[00:00] What's up you guys, it's Graham here, and something really strange is happening with America's debt right now. Starting September 9th, the United States is going to begin Operation Borrow a Ton of Money, where we borrow even more money to buy back our own debt because no one else wants it.
[00:15] Okay, definitely dramatizing things for the sake of an intro, but the point still remains. In less than a week, we officially doubled the amount of new money that gets borrowed just to pay back loans made to the U.S. government. And a lot of people are now beginning to worry, what happens when the solution to too much debt is just even more debt?
[00:34] That's why we really got to discuss exactly what's happening. What's this news for the future of our economy? And then most importantly, why Ray Dalio believes this is the point of no return. Because if there's one thing to take away, it's that America's problem could eventually become our problem.
[00:50] Although before we start, I need to ask you for it. Please hit the like button and subscribe. From all of my research, it just helps out the channel tremendously, and if you take the time to do that, I'm at my computer right now. I will do my best to read and reply to as many of your comments as I can.
[01:06] So thank you so much, and also a big thank you to SoFi for sponsoring this video, but more on that later. Alright, so in terms of what's about to happen, and why some economists are ringing alarm bells, we've got to talk about treasury buybacks.
[01:18] Now, even though this sounds like the equivalent of the government paying off one credit card with another, well, that's actually basically what they are doing. But there is a bit of a strategy. On a really basic level, the United States raises money by issuing what's called treasury bonds.
[01:33] This allows practically anyone to invest in the United States government and get paid back a fixed interest rate guaranteed that's usually between 3% to 5% a year. However, those debts eventually do need to be paid back with interest after a certain amount of time.
[01:50] So when those debts come due, the government says, no problem, we'll just sell new debts to new people to pay back the old people. Proud of themselves. Except today there's a bit of an issue.
[02:02] Inflation is rising, and buyers of those treasury bonds are now beginning to say, I'm not lending anymore at 4% because inflation is rising. So if you want me to buy your debt, I'll need to get paid back 5%.
[02:16] So the government is starting to pay back its long-term bondholders at a higher interest rate with short-term bondholders at a lower interest rate. Kind of like paying off a mortgage with an introductory rate credit card.
[02:30] It's not exactly ideal, and it flows here a little longer, but it's quite risky. Which leads us to the next problem, which is interest rates keep rising. The fact is, there are not enough new buyers to absorb all of the old loans.
[02:45] So the United States has to make a choice. Do they offer a higher interest rate to entice people to buy those loans, or do they just buy back the loans themselves? I think you know where I'm going with this.
[02:58] Just recently, they announced that they would buy back their debt at twice the rate as before. The trouble with this, though, is that it's like putting a piece of tape over the check engine light without actually solving the core issue, which is that inflation is rising, our national
[03:12] debt is surging out of control, fewer people want to buy United States government debt, and instead of addressing the issue, they're borrowing money to be able to artificially lower interest rates and the market already calling their bluff This one in terms of what happening next and why the market beginning to price in its first rate hike since 2023 The new Federal Reserve Chair Kevin Walsh
[03:35] had a very clear warning, and it all has to do with the five-part plan. Every year, the Federal Reserve meets in Jackson Hole, Wyoming to signal their forecast on the economy, inflation, interest rates,
[03:47] and where they see the market headed over the next year. And last week, our new Fed Chair, Kevin Walsh, had five crucial points that he wanted to make very clear, with the first being, number one, the Federal Reserve will remain silent.
[04:01] Now, unlike Jerome Powell, who believed the Federal Reserve should signal their move ahead of time to give the markets enough time to prepare, Kevin Walsh takes the approach of say absolutely nothing, signal absolutely nothing,
[04:14] and indicate absolutely nothing. Or in other words, he says that in the past, the Fed would look at the markets, who would look back at the Fed, who would keep looking at the markets, and it's like a hall in the air. So this time, he says that we are on our own, leading to number two, the market watch.
[04:30] Kevin Walsh said that by staying silent, the markets will decide what they do on their own, and then the Federal Reserve is able to act separately from that, which is why I also emphasized number three, lowering inflation.
[04:42] I kind of feel like this is just turning into a huge joke at this point, because everybody says this, but then inflation does nothing but keep going higher. Except they will say this time Kevin Walsh said, no, this time we're actually serious.
[04:56] Or in his words, we must be confident that underlying inflation is moving to our objectives clearly and at a sufficient speed. Otherwise, we have work to do. Which is Fed speak for raising interest rates during a time where, number four, our economy is fine.
[05:12] Again, from their perspective, the economy is able to handle higher interest rates because the jobless rates only are at 4.1%. Those who want jobs are usually finding them. And even though the housing market is slowing down, it's not necessarily crashing.
[05:25] Or as he says, he's hard-pressed to describe broad financial conditions as restrictive in the sense that companies can still borrow, and rates aren't that high to the point that it's beginning to discourage spending.
[05:37] And then finally, we also have number five. He thinks that AI could change everything. In fact, Kevin Warsh called this a hinge point in history and even a new factor of production. But the question still remains.
[05:49] When does this happen? And what if something breaks in our economy before we're able to prepare for it? That's why in terms of what's about to happen over the next month, why interest rates are back on the rise, and the impact the new government buyback is about to have on stocks, real estate, and the entire economy,
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[07:36] All the details are down below in the description. Thanks so much. And now let's get back to the video. All right. So in terms of what's most likely to happen, what the data says, we are most likely going to see it in the next year.
