The Fed's *RULE* Just FLIPPED | Unexpected SHIFT.

well the FED is back at it again talking

down the stock market all stock indices

ran across the board today and bond

yields actually going up indicating

selling in the bond market suggesting

that some are going uh oh maybe the FED

is going to go a lot further than we

think now let's break down the comments

that happened this morning and try to

put them into context so first contacts

the last summary of economic projections

from the FED suggested the FED would

raise rates to a peak of 4.6 percent

since then we've got a pretty bad

inflation report uh in in October that

was followed by a pretty good inflation

report here in November but that bad one

in October based on CPI numbers from

September led the fomc projected

terminal rate to move up right now we

sit just below five percent that's kind

of where we think the fed's gonna go so

we got a peek out at five percent stay

there for a while well today we got Mr

Bullard who really really threw a

curveball to markets and I want to talk

about whether we actually want to heed

that warning or if they're trying to

accomplish something else Mr Bullard

this morning suggested the following we

need to get to a sufficiently

restrictive zone of interest rates and

significantly restrictive is something

that's Up For Debate but he gave a range

using the Taylor rule as a guide and I

going to break down the Taylor rule in

just a moment so if you're confused by

the TR the Taylor rule don't worry about

it what you want to pay attention to is

here it suggests the recommended federal

reserve's policy rate that's the fomc

terminal rate right which which is

currently still got about a percent to

go before we get to sort of the peak

levels we'll see but based on the

recommendations created by the Taylor

rule we have a generous tale tailor rule

calculation because you could change

some coefficients in the formula I'll

show you how that works and then we have

a less generous one in English this

scenario says inflation will be lower

this scenario says inflation will be

higher

and as a result you get this chart it

shows that presently we are here on this

little blue line and the generous

version version here suggests that the

fed's policy rate needs to go to five

percent well that's what markets are

currently anticipating is that we need

to go to about five percent but look at

the less generous version it goes all

the way up to seven percent and the fact

that what the market is pricing in right

now is literally the bottom edge of this

entire range scared the hell out of

markets today this was bad

now let's understand the Taylor Rule and

then put into context what the FED is

trying to accomplish so the Taylor rule

was created by this guy John Taylor from

uh Stanford and there are many different

formulas for it I'm going to use a

simplified version just because every

single one of these pieces here can have

coefficients that get changed based on

certain inputs so you could really

manipulate this formula pretty pretty

intensely but what I'm going to do is I

want to show you the bias that this

formula has and then I'll tell you a

little bit about the Stanford guy and

kind of where his head has been

so the way this works is you have this

formula here I'm not going to even

bother reading it to you because half

are you going to click off the only

formula you need to know right now is

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anyway so not without reading you that

