I'm officially changing my market strategy

Okay, so I think it's a good time to go

over the market again. Let's go over the

latest data that came out. February

month over month CPI was at 0.3% versus

0.3% forecast. February earn CPI was at

2.4% versus 2.4% forecast. January month

over month quarter PCE price was at 0.4%

versus 0.4% forecast. January earn

quarter PCE price was at 3.1% versus

3.1% forecast. and February month

overmonth PPI was at 0.7% versus 0.3%

forecast. Now, while the data that came

out was somewhat within the expected

range, February PPI was relatively high

versus the forecast in the last period.

The main reason for this was due to the

B2B service cost which hiked their

annual contracts at the start of the

year and the delayed pipeline pass

through of early 2026 tariffs. Now on

the inflation data, you can reasonably

expect it to go higher in the following

months given the war and energy prices.

Now FOMC meeting happened on March 18th

and the Fed kept the rates flat, keeping

the interest rate at the range of 3.5 to

3.75%.

Now Paul did say a few things, but let's

keep in mind the market doesn't really

care what Paul is saying anymore. He's

clearly a lame duck and whatever he says

will have lack of continuity, so the

market doesn't care. Nonetheless, the

overall tone was that he doesn't know

what will happen in the future given the

war and the tariff and etc. Here are

some quotes from Paul during the press

conference. The implications of events

in the Middle East for the US economy

are uncertain. In the near term, higher

energy prices will push up overall

inflation, but it is too soon to know

the scope and duration of the potential

effects. The thing I really want to

emphasize is that nobody knows. The

economic effect could be bigger. They

could be smaller. They could be much

smaller or much bigger. We just don't

know. Total core inflation is about 3%

and some big chunk of that between a

half and 3/4 is actually tariffs. The

question of whether we look through the

energy inflation doesn't really arise

until we have kind of checked that box

of reducing tariff driven goods

inflation. So basically he's saying he

doesn't know what will happen. Now the

Fed did indicate their view on the

interest rate trajectory. They're still

forecasting one rate cut within the year

and the projections came out indirectly

through the dot plot. Okay. Now that's

the overall news headlines which came

out in the past few weeks. Now

specifically on the market, there are

three things that is impacting the

market. Number one, the war, number two,

the Fed. And number three, Trump. So

let's go over each of them. First on the

war. Now the war started in late

February. So it has now been about 4

weeks since the war erupted. My view on

the war is very simple. It is now a

stale news. Historically, when the

market is impacted by a war, it

generally becomes stale after a few

months. Let me give you a few examples.

The Gulf War in 1990s started in August

1990, which led to around 17% drop in

S&P 500. However, the market recovered

after 2 months. Iraq war started in

March 2003 and the market fell about 15%

but recovered within the year. Russia

Ukraine war started in February 2022,

dropped by about 7% but recovered after

around a month. Now given the market is

now acting faster than before, we need

to assume that the war is now on a stale

news and the war itself is not something

which the market will care that much.

What really matters is not the war

itself but the side effects of a war.

I.e. how longer the energy prices will

stay high and how much higher CPI it'll

translate to. Just like how it led to a

significant rate hike in 2022 due to the

Russian Ukraine war and the massive QE.

Now for this war, Brent oil recently

spiked back above $110 per barrel. Wall

Street consensus dictates that every

sustained $10 increase in oil adds

approximately 0.2% to 0.3% to headline

YCPI.

So the message I'm trying to convey to

you is this. Stop thinking about the

war. The war itself doesn't carry much

meaning anymore. Let's just think about

the inflation. Whether the US has more

missiles or whether it started an aerial

assault in the Persian Gulf, these

things are starting to matter less

anymore. We only need to care about the

strikes or movements that impacts the

inflation. That is all we need to care

about the war at this point. Now, on the

Fed, as I said before, the Fed is rather

[clears throat] trapped. Now, the

primary reason the S&P and the NASDAQ

fell by about 7% and 10% from the

all-time highs is mainly due to two

reasons. Number one, the market is

already pricing in two or more RAS

within the year. And number two, it was

expected that the inflation will stay

flat at the minimum, but it has now

potential of ripping higher. In the

latest statement, the Fed indicated that

they're now only predicting a single

rate cut within the year, which

disappointed the market. Now,

personally, I'm actually surprised that

they think even a single rate cut will

be feasible, but it is what it is. Now,

as I tell you guys all the time,

interest rate is the fundamental basis

of valuation and a mismatch between the

actual and the expected interest rate

will generate disappointments as the

discount rate of the cash flow will be

higher leading to a lower valuation of

stocks. So, this was the first reason

the market dropped. Now, the second

reason is the inflation expectation.

Originally, the CPI was coming out at

between 2.4 to 2.6% which was showing a

stable trajectory for the past few

months. However, given the uncertainty

surrounding the tariff and the war, the

market is now expecting the CPI to

become higher. Now, let me give you a

couple of scenarios based on the

consensus. If oil drops back to $80, CPI

will most likely peak at around 3.0% Y

in May due to base effects, then resumes

a downward path to around 2.6% by year

end. This is a happy scenario. If oil

stays at $100 plus, CPI will rip back to

over 3.5% Y by July and August. Now, in

this scenario, the Fed's projected one

rate cut is certainly dead and the

market starts pricing in a potential

hike. This is the worst case scenario.

Now, as I said, if the Brandon WTI stays

at over $100, the CPI will inevitably be

at 3% or more on a Y basis. Now,

obviously, the CPI is on an earover

basis. So, if the oil price stays at

$100 or higher for more than a year, the

base of the year-on-year CPI will

already have been elevated leading to a

lower inflation down the road. However,

for that one year, when the CPI remains

high at around 3%, the market will be

impacted. Now, the market is pricing in

this uncertainty at the moment. Now, if

Kevin Wor comes into the office, as I've

been saying all along, it was already

obvious that he'll refrain from

expanding the Fed balance sheet. But now

it has become even more clearer. A QE or

any balance sheet expansion of any kind

is quite remote for the time being.

However, on the interest rate cut, it

may happen. But given the circumstances,

more than a single rate cut is unlikely.

Now, given the circumstances, may FOMC

meeting will be extremely important. Wol

should try to calculate the impact on

the CPI from the war and also try to

calculate how much deflationary impact

AI will have and announce his views

after he becomes the chair. Now, the

reason the market is somewhat falling

less than it seemingly should is really

because of this. They're all waiting for

worse to come on board and give his

views. If his views are relatively

negative and skewed towards more

inflationary pressure from energy

prices, the market will panic. If it's