Federal Reserve to "Hike" Rates

Chimoth, also known as Chpock because he

spacked a bunch of businesses that in

aggregate lost a whole lot of money,

including Virgin Galactic, Open Door,

amongst others, speculates that the

Federal Reserve may raise interest

rates. In this video, I'm going to

explain what the Federal Reserve is

actually likely to do. We're going to

keep this video short because I'm not

feeling my best. If you want to invest,

go to houseack.com. Earn a 5% yield and

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do with the company. Man, that rhymed. I

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Anyway, let's get started. First, there

are two sides of this debate. On one

side of this debate, we have people who

argue the Federal Reserve needs to raise

rates. And the argument that they give

for raising rates, we'll just put it on

screen here. All right. The argument for

raising rates is

stimulative tax cuts uh and uh high

inflation from tariffs. All right,

simple argument. Okay. Second, there are

people who argue that the Federal

Reserve is too late and needs to cut.

Unfortunately, I think both of these

people, these groups of people do not

understand how the Federal Reserve

operates. It's fine. I'm here to help

you understand that. So, enjoy my

pixelated text raise. Oh, the tax cuts

are stimulative. Oh, we're going to have

high inflation from tariffs. more on the

cut side. economy slowing uh tariffs

will slow GDP more and uh this will lead

to a deflationary potential crash

uh on top of uh a weak labor

market and uh and then of course um uh

you know low pricing power at companies

right small

PP

okay the thing is both of these sides

are correct once data breaks. You have

to remember right now we do not as a

federal like looking at this from the

point of view of a Federal Reserve or

the Federal Reserve. We do not have any

delta. Okay, Delta is very different

from alpha. Don't don't get confused

with the alpha report and the coupon

code expiring this week because we're

raising the prices a lot on the alpha

report as we come out with the app that

makes it pretty epic for you to see my

stock opinion at any given time and my

valuations for them. It's okay. That's

coming out soon. Delta is basically just

the difference, right? This is what the

Federal Reserve cares about. The Federal

Reserve does not care about your opinion

about whether or not there's going to be

a crash or a slowing economy. The

Federal Reserve does not care if you

think the tax cuts are going to be

stimulative. In fact, the tax cuts are

not necessarily going to be stimulative

at all given the fact that we're just

extending the 2017 tax cuts. And yes, we

are returning the 179 deductions uh for

certain products, uh, you know, uh, such

as investments such as machinery, which

is great for chip manufacturers, uh,

certain investments such as aircraft or

real estate products that can be cost

segregated. Great.

But again, broadly, the tax plan is an

extension of the 2017 tax cuts along

with some additional items. No taxes on

cash

tips. Cash tips likely weren't declared

anyway, so I'm not sure exactly how

stimulative that is. Uh, and then

overtime

pay. All right. Yes, there are some

extra things in there that are going to

increase the budget deficit that are

going to unfortunately uh lead to pain

when it comes to the deficit. But will

they be mega stimulative like what we

saw during co? No. Will they be somewhat

stimulative? Yes. Now, does any of this

matter? Does even my opinion on this

matter? No. Because what matters to the

Federal Reserve is the delta. In other

words, what is the change in the

economy's growth in inflation and the

labor market? And so far, I'll make this

as clear as possible. The change or the

delta that the Federal Reserve sees in

markets is a big fat zero. So in other

words, until we have

change, the Federal Reserve doesn't know

whether that stasis

zombie is in his sort of vat floating

around is going to have his vat broken

and shattered and he's going to fall out

on the floor dead because the economy is

dead or is going to break out of the top

of it because he's so strong and he's

fully matured and he's been

overstimulated. He's going to take over

the world with

pain. That's what the Federal Reserve

responds to. Until we have a delta of

zero, the Fed doesn't care. Instead, the

Federal Reserve will look at this. Oh my

gosh, look at that. I wrote all of that

on the very chart I was going to

reference. Isn't that almost like a

sign? Yes, all of this is the

noise. Until the delta

changes, that's redundant. Until there

is a meaningful

delta, the Federal Reserve will pay

attention to this. What is this? This is

a fiveyear forward inflation chart. It's

basically the difference between the

5-year Treasury yield and the 5-year

inflation protected Treasury or TIP

security. You don't need to worry about

that. Don't calculate it. Just look at

the damn chart. Okay? Guess when the

Federal Reserve is cutting rates. I'm

going to try to make this really simple.

