The FED *just* Revealed their 2022 Market Crash Scenario.

hey everyone kevin here you wanna know

what the federal reserve's doomsday

scenario

is for the market specifically the stock

and housing market over the next

potentially few months to couple of

years well

they basically handed it to us on a

silver platter now you may not have

heard about the doomsday scenario

because the doomsday scenario was buried

in

the dodd-frank stress tests

of banks and financial institutions and

if you just

saw headlines of the stress test you

probably would have only heard something

like this

the tests show that large firms have

sufficient capital levels to absorb

losses

during stressful conditions this is due

in part due to substantial capital

buildup

since the last financial crisis and the

results suggest that all firms

would experience substantial losses

but would remain well above their

minimum risk-based requirements

and could continue lending or if not all

then at least

23 of the firms that participated

but this isn't about saying yay okay the

bank stress test went okay all right

what else

this is about looking and understanding

what the adverse scenario entails

how much did the stock market drop in

their scenario

how much did the housing market drop in

their scenario when

did these drops occur now what's kind of

interesting but also a little weird to

think about for this scenario

is this scenario was conducted in

february so we're really only now

getting the results of this

so some of this feels a little weird

since technically we're already

in the second quarter in fact the second

quarter of 2021 is

almost over it comes to an end in five

days just like my course coupon code

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right but more importantly we must talk

about the severely adverse scenario

this is the hardest scenario under which

the banks were tested under

this means the fed thought hey

what is like the worst we could throw at

these banks

to see if they can withstand it and

let's see some of the variables they

changed

to indicate this crash actually coming

some of them

surprised me and i have a feeling

they'll surprise you as well

all right and if any of the stresses you

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we go the severely adverse scenario is

