1 00:00:00,000 --> 00:00:16,200 Alan Cring Productions in association with Emergent Light Studio presents the Illinois State Collegiate Compendium Academic Lectures in Business and Economics. 2 00:00:16,200 --> 00:00:23,920 This is Business Finance, FIL 190 for spring semester 2024. 3 00:00:23,920 --> 00:00:32,880 Today, Bonds and Bond Yields. 4 00:00:32,880 --> 00:00:34,480 This is sort of a finish up. 5 00:00:34,480 --> 00:00:40,880 I'm going to clean up some work from last week and from a little before that and then 6 00:00:40,880 --> 00:00:45,920 carry it forward to this current chapter on bonds. 7 00:00:45,920 --> 00:00:49,320 Now, this is the last chapter before the midterm exam. 8 00:00:49,320 --> 00:00:55,960 I want to emphasize that on the final exam, on the midterm exam, on the midterm exam I 9 00:00:55,960 --> 00:01:05,840 am not going to ask you any mathematical questions about bonds, bonds themselves, chapter 7. 10 00:01:05,840 --> 00:01:11,080 I ask some general questions, definitional questions, concept questions. 11 00:01:11,080 --> 00:01:12,920 Yeah, that's fair game. 12 00:01:12,920 --> 00:01:19,160 But I don't like having you have so little time to get it together with respect to calculating 13 00:01:19,160 --> 00:01:25,240 bond yields, bond prices, and all that kind of stuff. 14 00:01:25,240 --> 00:01:30,280 I really don't want to put you in that situation as we are getting that close to the final 15 00:01:30,280 --> 00:01:31,280 exam. 16 00:01:31,280 --> 00:01:32,600 Why do I keep saying the final? 17 00:01:32,600 --> 00:01:36,920 I'm looking ahead to the midterm exam. 18 00:01:36,920 --> 00:01:46,680 So this is what I do with bonds today and on Wednesday is entirely the just, I'll show 19 00:01:46,680 --> 00:01:48,960 you the math, fine. 20 00:01:48,960 --> 00:01:54,680 But I will not hold you responsible for being able to do the math on the midterm exam. 21 00:01:54,680 --> 00:01:56,600 Want to emphasize that. 22 00:01:56,600 --> 00:02:02,260 We do have a surprise quiz today and that will begin at 10.35. 23 00:02:02,260 --> 00:02:03,960 So look forward to that. 24 00:02:03,960 --> 00:02:10,600 And you should always consider these quizzes as mini-preps, miniature study guides for 25 00:02:10,600 --> 00:02:12,240 the midterm exam. 26 00:02:12,240 --> 00:02:15,560 So definitely this one is right in that area. 27 00:02:15,560 --> 00:02:22,040 Oftentimes, and I will cover the midterm exam in the review next Monday, but always consider 28 00:02:22,040 --> 00:02:26,560 that those quizzes, sometimes I'm very lazy. 29 00:02:26,560 --> 00:02:33,160 I'll just copy a question from a quiz and I'll paste it into the exam. 30 00:02:33,160 --> 00:02:35,640 Or just change the numbers. 31 00:02:35,640 --> 00:02:41,680 They're very similar, those quizzes are, to the way I ask and the questions I ask on the 32 00:02:41,680 --> 00:02:43,040 midterm exam. 33 00:02:43,040 --> 00:02:47,760 So always consider this, that there's a bright side to suffering through these quizzes that 34 00:02:47,760 --> 00:02:53,040 makes you much stronger and that's why I have such good scores on the midterm exams. 35 00:02:53,040 --> 00:02:56,640 This is because I've prepped you for them. 36 00:02:56,640 --> 00:02:58,920 Enough of that, let's have a look at the numbers. 37 00:02:58,920 --> 00:03:08,040 And we have on deck today, it's a bull day, but it is barely a bull day. 38 00:03:08,040 --> 00:03:11,040 It's a barely bull day, as it were. 39 00:03:11,040 --> 00:03:16,040 You can see that the Dow is up a lousy 0.15%. 40 00:03:16,040 --> 00:03:27,600 And the standard of pores, it's up 0.01%, performing worse than the Dow. 41 00:03:27,600 --> 00:03:32,520 And the NASDAQ is also up, but a lousy 0.21%. 42 00:03:32,520 --> 00:03:37,120 And as you can see from the spark charts, everything started out happy today, but the 43 00:03:37,120 --> 00:03:44,000 spark charts are showing that the bears have sort of come back in in the last 10, 15 minutes 44 00:03:44,000 --> 00:03:45,920 and they're really tearing up. 45 00:03:45,920 --> 00:03:52,920 They've dragged the S&P 500 down from a good start into almost negative territory. 46 00:03:52,920 --> 00:03:58,280 As a matter of fact, it looks like a dip negative there for a couple of minutes. 47 00:03:58,280 --> 00:04:04,280 But it's just not a good happy day on the street right now, on Wall Street, on the street 48 00:04:04,280 --> 00:04:05,480 we say. 49 00:04:05,480 --> 00:04:09,000 So we go over here and we have a look. 50 00:04:09,000 --> 00:04:13,440 Crude is in nice, right in its trading band there. 51 00:04:13,440 --> 00:04:19,240 I noticed the price of gasoline came up a little bit at the retail level, but it's nothing 52 00:04:19,240 --> 00:04:20,240 major. 53 00:04:20,240 --> 00:04:24,720 But the price of crude, you notice it, it had been down through the night and into the 54 00:04:24,720 --> 00:04:26,400 early morning. 55 00:04:26,400 --> 00:04:31,160 And then it had a bit of a spike here in the last 10 minutes or so. 56 00:04:31,160 --> 00:04:37,760 Well, it was actually about 20 minutes ago it started running upward and I don't know 57 00:04:37,760 --> 00:04:43,040 what its thoughts are, but it's nothing to be concerned about unless there's something 58 00:04:43,040 --> 00:04:46,400 happening over in the Middle East I don't know about. 59 00:04:46,400 --> 00:04:51,960 Gold is taking a toilet break, which is good news because if gold is rising that means 60 00:04:51,960 --> 00:04:55,400 that there are concerns about stocks and bonds. 61 00:04:55,400 --> 00:04:57,680 So we don't have that happening. 62 00:04:57,680 --> 00:04:59,720 Gold and silver are both down. 63 00:04:59,720 --> 00:05:04,080 Moving over here into the bonds, there you go. 64 00:05:04,080 --> 00:05:08,080 Well we've got a little bit of a spike in the yields. 65 00:05:08,080 --> 00:05:13,840 That would mean that there's something of a sell-off in the bonds, drives the price 66 00:05:13,840 --> 00:05:17,440 down and therefore that will cause the yields to rise. 67 00:05:17,440 --> 00:05:22,560 It's nothing much though, two and a half basis points isn't anything at all. 68 00:05:22,560 --> 00:05:32,240 So right now bonds are kind of having a stable period around two and a quarter percent on 69 00:05:32,240 --> 00:05:34,200 the 10-year benchmark. 70 00:05:34,200 --> 00:05:43,560 So now remember that when I do this on purpose, remember that an interest rate or a yield 71 00:05:43,560 --> 00:05:53,080 as it were is going to have the risk-free rate of course plus the three, the default 72 00:05:53,080 --> 00:06:00,240 premium, the maturity premium and the illiquidity premium. 