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Hello everyone, meet me, this is Kevin. In this video, we discuss the "great reset" of the Federal Reserve. We will compare inflation in the 1970s with today's. How are they similar and how are they different? Are we doomed to a repeat of the same triple wave of inflation that will destroy our economy and perhaps even the US dollar?
What about today's housing crisis? How does it relate to the time when we ended three waves of inflation in 1981? And how is this different from 2008? We will also touch on the banking crisis and the inevitability of a recession predicted by the 10- year yield curve, as well as the real dangers ahead.
Happy Cyber Monday. Let's begin. First, based on the data released today , it is clear that Americans are starting to suffer again. Credit card usage among debtors with payments over 30 days late by household income level is now higher than it was before the pandemic. We see that for the income category of $25,000 to $50,000, we have exceeded previous figures.
In other words, those who don't have time to pay are even further behind than before the pandemic. So, despite the printing of money, the situation is similar for the middle class with an income of 50 to 75 thousand . For the category up to 25 thousand, the same thing, in fact, new highs. For the $75,000 to $100,000 category and for six-figure incomes, we are also seeing new highs.
In other words, there is more use of debt funds on overdue accounts. And this applies to every income threshold. Here we see that net debt write-offs and delinquencies over 30 days are also higher than previous peaks. Common money market funds are sometimes perceived as a signal of investor fear. After all, if investors thought everything would be fine, the benefits of a 5% return on the money market would be significantly less than the returns from investing in bonds, stocks, or real estate.
So, at a yield of 5%, this rapid growth in money market funds is a sign of a wait-and-see attitude. In other words, people are afraid and unsure that they will get a better deal in stocks, real estate, or bonds, even though some of them are at quite low levels. So they take a wait-and-see attitude .
This may be largely due to inflation expectations. Finally, look what happened to prices. Here we see that rents across the United States have increased by 28% since 2020. So, essentially, rents have skyrocketed since before the pandemic. Mortgage rates are now 8%, which is significantly higher than the 3% we had before the pandemic.
However, for some reason, housing prices, although they declined in late 2022, have generally started to rise again. Very strange. Meanwhile, chicken dishes have risen in price by 32%, burgers by 23%, pizza by 17%, and pasta and noodles by 14%. Look at this. Savings across all income levels are clearly unevenly distributed.
The top 10%, or more precisely the top 1%, saw the largest increase in savings, at 32%, during the pandemic. In other words, the pandemic has definitely made the rich richer. And while these pandemic savings are gradually being depleted, it doesn't change the fact that we are seeing defaults across all income levels, which we talked about at the beginning of the video.
Which is strange, because if we really had a lot more money, we should have less stress, not more. In fact, we see more stress. And it makes people think about this graph. This graph here shows consumer prices. In the early 1970s, in 1969-1970 , we saw inflation rise rapidly, only to continue its rise in 1974 and 1975.
And then continue even more rapid growth until 1980. This leads many to say this: this post-Covid spike in inflation is just the first wave. And we're going to go through a total of three waves. And with three waves of inflation, people expect the housing market to crash. After all, here's a graph from Reventure Consulting showing that the number of mortgage applications for home purchases is at its lowest level since 1994.
And the income needed to afford to buy a house today is $111,000. You need to earn a six-figure sum just to be able to buy a mid- range house, a regular house. So in this video, we have to start thinking about: what does all this mean? Are we in trouble? What will happen next? And what are the biggest risk factors that could actually destroy the economy , making us say, “You know what?
Maybe we don't want to buy bonds now because maybe yields will rise even more. Maybe we don't want to buy stocks now because if yields rise , stocks will fall. And maybe we don't want to buy real estate because, well, the real estate market crashed in 2008, right? So couldn't it happen again? Well, we have some historical context because we don't want to play the " this time it's different " card.
In fact, we want to learn from the mistakes of history and make sure we don't repeat them again. Before we get to the answers, since today is Cyber Monday, I want to announce our sale. Visit meetkevin.com to learn more, or email us at [email protected] for package deals. But remember, this Cyber Monday we are also releasing all the lectures in our Gold Course.
