 A big reason for why I decided to do kind of an economic topic again and to again talk about the markets and finance is because of what happened today in the markets. It is not quite a complete meltdown, it's only not 1987, it's not much of 2000 yet. It doesn't come close yet to the devastation of 2008 particularly that month to September after Lehman was when bankrupt but it was a big move. The Nasdaq was down, Nasdaq which is heavily weighted towards tech stocks, the ones that you guys are constantly buying on dips. I hope you still have money left over because there are going to be quite a few dips happening here for you to buy in. The Nasdaq was down over 4%. That's almost 5%. 4.5%, 4.0%, something percent. That's a big move. 5% move in the stock market index. Now a particular stock can move 5% in particular day that we were not shocked at although that's still unusual. But for an entire index to move down 5% or close to 5%, that's big news. That is significant. That is a lot of wealth got destroyed today. A lot of wealth got wiped out. The S&P 500 was down I think 3. Bank stocks were down about 3. So generally across the board, I think the Russell 2000 which is mainly small companies in the US, small publicly traded companies in the US was also down about close to 5%. As I said, Bitcoin was down 18%. It's now trading, somebody says it's now trading at 22,371. Down 18% in 24 hours, it's down way over 50% since the beginning, since its peak in late 2021. Crypto was down today around 10%. It depends on the crypto, but in index some cryptos are down to zero now. The markets took a real beating today. It wasn't a major crash, but it was a major beating. Tanya bonds were way down, which means the yield on the bond, the interest on the bond went way up. So bond yields and prices are inversely related. So the higher the interest rate goes, the lower the price of the bond is. That is just a mathematical relationship. It just has to happen that way. It's just the way they're priced. So interest rates went up. At some point this morning, the two-year interest rate was higher than the 10-year interest rate. We call that an inverted yield curve, although how you exactly define inverted, what you compare to what people disagree about. But clearly, the two-year was higher than the 10-year, which often signifies a recession coming, but then the two-year went down and the 10-year went up even more. So it wasn't inverted by the end of the day. But the two-year interest rate has gone way up. The 10-year interest rate has gone way up. The dollar has gotten significantly stronger. I mean, the dollar-euro, I don't know if you guys are watching dollar-euro. This is a great time to go to Europe. Your dollars can buy a lot right now in Europe. It's almost parity. Traditionally, historically, the euro has always been more valuable than the dollar, so it took about $1.2 to buy euros, sometimes 1.1. It's 1.04 right now, heading to 1 to 1. I remember the days, and I know I'm old, but I remember the days where it took $2 to buy a British pound sterling. You guys remember those days? To buy a British pound sterling, two bucks. For a long time, it was about 50. It fluctuated about 40, about 50, about 60, up and down. Now it's 1.2. It's 1.2. So again, great time to go to UK, great time to go spend your dollars overseas, and maybe the best place is Japan. God, the Japanese yen, the dollar is so strong relative to the yen. You could buy a lot of stuff in Japan right now. Again, it's a good time to be holding dollars. Now who would have expected that? We've got inflation. Dollar should be declining, but the market's always forward-looking, not backward-looking. They're not present-looking, they're forward-looking. So the reason a dollar is strong is because everybody expects interest rates in the U.S. to go up significantly. And if interest rates go up significantly in the U.S., when in Japan, interest rates are basically zero or 1%, then if you hold yen, you'll only get X interest rate on it. But if you hold dollars, you'll get a much higher interest on it. So people want a higher interest return that the dollar potentially affords them, they can hedge the currency risk, and so they're converting it to dollars. Everybody wants the whole dollars right now, which is not what I think most people would have expected. So you've got pretty much, so you've got the bond market collapsing, you've got the stock market collapsing, you've got crypto markets collapsing. Again, I said this the other day, but so much for crypto being a hedge against inflation. But what's interesting, again, that shows you that markets are forward-looking, is that gold is going down. Gold was down about 2% today. And if you think about gold, we're sitting on an 8% annual inflation. Every time a new record in inflation is recorded, again, price inflation, not monetary inflation, price inflation, every time a new number is reported, gold goes, seems to be either flat or down, is gold still an inflation hedge? Well, if you believe that people bought gold a few years ago in anticipation of inflation, one day it was coming, and so it's a hedge to the inflation now based on the price back then, then yes, maybe, maybe. Right