The Hell that's Coming | Punishing Fed.

now let's talk about the likelihood of

recession what just happened in the

Eurozone what are other folks as saying

and what's going on with five-year break

evens what's the disaster happening

today here on March 2nd and what do I

think about stocks bonds real estate

helocs we're gonna go through all of

that in this video but first we're gonna

jump on over here we're gonna listen to

CNBC and this likelihood of recession

being extremely high per former fed

Governor let's listen in you want to

bring in former fed Governor Frederick

Michigan he's now a Columbia University

professor and a CNBC contributor and

Rick it's really good to see you it's

been a while since we've gotten the

chance to talk to you you've got a new

paper that's out and it basically says

that the FED is damned if they raise

rates damned if they don't you want to

explain that

well I don't know if I put it quite that

way but the bottom line is that uh in

this paper which we we presented the U.S

monetary policy Forum that uh one of the

things we did is we looked at the

history and then we actually did some

economic modeling and the history says

you look at 16 uh uh uh uh cases of

where central banks actually tightened

uh interest rates when in fact they had

to get inflation down and this is in

many countries not just the US in every

single case you got a recession uh and

so uh you know maybe this time is

different but uh that's usually

dangerous thinking so just on that basis

alone uh the likelihood of a recession

is extremely high and this is

particularly true also from a economic

theory Viewpoint when a central bank

Gets behind the curve as the FED

certainly did they made a made a bunch

of mistakes uh particularly in 2021

which as you might know I've been on

CNBC uh since April of 2021 being very

critical of the pen on this when when

you get behind the curb in order to get

inflation back under control you have to

raise rates a lot and in fact you

inevitably have a recession so that the

you know this is just life uh the pet is

actually doing the right thing now

they've actually gotten uh uh uh on

board to do what they have to do they

stop being gradual they stop being they

were not preempted they now are uh but

the bad news is uh that uh that uh you

got to get the economy to slow down in

order to get inflation down when it's

actually uh burst up in a way that it

has recently well Rick let me let me

just say there are other people who look

at what you're talking about in history

where feds try and raise rates and

inevitably we wind up in a recession

they say it's just because some people

will say it's because the banks will

raise interest rates for too long go too

far as some people are arguing our

Central Bank is doing right now there

are people calling for a pause saying

wait and look around and see the lag

effect before you continue to raise

rates at additional Paces

um what do you say back to that uh I

this is super dangerous thinking so uh

uh one of the things we look at in the

paper is uh we look at a situation which

had a lot of parallels now which was the

vocal disinflation uh and many people

you know folk is a huge hero uh many

people don't really remember what went

on there the Federal Reserve when in

October 79 after voker became chair uh

raised interest rates to very high

levels uh and uh 17 actually was pretty

high level uh and then a recession

started and they backed off uh the

result was that inflation did not come

down expected inflation did not come

down uh and in fact uh uh uh there was

no ability to control inflation the FED

had lost its credibility and now

weakened it uh but to vocals the credit

he then realized that this was a mistake

and then the FED really took out the

baseball bat collaborate heads Big Time

raised uh federal funds rate to over 20

percent uh and then finally it took

several years of very high interest

rates than to get inflation down so uh

it is super dangerous thinking to think

that the FED should pivot uh that uh

when central banks have done that they

haven't completed their job they lose

credibility and particularly important

is when you've actually gotten behind

the curve you have to re-establish

credibility and therefore you have to be

tough now it's true that you might go

too far Central Banking by the way is

not an easy business it's uh there's a

lot of art to it there is science uh you

know uh economists have contributed to

that science of monetary policy but a

lot is Art and so you never quite get it

perfect but on the other hand uh picking

that you need to back off because you're

too worried about a recession is what

produces much worse recessions than

otherwise occur people forget that the

recession that occurred after the vocal

disinflation was actually the most

severe in the post-war period in fact

the unemployment rate went to above what

it did during the global financial

crisis uh so uh this is really uh

something that you really don't while

inflation was

all right yeah so okay what did we get

out of this well first of all yes the

likelihood of recession is High I mean

at this point it seems like a recession

is a foregone conclusion it'd be really

weird if we didn't get a recession

because every kind of signal you could

look at that's recessionary suggesting

recession hey maybe we will get a

recession I personally don't think it's

that big of a deal whether we have a

recession or not I think what actually

matters most is the depth of a recession

