Inflation & What the Fed JUST Said

hey everyone in this video i'm going to

talk about what the fed said today and

what it has to do with

inflation and some research i've been

working on okay let's get right into

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folks let's get into this so first

things

first inflation is obviously

massively debated right now how we

measure inflation is massively debated

uh the fact is we've printed a lot of

money but the velocity of money has gone

down so it makes sense that money is

circulating less

but it is also a fact that lumber prices

hit a record high today

uh when they've consistently been

hitting record high that uh record highs

that copper prices are uh up like crazy

we're

talking 50 60 wheat prices are up i mean

you look around

used cars new cars everything

is up with the exception of maybe like

apparel

okay apparel's down big deal but a lot

of prices today

are up substantially and they're

increasing substantially

and the fed's argument is obviously that

these increases are due to supply

shortages and total shifts in demand

and expectations all brought on by covin

and in some sense it makes sense

when you get a pandemic and it totally

changes the way we do business and even

think about doing business

we need less of some things and much

more of other things and it

totally changes and screws up everything

instead of people needing work computers

they now need more

computers at home which changes chip

dynamics when we think oh the pandemic's

gonna stop people from

buying cars and people are going to be

spending less because there's going to

be this big long recession

and people stop producing chips but then

all of a sudden we get the larry cutler

v-shaped recovery

we start buying chips again really fast

and potentially even more

than we had before because

cryptocurrencies are going to the moon

you know it kind of makes you go oh yeah

that's definitely going to screw up some

supply chains because well that's pretty

much exactly what's been happening

so what i wanted to do is digest a

little bit of what the fed said today

but then also try to look at history a

little bit

uh the easiest way to look at history is

kind of just look at what inflation has

done

over the last 100 years so uh take a

look at this right here

this is the last 100 years sort of a

chart of

of inflation here uh this is from

tradingeconomics.com they've got a

really nice

long chart here one of the neat things

about this is it really shows us that at

the turn of the century

we actually had deflation this line

right here is sort of a deflationary

period of time

and that we were really struggling to

even see inflation

we had uh spikes and bouts of inflation

especially

after uh world war ii uh we saw this

massive dip

during the great depression we also saw

a really massive peak over here around

1948

49 as we had a recession but what's

fascinating is

with the exception of this sort of

1948-49 peak

and the exception of what happened after

1970

when we left the gold standard we really

haven't seen

hyper inflation in the united states so

for example if we take out

the gold standard mess up over here and

these wage and price controls that were

implemented by nixon if we take that out

over here

and uh we you know we take even if we

leave this spike in over here whatever

leave this out

remove the gold standard removal here

and the nixon error remove that for a

moment

what we notice is that inflation

historically stays

pretty dang on average low you know

folks like to say oh this is the great

moderation right here since the 80s

that inflation only recently has had

this phenomenon of being low

and that lately we're all freaking out

and complaining about this

this this little line right here this

movement up and then maybe that line

will go to oh no three percent

or maybe three and a half percent for a

couple months and maybe it'll

maybe it'll stay three or four percent

uh i'm not sure if it'll actually go to

four percent but maybe maybe we'll stay

high for for a few months consistently

uh and then then the big question is

which way is it gonna go well

if history has any guide it tends to

vacillate and tends to go up and down

but it tends to rotate down

after even temporary peaks in fact when

we look at any of the peaks of inflation

we've had

we've never had consistently high

inflation we've had very very short-term

bouts of

high inflation high inflation with

elevated inflation

over here right i mean these these are

potentially years right here where

you've got inflation sitting around six

seven eight percent

but the peaks over ten percent

relatively short in duration

something that i did find very

interesting as well that somewhat

relates to

the burst in spending that we've had

here with uh temporary spending which is

very much what we have right now we have

temporary let's spend big on

a stimulus let's spend big on

infrastructure and then ideally stop

spending right we get this short-term

bout of spending

fix what's broken uh and then ideally we

stop spending if we keep spending

spending it becomes a problem but a

period of time in history where i found

we had a burst of spending

not necessarily something crazy like

getting off the gold standard or a war

but a period of time where we had a

burst in spending

and it was a short term it was a

temporary boost in spending

uh what happened afterwards was sort of

a little strategy that i was looking for

and so what i found was uh right here it

was a

in a period of around 1948 49 after that

recession

after the korean war ended 51 52

we actually saw uh this very very

moderate period of inflation over here

uh inflation bobbing around short term

deflation right here

inflation around two three percent

dropping

to one one and a quarter percent for

almost a decade here

and really not rising again until 1969

where inflation ran up

to about five percent and so we had this

really a period this

period here of low inflation and uh the

question was okay well why

why did we have a period of low

inflation in the 1950s and

the research that i was doing at the