now I think it's going down because the expectation, again, is that the Fed is going to increase interest rates and crush inflation, but also crush the economy at the same time, and we're heading towards a recession, which could lead to deflationary pressures, although I'm skeptical, I think we're much more likely to head towards stack inflation. But gold is going down. So is gold really a hedge against inflation? When it's used in such speculative manner, are people really buying gold based on their inflation expectations or based on speculation in gold? Gold no longer is money, so yeah, not clear at all, not clear at all. So silver was down a lot today as well, silver and gold both were down today. So a lot is moving, and things are moving fast, and things are not moving slow, right? Oil was kind of flat. Oil was the only thing that wasn't moving dramatically today. Things are moving. Let me just say, I don't expect this to stop. I don't think suddenly everything is going to recover. We've reached the bottom, and then tomorrow we're going to start on one of these, you know, like we did during COVID, you know, everything collapsed, and then starting in April, at least in the broader market, everything started going up and up and up and up and kept going up. I don't see any signs that that's going to happen. And I think the primary reason for that is the massive uncertainty in the world right now, the massive uncertainty regarding monetary policy, physical policy, war, trade, supply chains, massive uncertainty about China. I don't know if you're so recently, again today, I think it was, or yesterday, that there's a huge spike in COVID cases in Beijing. So they basically starting one of these massive testing campaigns again, and if they're going to get a huge spike, they're going to test a lot of positive, then what are they going to do? They're going to shut down Beijing and Shanghai. And so it's not over in China in a sense of the disruptions to production, which is a huge force when it comes to all of this. There's no energy in the United States, no energy in the United States to do the one thing that is necessary to help spur supply, which will ultimately help reduce inflation, partially help reduce inflation. And that would be deregulation, no spur to deregulate. I didn't see nobody talking about deregulation, nobody talking about spurring supply, spurring production by deregulating American business, by deregulating American labor, by getting the government out of business, not Republicans, not Democrats. They're too busy, who knows, you know, they're too busy with Trump, they're too busy with guns, they're too busy with abortion, they're too busy with a whole bunch of stuff. Nobody, nobody, nobody, nobody out there is talking about actually deregulating the economy. I mean, getting rid of the Jones Act and getting rid of the millions and millions of regulations that are placed on American business, the licensing laws that would actually lower prices, because they would take away an increased competition, nothing, not a single, by the way, last show, somebody mentioned that Ron DeSantis had was giving Florida a one year reprieve of sales taxes. And wow, that would be pretty amazing, although again, not the kind of thing that I think is of the highest importance, right? I don't think taxes are the problem right now. You probably didn't hear that right. I don't think taxes are the problem right now. It's regulations and subsidies and controls that are much more harmful to the US economy than taxes. But hey, getting rid of sales taxes for a year in Florida, that seemed like a good idea. Why not? Particularly given that Florida is running a surplus. But this is the issue. He didn't do it. So whoever told me this on the show, it never happened. So Ron DeSantis signed a bill that selectively, for particular periods of time, reduces sales taxes on specific particular goods that the government has decided they're important. It's more central planning. It's more they know what's good for you. It's more than telling you. It's ridiculous. So I don't know before school starts, no sales tax on notebooks and writing materials and back to school stuff. That's bullshit. Why is that more important than I don't know food or electricity or I don't know. Or so they're 10, they're 10 different things. And each one is like a tax holiday for a particular period of time, sales tax holiday, a particular period of time. And it's more government manipulation, government trying to determine your values for you, what's important to you, what you should be buying incentivize you to buy this, not that choosing sectors of the economy they want to help. So they don't say we want to help these people, they just give them stuff. It's pitched by the way as a way to help the middle class. Everything today, everything today is pitched as a way to help the middle class. They've even gotten away from the idea that they want to help the poor. They don't really care about the poor. Everybody knows they don't care about the poor. So it's not even pitched as a way to help the poor. It's all about the middle class because it's all about, all about buying votes. It's all about