73 00:06:00,240 --> 00:06:10,360 And of course the risk-free rate has the real rate plus the expected inflation premium. 74 00:06:10,360 --> 00:06:20,520 Okay, with any interest rate is going to carry R sub F. All interest rates will carry that 75 00:06:20,520 --> 00:06:21,520 one. 76 00:06:21,520 --> 00:06:32,040 Where the action happens on a given interest rate is in this risk premium as we call it. 77 00:06:32,040 --> 00:06:38,520 Now the default premium does not, isn't part of a treasury of any kind. 78 00:06:38,520 --> 00:06:44,720 A three-month, a one-year, a 10-year, a 30-year. 79 00:06:44,720 --> 00:06:48,040 Default premium you can ignore it, it's just not there. 80 00:06:48,040 --> 00:06:54,840 However, and of course the illiquidity premium, you can sell any treasury debt instrument 81 00:06:54,840 --> 00:06:56,160 in a blink of an eye. 82 00:06:56,160 --> 00:06:57,860 They don't have any illiquidity. 83 00:06:57,860 --> 00:07:04,480 They are easily transferred to whatever other assets you want. 84 00:07:04,480 --> 00:07:15,920 The one that is interesting though, so with government, is there won't be any risk of 85 00:07:15,920 --> 00:07:23,040 default, no risk of illiquidity, but this one is going to be there. 86 00:07:23,040 --> 00:07:26,140 It grows as the time to maturity. 87 00:07:26,140 --> 00:07:33,320 So with a very short-term treasury bill, it has very little maturity premium. 88 00:07:33,320 --> 00:07:41,560 There's very little, tiny probability that interest rates would shift on the lender. 89 00:07:41,560 --> 00:07:48,360 However, as time goes on, that thing gets long, that thing begins to grow. 90 00:07:48,360 --> 00:07:56,680 A five-year treasury would have a bigger maturity premium than a one-year. 91 00:07:56,680 --> 00:08:05,960 A 10-year would have a bigger maturity premium than a five-year. 92 00:08:05,960 --> 00:08:11,600 A 30-year would have a bigger maturity premium than any of those. 93 00:08:11,600 --> 00:08:16,080 Now there's something interesting here going on because of maturity premium. 94 00:08:16,080 --> 00:08:18,920 Let's say 10-year maturity premium. 95 00:08:18,920 --> 00:08:24,960 That should be the same whether it's a government debt instrument or a corporate debt instrument. 96 00:08:24,960 --> 00:08:32,380 It should be the same because that is a macroeconomic thing. 97 00:08:32,380 --> 00:08:44,360 So when we see this maturity premium right here, this will be shared by all debt instruments. 98 00:08:44,360 --> 00:08:55,520 Government, corporate, private, they'll all carry the same maturity premium. 99 00:08:55,520 --> 00:08:57,880 At least we hope they would. 100 00:08:57,880 --> 00:09:01,040 There's an interesting thing that we can do with the maturity premium. 101 00:09:01,040 --> 00:09:04,200 I'll bring that up in just a minute here. 102 00:09:04,200 --> 00:09:11,920 But let me make a point here. 103 00:09:11,920 --> 00:09:27,320 Suppose that I had a government yield, a 10-year T-note, treasury note, and its interest rate 104 00:09:27,320 --> 00:09:39,920 was, let's say, 4.50%. 105 00:09:39,920 --> 00:09:54,120 Now suppose we also, at the same moment, we had a AAA, very high-grade corporate note, 106 00:09:54,120 --> 00:09:59,840 10-year note. 107 00:09:59,840 --> 00:10:17,800 And suppose that it was going off at 4.62%. 108 00:10:17,800 --> 00:10:21,680 Look over here. 109 00:10:21,680 --> 00:10:29,680 These two different debt instruments will carry the same risk-free rate. 110 00:10:29,680 --> 00:10:35,220 They will carry the same illiquidity premium. 111 00:10:35,220 --> 00:10:38,400 They're both quickly, easily sold. 112 00:10:38,400 --> 00:10:42,720 You can get rid of a AAA in the blink of an eye. 113 00:10:42,720 --> 00:10:47,360 And they would also have the same maturity premium because they're both 10-year. 114 00:10:47,360 --> 00:10:55,120 The only difference between these two instruments would be that the government debt instrument 115 00:10:55,120 --> 00:11:03,640 would have no default premium, but the corporate debt instrument would have a default premium. 116 00:11:03,640 --> 00:11:17,040 So in other words, if I look at it this way, and I'll put it in government, government, 117 00:11:17,040 --> 00:11:31,400 and the yield on the corporate, they'll have R sub F plus R sub D plus R sub M plus R sub 118 00:11:31,400 --> 00:11:35,920 I illiquidity. 119 00:11:35,920 --> 00:11:42,120 The corporate, and R sub F, I'll put it in here. 120 00:11:42,120 --> 00:11:55,760 The government default premium, the government, and the government. 121 00:11:55,760 --> 00:12:06,400 This would be the R sub D of the corporate plus the R sub M of the corporate and the 122 00:12:06,400 --> 00:12:14,200 R sub I L of the corporate. 123 00:12:14,200 --> 00:12:18,640 Now I'm going to subtract these upward. 124 00:12:18,640 --> 00:12:26,360 Well these will be the same, so when I say this minus this, I'll get a zero. 125 00:12:26,360 --> 00:12:32,040 The R sub M's are the same, so that'll be a zero. 126 00:12:32,040 --> 00:12:35,280 And the illiquidity premiums will be a zero. 127 00:12:35,280 --> 00:12:42,840 The only difference will be this minus this, but this one is zero because there's no default 128 00:12:42,840 --> 00:12:44,000 premium. 129 00:12:44,000 --> 00:12:52,480 So in other words, the difference between them would be exclusively the default premium 130 00:12:52,480 --> 00:12:54,840 on the corporate debt. 131 00:12:54,840 --> 00:12:57,020 That would be the only difference between them. 132 00:12:57,020 --> 00:13:02,120 That would be the only thing that could change, that could make them different. 133 00:13:02,120 --> 00:13:09,280 We do this all the time because this tells us that the default premium on the corporate 134 00:13:09,280 --> 00:13:18,240 debt is 12 basis points. 135 00:13:18,240 --> 00:13:22,520 We know that. 136 00:13:22,520 --> 00:13:24,840 And we can track it. 137 00:13:24,840 --> 00:13:36,800 We can watch that default premium if it moves upward, that's a bad sign for high quality 138 00:13:36,800 --> 00:13:37,940 corporate debt. 139 00:13:37,940 --> 00:13:41,940 The markets are putting a higher default premium on it. 140 00:13:41,940 --> 00:13:48,080 If that number right there, that 12 basis points were to contract, we know that this 141 00:13:48,080 --> 00:13:49,920 is good times. 142 00:13:49,920 --> 00:13:54,760 The markets are not putting as much of a default premium on high quality AAA corporate debt. 143 00:13:54,760 --> 00:14:07,760 So we can create a chart going through time to see a hidden whispering sentiment of the 144 00:14:07,760 --> 00:14:12,560 market about default probabilities. 