time was mostly

we had this period of low inflation

because of globalization

uh better partnerships with the world

after war

able to develop in other countries or

export our goods to other countries

or reduce costs by working with other

parts of the world

technology and technological deflation

the start of tvs and radios and things

that

reduce expenses in our life to make

things easier

and we really saw this burst of spending

followed by a period of of real calm uh

so bursts of spending from korean war

followed by a period of extreme calm in

inflation

and it really wasn't until what happened

in 69

to 71 when we started having wage price

controls where

prices were artificially limited uh and

when those limits were removed we saw a

surge in inflation

then we left the gold standard another

surge in

inflation because these artificial

limitations were that were imposed

in the late 60s were all of a sudden

removed and so we saw this sort of

unleashing of this great inflation

and really this was the result of a

manipulation a manipulation of

leaving the gold standard a manipulation

of having

purposely tried to keep prices down over

here in this late 60s era

but short of these manipulations when we

remove these manipulations

we we had a really incredible period of

no inflation

where we didn't have a war and

this war ended the korean war ended so

we had the inflation sort of driven by

war going away

and then we really got to this period of

normalcy and

inflation which is very much similar to

what we've seen for

the last 30 to 40 years

and so this belief that oh my gosh

there's going to be this

hyper rampant inflation is a little bit

challenged by history that sure is it

possible we're going to see some

elevated numbers that that go high on

this chart four or five percent we see a

spike here

yeah but history shows it will tend to

go back down short of crazy manipulation

in in prices like things purposely

trying to keep prices down

now in an interesting way some might say

hey

well we have manipulation and the fact

that the government is printing but this

isn't

trying to manipulate by keeping prices

down this is just the government's

printing money and that's one of the

things well

the government does very very well we

know that uh and so

looking at this chart yeah we might say

hey well it's all the money printing

that's happening

that's what's going to cause massive

rampant inflation

we're going to see one of these spikes

again well even if we were to see one of

these spikes and we saw

you know a 10 15 inflation or even the

inflation that we saw in the 70s which

was a period of time where the federal

reserve was very passive

they were very very slow at reacting to

inflation we don't expect them to be

slow at reacting to actual inflation

again

or or persist in inflation i should say

not actual inflation

we expect that the fed has has hopefully

learned we wouldn't actually expect

these

spikes to last long if we had them so so

history gives us that bottom line

history gives us

the bottom line that absent artificial

and massive changes like purposefully

trying to limit price growth

uh and then seeing the balloon pop on

that or purposely getting off the gold

standard or war

short of those things we didn't really

see massive

inflation even when we've been doing

insane money printing from 2010

before the covet pandemic we didn't get

massive inflation qe1 qe2 qe3 qe

infinity

we haven't seen massive inflation it's

bizarre it's very very bizarre

and so this kind of brings up some of

the things that the federal reserve said

today and i'm trying to put this all

together here and

decide okay so what what the heck is

actually happening here

so the federal reserve today multiple

members had a few things to say

charles evans for example charles evans

he's the

chicago bank president of the federal

reserve uh something else that's unique

about him is he is also a voting member

of the

federal open market committee which

helps set interest rates uh and he said

today quote the fed still has quote

some ways to go before we reach our dual

mandate goals of maximum

and inclusive employment and inflation

averages two percent

for now the policies are likely to hold

for some time so usually sometimes it's

three to six months

aka no taper announcement yeah not even

thinking about it

but he also goes on to say and this was

another step further here he goes on to

say

i personally think that the achievement

of sustainable inflation averaging two

percent

is a lot harder than people think okay

so let's try to register that for a

moment

the achievement he's saying inflation is

an achievement if we can get inflation

it's an achievement

the achievement of sustainable inflation

averaging two percent is

a lot harder than people think and he

goes on to say and so i'm not in a hurry

in any way to have that discussion

about pulling back on asset buying it's

really weird

it's counter-intuitive but when we look

at the chart

it kind of also makes sense it's been

hard

to consistently remain at two percent

even back in the 1950s and 60s

we had a very hard time having

persistent inflation in america

even back in the world war era we had

massive spikes in prices due to war

and shortages caused by war guns and

butter right

but they were short-lived very

short-lived periods

let's go on to some additional quotes

here we have charles evans going on

to say that when that there are fears

that when the economy reopens

and begins to work again that inflation

might spiral out of control

even as we get through those inflation

or those supply shortages

he says quote i would not be concerned

about inflation moving persistently too

high

unless we saw quite outsized movements

in financial market pricing

at the longer maturities or in

survey-based measures of inflation

expectations okay so that's complicated

basically in in plain english what he's

saying is yo when you really got to

start worrying and this is a nice

heads-up for you to actually pay

attention to okay

but when you start worrying is when the

10-year treasury yield

which shot up flattened and is now