All lectures are now available. This is no longer a pre-sale , they are all brand new. In fact, I teach them in this studio, teaching you how to avoid paying avoidable taxes. How to save on taxes, how to retire early, how to minimize liabilities and start a part-time job. We will help you get started with accounting.
We will give you everything we think you need. And I'm the one who teaches these courses on wealth accumulation and early retirement. So if you want to avoid the pitfalls you wish you knew about 10 years ago, this course is for you. Check it out for yourself. It includes live broadcasts for course participants.
You can go to meetkevin.com to learn more. So, are we going back to the inflation of the early 70s, which will lead to a complete disaster and tough Fed action, as was the case under Chairman Volcker in 1980-82, which caused a sharp increase in unemployment , which we will talk about later? So, friends, here is some very important information that we need to know.
The first spike in inflation that we saw in America occurred in late 1969. Take a look at this graph. I really want you to pay attention to the left side. You can see it around '69, '68, '69. It was then that inflation began to rise rapidly. So, I want you to watch. 69th, 70th, a lot of inflation, you know?
Then, right here, suddenly inflation drops, but then rises sharply again. Why is that? Why did it fall and why did it fly up again? And what lessons can we learn from this to avoid making the same mistakes? Let's figure out what happened at that time. August 15, 1970, to combat the higher inflation we began to see in the late 60s, partly due to the Vietnam War.
President Nixon decided to pass and implement the Economic Stabilization Act for the following year, 1971. This was also the same year that the United States abandoned the gold standard. In the Stabilization Act of 1971, Nixon sought the authority to issue the executive order of November 13, 1971. And he said, “That’s it.
No one is allowed to raise wages, rent, salaries, or any prices anymore." Nothing was allowed to grow . "The first phase was known as the ' Nixon shock', when we effectively froze all prices for 90 days. These were very strict price restrictions that legally prohibited inflation from continuing to rise.
So, legally, we have banned price increases. This is very interesting because if we look at the CPI graph, it becomes clear why in 1971, around this area, we started to introduce price caps or freezes, and inflation started to come down. This schedule isn't perfect, so we could see implementation somewhere around here.
So what happens after price controls are introduced? Well, you might remember from school that every time you say, "Hey, we want to introduce price controls." "And in this case, we want to impose a price ceiling, then we're effectively saying, 'We're going to cap prices right here.'" “But unfortunately, the number of goods supplied at such lower prices is decreasing.
So as a result, we face a deficit. At these lower prices, demand is here, and supply is here. So this is where we face a shortage of goods. And that's exactly what happened in the early 1970s. We faced significant shortages of goods and services that people needed, which only fueled and ultimately worsened price inflation once price controls began to be lifted.
You can't keep price controls forever, at least not in a capitalist economy. Let's see what the next steps of Nixon's plan were, and then return to the inflation graph. After the "Nixon shock," the president lifted all freezes and instead moved to more structured price controls. In other words, we will allow certain goods to become more expensive by a certain percentage because there has been too much shortage of regular goods and services.
Of course, there was also the oil shock of 1974, which only exacerbated the pain of resource shortages. It was actually eerily similar to what we saw during COVID, when first we ran out of toilet paper, and then we ran out of microchips. And I'm not talking about Doritos chips. I'm talking about microcircuits for washing machines, cars, and computers.
A massive shortage of microcircuits, very similar to what we saw in the early 70s. The only difference is that today we did not implement price controls. So prices naturally rose due to the huge shortage. Then Nixon said: " No way." "We will not allow such a price increase." “ Unfortunately, during the transition from the second to the third phase, when price restrictions became more flexible and the Economic Stabilization Act, which was useful at the time, expired, we began to return to a free market.
And, boy, does the free market tolerate price controls. That's why you'll see a massive spike in inflation as Nixon's price controls began to loosen and were eventually repealed. Only this time, instead of an inflation peak of about 6%, we got a peak of almost 12.5%, which is much worse than the first time.
