F*$k This... I Might have to Flip AGAIN.

hey everyone kevin here in this video

we're going to talk about the disaster

that just happened in markets today and

no it doesn't just have to do with these

stock indices it has to do with

the fed

inflation what the bond market just told

us war in russia ukraine and what it

might mean for our portfolios going

forward so we've got some work to do

let's get right into it quick note this

video is brought to you by streamyard to

learn more about professional live

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all right so our original thesis before

war was

relatively simple

we had a belief that inflation was now

persisting this is because of the

minutes that came out from the december

16th fomc meeting from federal reserve

on january 5th we learned that the

federal reserve said yup yup yup yup we

now have persistent inflation it's

definitely not transitory anymore okay

we're done using that word we also

learned that the fed said that inflation

is broadening

and we also learned uh that uh we'll add

another box here because i didn't write

it up here we also learned

that not only is inflation persistent

and broadening but they have way larger

balances and more money than they've

ever had before and that means they

should probably hike or or tighten

monetary policy faster than ever before

ever before

we expected most of the market expected

putin not to invade ukraine that this

was a lot of show and that there

wouldn't actually be an invasion so that

was an expectation and we were watchful

for the potential of a wage price spiral

now this is a quick summary this is

basically where the wages people earn

are higher or going up at a faster rate

than the rate of inflation the last

labor report showed us that wages were

going up at about eight point eight

percent on an annualized rate and

inflation was about seven point five

percent this is the start of a wage

price spiral and it is the first such

report that we had and it looks back

into january so we kind of had all of

these check boxes here more money to

tighten down on likely no war wage price

spiral a broadening of inflation

pressures and persistent inflation

this made it very clear

at least in my opinion that the odds of

a recession were going way up because

the federal reserve would have to react

to this by hiking uh interest rates

becoming hawkish this drives down

aggregate demand which makes it a lot

easier for you to have even slightly

negative gdp for two quarters in a row

which is a recession right and then it

would also lead to weak earnings like

week q1 q2 earnings in addition to a

potential recession which would just

make earnings even worse this is a

really bad original recipe here for

stocks

and that is originally why i sold

well things have obviously changed

we have a war thesis now

and see the war thesis says that we now

have this new form of transitory

inflation it's going to depend on how

long obviously the war lasts but we have

this new thesis of transitory inflation

this would be a prices of oil going up i

think we just hit 105 again today on

brent crude because the war is lasting

longer than expected already some

thought by now that either ukraine would

have fallen or russia would have pulled

out or negotiations would have gone

better whatever price of oil is back up

commodities are still going up nickel

aluminum

wheat things related to the area here we

hear that freight pressures are going up

a freight consultancy company is talking

about the cost of ship shipping goods

literally on ships going from ten

thousand dollars to forty thousand

dollars potentially and of course air

freight getting even more expensive

so uh we do expect this new

transitory inflation regime and we're

calling this the new slash war

transitory inflation unfortunately that

comes on top of the persistent and broad

inflation that we had up here this is a

little bit of a problem

but then you also get this interesting

thing called transitory fear and that is

when we have war and even the potential

and i'd say relatively small

chance of nuclear threats we do have war

high costs

