Hey, so this Friday is super important and you might want to understand exactly what's going on. and I'm going to break it down super easily for us. So you may have heard that the Federal Reserve might potentially lead us into a recession in their attempt to fight inflation by raising interest rates, they're making it more expensive for the economy to function and so in a weird way, by making things more expensive, they're trying to make things less expensive by stabilizing how much business is charged for goods and services like everyday things like groceries, electronics, and travel. And once they cure those Rising prices, they hope they can reduce interest rates.

Now that's sort of the vision of the FED. We don't necessarily have to agree with them completely, but what we do know is this: Friday something important is happening that we want to pay attention to and it's something that led to a disastrous recession in the past. First, think about it. Kind of like this: The FED is treating the economy kind of like a Rowdy teenager getting their wisdom to teeth removed.

They're putting us to sleep long enough so they can solve the problem extracting the wisdom teeth which has grown a little too large. But if they put us asleep too long, well, that's a problem. Just like not having us asleep long enough is a problem, right? So we know they're threading this tough balance. but I took a deep dive into the history of the Federal Reserve over the weekend.

I Looked at thousands of papers from their secretive board meetings see the Federal Open Market Committee has meetings every approximately six weeks, about eight times a year, but the transcripts of those meetings are secret. You may have heard of the minutes before, but that's just a summary. It's not a transcript of what was actually set. The transcripts come out about six years after each meeting, and so I decided to go back to the early 1980s to see what was going on then and what I found was absolutely mind-blowing.

First to set the stage so you know where we sat in that time period. You have to look and understand this particular chart. Take a peek at this. This chart shows you the Federal Reserve's interest rates and I drew an arrow to where August of two of 1980s notice interest rates had just been 17 and a half percent and those interest rates were actually being cut all the way down to under 10.

Think about that for a moment I think we're up to 17 and a half percent and then they were reduced to under 10. People were cheering hey yay! this is wonderful. Look, interest rates are under 10 Again, how spectacular. But what ended up happening? Well, unfortunately, those interest rates skyrocketed again under the leadership of Paul Volcker.

So think about this. We think of Paul Volkers, the guy who raised interest rates substantially, but we generally don't think of them as the guy who basically just came in and interest rates went up and then they went down. and then they skyrocketed rates. Again, That's why people associate Paul Volcker.

But the good old rug polling. remember, you don't want to be standing on a rug to have somebody pull the other end out because unlike Fine China on a dining room table, you end up falling and getting hurt. Nobody wants to fall or get hurt. So wait a second.

Why did interest rates Skyrocket to 17.5 drop under 10 and then get booted right back to the Moon While there was a problem and the Federal Reserve made that really clear in the documents that I found this weekend and it's Eerie how similar some of these concerns are today and how much this actually relates to something that happens this Friday Ready for this? Buckle up here We go here It is: August 12, 1980. Quote: It seems to me despite our roller coaster ride, we have not dented inflation expectations very much. I Think we have a real Groundswell for an explosive development on the side of inflation expectations. Again, in spite of all we've done, we haven't laid to rest inflation expectations very much.

Listen to How It continues. Obviously, long-term interest rates are very heavily influenced by both actual and expected inflation. I Think we have a real dilemma here. Chair Volcker then moves on to ask the next person what they think and the next person says inflation expectations have actually deteriorated in the last month or so.

think about this. you're Paul Volcker and you're asking your cohorts at the boardroom table. All right, You think inflation expectations are getting worse? What say you? Well sir, I too think inflation expectations are looking worse. Listen to the way they say it.

But my own perception, like that of others, is that the price Outlook and inflation expectations have actually deteriorated in the last month or so. The unit labor cost situation, of course, looks terrible. They use those words. those were their words in their transcripts of this board meeting.

Listen to this: While we still have a weak economy in the near term, it may be a little stronger than we thought it was. That sounds eerily similar to today, but the price situation, if anything, looks worse. Conceivably a good deal, more than a little worse rather than a little better. Oh, so in other words, these inflation expectations were out of control.