All this time, we had just abandoned the gold standard, which was a clear signal to Americans: “Hey, you know what? Not only will prices rise, but now your money is n't even backed by gold. So I guess just have faith." And the trust you were supposed to have in fiat money was based solely on the rise in prices after deregulation.
It didn't help that Arthur Burns was more concerned with the whims of politicians than with the benefits to the economy. That's why the Federal Reserve today demands independence from politicians. Of course , many will roll their eyes skeptically and say, “Yeah, of course. They are independent. "We'll see how they start acting before the elections." It's quite possible.
Or maybe it's just a coincidence. In fact, Mr. Arthur Burns was so inept at managing the Fed's policies that he made it clear to Americans that they felt inflation was increasing and the dollar was depreciating, especially when it was no longer backed by gold ; he preferred to raise rates, then lower, then raise again , lower, raise , pause, raise, pause, raise, pause, raise, pause, lower, raise, raise again , raise again, lower, pause.
As you can see, the Fed really didn't have any consistency or clear strategy to explain to Americans what they should expect. This later became known as one of the greatest failures of the Federal Reserve's monetary policy . In fact, on the FederalReserve.gov website, you can see that the Fed inadvertently made a technical error by implementing an interest rate rule in which nominal rates changed less than expected inflation.
In other words, the Fed did not act to get ahead of inflation, but constantly caught up with it , without ever being able to overtake it. So it's very important to talk about how today's situation compares to the 1970s. And after we compare the situation with inflation, we will analyze how we can end up in a recession, similar to 1981.
How this affected real estate prices and what it could mean for the banking sector . First of all, a quick announcement about the Meet Kevin Live channel. If you want to join me live every morning when the market opens, look for the video titled " Stock Market Opening" with the date. Every day when the market opens at 5:25, you can be there.
It's free, and we'll discuss the morning news together. Also, , we've moved it to a separate channel. Links to both resources are below. I published the first video a few days ago, it's called "What is House Hack—a startup Meet Kevin ." Even on the cover you can see what House Hack is all about and we get straight to the point .
So go to these channels if you are interested. Below, next to the link to my capital building courses at meetkevin.com. This is a graph of the current inflation rate in the United States. As you can see, housing market indicators are starting to decline. In fact, many find the housing market so slow to reflect in strange government price measurements like owner-occupied equivalent rent, which is very annoying and often 18 months late.
The housing sector could eventually push us into deflation, even if some other indicators start to rise again. It's not just about our inflation figures, which some call the " CPI lie." This is also deflation in the eurozone, especially in Germany. In fact, the Eurozone may be in a state of outright recession: recent GDP figures have fallen by 0.1%, German producer price indices have fallen by 12-14%, and China's PPI and manufacturing prices are also negative, giving reason to believe that these large industrial countries may start exporting deflation to us.
Exporting deflation is just a fancy way of saying, "Of course." You can buy goods in America for much more or produce them in Germany, Bulgaria, China, or anywhere else for much less. And, of course, since we live in a capitalist economy, most businesses will choose to manufacture where it is cheapest, not necessarily where it is American- made.
Now, if we look at the core CPI in the annual trend, we see that the core CPI is gradually decreasing , as are basic services excluding housing. And while these figures are very volatile on a monthly basis , if we look at the three-month moving averages, we see that almost all of these numbers show a nice downward trend.
This positive inflation data, especially over the past few months, has helped us finally feel like we may have peaked in Treasury yields , which peaked at around 5% when Bill Ackman and other hedge funds decided to go massively short on these bonds. Remember: when you play for a drop in bonds, their prices fall and yields rise.
The reason you think yields will rise and you start selling or “ shorting” bonds is because you expect the Fed to keep rates high for longer. But the Federal Reserve has recently changed its tone on what course it actually wants to follow. And this is probably related to the events of 1982. This U- turn by the Federal Reserve is probably related to the events of 1982, which were a real mistake.