characterized by a severe global

recession

accompanied by a period of heightened

stress in commercial real estate

and corporate debt markets hmm sounds a

little familiar to 2008

but okay the u.s unemployment rate

climbs to a peak of

10.75 in the third quarter

of 2022. hmm why would they pick that

you know i personally like reading these

because like wait a minute

what is it about 2022 that you don't

like

anyway unemployment rate rises to 10.75

in the third quarter of 2022 a four

percentage point

increase relative to its fourth quarter

2020 level

real gdp falls four percent from the end

of the fourth quarter of 2020

through the third quarter of 2022 what

is it with the third and fourth quarter

of 2022

is this like is this a suggestion that

there's gonna be some stress at the end

of 2022 maybe

i don't know it's just there it's just

their scenario right

that the cohort sold excited the decline

in activity

is accompanied by lower headline

consumer price

index inflation which quickly falls to

an annual rate of about one percent

in the second quarter of 2021. now this

is

this is we know this is wrong because

right now we're

not seeing that however what's really

freaky and so we can this is why i kind

of preface that you kind of want to

avoid

considering their second quarter of 2021

talk because well this test was done in

february

and this is not true like inflation

right now is higher way higher

than an annual rate of one percent we're

at an annual rate of over four percent

okay

so consider that for a moment it's kind

of weird what they're talking about in

their scenario even though this timing

is

not possible anymore the second quarter

of 2021 is over

what they're talking about in their

scenario which they're worried could

potentially

or or is their test scenario i'll say

i'm not saying that they think this is

what's gonna happen

it's just their test scenario right so

q3

to q4 2020 they think the

characteristics that could lead to a

crash like this would be

high unemployment of 10.75

inflation actually going down to an

annualized rate of one percent and then

gdp falling

at a total rate of four percent this is

really interesting to me

because 2022 is going to be marked by

a very fascinating set of inflation data

in fact we've talked about this on the

channel before but consider this

if prices for certain widgets goes up

let's say 10 percent in 2021

because in 2020 it was let's say a

hundred dollars

and now all of a sudden it's a hundred

ten dollars that's a ten percent

increase

but if the price because supply chain

shortages fixes you know gets cleared up

or whatever

and goes down then what do we end up

having

we have a deflation rate of five percent

for that particular product well if this

happens and this cleans up or the supply

chain

crisis sees clean themselves up and we

get this happening in

multiple different segments of the

markets yeah

it's actually possible that headline

inflation could fall

to one percent kind of creepy to think

about but like that path is there

okay so let's go back to the scenario

here so and then stays at the level for

another quarter

before here we go gradually

rising to two and a quarter percent by

the end of the scenario period

so also weird they're kind of suggesting

this temporary fall in inflationary

readings

which we have here and then an increase

again

in inflationary readings here let's use

the red there we go so really you get

this big spike in inflation

followed by a decline in inflation

readings and then an increase again

this this is chartable like this could

make sense that could be what happens

just kind of interesting in line with

the sharp decline in real activity the

three-month treasury remains near zero

and the 10-year yield falls to 0.25

percent

folks 0.25 right now we're at

1.5 percent so a little different here

right so again ignore this talk about

quarters of 2021

because this is just their scenario here

uh after which gradually rising to one

and a half percent by the end of the

scenario period so this is interesting

because this is where we stand

now so this is a little counter to

these scenarios that we have over here

but we'll write it down

so we'll put 10 year 1.5 percent

towards the end of the scenario period

which is basically during crash time

all right let's now move forward oh

worth also taking a peek at some of

these charts and then we'll get the

numbers on equities falling

and housing prices falling so look at

this gdp growth in their adverse

scenario

look at this here's that v-shaped crash

down

then you get this explosion up which

we're seeing now

but look at this this is something else

the projection and again this is not a

projection of what

is going to happen this is just a

projection of if this happened

how would banks be able to hold up right

so you have to keep that in mind but

that this is their

these are the scenarios they're talking

about of potentially having this

over correction to the downside and then

rotating back up

it's kind of like you you've got this

insane velocity to the downside but then

this insane velocity of the upside

and then when you go back down to

stabilize you actually crack down a

little bit before stabilizing

kind of weird and interesting because

could happen here's what they see for

house prices

they see that in their scenario about

midway through their scenario

quarter 3 2021 i drew this little red

line for quarter three just so you would

see

they see housing prices potentially

falling and then coming back up

and this is a substantial fall i'll tell

you how much in just a moment because

they write that down

and then this is what they see for the

dow jones this incredible

skyrocketing that we're seeing now and

then this u-shaped kind of fall

and recovery again corporate yields in

the inverse here

okay now you ready for declines you

ready for this

okay here we go so conditions in

corporate and real estate lending

markets

deteriorate markedly the spread between

yields blah blah most of us don't care

so much about spreading yields if you do

pause in the reading here we go

asset prices drop sharply in this

scenario

equity prices fall 55

through the third quarter of 2021 now we

have to again revise this because we're

literally going to be in the third

quarter of 2021 in a few weeks

but the point is if there if there is

going to be a crash ever

like this this is how much they think

stocks could fall

55 accompanied by a rise in the

volatility index

and house prices and commercial real

estate prices experience

overall declines with house prices

falling

23.5 percent through the end of 2022

and commercial real estate prices

falling 40

through the first quarter of 2023 then

this would cause severe recessions in

the euro area the united kingdom

japan and a significant deceleration of

activity

this also assumes the largest

counterparty

collapse at banks which ends up leading

to a flight to safety

which could prop up the us dollar

despite seeing these declines

but this counterparty collapse could

lead

to the greatest losses in derivatives

and lending derivatives folks

in case in case you don't remember

derivatives

what do you think options are are

options

valued based on their own performance or

are they derived from the value of

something else yeah folks options are

derivatives

so this scenario really kind of scary

something to pay attention to uh you

know it's

it's just the scenario uh it's a

scenario that was created in february

2021

i just find it very very interesting

that

this the suggestions of what could cause

or

be a result of this recession it's not

very clear if we're talking cause or

effect of some of these things

some of these things could be effects

gdp falling four percent

inflation down to one percent

unemployment 10.75

real estate prices then falling 55 sorry

stock prices falling 55

real estate prices falling 23 to 55

but i have to say it's a little weird to

also consider that

well we could see inflation inflect

downward before

going back up it's also a little weird

to think that yeah

we are having this crazy recovery to the

upside

what if we do overshoot to the down

before we stabilize again

it's a crazy scenario it's certainly a

scenario that again

sort of reiterates to me personally like

kevin

you probably want to reduce some of your

risk exposure

to options this is something i've been

talking about doing

for months reducing exposure to margin

reducing exposure to options very

important

consider it keep it in mind okay folks

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