Best of Caller Questions - Friday Juneteenth

**SPEAKER_1** (0:00)
This is a Best of Invest Talk episode from KPP Financial. Listener questions will be answered, and commentary provided by Justin Klein and Luke Guerrero.

**Justin Klein** (0:15)
Richard in Santa Clarita wants to talk about Treasury bills.

**Richard** (0:18)
Yes, thanks Justin for once again taking my call. I've been a listener of this show for a long time, like over 10 years, and I try to catch every episode. But one of the things, I have a question going back to what Steve Peasley used to say, and maybe emphasized it because it was where the conditions back then. But he always said that whenever the 10-year Treasury is lower than the 2-year, when you have the inverted rate there, he said historically always it follows with a recession. And he said that that recession, it may not be next month or in 5 months or maybe even 18 months. But we did have a period of time a while back where the, was an inversion that took, was a long time lasting. And then finally, it's, you know, switched back to more, you know, the normal. So does that mean and given what you've said about, there are so many factors now from the war to AI and a lot of things confident.
Will that, how does that hold? I mean, taking that into consideration, I don't think we've had a recession since the last inversion.

**Justin Klein** (1:43)
Yeah, that's definitely true that we didn't have an official recession because it did invert back in 20, what was that, 20?
Yeah, so that was back in 2023, early, yeah, into early 2024 where it was inverted. I think that we're in a new era, you know, that was post-World War II when things were a bit different. Now, what we have is what I call, what we call in the industry now, fiscal dominance, where, yes, there can, and there's a lot of manipulation of the yields curve by Treasury, the Fed, they can do it based on issuance, are they issuing in the long end, do the short end, all of that. And then the powers that be, they don't want a recession, they don't want to preside over a recession, so they'll put through some sort of spending packages, whether that's an emergency, through some sort of a war, things like that. Whatever it is, they're manufacturing, and that's why I say the risk to most people, the risk to markets, excuse me, is really a crash up. That's kind of what you're seeing now. Everyone's worrying about 8 type of deflationary bust crash, and that certainly could happen for short stints, but you've seen the short stints are hit with some sort of stimulus. And in the background now, you have such a large deficit, and that large deficit means huge interest payments. We know it's now over a trillion dollars a year, higher than the military spending, at least for now.
And what that is, is that is basically government spending, right? That's government spending because they're spending on interest, and that's going into people's pockets. That's dollars being created.
And so that is kind of underlying everything, and really, pun intended, no pun intended, trumps everything, to a degree, not entirely, but definitely has this veneer of just stimulus underneath the surface that's coming from government spending and government, government largesse, government effectively stimulus that's happening every single year with our deficits so large, right? We're at what, five, six percent deficit to GDP ratio, which those are levels that you see during a recession. And so it's very hard to have a true recession when government's spending that much. The real worry is that eventually if the either number one, the bond market takes away the printing press, basically saying we're no longer willing to finance you. I think that's more farther off than people understand, mainly because the Treasury issuance schedule, are they issuing the long and the short end right now? And even under Trump, under Biden administration, they were all kind of pushing on the short end, which is issuing short dated Treasury bonds, which I think is what you kind of asked about originally. And that is stimulative to the overall economy. There's a lot of banks that want to own that type of paper. And so they're easy to find financing in the short term. What that ultimate release valve will be is the dollar. And that's why the dollar has been structurally weak for a couple of years now. And even when the expectation for Fed rate hikes increases, you're not seeing a big rally in the dollar. I see structural downside in the dollar. And that is the release valve of all this money printing, all this fiscal dominance, all this fiscal largesse. So I know I talked a lot there. I kind of went on a tangent. But hopefully that gave you some perspective on what's going on with the underlying economy and why we're not seeing recession even though we had that inverted yield curve.