Hey guys, it's sasha, the stock market has just plunged three point four percent this morning after waking up with a massive hangover, because yesterday the stock market decided to do the exact opposite after during power announced a 50 basis, point increase to the interest rates and, if You're, an investor in the stock market - you might be scratching your head wondering what the heck is going on, because yesterday the stock market thought that the announcement by jerome powell was really good. So tesla went up seven percent in a few hours, many grey stocks jumped up by over 10 and the s p 500, jumped by around four percent. Following the announcement, and today the stock market is suddenly doing a massive sell-off. Having had the chance to sleep on the news, so what is happening, how bad is it going to get well? Yesterday, jerome powell, the chairman of the u.s federal reserve, announced that the interest rates will rise by 50 basis points to a target range of 0.75 to 1 percent.

This follows a 25 basis point increase at the last meeting and this time around jerome powell sought to reassure the stock market by saying that the committee has no intention of raising interest rates by 75 basis points at any one meeting in the coming months. So the likelihood is that when they next meet a month and a half from now, they apparently will only be looking to do. Another 50 basis. Point increase, except here is the thing.

Six months ago, in november 2021, jerome powell was still calling inflation transitory, saying it's just going to go away all by itself for the first time in history, with no intervention required whatsoever from the fed. Then, a few days later after he was nominated for a second term of president biden, he miraculously changed his tune completely saying that hey, maybe inflation is not so transitory after all, but at the same time there is absolutely nothing to worry about and the fed spent A few months employing a strategy of doing absolutely nothing and miraculously for some completely unforeseen reason. Inflation decided that no it's just going to keep on rising while the u.s central bank are sitting around twiddling their thumbs and inflation went to seven percent in december 7.9 percent. In february before the fed went and increased rates for the first time in march this year and at that meeting just about six weeks ago, jerome powell said the fed is only going to need to do.

Eight increases of 25 basis points each this year, which was mighty odd because inflation was already going up by about 50 basis points every month at that point, and the fed committee only meets every month and a half so a 25 basis. Point increase was clearly not going to do very much at all, and it seemed patently clear at the time i've been saying that the fed needs to stop scratching their ass and do something for about seven or eight months on this channel and i'm just a random Guy on youtube and now drawing power's promising that they will definitely not increase interest rates by more than 0.5 percent each time. So, just to recap, six months ago there was no need to increase rates at all categorically two months ago. They were definitely not going to increase them by more than 25 basis points per meeting and yesterday they are definitely not increasing by more than 50 basis points.

And yesterday, when during power did his q a session, everyone seemed to buy that explanation. The stock market rejoiced because the stock market has an irrational fear of interest rates going up you see, interest rates of under 1 are still historically incredibly low, unprecedented sort of levels of low, but hey it is more than zero. So, let's all agree to panic and throw our toys out of the pram. Every time we do an increase, everyone seems to be afraid of interest rates going up faster because there are several different massive economic implications, many of which to collectively especially lead to a recession and a recession is a dirty word and we should avoid it at all Costs by kicking the can down the road, except here is the big obvious problem.

Inflation has now entered a spiral for several weeks now we are hearing more and more reports how employers are being forced to increase pay to match the high levels of inflation and when you get into a situation where employers are having to make fast adjustments to pay Outside of their regular pay review process because of inflation, you know you have a real problem, because those higher wages will push up the cost of goods and services. I don't know if you've noticed, but pretty much, every single online subscription or service that i have has increased prices dramatically in the last two to three months. Food in a supermarket is going all kinds of bananas and for most people the real terms, impacts of inflation. On their lives is well into double digits running far above the official rate, partly because the huge increases in rent haven't yet been included in the cpi and partly because what do the poorest people in society spend their money on food in the supermarket? Well, cpi says that food inflation is already at 10 and accelerating fuel for their car.

Well, that's running at 48 inflation and also accelerating fuel to heat their home and gas, well, 70 percent and 22 for those two and both rising. These are absolutely insane numbers, and here is what we're going to see in the next few days. Next week on may 11th, we will get the cpi data for april and boy. Is it going to look ugly last month for some really weird reason: the media decided that inflation has now peaked and will start magically coming down.

I don't know how the mainstream media decided that, but it seemed mighty odd because it only took them about four seconds to decide after the cpi data was published, so they looked at the data those journalists analyzed. It wrote the article and published it in approximately four seconds. I then literally saw multiple leading publications doing exactly that. Multiple of these massively long, exhaustive articles coming online barely seconds after the date come out or or they were already fed the narrative and told what the points are going to be before the data came out.

You decide which is more likely, but in case you were not aware. Here is what the price of natural gas looks like in april. It has literally gone to the moon. Price in march was hovering at around the five dollar mark and we were looking at between seven and eight dollars in april.