buying votes. So the idea that this is Reagan, Nask, that this is following Reagan, just ridiculous. Sorry, but just ridiculous. It's more, you know, DeSantis acting like a central planner to manipulate people, trying to give them little goodies and little favors and little things that he thinks will get them excited and get them to vote. You know, the more he does, the more he does, the more the Florida Legislature does, I'm sorry, but the lower my opinion of him is. I guess this is not ancient news because the tax bill was only signed yesterday or today. No, today. I read it today in the people. Anyway, but this is something that somebody brought up on the show on Saturday. So markets are down. Institutes are going up. The Fed is meeting on Wednesday. And on Wednesday, the Federal Reserve will decide if Federal Reserve will decide how much to raise short-term interest rates by, how much they will raise their overnight lending rates by. You know, they had originally said that they would raise them by 50 basis points. That's half a percent. Today, the news reports are that they are just talking at the Federal Reserve about raising interest rates by three quarters of a percent instead of just by half a percent. So three quarters is more, right? This is why I think partially the market responded the way it did today is to those rumors of three quarters of a percent hike. So let's walk through what it means to raise interest rates by three quarters of a percent. Or what it means to raise interest rates. Why higher interest rates are thought to fight inflation? In what way did they reduce inflation? And what likely impact they are going to have on the economy, on jobs, on your standard of living, and ultimately on prices as well. So the Fed might raise by 50 basis points. It might be raised by 75 basis points. It doesn't really matter. They're going to raise interest rates. They're going to raise interest rates significantly over the next year. What impact does that have on the economy? Well, you know, think about, think about kind of how the economy in the world in which we live works, how businesses work. Businesses typically borrow money when they want to expand. They use that borrowed money to maybe buy real estate, maybe construct real estate. They use that borrow money to buy machinery, invest in capital, to hire employees, pay their salaries. And then once the new facility is running, it starts generating revenue. Some of that revenue goes to paying off the debt. And hopefully if they've done this well and if they've got a good loan and the interest rate is low and the amount of money they're paying for the debt plus all their other expenses is less than the revenue that they're receiving, they make a profit. But most businesses, both in the private sector, but also public in the public sector, in a sector where firms are traded in the stock market, in both sectors firms use debt to expand, to hire new employees, to get capital equipment, to grow the business. Now, not all businesses do that. Not all businesses have to do that. A company like Apple could just use the cash that it has. It is so profitable. It has so much cash that it could just use that money to expand, to buy other businesses, to give employees raises, to go into new ventures, to fund R&D. But the fact is that very few companies are that profitable. And many companies in order to grow, in order to expand, borrow money. Now, in order to borrow money, you have to believe you're going to be profitable. One factor in being profitable is the cost of that money, the interest you're going to have to pay on the debt that you just borrowed. The lower the interest, all else constant, the lower the interest, the less revenue you need in order to be profitable. Or for a given level of revenue, the more profitable you will be. So the lower interest rates are, the cheaper credit is, the cheaper it is to expand, to buy capital, to employ people, to grow the business. So with interest rates artificially low, real interest rates, you know, negative, companies can get very cheap capital. They can therefore build, expand, grow, employ. And there's a sense in which that's partially why we have such low unemployment. Because over the last 10 years, interest rates have been so low, the business is going to afford to buy, you know, build another factory, you know, open another store, hire more people. And they can pay it off because the money coming in is greater than what they have to pay on debt. And they keep doing this. And look, it's not true that these companies are raising money at zero. It's just that zero, the zero that the Federal Reserve is pushing interest rates down to lowers all interest rates, even say if the company in a normal time with interest rates at two, three, four percent would have to pay, I don't know, eight, nine, 10, 12 percent. Now, because it states a zero, a paying four, five percent less than what they otherwise would, which makes it possible for them to do more. Now, if the interest rate is low artificially, which is what it is given that the Federal Reserve controls it, it's artificial at any level that it's at, then this creates distortions. Companies are raising