The Great Fed Flippening JUST Happened

there's potentially another flip-flop

happening at the Federal Reserve and it

has huge implications for you if you're

in the stock market now yesterday I

posted a video on a lake

and if you go back to that video and you

listen to what I said six minutes in

you'll find something very important I

suggest that within six minutes into the

video I suggest the Federal Reserve

might let us know that

they're going to be more impatient or

they're going to be more patient with

inflation because they don't want to

cause as much economic hardship to

employment in other words they don't

believe that they actually have to crush

employment to get inflation down well

when I woke up this morning and I read

this I just about uh freaked out because

here's an article in Bloomberg

that literally reiterates the maybe I

talked about yesterday and I'm

absolutely Blown Away listen to this

fed backs away from wage Focus

bolstering case for rate pause and I'm

like you've got to be kidding me the

very next day I'm not trying to Pat

myself on the back I'm just trying to

say like this this is obvious If the Fed

stops trying to crush employment

then the FED will not hike again this is

potentially highly incredible and and

almost certainly then if that is true

the end of the cycle so listen to this

Federal Reserve officials are rethinking

their view that wage gains are fueling

inflation a key intellectual shift of

flip-flop that bolsters the case for a

pause in their tightening campaign now

this is important they don't give this

context but there's something known as

the Phillips curve and it's basically to

say that when inflation is or sorry when

when unemployment the unemployment rate

is low so in other words a lot of people

are employed well inflation should be

high that's the idea of the Phillips

curve and the Phillips curve teaches you

that if inflation is high you must

increase unemployment to lower inflation

that's the point of the Phillips curve

this ability to sort of one up to

get the other one down that's the thesis

if you have too low of inflation then

you want to get to maximum employment

that is the the principle behind the

Federal Reserve uh in and their rate

hike thesis one of them at least

and so the Phillips curve has been

relatively broken for the last about 13

years because if you look at about 2013

uh well so maybe last 10 years 2013 to

to just past covet you've really found

an even until now you've really found

that unemployment could be very very low

without causing substantial inflation

and this has led to a lot of economists

wondering okay so is the Phillips curve

dead is it broken was was it never

actually accurate in the first place

and more recently uh you're finding well

it's probably going to be true again we

just needed an inflationary impetus to

prove that it was true but now

economists especially at the Federal

Reserve are scratching their head again

going but what if the Phillips curve was

never correct in the first place what if

we can actually have low unemployment

and then High inflation for a period and

then come back to low inflation this is

pretty incredible because listen to how

this continues until recently many

policy makers at the U.S Central Bank

maintained maintained that a the road to

lower inflation ran through the job

market the idea was that because labor

costs make up a substantial portion of

the cost of providing Services an area

where price pressures have especially

been persistent or been especially

persistent workers would need to feel

some pain and so this is another very

common argument especially when we talk

about core inflation and services

inflation so you're more Super core

inflation with your more Super core

inflation what you're actually saying is

hey look super core is really focused on

Services services and stripping out a

lot of the goods the volatile Parts like

some of the auto sales the housing

sector stripping out the uh the energy

inflation figures we take all that out

and what we're left with are the things

that we really spend money on that

require labor which are going to be

things like haircuts dentists CPAs

Medical Care Services doctor Services

Attorney Services funeral services right

these are all relatively labor intensive

and so what you find is if you have

super low unemployment there's this

thesis that okay well that's going to

drive inflation up right because people

feel like they can just switch jobs and

get higher pay and that has been true

for a very long period of time

especially since there have been so many

available jobs and the argument has been

that's clearly what's driving inflation

but now economists are somewhat

flip-flopping and they're suggesting no

maybe maybe that's actually not the case

in fact the article goes on to say new

research and commentary from officials

and economists especially at the FED

suggest a link between the link between

wages and prices may not be so direct

and it's arriving just as the FED is

nearing the end of its historic hiking

cycle if the link between wages and

inflation isn't as strong as policy

makers believe then you do run the risk

of solving the softening the labor

market without seeing much progress on

inflation now yesterday I suggested that

we might end up having a Federal Reserve

that says look we don't necessarily need

to end up causing unemployment and that

is what I think so incredible is this