but what did he say that we could really

take away from here and how does this

sort of echo what we're seeing at the

Federal Reserve well the biggest concern

that Jerome Powell keeps talking about

at the Fab is this idea that they would

potentially cut rates and then have to

raise rates again because that could

lead to what Jerome Powell calls an

unanchoring of inflation expectations

and lead to a substantially worse

recession because basically they would

have to raise rates a lot higher that's

exactly what this former fed Governor

just mentioned uh and uh you know it's

it's the biggest issue I think that we

Face going forward is exactly that a

Breaking of inflation expectations and

unfortunately even though I I like to be

a bullish I have to say this chart right

here is bearish this right here on

screen now is a chart of uh inflation

expectations it is the five-year

inflation uh expectations chart if I go

ahead and draw a line over here and uh

we just sort of look at where we are

right now all the way back up to 2.7 I

mean look at this inflation expectations

went down to under about 2.15 on the

five-year Break Even we've just gone

straight up uh since the end of January

and into Feb here we are now sitting at

the same levels of inflation

expectations that we saw in October and

as a result we are seeing the 10-year

treasury yield right back over four

percent which is horrible for Real

Estate uh people thought for a moment

that uh I mean and you can sort of align

it with the uh the 10-year or the

five-year break even over here people

thought over here in December and

January that's it inflation has

conquered uh the 10-year treasury yield

is plummeting we're down to 3.38 well

now after some of the hot data that

we've gotten in January and some of the

stagflationary data that we got

yesterday and today this isn't good

remember yesterday we got pmis that

suggested manufacturing uh orders are

are cut in a contractionary territory

but all of a sudden The Institute for

supply side management suggests prices

being paid are in an expansionary

territory in other words prices are

going up again so now you're really

looking at stagflation you could look at

this morning's report as well from the

Eurozone the Eurozone this morning

reported 8.5 headline inflation that's

on a 20 country inflation estimate 8.5

headline that's down from 8.6 which is

great but sort of a slow decline uh the

expectation was 8.2 so you've actually

come in higher than expectations but the

problem was that core can came in higher

again not only did core come in above

expectations but it actually Rose from

the prior report the prior report was

5.3 percent came up to 5.6 so you

actually have a lot of ammunition that

you are giving to the Bears right now

suggesting this inflation fight is not

over in fact that's why you have people

like this David Einhorn guy who's

jumping on saying he's negative the

stock market and bullish on bonds milk

the yield so to speak basically he was

shorting the market all last year and

now he's suggesting hey you should still

be short the market so how does this

play in with with the sort of Nike

Swoosh recovery thesis well I think all

of it comes down to the dates that you

have to write down and the dates are

very simple it's March 10th 14th and

22nd those are the dates you want to pay

attention to because we're going to get

the rigged I mean the jobs report on the

10th then we're gonna get a CPI on the

14th and then we'll get the f OMC on the

22nd and so far the leading data

suggesting it's probably going to be

hotter than expected and that either

means inflation is becoming uncontrolled

which would be the worst case scenario

or inflation is just going to be hotter

for longer and so that's where we have

to sort of evaluate okay what does that

mean from an investor point of view

right well I think we can write that

down as as basically three scenarios so

if if we have if we continue to have

disinflation which right now seems to be

going away well that's obvious right

that's basically just stocks right up

stocks that's that's very simple uh

especially growth stocks uh and even

profitless companies one of the reasons

by the way because Arc invest absolutely

killed it in January uh and you know

just I don't want to like blanket

statement Arc invest and say you know

profitless companies are bad I think

there are some fantastic companies they

invest in there's some companies they

invest in I don't want to invest in this

is not not any kind of limit but they

did very very well in January because if

you can confirm a disinflationary

narrative not only will stocks go up but

you'll definitely see a a spike in Risk

especially profit list companies now one

of the reasons I personally have been

this is a personal financial advice for

you right but this is just sort of broad

uh Financial commentary you can even say

Financial advice it's just not

personalized right

um you know one of the reasons I've been

a big fan of keeping some more cash on

the side not not a lot you know 10

something like that and uh only exposing

myself to PP you know pricing power kind

of stocks and stocks with high free cash

flow is because of scenario number two

so scenario number one might be the

disinflation narrative scenario number

two is the uh the sort of uh bumpy the

bumpy ride scenario right uh bumpy ride

where basically you have inflation that

stays higher for longer so inflation

inflation higher for longer but but

slowly trending down right but slowly

