the FED Funds rate is going to remain this Elevated for a very long period of time Right and you know as as we get further And further out you're not going to You're not going to see these same types Of high yields when there's so much Uncertainty when it it feels like the FED is trying to push us into a Recession to get inflation back down it Feels like that's what they're going to Try to that's what they're trying to do But if they push us too far they're Likely going to have to lower interest Rates okay and and therefore in the Short term you can still get higher Yield Because the markets are thinking that The FED is going to keep raising rates But over the longer period treasuries You're not going to see those same rates It doesn't mean you can't still get a Decent return Which is not going to be as high So please please consider that and again Before recessions even crash you

Saw the inversion of the yield curve We're seeing it again today Now if we take a closer look at the Inversion like the spread between the Two-year And the 10-year or the three month and The 10-year looks something like this What you'll notice is anytime it inverts So anytime the three month gives you a Better yield on the 10 month or the 10-year anytime the three month gives You a better yield than the 10-year For a long period of time it's a good Indicator of a recession Exhibit a is where we currently are We expect to go I expect us to go into a Recession at some point in 2023 but you Can see it you can see in 2019 we had a Recession in 2020 it inverted here in You know 0.607 we had a we had a Recession in in 2008 it inverted over Here in 2000 we had a recession in 2001 And so on and so forth right 89 we had a Recession in 1990. it's inverted in 2022 Decent chance we're going to have a Recession in 2023. now there's always a Chance it gets delayed I mean you know There it just depends on how resilient The US economy is I mean if it stays Inverted a long time before making its Move back up to the upside then it could It could delay things you'll notice that It's not until after it uninverts that You actually are are sort of knocking on

The door of the recession so we're Likely not going to see the recession Occur when it's still down here It doesn't matter how long is it going To take for it to start to come back up Sometimes it could take a few months Other times could take a year right it's Really hard to know Exactly how long it will take but one is One thing is is is Um obvious by this chart is that when You see these types of inversions It leads To recessions right now there is a Period in 1998 where we had Um we had a brief a brief in inversion Of it But it was really brief right and it Didn't lead into anything this one's not Brief right I mean we've we've continued To just sort of go down and and we're More inverted now uh than we have been Since you know really since since 2000 Right like since during Crash Okay Same thing when you look at the spread On the two-year and the tenure a very Similar story right when it inverts we Typically come out of it into a Recession inverts into a recession Invert and do a recession invert into a Recession Why is this important why does it matter

So much If we go into a recession Right why does it matter Well remember the recession is likely Not going to be declared until the Unemployment rate goes up But once that starts to happen The stock market tends to tends to Unwind right it tends to start to come Back down If you go look at the stock market you Can see it historically bottoms during Recessions right exhibit a exhibit B C D And so on and so forth in fact in only One instance did the major bottom occur After recession and that was during crash now remember we had a Pretty big event occur in 2001 so I Think that is that con sustained Uncertainty led to a an eventual lower Low But for the most part the stock market Bottoms during their recession not Before it not after it except for except For this one in in 2002 it typically Bottoms During their recession But the recession doesn't start Until the unemployment rate goes up The unemployment rate isn't going to go Up until the Federal Reserve gets Monetary conditions to a point where a Lot of these companies have to continue To lay people off right now you might

Think that sounds you know cruel for the Federal Reserve to do but they're doing It To combat Inflation They're not doing it because they want People to lose their jobs per se Um you know their their mandates of Course they want to keep inflation low And and they they obviously want to keep The unemployment levels low they don't Want the unemployment levels to go up Too high it's just It's just that they recognize that wage Wage inflation is a real is a real Threat to to overall inflation and if They don't bring inflation back down Quickly then you could get to a a you Know a an inflationary decade where we We just don't make a lot of progress and I think that's what Powell is trying to Avoid I think you'd rather get inflation Back down so that we can go back into a Hopefully a long period of economic Expansion rather than just playing the Sandbox for 10 or 15 years So What about today what does the S P 500 Look like today well you know you know It's just been putting in a series of of Lower highs okay and and and these macro Charts that we've been talking about in 2022 Have been what has continued to allow me