But first, let's take a moment to reflect on what the Federal Reserve just said. The right way to think about it is to estimate the potential growth this year. I tend to think that the trend growth over the long term is a little less than 2%, I would say around 2%. But, you see, with the increase in the size of the labor force, as I mentioned, both through participation and through immigration, and through better functioning labor markets and supply chains, you see actually increased growth potential.
Catch-up growth in potential is possible . This means you could grow by 2% this year, but still be below the economy's potential output growth . I hope that's clear. Here's what's really happening. So I would call it low potential. But if you look at the potential, do you get the point? The Fed has been saying, "Hey, wait a minute," for a very long time, for years.
If the economy is growing at 2%, we just want it to grow a little slower so as not to drive up inflation. But wait. Now Jerome Powell has backed away from that, because it could mean having to act tougher to push the economy even lower. Now Powell is saying: if the economy could grow here at normal rates, we just want it to be a little below that level.
It doesn't actually have to be below trend. It's enough to simply be below potential. So as long as our bets are working at least a little, everything is fine. This is actually a massive turnaround. This reversal is due to lower inflation and the desire not to spoil the second part of the dual mandate, which I will now explain.
The Fed has many tools to keep from going too far. One of them is to stop and not raise the rates anymore. This is exactly what Jerome Powell hinted at: they are finished. The second thing they can do is be a little more patient with inflation. This is called opportunistic disinflation. In other words, the same policies that have been in place since 1981, when rates normalized, can be used now to gradually lower rates, prioritizing jobs, not just inflation.
But why should the Fed prioritize jobs? After all , they have a dual mandate: stable prices and maximum employment. What happened 18 months after the Fed's peak rate hike this summer? What happened 18 months later? That is, at the end of 2024, the unemployment rate skyrocketed. This is exactly what the Fed is trying to avoid.
The Fed is trying to avoid more than just Arthur Burns' mistakes. Remember, Arthur Burns made a big mistake. Arthur made a mistake because of the start- stop strategy. He made a mistake by undermining people's inflation expectations in an upward direction. People have lost trust in the Federal Reserve.
They didn't trust the Fed and believed that inflation would continue to rise , because why shouldn't it ? It has been growing for the last 10 years, let's say since '77, it has been growing for 10 years in a row. Why shouldn't it continue to grow ? And only when Paul Walker came to, so to speak, take everything into his own hands and say: “Listen, you have to trust us.
We will break this economy. We will raise rates until you believe us and start thinking that inflation is coming down, which is what actually started happening in '82, '83, and '84." The Federal Reserve, including Paul Volcker, observed: “Hmm, people’s inflation expectations are coming down. "This is fantastic news." The problem, however, is that the Fed wants to avoid more than just the first problem— high inflation expectations and a lack of confidence, which they have already ruined with their story of “ temporary inflation.” So they started with a false step, right ?
They want to avoid not only that, but also a second problem: an 18-month lag in employment that could suddenly devastate our economy just before the election. We have already started to see jobs reports indicating that we are in the late stages of the cycle. The late stage of the cycle is when most new jobs are created by the government .
We have already started to see this. The public sector and healthcare account for a disproportionate share of new jobs. Why is this a risk? Because that means, oh my, we could be six months away from mass unemployment. I write it down as UI—that's unemployment insurance. This is our nickname for unemployment.
We could be in the process for half a year. So, in other words, in a year, the Fed's actions over the past year and a half could cost us dearly . So as inflation tends to decline, the Fed should start easing inflation pressures by pretending that, "Oh, we're still aiming for 2%. They are slowly starting to soften their stance and change course because they don't want to make a second mistake and cause mass and unnecessary unemployment, because, as Jerome Powell himself says , it causes unnecessary human suffering, and that's not what the Federal Reserve wants.
So what does this mean for real estate? By the way, what level are we at today with inflation expectations? What about the banking crisis? Where do we stand with all these numbers, as well as the inverted yield curve? Well, the interesting thing about an inverted yield curve is that it usually portends a recession.
Anytime we dip below this approximate white dotted line, we are headed for a recession. And you'll notice that the last time we inverted this deep—you can see how deep it is here—was back in the early 80s. So the Fed wants to avoid that pain. But for now, they are following a trajectory that will cause this pain.
