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Devil. The CPI data just came out , and it's bad. They are not good. They are simply not good. This, unfortunately, confirms our fears from yesterday. Yesterday we were afraid that winning was simply impossible. Because even if you get a better headline score, like 0.5 or 0.4, it's still bad. That is, even if you win, you still lose.
Of course? But we just got a terrible score. This is a 7.2% annual increase in the CPI on an annualized basis. This is madness. This is a general indicator. You see how I placed it closer to the top. OK. This set here is our baseline. Yesterday I also said that I was very disappointed with tomorrow's CPI because it makes our task very difficult .
When you expect 0.2 here and 0.6 here, one of those numbers will be very far from the truth. Well, it turned out that was quite wrong, by how much? 11.5, that is, about 0.015. Oh no, 0.15. That's how wrong we were. So we did some real calculations to get the exact number, because they round down and only show 0.3.
Now, if you compare that to expectations, this was the result. Bloomberg reported that one of the few economists who guessed was actually a playwright with no financial or economic background who bets on CPI reports. And he guessed right, while a bunch of economists got it wrong. As you can see , this is a movement of about three and a half standard deviations on this normal distribution curve.
This is, you know, three and a half sigma . That's quite a lot. So the markets were expecting about 0.21, and we got, to be honest , 0.3. This is rounded. The asterisk is out of place. We got 0.35. We ended up somewhere around here, which is the risk of the far right tail of the distribution. That's what we're talking about in the data, the right tail, the tail right here.
And this is where we ended up . So, this is not good. No matter how you look at it, when you look at it from a statistical point of view, it's bad. And so, naturally, we see expectations for rate hikes rising. Using Kevin Warsh's metric, we just put together a spreadsheet. We took all levels of the fifth category.
And that gives us about 340 indicators. And if I look at this in a spreadsheet, scroll all the way down to see where my annualized performance is at or above 3%, I get 170 positions out of 340 on the list. This is exactly 50 % of categories growing at an annual rate of 3% or more. This is exactly the number that Kevin Warsh was telling us about.
Last month it was 54%, but he's mentioned two or three times now that 50% is just bad, and usually means further rate hikes. Nothing good. So all of Waller's talk over the last two weeks, the kind of bailout that we've been getting from the Federal Reserve, is now just going to fail because the expectation was, "Hey, okay, cool." "So, maybe we don't need a raise in October." "Oh, okay, maybe we don't need raises at all in 2027." "Oh, that's great." Thank you, Waller, for trying to reduce the price of pain in the markets due to rate hikes, because, you know, the markets were pricing in up to five rate hikes.
Well, all this talk looks very cheap now and leaves us with some problems, because look at this. We are now pricing in a 4.86 increase in this cycle. We are pricing in exactly 3.86 additional rate increases between now and September 15, 2027. This is the moment when our expectations for rates will peak.
Before the CPI report, we had 3.17 additional raises , and that's what Waller was trying to downplay . Something like, "Oh, we don't have to, you know, we can skip October." " So, we only have one thing left." The market is laying two more on top of that, right? He lays down three. "Ah, we don't need them all." And so we just saw even some of the Doomberg reporters saying, "Oh my God, this is crazy." Because you just saw this massive move back to actually pricing in another full rate hike.
From 3.17 to 3.86—that's almost , you know, a full step, especially if you round it up, because you're going from three to four, essentially. And when we look at October, we just went from a 23% chance of an increase in October to 50/50. But, 49.3%, to be exact. There is also very little good here. Very little good.
The volatility is now above 5.27 on the 10- year bond, which is what worried me. The super basic services index this month is 0.42. This is terrible. So that you understand why these numbers are so terrifying. Of course? Usually bureaucrats struggle to understand the speed at which all this is moving.
That is, how fast is the car going? So they take this number and exaggerate it. So, we take 0.42 and multiply. This is equal to 5% in super-basic terms. This means we have 5% inflation, excluding oil, gas, and housing. And part of the reason for this is that people continue to spend. People are still willing to pay that price.
I honestly don't even know who these people are, you know? For example, I buy the cheapest plane tickets I can find, okay? American economy base—they now add the "basic" tag . I read on my iPad in "basic ". This isn't even economy class anymore. Now it's " basic economy". And I'm like, "Well, this crap still costs $650." This is madness.
You know, it's one way. One way from LAX to Boston. It's just a set-up. Whatever. Don't even get me started on LAX. But I want to look at individual categories because you can see how much pricing power people don't have. I don't know how people manage to do this, because in general, consumers' purchasing power is simply destroyed.
Individual purchasing power fell by 0.7% year-on-year . This is the average hourly wage. So, average hourly earnings are starting to fall. This is very bad for the consumer sector. This is probably one of the reasons why we see such losses, for example, at Dave & Buster's, because consumers get a lot of it.
This is what they talk about in their reporting, but consumers are suffering at all levels, while their real purchasing power is falling, perhaps in part due to artificial intelligence, which is another early sign of the crisis. And that puts the Fed in a weird position , because on the one hand, the Fed is saying, "Oh yeah, hey guys, we need to raise rates because we need to fight AI-induced inflation ." And, you know , I hate to admit it, but it is what it is.
I, because I hate to say it, because I don't like to get into politics, but in many ways this happened because of Trump's actions. New liberalization tariffs, post-AEPA tariffs, this is Operation Midnight Hammer, then the war with Iran, that big beautiful bill that allows full write-off of equipment costs, which gives companies full tax write-off of goods purchased, for example, from Dell, which was great for Dell stock.