formula here's how it works the Taylor

rule tells you that whatever rate the

Federal Reserve chooses should be

determined by the rate of inflation this

makes sense the FED uses pce not CPI

that's why it's lower and I already

filled it in

and then you should add to what the

inflation rate is

basically how much real GDP has deviated

from where it currently is so in other

words if you want GDP to be at one

percent or let me say you want it to be

at two percent and you're at one percent

you've got about a 50 deviation there

that would add another quarter of a

basis point here is what you would add

just a rough example and you can

manipulate these coefficients as well

that's why this formula gets really

complicated but I'm going to keep it

simple and then over here you take

another half times the inflation rate

minus two and then you add two okay very

very simply put the bias of this rule

even if you missed all of that the bias

of this rule is the fomc rate should be

higher let me prove that to you watch

this we're going to do something really

simple here we're going to take a blue

pencil here we're going to say the

deviation of GDP is zero we're right

where we want to be okay great well that

cancels out the middle part of the

formula right let's say that inflation

is zero okay well that cancels out the

left part of the formula if inflation is

zero then this right here is going to be

one and that's because you take the

inflation rate plus two which if

inflation is zero would just be the plus

two multiplied by 0.5 that'd be one plus

another 2 over here that would be a

total of three

so if GDP is right where we want it and

inflation is zero the Taylor rule says

the the the fomc rate should be three

percent now why is that important well

it's important because if inflation is

zero and GDP is On Target

why would we need a three percent fed

funds rate this rule was created back in

1993 and it was created by somebody who

was very upset starting in 2005 for

about the next actually probably

starting in 2003 for about the next 12

years all the way through 2015 he was

regularly complaining that the federal

reserve's rates were too low in my

opinion this individual and his formula

have a bias for a substantially higher

fomc rate than we're actually likely to

see in the future now this really gets

down to your personal belief your

personal belief you have to ask yourself

do you think that if we removed the the

pandemic and all of the money printing

that happened in the economy do you

believe it would make sense for the

federal funds rate to be back to two

percent maybe two and a half percent

where it was in 2019 we were actually

hiking from about one and a half to two

and a half percent remember Donald Trump

was threatening to fire Jerome Powell

right do you believe we should be back

at those levels or do you think we

should follow the Taylor Rule and if

inflation was in theory zero and GDP was

fine which we did have a little bit of

inflation then which would just mean to

be even higher should the fomc rate be

three or four percent

see I think Mr Taylor and his rule are

kind of stuck in the 90s and the early

2000s personally I think that we have

moved into a regime where we we've come

to expect lower interest rates over the

long term and if you believe we're going

to return to lower interest rates over

the long term and if you kind of scale

out over the past 500 years of interest

rates which is quite interesting if you

do that there are plenty of charts of

this online but let me just basically

give you the bottom line of what you

would see if you look at interest rates

throughout history they've basically

just done this oh what drives interest

rates down throughout history well

generally low inflation so if you

believe we're going to return to low

inflation you would expect rates to be

lower probably than what John John

Taylor calls for and low inflation is

generally caused by an aging population

that spends less remember the velocity

of money one person spends a dollar it

creates four dollars in the economy but

when you get older you start spending

less not more because you make class you

have left less left over people keep

thinking oh when I retire I'm going to

be able to spend money like crazy wrong

you generally live off the whatever

you've you've been able to Nest Egg

essentially and then you get really

worried about like not having enough and

then having to go back to work right so

you tend to spend less so aging drives a

lower inflation globalism provides lower

inflation because people who are working

for three dollars an hour in in you know

Caribbean islands or in South America uh

start doing work that's worth twenty

dollars an hour in America through you

know Zoom or technology or the cloud

Photoshop programming whatever right and

all of a sudden it's like okay well pay

the person who's making three dollars

ten dollars and you're still saving ten

dollars as a company on hiring an

American right globalist and I'm not

saying that's what you should do I'm

just saying that's what drives other

people's wages up but actually drives

Global wages down and that's

disinflationary especially for modern

economies uh so globalism productivity

and innovation of course when it becomes

cheaper to have more iPhones or more

iPads or whatever what ends up happening

well you become more productive because

you have tools that make you more

productive we've got plenty tools that

make us productive and they allow us to

for example be on a cruise ship and

actually still upload videos to YouTube

to share education that's what I'm all

about is sharing education of course you

could always learn more about my

education if you like my perspective in

