Brace for Impact: Jerome Powell's Rug Pull.

well it's time to brace for impact

because big things are happening this

week and no I'm not talking about the

earthquake that shook me out of my seat

yesterday it was a 5.1 I got an alert on

my Android almost before the earthquake

even hit and then all of a sudden it's

like boom whoa what was that oh it's an

earthquake oh okay Ellen that's kind of

cool actually uh anyway it was quite

shocking uh much more shocking than

hurricane or tropical storm Hillary has

been for us uh but then again Baja

California got the most of it so uh our

heart goes out to the rebuilding they're

going to have to do over there with that

crazy flooding they're getting but we

actually have to brace for impact here

is of course what happens this Friday

which if you've been here long enough

you already know what happens on Fridays

yes Fridays at 705

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Pacific Time or 1005 eastern time that's

when drum Powell will be speaking at the

Jackson Hole Symposium there are a lot

of other things that happen there but

nobody really cares everybody's gonna

care about Jerome Powell and Nick T the

little bird who provides the leaks of

what the Federal Reserve is thinking

about before the Federal Reserve

actually says it to sort of massage

markets has given us a little bit of a

heads up of potentially what to expect

now before we look at exactly that it is

worth noting that the 10-year treasury

right now is up like 9.1 basis points

it's absolutely nuts that the 10-year

trash right now is sitting at 4.34 but

then again if you watch my video from

two days ago this is not a terrible

surprise and might explain why markets

are slightly green at the same time as

the 10-year treasury is at this level

because again people are moving money

into money markets why bother being

exposed to the risk of treasuries when

you could get the same yield on a money

market which is basically where your

money goes to sit in the reverse repo

facility

and if that's offering higher yields and

treasuries why bother investing in

treasury so maybe Bill Ackman at least

in the short term was on to something

here now remember I'm a big fan of

looking at my portfolio from two lenses

number one what is my long-term game

plan and how do changes in monetary

policy affect my long-term game plan

like growth stocks and energy are they

still going to be a play if we're truly

in higher for longer and are we going to

be in higher for longer it's the worst

thing to hear if your bull is higher for

longer however in the short term we know

they're Hedges we can play after all

after Tesla earnings we knew it was bad

news just type into Google meet Kevin

Tesla Bull bad news in short term and

sure enough the stock trades down like

25 I mean that's that's okay there's

short-term trading and we can take

advantage of that just make sure you pay

attention to volatility a lot of people

get the direction right but screw up

volatility and if you don't know

anything about historic volatility

courses link down below but you already

know that okay so let's talk about what

Nick T just talked about so why the era

of historic low interest rates could be

over this is not good okay I don't like

hearing that I personally like thinking

that hey you know when I look at the

five-year break evens inflation is

looking pretty stable to me I'd like

these break evens to go down a little

more here's the five-year break even as

you can see it's kind of trended down

over here on the right I'll hide myself

for a moment it's Trend it down on the

right okay it's not running away this is

the five year forward which is if the

last one is how much inflation is

expected to be over the next five years

2.25 big deal then this is how much

inflation is expected to be five years

out and then five years forward and

that's at like 2.34 big deal okay this

is uh the uh expectation of the Federal

Reserve cutting rates starting in March

uh and getting a whole basis point down

by uh December of 2024. and then this

yet still though is the fed's terminal

rate we are approaching this higher

terminal rate and starting to price in a

little bit of maybe that one more rate

hike at about 10 to 13 percent chance

for November okay great again we don't

want to hear that I mean we got so many

Cuts priced in the last thing we need is

yet another hike and remember what what

matters now isn't hike or not it's how

long bro and this is what we're really

hoping for from Jerome Powell well

unfortunately this is not a good bull

piece this is a terrible actually this

here talks about how what if the neutral

rate of interest is higher see they

write here economists and policy makers

infer this it's this magic number the r

naught the r star neutral rate whatever

it's all the same crap reminds me a lot

of covid and like the spread of covid

whatever it's all fugazi anyway

basically the idea is if borrowing

spending are strong and inflation

pressures are going up then you need to

raise interest rates because the neutral

level is higher than where we currently

are so again inflation up spending up

borrowing up raise rates inflation down

borrowing and spending down lower rates

okay but what about both is it possible

that you could actually have a stronger

economy and lower inflationary pressures

that's my argument is that yes we can

have a stronger economy and lower

inflationary pressures now let's see

what Nick T here ends up suggesting so

Nick T goes on to say that hey there are

potentially reasons to see higher for

longer and that really maybe if we're

still running at over a two percent GDP

pace which we kind of are right now the

Atlanta fed real now GDP puts us at like

six percent annualized which is insane

growth then as Barkin here says then we

have to be higher potentially than what

we thought now of course there's a risk

of a monetary policy lag affecting us

right and that's a problem so why could

this be happening well maybe it's

happening because of what I wrote is

stemmies they say here an increased

demand for savings and investments into

clean energy I personally wrote stimi

which is is hey chips act and uh

inflation reduction act or basically

massive stimulus checks still flowing

into the market and we still haven't

seen that from the point of view of

earnings that like energy companies for

example or chip companies but we'll see

we've got Nvidia coming up but really

these are expected to play out over the

next couple years not over the next

couple months these stemi checks anyway

what do we have here is this idea that

look it is possible though that you

could end up having a more robust

economy with productivity boosting

Investments like artificial intelligence

that end up pushing up the neutral rate

in contrast to a slow population growth

and an aging population that brings down

productivity so in other words there is

this reason to suggest hey like even

though we think the population's Aging

people are going to spend less what if

Ai and retirees spending their savings

actually pushes up the neutral rate

that's entirely possible now Nick T

doesn't really give us a conclusion here

other than saying that Jay Powell has

warned against setting policy based on

estimates of the neutral which he

compares to navigating Celestial Stars

so basically it's impossible to figure

it out but what does this mean for us

well what this means is this Friday is

going to be all about what is Jerome

Powell saying about how long do we have

to be hired we know that he believes if

inflation expectations come down and the

level of restrictiveness we need comes

down we can lower rates but when is that

going to be so what are we looking for

this Friday

hence does he care about the neutral

rate if he cares about the neutral

weight it's bad news

how high for how long I don't think

we're going to get a decision on

November or September I think he'll punt

that but he I think he'll be PR I think

he will lay a road map like he did last

year which last year's Jackson Hole

tanked the market because he laid the

road map that thinks that there was a

lot more work to do well now it's been a

year it's been an entire year so j-pow

please give us a clear path of hey just

give us something like as long as

inflation comes in under three percent

we want to see flexible average

inflation targeting we're comfortable

lowering rates because we don't want to

see joblessness that's going to be the

key is he going to want to see

joblessness or is he okay with the

economy running hotter because the

economy is running hotter right now some

sectors are weak like Freight but if he

says that he needs the economy to weaken

below GDP measures we have now whether

it's fugazi or not we're in for a crop

show and brace for impact so again if

you need jobs joblessness to go up if he

needs the economy to slow below two

percent both of those are a problem they

haven't happened yet and if he mentions

the real rate those three things mean

we're screwed