holy sh*t, i could be wrong about the stock market

hey everyone me kevin here so there's a

chance that i could be wrong uh

according to history there's actually

one instance in the past where we were

able to get under five percent inflation

without a recession and i think it's

worth

exploring what the economist just said

about this one era and what it could

mean for us going forward so

that's what we're going to do in this

video

if you find this helpful well

buckle up and consider getting yourself

life insurance in as little as five

minutes by the link down below all right

so the first thing that we should do is

we should look at inflation year over

year and the easiest way to do this is

just hop over to the st louis fred grab

the chart and we can go all the way back

to the 50s and we can see what inflation

has looked like uh well historically and

broadly speaking as as somebody who

loves charting

we know that we have had this

downtrend of inflation essentially since

the 80s i mean it's pretty clear after

paul volcker killed inflation over here

we've seen this consistent downtrend and

a lot of this agrees with the kathy

woodyan argument which is technological

innovation and creative disruption leads

prices to go down it leads

legacy companies to go bankrupt and have

to lower prices because of that leading

to broader based in deflation rather

than inflation so the long-term trend

here is clear decades long i i would

expect we're more likely to face

negative interest rates than

hyperinflation at least based on the

longer term trend and the rationale for

that longer term trend uh what's

fascinating though is if we look at this

chart and we look at the five percent

level which is right here where my mouse

is here there's only been one time in

history we've actually been able to get

it down without a recession you see here

recession well at least in the last 70

years right here recession here

recession here recession uh i i guess

that never really hit five percent no

that hit four point eight nine percent

okay here you go over five percent

recession uh here we go uh this didn't

even hit five percent recession we hit

five percent here during 08 recession

right and so here we are again

uh and and this is as far as the measure

goes back maybe maybe that's why we

can't go any further back this is the

furthest it goes back looks like we're

above five percent here and of course we

had a recession as well and so the only

time that we have not hit a recession

was actually right here in 1951 where we

went from 9.4 inflation back down and

we're going to talk about that

right after we take a listen to uh some

highlights from this article from the

economist it's really really incredible

so here they talk about today as

inflation spikes there's a growing sense

that the fed has lost its way they and

this so far they say has battered stock

markets we know this last eight weeks

eight to nine weeks have been a little

rough and led many firms and homeowners

to wonder if the era of low rates might

be over for good

and so they say that in the long run

they believe that the world's aging

population along with the kathy woodian

argument essentially is going to keep a

cap on interest rates but what's

important is what might happen between

now and the long term so that's short to

medium term and this is where they think

we might go through what they call an

unpleasant financial squeeze rather than

this hyperinflationary paul volcker

disaster style era of the 1970s

so let's take a look at this

they mentioned that over history

we've been somewhere

well global interest rates have been

above five percent uh in the 90s and

over the last decade they've only been

about two and a half percent we've seen

cheap financing sort of be the

cornerstone of our global economy uh and

they suggest that right now though in

the last 18 months we've had a little

bit of a rude awakening that so far with

inflation at seven percent now and the

next expected cpi read to come in at 7.3

percent they argue that it's likely

we're far from transitory inflation and

if anything inflation right now seems to

be feeding into

wages and this is a problem because as

soon as inflation goes into wages then

you could potentially risk what's known

as the wage price spiral this is that as

prices of things go up via inflation

people demand more pay because they need

more pay just to pay food and rent and

bills and we know that rent's gone

ridiculous potentially as much as 20 up

year over year

and so that demands that wages go up but

if wages go up and companies want to

preserve their profit margins they raise

their prices as a way to preserve profit

margins which is literally what every

single company has been saying in their

earnings calls for q4 that they believe

they have pricing power and because

prices have gone up for wages and costs

they're going to raise prices to

preserve their margins to try to appease

their investors and that sounds good for

the company but it's terrible for

inflation because it means that the

spiral is starting and it's an upward

driving spiral now

they say here that private sector wages

and salaries are up five percent in a

year i wrote next to it rent because we

know rent is up about 20 so there's

actually

a lag uh you know in in real terms wages

have actually gone down in the last year

real terms is basically just taking your

actual your nominal wage growth of five

percent subtracting inflation from it

and then you're negative two percent so

you have actually had a real decline of

wages in of two percent over the last

year which is insane because everything

else has gotten more expensive i mean

there are some food items that have gone

up 50 and it makes you wonder like why

is our cpi seem rigged sometimes but you

know that's the topic for a different

video in december the median consumer

expected prices rose by six percent over

12 months and many of these trends are

being felt around the world global

inflation they say has now reached six

percent and as a result of this we're

seeing 12 emerging market rate setters

aka central banks raising rates in 2021