Now some say that this curve is curved this way because inflation expectations and inflation itself are so high now or were so high then. So, it makes sense that in the short term, a higher yield is needed on a short-term bond than on a long-term one. Others say: “Explain it however you want. This means that recession and unemployment are approaching." And I think the pessimists may be right.
And Jerome Powell knows this , and he knows that this unemployment is coming. So when we had unemployment in the early 80s, what ultimately happened to the real estate market? Did the real estate market suffer a significant collapse while the Fed was fighting inflation? Here is a graph of housing prices on an annual basis.
And we found that house prices actually fell by about 1.5% on an annualized basis—that was a short-term spike around 1982, along with the high unemployment that we were facing. We don't have those unemployment levels yet, so the real estate market has been relatively stable. In fact, we still have positive price growth dynamics.
This is a year-over-year chart, so anything above this line means prices are still rising . Of course, they grow more slowly , but they still grow. Unlike the price deflation we saw, when prices fell by 30–40% between 2007 and 2011–2012, when some markets bottomed out. So, interestingly, perhaps the situation today is not at all different from the early 80s.
Maybe what happens next today will actually have little impact on the real estate market, but the next big problem is unemployment. You see, maybe this time things are no different. We are actually going the same way. People ask, "Keven , why can't it be 2008?" Well, because in the early 80s and today, people had stable mortgages that they could afford.
They didn't have the no- income mortgages or the bad loans that were there in 2008. In 2008, there were not only problem loans, but also the practice of "short sales," where lenders would pay you $10,000 to $20,000 to simply leave your house and sell it to avoid foreclosure and write off all your other debts.
But today, as in the early 80s, we have much more equity. We have stable 30-year fixed-rate financing and people are less eager to move because of high rates, so we don't see any real pricing. If you look at the four-week average price, the orange line is 2023. We see this graph of monthly supply volume.
On this graph, we are approximately at the level of 2022 indicators. Of course, there is a tendency to increase in the winter period. This is completely normal. In 2021, we remained slightly below trend due to a large deficit. Prices are a little higher now than they were last year. The white line on the graph indicates 2022.
The blue line shows how far we are ahead of last year's figures. Don't get me wrong. There was a price correction, especially in markets with a high share of rentals and those affected by COVID. We saw prices nationwide fall from a peak in May 2022 to a low in December 2022 , a nearly 15% correction.
And for new home developers, the situation was even worse. I'll explain the situation with the developers in a moment, but think about it. If we are really no different from the 80s , then it makes sense that we are only seeing a collapse in real estate sales volumes, not a massive collapse in prices on the secondary market.
At the same time, the biggest concern for the Federal Reserve should be unemployment, not inflation. Unless, of course, inflation starts rising again, but it doesn't look like that yet. I'm knocking on wood to prevent this from happening. What about new buildings? Well, with the prices of new buildings, things are a little more complicated, because most buyers do not actually pay the price indicated in the ads.
Typically, these prices are artificially supported by incentives from developers. For example, a developer might say, "Hey, pay $480,000 for this house." "We'll do $50,000 worth of upgrades for you, well, let's say $ 40,000, for flooring, countertops, cabinets, whatever." So the buyer actually pays 440.
This would just be a quick example. However, recently these prices, even with upgrades, have not been as attractive to buyers, so we have started to see prices drop. Actually, quite significantly. If you look at the left side of the graph, you can see that we peaked at almost $500,000, and now that level has dropped.
We are currently at around $415,000. This represents a discount of over 15 percent on new construction compared to their peak. This is probably normalization, because all these incentives no longer work. We really have to lower the price, but this is definitely a worrying signal that is worth paying attention to, since a drop in prices for new buildings can drag down prices on the secondary market.
This is logical, because if they continue to build more new houses and sell them at lower prices, then why buy an old house when you can buy a new one, perhaps even cheaper. So, this is definitely a wake-up call, but it's unclear whether it will be like 2008 or 1981 . Now a few additional points before concluding.