down trending so the channel is down so

to speak but it's it it's taking a

little longer right and then of course

you have scenario number three which is

the worst case scenario and this is your

Paul volcker scenario where basically

the FED has lost control uh loss of

control that's your worst case scenario

obviously right I don't actually believe

any of the data we're seeing right now

is reminiscent of a loss of control even

those five-year break evens right this

is not screaming loss of control let me

hide myself for a moment over here in

March and April this was the market

saying oh my God we're losing control

right this here was the market saying

holy crap we're screwed okay so if this

is loss of control over here let's let's

write that down so it's annotated and

it's maybe a little bit more clear so

let's put a little background on this

there we go okay good so if this right

here is loss of control and we'll go

ahead and drop that right here then

right here is probably your disinflation

right this is your scenario number one

this is your scenario number three well

what the market is telling you right now

is that yes we are trending towards loss

of control but really where we're

sitting is at the bumpy ride level right

bumpy ride uh and and so that's that's

where I would align myself where I am I

should aligning myself right now with

the bumpy ride thesis and for me the

bumpy ride thesis says okay inflation is

going to be higher for longer so how do

I invest with inflation that's higher

for longer but trending down well

nothing's changed you know people say

I'm the biggest flip-flopper ever and

yeah that's true but there are also a

lot of things I am I'm very consistent

on and and for me even with the data

we're getting so far I still believe in

that that sort of Nike uh a swoosh it's

just going to be more bumpy uh sort of

more turbulent than expected

and I do believe that means more pain

for real estate for longer so it sort of

delays your bottom for Real Estate with

the exception of Miami I mean Miami is

just absolutely killing it and I think

that's just sort of because so many

people have been moving to Miami but

anyway uh you know what is obviously the

risk so what happens now we have to ask

ourselves what happens if uh the 10th

14th are bad right so if these two dates

are bad well then what happens is uh

there will be massive fear

between the 14th to 22nd you'll have

massive fear between the 14th to the

22nd because we'll be worried about 50

BP from fed which won't happen uh but

but the markets will be very worried

about that and will be worried about a

verbal spanking right that's that's

where the worries will really be from so

if we have now now if we have a really

uh but but okay let me put this way a

somewhat bad

a somewhat hot 10th uh 14th won't

necessarily mean we're in a scenario

three Paul volcker right a somewhat hot

10th or 14th just reiterates bumpy ride

which to me reiterates pricing power

stocks right

if uh like for me to be really concerned

real concern like serious concern like

oh my God we need to change strategies

potentially or like have a little bit

more of a cash allocation or whatever

like yes the sell word right real

concern would would be an explosion

in uh in inflation right and and where

do you get this you get this in the uh

wage uh uh uh sort of wage data on wage

growth on the 10th and then you get it

in obviously the CPI report uh and this

would be a breakdown in core uh which is

possible that you get that especially as

maybe used car prices pop back up so uh

really we're probably if if sort of I

drew a spectrum here and uh in my

opinion I put us at you know zero which

is full on disinflation and 100 which is

full on Paul volcker you're screwed uh I

would probably put us uh right about

here which is about at the 40 level so

slightly like really heavily in the

bumpy ride Zone but slightly closer to

disinflation than closer to Paul volcker

and that's simply because of leading

leading wage data that we're seeing

right a leading wage data about wages

coming down on the supply of labor

skyrocketing what earnings calls are

saying what forecasts are saying and

really as long as we end up with the

bumpy ride scenario

recession or not is not going to be that

big of a deal it's scenario number three

that's bad because that's going to be

basically depressive like that that

would be terrible I mean this is really

where unemployment skyrockets right so

scenario number three is depressive

uh scenario number one is just basically

the moon and then where we are is just

probably the very wide middle which is

quite a bumpy ride and so those are my

sort of expectations going forward uh

and and some commentator here about

these massive fears I I really do not

believe uh the FED has has any interest

in in going to 50 Beyond maybe just

yapping about uh a 50 like oh yeah open

to it you know whatever they say crap

like that all the time uh I don't expect

that because in my opinion it's too much

of a credibility shot in the foot uh

suggesting that uh that uh you know they

they have once again failed uh so uh you

know somebody here writes if we had a

very hot inflation report 50 BP will

happen but in fact it doesn't matter if

they go 25 or 50 all the hikes they have

done already are not yet reflected in

the economy get ready for a clapping

yeah I mean you're not wrong right there

is still a lag I think we would have to

have a substantially hot uh 10th and

14th report for a 50 kind of clapping