less travel i mean think about it

apple has banned all shipments of apple

products and sales of apple products in

russia

now anytime a company like an american

any american company says hey we're

going to stop selling our products

somewhere that lowers the revenue for

that company not only does it lower the

revenue for that company but every

thousand dollar ipad is probably the

equivalent of five thousand dollars of

actual future gdp because that's less

money that flows to shareholders less

dividend payment that comes out less

money that goes to employees less money

that goes to research and development to

do capital expenditures whatever

and so when when folks ask me kevin how

can aggregate demand go down because of

war like i'm over here still getting

seven beers a night it ain't making a

difference in my life and and you know

we have to make that as a matter of fact

statement obviously we care about

people's lives and when we don't want to

see people dying but as a matter of fact

saving yeah that's that's right we're

maybe we're not buying less beers here

but if people are buying less bags of

rice or ipads in certain areas then that

reduces the amount of global gdp we have

which reduces the velocity well the

velocity of money then that amplifies

how much of a reduction we actually see

throughout the global economy and then

we do see global aggregate demand tend

to trend down as earnings for these now

international mega cap companies

throughout the world actually start

coming down i mean even netflix and

disney have come out to say that they

expect their earnings to be impacted

because of this war that flows through

to consumers even to the effect of hey

if earnings come in bad q1 q2 now people

have less wealth because their stocks

are going down that also leads to a

reduction of demand so demand does go

down through war it's just not as

immediate like oh they're bullets flying

i guess i can't buy beer tonight it's

not that immediate right but but it does

still happen so uh and you know more

direct things like obviously less people

traveling you can't fly from europe to

asia

well as easily anymore because it's you

can't fly over russian airspace anymore

anyway so things like this make things a

lot more complicated they increase the

cost for airlines blah blah blah okay

one of the things that it does do though

is it does give the fed a little bit

more time to potentially wait for data

see the fed wants to be able to kick the

can down the road because

they're not convinced that inflation

this original transitory inflation here

which they no longer call transitory i

don't think they're convinced that they

actually believe these pressures are not

transitory even though they're not

saying it anymore i think they still

think this original inflation is

transitory because they keep telling us

in interviews don't worry second half of

the year supply chains will get better

and we just need to wait for more data

and then that original inflation will go

down and if this original inflation goes

down and all we're left with is this new

sort of transitory inflation well then

we could afford to be patient to wait

for this transitory this new transitory

inflation to go away because that's not

this is not effect of our monetary

policy this is an effect of war so as

long as this ends up going down by the

fed buying time and getting more data

then the fed actually doesn't have to

hawk as

quickly so this is actually a good check

mark here because the fed is more likely

to want to take their time more and wait

for more data to see if this gets better

and this gets worse that's okay because

the boogeyman here is war

not us this is our fault but we have no

control over this okay so

now at the same time we would hope that

the wage price spiral ends this is going

to be critical no matter what scenario

you think we're going and you've got to

pay attention to wage price spiral and

of course we'll talk more about as well

things to pay attention to and not to

pay attention to regarding catalysts i

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check them out okay so why can the fed