First, Twitter users often write similar things. The music will soon die down. If you stay at the ball too long, everything can turn into pumpkins and mice. Basically, citing a picture of accumulated excess savings of US households heading towards zero, probably by April 2024. The problem with this post is that it forgets that the accumulated excess savings before the pandemic were also zero, and the party hadn't even started yet.
In fact, the party was still going on. So I personally don't find it useful, just like this . Here is a self-proclaimed Ph.D. saying that the Federal Reserve is just making up policy on the fly, which is quite ironic since the Fed has literally been saying this for years. This is not a surprise. They just say, " Look, we'll make a decision when the data comes in." However , because of this, they assume that the Federal Reserve created this hydra and does not know how to stop the bank financing program.
It is worth remembering that the banking mechanism that the Federal Reserve System has contains about 111 billion dollars. $111 billion may seem like a large sum, but when you compare it to the entire size of the banking system, which is about $20 trillion, the bank funding program is extremely small and probably irrelevant to whether we should fear what lies ahead.
So, how do we draw conclusions from this and what should we do? Well , let's write this down. First of all, we must consider that if inflation does not rise again, the Federal Reserve is probably done with its job. Let's just state this. The Fed has stopped raising rates. A pause has come. The Fed last raised rates this summer, and that starts an 18- month countdown to the moment we triggered mass unemployment in 1982, which means the 12- month clock— let's write it down—is ticking.
Now the question is, will the Federal Reserve take into account that time is running out? So far, markets believe the Federal Reserve will cut rates by about 9/10 of a percentage point by December 2024. If they do, it could support some interest rate sensitive sectors like automotive, solar, etc. But if that clock is indeed ticking, the reality is that the Federal Reserve may have to cut rates by a much larger amount than 0.9%.
In fact, the Federal Reserve may have to cut rates by as much as 2.9%. Or, let's say, by 3%. Let's hope that as inflation declines, the Federal Reserve can do this to prevent large-scale layoffs that could truly devastate the economy . Because even though we can observe price fluctuations from developers between, say, May and November of the following year, which is simply drawing lines from top to bottom, the reality is that the housing market is dependent on the level of occupancy.
And if we can avoid a recession due to unemployment like in 2008, or a recession due to unemployment like in '82, when prices barely went down, if we can just avoid a recession due to unemployment in either of those scenarios, there's a chance that house prices could actually start to go up again, not down, in 2024, especially as yields start to decline.
Some argue that with lower rates, supply in the market will increase, we will get better pricing, and therefore prices will go down. So there is a certain risk factor here as well. But if the Federal Reserve prioritizes unemployment , many fear that the Fed will ultimately provoke even greater inflation.
People think that because in 2021 our economy was so strong that many people thought, "Oh my God, this is great. The economy is just exploding." And then we got inflation. So, recent history has almost conditioned people to believe that a strong economy equals inflation. But the reality is that since 1982 we have had a relatively strong economy while facing disinflation.
Of course, there were ups and downs, like in '87, but we stayed well above the level of '82, there was the dot-com bubble, the expected recession due to COVID. It is worth remembering that a strong economy does not equal inflation. We can have a strong capitalist economy without inflation. And the reason for this is that the Federal Reserve is actually constantly fighting deflation.
You see, capitalism drives down prices. It makes everything more competitive , like those great prices we have right now on the Black Monday sale at meetkevin.com. But the Fed doesn't want deflation because it makes it harder for people to take on debt, as debt becomes more expensive to pay off. So the Fed prints money to cause a little inflation, encouraging you to spend and stimulating economic growth, helping you pay off your debts more easily while you earn more and the amount of debt remains the same.
As a result, the Federal Reserve actually hates deflation even more than it hates inflation. And this could lead to the printing presses being back in operation just before the election. And I firmly believe that the results of this election will not be determined by what people feel today. They will be determined by how people feel in a year.
Thank you very much for watching. If you like this style of presentation, leave a comment below. If you didn't like it, leave a comment, and we'll see you in the next video. See you later.
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