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Michael burry tells you to sell and the FED we gotta talk about big issues and what we've got coming to us and the big risks and yes we did extend the coupon code to Friday the third that will be the final final coupon code check that out February 3rd 11 59 PM at's right good old Michael burry again coming out and suggesting sell on Twitter and this has a well every time Michael barice says this kind of stuff he tends to temporarily at least break the internet and everybody talks about Michael burry which In fairness it's worth looking into what his perspective is because it's pretty dang contrarian to what the rest of the market believes and if we can kind of evaluate Michael Murray's sell warning next to what the Federal Reserve might do hey maybe we can try to understand where Michael burry is coming from so Michael burry tweeted cell uh well yesterday evening that's all he tweeted just the word sell period now what reminds me about cell period is that's what I tweeted in January of 2022 and I got the most backlash I've ever seen in my life from people and I'm like well things have changed and when things change it's important to change your mind as unpopular as that might be it's important for people to wake up and realize the world evolves and when the world evolves you've got to change with it otherwise you just end up dying an old fuddy duddy who refuses to change with the world so Michael burry tweets sell and when we put together what he's previously said we kind of get an idea as to why Michael burry would suggest it's important that now you sell so Michael burry has previously suggested that it is very likely indeed that inflation is going to come down rapidly in 2023.
this is a pretty typically accepted scenario right now it wasn't last year last year folks were saying oh that's it the dollar is is uh is is going to lose all of its purchasing power inflation is going to run rampant and the entire economic system is going to collapse because inflation will be uncontrollable unless we get Paul volcker well sure enough so far inflation is indeed proving to be transitory that yes when you print oodles and oodles of money the tune of four trillion dollars of money yes four to six actually four to six trillion dollars of money what ends up happening yeah you end up creating inflation to some extent that's a good thing because it actually signals that we're still capable of creating inflation I know that seems wild but when you have a company or a country like in Japan in the 1990s and you print money for 20 years and you can't get inflation up it's kind of a sign that you probably have larger structural issues in your country that restrain growth and that's bad whether that's an aging population a retiring population a population that isn't innovating anymore leading to more spending on goods and services whatever it is the last thing you want is a country that can't create any in inflation that is actually really bad because then you end up having negative growth after negative growth you encourage people to save their money and not spend it because why spend or invest if ultimately you can't create growth anyway think about that for a moment why hire an Advertiser to help you advertise your company's goods and services if you're not going to be able to grow anyway so everyone turns inward and what happens is you lower the standard of living for everyone so to some degree a country being able to still generate inflation which fortunately for the sake of Japan Japan's actually finally starting to see some degree of inflation again uh it it the last thing you want is again being in a deflationary environment where there's it's impossible to create any kind of inflation you want some inflation you just don't want hyperinflation so now we're in a position where after all of the money printing good yes our economy is still interested in growing which is good uh and so what we end up having now is what well we've got uh the idea in the more Market that yes inflation is finally proving to be transitory again we've gotten over the hump of money Printing and the supply chain crises and war that led to uh this sort of inflation at least the initial impacts of War given that the war is still going on in Ukraine and now we expect inflation to rapidly fall this is very much in line with Michael burry uh and and his sort of commentary Michael burry and his commentary is hey you know what inflation is going to come down so we can all agree that inflation is likely to come down this obviously creates a risk because if even the Bears say that inflation is going to come down and the Bulls are like yes inflation is going to come down now we have to be really blind or we have to be really unblinded to the idea that well what if it doesn't come down as rapidly as we think right it seems that a lot of the market is excited about inflation coming down even Michael Murray and the Bears are excited about inflation coming down the question is what happens next and what happens next in my opinion is why Michael burry is suggesting that you should sell well now there are two tail risks here tail risk number one is that inflation doesn't actually fall as much as expected if inflation ends up staying High because owner's equivalent rents don't end up coming down as quickly as we think that basically the rental uh lag of a decline in housing prices which we've already seen to decline in housing prices and housing rents if that lag doesn't end up showing or that result which is lagged by about six to 12 months doesn't end up showing up in CPI data because rents start going up again uh then that's a problem obviously that would be a problem now you might wonder like wait but how could that work I mean if if owner's equivalent if actual rents are coming down shouldn't CPI rent eventually come down as well yes but it really requires owners or actual rents continuing to fall for example if CPI rents did this but actual rents did this well if they continue and CPI basically catches the line you don't necessarily rarely need to get a substantial decrease in housing inflation so tail risk number one is inflation doesn't actually come down whether that's because used auto car prices stop falling rents start Rising again housing costs start going up again because Financial conditions have loosened Medical Care Services basically super core which is like