So, I'm going to take a giant oval for

green. when the Federal Reserve is in a

cutting

mindset. I think this should be pretty

damn

obvious. Okay, this is when the Federal

Reserve is in either a cutting or a

halting

mindset. Very

simple. You get it? All right. When is

the Federal Reserve in a hiking mindset?

In other words, they're hiking rates

because they're worried that uh

inflation is getting

away.

Okay, do you get the picture? Hiking.

This is when the hiking trajectories

start. And the Federal Reserve's goal is

to try to keep inflation

expectations. Oh, I hate it when it does

that. Uh stable. And we can't even get a

change in inflation expectations right

now because frankly there's so little

change for the Federal Reserve to

respond to. And that's what drives the

Federal Reserve nuts is if you look at

inflation

expectations, look at how flat we

basically are in this tight range over

here. This is not an indication that

inflation expectations are running away

and that the Federal Reserve needs to

panic and hike. It is not a sign that we

are in a crash and the Federal Reserve

needs to cut rates to zero. This is

where people go, "Oh, well, isn't it

oddly convenient that the Federal

Reserve cut rates right before the

election?" If you look at the labor data

that was collapsing in June and July,

it's where a lot of people went bearish

in July and then of course we had our

Japanese uh carry trade crisis in

August. If you look at the labor market

of those months is really bad. Federal

Reserve was responding to a delta to a

change. That delta was partly revised

away and then partly grown away by

frankly election enthusiasm. So what are

we left with? Well, we're left with an

environment where yes, the Federal

Reserve because cut because it looked

like we were going to break well below

this because you combine the change in

the labor market with the low end to the

5-year inflation

expectations. No surprise. Fed cuts.

What do we have right now? No

expectations of that. We're not even at

the low end of that. And even though we

were ticking on over here at the higher

end of this, our inflation numbers, CPI,

PPI, and the PCE numbers were coming in

low. In fact, the only reason they're

coming in even slightly positive could

potentially be because of some of the

pull forward of tariffs. Otherwise, they

would have likely been coming in

negative and the Federal Reserve would

have been likely to respond with rate

cuts. But for now, again, no delta of

data. So this idea that, oh my gosh, the

Federal Reserve needs to do anything is

actually a very American bias. It's an

American action bias, I like to call it.

It assumes that the Federal Reserve

always needs to do something. Sometimes,

and you need to understand this if

you're a long-term investor as well,

sometimes the best thing to do is

nothing. Sometimes the best thing to do

is just wait. That is what we were doing

with House Hack. And when something goes

poopy dupy, in the event something goes

poopy dupy, let's say the Federal

Reserve comes in and cuts rates to zero

because there's some kind of panic,

we're immediately going to end our 5%

bond fundraiser because we're going to

be able to finance a bunch of real

estate really dang cheap. And we don't

need to pay 5% anymore. Of course, we

still will to the people who have the

bonds through conversions. But the point

is, you don't actually have to do

anything with your investments while

you're waiting for the Fed or

speculating on the Fed. Let's listen for

a moment to what Champsack has to say

and I'll add some commentary.

Unfortunately for President Trump's

agenda and for a MAGA movement, this is

the worst of all conditions. The

financial markets will punish this. The

political calculus will be for the

president to decide how much credit he

actually wants to take for this bill.

I don't actually think financial markets

are going to punish Donald Trump's bill.

If the market declines, it's likely

because of a decline in growth

expectations. But markets that is the

stock market they like even marginal

stimulus stimulus the 179 overtime tax

on no you know the social security

provisions which are really not really

no tax on social security they're more

like expanded deductions are being built

in these are marginally stimulative

earnings projections like a little bit

of stimulus I think he's more referring

to the bond market and this idea that

the bond market will punish because

we'll have a higher deficit for longer.

But the bond market breaks in the

direction of recession, not in the

direction of deficits in my opinion.

We'll listen more because even though it

has his name on it, the contents of the

bill are different in actual facts than

what I think he intended. And what I

mean by that is when you look inside of

what happened in the 11th hour last

night, it's disappointing. This thing is

like antidoge. If Doge was meant to be a

reflection of the American voting

population's desire for meaningful

reform in government, cost controls,

some form of austerity, and to get this

debt spiral in check, this is the

opposite of that. What? Uh, let's also

be clear. Many Americans voted for

Donald Trump because they did not want

Kla Harris, an unelected assigned party

member. Many Democrats were rightfully

pissed off about that because, and you

should be because that assignment of

Kamla got the world Donald Trump. But

I'm not convinced that everybody who

voted for Donald Trump. There are some,

but I'm not convinced that everybody who

voted for Donald Trump voted for

austerity. Austerity

sucks. What happened was in the 11th

hour, you had a handful of people

abstain. You had one person that passed

away in the last few days. You had one

person that fell asleep on the floor of

the house. So, he wasn't even This is a

little hyperbolic been woken up for the

vote. And in the middle of all of that

chaos, what happened was all kinds of

things were added and attached and

canled at the last minute because what

happens is you have to have these puts

and takes as Freeberg described. If you

want to spend over here, you have to

find a cut over there. But I think what

happened was there was really not a lot

of financial literacy used to decide

what to actually put in and what to cut.