not be hawkish now because some folks

are saying hey the fed should just shock

us now anyway and they might but why

can't they or or probably why can't they

shock us now well again when we have war

fear we already expect that aggregate

demand is likely to go down for the

reasons i talked about with with

inflation uh likely heading down or or

demand for products and travel or

whatever ipad's going down

amplified by the velocity of money the

fed's unlikely to want to double clamp

down on the economy because if inflation

starts going down and demand goes down

and the fed hikes then you could have

something worse that happens which we'll

talk about in a moment so fear

tends to lower aggregate demand which in

time should lower inflation naturally

without having to hawk right

but if you

have low demand and inflation's going

down

and you decide to hawk what do you end

up with well a potential worst case

scenario nobody wants this okay this

would be very very bad we do not want

this stagflation why because stagflation

can lead to what we call regime collapse

this is where literally the dollar could

just disappear and the reason you get

regime collapse is because during

stagflationary environments

you

fail both of the priorities of the fed

maximum employment gets

it becomes a failure because people get

laid off in stagflationary environments

and when there's high inflation you

certainly don't have price stability so

now you're losing on both points right

now the fed's only losing on one we're

good on number one if point number one

is max employment or max e we we're good

here we've won we just haven't won on

price stability we're kind of like uh

let's wait and see let's hopefully see

if we get price stability without

killing maxi so anyway this is why i

don't actually think that the federal

reserve is likely to hike too

aggressively so what the federal reserve

has to do right now is they have to buy

time

because we don't know what's going to

happen so they've got to buy time buying

time generally means the fed is becoming

dovish right they're relaxing they're

not being as aggressive

and see these are just some scenarios we

don't exactly know what'll happen but if

we have a short war and we bought time

maybe we start getting inflation that

fades which keep in mind inflation

inflation fading does not mean going to

zero it just means disinflation like

instead of seeing eight percent

inflation now we're seeing six and a

half six five and a half five that's

disinflation right and this could lead

to a soft landing and you buy the dip on

this you buy the dip on warfares you buy

the dip on drama on reports on fed day

whatever you buy the dip you hope for

the soft landing

uh however if we do reduce aggregate

demand too much it's possible we could

go to a recession but it's unlikely that

in a short war demand would be reduced

too much for a recession so the bigger

concern would be what if we have a long

war the federal reserve buys time during

a long war aggregate demand goes down

well now one of two things can happen

inflation could fade disinflation okay

great back to soft landing hopefully

soft landing before we've reduced demand

too much for a recession or

if we don't get inflation down we have a

longer war and this inflation persists

and the war inflation persists well then

the fed's just going to have to force a

recession forcing a recession is

basically when the fed paul volcker paul

bulkers us and they raise rates some

ridiculous sum five six seven percent or

whatever instantly and uh then everybody

freaks out and markets freak out okay so

let's come over here

now

this is really important to pay

attention to going forward and this is

this all has to do with federal reserve

of course

the federal reserve has a secret public

enemy number one and the reason i call

it the secret public enemy number one is

because a lot of people say the fed only

cares about max employment and prices

it's but they have a secret public enemy

uh and they're called inflation

expectations that's sort of the

collective enemy here inflation

expectations and we actually had good

news on this we actually had what looked

like a peak inflation expectations kept

going up uh and then ding we actually uh

peaked in roughly uh actually probably

peaked in around december here because

when we got the january numbers here

the inflation expectations for one year

out based on the new york fed survey of

consumers went from six percent to five

point eight percent this is the uh first

time we've actually seen

an inflection point down since october

of 2020.