To focus mostly on stacking cash now it Would be a lie to say I haven't bought Anything right I have occasionally Picked up some things this year but I'm Not picking up super risky things this Year I'm picking up you know very safe Options and the safest of course is just To stack cash so that has been my Primary priority in 2022 once I really Realized that this was going to unfold Was that I just thought all right well It makes sense to stack cash until the Macro these macro headwinds have you Know have have sort of gone away okay Now so far the s p has just been putting In a series of lower highs And lower lows And every time we get one of these crazy Rallies everyone starts getting really Excited again and and talking about how We're you know gonna go put up you know We're going to see some crazy melt up Right you know there hasn't really gone A few months this year where someone's Not talking about a melt up you know to To you know new highs and whatnot but so Far that has not yet happened and every Single time we have one of these rallies Everyone calls for a melt top and it's Just another lower high right I mean to Me A lower high is just not a melt up it's Just a it's just a counter twin rally Right it's the bear Market rally it's

Shorts covering uh retail fomoing back In after the shorts cover and then and Then you know people looking at these Resistance levels and then saying all Right well it's probably going to go Back down and then eventually it does And this just happened this just Happened many many times this year So this looks like a structural bear Market right it looks like a structural Bear Market through and through We can look at this and say you know What It looks pretty close To an average bear Market you might say Right you might say it looks pretty Close to an average bear Market you look At the 2022 bear market and you compare It to historical ones we're pretty Average right now pretty average bear Market Still a good chance we could go higher In the short term especially if we if we See a sustained rally you know getting Into December which is somewhat seasonal But there are going to be a lot of macro Headwinds coming into Play Still and That is the Federal Reserve raising Interest rates because inflation is high And still waiting to see that Unemployment level finally start to go Up when it does we'd like to get that Recession that's usually where the stock Market bottoms the NASDAQ is also

Putting in a series of lower highs And lower lows Okay it's it's the same thing And this rally for the NASDAQ has Actually been relatively weak compared To some of the major indices This is a structural bear Market as well Right it look bear markets don't resolve Themselves overnight and recessionary Bear markets can take like a year and a Half or something on average like 16 Months or you know that they take on Average they take a longer period of Time Than bear markets that are not part of a Recession so we have to consider that The biggest You know Counterpoint I suppose Is the Dow Jones right Let's put it in a new high so Lower high Lower high Lower high ER High right It's a higher high Low a lower low a lower low a lower low A lower low and a lower low now this Index is putting in a higher high here What does that mean right you know what Does that mean for for this whole Theory Does that mean it's not a valid anymore Well I think what we should do is take a Journey back through time Now remember

During 2000 if we go back and look at at The s p Back in in you know during this bear Market it was a fairly structural bear Market right a lower highs all the way Down Here we even it was still technically I Believe a lower high and so on and so Forth lower lows and lower highs fairly Structural bear Market Now that our drones looks different in 2000. okay and we need to consider that Look at this this is the Dow Jones I mean look look what look what's going On here It's all over the place right it doesn't It doesn't show the same exact type of Trend that you would have expected like A like this like the s p did right where The s p was essentially always putting In you know lower lows and lower highs The the you know the um the Dow Jones Can see rallies that basically take it Back up to around the prior High That's not that uncommon for the Dow Jones to do that it's still put in lower Lows even though the highs were Sometimes very similar And in fact If we were to take a bar pattern And maybe you know grab it from right Here And then shift this over And we're going to take this all the way

Over to the current time So all the way back up oh sorry we're Going to bring it all the way up here We're going to just make some Comparisons right So let's zoom out And maybe you know what maybe I should You know maybe I should put this on like A weekly time frame so it you know so It's not it's not so confusing that Might be a little bit better let me just Do that really quick so I'm going to Switch this over to a weekly time frame Just to Um you know just to clean up some of the Data so it's not it's not so convolutely Let me switch this to a log scale as Well Um So again The Dow Jones right here So we're going to take this bar pattern Right this one And put it over here Now what do you notice right I mean like You know you can look at this and see I Mean right here this was a pretty crazy Rally back up to the upside Right on the weekly it went higher if You don't include the wicks I mean it's a pretty good match right Like it's a pretty good match for some Of these rallies the Dow Jones can see Crazy rallies even during a structural