recessions can be natural and needed I

don't mind a recession I mind the damage

being done by pretending we can avoid it

forever yeah exactly it's kind of like

just go through your medicine take your

medicine and go through it you know let

the Staples Get Wrecked and go from

there

uh let's see here

inflation

inflation striba

then

okay basically

the government's to blame for inflation

because they spend too much damn money

and maybe if the government stops

spending so much damn money uh we'd have

less inflation well yeah that's a really

good point because not only uh is is

that true uh but you know we're still

providing massive stemi checks right

it's just going to electric vehicle

companies and Chip companies now

so uh Nick T also just retweeted an

article uh about uh CPI running a little

bit higher than pce but there's this

expectation that maybe those will flip

uh this year I don't know how much that

really matters but he basically posted a

couple screenshots here uh oh look they

talk about the wedge how cool uh but

anyway it's really just the difference

between CPI and PC and really the

thought is that CPI might fall faster

than PC I don't terribly care uh you

know which one's falling faster whatever

the fed's preferred method obviously is

looking at pce and what they're saying

is here the rate of falling of CPI is

faster than PC which is great you know

it sort of reiterates the uh

disinflationary idea but uh let's be

real we're still um

we're we're still dealing with one heck

of a bumpy ride let's put it this way I

wouldn't want to be on uh you know this

this sort of like if this Market were a

plane you wouldn't really want to be on

it because you'd be very uncomfortable

you'd probably get motion sickness and

and uh and want to vomit now how does

that actually relate to us holding

stocks well fortunately there's no

motion sickness there maybe where there

is some motion sickness is the fact that

the new you know yesterday we talked

about this guy Goolsby who now is the

president of the Chicago Federal Reserve

Bank

apparently the way he was hired was a

company was basically contracted called

Diversified Search Group and that

Diversified search group was put in

basically hired to find a new president

for the Chicago fed and the person that

was hired

was actually the director's husband

at the Diversified search group so in

English a lady

worked at a recruitment firm that was

hired by the FED to find a new president

and she's like you know would be perfect

for this job my husband

kind of interesting anyway that gives

you a little bit of a maybe some Jade

for what's going on with the FED but you

know they are they're just human too

they don't really know what the heck's

going on that these are things that I'm

paying attention to to help me uh to

sort of help guide me uh but again you

know uh look would I be throwing my

money into bonds or savings probably if

if I was wanting to buy a lot of real

estate yes absolutely I'd probably be

all in on on bonds and savings I just

milked the yield until I was ready to

buy real estate uh you know I and I do

think with the skyrocketing of the

10-year treasure yield they're still

paying a substantial amount of pain

unfortunately ahead of us you know you

look at the bond yields right now my

goodness skyrocketed this morning it's

up seven bips look at this you're right

four point almost 07 on the 10-year

treasury I mean you zoom out on this I

think we're at the highest level since

like October or November now yeah yeah

look at this we briefly went to about

4.2 in October over here but boy this

right here was where you started getting

the the idea that oh real estate's

bottoming and people starting to buy

again yeah well they're about to get

spanked uh yikes so uh you know hey look

if I wanted to buy real estate I'd be

standing by but I still maintain uh and

and we'll see you know I might have to

change my mind after the 10th to the

14th but at this moment I still maintain

substantially the Nike Swoosh idea uh

even though you know markets are again

going to respond I expect quite volatile

absolutely anyway uh to uh to the next

few weeks because there'll be so much

essentially fear uncertainty and doubt

about what's going to come uh which

entirely makes sense uh yeah I I would

um

you know I I guess wait and see as far

as Tesla that darn thing's like down

almost eight percent in the pre-market

right now wouldn't be surprised by the

way if that sort of retraces back to

about 175. that's probably where you

have the best support right now for

Tesla is about that 175 level you could

see that on screen here and that's

really just looking at our retracements

over here we got rejected at the 221 uh

and we generally don't like to float

around in the middle so I wouldn't be

surprised to see a nice retracement

we're already going to get a massive red

candle stick down to about 187. what I

do think will be very interesting is

what kind of buy the dip activity are we

going to get from institutions when the

market actually opens up that will be

very interesting are we going to get a

lot of selling before these reports

possibly a lot of Institutions have a

very hard time justifying buying before

inflation or jobs report that's come out

so the next few weeks uh really the next

two weeks most importantly the next 12

days are going to be very very critical

so we'll pay a lot of attention to

specifically what's going on there but

that's roughly my take right there on uh

on markets and what's going on