So the point where the board members were absolutely panicking in their August of 1980 meeting and look what they did after that? Panic My friends, they rugged the market by skyrocketing interest rates. Here we are trying to debate whether the Federal Reserve is going to go with a 25 basis point hike and then pause or a 25 basis point hike and then another 25 basis point hike When we haven't even realized the reality of the severity of the matter is, if inflation expectations run away, you know what'll end up happening. Who will end up kidding? Not five percent inflate or interest rates or five and a quarter percent will get seven percent or eight percent. So the last thing we want are inflation expectations to as they say d anchor because then we're screwed.

Nicely put. now, if you liked what I just showed you, make sure to subscribe and like the video. Really appreciate it. But I want to show you what just happened this last week and what it could signal for what's to come.

And folks, it's not exactly ideal. And now I want to be very clear. I'm generally very optimistic, but if there's one thing that keeps me up at night, it's this. And it's not something that I want to pay attention to, but it is something we have to pay attention to.

It is the University of Michigan's Consumer Sentiment survey. We'll be getting the final read for this report this: Friday Listen to what the last report said: Year ahead: Inflation Expectations: Rose From 3.6 percent where they had remained anchored for the last 12 months, folks, and all of a sudden, they've jumped to 4.6 percent from March to April These expectations have been seesawing. Yes, but not not by a percent. They've been seesawing by about a tenth of a percent, alternating between increases and decreases.

Correct. However, this overshoot is quote notably elevated and the bumpiness of these expectations could potentially lead to a de-anchoring of longer-term inflation expectations. Though right now, those have been remarkably stable. So in English, the last consumer survey that we've had about inflation expectations from the University of Michigan is that we might start being concerned that inflation expectations could break again, much like they did in the 80s.

Now last Friday, we got something known as the preliminary report and it showed us a big problem with inflation expectations. This Friday at 7 A.M Pacific time we will be getting the revised and final numbers. We really want to see those numbers coming under 4.6 because if they maintain at 4.6 the Federal Reserve may be convinced to hike not just one more 25 BP but continuously until those numbers again anchor low. Because if they don't anchor low, then we could start what's known as a wage price spiral.

See what inflation expectations become unanchored. You can cause something known as a wage price spiral. This is when the price of Labor Rises faster than the price of goods and services which are also Rising. But people working then realize they're having struggle struggle surviving on what they're being paid because prices keep rising and rising and rising.

And so they demand higher pay or threaten to go somewhere else. And when that spiral becomes self-fulfilling the FED has failed. Then we get Paul Volckert. We get rug pulled.

You get someone like Paul Volcker who puts us through a nasty, dirty recession with the stock market plummeting and a lot of joblessness, massive layoffs that actually stick and lead to the unemployment rate. Rising Not like the Click bait unemployment that we're getting right now where people are getting laid off, but there's so many available jobs, the unemployment rate is actually falling. No, we mean real skyrocketing of unemployment numbers. The Fed's commitment to controlling inflation and helping anchor inflation expectation in the long term is what's super critical.

Following the Volcker era, once the Fed was able to get back on a path of controlling expectations, they were able to more gradually reduce inflation through something known as opportunistic disinflation. That's something that Chairman Alan Greenspan really took home. That's how they ended up going from 18 inflation to nine percent inflation in the matter of a year or two through Paul Volcker, and then from nine percent inflation down to one and a half percent inflation over really the next 20 to 30 years. they had patience and getting to that lower Target.

But they were able to have that patience solely because of inflation expectations. Long as expectations are low, the Federal Reserve has latitude to basically be nice to us to give us some more of that juicy laughing gas so we can really see how much of a joke the FED truly is. But in the meantime, we have to pay attention to that because they can hurt us. Especially since with a wage, price spiral is so critical.