so it's been a while it's been about a

year and a half and we finally have this

potential peak here in inflation

expectations

problem is the longer this war goes on

what do we think is going to happen to

inflation expectations well they're good

right now but i expect in the future

they're going to end up turning bad

and that's because again as long as the

war goes on people are going to see gas

prices go up and of course consumer

expectations for inflation are going to

go through the roof

as a result the market today started

responding

the five-year break-even rate today

jumped to 3.29

basically the five-year break-even rate

is the difference between the five-year

treasury and the treasury

inflation-protected securities tips you

don't have to really know what any of

that is but let's just put it this way

when a chart does this

at this point in the chart people have

the lowest inflation expectations and

this means the market's pricing in the

highest inflation

and the way this chart actually looks

right now

is that we started having this

skyrocketing in at the end of 2020 sort

of the beginning of 2021 this is when in

february march we had all these big

sell-offs in 2021. in the summer things

kind of stabilized delta came and then

we got the big inflation peak from delta

and now we're like here because of war

so so this kind of gives you the graphic

of inflation expectations here and we

are looking back at the highest point

that i've ever seen like when i click

max it goes all the way back to 2000

for comparing these inflation

expectations and it does the chart

doesn't go any further we're just at the

highest point and that number right now

is 3.29 which is not good

uh and the other thing that's not good

is the federal reserve ideally they like

to say things without having to do

things like when the fed comes out and

they say hey we're going to buy an

unlimited amount of bonds like they did

in march of 2020 and then the stock

market starts skyrocketing that's like

free money the fed was able to get a lot

done

doing nothing all they did was move

their lips and the market rebounded

that's good okay well that's what

they're trying to do now with yields

they're trying to purposefully push

yields up like the 10-year yield and the

two-year yield up because that increases

borrowing costs without the fed doing

anything the fed doesn't lift a finger

borrowing costs go up mortgages get more

expensive and what happens you remove

stimulation from the market while the

fed doesn't have to do anything

ah but now we've got a little bit of a

problem we got a war so now everything's

a poop show because people are using

treasuries as a flight to safety a haven

asset so what that means is when we look

at the 10-year treasury yield it was

sitting at 2

a couple days ago now it's at 1.74

the 10-year plummeted it just dropped 26

basis points mortgage rates are gonna be

down tomorrow because of this

good day to lock in your refinance rate

if you wanted to tomorrow unless it

keeps falling the two-year went from 1.6

to 1.34 so yields are actually falling

at the same time the 10-2 spread the

spread between these two is also falling

which is bad because it's at the lowest

point right now

that we've seen since 2019 because this

could potentially signal us heading

towards a recession so we're actually

now stimulating the economy more because

the bond market got effed up by war

and the yield curve

is falling against signaling more

recession so

these are all bad

all of these are bad the market right

now is just pricing in poop uh that is

that inflation expectations are going to

go up the bond charts say inflation

expectations are going up and the fed

manipulating the bond market isn't

working

because now it's being used as a haven

asset which means bonds are still

stimulative which is bad

so this means the fed could end up

having to

rug pull us

how does how do rug pulls work well

usually rug pulse happen at liftoff

liftoff by the way is write it down if

you haven't yet

march 16th that's when we're expecting

liftoff for the fed to actually raise

rates take a look at the last two times

we actually had liftoff at the fed

june 30th 2004 we had a three-quarter

percent hike that's 75 basis points we

went uh all the way up to two to two and

a quarter it's always a range that they

give and then after that listen this you

know how people are like oh the market's

pricing in 5 25 basis point hikes or all

that kind of crap yeah okay 2004 they

hiked rates 25 basis points

17 times in a row

okay so they really like the 25 25 2020

movement after a first shock right

june 2011 they raised rates a half of a

percent

uh to 0.5 to 0.75 and then after that

they raised rates

nine times at 25 basis points again 25

25 24 right they really like that 25.

