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disaster that just happened in markets today and no it doesn't just have to do with these stock indices it has to do with the fed inflation what the bond market just told us war in russia ukraine and what it might mean for our portfolios going forward so we've got some work to do let's get right into it quick note this video is brought to you by streamyard to learn more about professional live streaming software at medkevin.com dreamyard all right so our original thesis before war was relatively simple we had a belief that inflation was now persisting this is because of the minutes that came out from the december 16th fomc meeting from federal reserve on january 5th we learned that the federal reserve said yup yup yup yup we now have persistent inflation it's definitely not transitory anymore okay we're done using that word we also learned that the fed said that inflation is broadening and we also learned uh that uh we'll add another box here because i didn't write it up here we also learned that not only is inflation persistent and broadening but they have way larger balances and more money than they've ever had before and that means they should probably hike or or tighten monetary policy faster than ever before ever before we expected most of the market expected putin not to invade ukraine that this was a lot of show and that there wouldn't actually be an invasion so that was an expectation and we were watchful for the potential of a wage price spiral now this is a quick summary this is basically where the wages people earn are higher or going up at a faster rate than the rate of inflation the last labor report showed us that wages were going up at about eight point eight percent on an annualized rate and inflation was about seven point five percent this is the start of a wage price spiral and it is the first such report that we had and it looks back into january so we kind of had all of these check boxes here more money to tighten down on likely no war wage price spiral a broadening of inflation pressures and persistent inflation this made it very clear at least in my opinion that the odds of a recession were going way up because the federal reserve would have to react to this by hiking uh interest rates becoming hawkish this drives down aggregate demand which makes it a lot easier for you to have even slightly negative gdp for two quarters in a row which is a recession right and then it would also lead to weak earnings like week q1 q2 earnings in addition to a potential recession which would just make earnings even worse this is a really bad original recipe here for stocks and that is originally why i sold well things have obviously changed we have a war thesis now and see the war thesis says that we now have this new form of transitory inflation it's going to depend on how long obviously the war lasts but we have this new thesis of transitory inflation this would be a prices of oil going up i think we just hit 105 again today on brent crude because the war is lasting longer than expected already some thought by now that either ukraine would have fallen or russia would have pulled out or negotiations would have gone better whatever price of oil is back up commodities are still going up nickel aluminum wheat things related to the area here we hear that freight pressures are going up a freight consultancy company is talking about the cost of ship shipping goods literally on ships going from ten thousand dollars to forty thousand dollars potentially and of course air freight getting even more expensive so uh we do expect this new transitory inflation regime and we're calling this the new slash war transitory inflation unfortunately that comes on top of the persistent and broad inflation that we had up here this is a little bit of a problem but then you also get this interesting thing called transitory fear and that is when we have war and even the potential and i'd say relatively small chance of nuclear threats we do have war high costs less travel i mean think about it apple has banned all shipments of apple products and sales of apple products in russia now anytime a company like an american any american company says hey we're going to stop selling our products somewhere that lowers the revenue for that company not only does it lower the revenue for that company but every thousand dollar ipad is probably the equivalent of five thousand dollars of actual future gdp because that's less money that flows to shareholders less dividend payment that comes out less money that goes to employees less money that goes to research and development to do capital expenditures whatever and so when when folks ask me kevin how can aggregate demand go down because of war like i'm over here still getting seven beers a night it ain't making a difference in my life and and you know we have to make that as a matter of fact statement obviously we care about people's lives and when we don't want to see people dying but as a matter of fact saving yeah that's that's right we're maybe we're not buying less beers here but if people are buying less bags of rice or ipads in certain areas then that reduces the amount of global gdp we have which reduces the velocity well the velocity of money then that amplifies how much of a reduction we actually see throughout the global economy and then we do see global aggregate demand tend to trend down as earnings for these now international mega cap companies throughout the world actually start coming down i mean even netflix and disney have come out to say that they expect their earnings to be impacted because of this war that flows through to consumers even to the effect of hey if earnings come in bad q1 q2 now people have less wealth because their stocks are going down that also leads to a reduction of demand so demand does go down through war it's just not as immediate like oh they're bullets flying i guess i can't buy beer tonight it's not that immediate right but but it does still happen so uh and you know more direct things like obviously less people traveling you can't fly from europe to asia well as easily anymore because it's you can't fly over russian airspace anymore anyway so things like this make things a lot more complicated they increase the cost for airlines blah blah blah okay one of the things that it does do though is it does give the fed a little bit more time to potentially wait for data see the fed wants to be able to kick the can down the road because they're not convinced that inflation