trending

down what he's saying is when you start

seeing that skyrocket again

that's when you want to be more

concerned or when you start seeing

people's inflation expectations for 2023

and 4 and 5 come in at 3 4

over and over again that's maybe when

we're going to start having problems

but we're not seeing those in right now

because inflation and this is something

that's so weird about inflation so much

about inflation has to do with our

expectations

let me ask you this and this might be a

more simple way to think about it

because it helped me think about it a

lot more is do we

actually think that real estate prices

are going to go up

15 a year like they did over the last 12

months

forever no that'd be insane right i mean

like already real estate prices went up

15 percent of people like bubble

that's it it's getting ready to burst

because prices going up is not

very normal it's it's kind of abnormal

to see those sorts of

growth numbers it's weird it's abnormal

to see the growth we saw in the stock

market last year and that's why we're

having such

such pullbacks now in stocks despite

amazing and smashing earnings we're

having pullbacks in stocks

because so much growth has already been

priced into one year and it's weird

it's kind of like do we think that we're

always going to be gay

we're always going to have to buy cars

at sticker

because prices are going up for cars no

do we always think that we're going to

be able to

get a used car for two or three years

drive it around and then

in a year sell a toyota camry back to

the dealership for four thousand dollars

more than what we paid

you know a year or two later no we don't

expect

those prices to continue to go up we

realize that the prices of housing are

high right now because there's no

inventory we realize the prices of cars

are up right now because there's no

inventory we realize the prices of chips

are up right now because there's no

inventory we realize the price of lumber

is up right now because

there's a potentially a lack of

inventory okay i don't know that much

about the the lumber markets and there

there are anecdotes of people going oh i

see plenty of lumber at the yards no

we don't know how many of those are

dedicated to contracts or already i

should say designated to contracts in

that right

so it's very interesting kind of makes

sense

uh when we look at it from that point of

view that oh yeah i guess we probably

wouldn't really expect

year over year persistent inflation over

and over and over again

fed loretta mester she's part of the

cleveland fed she says she expects six

to seven percent economic growth over

the term of this year

and falling unemployment this year uh

but she says that her

positive baseline outlook depends on

appropriate monetary policy which

in her view will be basically being very

accommodative

for quote some time to support the

broadening of the recovery

this is an interesting argument

broadening of the recovery we want to

support the broadening of the recovery

so we don't just care

that stock market's gotten back or that

hedge funds are doing well or that

tech companies are doing great even

though their stock price is not that

much going

up the companies are doing great they

want to see that broaden out they still

want to see hotels doing well and

restaurants doing well

got time to go now uh she also

responds uh with uh concern over a jump

inflation

she does say that she expects to see a

notable

jump her words notable jump in inflation

over the next couple months

with an overshoot of the fed's 2 target

but she believes that will be temporary

and that the fed will remain highly

accommodative because that'll be

temporary

notice so far all these people are very

much echoing what jerome powell has said

which is a little bit different from

what kaplan over at the dallas fed has

said that maybe we should taper earlier

but everybody else especially the voting

members because kaplan's not even a

voting member

the voting members are like no we're on

the right path we're gonna wait

we're gonna wait uh boston fed eric

rosengren

he says that uh the implications in the

market that we see right now

are that our policy is going to remain

accommodative until the labor market

consistently can consistently help

deliver the fed's two percent inflation

goal

again we look at that chart it's been a

little bit difficult to see two percent

inflation

so we'll see i think a lot of this is

in a weird way going to come down to our

expectations of inflation as society

and what's crazy is our expectations of

inflation in society

are actually dictated well not dictated

by but they're they show up in they're

evidenced by

trends in the treasury yield curve this

is why every single day we do market

open market close you see me talk about

the 10-year treasury

because when that thing spikes that

means the market broadly is like oh

we got to be worried about this for

inflation purposes lately the market's

been digesting data that hasn't even

been like mega hot it's just been like

okay i mean

those are good numbers but they're not

like overblown numbers they're not

overly hot numbers

all right treasury yield's been falling

it's weird

it's crazy something to pay attention to

and i know how counterintuitive it feels

that maybe maybe we will go back to

normal levels of inflation

but that's the way i'm investing right

now and i know that might sound crazy

but i strongly believe with

uh over 70 to 80 conviction that we're

gonna have these crazy price increases

for the next

three to four or five months and then

we're slowly going to inflect back to

the downside

at least for the next two three four

years thereafter and who knows maybe

some other black swan comes up during

that time or after and screws things up

but so far i'm

not seeing the long-term persistent

inflation that a lot of uh youtube

videos sort of uh fear-monger right now

anyway these are just some of the

observations that i'm making i'd like to

hear from you

let me know what you think check out the

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folks we'll see in the next one