The Federal Reserve is Blind as F: The Coming Mega Crash

any people would have said needed to

happen in this market Apple Microsoft

Nvidia all more than 10 percent from

their highs and yet the overall s p so

needing that good old decline that good

old reset and you know what that may be

true but there's also some potential

fear that the Federal Reserve is going

well overboard and that's what's giving

the Bears the strongest potential

recession narrative right now in fact

there are some arguing that right now

inflation is basically gone yet the FED

has raised rates over

550 basis points five and a half percent

take a look at Jay Parsons who puts

together a really great thread on

Twitter Jay Parsons says the following

inflation is basically gone when you

exclude the lagged shelter index in CPI

remember rent is one of the biggest

variables in the CPI basket category and

there's about a 12 month lag between

rents and CPI now this is really

important so there are two things he's

setting up here right and then we'll

talk about how the FED is potentially

screwing things up he's setting up two

things number one he's telling you look

inflation is essentially trending

towards zero but you have to remove the

shelter component and this frustrates a

lot of people because people say well

come on man like housing is a big

portion of what people spend money on 30

to 40 percent is usually your housing

ratio for those mortgage lenders out

there your good old front end ratio and

so removing that seems kind of rigged

but the reason people remove it is

because the government uses this lagged

measure of trying to understand what

rents are known as owner's equivalent

rents which is basically what do owners

think they could rent their home out for

in surveys well rents could go up and

then it takes homeowners a long time to

actually realize what rents are as lease

turnovers take time and so this gives

you a really bad measure of what actual

rental inflation is Redfin gave us a

much better indicator they say that year

over year from this July so basically

last month to last August so an 11 month

comparison rents are actually on average

negative 16 so that actually means

prices fell over the last 11 months

which let's just assume they're flat

August to August that may means your

rental inflation is actually zero but

the government says rental inflation is

actually around

five to six percent annualized that's

when you take that point four or point

five number and multiply it by twelve

and that's really frustrating folks

because that's leading a lot of folks to

say the FED is going to drive us into a

recession because they're looking at

lagging data and this lagging data is

going to leave the FED keeping rates

higher for longer and that could end up

crushing our economy which obviously

isn't good let's keep looking at what

Jay says here and then we'll go into

some of the latest data so Mr partisans

here goes on to say I'm surprised about

how little buzz there is about this

inflation decline to basically

nothingness outside of the econ or

Finance Community this like inflation

right now less shelter is sitting at

just one percent year over year the

lowest number since November of 2020.

