The Market's Expectations are Dangerous. Prepare for Tomorrow.

oh boy we are pricing in almost

Perfection and that could be setting us

up for some serious disaster over the

next few weeks especially over the next

two days because tomorrow is the CPI

release the Consumer Price Index

inflation report release we will talk

about the actual expectations for CPI

then we're also going to talk about the

Federal Reserve expectations for the fed

and I'll tell you both of the

expectations this time are really on the

uh sort of bullish side which I actually

prefer when expectations are leaning

bearish when expectations are leaning

bearish it's really easy to beat them

for example last month we had

expectations that inflation would come

in at 8.1 percent and that month over

month would be at point six percent and

I'm like oh man seems a little high you

know based on some of the research and

reading I was doing we ended up coming

in at 7.7 and 0.4 right along my

expectations I felt really good about

that now that's awesome but those

numbers were also leaning and starting

High problem in my opinion is when

markets are expecting bullishness it's

really and good numbers it's really easy

to miss to the high side and it's uh

it's not so great I'm gonna end this

video start by talking about those

expectations regarding to the Federal

Reserve remember how the FED is

regularly telling us that oh uh you know

we're gonna hike rates and then we're

gonna stay high for longer well there's

add to this let me show you some of the

history and then uh you're going to kind

of see what expectations are and you'll

see what I'm saying here okay all right

look for some time all right so that's

the phrase we keep hearing here what is

the average time between the peak

Federal Reserve rate and their first cut

okay well the average is actually about

11 months you can see here different uh

Peak and cut Cycles Peak rate uh and

then they cut until what rate right and

really what we care about is this time

how long is for some time well

previously it's been five months 18

months eight months five fifteen eight

months and seven the average here is

about 11. so usually we stay at a peak

rate for about 11 months however one of

the issues with this chart here is that

in all of these periods inflation was

relatively stable if you look at these

years here on the left none of these

years are like oh my gosh inflation was

raging during that time and if you go

look at the 19 the early 1980s and

you're like well that was the last time

we had raging out of control inflation

right or we could look at the Korean War

back in 1951 where inflation plummeted

within a year but the problem with that

is it was only War driven rather than

pandemic and War driven right it was

also before the time of really massive

intervention by the Federal Reserve so

1951 maybe not the best example the

1980s were really weird because they the

Fed was really weird in 1980s and that's

why they're not in this chart they kind

of raised rates cut rates raised rates

cut rates raise rates cut rates like

when you look at the chart it's just

like like they were so confused uh and

that's actually what the FED is trying

to prevent this time around they're

trying to prevent signaling confusion

and so that's why the 80s aren't

actually on this chart we're just

looking at really years since then and

so since then it's sort of like okay

well

um that's not great you know it seems

like they stayed Peak for a while now

look every cycle is different in 95 and

97 we didn't and really 2008 18 rather

we didn't really in these Cycles here

face a potential substantial recession

we did face a potential mass of

recession and actually did end up having

recessions here in.com and 2006.