idea that if the FED comes out you know

in two days and says we're okay keeping

people employed and not throwing people

out of their jobs and at the same time

we can be patient with getting inflation

down then we have a massive Game Changer

ahead because markets are not pricing in

the FED being unwilling to let

employment or unemployment rise in other

words markets were pricing in that the

FED is going to cause unemployment

That's What markets are pricing in and

that is the basis of the bear thesis

because the Bears believe once we start

causing unemployment we're going to have

an earnings recession but wait a minute

if the FED changes the script and says

wait no we don't actually need to cause

unemployment first of all the Bears are

going to lose their sh-19

because we're going to realize oh my

gosh

the whole narrative that we've been told

which is the fed's going to cause

unemployment will end up being false

that's remarkable and it's especially

remarkable because of the following so I

was debating this bear and then we'll

keep going with this piece here I was

debating this bear just the other day

and uh it was well I guess I shouldn't

oops that's the other thing I guess I

shouldn't necessarily call it a debate I

would call it more of uh me asking some

pointed questions we'll put it that way

uh the reason I ask these pointed

questions is because uh this person has

a bearish tilt I think they're very

educated I think they're very smart and

they have very good arguments but I do I

think they very clearly have a bearish

tilt uh and that's okay so so they make

this argument here lots of comments

about bears being dead lately I think

what people are forgetting is something

broke in the system the regional banking

system fed forced to inject liquidity

via the bank term funding facility uh

and uh and markets bottoms since then

and have been higher since you know the

end of last year now what's interesting

is markets are higher because of the

wealth effect or driving the wealth

effect higher rather which you'd think

would reignite another round of

inflation there have been slight cracks

in the job markets and a sign that the

economy is slowing but people's assets

are up so people have more money to

spend and overall the job market has

been relatively resilient so basically

buried into this argument is is this

idea that hey look you need to cause

unemployment because the jobs Market has

been resilient and people's wealth is

going too high and that's going to cause

inflation now my personal counter to

that which is sort of more of a tangent

to where I want to get to my argument to

that is obviously check out the coupon

code linked it down below because we

have a big expiration coming up this

Friday which is after this crazy week

but this Friday we'll be uh having

another coupon expiration mostly because

we're going through the the starting

phases of a new refresh of adding a ton

of lectures we're going to keep the old

lectures for adding a ton of new

lectures to make sure people get a great

start in all of the courses so we've got

some really cool updates coming from

those but really built into this

argument here is the the thought that if

we don't cause wage loss or sort of job

loss then people's wealth will be too

high and will cause inflation the

counter to this is well look at 2012

really to 2020. we didn't cause

inflation solely because people's wealth

went up right so there's not a direct

link between I would say the stock

market necessarily always driving people

spending up and causing inflation the

wealth effect has a larger effect on

consumer spending when it comes to real

estate prices but even then

can if our economy can absorb that

additional spending that is because

Supply is becoming more efficient or

becoming more productive as workers and

we don't necessarily cause that

inflation so now what I think is

interesting is actually I'm not trying

to Pat myself in the back here but I end

up I end up replying with hey so to

clarify you're basically saying the wage

effect is going to lead to higher uh

higher spending uh and therefore a

higher propensity of businesses to raise

prices right and so uh the response here

is without Demand Being crushed

inflation will remain sticky and

elevated the wealth effect is driving

assets higher and that keeps the

stickiness going and so the stakiness

argument is probably at this moment one

of the most powerful arguments the Bears

have which is that as long as inflation

remains sticky the fed's gonna have to

have to act harder and raise rates more

now I dispute that because I believe the

Federal Reserve does not actually have

to raise rates more I believe the FED

could actually say look we're happy with

rates where they are and what we'll do

is we'll just we'll just wait for that

stickiness to go away unfortunately only

for really the Bears if if the FED just

Waits For That stickiness to go away

well then what you end up with is a

situation where patience prevails and if

patience prevails that sticky inflation

will probably Trend away uh without

crushing markets or employment but my

favorite response here was actually

where's my chart I had a little chart

that I replied with oh maybe it wasn't

actually in this reply oh here it is

okay uh so I wrote and services

inflation is still sticky that was sort

of my I was summarizing his argument

pre-summarizing his argument and uh and