Medical Care Services uh other health care spending stuff like haircuts those are super core Services uh tail risk number one is inflation doesn't come down for for any of those reasons so it's worth writing down what your risks are and and knowing risk number one is inflation doesn't come down now that's the biggest risk especially since more and more of the market is now pricing in this idea that oh yes inflation will absolutely come down so risk number one write it down inflation doesn't drop as much as expected now there are some good things to that in that uh all the Federal Reserve has to do as long as we're trending down trending down down is okay we don't actually have to get to two percent and now this blows people's minds but thanks to flexible average inflation targeting we know the FED has a policy of saying as long as inflation averages two percent over time and this is pce inflation which is generally lower than CPI inflation look we're okay with that we don't actually need to hike uh until the economy is totally devastated and inflation is actually at two percent because we could just say hey we're good with it averaging two percent okay so that's risk number one is inflation doesn't drop as much as expected and if it doesn't Trend down the FED can't pull the flexible average inflation targeting or fate hat out of the um uh you know out of their repertoire so to speak uh the rabbit of Fate can't come out of the magician's hat so to speak now risk number two is is what I call the bury risk okay so this is the bury risk so again if the base case base case is inflation goes bye-bye uh fed stops hiking and creating job losses because they no longer need to if that's the base case then we always want to be aware of where are the blind sides and right now Blindside number one is inflation doesn't drop as much as expected but then tail risk number two is the Michael burry risk now I want to just explain that when we're talking about tail risks a lot of people who aren't in finance might not be able to visualize that so let me kind of draw it for you tail risks have to do with a typical bell curve distribution and statistics and this is basically to say that 50 percent uh the 50 of the likely outcome is is right here and then you sort of have standard deviation moves right so uh we we expect that uh one-third uh you know this represents about 33 percent this represents about 67 percent uh and then you have these tail risks over here that are kind of low likelihoods to happen so this would actually be like uh you know less than five percent chance over here a less than five percent chance over here on the right side right these are your tail risks so your tails are the left tail and then the right tail uh so uh tail risks one of the tail risks I believe that we have is the bury risk and so if the base cases inflation goes by by fed stops hiking and creating job losses the the the other risk is the bury risk which ultimately is yes inflation does end up going down and as inflation plummets what happens we can cut rates just like the market expected remember today the Federal Reserve is expected to hike rates by 25 basis points that's not a big deal the Market's already priced it in the Federal Reserve historically in this particular hiking cycle has matched exactly what the market has expected almost every single time now whether it's the chicken or the egg that comes first doesn't really matter because all it takes is a text message from Jerome Powell uh and Blasting it over uh uh you know to or to a text message to Nick T who then blasts over the internet to really set expectations that's all it really takes right that's literally all it takes uh so you know what uh what again it doesn't really matter with chicken or egg uh whether the FED follows the market or the FED creates the market and then follows it 25 BP is what we're expecting for a hike today that's the boring part what everybody cares about is what the FED does next and sort of projections for what the FED does next bury thinks what the FED does next is it actually ends up following the market and saying we're going to pause by uh potentially May and then we'll end up actually cutting rates by the end of the year even though the FED right now isn't talking about cutting rates by the end of the year the market is starting to price in the idea that the FED could cut rates by as much as one percent by the end of the year and burry's thesis is that okay fine if inflation goes down but then you all start cutting rates then what you'll likely do is induce Financial conditions to basically collapse in other words uh well to become very very loose I should say there are measures of financial tightness Financial conditions indices the higher they are the more tight Financial conditions are which would be higher interest rates lower stock prices that's an example of high or tight Financial conditions and when the chart Falls or collapses Financial conditions are loosening usually people use the Goldman Sachs Financial conditions index to sort of chart that but anyway if Financial conditions loosen and we start seeing rate cuts the thesis is oh okay well everybody's going to go back to spending everybody's going to feel rich again everybody's going to go YOLO into stock options and meme stocks and profitless companies and start creating profitless business models again like stupidness like what we saw with open door or carvana where yeah you end up buying a car through a vending machine yeah because that makes a lot of sense or you try to flip homes and don't consider Market risk and you don't buy wedge deals you don't even buy good deals you just try to flip homes to try to make a commission on actually flipping the homes basically Open Door trying to systematize being a real estate agent it's nutty nobody's ever been able to succeed at it and so this is how these these profitless money losing companies end up growing and really what they are is walking zombies they're zombies that that need to die they're companies that need to go bankrupt and because they shouldn't exist they use Capital that should actually be deployed for business models that actually work and and create a real net benefit to society and so recessions are actually a healthy thing because they end up killing off bad businesses but not only do they kill off bad businesses they end up getting people fired who uh potentially are in excess a product at