And that lack of discipline is going to

create I think a negative set of

consequences. That's why Congress is so

dysfunctional. I think it's really

important to understand for a moment how

Congress works.

Okay, here's how Congress works. Let's

say you're a representative. You need to

get reelected in two years. You just

blew all your money getting elected. How

do you think you're going to get

reelected? By raising more capital. How

can you get a promise of more money?

Lobbyists. Lobbyists come to you and

say, "Hey, Kevin, you want to get

reelected? We'll help fund your

reelection. We just need you to help us.

We know this budget reconciliation bill

is coming up. We um we pre-wrote a

section we would like you to include.

Don't bother reading it because um even

if you do, if you change it, we ain't

paying you next year. Here you

[Music]

go. That's how Congress functions. And

see, one of the reasons our founding

fathers made it so complicated for

Congress to do anything is to sort of

prevent people from just staying in

power forever and getting whatever

policy through that they wanted. They

wanted to make it difficult to actually

get policy through. One of the benefits

of making it difficult to get policy

through is

frankly Congress ends up doing nothing.

Which is part of my message. There are

times in an investing career you just

become a patient watcher.

Be a reflection of the American voting

spiral in check. Sorry, I backed up a

little bit. It was in the 11th hour. you

had a hands were added and attached and

cancelled at the last minute because

what happens is you have to have these

puts and takes as Freeberg described. If

you want to spend over here, you have to

find a cut over there. But I think what

happened was there was really not a lot

of financial literacy used to decide

what to actually put in and what to cut.

And that lack of discipline is going to

create I think a negative set of

consequences. So what are those

consequences? Today the tenure is around

4 1/2%. At the rate in which it's

escalating since liberation

day by the end of this year we're going

to be past 5%. The 30-year is on a rate

now to get past 6 and a4 maybe even

reach 6 12%. I know anybody can draw

trend lines, but if you do this and

continue on this trend, it's just a

matter of time before something breaks

to the downside and then people are

going to be like, "Oh my gosh, the 10

year is 3%. Oh my gosh, the 10ear is 2

and a half%." Uh, yeah, cuz you're in a

recession. Those

are way

beyond what most people thought was a

reasonable place to be for the United

States economy. And so what will the

implications be as rates go to those

levels? You'll delever from the United

States. You'll sell US debt. You'll own

things like gold and Bitcoin if you're

curious about what's happening to gold

and Bitcoin. Uh by the way, this happens

when you are actually concerned about

the debt. But usually what happens in a

recession, the entire world goes into a

recession and people aren't actually

concerned about the debt anymore.

They're concerned about surviving and

they're like, "Please go into more

debt." And so what then ends up

happening is at least until the Federal

Reserve bails everyone out, people flee

to the Treasury bond market because out

of assets across the world, at least the

Treasury bond market is one that at the

very for what it's worth promises to pay

you back your capital at the end of your

holding period for what that's worth.

Again, we can talk about inflation

dynamics and sound money and all that

stuff separately. But this is usually

what happens in recessionary

environments, right? We're just looking

at at um risk and typically risk assets

go down and they continue to go down

until the Federal Reserve bails out

markets and tells everybody that's okay

to go buy risky assets again. They

started to spike in the last few days.

You'll have ratings organizations that

add to this cascade by downgrading the I

think it's kind of also hilarious that

Chimamoth is trying to imply that he's a

profit. You're like, oh, you know, this

is what you're going to see. You're

going to see Bitcoin and gold to go up

and you're going to see rating agencies

decline. Oh, by the way, both those

happened the last two weeks. Anybody can

read a chart and read the news

headlines, my friend. the United States

that happened on Friday. You'll have

very smart people starting

to signal that this is a much harder

problem than they This is again reading

the headline of Elon Musk complaining

that it was a lot harder to cut debt

from the government than he expected.

Initially thought that's how I

personally interpreted Elon's comments

over the last few days. So what was the

House supposed to do? I think what they

were supposed to do was implement some

form of austerity. They were supposed to

by the will of the people never going to

happen pass a recision bill. They were

given that recision bill. It was just n

and none of them would have gotten

reelected.