so then I asked him I go you know how

much fed patients do you think markets

are pricing in right now because take a

look at this chart this chart here shows

that U.S wage growth continues to soften

but what I really want you to pay

attention to when we look at this chart

when we blow this chart up that I posted

on Twitter follow me on Twitter by the

way at realme Kevin uh when you look at

this chart closely what you'll actually

find is that it peaked it right at the

beginning of where that 2022 number

starts so Jan January of 2022. well

inflation didn't Peak until six months

later which suggests that if there is a

link between wage growth and inflation

what will actually end up seeing is a

six-month delay and if you look at this

chart you can see we've had the largest

declines most recently in wages which

somewhat suggests that if the largest

declines in inflation have been res or

in wages have been recent then the

largest declines in inflation are yet to

come

so this really coincides potentially

with this flip from the Federal Reserve

on hey you know what we're going to be

more patient we're not going to force

a job loss because why would we cause

job loss if we don't have to if we could

just let the Dynamics of basically

inflation prove itself to end up being

transitory by being patient now don't

get me wrong when I say that there are a

lot of people say oh but Kevin they were

wrong the last time they were that is

correct but that doesn't mean they have

to be wrong twice in a row now there's a

chance of that of course where jaded

against the FED at this point remember

last time they were still printing money

in March of 2022 when inflation was six

percent that was stupid my

seven-year-old knows you don't still

print money when inflation is six

percent

but that's what happened anyway so uh so

looking forward when you overlay and

this is an interesting chart as well

when you overlay what's actually

happening with inflation

and you overlay that with what's

happening with wage growth you could see

this a little bit more clearly so I'm

going to throw this on screen here and

that would be uh well hopefully it

actually ends up appearing so I'm having

a little bit of an issue getting getting

it up at the moment hold on a sec it's

supposed to be there but it's not

okay I will plug that in again but

basically it just overlays inflation

coming down with uh wage growth coming

down and uh the argument is that okay

well if both are slowly trending down

then maybe we don't need to raise rates

more this article continues and also

suggests that the prospect of oh here it

is I finally got it to show up oh how

interesting it's um

it's presentation mode is a little funky

but you know what

um

that could end up being okay so we'll

just go with it I think we'll just go

with it yeah it's just showing the whole

presentation mode which is usually it's

cleaner and just shows the picture but

whatever so anyway so here you have that

U.S wage growth inflation slowly

moderating and we want this moderation

to continue here on the white line

You'll see U.S average hourly earnings

right here and we can see we've notched

the lowest level here at the lowest

advance of wage gains in the last 12

months so we could see we're really

seeing this moderation happening uh slow

slowest advance in nearly two years

actually look at that nearly two years

you have the slowest advance in wages

here and then the blue line is inflation

and you're actually what you've seen is

you've seen this decoupling right so you

see this inflation uh right here this

blue line and you see this wage growth

wage growth actually falling and

decoupling away from inflation uh that's

actually quite remarkable because again

it's reiterating this idea of wait a

minute maybe wages aren't what's

actually driving inflation maybe this

really is a supply or was a supply chain

issue uh anywho so that's a pretty big

charm but then there's this idea that

okay well you know uh what about you

know the banking crisis or how is this

going to affect jobs in general and this

article goes on to say that uh initially

while we thought really cooling the

labor market was important this article

points out that in just the last cycle

in the last of in the May meeting Jerome

Powell in his press conference said the

following quote I do not think that

wages are the principal driver of

inflation I think wages and prices tend

to move together and it's very hard to

say what's causing what Powell's remarks

alluded to a crucial question in the

emerging wages versus prices debate or

wages a large driver of inflation or is

it more likely to be the other way

around is inflation a driver of wages

and this is fascinating because it goes

back to the argument of the wage price

spiral the thesis used to be that if

wages go up people will be able to spend

more money because they can spend more

money businesses uh can end up demanding

more money and then wages go up again

because now because businesses demand

more money hence there's more inflation

you end up getting employees going well

too that I can't survive I need to I

need I need more pay maybe that argument

is actually entirely flawed maybe what's

more likely to be true is

hey uh a lot of people have more money

and they're buying our crap a lot more

and business is doing really well and we

actually have supply chain shortages

leading to price increases but that's