it's less than half of the 20-year

average meanwhile CPI rent inflation

continues to slowly cool as expected

following its predestined down ramp

based on asking rents that have been

moderating since the spring of 2022 CPI

rent inflation measured 0.41 month over

month the lowest read since December

2021. year over year though CPI rents up

eight percent marking four months of

cooling after 12 to 20 months Ascension

okay some detailed numbers here on top

of what I've just outlined and so as

these asking rents continue to cool we

actually start wondering what happens to

inflation when these rents go

potentially flat or negative this is

what I argued in a tweet myself

yesterday where I said we could be

looking at deflation solely because of

rents going negative and dragging the

entire index down think about this the

year-over-year CPI read was 3.3 percent

in the CPI read we got yesterday on

Lauren's birthday

well what is the uh what was the main

contributor to that well housing 90 of

it was contributed by housing well

imagine now if we first of all if we

take out that 90 right if we were to go

over simplifying here but if we go uh

3.3 times 0.1 we really only saw 0.33

year-over-year inflation outside of that

housing contribution right but imagine

now if housing via rents or even let's

say down one percent and so you got a

0.9 weight to the downside with no

upside contributor to inflation you

could potentially be not just below two

percent but below zero with housing

disinflation now I'm not suspecting that

we're actually going to get to that

because I think other prices might end

up continuing to rise and obviously

we're still dealing with really high

prices right rents still feel high and

that's important to know is just because

the inflation rate is falling doesn't

mean prices are coming down people get

this wrong every time they hear me

talking about inflation going to zero

and they're like why are price is still

so high well that's because they went up

and then they're flat and when you go up

and you're flat you're still really

expensive but the inflation rate is

technically zero and there's obviously a

big misunderstanding about that but

anyway this idea about this lag shelter

data even though the FED implies that

they're aware of it has a lot of people

scratching their heads and going this

fed is going to drive us into a

recession look for example what Marie

Daley mentioned yesterday here's

Bloomberg quoting her when Bloomberg

suggests markets were fragile yesterday

after San Francisco Reserve Bank

president married daily said the FED

quote still has more work to do to

combat Rising prices dampening the

impact of broadly positive inflation

data on Thursday now that was very

frustrating to markets in fact you don't

even have to look too closely at the

markets if you even were totally looked

at markets yesterday you were probably

like what the hell just happened because

look at for example the NASDAQ yesterday

after we got our CPI report yesterday on

the NASDAQ the NASDAQ actually returned

to another FIB level right around 374.

it rallied out of the gate much like

many stocks did but stocks broadly sold

off throughout the rest of the day and

held lows throughout the rest of the day

following Mary Daley's comments and this

is because people were worried that this

fed might legitimately overdo it and

drive us straight into recession and

this makes sense because think about how

slow they were to react to What

initially was just thought to be oh

it'll just be a transitory little bump

of inflation but we printed so much

money so rapidly and we ended up getting

a very large explosion of inflation to

which obviously the FED reacted very

slowly the feds the Fed was still

printing money in March March of 2022

when we had over seven percent inflation

which was nutty but anyway they're slow

to react on that side now people think

they're going to be slow to react on the

other side uh to some extent break evens

are relatively stable breakevens are a

tool that I like to use to evaluate what

the market thinks about inflation

five-year Break Even rate sitting at

2.27 that assumes that inflation is

going to be an average of 2.27 for the

next five years that's pretty close to

Target

The Five-Year forward level is coming

back down normalizing rapidly from this

really bizarre Spike we had over the

last week so I'm going to keep an eye on

that but not make any conclusions there

the terminal fed funds rate is currently

expected to be 5.37 which is basically

where we are now with less than an eight

percent chance of us actually getting a

hike from the FED going into uh the

September meeting we are expecting that

our first Cuts will come from the FED as

early as January 2024 that is the first

time we have any implied rate cuts and

then we are looking at about one percent

of rate Cuts as soon as November of 2024

so somewhere starting somewhere Jan

March May getting all the way to about a

percent of cuts around the election time

which won't that be quite convenient but

there'll be potentially massive interest

rate cuts by the time we get to the

election

and unfortunately If the Fed continues

to behave the way it does with this fed

speak where it's like oh yeah okay yeah

inflation's coming in good yeah that's

fine we still have more work to do the

more the FED pulls that off the more

likely it is that we're going to get

pretty substantial rate Cuts come the

time of the election because the FED

will really have risk overdoing it and

we might actually end up seeing

unemployment rise substantially more

than expected and that's actually a big

problem in fact with some of where

you're seeing the highest unemployment

right now is in a pretty surprising

place I'll talk about that in just a

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that would be at meet kevin.com okay so