the bank of england did so as well the

bank of england is about a quarter

percent ahead of us and now all eyes on

are on powell who whom the economist

says has a dominant role in the world

but argues is behind the curve now they

do say that the goal is to get back to

two percent by 2024 which might be close

to the neutral rate of interest this is

when you're neither stimulating the

economy uh nor uh

essentially trying to tighten on the

economy or restrain the economy or as

they say here hold it back

uh and so

here they go on to say that the most

likely prospect uh therefore of a year

or more of interest rates rising well

okay let me rephrase this a little bit

so in the long term 2024 plus they

believe it's likely we're going to see

these lower rates again that makes sense

but they make this argument here and

that's the start of a powerful argument

that they're going to conclude with you

they believe that quote the most likely

prospect is therefore

of a year or more of interest rates in

america rising more sharply than the fed

has so far indicated

some forecasters predict interest rates

will rise by 1.75 percentage points in

2022 more than any year since 2005. and

so the economist here is making the

argument that look long term we're going

to have lower rates we're going to have

a more likely element of deflation the

kathy woody an argument is going to make

sense but we're going to go through this

really weird financial squeeze period

and we don't exactly know what's going

to happen nobody can predict exactly

what the market is going to do

and this is why we look to history and

that that chart i showed you which we'll

be going back to in a moment and so

again they reiterate here that the most

likely prospect is a year or more of

interest rates rising more sharply than

the fed has indicated now i think this

is interesting because right now you've

got people like mary daley coming out

from the federal reserve and and they're

suggesting things like hey you know what

we're going to be data dependent we'll

see what the data does our goal is a

smooth landing a soft landing jerome

powell says we want to be very

predictable and methodical with how we

do this we want to communicate clearly

to the the american public into markets

we've got neil kashgari who even was had

headlines suggesting that maybe there

would be a pause in store for interest

rates in the spring or maybe only two

rate hikes this year although when i

broke down the actual transcript of that

neil kashgari article and transcript

went through the transcript neil

kashgari said the only way we would

pause interest rate hikes is if the data

started turning in our favor otherwise

it's possible we might have to move to a

more contractionary stance so i think

the fed a little bit is playing us

they're trying to play the violin for us

and say hey everything's gonna be okay

everything's gonna relax like we're

gonna be fine we're gonna soft landing

this but i think the fed themselves

realizes that's the hopeful case

scenario that

hope isn't always the scenario that's

going to work out best uh you know with

a rescue ship for the titanic took four

hours to come hope was that it would be

there within the next 30 minutes okay

hope doesn't always work out but they're

playing the violin for us right now now

i want to just clarify before we get to

the end of this article i i used to be

the biggest fan of jay pow but i'll tell

you when he flipped on us nine days

after meeting with joe biden i lost a

lot of respect and i made a video saying

i can no longer trust this guy it was a

short it was like 59 seconds long you

could probably see it just type into

youtube meet kevin i can no longer trust

this guy jerome powell or fed or

whatever and you probably see him

and that was within that moment where

i'm like you literally just flipped

because of politics or like what why it

was odd uh so anyway and i like

in hindsight like

i i don't disrespect him i suppose for

for making this change because i'd

rather know but the fact that it came

nine days after meeting joe biden makes

me think that there's a lot more

politics at play here and the fed right

now is kind of trying to sing the song

of joe biden

trying to tell us that in this midterm

election year don't worry everything's

gonna be okay we've got it all under

control and there's supposed to be a

political you know

chasm between these two anyway

so over the past 20 years the underlying

neutral rate has steadily fallen as

savings and investments got out of whack

rising global savings caused by hoarding

of cash reserves in asian countries and

so on so forth basically

they reiterate here that look it's very

very normal that because of

technological progresses and uh and what

history tells us spending on

intellectual property and innovation

again the kathy woodian argument it's

very normal for us to expect that

interest rates will go back down

substantially for for the long term and

that we can expect a low level of

interest rates in the long term future

that's okay but take a look at this this

this is very interesting

these factors lay down the map for

interest rates in other words rates are

going to go down in the long term in the

long run

any upward shift is likely to be small

and to the extent that this reflects a

pickup in investments welcomed because

we want to see more investments right

however between now the short term the

medium term and the long term

there is likely to be a sharp and

potentially painful rise in rates

the world's debts have reached 355

percent of gdp

making firms and households potentially

more sensitive to even small rate rises

potentially after we offload the cash

that we have because households do have

a lot more cash on their balance sheets

but once that cash is gone that's when

pain starts because that's when you go

back to debt and it's like oh crap

credit card rates are higher buy now pay

later rates are higher everything's

getting jacked up right and then listen

to this one folks there are few examples

of central banks taming inflation

without the economy suffering recession

the last time

america's inflation fell