leading to profits rising at businesses

he uh how about letting the employees

share in some of those wage gains

employees get wage gains then the supply

chain shortages go away and profits stop

growing as wildly and what happens oh

wow maybe wage growth plummets so maybe

wages don't actually drive the prices

businesses are setting maybe it's really

just demand okay interesting so anyway a

new research from within the FED system

also supports this thesis a statistical

analysis suggests

faster wage growth has contributed quote

only minimally to faster inflation in

recent years according to a column by

the San Francisco fed

the columnist noted that businesses can

absorb those costs via lower profit

margin or using automation this is when

wages go up uh businesses can basically

absorb those with more productivity or

why that whatever rather rather than

solely uh continuing to raise wages

before the pandemic

often groups often referred to pay bumps

as basically the start of inflation but

we've really not seen that inflation uh

let's see here we also oh this was a

good chart as well then they go into

this chart on small businesses and uh

wage gains there we go I fixed the iPad

in the meantime take a look at this

fewer small businesses plan to boost pay

sheriffs companies actually raising

wages remains elevated so in other words

you have the blue line indicating net

percentage of small businesses raising

wages uh or sorry that's the white line

and then the blue line is net percentage

of business uh of businesses planning to

raise wages in the next three months so

you have this differential of basically

hey have you raised wages versus are you

going to raise wages now I'd really like

to see uh Bloomberg or somebody do is I

would like to see this chart

for companies like uh Pepsi and uh

Kimberly Clark and Procter and Gamble

and basically your Consumer Staples

where they keep bragging about having

raised prices but I actually think the

chart here is very much the same where

you have a lot of businesses who have

just raised prices or year over year

have raised prices but the number of

businesses planning to raise wages going

forward or companies planning to raise

raise prices going forward is much lower

than those who have so I'd actually

think this is quite a fascinating chart

because it really shows you that

difference additional additionally they

have some quotes in here about how

there's this mismatch between mapping

inflation and wages and I think that

really just goes to reiterate some of

the things that we've just talked about

but I want to talk about some of the

implications of of what this Federal

Reserve policy shift could mean and

specifically how we might identify it in

the fomc conference so first of all if

the Federal Reserve suggests that yes

indeed we are willing to let uh the

unemployment rate stay low because we

don't believe that the unemployment rate

causes inflation then what the FED is

really doing is they are telling you hey

everyone

we're not going to force a recession

in fact we think that inflation can

slowly go away without causing

joblessness

and your songs are going to go up

that I think is in the most clear

English what this fed flip-flop could

mean now I understand there are these

traditional arguments uh for example

somebody who takes this argument very

clearly is actually somebody I met on a

playground which sounds very odd uh but

but chamoth has this sort of

traditionalist argument of we need to

see the Federal Reserve absorb liquidity

we need to see the the Federal Reserve

continue with their quantitative

tightening and basically all of that

money that was injected into the the

system needs to be sucked out and that

sucking out is going to drive markets

lower you know trimath has been a very

big proponent of sort of not being in

the market not being exposed to a

quantitative tightening regime because

we don't know the outcome of

quantitative tightening uh and this is a

very fair argument because technically

he should be correct

but he might not be correct because when

we look at the first sort of real

drawdown of uh of refilling the treasury

general account for example last week we

look at this first real liquidity

drawdown what ended up happening well

what ended up happening was and again

I'm not trying to Pat myself on the back

it was just a very clear prediction what

ended up happening was what we talked

about

the reverse repo facility saw its

balance go down and we saw the treasury

general account go up in other words

some of this quantitative tightening

that everybody is afraid of is really

being buffered by the uh the repo

facility now so what is the repo

facility and like you know explain it to

me like I'm five basically when banks

have extra money bags sitting around

they can put those money bags at a

special place and we call that

the repo facility and the amount of

money bags sitting there is roughly in

the amount of uh two trillion dollars

which is pretty remarkable because it's

a lot of money and we just saw reverse

repos drop about uh

uh let's see here I'm trying to pull up

a chart of reverse repos if I can but we

we just saw the the reverse repo

facility drop about 106 billion dollars

as the TGA the treasury general account

was being filled up and it's not a

surprise because you can actually make

more money buying six month t-bills

right now that you can make in the