what segment of our economy right now is

seeing the largest level of unemployment

well you might be surprised by this but

it's actually the income groups making

more than 125

000 per year that's kind of scary to

economists because they look and go wait

a minute High inflation was supposed to

affect poor individuals more you know

that's that's how everything's rigged

against poor folks is inflation's

supposed to hurt the lower income folks

but it's actually the higher income

folks who are ending up with more credit

card debt lower wage increases and more

unemployment and layoffs all of this

combined leads to potentially more of a

rich session as some people are calling

it and this reality that the FED May

completely end up overdoing it so we'll

see but it's one of the reasons or in

other words one of the reasons I should

say that we're seeing treasury yields so

elevated at the moment is and actually

Rising today good lord it's kind of

remarkable 10-year treasury back to

about 4.11

what you have is you have people with

this impression that okay well if the

FED is going to overdo it with this

higher for longer nonsense even though

inflation is basically gone to zero well

then we may as well keep selling off

treasuries because the FED will keep

jacking up rates ignoring economic data

and pain that's really the bare BET

right now the bear bet isn't oh

inflation is going to be here forever

we're going to get Paul volckert that

was last year's bare bet today's bear

bet is the fed's blind to inflation

being gone and the pain that they're

actually creating as well as the lagged

effects of their policy as they're

driving this bus looking in the rearview

mirror looking at inflation reports to

which 90 percent of the inflation

reports are propped up by CPI data that

is 12 months old owner's equivalent

rents and shelter inflation it's pretty

nutty so anyway that's leading to a lot

of fear obviously there's some

geopolitical uh you know updates

regarding Biden and China and some

economists saying he's not doing enough

others saying he's doing too much

China's economy slowing down all this

nonsense all this by the way doesn't

seem to be affecting oil prices at all

because take a look at this even with

China's economy and sort of somewhat of

the doldrums right now you still have

international oil at 87 bucks a barrel

that's relatively High WTI the Western

blend sitting at about 83 much higher

than the 69 we were used to there for a

while zoom out on the five year and if

you look at the five-year chart for

Brent crude and you remove 2022 from

like Jan 2022 when that invasion was

really threatened in Ukraine all the way

to about November if you remove that

hump we are at the highest level of oil

prices in the last five years in fact

let's why don't we just zoom out a

little bit more the last time we saw oil

at these levels before this uh you know

2022 Ukraine Madness was in that 2013 to

2014 oil crisis cycle which is quite

remarkable especially since a lot of

economies are really slowing down right

now seems kind of like the opposite of

what should be happening but then again

we are seeing or hearing of more

threatened Supply constraints uh

purposefully designed by OPEC plus to

prop up the price of oil all of these

things just contribute potentially to

more unemployment and more pain in the

economy and so I think it's potentially

quite likely and this is just my

prognostication so take it for what it

is it's an opinion okay you know we're

gonna have opinions but my

prognostication on this is that the

fed's rate cutting cycle will actually

look a little bit extreme I'm going to

pull up a notepad here and kind of draw

for you what I think so what I think

we're going to see is something where

you end up with rates that have risen

substantially that are about 5.5 percent

and then what you're as sort of the

upper bound and then what I think we're

going to see is this flat right so we

might end up seeing let's draw that a

little straighter there we go so let's

call that the July level so we'll call

that July

23. it would not Shock me to see a

Federal Reserve that keeps rates at five

and a half

until July 2023

and here's the crazy part you ready for

this election season is really going to

heat up and I'm not like tinfoil hat

here I just think it's going to be oddly

convenient how this aligns okay ready

for this and and mind you I'm saying

this here in August of 2023 so it could

be wrong here but this is how things are

lining up with today's data this is what

I would be expecting we sit at five and

a half all the way to July 2023. now all

of a sudden we start seeing unemployment

rates arise and then what do we see

during this election cycle which I'm

going to draw I guess I should draw that

as let's draw it as sort of like this

box here we'll call this little box here

election cycle now let's draw it like

this yeah there we go we'll call that

election cycle time which would be your

August of next year to November of next

year maybe even December of 2024 I think

during this window you're actually

likely to see rates end up doing

something like this a dramatic plummet

to where you could see right before the

election some kind of pretty wild minus

