Two Fatal Dangers that could Collapse Markets.

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folks take a look at this this right

here is an elevator with a piano on it

yes I had to show that to you I I don't

know why there's a dude playing a piano

inside the elevator but I thought it was

kind of funny all right next inflation

break evens so the first thing that I

want to mention is this is the chart of

five year break evens we've spent a lot

of time looking at this chart before now

what's remarkable first is just from a

technical analysis point of view look at

the bottom that we hit here where I just

laser Reddit this the bottom that we

just hit in expectations that is

people's expectations the Market's

expectation of inflation's trajectory

right that it's going to Trend down

substantially here off of this peak over

here in expectations of March which Peak

inflation came about three months later

and that's why this chart is usually so

powerful this chart is usually so

powerful because it tends to precede

inflation and what inflation does by

about three months but take a look at

this from a TA point of view the bottom

that we just hit literally bounces the

top or marks the top of the 2018

inflation expectation cycle which what's

kind of scary about that is during this

period of time as these expectations

were arising you had Jerome Powell hike

hike hike hiking and uh to the point

where Donald Trump was threatening to

fire him right so while we were at these

levels Jerome Powell is hiking to the

point where Donald Trump a president at

the time is expecting to fire Jerome

Powell and that's literally what we

celebrate now is a low of expectations

right but there's another problem here

and the problem evolves a little bit so

let's look at this in a little bit more

detail so first of all this chart right

here shows you inflation expectations

over just the last year over the last

year you could see how these inflation

expectations have been plummeting and

part of this is because and it is true

part of it is because we've seen uh you

know prices for Commodities plummet

whether it's copper or Lumber or a

memory chips you know Samsung just

reported terrible earnings on Friday

this is a first profit decline I think

since the 90s it was it was remarkably

bad dram price is collapsing which

usually memory chip prices are the first

to sort of collapse in a memory in just

sort of the semiconductor market and so

we have this massive Peak here in

inflation expectations in March and

again that downtrend really aligning

with what Commodities are doing this

right here zooms out about five years

that first chart we saw there so this is

zoomed into one here now here's what's

remarkable about this chart is it makes

it so clear and this is I mean we're

going to get into the part where this

may start breaking apart but what I want

you to look at is here look at this peak

right here in inflation expectations

that's March look at the peak here in

actual CPI that right there is June so

you see this three-month lag and when

you sort of get Peak to Peak and we've

seen these sorts of lags of the Blue

Line being CPI peaking after inflation

break evens Peak and it's really quite

remarkable because it's been very

consistent very consistent over the last

uh probably what 20 30 years let me see

this here this chart goes all the way

back to okay 2005 is as far as 2004 is

actually as far as we went back here so

about 18 years so you can see this very

remarkable correlation between the two

and you see that delay between the two

but then I got to think of myself we

rely so much on these inflation

expectations to come down we don't even

obviously in this video need to talk

about the fact that like what happens if

inflation does come down five percent

and then it stays there and then the fed

you know has a credibility challenge of

well we said we were going to get it to

two percent even though it's coming down

we're gonna have to be more aggressive

right we don't even need to really talk

about that in this video because that's

that's a whole other issue but the other

issue that we always want to consider

because I I think it's so important to

always pay specific attention to your

Achilles heel what are you so confident

in that you might potentially be wrong

about right and everybody always says

well I mean historically it's right and

the most dangerous words or this time is

different but you know I don't like to

believe that I like to think that there

are nuances to every style of recession

and crash that we're in so there can be

differences and we want to at least be

aware of those and so one of the things

that sort of made me start pausing a

little bit and thinking about

expectations was this study that just

came out from the Federal Reserve they

talked about how homeowners revise down

their near-term inflation expectations

and their optimism for the future of the

labor market in response to labor market

or in mortgage rates when renters are

less likely to do so so really what you

have here is you have a division you

have more apathetic individuals you know

people who don't really pay attention to

mortgage rates because they don't affect

them and and More in tuned individuals

homeowners homeowners Services renters

and if that can meaningfully affect

expectations to the tune of uh of you

know a study basically saying oh yeah

homeowners absolutely are driving

inflation expectations now then it made

me pause for a moment and think my

goodness what if this fall inflation

expectations we're seeing here is by

some degree because the markets believe

that the federal reserve's tools are

going to work that the Federal Reserve

believes they're going to get interest

rates up high enough to bring inflation

inflation down and so then markets

believe it's going to work so what do

they do they say oh well we're just

going to have pain for a a transitory

period of time let's just spend more in

the meantime remember what I posted on

Twitter and we talked about just a few

days ago on the channel we talked about

the explosion absolutely explosion and

Consumer Credit which to some degree is

a sign that people are sustaining their

spending because they believe in a weird

Twisted way that ah well this hiking is

just going to be temporary the FED is

going to have to Pivot let's just spend

more on debt temporarily we'll get to

the FED pivot and then we'll go back to

the Glory Days and it makes me pause

thinking what if we're wrong like what

if we're spending on credit thinking the

fed's going to Pivot and then they don't

or inflation expectations don't actually

lead to the plummet in an inflation

expect or readings that we're hoping to

see right and remember folks even if we

just went to the lows of expectations

now we were still in a hiking regime

over here we were still in a

quantitative tightening regime where the

Fed was trying to roll off bonds and

basically vacuum money out of the

economy so for part one before we get to

part two pain which I'm going to talk

about in just a moment this is going to

be our little transition picture here

for part one I think a really important

takeaway here is a lot of things can

affect expectations for people and for

markets and it doesn't with a hundred

percent certainty tell us that inflation