145 00:14:12,560 --> 00:14:18,500 And we can do this for double A's, single A's, because, well, it gets a little bit tricky 146 00:14:18,500 --> 00:14:24,520 when you get below the A range because the illiquidity premium starts to fuzz it a little 147 00:14:24,520 --> 00:14:25,520 bit. 148 00:14:25,520 --> 00:14:27,320 You see what I mean? 149 00:14:27,320 --> 00:14:33,560 There wouldn't be that, the two illiquidity premiums subtracting, canceling each other 150 00:14:33,560 --> 00:14:34,720 out because they're the same. 151 00:14:34,720 --> 00:14:39,720 They wouldn't necessarily be the same if the corporate debt is of low enough quality. 152 00:14:39,720 --> 00:14:43,760 It might be a little harder to unload it very quickly. 153 00:14:43,760 --> 00:14:49,960 But in general, though, the more important point here is that this is a way that we can 154 00:14:49,960 --> 00:14:59,720 track the sentiments of the market about the probability of default in high grade corporate 155 00:14:59,720 --> 00:15:02,860 instruments. 156 00:15:02,860 --> 00:15:08,600 And so this is, and it is used, it's used quite a bit to just keep an eye on what's 157 00:15:08,600 --> 00:15:11,080 going on in the market. 158 00:15:11,080 --> 00:15:14,480 Now what is it right now? 159 00:15:14,480 --> 00:15:24,920 It's been, it's contracted a little bit, maybe down to the difference right now is maybe, 160 00:15:24,920 --> 00:15:34,320 I think I saw a point, 48, it was 48 basis points, and it had contracted a little bit. 161 00:15:34,320 --> 00:15:36,520 This is a little bit extreme on this example. 162 00:15:36,520 --> 00:15:40,140 It's usually a little bit more than that default premium is. 163 00:15:40,140 --> 00:15:46,400 But I can look at the yield on a 10-year corporate bond, a AAA corporate bond, the yield on a 164 00:15:46,400 --> 00:15:52,480 10-year treasury bond, and I can take the, subtract the two, and all that's going to 165 00:15:52,480 --> 00:15:58,520 be showing is the default premium on AAA corporate instruments. 166 00:15:58,520 --> 00:16:02,040 And then I can do it for double A's, and I can do it for single A's. 167 00:16:02,040 --> 00:16:06,560 And like I said, once you get down to the B range, then it gets a little bit, a little 168 00:16:06,560 --> 00:16:12,360 bit more speculative down there. 169 00:16:12,360 --> 00:16:15,720 But that's useful for us to know. 170 00:16:15,720 --> 00:16:27,880 Now there's another thing that gets us into the fun part of this lecture 171 00:16:27,880 --> 00:16:36,960 for today, that maturity premium on bonds. 172 00:16:36,960 --> 00:16:42,800 It should be about the same whether we're talking about treasury or corporate. 173 00:16:42,800 --> 00:16:48,080 The maturity premium for 10 years from one instrument to the other would be about the 174 00:16:48,080 --> 00:16:49,200 same. 175 00:16:49,200 --> 00:16:53,940 The maturity premium for a 20-year, for a 5-year. 176 00:16:53,940 --> 00:17:13,960 So taking that as our basis, taking that as our basis for this. 177 00:17:13,960 --> 00:17:16,960 There is an animal called the yield curve. 178 00:17:16,960 --> 00:17:24,360 Now I'm going to come over here, and I think I've put this up for you to see. 179 00:17:24,360 --> 00:17:30,200 I'm going to have to check to see in your files folder in Canvas if it's there. 180 00:17:30,200 --> 00:17:36,520 But let me look at something here. 181 00:17:36,520 --> 00:17:39,140 Google. 182 00:17:39,140 --> 00:17:41,560 It's not saving the bookmarks that I want. 183 00:17:41,560 --> 00:17:44,640 It saves bookmarks that I'm not asking for. 184 00:17:44,640 --> 00:17:46,400 But let me do it this way. 185 00:17:46,400 --> 00:17:50,800 I'm just going to write yield curve. 186 00:17:50,800 --> 00:17:56,680 Now the site here I'm going to use is the U.S. Department of the Treasury par yield 187 00:17:56,680 --> 00:18:00,040 curves. 188 00:18:00,040 --> 00:18:10,640 And let me do something here. 189 00:18:10,640 --> 00:18:23,400 I want to do the time period for 2024. 190 00:18:23,400 --> 00:18:27,600 Now I want you to look at something. 191 00:18:27,600 --> 00:18:34,080 Look at, we usually, I mean we can look at this ultra short one month. 192 00:18:34,080 --> 00:18:41,840 But do you see how these are moving around and changing from one month to six months 193 00:18:41,840 --> 00:18:45,320 to a year to two years to three years? 194 00:18:45,320 --> 00:18:50,360 That should be only the maturity premium. 195 00:18:50,360 --> 00:18:53,720 That should be only the maturity premium. 196 00:18:53,720 --> 00:18:59,960 Now it would be really great if I were able to show you what a normal yield curve looks 197 00:18:59,960 --> 00:19:00,960 like. 198 00:19:00,960 --> 00:19:09,680 A normal yield curve does nothing but take the maturities of a certain type of debt instrument 199 00:19:09,680 --> 00:19:13,920 against their yields. 200 00:19:13,920 --> 00:19:26,280 So this axis would be time to maturity on the horizontal axis and on the vertical axis 201 00:19:26,280 --> 00:19:27,600 would be the yield of it. 202 00:19:27,600 --> 00:19:42,560 Now what should happen, what is normal to happen is that you have a nice pretty 203 00:19:42,560 --> 00:19:45,720 upward sloping curve. 204 00:19:45,720 --> 00:19:52,180 The maturity premium gets greater the longer the maturity. 205 00:19:52,180 --> 00:19:54,400 It builds through time. 206 00:19:54,400 --> 00:19:56,320 That's what it should do. 207 00:19:56,320 --> 00:20:03,600 And it usually does that. 208 00:20:03,600 --> 00:20:08,440 Except that there is our times. 209 00:20:08,440 --> 00:20:14,240 But let me show you a couple here. 210 00:20:14,240 --> 00:20:15,520 This is the normal one. 211 00:20:15,520 --> 00:20:22,060 It swoops upward pretty, very smooth, nice thing. 212 00:20:22,060 --> 00:20:25,120 Let me show you one that would be the end of the world. 213 00:20:25,120 --> 00:20:30,560 This one you don't ever want to see this one. 214 00:20:30,560 --> 00:20:32,640 That's a descending yield curve. 215 00:20:32,640 --> 00:20:45,800 That would be essentially the only way that could happen is if the hell of a depression 216 00:20:45,800 --> 00:20:48,620 were coming in. 217 00:20:48,620 --> 00:20:51,400 That would be about the only time you would see that. 218 00:20:51,400 --> 00:20:55,600 So we pretend that that one, we won't see that one in our lifetimes. 219 00:20:55,600 --> 00:20:59,560 However there's a mini version of it. 220 00:20:59,560 --> 00:21:07,920 Now every time we've seen what I'm about to show you, either a recession or a pause has 221 00:21:07,920 --> 00:21:09,160 happened. 222 00:21:09,160 --> 00:21:11,120 Usually a recession. 223 00:21:11,120 --> 00:21:19,240 Historically this one has always predicted correctly a recession. 