Welcome in, everyone. We're diving deep today
into some pretty interesting changes happening
in the U .S. economy, you know, the kind of stuff
that really makes you go, hmm. What's going on
here? Yeah, absolutely. We've got a ton of fascinating
data to unpack today straight from the government.
Plus some seriously sharp analysis of Powell's
latest moves and a briefing that ties it all
together and helps us see the big picture. Exactly.
And that's exactly what we're here for today.
We're cutting through the noise, extracting those
key insights so you can really understand what's
happening beneath the surface of the autonomy.
I like that. Cutting through the noise. That's
what we do best. You know, and one of the most
intriguing things we're going to explore today
is this idea of a Quad Four environment. Ah,
yes, Quad Four. Now, I know that might sound
a little jargony, like something you'd hear whispered
on Wall Street, but trust me, it's important.
It could have some serious implications for where
things are headed. Oh, absolutely. Big implications.
So let's break it down. What exactly is Quad
Four? OK, so in the simplest terms, Quad Four
is like a specific phase in the economic cycle,
and it's marked by two main things. slowing economic
growth and falling inflation. It's kind of like
this unique combo of economic forces. Glowing
growth and falling inflation. Got it. So what
makes us think we might be heading into Quad
Four territory? Well, we're seeing a bunch of
signs, both in the hard data and in how experts
are interpreting things. For starters, we've
got a noticeable uptick in federal layoffs. Layoffs.
Yeah, and specifically those working for the
government. If you look at that chart, initial
claims, federal employees, you'll see a pretty
dramatic spike recently. And the analysis that
came with it, it emphasizes that the feds have
been a big source of new hires lately. So these
layoffs, they're a pretty big deal for the overall
jobs picture. Wow. Yeah. That chart really jumps
out at you. That upward trend in jobless claims
definitely signals something's changing. What
else is pointing to this potential Quad 4 scenario?
OK. So on top of the layoffs, we're also seeing
government spending slowing down. And I mean,
the growth of spending. It's like they're pumping
the brakes a little. This is something that the
analysis explicitly calls out as a contributing
factor. Interesting. So less spending by the
government, and then there's immigration. Exactly.
Immigration. Huge factor. The chart immigration
and Big G mattered to employment and spending
growth. It shows a sharp decline in net immigration
to the US back in 2024. And fewer people coming
in. Well, It can put a damper on economic activity.
Makes sense. Fewer people coming in, less demand
for goods and services, and fewer workers available.
And what about consumer spending? Are people
still out there buying stuff? So the analysis
suggests that consumers are being a bit more
cautious these days. They call it tepid consumer
activity. And that definitely plays a role in
slower economic growth. Right. Less spending
means slower growth. It's all connected. You
know, I also noticed something interesting in
the data. Crude oil returns are down, like way
down. 17 % since January 2025. That's according
to the crude oil returns chart. So how does that
fit into all of this? That's a great observation.
The drop in oil returns can actually be a sign
of things cooling down economically and potentially
sign that inflation might ease up too. Lower
demand for oil usually means lower prices. So
that 17 % drop, it really fits with this idea
of slowing growth. And maybe even falling inflation.
OK, so let me recap. We're seeing more people
losing their jobs in the federal government.
Government spending is slowing down. Fewer people
are immigrating to the U .S. Consumers are hesitant
to spend. And even oil prices are down significantly.
All of these point towards Quad 4, right? Exactly.
It's like all these pieces of the puzzle are
fitting together and they're painting a pretty
clear picture of where we might be headed. Now
let's talk about the Federal Reserve. They've
decided to slow down how fast they're reducing
their balance sheet. which is currently at about
$2 trillion. Why the shift in strategy? OK, so
this is big. The Fed's decision to kind of ease
up on shrinking their balance sheet. The analysis
suggests they're trying to take some pressure
off the financial markets. This could lead to
lower yields and higher bond prices. Think of
it like this. When the Fed buys bonds, it increases
demand, which pushes prices up and yields down.
Shrinking the balance sheet does the opposite.
So by slowing that down, they're trying to prevent
yields from rising too fast. And they're trying
to stabilize the bond market a bit by not selling
off their bonds as quickly. Exactly. And here's
where it gets really interesting. We need to
consider how much U .S. Treasury debt is coming
due soon. We're talking a massive five point
three trillion dollars. That's according to the
five point three T in U .S. debt maturities chart.
And look at those maturities coming up between
April and July of 2025. It's a huge amount of
debt that needs to be refinanced pretty quickly.
