The Massive, Coming Fed U-Turn & 5% Rate Cut.

hey everyone me Kevin here so a lot of

people have been asking me how in the

world is it possible that the FED is

actually considering a pause with the

unemployment numbers that came out this

morning people are also wondering how is

it possible that the economy could

potentially not go into a recession with

the Federal Reserve going through

quantitative Tiding and how is it

possible that the market is pricing in

cuts it doesn't make sense

or does it well in this video my goal is

to explain

why it might end up making sense for the

Federal Reserve to essentially do what

the market is projecting at least what

the bond market is projecting and that

could end up being very good for stocks

and maybe also real estate and maybe

also the economy and the recession now I

don't want to come from this permeable

point of view that some people try to

label me as try to be just as realistic

as I can with the data I I want to

step back for a moment with you and ask

what is the driver of the Federal

Reserve and I'm so I'm going to ask you

a question here

does the Federal Reserve care about

stock prices and does the Federal

Reserve care about real estate prices

and so that question is I think very

important because it's these questions

here that lead people to say well the

market should be going down if the

Federal Reserve is trying to slow down

the economy right these should be

suffering we should have negative

earnings growth

so we'll talk about that and we should

have slower and softer real estate sales

which we'll talk about that as well so

hold that thought for a moment and now

consider some of the catalysts that we

have coming up right now we're at about

June 2. well over the next about

14 ish 12 to 14ish days we'll have some

catalysts and these will be pretty

important and are potentially actually

driving what's happening here which is

fascinating you know we talked about

that and this what's coming here

especially on the 17th I bet you you

don't have the 17th written down we're

going to talk about this we talked about

it this morning in the course member

live stream and I want to take that

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kevin.com if you want a bundle code this

morning we've just been talking about

the FED some stocks we're analyzing and

so we haven't got into changing the

prices yet so there's a good chance that

while you watch this video or after this

video posts for a little bit uh we'll

still have our June 1 pricing and you'll

see because the sales Banner will go

away so if there's no coupon then you

know the prices have gone up and we're

working on that if not later today then

tomorrow we'll get that done I'm going

to get one or two more videos posted in

Barbara posted and that's it so if you

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programs out link down below okay so