And look at what Bank of America and Nomura Research have to tell us about the wage price spiral and expectations that we might hold regarding wages. Take a look at this Bank of America report just out from a couple days ago. This Bank of America report gives us a warning about what's happening with wages. Now it's actually good news, Bad news.

But take a look at this right here. Bank of America says models and history suggest that wage growth is consistently a lagging indicator. In particular, wage growth picks up when the economy is hot and only slows once the economy is in recession. In other words, wage growth only goes down when we are in a recession while wage growth has actually started to fall Now, Bank of America here says that optimists argue that quote this time is different and wage growth can slow back to normal without causing unemployment.

Bank of America says they're skeptical. They says in they say in recent months wage growth has shown signs of falling despite a hot labor market. That is a dangerous recessionary indicator. That could mean a recession is already potentially here according to Bank of America.

So this is something that we really want to pay attention to, because take a look at this. Bank of America suggests hey, maybe businesses. Maybe the reason we're seeing wage growth fall is because businesses are shifting their strategy. They're willing to hire less qualified and therefore less productive workers, and they're taking away amenities from us like they're cleaning the hotel room less often and we're getting less free snacks on the Airlines And we're getting shorter business hours or longer wait times.

So maybe that's why we're actually getting less productivity and wage growth falling. And it's a worry that we're either in a recession or we're in this environment where we're paying more but getting less. And this is showcased in some of the data as well: Hours worked Rose at 2.5 percent at an annual rate, but GDP is only rising at 1.7 percent, suggesting that output is actually declining, and Bank of America suggests the economy is so out of balance still today, that it is almost certainly going to require a mild recession and a significant rise in the unemployment rate. This is per Bank of America.

So in other words, it's not just the fear of what's happening with inflation expectations. Though, inflation expectations are very, very important, because as no more research tells, US, inflation expectations will drive an increase in wages and wages increase. Specifically, what are known as quote: non-housing core Service inflation. Basically, that's the sticky part of inflation the FED has been really upset about.

So put all this data together for a moment. If inflation expectations de-anchor then the sticky part of inflation like non-housing services like the people giving your haircuts or making you know cutting your hair, the people doing your legal services, or Tax Services They raise prices more because wage expectations go up. That ends up leading to a wage price spiral and a re-acceleration of wage growth. which ends up meaning the FED has to force us into recession and then we truly get the rise of unemployment.

This is where Bank of America is really confused by the data we're getting right now because they see productivity going down. But not only do they see productivity going down, they see that we have these weird signs that wage growth is falling, but they actually think that current signs of wage growth falling are basically clickbait. They're essentially telling us, hey, wage growth is falling right now because businesses are just hiring lower wage workers who are providing us lower quality work. This is a sign that the wage price spiral could still be here.

and if inflation expectations de-anchor this Friday and the wage price spiral is still here, to some degree, the FED will be forced to drive us into a very real inflation. to correct the lack of productivity that our economy has now the imbalance. Again, listen to Bank of America The economy is still out of balance. We still think getting the economy into balance will require a mild recession and a significant rise in the unemployment rate.

This is something that should make us pay very close attention to what's going on. Not only this, Friday but going on in the future now. I Want to be very clear while the bond market is signaling massive fear with an inverted yield curve, I'm finding more reasons to be optimistic than bearish. I Think 2023 will be a glorious year to have bought stocks in real estate and I really believe in the long term.

Nike Swoosh recovery that we hit massive pain in capitulation. We slowly bounce our way back from there, but it might only become clear that buying stocks are realistic was a good idea. Five years from now and then. we'll wish we could go back to some of these price levels.

Of course it's really blurry and I understand the pain that comes with uncertainty. I've personally been beaten down to the last hundred dollars in my bank account and I've personally found myself driving from Ralphs to Vons across the street solely because grapes were cheaper across the street than where I was I Believe however, that the harder I work during hard times, the better the good times will be. and I hope you agree. And if you found this helpful, consider subscribing, consider sharing.

We'll see the next one. Thanks so much.