9

billion. They couldn't even pass a $9

billion recision and instead they passed

a $4 trillion inflation to our debt. Now

you hand this to the Senate. The Senate

is in a very difficult place. It's over

$4 trillion over the next 10 years and

now we're conflating inflation with an

expanding debt. I actually agree that

the debt matters to the extent of how

strong your economy is and as a

percentage of your economy. Look, I'm a

big fan of of controlling government

spending too, but trying to take an axe

and austerity is also just going to

induce a recession. So kind of damned if

you do, damned if you don't place as

well. Do they want to quote unquote

claim victory and say, "Here you go,

President Trump. Here's your bill. But

they'll further bastardize this thing

and it will be even further away from

what I think benefits MAGA and benefits

Main Street. So, who does it benefit?

Current course and speed right now, this

bill is about traditional Republicans

and traditional Democrats. Yeah.

Circling the wagon and putting on a

platter a set of things that I think

will be hurtful to average Americans.

You're going to see energy prices spike.

You're gutting the number of electrons

that will be available for things like

AI. You're going to increase Medicare

prices and the math is wrong. So when

you sensitize this thing to a 4 and a

half or five or five and a quarter rate,

so meaning not what the CBO used, but

the real conditions on the

ground, this thing is an albatross. And

the last thing I'll say is now to top it

all off, I think that Jerome Powell will

see the writing on the wall. No, many

aspects of this thing are inflationary

and if they're not handled well by the

Senate, he has a lot of room to actually

increase interest rates.

So, I would just say that the Senate has

an incredibly difficult job. I think the

president has an even more difficult job

about what to do right now. But the

House did nobody favors. They did not.

Yeah. So, keep in mind, first of all, we

addressed the drone Powell. He responds

to

Delta. But what we need to address is

one of the reasons this albatross is

able to get through is through budget

reconciliation. It's really a way of

saying that, hey, we don't want to get

the budget bill held up, so we're going

to pass something through

reconciliation, which bypasses the

filibuster in the Senate. In English,

you don't need 60 votes. You only need

51.

So basically, Republicans or whoever's

in power, Democrats had used this the

last time, will essentially get everyone

around, shove in everything that they

can in this budget reconciliation bill.

That's why it's expansionary because

everybody's trying to get their

reelecting meat into the bill because

they know this bill has the highest

likelihood of passing and this might be

the only thing that ends up getting

done, the only action before midterms.

which is kind of sad, but that's the way

the system works. That's why everybody's

trying to not circle their wagons, but

hitch their wagons to this

bill. So, look, I agree that the debt's

a big problem. And I agree with Jerome

Powell that it's

unsustainable. I don't think what our

economy is facing in the near term is

while there's a lot of fear around the

debt right now, the debt is still, I

hate to say it, but sustainable at

today's levels. I think we need to get

through the slowing economy first. And

by raising interest rates, you're not

actually inducing a soft landing. If

you're going to raise interest rates and

that plane comes in for a landing, you

would actually just crash that plane

into the runway and then it, you know,

delta's

over. Who got that one? And then you

have a real problem, which is not good.

uh best case scenario, you actually come

in for a soft landing and and you just

you take off again. You go around and

you just keep the economy going and you

never actually have, you know, a hard

landing or a recession. So,

um this is why the Federal Reserve is

poised to wait. And this idea that oh,

you know, when you see people come, oh,

the Fed's going to be too late, they

need to cut, they're going to be too

late, they need to do this or whatever.

Yes, the Fed's always too late. And when

people say that, but Kevin, you know, if

they don't cut, they're going to be too

late. I don't think they realize that

that's like the definition of the

Federal Reserve. They're always too late

because they wait for the data to

confirm what they need to do. It's

literally the way the system is

designed. It's kind of like

saying, you know, imagine

uh, you know, somebody says, "Hey, if

you eat an apple a day, you'll never get

cancer." Okay, I'm making this up, okay?

And then you're 70 years old and you get

diagnosed with cancer. And somebody's

like, "Hey, did you have an apple a

day?" And you're like, "No, but I'll

start now." Yeah, bro. It's too late.

like the Federal Reserve is almost

always going to be that 70-year-old that

waits until the last minute and and then

it's too late, you know, and then they

have to go really extreme and it causes

a lot of damage or

whatever. And so then people are like,

well, why don't why don't they just eat

an apple a day now? It's cuz it's not

how the Federal Reserve was designed to

operate. Just the way it is. Anyway, I

hope that adds some perspective.