[07:49] And then finally, what you are able to do about it, there is one more topic worth discussing. And that would be the stock market. Look, even though rising interest rates generally cause the stock market to fall, the housing market to freeze, and the economy to slow down,
[08:03] so far in the big picture, things have been holding up relatively well. But the S&P 500 has still up slightly over the last month. Home prices nationally are flat. And besides the recent Japanese yen bailout, combined with rising oil prices and another round of back and forth with the Middle East, things have been fairly stable.
[08:22] However, it is worth mentioning that going forward, we should expect a lot more volatility over these coming 30 days. And according to Ryan Detrick on Twitter, or X, however you want to say it, this is something that we should all prepare for.
[08:35] Like, according to his research, September is typically the worst month of the year in the stock market, especially during midterms. And surprisingly, September is only positive for stocks, 45% of the time, while seeing an average decline of 0.6%.
[08:49] Why? Well, believe it or not, there's actually a term for this, known as the September Effect. Now, even though that is not a guarantee we're going to see a loss in the markets, and genuinely anything can happen, overall, September tends to be a month where investors raise extra capital, cash in on profits,
[09:05] and sell losing positions for tax loss harvesting, which tends to be just negative for the markets. On top of that, we also tend to see lower volume in September as investors take a vacation at the end of summer.
[09:17] And when you combine all of that together, you get data that shows that September tends to be very weak, and that's totally normal. But thankfully, there is some good news in that even if we do see some weakness, according to the data, once it's over, we're going to enter some of the most boorish quarters of the entire four-year cycle,
[09:36] with post-election results causing the market confidence to increase and prices to soar. Plus, when September does produce positive returns, it's usually really positive with some of the highest September returns taking place during midterms.
[09:49] But basically, all of that is to say that right now, investors just really dislike uncertainty. We have rising interest rates somewhat up in the air. We have a conflict in the Middle East that's never ending. Oil prices continue going higher, and the market's beginning to price in a chance of a Democratic sweep of both the House and the Senate in just 60 more days.
[10:07] Now obviously a lot can change from now until then, but on a broad scale, we need to expect more volatility and potential declines until the market prices in the unexpected. Although in terms of what's about to happen on September 16th, if interest rates are going
[10:22] higher and then most importantly what you could do about it here what you need to know Like I said earlier the market is now pricing in more than a 60 chance that on September 16th the Federal Reserve raises
[10:34] interest rates by 25 basis points in addition to buying back your own debt just a week before that. But the way I see it, most of this is already priced in with treasury rates continuing to skyrocket higher. But there is also a chance that interest rates go so high on their own
[10:50] that the Fed doesn't need to cut rates because the market didn't pour them. So that's always a possibility. In fact, even when the Treasury signaled that they would be buying back their own debt, these interest rates remained pretty much unchanged.
[11:03] But keep in mind that there is the chance as well that they do raise interest rates just to signal that they want to be tough on inflation. And if that happens, the data says that so far, the economy could probably support it.
[11:15] Although the stock market's not going to be happy. But really, though, in my opinion, the big move to really watch out for is whether or not the 10-year treasury yield exceeds or hits 5%. The last time this happened was back in 2007, right before the Great Financial Crisis.
[11:31] And this is largely considered the financial barrier between everything is fine and, oh, shit, we are... To truth be told, they're probably doing everything possible to make sure everything stays okay before something breaks.
[11:44] So in terms of my own thoughts and what you can do to prepare, here is what I'm doing going forward. Look, it might not be a surprise at this point, but I've been following Ryan Zetrick on Twitter for well over a year now.
[11:56] And his data is the most assuring that I have ever seen. Like, he's quick to point out that even in great stock market years where we see a 20% return, we still see significantly bad drops, with some days down as much as 3.5%.
[12:11] Or even this, since 1950, the S&P 500 was higher one year after the August 31st close in 18 of 19 midterm years with 0, 20% plus drawdowns over the following year.
[12:24] All of that to basically say that in the short term, I would not be surprised if we see a 5 to 12% market drawdown just because of market uncertainty. But I also wouldn't be surprised if we continue inching higher, especially once elections are over.
[12:38] If the markets like what they see, I think it's smooth sailing and we'll see a bit of choppiness, but nothing crazy. Although, keep in mind, really anything can happen and you just got to brace for the unexpected at this point.
[12:50] That's why going forward, here's what I'm doing. Here's a bit of a different answer for everyone. I'm going to throw you off here. My current allocation is right now about 55% in stocks, 20% tax-free Nini bonds, 10% in the crypto, Bitcoin, ETF, and rest in real estate and other investments.
[13:06] If the market drops, buy in, but if it keeps going up higher, I'm kind of happy with the way things are going right now in my current allocation, and I'm going to keep things as is because it's pretty well balanced.
[13:18] If one falls, I buy back in with this, and if the market keeps going higher, great. I'm still invested. I still make money. I am definitely not selling anything, but I'm also not buying at the crazy levels either. But of course, if the market drops, I'm all in.
[13:32] So with that said, thank you so much for watching. make sure to hit the like button, subscribe, and don't forget that if you want to see extra videos from me every single week, as well as early access to videos like this, and bonus content that I don't post publicly, feel free to join as a channel member, and you also get priority
[13:48] responses to comments, because they all come up as a notification on my phone, and I respond to each and every one of them. So if that sounds interesting, feel free to join. Thank you so much, and until next time.