two percent now markets are not pricing

that in right now markets are actually

only pricing in minus one percent but I

think staying at this high level to just

a hundred percent make sure inflation is

gone and the economy is nearly crushed

we'll end up leading to a Fed that

prefers rapid rate Cuts rapid and

aggressive rate Cuts that's what I think

so uh unfortunately that means this this

higher for longer pain is likely to

affect interest rate sensitive sectors

more and that's problematic it's

problematic for Autos it's problematic

for solar it's problematic for debtors

it's potentially also problematic for

housing that hire for longer pain as

soon as we get to that rapid decline in

rates though all of these sectors will

have a massive Tailwinds behind them and

so this is where a lot of people will

say okay so are you saying we should buy

Autos solar and stuff like that and you

know have debt or whatever it should we

should we just buy those things in the

summer of 2024 then you know right for

potentially those rate cuts and while

that is theoretically a good idea

usually the stock market

aggressively starts pricing in these

sorts of rate Cuts 9 to 12 months before

they come which actually means you would

potentially hope to see some of this

rate cutting priced in starting between

November and maybe May of next year

who knows but it's something to consider

that's just my thesis the whole like the

it's entirely possible the FED ends up

stair stepping rates down a little bit

more where where you kind of slowly

lower rates and you do end up getting

that one percent they slow walk rates

down but I don't think the FED is going

to do that and I want to be very clear

about why I think that I think the FED

has worked so hard to get to this level

you know sitting in their Pizza

boardroom meetings and like let's raise

uh anyway I think they've they've done

what they can to get to this level now

you're at this level and now the goal is

don't signal to the economy that we're

just going to run the money printer

again because that would imply inflation

expectations rise

uh and that's what they don't want they

don't want inflation expectations to

de-anchor let inflation get low and then

you could rapidly cut when inflation

expectations are low and inflation is

low when both of those are low then you

could rapidly cut now that obviously

introduces the other bear argument where

people say oh but when the Federal

Reserve is going to cut rates again

they're going to induce inflation uh and

this is something that I strongly

disagree with that's because if we look

at the FED uh balance sheet how much

money they actually have outstanding I

think one of the things that a lot of us

forget is that we think very Austrian

for a moment and we think okay inflation

per the textbook is the expansion of the

money supply fine maybe that is the

textbook definition of inflation the

expansion of the money supply then let's

just say consumer prices okay consumer

prices how do consumer prices move when

the money supply expands well as long as

the money supply expands gradually

consumer prices actually stay relatively

stable so from a from an Austrian point

of view you can expand the money supply

and you're supposed to be creating

inflation but consumer prices don't

actually move up

that is what we saw in the decade post

the last crisis look over here and sorry

if I said 2023 where I met 2024 I think

you know what I mean but anyway this is

what we saw with the fed's balance sheet

from 2009 all the way out to 2000 and

really 14 we saw the expansion of the

money supply we saw the leveling of the

money supply and we briefly saw a

decline in the money supply during this

entire era right here from the 2008

financial crisis we actually didn't see

very much inflation at all in fact the

Fed was considering lowering their

lowering their inflation Target to 1.75

percent during this era what was the

rapid expansion that acceleration in the

money supply that led to the rapid

inflation that we see now obviously

stimulus checks helicopter money all of

them this is a lot more logical so I

think when we look at the Nuance of of

you know when the FED Cuts rates and the

expansion the money supply we don't

necessarily have to create inflation if

we do it in sort of normalized ways and

we've seen rate Cuts before not lead to

substantial inflation or any inflation

for that matter so I'm not a believer

that when the Federal Reserve finally

rapidly Cuts rates that we're going to

re-induce inflation I think that'll be a

story of the past that's my opinion it

could be wrong and if there's data to

suggest it's important to flip-flop well

you know I will make sure of that uh or

make sure to bring that flip to you but

for now I'm pretty confident in you know

to the extent that you can be in any

kind of prediction prediction I'm pretty

confident that this is probably more the

direction the Fed is likely to lean and

that could be frustrating for stocks in

the nearer term but uh personally if you

have an investment Horizon that's more

than a year

probably a good opportunity though

obviously that's not personalized

Financial advice for you because that

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