this original transitory inflation here which they no longer call transitory i don't think they're convinced that they actually believe these pressures are not transitory even though they're not saying it anymore i think they still think this original inflation is transitory because they keep telling us in interviews don't worry second half of the year supply chains will get better and we just need to wait for more data and then that original inflation will go down and if this original inflation goes down and all we're left with is this new sort of transitory inflation well then we could afford to be patient to wait for this transitory this new transitory inflation to go away because that's not this is not effect of our monetary policy this is an effect of war so as long as this ends up going down by the fed buying time and getting more data then the fed actually doesn't have to hawk as quickly so this is actually a good check mark here because the fed is more likely to want to take their time more and wait for more data to see if this gets better and this gets worse that's okay because the boogeyman here is war not us this is our fault but we have no control over this okay so now at the same time we would hope that the wage price spiral ends this is going to be critical no matter what scenario you think we're going and you've got to pay attention to wage price spiral and of course we'll talk more about as well things to pay attention to and not to pay attention to regarding catalysts i do just want to give a quick shout out thank you so much to all those of you who joined we do those market live streams every morning i constantly update lectures for all the different programs and i'm excited to generate more of those over this next month and of course huge thank you to our uh streaming partner here met kevin dot com stream yard anytime i do stream events on public and i throw up your comments stream yard enables me to do that so go check them out okay so why can the fed not be hawkish now because some folks are saying hey the fed should just shock us now anyway and they might but why can't they or or probably why can't they shock us now well again when we have war fear we already expect that aggregate demand is likely to go down for the reasons i talked about with with inflation uh likely heading down or or demand for products and travel or whatever ipad's going down amplified by the velocity of money the fed's unlikely to want to double clamp down on the economy because if inflation starts going down and demand goes down and the fed hikes then you could have something worse that happens which we'll talk about in a moment so fear tends to lower aggregate demand which in time should lower inflation naturally without having to hawk right but if you have low demand and inflation's going down and you decide to hawk what do you end up with well a potential worst case scenario nobody wants this okay this would be very very bad we do not want this stagflation why because stagflation can lead to what we call regime collapse this is where literally the dollar could just disappear and the reason you get regime collapse is because during stagflationary environments you fail both of the priorities of the fed maximum employment gets it becomes a failure because people get laid off in stagflationary environments and when there's high inflation you certainly don't have price stability so now you're losing on both points right now the fed's only losing on one we're good on number one if point number one is max employment or max e we we're good here we've won we just haven't won on price stability we're kind of like uh let's wait and see let's hopefully see if we get price stability without killing maxi so anyway this is why i don't actually think that the federal reserve is likely to hike too aggressively so what the federal reserve has to do right now is they have to buy time because we don't know what's going to happen so they've got to buy time buying time generally means the fed is becoming dovish right they're relaxing they're not being as aggressive and see these are just some scenarios we don't exactly know what'll happen but if we have a short war and we bought time maybe we start getting inflation that fades which keep in mind inflation inflation fading does not mean going to zero it just means disinflation like instead of seeing eight percent inflation now we're seeing six and a half six five and a half five that's disinflation right and this could lead to a soft landing and you buy the dip on this you buy the dip on warfares you buy the dip on drama on reports on fed day whatever you buy the dip you hope for the soft landing uh however if we do reduce aggregate demand too much it's possible we could go to a recession but it's unlikely that in a short war demand would be reduced too much for a recession so the bigger concern would be what if we have a long war the federal reserve buys time during a long war aggregate demand goes down well now one of two things can happen inflation could fade disinflation okay great back to soft landing hopefully soft landing before we've reduced demand too much for a recession or if we don't get inflation down we have a longer war and this inflation persists and the war inflation persists well then the fed's just going to have to force a recession forcing a recession is basically when the fed paul volcker paul bulkers us and they raise rates some ridiculous sum five six seven percent or whatever instantly and uh then everybody freaks out and markets freak out okay so let's come over here now this is really important to pay attention to going forward and this is this all has to do with federal reserve of course the federal reserve has a secret public enemy number one and the reason i call it the secret public enemy number one is because a lot of people say the fed only cares about max employment and prices it's but they have a secret public enemy uh and they're called inflation expectations that's sort of the collective enemy here inflation expectations and we actually had good news on this we actually had what looked like a peak inflation expectations kept going up uh and then ding we actually uh peaked in roughly uh actually probably peaked in around december here because when we got the january numbers here the inflation expectations for one year out based on the new york fed survey of consumers went from six percent to five point eight percent this is the uh first time we've actually seen an inflection point down since october of 2020.