capital that shouldn't in a proper world be raising capital. Investments are going into areas that are not optimal that don't maximize our well-being or economic well-being, that don't maximize economic efficiency. They're being driven by an artificially low interest rates. And this results in a misallocation of capital. But you see, misallocation of capital is something that's very difficult to point at. It's very difficult to show the problem. It's very difficult to show the problem with a misallocation of capital until you get a crisis. And suddenly, all this misallocated capital, all these companies that misallocate a capital, some of them go bankrupt, many of them get in financial distress, some of them just turns out a lot less profitable than they used to be. And given that they're going to be a lot less profitable than they used to be, guess what happens to their stock price if they're publicly traded? It goes down. So as interest rates go up, not only are future cash flows going down, discounted at a higher rate, so the value of the money today, the value of those, you know, I'm going to, oh, this company is going to generate profits of a billion dollars in five years. Well, that billion dollars in five years is worth x if interest rates are zero, it's worth five billion, and it's worth less than that amount if interest rates are 10%. I'll have to do a finance one-on-one to explain that one for you at some point. But in addition, the other impact that interest rates going up has is that in and of itself, it reduces the cash flows. More of the company's money is going to go to debt service. And for some companies, as interest rates go up, the debt that they have to pay, the amount of money they have to pay in interest on the debt goes up and might make them unprofitable. We'll get to zombie companies in a minute. So the probability of bankruptcy, the probability of default, we're back. I fixed it. No, I didn't. I didn't fix it because I didn't know what went wrong. It must be, it must have been a quirk in the matrix in the internet, some things going on in the internet. Maybe somebody, anyway. And suddenly it goes up, risk goes up, profitability goes down, and your discounted cash flows at a higher interest rate, all of that results in a lower stock price today. All of that is why you saw the stock market go down as much as it did. As interest rates go up, that becomes riskier and riskier. And right now, the market thinks the Fed is going to raise interest rates to about 3%, and it's pricing that. But what if it turns out that the Fed raises interest rates to 5%? Well, that's not priced yet. And that's where you get a lot of downside still in the stock market, a lot of downside potential in the stock market. Why is tech getting hammered more than the rest of the economy? Partially because tech was so expensive before all of this started. The assumption for tech was they could borrow it zero forever, and they would be unbelievably profitable forever. They were priced for just the most rosy positive scenario possible in ways that other sectors were not. So when it became clear that the rosy scenario is not going to become a reality, well, tech adjusted. Prices, investors adjusted the pricing of tech. So tech has come down significantly because it was so expensive. It's still expensive. It's still priced for a rosy scenario. It still doesn't really have fully the possibility of recession, the possibility of bankruptcies, the possibility of layoffs, the possibility of increased of really bad economic times. Now, of course, what happens when interest rates go up and businesses start struggling because they can't repay the debt or they just can't borrow money to expand. So they stop expanding or consumers can't borrow money. They can take out, I don't know, a home, what do you call it, line of credit to go buy stuff or consumers can't get that auto loan or they can't get that loan that they take on less credit card debt because some of the credit card debt is so expensive, people stop using it. So consumption comes down, but business investment goes down, business expansion goes down, and businesses start laying people off. And some businesses at the margin go bankrupt. And this is how, this is why rising interest rates can bring about a recession. But it also is true that rising interest rates can reduce demand. They reduce demand by the fact that you have less money because you're unemployed. You have less money because you can't borrow any. You have less money because you're not getting that raise. And as a consequence, this demand, less demands put less pressure on prices. Prices don't keep going up at the same fast rate as they used to. This is why interest rates and interest rates high enough causing a recession is one way in which you can slow inflation down. How much you slow it? Different question, but you can slow it down. Grow. Please consider sharing our content and of course subscribe. Press that little bell button right down there on YouTube so that you get an announcement when we go live. And for those of you who are already subscribers and those of you who are already supporters of the show, thank you. I very much appreciate it.