with that said

that's what we're going to be working on

here but that's not so much of a

catalyst right this is this is Kevin

pricing over here what's a catalyst here

is on the 17th you actually have the

CBOE as options your standard options

expiration date and an OP X date not to

be confused with operating expenditures

at a company is important because it can

increase bets for hedging in either

direction given that the market has

basically done one of these this year

it's likely hedging is being conducted

to the downside via puts for the 17th

but if people are buying puts now for

the 17th what you're actually doing is

you're forcing market makers to be

buyers

now and so quants and market makers are

buying here you've got the 17th here now

why would you have hedging being done

over this two-week period versus just

any other month you have standard

options expirations and you have

weeklies as well but those matter less

these are the bigger dates and the 17th

is the big date for this month well

because conveniently that week which

actually makes that options expiration

during that week a weekly expiration you

will have the fomc meeting on the 14th

and you'll have CPI on the 13th those

are really big deals because these are

going to drive what the market does if

we get a terrible Miss on CPI we get

some kind of core read that's actually

going up and we're seeing that Services

inflation is becoming substantially more

sticky you would expect the market to go

down in those shorts or put options to

make money especially since if this

really anchors then the Federal Reserve

will likely be inclined to raise

interest rates in the June meeting which

right now markets are actually pricing

in a June pause and a July hike which

I'm not going to rehash the likelihood

of this Beyond just giving you a brief

summary brief summary is that this is

probably unlikely because pausing and

then hiking again would be likely seen

as repeating the mistakes of the 1970s

era where between 1970 and 1978 the

chairperson of the Federal Reserve

Arthur Burns essentially created this

expectation that the FED doesn't know

what it's doing because we're just going

to lower rates and then we're gonna

raise rates and lower rates we're gonna

raise rates and we're lower rates we're

gonna raise rates if you look at the

fomc rate it's nuts for the 70s markets

don't like that because it's a signal

the FED is confused they're not

consistent or they lack control couple

that with war and oil price shock and

leaving the dollar standard you have

broken inflation expectations and then

you get Paul volckert which is a fancy

way of saying everything goes to poopy

doopy and the market crashes that's bad

so I I don't think that if we pause here

we'll hike again but my opinion doesn't

so much matter what instead matters is

going back to this question

does the Federal Reserve actually care

about stock prices and real estate

prices

now it is tempting to answer that

question with a yes or no it's tempting

to say oh of course they care because

that's part of the economy and other

people are like no they don't care about

that they only care about other things

so the answer to this is a mix the FED

really only cares about stock prices and

real estate prices to the extent that

these items affect the federal reserve's

mandate

soon with how society's going will

probably call this a person date but

we'll just stick with mandate for now so

stock prices and real estate prices only

matter two

what the effect that they affect the

Dual Mandate of stable prices

stable Pete and Max E stable P Maxi

stable prices maximum employment that's

what matters so for example if real

estate prices are plummeting and they're

affecting households propensity to spend

then you might actually see disinflation

and pricing and you might see layoffs

but this is ultimately what the FED is

trying to control stable prices at

maximum employment

and so now you have to ask yourself okay

well the FED probably has a formula for

arriving at the interest rate they have

and they do and now what we want to do

is compare that formula to what Sable

prices in Max E demand the Federal

Reserve to do so let's consider the

formula the formula is as such the

effective

Federal Reserve Open Market Committee

rate and the reason you say effective by

the way just kind of write this uh I

don't know down here for a moment is you

say effective because the rate is

actually just a trading range and the

rate kind of on the daily basis

fluctuates between five and five and a

quarter percent that's the range we're

in right now so if they're trying to

accomplish five percent well what goes

into that formula well what goes in are

two things one is the level of uh

inflation expectations generally about

three years out so we're going to take

the three-year inflation

expectation we're going to write that

down let's say right now that three-year

inflation expectation is three percent

now after we have the three-year

inflation expectation what we're going

to put in here is some form of real rate

that we're targeting

and that real rate really depends on if

the Federal Reserve is trying to be

restrictive or not or potentially even

accommodative so we'll talk about that

in just a moment but right now that real

rate is expected to be about

two percent this is based on Jerome

Powell's last two fomc pressures where

he explained this to us

so when you add this together you get

the fomc's rate of five percent

so now you wonder okay well how could

the market possibly be pricing in rate

Cuts well here's how first of all the

stock market going up doesn't actually

matter to the FED again to the extent

that they only care to the extent it

affects prices employment

same thing for Real Estate so for the

moment we could actually think let's

just draw an X through this let's

decouple this because what's actually

happening right now well what we have is

we have maximum employment nobody would

argue that when we just added 300 what

39 000 jobs to the payrolls data yeah

the establishment survey yes we know the

household came in slightly negative and

there's some abnormalities with that but

nobody would argue that when we're

beating for 14 months in a row and we're

well above a pre-covered trend on the

establishment survey nobody would argue

that we don't have maximum employment

now it could be said that we'll do it

again the household came in negative

yeah but there's volatility between

those two numbers last year we're like

why is the household survey lagging so

much and they've caught up all of a

sudden magically who knows maybe the dad

is raped but if the dad is raked it

doesn't matter because the fed's looking

at it going well

all right whether it's rigged or not

that's our job so check

okay so then the next question is stable

prices and this is where folks will say

oh but Kevin inflation is sticky on the

services side maybe and that that

absolutely may be true that's why this

CPI date and the shorting is happening

because yeah inflation could continue to

prove to be sticky that's not what we're

seeing in Spain it's not what we're

seeing in Germany we're seeing inflation

in the entire European and Union come

down faster than expected wage growth is

much more stable now than it used to be

wage growth tends to lead to service

price growth which is the whole sector

people are worried about so in a weird

way you have like a reverse wage price

spiral think about that for a moment

what is a wage price spiral well a wage

price spiral is When people's pay goes

up so pay goes up and when pay goes up

people have the ability to spend more

money on stuff so they spend more money

on stuff spend goes up which enables

prices to go up but if prices go up you

don't feel like your pay is going as far

anymore so you demand more pay okay well

you can also reverse this if your pay is

more stable then prices can be more

stable

so it's a reverse wage pay as well

that is roughly what we're seeing based

on not just jolt's data but also the

payrolls report that came out this

morning in the ADP private report

yesterday which some people like because

they think it's less rigged than the

government data and whether it is or

isn't they're all saying the same thing