these were times rates actually were cut

march 3rd of 2020 we saw rates go from

2.75 down to one to one and a quarter

and then two weeks later we sell rates

just cut straight to zero

these were so these here are cuts and

these here were hikes but looking at the

two recent hike cycles we actually did

have a little bit of an initial shock

now they didn't really affect the market

stand which is good uh but right now the

markets are pricing in only of 2.7

chance of a 50 basis point hike followed

by stability of 25 hikes 25 hikes you

know 25 bases point hikes 25 basis point

hikes whatever it's 0.25 it's 25 basis

points and this over and over again

potentially you know nine to 10 times

kind of how they've done the past uh

because the market's only pricing in a

2.7 percent chance of a 50 basis point

hike if the fed comes out and ends up

giving us a 50 basis point hike the

market's gonna freak and we'll probably

see the market fall quite substantially

on that because the market's not

expecting that right now

so what do we have going forward in

terms of catalysts and then we'll talk

about scenarios and what's likely or not

so let's take a look at just catalyst

for a moment so tomorrow on wednesday we

get european inflation data that'll be

interesting

but tomorrow we also get powell talking

and this is the first time in 35 days

that jerome powell is going to be

talking which is quite interesting

because he's been busy printing a lot of

money he's been printing about 1.62

billion dollars per day while he hasn't

been talking to us that means every day

for the last 35 days i kid you not he

has been doing this to the tune of one

point six two billion dollars yeah

because they're still stimulating right

now i'm putting money in the fed and i'm

sick and tired by the way of the people

in the comments like and advantage

pretty money yeah they digitally create

money jerome powell calls this digitally

printing money the treasury department

physically prints it but the fed

digitally prints it

it's changing numbers in a spreadsheet

folks anyway

then we get the private jobs report on

the second the big one though right here

is going to be the jobs report on the

fourth because this is going to help us

understand if we have that wage price

spiral happening again that is are those

month-over-month wages going up more

than inflation right now the expectation

is 0.5 percent month over month which

would actually be a good thing that

would mean no wage price spiral because

it's coming in less than inflation right

that's six percent annualized

cpi on uh march 10th

this is going to be a little bit of an

issue because the inflation for we're

expecting inflation to come in hotter

because of all the oil prices and all

the oil shocks right but the way they

calculate cpi is kind of funny so what

they do is for volatile things like gas

or oil they take these 10-day snapshots

and determine what the price is and then

they kind of take an average and they

say that for the month so if they took a

10-day snapshot of february they'd see

oil at 90 95 and 100 and then they'd

probably say okay oil was 95 for feb

even though the last day of fab

oil could have been 105

they're going to assume it's 95. so you

definitely see a lag in the way they

take these price snapshots it's designed

to kind of smooth out those fluctuations

but it creates a lag which actually

means

the april earnings and april cpi data

those are going to be the ones that are

probably the poop show

of course if we get really bad jobs

numbers especially a wage price spiral

or we get a really bad cpi print on the

10th then the fomc is going to be a poop

show and there's a good chance we end up

seeing this rug pull where we see a half

basis point hike or sorry a 50 basis

point hike or half percent hike uh this

would be considered more shock and awe

so if we get bad news on any catalyst

here that's going to be your shock and

awe

now what's uh what's likely so i wrote

down most likely here well i'm kind of

50 50 on this so in my opinion i think

the fed becomes more dovish because of

war

but uh you know unless we have of course

the substantial worsening of some of the

other things that we talked about uh

which if we flip the board i mean there

were plenty of not so great things that

we talked about here like for example we

don't want to go into stagflation this

is why i think they're going to be more

dovish but if these two things get out

of hand the new war transitory inflation

and the previous inflation there's going

to be a poop show yeah so a lot is is

definitely hinging on this war but

anyway so a lot of me says

dovish by the war dip

unless there's a substantial worsening

of the reports if the reports come in

horrible then just expect the fed's

gonna rug pull us right so pay attention

to those reports q1 earnings

uh and oh yeah if we get a substantial

worth sitting and you expect q1 earnings

to be bad and you expect the april

consumer price index for the month of

march to be bad you should just sell

everything

now where am i

uh and you know where have i been

sending my alerts for buying you know

cardano at 80 cents that thing's up like

20 to 25 which is awesome or uh average

cost basis now

what 745 on tesla on 69 69 shares if you

want to see when i send these alerts

check out the programs linked down below

and building your wealth a stocks in

psychology money comes with all of those

uh and keep in mind that was a reset

basis as well i took gains on tesla

because my basis was like 200 something

but anyway

uh over here where do i stand uh i

really stand about 50 50.

that is i i am so

unsure right now which way to lean i do

believe that there's a less of a chance

of the fed rug pulling us personally i i

don't think they can rug pull us because

it'll lead to that stagflation argument

but i also know we got crap ahead of us

we have horrible reports ahead of us we

have i think what are going to be bad q1

earnings remember amazon and etsy missed

on q1 expectations the stocks still went

up because people just like yeah by the

dip the earnings beat it's like yeah but

their guide was bad i'm shocked those

stocks still went up it's just nuts uh

and uh and then of course that april cpi

er you know i'm not too optimistic about

q1 i think people are kind of spent out

but uh yeah that leaves me 50 cash 50

invested right now i will say

you know if you were thinking about

selling real estate i generally only

like selling real estate if you really

have a better opportunity to move to it

better be a really good opportunity

otherwise i don't think it makes sense

to try to time the market with real

estate but i will say if you were

looking to time the market with real

estate the fact that we're probably

going to have lower mortgage rates

longer does give you a little bit more

of an opportunity to get some more money

for properties before potentially these

skyrocket again because guess what

happens the war ends so war ends what

happens ten years skyrockets potentially

to three percent because of all the high

inflation what happens mortgage rates

end up going to five percent and now you

have those real real estate headwinds so

anyway shout out to our sponsor again

mattkevin.com streamyard thank you so

much for watching this video i can't

believe i got it all done in one take

and we'll see you in the next one