224 00:21:19,240 --> 00:21:31,320 Every recession has been preceded by an inverted yield curve. 225 00:21:31,320 --> 00:21:36,920 There's an inversion that happens somewhere in the maturities. 226 00:21:36,920 --> 00:21:42,480 Every recession has had an inverted yield curve before it. 227 00:21:42,480 --> 00:21:52,160 Occasionally we've had where we saw an inverted yield curve and it didn't lead to a full blown 228 00:21:52,160 --> 00:21:53,160 recession. 229 00:21:53,160 --> 00:21:57,040 It just led to a place of flat economic growth. 230 00:21:57,040 --> 00:22:02,880 The economy slowed down but it didn't go into negative territory for the two quarters that 231 00:22:02,880 --> 00:22:06,960 are required to count as a recession. 232 00:22:06,960 --> 00:22:10,320 So we did not, we've seen that a few times. 233 00:22:10,320 --> 00:22:19,680 But an inverted yield curve is always a warning shot that things are going to get bad. 234 00:22:19,680 --> 00:22:24,480 They could get really bad or they could get just a little bit bad. 235 00:22:24,480 --> 00:22:32,400 But an inverted yield curve has always warned us of a recession coming. 236 00:22:32,400 --> 00:22:41,840 I'll give you an example from my time as an economic and finance writer back in the little 237 00:22:41,840 --> 00:22:44,360 earlier days of the internet. 238 00:22:44,360 --> 00:22:53,080 Back in the early 2000s, well I think I actually started it in 1999. 239 00:22:53,080 --> 00:22:59,960 I wrote a blog that became very popular, it was called the Dark Race Forums. 240 00:22:59,960 --> 00:23:05,120 And I talked about economics, I did some little lessons in it and all that. 241 00:23:05,120 --> 00:23:10,600 It was in the earlier days of the internet as you know it today. 242 00:23:10,600 --> 00:23:21,680 Eventually long after that, back in 2011, 2012, my website was destroyed by hackers 243 00:23:21,680 --> 00:23:29,560 and I suspect that they were from that scumbag group called Anonymous. 244 00:23:29,560 --> 00:23:33,920 I had said some bad things about them and they attacked and they wiped me out. 245 00:23:33,920 --> 00:23:36,160 They destroyed the backup servers and everything. 246 00:23:36,160 --> 00:23:40,440 However, you can still find my work on the Wayback Machine. 247 00:23:40,440 --> 00:23:47,800 The Wayback Machine is a website that archives everything that it has ever found on the web. 248 00:23:47,800 --> 00:23:50,000 Very cool and I appreciate them for that. 249 00:23:50,000 --> 00:23:58,160 But anyway, in the period from about 2005, I started writing about difficulties that 250 00:23:58,160 --> 00:24:03,200 the economy was having that were not being discussed. 251 00:24:03,200 --> 00:24:09,080 Manufacturing levels were sliding down to a third of what they had been in the Clinton 252 00:24:09,080 --> 00:24:16,400 administration and the economy was having suffering severe, what were starting to be 253 00:24:16,400 --> 00:24:21,400 severe economic treasury deficits. 254 00:24:21,400 --> 00:24:24,860 We had been in treasury surpluses. 255 00:24:24,860 --> 00:24:31,080 We had been closing the deficit all through the Clinton administration and in 1997, I 256 00:24:31,080 --> 00:24:34,400 believe it was, we went into surpluses. 257 00:24:34,400 --> 00:24:40,680 First time in half a century probably, we had actually had budget surpluses, one after 258 00:24:40,680 --> 00:24:42,960 the other after the other. 259 00:24:42,960 --> 00:24:46,280 And then of course we had some fun things happen. 260 00:24:46,280 --> 00:24:55,920 In 2001, during the early years of the Bush administration, first we had a representation 261 00:24:55,920 --> 00:24:59,920 that we were going into a terrible recession, which we weren't. 262 00:24:59,920 --> 00:25:03,120 There was no recession coming. 263 00:25:03,120 --> 00:25:08,840 But that gave the impetus for Congress to pass the longest, deepest tax cuts in American 264 00:25:08,840 --> 00:25:10,840 history up to that point. 265 00:25:10,840 --> 00:25:19,400 So we had deficits just returned big time and then we had 9-11, so we had a theater 266 00:25:19,400 --> 00:25:24,760 war start up in Iraq and in Afghanistan. 267 00:25:24,760 --> 00:25:31,760 We had a pair of theater wars, so we were driving into major deficit territory. 268 00:25:31,760 --> 00:25:39,280 But 2005, 2006, things were looking bad in the economy and I was writing about it. 269 00:25:39,280 --> 00:25:50,640 Come about 2008, here's what the yield curve was starting to look like. 270 00:25:50,640 --> 00:25:59,920 It was starting to look like... 271 00:25:59,920 --> 00:26:00,920 It was starting to flatten. 272 00:26:00,920 --> 00:26:03,840 That's not an inverted yield curve. 273 00:26:03,840 --> 00:26:12,160 Article inversion was not there in early 2008. 274 00:26:12,160 --> 00:26:14,760 By the time we got... 275 00:26:14,760 --> 00:26:25,560 I just kept writing about it, writing one article after another, because it was trying 276 00:26:25,560 --> 00:26:30,320 to flatten in the five to seven, five to seven year maturity. 277 00:26:30,320 --> 00:26:34,160 In other words, the seven year was trying to go below the five, but it was not. 278 00:26:34,160 --> 00:26:36,120 It just kept hanging. 279 00:26:36,120 --> 00:26:41,520 And then I can't recall what day in May it was. 280 00:26:41,520 --> 00:26:46,520 We had a technical inversion just briefly and then it recovered. 281 00:26:46,520 --> 00:26:47,960 But that's all it takes. 282 00:26:47,960 --> 00:26:52,600 If it technically inverts, that's what has always led to a recession. 283 00:26:52,600 --> 00:26:58,440 It's always been the predictor, not led to, but it's been the predictor of a recession. 284 00:26:58,440 --> 00:27:01,120 Even it was like three basis points. 285 00:27:01,120 --> 00:27:04,540 The seven year was below the five year. 286 00:27:04,540 --> 00:27:05,540 And I called it. 287 00:27:05,540 --> 00:27:07,380 I just put it on my website. 288 00:27:07,380 --> 00:27:08,800 We have a technical inversion. 289 00:27:08,800 --> 00:27:14,200 We're going to go into a recession. 290 00:27:14,200 --> 00:27:20,920 Well there were a couple of other analysts like me and we were also talking about the 291 00:27:20,920 --> 00:27:33,960 insane situation with the banks, the ten largest banks in the world, nine of them, their financial 292 00:27:33,960 --> 00:27:36,280 statements, they were gone. 293 00:27:36,280 --> 00:27:38,520 They were dead. 294 00:27:38,520 --> 00:27:40,200 And yet they just kept going on. 295 00:27:40,200 --> 00:27:47,920 And for some reason we couldn't figure it out why these dead banks, including Citigroup, 296 00:27:47,920 --> 00:27:55,720 Citibank and BOA and all of these others were corpses according to their financial statements. 