3 Reasons why the Fed will "Paul Volcker" CRASH Markets.

everyone me kevin here everybody is

worried about the potential for what's

known as a federal reserve a rugging or

a rug poll and oftentimes this is a

reference back to somebody known as mr

paul

volcker and the reason nobody wants a

paul volcker is because paul volcker

said oh my goodness the federal reserve

has lost credibility and in order for us

to regain credibility if inflation is

here let's just set interest rates to

here and prove to the world that no no

we're serious about crushing inflation

which obviously led to a devastating

recession now the federal reserve has

said well inflation's there but don't

worry folks don't worry

we're credible and therefore the fed

even though inflation is here at eight

percent is only setting rates to

potentially a terminal

four percent

oops but don't worry the fed says

they're credible so

what are three things that could

potentially lead to a return of paul

volcker to a return of the rugging

well number one is very interesting it

actually is one that we haven't talked

about on the channel before but we

really should pay attention to

and it has to do with this nominal

number right over here

see at the bottom there that bottom

right corner it says 1.9

there it is 1.9

what does that represent well that 1.9

represents something having to do with

motor vehicle insurance and this is

actually a very interesting line item

and vandatrak spent quite a bit of time

talking about that this weekend and i

want to give you a brief summary as to

why

motor vehicle insurance isn't just hey

save 15 on your gun jones with geico or

whatever blah blah blah it's so much

more than that see car insurance has to

do with the total pricing

of what it costs for think about this

medical

services related to the cost of

accidents it has to do with labor costs

related to actually installing pieces or

parts to cars or fixing them doing

bodywork to cars not just humans right

but it also has to do with the input

costs of

parts it also has to do with the costs

of rental cars which then has to do with

the semiconductor industry so to some

degree

car insurance by itself is what's kind

of referred to as a microcosm of our

total economy in other words if you just

look at all of the things that go into

car insurance pricing it's almost like

taking a cross-sectional slice of our

entire economy and saying man medical

labor parts semiconductors rentals you

know the cost of people being unable to

work because they were injured in an

accident the cost of litigation the cost

of court filing fees

all of this

gets summed up in car insurance and we

had a pretty bad read this last month

yeah just the last month we had a

reading of 1.9

which annualized means that medi or car

insurance motor vehicle insurance

increased at an annual rate of over 20

roughly about 22 because you can

multiply 1.9 by 12 and you get to a

figure that's over

20

inflation in just motor vehicle

insurance

this is a dangerous sign because it's

one of the early signs that uh oh we're

starting to get what's known as service

inflation now when you think of service

i want you to think of it being

particularly bad because of the s

service can tend to be sticky because it

takes a while of all of those little

input costs going down to actually drag

inflation from services down so

service inflation spiraling out of

control an absolute danger that we want

to pay attention to and it takes a

little bit of nuance in the reports to

see but boy it's not a good thing and

that 1.9 percent read in the last

inflation report tells us that inflation

really is quite broad the more broad it

is the more aggressive the fed has to

get to get all of the bucket down it's

so much to wrap your hands around in

your arms run it's not just oil and gas

prices it's like everything it's bad

but another one that tends to be really

really sticky and this is the second

issue

has to do with

wages and there's something special

happening over wages and this is a

problem because of something known as

the wage

price

spiral now you're probably familiar with

the wage price spiral but i want to show

you a few charts that show a little bit

of danger happening here and it's

something we've also got to pay

attention to but in addition to paying

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not talk about this wage spiral and the