so it's been a while it's been about a year and a half and we finally have this potential peak here in inflation expectations problem is the longer this war goes on what do we ll they're good right now but i expect in the future they're going to end up turning bad and that's because again as long as the war goes on people are going to see gas prices go up and of course consumer expectations for inflation are going to go through the roof as a result the market today started responding the five-year break-even rate today jumped to 3.29 basically the five-year break-even rate and the treasury inflation-protected securities tips you don't have to really know what any of that is but let's just put it this way when a chart does this at this point in the chart people have the lowest inflation expectations and this means the market's pricing in the highest inflation and the way this chart actually looks right now is that we started having this skyrocketing in at the end of 2020 sort of the beginning of 2021 this is when in february march we had all these big sell-offs in 2021.
in the summer things kind of stabilized delta came and then we got the big inflation peak from delta and now we're like here because of war so so this kind of gives you the graphic of inflation expectations here and we are looking back at the highest point that i've ever seen like when i click max it goes all the way back to 2000 for comparing these inflation expectations and it does the chart doesn't go any further we're just at the highest point and that number right now is 3.29 which is not good uh and the other thing that's not good is the federal reserve ideally they like to say things without having to do things like when the fed comes out and they say hey we're going to buy an unlimited amount of bonds like they did in march of 2020 and then the stock market starts skyrocketing that's like free money the fed was able to get a lot done doing nothing all they did was move their lips and the market rebounded that's good okay well that's what they're trying to do now with yields they're trying to purposefully push yields up like the 10-year yield and the two-year yield up because that increases borrowing costs without the fed doing anything the fed doesn't lift a finger borrowing costs go up mortgages get more expensive and what happens you remove stimulation from the market while the fed doesn't have to do anything ah but now we've got a little bit of a problem we got a war so now everything's a poop show because people are using treasuries as a flight to safety a haven asset so what that means is when we look at the 10-year treasury yield it was sitting at 2 a couple days ago now it's at 1.74 the 10-year plummeted it just dropped 26 basis points mortgage rates are gonna be down tomorrow because of this good day to lock in your refinance rate if you wanted to tomorrow unless it keeps falling the two-year went from 1.6 to 1.34 so yields are actually falling at the same time the 10-2 spread the spread between these two is also falling which is bad because it's at the lowest point right now that we've seen since 2019 because this could potentially signal us heading towards a recession so we're actually now stimulating the economy more because the bond market got effed up by war and the yield curve is falling against signaling more recession so these are all bad all of these are bad the market right now is just pricing in poop uh that is that inflation expectations are going to go up the bond charts say inflation expectations are going up and the fed manipulating the bond market isn't working because now it's being used as a haven asset which means bonds are still stimulative which is bad so this means the fed could end up having to rug pull us how does how do rug pulls work well usually rug pulse happen at liftoff liftoff by the way is write it down if you haven't yet march 16th that's when we're expecting liftoff for the fed to actually raise rates take a look at the last two times we actually had liftoff at the fed june 30th 2004 we had a three-quarter percent hike that's 75 basis points we went uh all the way up to two to two and a quarter it's always a range that they give and then after that listen this you know how people are like oh the market's pricing in 5 25 basis point hikes or all that kind of crap yeah okay 2004 they hiked rates 25 basis points 17 times in a row okay so they really like the 25 25 2020 movement after a first shock right june 2011 they raised rates a half of a percent uh to 0.5 to 0.75 and then after that they raised rates nine times at 25 basis points again 25 25 24 right they really like that 25.