We're talking something like a forty to fifty percent increase month on month. This is bonkers. Oil prices in april have stayed at above 100 largely replicating march, and in april last year oil prices actually dipped relative to march last year to around 60. So there goes a nice 65 to 70 annual increase.

When we get to see those numbers next week. Shelter has to keep on rising until it covers the sharp real terms increases in rent and mortgage prices of the last 18 months. Unless something magically happens to the way that that data is collected where they continue not going up by anywhere near the real terms. So yeah inflation data is going to look bad.

We pretty much know that. Well, i say we know that, but i am sure the stock market will not miss the glorious opportunity to run around waving their hands on the air when the numbers are published next week. But here is where it actually gets worse. The next meeting of the federal open market committee is due to be held on june 14th and 15th, and the may inflation data will be published a few days before that on june 10th.

So we're going to have two sets of inflation data before the next meeting happens and at the moment there is no indication whatsoever that inflation is going to somehow look better in may, energy prices are still high, supermarket prices are still high. There is very little that is stopping people from spending more money in the bank of bonds or any other ways of not spending money still pays really strong, negative real interest rates. You lose money that you don't spend because the fed rate is way way lower than the rate of inflation. So let's say inflation goes and doesn't accelerate, but just post another two months of 0.5 percent increases by the way it could actually get worse than that.

But let's assume it just keeps doing its thing. We are going to have a fed meeting where the target rate is currently at 0.75 to 1, but inflation at that point will be sitting at 9. Do you think jerome powell, at that point will be able to say, with a straight face that they are going to only increase the rate by 0.5 percent? At that point, if inflation just went up by 1 since their last meeting and sure the government's monetary policy over the last two years has been staggeringly bad, it's been an impossible situation to manage, but the solutions seem to be potentially even worse than the problem. We're trying to solve, because any serious increases in the fed rates now will mean we're going to go right back to senators and congressmen fighting it out over budget decisions, potentially cancelling a bunch of programs, and this is coming on top of a whole raft of other Massive spending decisions that have recently been pushed through by the democrats with the latest 33 billion aid package for ukraine now doing the approval rounds, but push will come to shove and interest rates are going to have to go up.

Here is the thing, though, the sooner the rates start going up by serious amounts and by serious i mean something like 75 or 100 basis points each time minimum the sooner inflation might actually come in check and the more time the fed dallies and doesn't do anything. The more time inflation has to build into an even worse spiral, the problem with the inflation wage spiral is, if you let it burn long enough, it doesn't need you to keep adding fuel to get worse. It starts being a self-sufficient reaction and, at that point, taking action is incredibly difficult because you're talking monopoly money and wheelbarrows instead of wallets, because at that point it doesn't matter what the original causes of inflation even were you have that issue with wages having to go Up every month, maybe even every week, to meet the fast increases of inflation. This has happened before this will happen again.

Those higher wages are pushing up the price of goods and services that use the people that are now costing those companies more money that causes inflation to go up even higher, even faster and so on, and so on and so on. In reality, the sooner the bigger increases come the better chance we have of actually getting out of this episode more quickly. Sure it's nice and easy to go and kick the can down the road, hoping that something magic will turn up, and then it just won't. But we're getting to a point where doing the kicking of the can is extremely dangerous.

The good news for anyone investing in the stock market, though, is that we're probably looking at a relatively long window where stock prices are suppressed because of the situation. The stock market seems to have an allergy to higher interest rates, even though the likely long-term implications are probably better. A well-managed short-term recession that may lead to another boom is better than letting inflation run right on a period of high economic and currency instability. The last two days have shown a really important point: the same exact stocks were sold off massively.

Yesterday morning, then they went up in price huge amounts. Yesterday afternoon many gross stocks went up by more than ten percent. Many other stocks went up by five, six or seven percent. Then they shot right back down this morning again and again we're seeing huge collapses.

Many companies share prices have dropped by over five percent in some cases. 10. So what does that tell you? It tells you that these price movements have literally nothing to do with the fundamentals of the companies that you are investing in, because those fundamentals have not shifted three times in the last 24 hours. Even the data on the macroeconomic variables, such as inflation, has not changed as a long-term investor.

This is a great opportunity because it opens the door to buy stocks discounted rates and that door may remain open for some time now sure not every stock, that's lost value is automatically a good investment. That is not the point i'm making, but those that are a good investment will now pay several times. The return on investment this year compared to what you'd get on the same stock last year and the mumbo jumbo with interest rates and inflation, and all of that is going to cause some short-term perturbations. Don't you mistake anything we are in for some unprecedented times, but i can tell you now that in 10 or 20 years time you will not care one iota whether the market moved up or down in june, compared to may this year you are going to be Looking at the graph and thinking to yourself, that was one heck of an opportunity to buy.