but still if you just average this right

here holding rates high for longer is

still going to put you at what is that

that's uh 23 divided by 2 that still

puts you at holding rates at a high

level uh for somewhere around 11 and a

half ish months that's a long time we

don't want to stay there long not only

do we not want to stay there long but

it's not what the market is actually

anticipating remember the Federal

Reserve meets uh starting tomorrow their

meeting ends on the 14th which is

Wednesday they'll raise rates what's

expected Now 50 basis points and we're

going to be looking for clues for the

fed's peak and then then cut cycle the

problem is the Fed is is basically

telling us hey look we're going to raise

rates to probably five and a quarter

percent and then we're going to stay

there longer well if they raise rates to

five and a quarter percent that's not

even as high as the market is

anticipating so if they raise rates of

five and a quarter percent they'd be

raising up to about this red line here

and if they held rates for about that

average of 11 months which whether you

used all of the months that I just

showed you or just the two previous

examples the average hold period is

about 11 months that would keep our hold

period

to somewhere around let's see that's

March about Feb of next year so about

right here this is actually what the

hike period would look like but it's not

what the market is pricing in the market

is actually pricing in that we don't

even get to the peak of 5.25 we only get

to about

4.75 to 5 somewhere in between there and

then we actually start cutting as soon

as the summer around June and July and

then we kind of just reduce from there

the problem with this is actually very

bad that in my opinion is very bullish

okay this is very very hopium very

hopeful but if the fat actually stays

with their 11 month hold on average

or honestly even if they just hold

anything more than three months we're

gonna have to price in all of this pain

all of this Orange right here needs to

get priced in the difference between

their hold and where the charts are

expecting right now and this is why when

you look historically it looks a little

remarkable that the current market is

pricing in 200 basis points of cuts and

if you look in Prior Cycles this is much

more what we're pricing it over here is

much more than what we've really priced

in previous to Cuts in any cycle here

previously going back the last 30 years

now that's weird I think one of the

reasons the market is acting like this

is because when we look at how deep the

yield curve inversion is the market is

actually pricing in 500 basis points of

cuts because we are so heavily inverted

at about 80 basis points inverted we are

expecting about 500 basis points of cuts

eventually and sure I actually do think

that's going to happen but the market is

trying to say oh cuts are going to start

in 2023 what if they don't actually

start until 24 or 25 how deep is that

recession going to go now Jerome Powell

did start going a little bit bullish in

this last cycle but all of that could

die if the CPI expectations Miss and

this is where we have a little bit of an

issue yet again see

CPI expectations last time were high CPI

expectations last time were easy to beat

year over year was expected to be 8.1

percent month over month was expected to

be 0.4 uh point no point six percent and

we ended up coming in at 7.7 and 0.4 it

was really easy to beat those numbers

the numbers are a little bit different

this time month over month expectations

are 0.3 for both core and regular

headline month over month and the

expectations for year over year are 7.3

you can see that here 7.3 with a bias to

to actually it's pretty pretty evenly

distributed here bias to the left and

right but still 7.3 and then a bias to

the low side here expectation 0.3 bias

to 0.2 that's not great because we're

really now

in this December cycle pricing in that

CPI tomorrow is probably going to be

solved I think the best thing we could

Hope For Tomorrow is we just hit those

expectations hit the freaking

expectations we don't even have to come

in lower than that and look I know all

eyes are going to be on the FED I know

people are worried about wage price

inflation service price inflation with

PPI coming in a little bit hotter than

hoped uh here last week but look

everything starts with the consumer

consumer good prices slow down then

produce your price to slow down then

wage prices slow down we know rental

inflation is coming down we know the

fed's paying attention to this we need

this CPI report to come in low this is

the start of everything or low or at

expectations that's what we need for

tomorrow if we just get ad expectations

my belief is there's a reasonable

expectation that markets can rally that

we now let me be very clear I do not

think we are at all for 2023 expecting a

v-shaped recovery this is not a Larry

Kudlow oh it crash we're going to V

shape up I think what we're seeing we're

going to see next year here is we've got

the the V down we've had a very very

quick V down we've Fallen about three

times as fast as we did in the.com Era

crash but I do think we're going to have

a very kind of slow gradual anchor

dragging along the bottom of the ocean

slowly getting reeled up uh Market

recovery and that's because our our

opium is very high right now based on

what the market is pricing in for a Fed

U-turn and any any bad CPI report is

going to derail that especially since

we've had this this reputation of

basically CPI comes in high then low

then High then low then High then low we

just needed to go low like last month

and then sustained low if we get that

rally mode and then maybe maybe that

sort of soft Landing that you just saw

depicted there actually could be a

reality but uh look there's there's no

way to sugarcoat this if tomorrow's CPI

misses these expectations like again all

we do have to do is meet we don't even

have to beat to the low side

but if we miss to the bad side

this can be dirty uh I'll be covering it

live so I can't wait to see you then but

um buckle up

buckle up probably the best actual

positioning is just cash on the side

because when the Market opens What's It

Gonna rally like three or four percent

before you actually get in but if it

goes to the dark side it could just be

so ugly so I mean I I think really cash

is not trash I think cash is probably

the best asset these days uh if you're

in you you must have a very very

long-term mindset and that's okay there

are a lot of people myself included that

have a very long-term mindset it's like

man whatever and you know I'm just gonna

keep buying you know pricing power

stocks and and build my quantity but

that takes Diamond Balls if you have any

short-term needs in this market cash

cash you can always get in once we

actually sustain good data points anyway

thanks for watching we'll see in the

next one good luck everyone I'm going to

New York Stock Exchange now