their at the business they work with him now that doesn't mean they suck but it could mean they suck you know some people they float around in a business because management doesn't want to fire them because it'd be unpopular to fire them or maybe a change workplace culture or whatever even if they suck at their job but in a recession businesses can just sort of mask that under Mass layoffs and a lot of people end up getting laid off some of them were probably really good workers some of them probably sucked at their jobs and needed to be laid off it's that sort of weeding that needs to happen in order for businesses to actually succeed and Society to succeed and and so businesses that suck and employees that suck should go away that's very very typical so the problem is the bury thesis is that because the FED is likely to cut again you could end up seeing all of these companies that were supposed to go bankrupt end up staying around and if those companies that were supposed to go bankrupt stay around and we go back to the speculation that we used to have uh and essentially people start spending money like they're stupid again and there's no real pain in the recession because we don't end up having a recession potentially then what happens we just end up with a second wave of inflation that is uh Michael Burris uh you know essential uh uh thesis is we're going to hav if you look at history which obviously the most dangerous words investing or this time is different if we look back at uh at history what do we find what we find in the 1970s the Federal Reserve was very start stop-ish about what they were doing with interest rates and that created massive problems because it led people's inflation expectations to plummet uh or I'm sorry to Skyrocket I want to clarify that it led people's inflation expectations to Skyrocket unplummit their trust in the the FED plummeted and as people's trust in the FED to control inflation plummet him their expectations for inflation skyrocketed which ended up leading to inflation that ran as high as 20 percent 18 18-ish percent but the FED had to hike rates to 20 percent see the FED uses something known as the Taylor rule uh when the Taylor rule is just basically a formula for suggesting how high should interest rates be and part of the formula is inflation now the Taylor rule falls apart when you have negative inflation when you're in a deflationary environment or a low inflation environment the Taylor rule has kind of been failing it hasn't been that good but now that we have high inflation a lot of people are talking about bringing the Taylor rule back into prominence and the Taylor rule has a bias for always keeping the Federal Reserve rate above the rate of inflation that creates a negative real yield environment right now we're not even there yet and drum Powell himself told us that by the time the FED stops hiking rates uh rates will end up being sufficiently restrictive which basically implies that the FED still has to tighten that it's too early for any kind of pause given that the rate of inflation is in the six percent region uh and the federal funds rate is only at 4.25 percent so again expecting more pain from the Federal Reserve is is what you should expect but again Michael burry says hey if people start thinking that inflation is falling quickly uh then we're we're just going to get back to a speculative spend environment that'll induce inflation the FED will lose any potential credibility that it even remotely had left and in such an event we'll end up with some substantially worse inflation than we had the first time much like in the 70s you had inflation throughout the mid 70s but you didn't actually have the crushing inflation and then the crushing blow of 20 interest rates until 1980 and 81 and 82 when we had a crash in the early 80s because we ended up having to get Paul volckard basically somebody had to put the big boy pants on maybe Jerome Powell ends up getting fired someone else takes his place puts on the big boy pants and says the FED will exert its dominance again and they actually destroy the market and throw us into a deep dark a depression this time and not a recession so that's sort of the the Michael burry thesis now Michael burry has been sort of labeled as somebody who's often more bearish than he is optimistic and that's okay there are optimists in the world and there are pessimists in the world doesn't mean you can't go have a beer with the person just means they have a different outlook on the economy than than you do and that's okay but that's essentially Michael burry's warning is it w the path the FED is likely going going on is one that will end up leading the FED to make a massive policy mistake and so the way to potentially protect yourself in such an environment is you have to ask yourself okay what would happen if Michael burry ended up being right well how much debt are you in uh what does your income look like are you potentially in a situation uh where where you've run out of money uh and you're starting to see the market bear Market rally up and you're thinking okay this is it I'm gonna go all into the market and you're even going to margin and then all of a sudden we do end up in six months getting more of a Michael Barry style scenario playing out and when that gets priced in because the stock market likes to try to pre-price things in well then you're really screwed that's sort of the Michael burry thesis and that's why he's warning and providing this idea of sell now interestingly he is doing so on the eve of the Federal Reserve meeting and that is also leading a lot of people to wonder okay uh why is he so bearish is it because he believes that in order to prevent the michaelbury scenario the Federal Reserve has to be really aggressive today that's possible and so my thesis on what the Federal Reserve does today is I believe they end up walking a tightrope of not trying to sound dovish not trying to sound bearish I think if I were sitting in the Federal Reserve board today I would be looking at drum pal and I was let's say one of the board members and we were having a meeting together or maybe I'm Jerome Powell right it would probably be like all right guys look we know the data is coming in good all right we just had ADP numbers that missed we had the ECI that missed yesterday we've got nothing indicating a wage price spiral we've even got chipotle saying it's becoming easier to hire people