reverse repo facility uh and so what's

great about this is is really another

way of saying that the Federal Reserve

can uh

can allow this tightening to occur and

all we're really doing is removing some

of the buffer that banks have we're not

necessarily taking that away from people

this is phenomenal so really you're in

this I hate to say it but like

potentially giddy scary Goldilocks

environment where we don't cause massive

unemployment we therefore don't cause a

recession or if it is a recession it's

very nominal

quantitative tightening doesn't actually

hurt us because the reverse repo

facility buffers us once the reverse

repo facility draws down to zero which

will take a very long period of time and

we consider even if you're you're

tightening to the tune of a 100 which

you're not you're kite into the tune of

about 80 billion dollars a month but

let's consider along with treasury

borrowings it's 100 billion dollars a

month it would take you 20 months to

draw down the whole repo facility 20

months of drawdown is is basically just

over a year and a half a year and a half

from now will be in 2025. the economy

could be so beyond a recession that any

of the actual impacts of tightening

might not matter or at all at that point

at that point it's like sure go ahead

and tighten don't worry the party's

still going so again I'm not trying to

come across as like this this Perma Bowl

I really am trying to study the Bears as

much as possible and I'm trying to

understand what you know what what

everything is happening in the economy

and it's very difficult to put it all

together but when you start putting the

pieces of the puzzle together you go wow

If the Fed on Wednesday

reiterates their shift away from causing

unemployment first of all that'll be

very politically popular and you're

going to get a lot of uh people alleging

that Janet Yellen and Joe Biden gave the

uh you know Mr J Powell a little phone

call and they're going to put their tin

foil hats on and they're going to make

the argument that this is all

politically motivated to ensure that

Donald Trump can't be elected you know

that's that's the argument that's going

to be made Trump by the way goes to

court tomorrow in Miami at 3 P.M but

anyway aside from all that it's it's

interesting because it seems like the

the folks peddling the bear narrative or

grasping at straws and I'm not

suggesting there won't be a Black Swan

but let me just put it this way I don't

think right now other than the inverted

yield curve there's so much terribly

scary and this flip from the FED really

reiterates that potential and it's kind

of mind-blowing to me uh kind of

mind-blowing so I'm I'm I want to be as

I say the cautious Optimist but the more

studying we do and I think together the

more we we discuss this the more we

start realizing the FED is not trying to

destroy this economy and that is going

to be statistically very very good

for the stock market

which is also quite strange because

it doesn't feel like we should be

hitting you know all-time highs over the

last year I guess that's that's one year

high so it's on all-time Highs but soon

enough we will probably surpass November

of 2021

and uh I think people are going to lose

their mind if the stock market surpasses

November of 2021 and goes back to sort

of this euphoric area era uh without

some kind of recession first uh but uh

you know what

I'm here for it

so uh yeah uh with that said have I

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below that I really wanted to point out

is actually a new one see this uh this

Divine well actually the camera that I'm

filming on and I'm still playing with

some of the settings on this so I still

have some learning to do uh but what's

really incredible is uh I have this

little thing called an insta uh what is

this thing called I don't know just go

to go to

metcaven.com webcam and so I have this

new camera that will actually follow my

head where I go uh you can see that and

so I have my hands free right here

and this camera will actually follow me

uh where I'm going oh I just I disabled

it by doing visual commands so you can

actually also disable this with visual

commands like I could put my finger up

like this and then it flashes blue to

acknowledge me uh and then hold on let

me make sure I'm doing it right

something to this effect and then I

should be able to is it going to work

somehow uh that's probably oh there it

zoomed in a little bit it's on it's on

face tracking so I saw it zoom out again

right away but the point is you could do

like these hand signals and I'll zoom in

and out I really think the face tracking

thing is pretty pretty cool though

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um it just keeps you centered in here

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around uh you know I don't want to cause

anyone queasiness but it's really cool

uh device so uh check that out uh

metcaven.com

webcam it's probably I would argue the

best webcam that I've used and I've been

traveling quite a bit I think I've tried

about

five different webcams there was

actually a point where I just resigned

myself to using the Mac webcam but then

I was in New York and I had this massive

glare and I couldn't get rid of it

because it's the computer webcam and I'm

like I need to I need to get a better

camera so I finally did and here it is

met kevin.com webcam all right so um

that concludes that uh that Fred piece