The Market Shift is Worsening — NEW Details

hey everyone me kevin here i believe the

fed is playing psychological warfare

with us

and what they're doing might actually

succeed

and it's worth knowing exactly what

they're doing and

what they might secretly be planning on

doing because it could affect our

investment style

going forward all right folks let's get

into this video keep in mind

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all right let's get into this first

we're gonna do facts

then we're going to do conclusions we're

going to talk a little bit about my

opinions after that

so fact number one we know that the fed

does not believe long-term inflation

will occur this is important because as

much as we think longer term inflation

might occur

it's worth noting what the fed believes

we know this because of their summary of

economic projections

which they do not release every time

they do a meeting it's only i think it's

only six times a year uh

actually it might only be four times a

year i've gotta fact check that but

either way

take a look at this we know that their

projection for inflation which is

right here it only hits a high of three

point four percent for the end of this

year

and in 2022 to 2023 and into the longer

run

right here between two and two point two

percent

that's it so we know the fed does not

actually believe

there will be a longer run inflation we

know this

fact number two we know that jerome

powell has acknowledged higher near-term

inflation

and that more fed officials are

expecting a rate increase

sooner rather than later either at the

end of 2022

or multiple times in 2023 in fact the

financial times reported that markets

appear to be pricing in

as much as four rate hikes

in 2023 we also know that

federal reserve president ballard from

st louis this morning on cnbc argued

for a rate hike as early as the end of

2022

now it's also worth noting the movement

in the dot plot the dot plot this is

oops that's not the dot plot there we go

the dot plot is right here we've also

noticed that

many more fed officials have the opinion

that rates should rise

in 2022 not just bollard but seven in

total compared to four

previously believed that rates should go

up in 2022

and now 13 versus seven previously

believed that rates should go up in 2023

and we're also seeing these dots

start trending higher but you notice

they all consolidate

around two to three percent for a fed

funds rate

and around two and a half percent for

the long term

now this is also interesting because if

we jump on over to the projections that

we had

in march which was the last time we got

a summary of economic projections

when we jump on over to the rates we can

see that they've always kind of been

relatively consistent here

between two and three percent for where

the fed funds rate

should be so this hasn't changed much

their overall belief

is that inflation will sit right around

that two to two point one percent level

and that the fed funds rate should be

somewhere between or and around

two and a half percent now fact number

three and we touched on this yesterday

but it's worth an update

the 5-year to 30-year treasury curve

has continued to fall today suggesting

again

and reiterating slower growth in the

near term

and again suggesting a flight towards

growth

and away from recovery or value

now this is evidenced by the latest

chart that we have on exactly this which

take a look at this if you look at the

day chart thanks to

bloomberg for this but look at the day

chart right here this is the

the curve between the five and the uh 10

i'm sorry

the five in the 30 year and we go ahead

and see this sort of plummet

leading up to the meeting meeting occurs

plummet yesterday and then today

we've plummeted even further

so uh looking at this on a one-month

scale is pretty dramatic and

pretty damning the shift is very very

evident and so this is important to know

so that's fact number three

fact number four has to do with

something known as the

sku index now the sku index measures the

volatility of pricing

between options calls and puts and

usually when the skew index is at

all-time highs which it presently is it

suggests

dramatic volatility coming in the next

30

to 60 days this is another fact that we

want to pay attention to

the next fact fact number five we want

to pay attention to

is that long run inflation expectations

for may 2022

came in at four percent this is much

higher than what the fed expects

remember fact number one we talked about

what the fed expects

they expect to see inflation in the long

run be between two

and 2.2 percent well consumers

society believes inflation next year

may 2022 will come in at four percent

it's a much higher expectation

the 10-year inflation expectations based

on the survey by the university of

michigan which is generally what we look

to

or who we look to for inflation

expectations finds that the 10-year

inflation expectation

for may 2031 is 2.8 percent

also much higher than what the fed

expects so

both the shorter-term inflation

expectations and longer-run inflation

expectations

are much higher than what the fed

believes will actually happen fact

number six

expectations of inflation can actually

affect

inflation this is a psychological trick

and this is going to be the basis for

the psychological warfare that we're

going to talk about with the fed but

here's how this works

if we expect higher prices in the future

we're more likely to buy

now this makes sense if we think graphic

card prices for our gaming computer are

going to go down over the next six

months

we're inclined to wait if we think

they're going to go straight up over the

next six months

we're inclined to buy now well the

inclination to believe that prices

are going up can lead to more demand

pressure

now which basically compounds on top of