297 00:27:55,720 --> 00:27:58,860 What you guys can do now. 298 00:27:58,860 --> 00:27:59,860 But they kept going. 299 00:27:59,860 --> 00:28:04,720 So I said we've got multiple crises coming down. 300 00:28:04,720 --> 00:28:15,880 We're going to have something bad happen. 301 00:28:15,880 --> 00:28:19,080 September 15th of 2008. 302 00:28:19,080 --> 00:28:23,840 That was the morning that the entire world almost came to a financial apocalypse. 303 00:28:23,840 --> 00:28:26,640 And I'll bet you don't know about it. 304 00:28:26,640 --> 00:28:31,440 It started out on the East Coast. 305 00:28:31,440 --> 00:28:37,320 As soon as the banks started opening, vast sums of money were being withdrawn from the 306 00:28:37,320 --> 00:28:40,620 money market accounts along the East Coast. 307 00:28:40,620 --> 00:28:49,260 It was just staggering along the lines of several billion dollars in each of the withdrawals. 308 00:28:49,260 --> 00:28:51,000 We couldn't figure out where they were going. 309 00:28:51,000 --> 00:28:54,480 They were going into shadow accounts and dark accounts. 310 00:28:54,480 --> 00:28:58,720 But we figured where they would end up, we would just look for something that was spiking 311 00:28:58,720 --> 00:28:59,720 in price. 312 00:28:59,720 --> 00:29:06,040 Gold, silver, oil, something would be where those funds were going. 313 00:29:06,040 --> 00:29:11,200 You can find any price spikes anywhere in the world's financial system. 314 00:29:11,200 --> 00:29:13,520 It was vanishing. 315 00:29:13,520 --> 00:29:22,440 By 10 o'clock, the Federal Reserve Board of Governors had called an emergency meeting 316 00:29:22,440 --> 00:29:28,600 to their analysts, their tech people, the ones who watched the world's situation. 317 00:29:28,600 --> 00:29:30,160 Where is this money going? 318 00:29:30,160 --> 00:29:32,200 Who is withdrawing this? 319 00:29:32,200 --> 00:29:38,360 We didn't have the financial disclosures in place then that we have now. 320 00:29:38,360 --> 00:29:39,720 What the hell is going on? 321 00:29:39,720 --> 00:29:49,040 Well, by that time, at 10 o'clock, $550 billion had been withdrawn from the money markets 322 00:29:49,040 --> 00:29:54,480 along the East Coast and then along the Midwest. 323 00:29:54,480 --> 00:30:00,760 The Federal Reserve put an immediate lockdown on withdrawals from money markets. 324 00:30:00,760 --> 00:30:02,340 They said no more withdrawals. 325 00:30:02,340 --> 00:30:08,560 They ordered the banking system to stop letting money be withdrawn. 326 00:30:08,560 --> 00:30:14,040 If they had not, by noon, it would have been over. 327 00:30:14,040 --> 00:30:22,120 The illiquidity, the banks would have had no money to honor your paychecks, your cards 328 00:30:22,120 --> 00:30:24,120 at the store, or anything. 329 00:30:24,120 --> 00:30:25,560 It would have been gone. 330 00:30:25,560 --> 00:30:31,280 But the Fed got in front of it pretty well, amazingly. 331 00:30:31,280 --> 00:30:38,160 And then later that little afternoon, Congress was called into an emergency session. 332 00:30:38,160 --> 00:30:40,560 And the doors were closed and locked. 333 00:30:40,560 --> 00:30:41,840 It was a secret session. 334 00:30:41,840 --> 00:30:47,520 They called the Treasury Secretary, the Federal Reserve Chairman at the time, and a bunch 335 00:30:47,520 --> 00:30:52,800 of others to find out from them what was going on. 336 00:30:52,800 --> 00:31:00,120 At one point, a representative at the time, kind of a crazy guy, but he was right. 337 00:31:00,120 --> 00:31:07,720 He asked the Secretary, rather the Speaker of the House, who was Nancy Pelosi at the 338 00:31:07,720 --> 00:31:17,920 time, he said, Madam Chairman, are we under martial law? 339 00:31:17,920 --> 00:31:20,400 And she just walked away from the podium. 340 00:31:20,400 --> 00:31:23,560 No, we weren't, but Congress was. 341 00:31:23,560 --> 00:31:28,560 They had US Marshals outside the doors to keep people from going out until they solved 342 00:31:28,560 --> 00:31:33,080 it, until they answered the question, what's going on here? 343 00:31:33,080 --> 00:31:35,400 There were some members of Congress who saw this. 344 00:31:35,400 --> 00:31:37,040 They said, I smell a rat. 345 00:31:37,040 --> 00:31:40,440 They were the ones who believed that 9-11 was a conspiracy. 346 00:31:40,440 --> 00:31:43,000 And they said, this is another conspiracy. 347 00:31:43,000 --> 00:31:48,120 Not only have you now taken away our privacy, now you're taking away our banking system. 348 00:31:48,120 --> 00:31:49,880 You get that kind of stuff. 349 00:31:49,880 --> 00:31:53,920 But one way or the other, yeah, we went into a hell of a recession. 350 00:31:53,920 --> 00:31:54,920 We call it the Great Recession. 351 00:31:54,920 --> 00:31:58,720 It was the worst one since the Great Depression. 352 00:31:58,720 --> 00:32:05,940 And a few of us called it. 353 00:32:05,940 --> 00:32:08,080 We saw it coming. 354 00:32:08,080 --> 00:32:14,120 We thought it was going to be bad for other reasons, the collapse of the banking system, 355 00:32:14,120 --> 00:32:19,160 because of its internal rot. 356 00:32:19,160 --> 00:32:26,360 What we didn't know at that time, and we found it out by accident in 2011, there was a lawsuit, 357 00:32:26,360 --> 00:32:35,920 Freedom of Information Act lawsuit, that was filed by a media group against the US Treasury. 358 00:32:35,920 --> 00:32:43,800 And they accidentally released the memo that included in it what was really going on with 359 00:32:43,800 --> 00:32:45,220 the banks. 360 00:32:45,220 --> 00:32:52,040 The banks were being kept alive by back-channel money that was being fed to them through the 361 00:32:52,040 --> 00:32:58,480 Treasury and the Fed to the tune of trillions of dollars. 362 00:32:58,480 --> 00:32:59,480 We didn't know it. 363 00:32:59,480 --> 00:33:00,960 It wasn't on the financial statements. 364 00:33:00,960 --> 00:33:02,600 The SEC was involved in it. 365 00:33:02,600 --> 00:33:03,880 They knew it was there. 366 00:33:03,880 --> 00:33:11,760 Those financial statements were a lie, because they did not include that backdoor money. 367 00:33:11,760 --> 00:33:18,560 At the time, a federal judge, the Federal Reserve and the Treasury joined the banks 368 00:33:18,560 --> 00:33:26,880 in asking a federal district judge in Washington, D.C. to quash that memorandum and not allow 369 00:33:26,880 --> 00:33:29,580 it into evidence. 370 00:33:29,580 --> 00:33:32,820 To her credit, that federal judge said, go to hell. 371 00:33:32,820 --> 00:33:35,460 Everyone needs to see this. 372 00:33:35,460 --> 00:33:38,740 So it was released, and no one cared. 