I mean, Michael Dell's fortune has increased by a hundred billion dollars. He returned six billion of that to the accounts of Trump's people, but you know, it was kind of like "you give it to me, I give it to you." You know, believe me, the businessmen here made very good money. Ordinary people are simply being destroyed by this inflation, and it is very widespread, especially now that housing is also becoming a more aggressive factor.
I mean, we saw right in the table how broad the categories are. Nick T. even says that the annual inflation rate, if you take the three-month trend, rather than just one point and multiply it by 12, if you take a less extreme approach, take the three-month trend: the three-month trend has now increased from 2% in August to 3.4%.
So we are really going up like a hockey stick, or at least moving in the wrong direction. I was really hoping that we would see a steep drop in one-up rates and we would talk about how we could still get one up on Kalshi so I could place a bet. It hasn't happened yet, it might still happen, but I really want to buy this at about 4%, odds of one rate hike this year, and I'll tell you why.
Mainly because 4%—it's so cheap for what could happen, and you know, is that the height of fear? Are we getting worse at the peak of fear? What stage are we at ? We'll talk about it. Just a quick note, this channel is of course sponsored, the company, my startup , is sponsored by Kalshi. So . Use kalshi.com/r/mevin or code mekevin.
So, let's think about this for a minute. When we look at what's left that could potentially save us from rising prices on toys, hotels, airfares, owner-occupied equivalent rent increased 0.3 from 0.2 where it was stable, healthcare increased 0.3%. Car and truck rentals increased by 5.4. Phone service, fortunately, has stabilized, which was a major indicator last month, but I mentioned it and people said, "Oh, but Kevin, phone service is such a big part." Last month in the CPI report I said, "Well, even if you take out these phone services, core inflation is still high." And now, actually, telephone services have stabilized, but the core is still hot.
This is not good. So, what is our only hope and where are we in this realm of peak fear? At the same time, workers are losing their pricing power, which puts the Fed in a very difficult position. A very difficult situation for the Fed. Why is this so bad for the Fed? This is bad for the Fed because they raise rates because of oil or AI.
They don't actually stop oil prices or AI. The only reason they raise the stakes is because of people's expectations. But the problem is that workers' pricing power is decreasing by 0.7% annually. Workers are simply being pressured. With workers' pricing power at such a low level, this is a sign that layoffs will begin soon .
I don't know when, but layoffs will probably be the "grim reaper" that will put an end to this party. Because once the market stops absorbing the laid-off, the labor force participation rate will also increase. If both of these factors converge, the unemployment rate will skyrocket. One, then two, then three percent, and we'll reach 8% unemployment.
And then people will say, "Well, you see, AI is destroying jobs." And then you will come to socialism. And then you have to ask yourself in 2029: what socialist stocks will you buy? You know, I tweeted about this two days ago. I wrote: " 2029 will likely usher in socialism . What socialist action will you choose?" And then I added, "I'll start first— solar energy." There are many people who don't really believe that solar energy will have another "heyday." Yes, that's funny.
But, anyway, let's look at the expectations. Look, if you look at the Qs (Nasdaq 100 index), they actually didn't do too badly on this data. They're still above 735. We predicted the peak of fear on Qs back at 700, and then, you know, we sent out an alert, "Hey, we're buying this dip." Uh, on Reinvest One.
You all already know about this. I don't need to promote Reinvest One, but many great course participants have upgraded and many new members have joined us, so we're happy to welcome you. But if you look at the bonds now, they are still hovering above the 5.27 mark. I hope it will subside today, because 5,312 is too much, we'll see where we actually close.
But for now, I will say that the market is holding up well, and, as always, companies with large cash reserves are doing best. This is Apple. We've talked about this quite regularly, not just in Alpha reports, but in general. And, of course, companies with large debts, whose debt service costs will rise, feel even worse.
It's like your Coreweave. So, the peak of fear is indeed behind us, but what we really need now is massive financial assistance. And who will save us? Is this the Fed? This is not talk from the Fed. This is Donald Trump making a deal with Iran. I know it's annoying that we keep coming to this conclusion, but that's just the way it is.
Sounds like a broken clock, doesn't it? The Iran deal, however, just became much more important. Is it possible that we will only get one rate hike this year? Of course. If we make a deal with Iran, the window of opportunity is from October 20 to 27 . If there is no deal , the worst case scenario is before the election, but ideally during that period, then the Fed will justify an increase not only in October, but also, probably, in December, for fear of losing control over inflation expectations.
So, we should see a stabilization of 10- year Treasury bonds. The only way to achieve this now is through a deal with Iran. The Iran deal has become even more important because inflation is not going away on its own. So all of these numbers are actually bad because they increase the pressure on Donald Trump to untangle the quagmire he has dragged America into.
Which is very unfortunate, because it's not the easiest problem to solve. Nevertheless, I remain optimistic. Okay, I remain a "Luigi Cup"-style optimist. My opinion hasn't changed. My bear- bull scale has not changed. I, you know, this is not the level at which I want to buy on a decline, because it's not that much of a decline.
I love the moment of peak fear for buying on a dip. So I'm not excited about buying at these levels. And it's surprising, but the market is relatively stable. Let's see if this continues. So, with that in mind, we need to send out the alpha report and catch up on the course stream. So see you late.
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