Bear market for the s p and the NASDAQ It doesn't mean it can't go put in a new Low eventually If it were to follow this one You know it might mean putting in a you Know it still maybe has maybe still has Some juice in it Um but as you get into you know Mid-December late December and then in 2023 you could still be looking at a new Low on the S or on the on the Dow In March or February or March of 2023. Followed by maybe a bounce back up in The summer And then maybe even another low later on But this is something that's important To consider is that just because the Dow Jones has put in a new high doesn't Necessarily mean anything I mean the Dow Jones historically has acted some lost Similarly while the s p and the NASDAQ Tend to just behave in a more structural Manner where they put in lower highs and Lower lows so again to sort of summarize Here We have recessions in Gray We have inflation in Orange This is headline we have core inflation Here in yellow or green we have the Effective interest rate in yellow and Then we have the S P 500 in purple One of the things you may notice Is that and let me let me clean this up Just a little bit

One of the things you may notice Is that Interest rates right interest rates in General 10 To have to go above inflation before Inflation comes back down The yellow line is the interest rate and Then the other two lines are headlining Core inflation but normally you'll see In interest rates go above inflation Before inflation comes back down to Earth right now We're not even close yet right like We're like four percent but core Inflation is over six percent and Headlight inflation is over seven Percent So it shows you that the Federal Reserve Still has Their job to do ahead of them to get Inflation Back Down Under Control This is why I often say in 2022 I say Cash is King and don't fight the fed the Fed Will continue raising interest rates Despite the fact that the economy is Slowing down because they need to get Inflation back down They want I believe and I think they've said this Right they've won unemployment to go Back up a little bit the unemployment Rate so that it loosens the job market

Some to help reduce some of those Inflationary pressures if they can Accomplish this If they can accomplish this Then the interest rates need to get Closer To where inflation actually is Okay That's why I think they're going to make It to at least five percent at least Five They need to get closer to five percent And maybe even six percent right they Need they need to get at least five Percent to get inflation back down During this process It will likely lead to more layoffs Eventually we will likely see the Unemployment rate go up when the Unemployment rate goes up we finally get A likely recession right we're likely Going to see a recession Remember when the recession hits or Right before it The yield curve should uninvert right The inversion will be gone you'll see These go back to normal Once it uninverts we likely get a Recession When we get the recession Remember what happens when we get the Recession that's normally when um The stock market that's what normally When the stock market bottoms right

S P 500 bottoms usually during their Recession So you can kind of see how it all works Together now again my interpretation of This stuff is is it could be ignorant it Could be naive I'm just showing you what My interpretation is based on the data And what I see just to summarize one More time to just make it as crystal Clear as possible Right inflation's High Real GDP is putting in new highs so According to that we're not in a Recession The FED will continue to raise rates They'll continue to roll off assets from The balance sheet This is likely going to make it so that The you know that that monetary Conditions tighten people will be laid Off we'll see the uninversion of the Yield Curve will go into a recession That's likely where the S P 500 bottoms That's my general assessment okay Where could this be wrong well you know I suppose that if the U.S economy is Stronger than people think it is then Perhaps the Federal Reserve could raise To five percent and and the U.S economy Continue humming along and it doesn't Necessarily have to have to Um you know experience this but that's Not my base case I mean I still would Argue that we're very much in a Structural bear market and

Um and and we still have a lot of macro Headwinds to face as we get into 2023 I Also think we're going to start to see Some earnings coming in for a lot of These companies in 2023 less than Expected and maybe you'll even see Negative GDP again Or you know two consecutive quarters Sometime in 2023 but maybe by that time The unemployment rate will actually go Up and then you'll see that recession Declared and at some point during that Recession which is usually declared After this recession starts then you'll See the S P 500 bottom And so on and so forth I know this has Been a lot I hope I've done a at least An okay job of explaining this and I Mean we've done several videos on this Before I wanted to provide an update Because it had been a while and we know That we have some pretty important stuff Coming up soon with new inflation data Coming in you know uh in December and we Also have another fomc meeting by the Federal Reserve in December as well Where they will likely raise interest Rates Again by at least 50 basis points With a 24 to 25 chance of a 75 basis Point rate height so we'll see what Happens we'll continue to follow the Macroverse uh because I do think it Helps to helps us navigate financial Markets

Remember if you guys like the content to Subscribe to the channel we also do have The sale on into the crypto versus Premium at into the We're going to run that for a few more Days so make sure you check it out we do Have several different tiers that you Can sign up for which should provide Options to you know to different people So thank you guys for tuning in Subscribe I'll see you next time bye


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