373 00:33:38,740 --> 00:33:44,100 At this point, how much money? we can only guess, because it's still a secret. 374 00:33:44,100 --> 00:33:52,160 Probably on the order of $35 to $45 trillion is being funneled into those banks, backdoor. 375 00:33:52,160 --> 00:33:53,880 And the SEC lets it go. 376 00:33:53,880 --> 00:33:56,120 So they were like, we're supposed to have them back? 377 00:33:56,120 --> 00:33:57,120 No. 378 00:33:57,120 --> 00:33:58,200 It was money. 379 00:33:58,200 --> 00:34:02,000 It was just literally, that's something we don't know. 380 00:34:02,000 --> 00:34:03,060 We got the memo. 381 00:34:03,060 --> 00:34:05,320 We saw what was going on. 382 00:34:05,320 --> 00:34:10,520 We could backtrack and figure out how much had gone in, but we don't know the mechanisms 383 00:34:10,520 --> 00:34:12,860 by which it was going in. 384 00:34:12,860 --> 00:34:15,680 We know how much it was. 385 00:34:15,680 --> 00:34:17,680 Was it just trucks driving up? 386 00:34:17,680 --> 00:34:20,440 Was it some kind of repost set up? 387 00:34:20,440 --> 00:34:22,480 It was certainly not open market operations. 388 00:34:22,480 --> 00:34:25,840 We would have seen those a mile away. 389 00:34:25,840 --> 00:34:28,480 But there you go. 390 00:34:28,480 --> 00:34:39,360 So as much as you can trust the SEC and disclosures and all of that, when it comes to banks, none 391 00:34:39,360 --> 00:34:40,400 of us. 392 00:34:40,400 --> 00:34:46,600 I was one of those idiots in 2008 who was screaming bloody murder, sell your bank stocks, 393 00:34:46,600 --> 00:34:47,920 they're going to go to hell. 394 00:34:47,920 --> 00:34:50,940 There were other investment analysts who were saying the same thing. 395 00:34:50,940 --> 00:34:53,840 We looked like idiots, because the banks didn't collapse. 396 00:34:53,840 --> 00:34:58,640 It was only in 2011 that we found out that we were idiots, because we didn't think. 397 00:34:58,640 --> 00:35:01,800 How could those banks still be alive if they're in this bad of shape? 398 00:35:01,800 --> 00:35:05,040 I was going to say, can't they not collapse because they were always getting bailed out? 399 00:35:05,040 --> 00:35:06,200 Well that's just it. 400 00:35:06,200 --> 00:35:12,160 This is the largest bailout in human history, in the history of civilizations. 401 00:35:12,160 --> 00:35:14,240 But that's just the way it is. 402 00:35:14,240 --> 00:35:19,760 Now getting back to this story here, going back to the yield curves, I'm just sharing 403 00:35:19,760 --> 00:35:28,440 that with you as the intrigue that goes behind what we deal with in the world of finance. 404 00:35:28,440 --> 00:35:35,600 We can't always believe what our lying eyes are telling us, but we have to rely on it 405 00:35:35,600 --> 00:35:36,980 anyway. 406 00:35:36,980 --> 00:35:38,800 And here's the kicker. 407 00:35:38,800 --> 00:35:44,940 You are living in a very strange, I mean a strange-ass time. 408 00:35:44,940 --> 00:35:50,160 Let me take you back to the time period 2023. 409 00:35:50,160 --> 00:35:51,160 Apply. 410 00:35:51,160 --> 00:35:58,440 Look at this. 411 00:35:58,440 --> 00:36:02,400 That's not just an inverted yield curve. 412 00:36:02,400 --> 00:36:04,920 That's an inverted yield curve from hell. 413 00:36:04,920 --> 00:36:09,360 These numbers should be going up, up, up. 414 00:36:09,360 --> 00:36:17,720 But right here, you see from the six months to the one year, you see from the one year 415 00:36:17,720 --> 00:36:27,880 to the two year, two year to the three year, three year to the five, the seven, the ten, 416 00:36:27,880 --> 00:36:32,240 the thing is inverted not across two. 417 00:36:32,240 --> 00:36:44,360 It's basically that yield curve at the beginning of 2023 and it actually was before that. 418 00:36:44,360 --> 00:36:48,240 The longest inversion of a yield curve any of us have ever seen. 419 00:36:48,240 --> 00:36:51,920 Of course we were all saying, oh, recession. 420 00:36:51,920 --> 00:36:53,720 Oh my God. 421 00:36:53,720 --> 00:36:55,000 OMG. 422 00:36:55,000 --> 00:36:57,560 We didn't go into one the first time. 423 00:36:57,560 --> 00:37:00,280 We didn't even go to zero GDP. 424 00:37:00,280 --> 00:37:05,400 Now a recession is technically, again, two consecutive quarters of negative economic 425 00:37:05,400 --> 00:37:06,400 growth. 426 00:37:06,400 --> 00:37:09,080 It didn't happen. 427 00:37:09,080 --> 00:37:11,100 And now let's go here. 428 00:37:11,100 --> 00:37:14,960 This thing has been inverted. 429 00:37:14,960 --> 00:37:18,400 Let's go to 2024. 430 00:37:18,400 --> 00:37:21,160 Let's go to the one from yesterday. 431 00:37:21,160 --> 00:37:26,400 Look at that son of a bitch. 432 00:37:26,400 --> 00:37:31,160 It's still inverted. 433 00:37:31,160 --> 00:37:35,160 And it's still inverted way out there. 434 00:37:35,160 --> 00:37:40,200 That should be a recession coming within six months. 435 00:37:40,200 --> 00:37:45,680 That's about six to nine months for a recession to hit after an inversion, a technical inversion 436 00:37:45,680 --> 00:37:47,960 of a yield curve. 437 00:37:47,960 --> 00:37:49,380 It's not happening. 438 00:37:49,380 --> 00:37:53,880 How in the hell the economy hasn't dodged a bullet. 439 00:37:53,880 --> 00:37:56,960 It's dodged a nuke. 440 00:37:56,960 --> 00:38:02,200 It just keeps going along like, now we're talking about the economic recovery is underway 441 00:38:02,200 --> 00:38:03,800 and all this. 442 00:38:03,800 --> 00:38:04,800 How? 443 00:38:04,800 --> 00:38:10,240 An inverted yield curve never has had this happen. 444 00:38:10,240 --> 00:38:11,240 Yeah? 445 00:38:11,240 --> 00:38:18,480 Government spending is not that significant. 446 00:38:18,480 --> 00:38:24,880 The budget deficits have been getting controlled, even with bad tax rates, and the Fed certainly 447 00:38:24,880 --> 00:38:30,320 isn't printing money to feed the economy, to make it feel good, like chicken soup when 448 00:38:30,320 --> 00:38:32,040 you have the flu. 449 00:38:32,040 --> 00:38:33,040 This is something else. 450 00:38:33,040 --> 00:38:40,920 It is the first time, and you are actually coming into your professional lives in something 451 00:38:40,920 --> 00:38:45,440 that, and there's argument, well, why is this now? 452 00:38:45,440 --> 00:38:54,480 Why not in another inverted yield curve period of time, in the 40s, 50s, 60s, 70s, 80s, it's 453 00:38:54,480 --> 00:39:01,800 never happened before that we've had an inverted yield curve, and it did not lead to a recession. 454 00:39:01,800 --> 00:39:08,260 It's never before happened that we have had a yield curve that had that much of a distance 455 00:39:08,260 --> 00:39:11,000 going down in the yields. 