charts that we have coming up especially

important because one of the things with

a wage price spiral is that it's really

difficult to undo basically what happens

is

the costs of goods go up so it becomes

more expensive to live right the cost of

living or col goes up when the cost of

living goes up people demand higher

wages when people demand higher wages

companies that want to preserve their

margins raise prices again increasing

the cost of living for people working

wages or earning wages which again

increases a demand for higher wages this

kind of spiral can lead to a

self-sustaining self-fulfilling form of

inflation which is very very bad and can

dispel could literally spell the end of

a currency as we know it and this has

happened many times all you have to do

is look at south america and you can see

the disaster that inflation can rage on

countries and currencies which have

often gone to zero you might remember

wheelbarrows of cash back in the days of

the weimar republic that can happen wage

price spirals are a great way to lead

that to happen so what kind of charts do

we want to pay attention to now we want

to pay attention to wage growth this

makes sense and what do we notice with

wage growth here recently well recently

within 2022 we could look at the atlanta

fed wage growth tracker and what we're

actually seeing

is this increase in

wages

higher than normal based on the atlanta

fed's measure of it and you see sort of

this inflection point right over here in

about the middle of 2021 where all of a

sudden this one actually runs hotter

or starts running hotter than it usually

does in trend and has now surpassed the

average hourly earnings based on a

composition adjustment which is just a

different way of measuring it and just

average hourly earnings the way the

bureau of labor statistic measures

statistics measure that measures it

excuse me this is brought to you by the

atlanta fed and this is their version of

what they are estimating current wage

growth might be like and the scary part

folks is right here we have this odd

inflection point up this is

understandable because we have a lot of

inflation here that's driven wages up

year over year and we know that but the

fact that we're here and it's now

worsening is a little bit of a cause for

concern now some say that this spike

here correlates to this little

itty-bitty hole over here but this is

quite a substantial move compared to

just this little dip right here

so sometimes you get what are known as

base effects which is comparing back to

the whole of last year and that's why

numbers can appear higher right

but

folks this is something to pay attention

to and if we go a little bit deeper and

we look at something like

the wage growth tracker alone and we

kind of zoom into a little bit more what

do we see we see an absolute increase

here not just at the end of 2021 but

also this inflection point again in 2022

now when we look at annualized wage

growth we do see a decline in wage

growth that means wages are still going

up but 12 months you know on sort of a

12 month average wages have been going

up about five percent we look at about a

six month average going back we're

sitting about four and a half percent

wage growth and within the last month

we're about that 3.9

but

this doesn't help us understand why all

of a sudden we have this big inflection

point at the right side of these curves

of potentially wage costs going up and

so some are calling this an early red

flag of potentially

while we see commodity prices come down

the risk that we end up seeing

service inflation actually just start

taking off along with potentially a wage

price spiral just now starting to take

off and on july 29th we are going to

hear from the federal reserve and what

we're going to want to pay specific

attention to is the federal reserve's

take on what's happening with not just

service inflation but also wage

inflation because these things could

keep the fed aggressive for longer which

is bad but that's just two of the three

things and we're not even talking about

the expiring coupon code no we've got to

talk about the fact

that we've got a bigger potential

problem that has a lot more weight in

inflation so you remember one of the

most popular measures of inflation is

cpi well cbi carries what are known as

weights so when a cpi report comes out

and we look at something like motor

vehicle inflation we can actually see

that the weight for cpi inflation for

motor vehicle insurance is 2.3

percent

so that means for every 100 or every

doubling of motor vehicle insurance we

only see cpi move by

2.379 percent so you double it only

moves cpi inflation by two point uh

three seven percent right

however that's motor

vehicle insurance one that's a lot more

damning

actually has to do with owners

equivalent rents and housing which has

closer to a 32.7

almost a one third percent weight

as part of the cost of inflation or how

much or the measure of inflation how

much inflation goes up and the problem

with owner's equivalent rents

is that rents have skyrocketed to the

tune of somewhere between 14 to 25

year-over-year across the nation and the

problem is the more we end up seeing

rent go up

the more we actually have cpi go up and

if cpi is super super high in july and

let's say maybe we've peaked in july and

now we're like oh it's good gas prices

are starting to go down a little bit and

oil prices are starting to go down a

little bit but then

cpi gets propped up because rent goes up

even more because the measures of rent

inflation owner's equivalent rent are

delayed six to nine months from what the

actual market is doing that is market

rents right now are up 14 to 25

but owner's equivalent rent is really

only up about five percent right and if

owner's equivalent rent is only up about

five percent then we still have nine to

uh 20 percent to go to be realized in

cpi

which means that delay could show up

over here in august september october

november december and we could actually

end up seeing inflation even though

commodity prices are going down we could

see inflation get propped up even more

and maybe we end up seeing something

like a 10 inflation level

and you think that well maybe rents will

go down right that would be the hope

because if rents don't go down and

owners equivalent rents which have a 33

weighting uh in cpi drags inflation

readings up even higher

then

maybe maybe we're screwed because the

fed's going to have to pull vulcarus

right

but hey is there a chance that rents

will go down well this is where things

get a little tricky see as inflation or

cpi goes up the federal reserve

increases rates when the fed increases

rates or the bond market thinks the fed

is going to raise rates what goes up

mortgage rates and so when mortgage

rates go up what goes down is buyer

purchasing power which actually

increases the demand for rentals and

don't take my word for it you can just

take a look at what jp morgan says about

this because this is a complicated topic

that's known as inertial inflation we're

not going to get super deep into the

weeds on this but take a look at just

this section here complicating things

further is evidence that higher rates

intended to lower inflation make rent

inflation

worse

in the short run and that's because

supply can't keep up and rental rates go

up leading to more pain as prices for

rents go up as prices for rents go up

because the fed is raising rates

and now all of a sudden we're seeing

rents go up even more the fed's raising

rates to try to get inflation down but

what they're actually doing is pushing

up cpi rents at a six to nine month

delay meaning they're potentially hiking

on us

while we're in the midst of a recession

and this is why it is so critically

important to be prepared for the dangers

that lay ahead now we don't want to be

all crazy fear-mongery and say that's it

this is the end of the world we're for

sure going to get paul volcker this is a

warning for you that if you don't have a

sticky note on the wall in front of you

right now

that has at least

services like motor vehicle inflation on

the wall in front of you so you can pay

attention to it and watch it if you're

not paying attention to wage growth and

if you're not paying attention to rent

and owner's equivalent rent growth

you're walking blind in a market where

we could end up seeing all of these

things lead to us getting paul volkard

out of nowhere and if we get paul

volkard expect massive

pain in the markets at least in the

short term and hey maybe they'll be

buying opportunities just maybe

and maybe those buying opportunities

will never come maybe all of these

things will fade away and that's

actually another reason you want to pay

attention to these things because if all

of these things fade away service

inflation doesn't become a problem wage

inflation fades away is not a problem

rent inflation fades away is not a

problem then guess what also fades away

mr volcker and that should actually give

you confidence to get into the market

rather than constantly being fearful

that oh no everything's just going to

get worse and not get better personally

i'm paying attention to these signs i'm

very nervous that these things are going

to inflect to the bad side which there

are some signs that they are already

reflecting to the bad side but i'm

hopeful that there's some kind of glass

ceiling and that they come down however

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