no wage by spiral so to some extent as

long as the Fed

I don't know why I hit Stables here

maybe I'm thinking about horses anyway

stable prices

um to some extent if we can get to

stable pricing

then this does not matter what matters

is that we eventually get to stable

pricing and so then people have this

question okay well we need to get there

fast right

no the only thing that limits how

quickly you have to get to two percent

inflation or inflation expectations but

inflation expectations just Google The

Five-Year Break Even rate

they're this they're straight down

they're at Lowe's nobody's really

expecting inflation to dis anchor right

now so in other words if inflation

expectations are falling

you have no rush to get inflation down

in fact by you just holding firm

inflation slowly just continues to

trickle down wages aren't pressuring

core Services more and so you're

actually trending I'm going to put a t

here you're trending to stable prices

so then the question is well I mean the

FED is projecting unemployment to go up

don't they have to follow through with

that

no because if they do not need to

remove maximum employment in order to

get to stable prices then they win their

dual mandate there's no point to getting

to stable prices and then having 10

unemployment because now you've got to

go the opposite direction to fix all the

damage you just caused that's the over

tightening concern so if you're at five

percent and you're like we're just by

hanging out here we're trending towards

stable prices

we're at Max employment and it's doing

really well doesn't look like we're

going into a recession

why screw with it just let it be this is

really good now a lot of people that go

but Kevin that's Goldilocks so it's

gonna be an earnings recession you want

to see an earnings recession all you

have to do is look at chip stocks not

their stock prices but actually look at

their earnings Reports look at Intel

look at Nvidia look at Dell that just

came out look at Macy's look at Nike

over the last earnings uh periods here

you can see what an earnings recession

starts looking like in other words

negative a quarter over quarter Revenue

growth and earnings growth

so uh Revenue growth leading to that

earnings recession right okay so now the

question is but why then is the market

pricing and cuts well the market is

pricing in Cuts because of this

if we end up getting disabled prices and

we remove from the news cycle all this

fear and drama and fud and uncertainty

and doubt about prices running away and

being so unstable what's going to happen

to inflation expectations three years

out

well should be obvious inflation

expectations three years out will

probably fall and let's say inflation

expectations go to one percent because

maybe people think artificial

intelligence is actually going to cause

disinflation in the future so you see

and we're going to be extreme with this

but I just want to show you how this

could function

and now the Federal Reserve says okay

well you know we could go to maybe

rather than a restrictive stance which

if restrict restrict is let's say

restrictive is a real rate of two

percent maybe more of a neutral level is

one percent okay well if I change this

to one percent what do we all of a

sudden have well we have fomc rate of

two percent

now let me be extreme here okay

watch this let's say inflation

expectations are one percent inflation

actually starts trending to one percent

rather than two percent

well now rather than having the fomc

rate at a neutral rate the FED might

want to go accommodative

accommodative might be a real rate of

zero percent

okay so uh or or quite frankly it could

even be watch this you know what let's

go a little extreme I said I was going

to go extreme super extreme real rates

of negative one percent

okay well what happens then instead of

uh one percent here if this is negative

one percent

well then the result of the formula is

zero percent rates

which we're at five percent right now of

federal you know federal funds right

what is the bond market pricing in right

now well by the time the cycle is over

over the next two or three years the

bond market is pricing in

500 basis points of cuts which is just a

fancy way of saying five percent of cuts

which is another way of saying we going

back to zero

and then people are like wait a minute

Kevin if we go back to zero isn't that

going to cause inflation again

no not necessarily because remember what

caused inflation in the last cycle was

the rapid printing of money not the

printing of money look at 20 or a 2008

2008 all the way through 2020.

gradual printing of money inflation down

actually so low they were thinking of

lowering the inflation rate to 1.75 and

everybody was freaking out about

negative

rates and what that would mean for

banking

so

does the Federal Reserve care that

stocks are rallying in a dare I say it

Nike Swoosh style recovery which I

expect to continue for the rest of the

decade hence Nike Swoosh now you can see

it

do we think the FED actually cares

about stock prices or real estate if

their mandate has been met stable prices

in Max E

no

they don't obviously if there's Euphoria

then you could end up causing unstable

prices and inflation again but wait a

minute

stock market rallies don't cause

inflation

rapid money printing causes inflation

so what now is the Practical bottom line

of all of this

well the Practical bottom line of all of

this is no matter what happens

here on CPI or fed day this is your

short-term fear right this short-term

fear might give you reason to well first

of all buy those courses linked down

below or email us at staff meet

kevin.com before we change the prices

but maybe it makes sense to buy here if

you think inflation is going to be okay

if you don't think that inflation is

going to come in okay then maybe what

you do is you plan to buy

here right here or here or you just wait

you just don't buy that's another option

right

but long term not short term long term

practically speaking

if this is the direction of our Market

does it make sense to invest in treasury

bonds yielding you 4.5 percent when

there's a risk your opportunity costs in

the market substantially higher that is

if stocks are going to return 20 why do

you want the four and a half percent

well sure there's a risk of downside

here right these stocks could actually

go negative 10 or negative 20 then that

looks more attractive but the point is

there's a real risk of being

mispositioned because of the belief that

the FED cares about stocks and stocking

real estate prices

and this misbelief that the FED as soon

as they start printing again they're

going to cause inflation again and this

misbelief that the Federal Reserve needs

to cause unemployment in order to have

prices go down

a lot of it is just not based in fact

and

while the one thing that could destroy

all of this

and everything I just said can still

make complete sense if this happens

is this

if CPI unleashes and for some reason

core inflation skyrocketing and the wage

price spiral comes back then you can

actually just reverse this stuff right

because now you potentially have a

de-anchoring of inflation expectations

and you say well inflation expectations

are going to be four percent and we

actually think we need to be at a real

rate of three percent to be more

restrictive well what does the formula

tell you then well the formula tells you

then you're going to have seven percent

interest rates in the market which

obviously uh would would take a little

bit of work to price in in other words

it would be bad for stock so yeah

there is a potential things could go

wrong but it doesn't change the facts of

how these formula work

and so for me I look at is if this CPI

comes in solid the jobs that added today

was fine CPI comes in solid

you get a pause

after you get a pause they're done it

doesn't make sense to send this

wish-washy garbage signal to the market

for what another 25 BP who cares just

keep it there a little longer it's

complete nonsense so this is my POV

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email us at staffmbecaven.com if you had

any questions about bodily open we'll

see you next one goodbye