these were times rates actually were cut march 3rd of 2020 we saw rates go from 2.75 down to one to one and a quarter and then two weeks later we sell rates just cut straight to zero these were so these here are cuts and these here were hikes but looking at the two recent hike cycles we actually did have a little bit of an initial shock now they didn't really affect the market stand which is good uh but right now the markets are pricing in only of 2.7 chance of a 50 basis point hike followed by stability of 25 hikes 25 hikes you know 25 bases point hikes 25 basis point hikes whatever it's 0.25 it's 25 basis points and this over and over again potentially you know nine to 10 times kind of how they've done the past uh because the market's only pricing in a 2.7 percent chance of a 50 basis point hike if the fed comes out and ends up giving us a 50 basis point hike the market's gonna freak and we'll probably see the market fall quite substantially on that because the market's not expecting that right now so what do we have going forward in terms of catalysts and then we'll talk about scenarios and what's likely or not so let's take a look at just catalyst for a moment so tomorrow on wednesday we get european inflation data that'll be interesting but tomorrow we also get powell talking and this is the first time in 35 days that jerome powell is going to be talking which is quite interesting because he's been busy printing a lot of money he's been printing about 1.62 billion dollars per day while he hasn't been talking to us that means every day for the last 35 days i kid you not he has been doing this to the tune of one point six two billion dollars yeah because they're still stimulating right now i'm putting money in the fed and i'm sick and tired by the way of the people in the comments like and advantage pretty money yeah they digitally create money jerome powell calls this digitally printing money the treasury department physically prints it but the fed digitally prints it it's changing numbers in a spreadsheet folks anyway then we get the private jobs report on the second the big one though right here is going to be the jobs report on the fourth because this is going to help us understand if we have that wage price spiral happening again that is are those month-over-month wages going up more than inflation right now the expectation is 0.5 percent month over month which would actually be a good thing that would mean no wage price spiral because it's coming in less than inflation right that's six percent annualized cpi on uh march 10th this is going to be a little bit of an issue because the inflation for we're expecting inflation to come in hotter because of all the oil prices and all the oil shocks right but the way they calculate cpi is kind of funny so what they do is for volatile things like gas or oil they take these 10-day snapshots and determine what the price is and then they kind of take an average and they say that for the month so if they took a 10-day snapshot of february they'd see oil at 90 95 and 100 and then they'd probably say okay oil was 95 for feb even though the last day of fab oil could have been 105 they're going to assume it's 95.
so you definitely see a lag in the way they take these price snapshots it's designed to kind of smooth out those fluctuations but it creates a lag which actually means the april earnings and april cpi data those are going to be the ones that are probably the poop show of course if we get really bad jobs numbers especially a wage price spiral or we get a really bad cpi print on the 10th then the fomc is going to be a poop show and there's a good chance we end up seeing this rug pull where we see a half basis point hike or sorry a 50 basis point hike or half percent hike uh this would be considered more shock and awe so if we get bad news on any catalyst here that's going to be your shock and awe now what's uh what's likely so i wrote down most likely here well i'm kind of 50 50 on this so in my opinion i think the fed becomes more dovish because of war but uh you know unless we have of course the substantial worsening of some of the other things that we talked about uh which if we flip the board i mean there were plenty of not so great things that we talked about here like for example we don't want to go into stagflation this is why i think they're going to be more dovish but if these two things get out of hand the new war transitory inflation and the previous inflation there's going to be a poop show yeah so a lot is is definitely hinging on this war but anyway so a lot of me says dovish by the war dip unless there's a substantial worsening of the reports if the reports come in horrible then just expect the fed's gonna rug pull us right so pay attention to those reports q1 earnings uh and oh yeah if we get a substantial worth sitting and you expect q1 earnings to be bad and you expect the april consumer price index for the month of march to be bad you should just sell everything now where am i uh and you know where have i been sending my alerts for buying you know cardano at 80 cents that thing's up like 20 to 25 which is awesome or uh average cost basis now what 745 on tesla on 69 69 shares if you want to see when i send these alerts a stocks in psychology money comes with all of those uh and keep in mind that was a reset basis as well i took gains on tesla because my basis was like 200 something but anyway uh over here where do i stand uh i really stand about 50 50.
that is i i am so unsure right now which way to lean i do believe that there's a less of a chance of the fed rug pulling us personally i i don't think they can rug pull us because it'll lead to that stagflation argument but i also know we got crap ahead of us we have horrible reports ahead of us we have i think what are going to be bad q1 earnings remember amazon and etsy missed on q1 expectations the stocks still went up because people just like yeah by the dip the earnings beat it's like yeah but their guide was bad i'm shocked those stocks still went up it's just nuts uh and uh and then of course that april cpi er you know i'm not too optimistic about q1 i think people are kind of spent out but uh yeah that leaves me 50 cash 50 invested right now i will say you know if you were thinking about selling real estate i generally only like selling real estate if you really have a better opportunity to move to it better be a really good opportunity otherwise i don't think it makes sense to try to time the market with real estate but i will say if you were looking to time the market with real estate the fact that we're probably going to have lower mortgage rates longer does give you a little bit more of an opportunity to get some more money for properties before potentially these skyrocket again because guess what happens the war ends so war ends what happens ten years skyrockets potentially to three percent because of all the high inflation what happens mortgage rates end up going to five percent and now you have those real real estate headwinds so anyway shout out to our sponsor again mattkevin.com streamyard thank you so much for watching this video i can't believe i got it all done in one take and we'll see you in the next one
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