from over five percent without a

downturn was over 70 years ago

fighting inflation could put the world

in a slump

if so the prospect that rates will one

day fall back again would only offer

some consolation

that's kind of bearish now what about

that one exception can we be that one

historical exception where inflation was

quelled

well we have to know what happened in

1950 to 1952. the korean war happened

and when you have a war you tend to have

wartime inflation that's because

manufacturers shift their production to

guns instead of butter this is the old

definition of guns and butter not the

stocks in psychology money definition

that we like to use but they shift their

production to means of war like tanks

and bullets and guns and that increases

the price of things like butter and food

and consumer consumer essentials right

because we're focused on a war

now what's interesting is what happened

in 1951 is our government and treasury

department actually felt that inflation

would be long lasting so they

implemented very stringent price

controls and aggressively responded by

essentially tightening monetary and

fiscal policy to bring inflation back

down

they also raised taxes so they raised

taxes they tightened policy and they put

in price control saying we're not

allowing you to charge more than x for a

certain product well this succeeded in

bringing inflation down

but what happened unfortunately was

because of these higher taxes and all of

these these price controls we ended up

just kicking the can down the road about

two years from 1951 and we fell into a

recession in the third quarter of 1953

all the way through the first quarter of

1954. now it was a brief a recession

it wasn't an extremely painful recession

like what we've seen in 2008 or or uh

probably uh what we've seen in other

recessions it was brief and and

relatively painless but it was still a

recession nonetheless and so i find it

very interesting that the only time

we've actually been able to get under

five percent inflation without creating

a recession was when we basically raised

taxes a bunch and implemented price

controls unfortunately neither of those

are very likely to happen in america

there's not a lot of appetite to raise

taxes especially during a democratic

administration when republicans have

enough control to basically prevent

the biden administration from doing

anything until 2024 so i don't think

taxes are going to be able to go up much

especially since the buildback better

plan keeps getting whacked i really

doubt that price controls are going to

be popular because price controls are

the lifting of price controls are

ultimately what led to the insane

inflation that we saw in the late 60s

and then the disasters that we saw in

the 70s

so i also doubt that we're going to see

price control so price controls and

taxes are likely off the table which

means we're most likely to see

aggressive monetary policy tightening

from the federal reserve in addition to

a lack of fiscal stimulus leading to

what is most likely going to be

according to history a recession that

pulls us down from above five percent

levels of of inflation now that does not

necessarily have to be a bad thing you

know i think when we hear recession we

think oh my gosh that's it you know time

to be the most bearish ever not

necessarily recessions are wonderful

opportunities to remove speculation from

markets

to remove uh uh

zombie companies from markets that

shouldn't be alive to create the

innovation that we should actually

foster the fact that companies like

amazon and apple have become so

incredibly efficient from the pandemic

uh and and have have uh you know worked

on their supply chains to the point

where in a few years they're gonna have

the most efficient supply chains in the

world they're gonna be the most

efficient companies ever that we've seen

in the world a recession wouldn't hurt

them i mean their stock price might go

down temporarily but in the long term

they'd be great like companies like

tesla and whatever else they'll be

they'll be phenomenal in the long term

but in the short term what you'll

actually likely do is weed the

battlefield for these companies and

you'll actually pave the way for

companies like apple amazon and tesla to

be bigger more efficient companies than

we've ever seen before in our lifetimes

so a recession could actually be the

best possible thing to get all the crap

out of the way get the speculation out

of the way reset our economy so to speak

get rid of inflation and then we're

really off to the races the question now

though and this is the most difficult

one is do you buckle up and hold on for

the ride because we're going to have a

lot of rallies and crashes and rallies

and crashes and rallies and crashes

between now and when we get inflation

down hopefully inflation is transitory

the biggest argument which at this point

we know is not but

the biggest argument that inflation will

be coming down is that don't worry

supply chains will fix themselves by the

end of 2022 or at least they'll get

better in the second half but the

question that i have to ask you is just

because supply chains get better does

that mean companies are going to stop

raising their prices if consumers are

still buying or do supply chains get

better reducing the costs that

businesses have and prices continue to

go up because people are continued

continuing to be willing to pay those

prices leading to essentially double

benefits to the profit margins of

companies lower costs and higher incomes

and then we actually get the greatest

earnings ever for companies right before

potentially going into an actual

recession when the fed says we've got to

get really aggressive here uh i don't

know i obviously don't know the answers

but i'm going to be tracking this on the

daily to try to find out when we

actually hit an inflation inflection

point and of course i'll be sending

alerts in the stocks and psychology

money group for any kind of transactions

or trades that i make based on new

information that i find thank you so

much for watching i really appreciate

you and folks we'll see in the next one

thanks goodbye