456 00:39:11,000 --> 00:39:12,400 How? 457 00:39:12,400 --> 00:39:14,680 You got me. 458 00:39:14,680 --> 00:39:16,640 I mean, you can see it right there. 459 00:39:16,640 --> 00:39:18,480 See the inverted yield curve? 460 00:39:18,480 --> 00:39:20,640 Even now, you saw what it was. 461 00:39:20,640 --> 00:39:28,840 It's still inverted, clear out here to where it was at the beginning of 2023. 462 00:39:28,840 --> 00:39:35,840 It's inverted clear out to the 20 year, and it shouldn't be. 463 00:39:35,840 --> 00:39:38,360 We shouldn't have an economy doing as well as we do. 464 00:39:38,360 --> 00:39:43,600 It's not a fantastic economy, but it is sure a decent economy. 465 00:39:43,600 --> 00:39:48,560 We've been in an economic recovery long enough that I would argue that we're now in a full 466 00:39:48,560 --> 00:39:57,080 blown economic expansion, and yet here we are with an inverted yield curve. 467 00:39:57,080 --> 00:39:58,200 So there you are. 468 00:39:58,200 --> 00:40:09,080 That's a little of the history of yield curves and near apocalyptic situations in the country. 469 00:40:09,080 --> 00:40:10,400 That's above my pay grade. 470 00:40:10,400 --> 00:40:14,880 I'm just a stupid old school professor. 471 00:40:14,880 --> 00:40:18,160 I let other people worry about this. 472 00:40:18,160 --> 00:40:24,720 There are different theories, or different hypotheses I should say, but none of them 473 00:40:24,720 --> 00:40:33,800 really are satisfactory, although a couple... You see, as I had said before, the Federal 474 00:40:33,800 --> 00:40:36,120 Reserve has a lot of different ways. 475 00:40:36,120 --> 00:40:42,920 When we hear that the money supply was being contracted, there are a couple of tricks that 476 00:40:42,920 --> 00:40:51,720 can be done, the Fed can do, to actually pump money into an economy, but at the same time 477 00:40:51,720 --> 00:40:56,200 it looks like they're contracting the money supply. 478 00:40:56,200 --> 00:40:57,640 Maybe. 479 00:40:57,640 --> 00:41:04,620 My good teaching assistant remembers, probably not too happily, the whole thing with repos 480 00:41:04,620 --> 00:41:12,960 and reverse repos, how the government can sell treasuries to banks, which makes them 481 00:41:12,960 --> 00:41:20,840 less liquid, but they are also at the same time promising that they will buy those treasuries 482 00:41:20,840 --> 00:41:26,480 back in one, two, five days, something like that, so that it looks like money is disappearing 483 00:41:26,480 --> 00:41:31,120 from the banks, but it's flipping right back around, and then the next day they do it so 484 00:41:31,120 --> 00:41:37,480 that there's this constant bladder of money in the system flowing both ways, and if you 485 00:41:37,480 --> 00:41:42,360 use the right balance between the buys and the sells, you can actually expand the money 486 00:41:42,360 --> 00:41:47,800 supply, but it looks like through your plain old open market operations, you're contracting 487 00:41:47,800 --> 00:41:49,800 the money supply. 488 00:41:49,800 --> 00:41:58,200 But that should not have been good for inflation, and yet we have won, at least for now, the 489 00:41:58,200 --> 00:42:01,160 battle against inflation. 490 00:42:01,160 --> 00:42:10,720 So you might want to stick to some other world other than the theoretical side of it, because 491 00:42:10,720 --> 00:42:17,720 right now we are in a period we've never seen before, and that's where you guys come in. 492 00:42:17,720 --> 00:42:23,400 Now let me talk to you a little bit about all of this, but first I need to show you 493 00:42:23,400 --> 00:42:31,480 something, that last Excel sheet that I did, I have now upgraded it again for you, my good 494 00:42:31,480 --> 00:42:33,200 students. 495 00:42:33,200 --> 00:42:39,160 It does a calculation for you now that I should have shown you, usually I do this at this 496 00:42:39,160 --> 00:42:45,520 point, but I realized that there were some questions in the book that kind of, you should 497 00:42:45,520 --> 00:42:49,120 have known this, you should know this, and they covered it in the book, but I'm going 498 00:42:49,120 --> 00:42:55,120 to give you, I have in the Excel sheet now, something that will do this for you. 499 00:42:55,120 --> 00:43:00,120 It has to do with yields and returns. 500 00:43:00,120 --> 00:43:10,560 Now as I said maybe a week or two ago, yield and return and rate, interest rate, they're 501 00:43:10,560 --> 00:43:14,920 all different ways of saying the same thing. 502 00:43:14,920 --> 00:43:24,880 The yield on a bond, the return on a stock, the interest rate on a loan, those are all 503 00:43:24,880 --> 00:43:31,320 the same thing, they're interest rates, but we use different words for different kinds. 504 00:43:31,320 --> 00:43:35,140 Now let me show you a stupid pet trick. 505 00:43:35,140 --> 00:43:42,920 This is a simple one, but to do this I have to make sure you understand that we need a 506 00:43:42,920 --> 00:43:53,440 common unit of measure for rates, yields, returns. 507 00:43:53,440 --> 00:43:58,500 The common denominator is the annualized. 508 00:43:58,500 --> 00:44:02,200 We make everything annualized. 509 00:44:02,200 --> 00:44:15,520 So that you pay $100 and in one year you've got $110, well that would be 10%. 510 00:44:15,520 --> 00:44:22,960 The holding period was one year, so that would be an annualized rate right there. 511 00:44:22,960 --> 00:44:31,280 But this young gentleman, he put in $100 and he pulled it out after six months and he had 512 00:44:31,280 --> 00:44:34,420 $110. 513 00:44:34,420 --> 00:44:41,520 So his return on an annualized basis isn't the same as yours, but it's not quite just 514 00:44:41,520 --> 00:44:47,080 10% times two because of the compounding phenomenon. 515 00:44:47,080 --> 00:44:52,760 Remember finding present values is discounting, finding future values is compounding. 516 00:44:52,760 --> 00:44:58,280 So we need to put everything into annualized terms. 517 00:44:58,280 --> 00:45:09,440 And the formula to do that is you take the ending value over the beginning value and 518 00:45:09,440 --> 00:45:19,840 you raise it to one over the number of years and then you subtract one. 519 00:45:19,840 --> 00:45:27,840 Now that's fine if you have whole numbers of years. 520 00:45:27,840 --> 00:45:42,840 So you invest $200 and in three years you have $225. 521 00:45:42,840 --> 00:45:47,800 Now just your plain old holding period return. 522 00:45:47,800 --> 00:45:54,360 The holding period return doesn't care about annualization. 523 00:45:54,360 --> 00:46:08,280 Holding period return, all you do is take $225 divided by $200 minus one. 524 00:46:08,280 --> 00:46:12,000 That's the HPR, the holding period return. 