the existing problem we have which are

supply chain issues

so high inflation expectations

potentially lead to more demand stacking

on top of

supply chain disasters helping

essentially push prices up

together fulfilling a self-fulfilling

cycle of inflation so that's in how

psychology affects inflation then we

have fact number seven

and this is that high inflation

expectations and

high inflation are both generally

considered bad

so two different things right

expectations and actual inflation both

of them are considered

bad because when high inflation comes

high inflation tends to hurt consumers

most

they also hurt businesses but they

disproportionately affect less wealthy

individuals with more consumer debt as

opposed to asset-based debt

assets of course can go up with

inflation by writing on top of the

inflation curve

but it's usually folks with student loan

debt credit card debt card debt

or other really non-asset-based debt who

end up

getting screwed now i understand that

sometimes cars can be deemed assets

but let's be real generally 99 of cars

that are out there go down in value so i

don't like to consider them

asset-based debt they're more of a

consumer debt

and i understand we can have a debate

about that but now we have these seven

facts that we've set up on the fed we've

talked about

the skew index we've talked about the

fives and thirties about how

this chart is plummeting well the skew

index is at all-time highs we've talked

about

the dot plot and how the fed does not

believe that we are going to have

long-term inflation we've talked

about long-run inflation expectations

and the psychological

impact that inflation expectations can

have on actual inflation

and we talked about how inflation is bad

so where's the psychological warfare

part come in

oh yes let's talk about this so here's

the thing

my conclusion number one the fed doesn't

believe that we'll have long run

inflation we know that

so it appears to me that the fed's

hawkish meeting on wednesday

may be an attempt to manipulate the

market

to inflect downwards their inflation

expectations

consider this when the fed ignores the

present inflation we have

we lose trust in the fed the fed creates

more uncertainty because people believe

that the fed is hiding true inflation

and that inflation is actually worse

than it appears making the fed

lose trust alternatively if the fed does

like they did on wednesday

and they come out and acknowledge that

short-term inflation is much higher than

expected

but at the same time stating that they

still believe that longer run inflation

will align with their

long-term expectations then we all of a

sudden ease the fears

that the fed is hiding something from us

instead it makes it feel more like okay

the fed just underestimated they came

clean

about their mistake okay can we now get

back on the same page and

no longer fight the fed but instead

align with the fed

well right now it appears that the

market is actually

aligning with the fed now you might not

believe the fat and that's okay

you may be watching this going i still

don't trust them okay that's okay

that is okay you are right to believe

that but take a look folks

the market is buying it 30-year

treasury bonds folks 30-year treasury

bonds

straight down after the fed meeting here

i'll remove myself

so you can actually see it straight down

on the 30-year

let's go to the 10-year which is

obviously longer

initial fluctuation up leading into the

meeting

down after the meeting continuing this

monthly

downtrend that we have in the tenure

though the 10 year is a little bit more

mixed than the 30 year

which makes sense because it's closer to

the short term than the long term

and then folks the five year boom

straight up would you wait a minute

that is exactly the alignment we're

expecting

we're expecting based on the fed what

the fed said we're expecting

the market if the market wants to align

with the fed

then we believe inflation will be higher

in the short term making

five-year treasuries less desirable

meaning people are selling five-year

treasuries and i know this gets

confusing but when people sell the

five-year treasury

the yield goes up and instead

people shift into longer dated bonds

like the 30-year

and when people buy more of the 30-year

the yield goes

down so right now the stats

the charts and i've spent the last seven

hours

diving in on this i really i mean i

really enjoy this i also like providing

you these short under 15 minute

summaries because it's a lot to digest

but to me my bottom line conclusion

number one which you've got more

conclusions but my number one conclusion

is

the fed is successfully

molding some might say manipulating the

market

to align with what the fed believes

and the market is buying it the market

didn't believe the fed before

now the market's like okay all right

y'all just f'd up okay no problem

oh okay we should be aligning that way

okay

all right it's literally what's

happening okay

conclusion number two and this was

brought to us by bloomberg this morning

so credit to bloomberg

and i've been studying this again

throughout the morning here

it's possible and there's starting to be

murmurs of this and these are just

murmurs so this is i would say a little

bit of a weaker conclusion but it's

still a conclusion

it is possible that the fed may actually

be coming on too strong

as it often does consider when they came

on too strong in 2018

and crashed the real estate market by

dropping prices 12

month over month i know because it

literally punched me in the face

but we also know that we can actually

lead

or this sort of hawkish behavior rather

could lead to

lower inflation than expected that is

the fed

might be overly hawkish and end up

reducing inflation

expectations which we're already

starting to see especially longer term

inflation expectations