is going to go down enough to where the

fed's going to Pivot sure maybe

inflation will fall down and follow

break evens but what if it's just not

enough to where the FED is so concerned

about their credibility they keep

driving things down and peoples or the

markets expectations are skewed by

thinking well we haven't had rates like

this in 40 years so it must bring

inflation down but it's going to be

temporary let's just keep spending in

the meantime and then ironically that

let's just keep spending and borrowing

in the meantime actually continues to

keep inflation up especially on services

like travel entertainment whatever right

it's scary so there is a very real

element to yes inflation will generally

go down after inflation uh break evens

go down but it could take longer this

time around and again and this isn't a

play though this time is different

argument it's just to say if it does

take longer you're going to want to be

prepared to be more patient in this

market and then this is where uh we got

to talk about Amazon and yes this was

back in my HVAC days I saw this picture

come up on my iPhone I watch actually uh

this is a photo of me back I don't know

probably eight years ago back in my HVAC

day so you could see I was really good

at uh heating and air conditioning uh

with my good old eight inch T there

anyway

so what did I notice at Amazon well one

of the things that I noticed at Amazon

which was really really interesting

wasn't this note here I put a little

cynical Mark over here that I think they

moved Prime day into Q3 or their Q3

instead of Q2 because they took their

bad right down for rivian and Q2 they're

like ah that quarter is going to suck

anyway let's just move Prime day to the

next quarter and have a good quarter

afterwards but I thought this was really

interesting

we have slowed our it's actually right

under me here there we go there we go we

have slowed our 2022 and 2023 operation

expansion plans to better align with

expected consumer demand okay so keep

that in mind Amazon is saying hey we're

gonna slow our expansion

so I thought about that

and then I'm like wait a minute you're

on one hand you're going to slow

expectation but then over here you're

actually talking about a subsequent Step

Up in demand so why are you slowing your

expansion while you're seeing a step up

in demand

so initially I'm like that just seems

like it doesn't make sense but then it

made sense over here it made sense that

they say there's a pre-spend to keep the

pipeline movement moving so when we make

adjustments to the time Horizon the

impact is not as great as you expected

now but instead it affects us later so

what they're saying is look

right now consumer demand is up but we

actually expect consumer demand to go

down and so that's why what we're

actually going to do is not only do we

expect more normal shopping patterns

which is a way of saying lower shopping

patterns for Amazon but even though we

saw a bump up in consumer demand

recently we are planning logistically

and uh from an operational point of view

come on there we go we're pla jeez I

don't know what's going on with this PDF

today uh we are planning from an

operational point of view to experience

a Slowdown and so I thought that was

very interesting because and as there's

more to this as well but it's really a

warning to us that okay so for now we

can actually still see really hot

consumer numbers because consumers

expect inflation is going to come down

so they just borrow to keep spending and

Amazon's like yeah they keep spending

and so we look at these consumer numbers

that are substantially lagging and it

just spent spend spend spends been but

it's actually really really misleading

because the true pain might actually be

to come when consumers actually go

oh God inflation's not going down as

fast as we thought and Amazon's starting

to see signs of that potentially being

true this made me a little bit nervous

as well now I want to take a note at a

few other things here so they talk about

AWS margins dropping one of the things

that we are seeing is that this this

constant belief that Amazon AWS is only

going to go go might not necessarily be

true in that they're even making

comparisons to the 2008 rough Rush rough

patch and how that time frame really

prepared them for what they may see

going forward especially as customers

quote optimize their costs and need help

scaling down the amount of Amazon web

services they use that was kind of scary

to me I mean I always like to write

notes when I read these things

uh and uh and for me I wrote here sounds

to me like Amazon adjusted for higher

spend now but they're planning for spent

to fall in the future like in 2023 so

they're beginning to slow their

expansion rate and they're helping

businesses scale back in AWS that is

really a sign that businesses and

consumers tend to lag in pain because

they use or are using debt to sustain

their prior lifestyle this means more

pain ahead and the Real Pain potentially

especially in earnings hasn't happened

yet it might not if inflation Falls

substantially right we might not get

that pain but it might take well it

might take real Panic to actually get

that inflation to come down see and then

I wrote ironically low inflation

expectations kind of imply hey the FED

will you turn right let's just spend on

debt get through 2022 and we'll be fine

but those that are complacent could get

whacked and that's what I'm trying to

warn you of like don't be complacent get

fact join the programs on building your

wealth to where we go through these

sorts of reports together every single

day the market is open when I'm uh when

I'm in the office and and we can

actually learn together and find these

patterns together we do these daily so

now this was also interesting they're

still seeing advertising growth but

they're prepared for the potential

optimization that could be to come

that's another element that's like oh

okay all right and then they talked

about what about all this hiring that

you had done and they're like look we

hired a lot more people than we thought

because we thought Omicron was going to

keep people locked down for a while now

the Varian ended up not being that bad

so people went sort of back to their

normal lives but now we're stuck with

nearly double the head count and it's

kind of like oh okay so you became super

bloated with the expectation you were

going to have a lot more demand but that

didn't follow through as much as you

thought you're getting back to normal

levels but now not only are you not at

Omicron levels you're at normal levels

but now you're also potentially planning

for the real slowdown now generally

Goldman Sachs remember it's worth noting

tells us that the bottom of the market

happened six months before the bottoman

earnings so generally the stock market

doesn't buy bottom when earnings are at

their at the trough at the lowest point

the stock market bottoms about six

months before that which is still a

moving Target in terms of where that six

month bottom is that that pre-six months

is it now you know was it three months

ago

I don't know so we'll see anyway let me

know what you think make sure to check

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daily thanks so much for watching and

we'll see in the next one goodbye