the courses on building your wealth link

down below getting before Black Friday

it's going to be the best pricing uh we

we always have pricing that Trends up

and so you get in now you can have the

best pricing but this is this is one of

the largest coupons we've ever done

so what does this mean well it

potentially means in my opinion that

John Taylor is a little too aggressive

here why then would James Bullard of the

FED talk about Mr Taylor and the Taylor

rule well for a couple reasons one the

Taylor rule has the biggest concern over

what's known as the wage price spiral

and that's the risk that ultimately

people keep demanding more pay because

prices are going up

fortunately the risk of that is becoming

less severe it was starting to get quite

concerning at the beginning of 2022

which was the biggest reason I sold

stocks that risk has mostly moderated

but it's still a present risk

so what happens when or why then if the

risk of a wage price spiral is is

limited uh although it is still present

why then is James Ballard

Hawking why is he talking like the FED

might actually raise rates to seven

percent to kill inflation well the

reason in my opinion he's doing this is

because the FED has a very important job

and it is driving this chart down sorry

not Tesla chart it's doing that too it's

doing that to a lot of growth and

cyclical stocks this particular chart is

a chart of the five-year Break Even rate

of inflation if you've been watching

this channel you've seen me watch this

pretty closely it was doing great all

the way up to about October and that's

where the FED lost it where all of a

sudden this darn chart starts exploding

and it really took the last fomc meeting

for Jerome Powell remember when that

reporter asked the stupid questions like

hey the market seems to be going up it

was going down and then Jerome Powell

just lets it rip and talks about all the

reasons why the fat has to work harder

and raise rates more the FED wants

Finance conditions to be tight that's

what we learn almost every day from

Nikki leaks they want tight Financial

conditions they want layoffs they would

never politically say that but let's be

real that's what they want they want

layoffs they want lower risk of a wage

price spiral when you lay a lot of

people off what signal does that send to

employees it sends a signal that oh crap

I better not quit or get fired because I

might have a hard time finding a job

somewhere else where and that's very

different from the mentality of oh fire

me I don't need to be productive here

I'll go get another job that'll pay me

more you know that's kind of like what

you had in 2021 was this this belief

that you can't get hurt uh and boy I've

have those things changed but take a

look at this because of the Federal

Reserves yapping and that weaker

inflation report that we just got in

November we've actually thankfully seen

a really nice relaxation of this curve

this is very important but this is what

the FED is doing you can see that

inflection point right here would

actually steeping down the FED will do

whatever they need to do you to come out

and publicly talk inflation down and

they want this break even curve to be

even lower than this point where it was

over in September because if you go five

years back that point was just as high

as what it was in 2019 when they were

hiking so you have a Fed who has a job

and their job is to basically until we

get multiple reports on a roast showing

that inflation is is going down they are

just going to come out day after day

after day after day and they're going to

talk the market tight that's what they

want they're always going to look for

the bad news oh that's just one good

report and then as soon as two good

reports come out like CPI and PBI well

you know two reports isn't the start of

a trend and I guarantee you when Bullard

came out this morning okay I can't

guarantee this but I can only guarantee

a 60 off coupon code well I guarantee

again I hashtag don't guarantee but I

almost guarantee you that after Bola

talked markets read this morning Jerome

Powell on them were like

heck yeah bro you did it you crash Mark

it's a good thing we sold out right

before we started tightening huh all

under the guise of uh yeah let's uh just

get out of the market so we're not

biased yeah not not shady at all uh

anyway there you have it so

what's going on with the fed's great

reset trajectory well ultimately it

comes down to what actually happens with

the data but in terms of your investing

and positioning you have to ask yourself

what's more likely are we going to go

back to a low inflationary regime modern

monetary Theory zero or negative

interest rates I would say that's

probably 80 to 90 likely we can disagree

about that of course the whole point of

sharing perspective is not that you

become a zealot and listen and agree

with everything I say right uh and and I

think there's maybe a 20 chance that we

end up going into a direction of

consistently higher levels of federal

funds rates that maybe four or five

percent just becomes the new normal and

we just sit here for years that's going

to be devastating for Real Estate like

really devastating for Real Estate it's

one thing if we go back to zerp the zero

interest rates real estate will be fine

it'll rebound so quickly but if you're

looking for more affordable real estate

unfortunately there's no right answer

for you because as fomc rates stay high

mortgage rates Stay High

so it doesn't again even though prices

might come down it doesn't really

increase your affordability which is

pretty terrible uh you would need a

substantially massive correction uh

anyway so that gives you some insight if

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good luck everybody bye