$5 .3 trillion? That's a lot of money. So how
do falling yields play into this? This is where
it all connects. Lower yields would make it much
cheaper for the Treasury to refinance all that
debt. The analysis suggests that... this could
potentially save the government hundreds of billions
of dollars in interest payments. And the Fed
knows this. They're calling it a pressure cooker
situation. Yeah. So slowing down the balance
sheet reduction, it's like releasing some of
that pressure. That makes sense. Lower borrowing
costs for the government could have a ripple
effect throughout the entire economy. Now there's
a chart here called U .S. Central Bank Total
Assets Effect on Yields. It seems to suggest
that the size of the Fed's balance sheet and
bond yields have an inverse relationship. What
does that mean? All right, so that chart is pretty
fascinating. Basically, when the Fed's total
assets decrease, which happens when they shrink
their balance sheet, yields tend to go up. And
when their assets increase, yields go down. So
by slowing down the reduction of their assets,
they're essentially trying to moderate the upward
pressure on yields, which, as we just discussed,
could really help the Treasury with all that
refinancing. So, the Fed is playing a strategic
game here, trying to balance a potential economic
slowdown with the Treasury's enormous debt obligations.
It's a lot to juggle. Now, how have the markets
reacted to all of this? I know we've already
seen some movement in yields. Yeah, the markets
are definitely paying attention. The U .S. Tenure
Yield Percent Chart shows a pretty big initial
reaction in the bond market. The yield on the
10 -year U .S. Treasury note has dropped about
50 basis points since January 2025. It hit a
peak of around 4 .78 percent back then. And by
March 20th, it was down to about 3 .2 percent.
That's a half percentage point drop, a pretty
significant move in the bond market. So if Quad
4 is really on the horizon, what could that mean
for yields and the bond market in the future?
Well, if slowing growth and falling inflation
continue, we could see yields drop even further.
And when yields go down, bond prices tend to
go up. So bonds could be looking at some significant
gains. This is definitely something investors
will be watching closely. Makes sense. Now, I've
noticed that Ryan Ricci, a macro analyst at Hedgeye,
keeps popping up in our research. And there's
a lot of talk about the VIX index. What's the
connection there? Ricci is laser focused on the
VIX. which basically measures how much volatility
the market expects in the future. It's often
called the fear gauge. And he's identified 20
as a critical level for the VIX. 20? Why 20?
According to Ricci, if the VIX goes above 20,
that's a big red flag. It could mean that fear
and uncertainty are rising in the market, which
could lead to a broader market downturn. It's
like a signal that things are getting shaky.
And he even suggests it could go as high as 25
or more. So a VIX above 20 is a warning sign.
Exactly. It could trigger a shift in market psychology
from complacency to fear. Think of it this way.
Once the VIX goes above 20, big institutional
investors, they start looking at their risk models
and those models start flashing red. That means
they're going to start selling to reduce their
risk. And that selling can push the market down
further. Interesting. So what if the VIX stays
below 20? Well, that's where things get interesting.
If the VIX can't break through that 20 level,
especially with big earnings announcements coming
up like Nvidia's, we might actually see the market
move higher. It would suggest that investors
are feeling a bit more optimistic or at least
willing to take on more risk. So the VIX at 20
is like a fork in the road for the market. Yeah,
I like that analogy. It's a crucial level to
watch. Now, I also wanted to touch on tariffs.
The sources mentioned that they could throw a
wrench into the inflation outlook. That's right.
Powell himself talk about how tariff hikes could
slow down progress on bringing inflation down.
He thinks the effect would probably be temporary,
but it definitely adds another layer of uncertainty,
which makes the Fed's job a whole lot harder.
So even with Quad Four potentially on the horizon,
tariffs could still push prices up in the short
term. Exactly. Imported goods. could get more
expensive, making it harder to get inflation
under control. OK. Last but not least, I wanted
to highlight something that Ryan Ricci emphasized,
using data to manage risk. What's your take on
that? In this environment, it's more important
than ever. Being data -driven is key, especially
now with so much uncertainty in the economy.
You've got to be proactive. Make decisions based
on solid data, not just gut feelings. And you
know, hedge -eye. They actually have a pretty
good track record of predicting market downturns.
The takeaway here is that risk management matters
now more than ever. So let's sum it all up. We're
seeing a confluence of factors that could lead
to Quad 4, slowing economic growth, possibility
of falling inflation, a cautious Fed and a Treasury
facing a mountain of debt. Yields have already
started to fall and bonds could be poised for
some gains. But volatility is still a major concern
and those tariffs are lurking in the background.
It's a pretty complex picture, right? It is.
It's all connected. Quad Four, the Fed, the Treasury,
the markets, they're all intertwined. The potential
impact on yields and bond prices is significant,
and it's something every investor needs to be
thinking about. It really highlights how everything
is interconnected, doesn't it? Government policy,
the Fed's actions, global economic forces, they
all impact our financial futures in complex ways.
And it underscores how important it is to stay
informed, to understand how these large -scale
trends might affect you personally. You know
it makes you think. What does it even mean to
be informed in today's world? How do you sift
through all the noise and find the information
that matters. That's something to ponder as we
wrap up this deep dive. Thanks for joining us.
Great discussion. I always enjoy these deep dives.
Until next time.