now because there's not that much competition anymore for workers and more people are looking for work which is great more labor force participation like everything's going exactly the way we want it guys we're winning we can't F this one up drone yeah I gotta go out there and you gotta hold the straight face and pretend like we just need more of this data that's all you gotta do Jerome go out there and tell the world you're not convinced inflation is on its way to two percent yet You're Gonna Keep tight until you're convinced it's at two percent you're not convinced yet and sure some things are looking optimistic but that's what we expect because we're winning the game but we don't want anyone to think that just because we're winning we're gonna start telling our goalie to go take a coffee break we're gonna fight even harder to make sure we claim the opponents being inflation the opponent right so so that's sort of my impression of of what I would think the Federal Reserve will do today uh and it's really because they're trying to prevent the bury scenario that this uh this idea that everybody's going to go back to spending like drunken Sailors because the stock market starts recovering and maybe the housing market starts recovering and then what happens you end up inducing another wave of inflation so I do not think there's any reason to be optimistic uh highly optimistic about the FED today now it's possible that the market is pricing in that the FED is going to be evil today I don't actually think that is likely either because the FED does not want to create a recession if it does not have to think about it the FED is doing good right now it's sort of like if if you're a military uh let's say the FED is is an army and they're winning the war why pull out the nuclear weapons and create even more long-lasting damage if you're already winning if you're winning just keep doing what you need to do to kind of base or basically just keep doing what got you there which is not going Nuclear So I do not think the FED wants to go nuclear and destroy the economy today so I am not very bearish on the FED today but I am also not very bullish that drone pile is going to be like we're done inflation's over so if your YOLO and calls or yoloing puts I think you might be playing in it wrong today uh I I think maybe maybe a way to to play it is actually you sell scraggles you sell both puts and calls to people who are yoloing on the FED today so you sell a put you sell a call you don't care what direction it goes you just expect volatility to go down now you want to pick stocks where volatility is actually higher this is something we often look at in our course member live streams which keep in mind I did extend uh the coupon code to Friday the third we got quite a few emails of people asking if we could extend it to the third so we're extending that uh final coupon code until 11 59 pm on the 3rd of February but look bury has a very reasonable thesis uh unfortunately for bury I think it's a tail risk I think it's a risk that uh that is unlikely uh to play out uh but uh but it could happen and if it happens then then he's uh you know he's he's made his point and uh and then good for him but again I think it's unlikely ough is this particular chart on screen now this is called the U.S Cleveland fed inflation now index and it's been very accurate at the beginning of the year where it'll actually lead higher CPI changes on a month over month basis so it's accurate uh you know and around the time of February March it was accurate when it projected the plummet in April May it was pretty accurate when it projected the jump in June and July pretty accurate as well when it represented a fall over in August and it also I mean it's been pretty consistent the Cleveland fed line is the white boxes so okay those are the white bar charts and they basically show that the Cleveland fed estimates inflation before CPI or the Blue Line come out so the Blue Line follows the white line well unfortunately the Cleveland fed is now projecting potentially as high as 0.6 month over month uh inflation uh for the next CPI report now they were they were way high uh in October when they were projecting 0.8 percent of month over month inflation but we did end up having inflation rise from about point four percent to about point four five percent on that month of a month basis so true it even though magnitude wise they were wrong they were correct directionally and uh that is leading at least to some concern that probably the most important thing we need to pay attention to is the risk that inflation does not come down that is I think the biggest risk and I think it's actually bigger than the Michael burry risk so this is where I do think having at least some cash on the sidelines is reasonable because I don't think we're going to get a straight down inflation I think uh we're probably going to be in a little bit of a bumpy path but hey you know what uh so far things moving pretty optimistically so things are looking good doesn't mean YOLO but it does seem like things are going in in a good direction and maybe the Federal Reserve can in theory engineer that soft Landing in my opinion the soft Landing is probably more of because of the inflation of jobs data we're getting now the base case scenario where as the potential of inflation skyrocketing again is more of a tail risk and a second wave of inflation is more of a tail risk so but then again maybe I'm being biased uh in an optimistic manner either way I uh this is sort of the Michael burry combined with fed thesis I think it's useful to understand that thesis going into the FED meeting today uh I'm not the biggest fan of thinking the FED is going to be super dovish or super hawkish today uh though uh we'll clearly want to pay very close attention because I think it'll set the stage for uh all of uh all of the our stock market movements really between now uh and the March fomc meeting now uh the March fomc meeting at least right now based on what the FED is pricing in or the markets are pricing in I scheduled for March 22nd so we'll have about a six to seven week break here of no fed which I think a lot of people will be excited about but again the markets will react based on what they expect the federal do in March in March we'll also be getting a new summary of economic projections which we will not be getting today
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