525 00:46:12,000 --> 00:46:18,800 Doesn't matter what the period is, that's just a raw measure. 526 00:46:18,800 --> 00:46:25,560 And that's not hard to do, you can whip that out on a calculator any old day of the week. 527 00:46:25,560 --> 00:46:39,080 If I could find a stupid calculator, well let me use the TI just to have it up there. 528 00:46:39,080 --> 00:46:53,480 So I would take 225 divided by 200 minus one. 529 00:46:53,480 --> 00:46:59,120 So my HPR is 12.5%. 530 00:46:59,120 --> 00:47:06,800 But that doesn't do us much good if we want to compare that to an investment that was 531 00:47:06,800 --> 00:47:11,080 not that number of years. 532 00:47:11,080 --> 00:47:17,680 So the way we annualize it is with that formula up there. 533 00:47:17,680 --> 00:47:44,880 The annualized return, the APR as it were, is 225 over 200 to the one over two or one 534 00:47:44,880 --> 00:47:51,920 over three. 535 00:47:51,920 --> 00:47:59,560 That turns it into an annualized rate using the geometric mean. 536 00:47:59,560 --> 00:48:04,440 Now some people would say, well why just take 12.5 divided by three? 537 00:48:04,440 --> 00:48:11,960 That would be what's called an arithmetic mean, not a geometric mean. 538 00:48:11,960 --> 00:48:14,920 We use the geometric almost always. 539 00:48:14,920 --> 00:48:23,920 So in this case, open parenthesis, 225 divided by 200, close the parentheses and raise that, 540 00:48:23,920 --> 00:48:29,040 open parenthesis, one divided by three. 541 00:48:29,040 --> 00:48:31,600 Close the parenthesis. 542 00:48:31,600 --> 00:48:32,600 Minus one. 543 00:48:32,600 --> 00:48:33,600 Don't forget the minus one. 544 00:48:33,600 --> 00:48:42,120 I'm always forgetting minus one and then I'm getting a wrong number. 545 00:48:42,120 --> 00:48:47,160 So it's actually 4%. 546 00:48:47,160 --> 00:48:54,680 Okay. 547 00:48:54,680 --> 00:49:00,560 You notice that it's less than if you had taken 12.5% divided by three. 548 00:49:00,560 --> 00:49:06,560 A little less. 549 00:49:06,560 --> 00:49:12,400 Here's where it gets to be a pain in the ass. 550 00:49:12,400 --> 00:49:20,720 It's when you have fractions of years. 551 00:49:20,720 --> 00:49:23,360 Or days. 552 00:49:23,360 --> 00:49:29,940 You have to turn days into years. 553 00:49:29,940 --> 00:49:37,400 And so in your Excel sheet, I have added another worksheet. 554 00:49:37,400 --> 00:49:40,880 The one present values and future values. 555 00:49:40,880 --> 00:49:44,200 I've added another worksheet. 556 00:49:44,200 --> 00:49:49,600 Annualizing. 557 00:49:49,600 --> 00:49:56,200 Because technically in order, if you have days, if you have days, what you would have 558 00:49:56,200 --> 00:50:06,920 to do is take end, ending value over the beginning value and raise that to the one over the number 559 00:50:06,920 --> 00:50:13,920 of days over 365. 560 00:50:13,920 --> 00:50:18,440 That thing down there in parenthesis minus one. 561 00:50:18,440 --> 00:50:25,800 You have to turn the number of days into years. 562 00:50:25,800 --> 00:50:32,920 So I've created an Excel spreadsheet that does years if all you need is years. 563 00:50:32,920 --> 00:50:40,220 But it also does days if you're given the number of days. 564 00:50:40,220 --> 00:50:50,240 So in this one, I could take that 200 initial investment, take it to 225 for three years. 565 00:50:50,240 --> 00:50:53,520 And I'll show you how this trick if you don't know that trick. 566 00:50:53,520 --> 00:51:01,320 You get your 4% that I got with the calculator. 567 00:51:01,320 --> 00:51:23,320 But what happens if you put in $500 and in, you come out with $538 after let's say $500 568 00:51:23,320 --> 00:51:29,640 for 525 days. 569 00:51:29,640 --> 00:51:32,240 So this will turn it into days. 570 00:51:32,240 --> 00:51:36,160 This one you can use for days. 571 00:51:36,160 --> 00:51:38,000 Now how do you get the days? 572 00:51:38,000 --> 00:51:40,520 I may put one other in there. 573 00:51:40,520 --> 00:51:42,000 There are a couple of ways. 574 00:51:42,000 --> 00:51:47,960 Excel has a days between dates so that you could actually take the dates and figure out 575 00:51:47,960 --> 00:51:50,360 the number of days from the dates. 576 00:51:50,360 --> 00:51:52,520 You could do it that way. 577 00:51:52,520 --> 00:51:53,520 Others can do it. 578 00:51:53,520 --> 00:51:59,720 I mean even on Google, there's a calculator you can pull up there that will find the number 579 00:51:59,720 --> 00:52:02,880 of days between two dates. 580 00:52:02,880 --> 00:52:08,280 But one way or the other, this simplifies that calculation just a lot and makes you 581 00:52:08,280 --> 00:52:15,600 a much happier person. 582 00:52:15,600 --> 00:52:22,320 But this will help you with calculating annualized yields. 583 00:52:22,320 --> 00:52:29,800 Now remember that those yield curves that I showed you, those are all annualized yields. 584 00:52:29,800 --> 00:52:37,580 You saw those 4.86 for a five year or something like that, 8.6%. 585 00:52:37,580 --> 00:52:42,640 That is annualized one over five. 586 00:52:42,640 --> 00:52:47,480 The 10 year is the annualized one over 10. 587 00:52:47,480 --> 00:52:53,400 So they're doing in all of those and in almost anything you will see, they won't be talking 588 00:52:53,400 --> 00:52:54,400 about HPRs. 589 00:52:54,400 --> 00:53:01,880 They'll be talking about annualized yields, annualized returns, annualized everything 590 00:53:01,880 --> 00:53:07,280 so that we can compare everything like we do in those yield curves. 591 00:53:07,280 --> 00:53:14,720 But this is up there now and it's nice to have it because then you can look at, well 592 00:53:14,720 --> 00:53:24,160 I made a trade, for example, I did a trade where I put in $230, I think it was. 593 00:53:24,160 --> 00:53:29,320 Twelve days later I came out with $246. 594 00:53:29,320 --> 00:53:42,880 So in that one I had, I'm thinking I put in $230 and then 12 days later I got out of the 595 00:53:42,880 --> 00:53:51,480 position and I had $245 for 12 days. 596 00:53:51,480 --> 00:53:52,780 That's a darn nice return. 597 00:53:52,780 --> 00:53:53,780 You could do that. 598 00:53:53,780 --> 00:53:57,320 Of course you'd also get the ones that are negative in there. 599 00:53:57,320 --> 00:54:03,340 I put in $230 and I came out with $205 eight days later. 600 00:54:03,340 --> 00:54:09,840 But this way you can track all of your returns regardless of the holding period against each 601 00:54:09,840 --> 00:54:15,440 other in terms of their annualized performance. 602 00:54:15,440 --> 00:54:19,320 Just something for you to use. 603 00:54:19,320 --> 00:54:43,720 Now you have a quiz to do right now.