chillaxing people about inflation then

doing the opposite of what we talked

about earlier oh okay well if inflation

is going to be less of an issue

we kind of rotate down on inflation

expectations

and then what happens when you rotate

down on inflation expectations

people ah why there's no pressure

anymore to buy now and all of a sudden

demand actually wanes supply chain

pressures are able to ease and resolve

themselves and oh crap

everything that was actually pushing

inflation up now vanishes

this is like kind of inception-esque

it's crazy

i mean think about it inflation is high

now people are freaking out or have been

freaking out about inflation

the fed comes out finally acknowledges

high inflation says they're going to

adjust short-term forecasts

and now they're coming in so strongly

that the market is responding in such a

way where the market's like okay okay

wait a minute let's change our

expectations and now if expectations

fall

we and undershoot inflation targets

meaning the fed might literally in the

future

like within the next two years might cut

like cut rate

or sorry uh cut uh bond purchases cut qe

right

and then raise rates only to in a couple

years have to reverse and potentially

lower rates again and increase bond

purchases or qe again quantitative

easing

now we don't want to project all of that

kind of flipping

at the fed but it's very interesting

because these two conclusions together

paint a very clear picture in my opinion

at least hopefully it doesn't sound

confusing to you but to me it's a very

clear picture

one the market is aligning with the

fed's belief that inflation will go away

but that short-term inflation is the big

problem

and this could potentially lead to an

overshoot by the fed to react too

soon and really what ultimately happens

is

the market ends up slowing down a little

bit

this this big growth after the v-shaped

recovery starts flattening out

and we end up getting certain sectors

blowing up more than others

personally i look to one of the most

down-beaten sectors we've had

over the last six months and quite

frankly

it's been tech it hasn't been crypto it

hasn't been recoveries

it's been tech tech is pretty dang

beaten down

now don't get me wrong i understand that

crypto is down and i'll have a crypto

video coming out soon to explain

my thoughts on crypto but take a look at

this we talked about the market like

this yesterday and we saw this happening

yesterday

look at the market again today let's

start with the losers

so in losers we have some moment arrival

was really a brief momentum pop here but

what do we have falling

a reit ashford hospitality we're going

to ignore the crypto related stocks for

a moment we're going to focus

on on actual non-momentum stocks here to

get an understanding of what's going on

and this would be things like levi u.s

steel

commodities right we've got

uh we've got pterodyne an industrial

microvision a lot of sorry we've got a

lot of momentum in here and i understand

that

corsair gaming very low multiple

falling we've got uh seagate

technologies are falling walgreen's

falling poshmark is in here expi falling

we got roblox nordstrom draftkings

jp morgan beyond meat

root tattooed chef build a bear

western digital marriott you've got

wendy's here gamestop simon property

group

disney the vast disproportionate amount

of what's falling today

including trimble another industrial

here are industrials

and recoveries spirit airlines dave and

busters

sort of day two of this a lot of dow

style industrial stocks falling

the ones that are doing very well today

ironically

maybe unironically are things like look

at this docusign

roku lemonade chargepoint

zillow tortash nvidia paypal

shopify we've actually for some reason

got delta in the mix over here

which kind of skews this a little bit

but anyway netflix square snowflake

the vast majority of the companies that

are doing very well right now

are actually the higher multiple

companies

so we can actually go even deeper than

just saying tech

it's actually to hire multiple companies

because if you consider

apple and google those are lower

multiple

companies with potentially less growth

forecast you look at a company like

lemonade

it has like an infinite pe ratio because

it's not profitable

docusign not profitable it has

it's literally up i mean kali 10 20.

it's probably up 30 45

over the last month i remember saying oh

my gosh docusign is under 200 what a

deal

end phase a lot of these higher growth

companies square paypal tesla

the higher growth companies are doing

very well right now so

this is actually a little different from

what we talked about yesterday where

yesterday we were saying it might be

tech overall but

specifically today and yesterday we're

seeing the market really

favor higher growth potential higher p

e stocks higher multiple stocks as

the market preps for a potential broader

slowdown

and a trade or rotation away from

reflation stocks like recovery stocks

and value stocks

kind of interesting some fascinating

trends i don't know how long this trend

will hold

the market can be very very fickle we're

expecting a lot more volatility

you know we've got triple witching and

so on whatever big deal

volatility doesn't necessarily mean

price directions go in our favor or

against our favor

it just means more people are trading

it's it's

not not a single easy catalyst that we

can use

but what we can say is the market's

moving

and right now it appears to be moving to

a line

with the fed and so anything we can do

to understand what the fed is doing

is going to be very very very very

important for our investing choices

so if you want more of these insights

consider checking out the programs

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folks thank you very much for watching

this video

and we'll see in the next one

you