Wow! A new JP Morgan report tells us when potentially the Federal Reserve could go back to zero percent interest rates. We'll also talk about their expectations for inflation and let me tell you, they are remarkable. This comes at the same time as Bloomberg suggesting hey, look at the financial tightening that has already happened without an actual increase in the joblessness rate. you look at Crypto down two-thirds housing market, rotating down buyers at a standstill, tax stocks down over 50 percent.

The Federal Reserve has done a lot to tighten Financial conditions without actually costing jobs. And in this particular report, we're going to talk mostly about inflation and what could end up happening with inflation. This report the JB Morgan Report on the 2023 U.S Economic Outlook Bad Moon Rising This is what we're going to go through in this video in the insights are incredible. By the way, if you case you don't already know I am meet Kevin that I'm reporting to you from Wall Street I'm just outside the New York Stock Exchange because tomorrow we ring the bell at the New York Stock Exchange and you are invited for a meet up at 5 PM outside the New York Stock Exchange Excited to see you and remember that tomorrow is also the expiration of the coupon code P P for the programs on building your wealth with new lectures coming totally for free in December All right, let's get into the report.

Remember that the lowest entry price we have right now is 407 dollars for one of the courses and it gets you lifetime access to live streams and the programs and additional content that comes out to them. So pretty good deal in my opinion. All right. So what do we have here? First, the JPMorgan report starts with a few quotes.

They suggest that no post-war expansion has died of old age. they were all murdered by the Fed. And boy oh boy, has this Market been murdered. Not only has it been murdered, but and potentially rightfully so because of high inflation.

but I mean, think about what would happen. if the FED hadn't been tightening right now, we'd probably probably still be hitting all-time new highs like we were in 2021 which was just so crazy I Remember every single day on CNBC Another all-time new high. As if that wasn't a sign of a bubble at all. Anyway, they talk about here how the unemployment rate goes down by the escalator and up by the elevator.

These are the first two quotes they start out with. Kind of interesting I mean you think about it if you flatten out the pandemic it did take from about 2010 2009 to all the way about 2021 to go from over nine percent unemployment to under uh, three and a half percent or three point six percent right around there. Pretty incredible. This is the projection of the survey of professional forecasters expectations for recession in the next four quarters.

Do keep in mind that every time I mention this, people say wait, didn't we already have a recession And yes, well, technically we had two quarters of negative GDP It's possible those could actually get revised up those GDP numbers and it's possible that the actual recession is still ahead of us and not behind us. There's also this talk about how difficult it is right now to see Financial excess and as a result of this and supply chain normalization, take a look at what JPMorgan is predicting. They suggest that it is not difficult to see the Federal Reserve returning to their effective lower Bound by the end of 2024. that would mean zero percent rates.

And let me tell you, zero percent rates would be really, really bullish. except they do think that would take until about the end of 2024.. they think the disinflation that we actually need so that decline in inflation could actually happen with without a lot of pain to the labor market. Keep in mind we've seen a lot of pain in valuations for assets, but when they talk pain, they're talking labor market pain here.

They mention a perfect citation here. Well, it's everything's. always an imperfect citation when you go into history, but it is a pretty decent comparison. Economic history teaches that this is not a fairy tale.

Disruptions associated with the Korean War mobilization pushed inflation up to 9.3 percent by March of 1951., just one year later, inflation was 1.9 percent. Over that period, the unemployment rate fell by half of a percent. So you could actually have inflation plummet without seeing unemployment rise. Keep in mind that for inflation to continue to go up, you not only need prices to have risen let's say from a hundred dollars to 110, but then you must see them Rise Again from 110 to 121 dollars If inflation just moderates like this and price is just a flat at 110, Yes, the prices are elevated from what they previously were, but inflation in that point an example price is staying stable would actually be zero, and that would take a lot of pressure off of the Federal Reserve and JP Morgan says that they see signs that a moderation is already underway and that cooling will become more prominent over time.

They believe that CPI inflation will cool from 8.2 percent year over year in September to seven percent in December and then just 3.4 percent by September of next year, largely driven by that decline in rents, which is pretty optimistic and pretty bullish. They do mention that supply chain dislocations have eased pent up demand for goods, and more recently, services such as travel should fade. Now this I think is interesting that the demand for travel might actually fade I Think that could be very interesting. Tight labor market conditions May loosen as well.

You know one of the things that could really loosen labor conditions right away I believe would be if we had better immigration policies. There are plenty of hard-working individuals that would love an opportunity to work in America but it is so difficult to get somebody from out of the country to actually be able to work in. America Anybody who's come through the immigration process knows it's hell. It's absolutely terrible.

Cheers to Coffee by the way. Hmm, all right. so what else do we have here? We have Auto Prices recently jumped over the last couple years, but an improvement in the supply side may allow vehicle prices to decline over the coming years. uh, over the coming year actually here with shelter inflation based on new rents starting to plummet and an updated Source data to the Bureau of Labor Statistics where research on health insurance prices should lead to a drop in related CPI prices after they surged going into September.

So some fancy calculus going on over here on top of this. Even though inflation expectations have been somewhat mixed, they believe that inflation expectations tend to follow reports. This is something I've talked about before that. It's awfully convenient that after we get a bad CPI report, all of a sudden inflation expectations go up.

It seems like as long as inflation expectations are relatively stable, they just end up following what the reports actually do. That's why I wrote the reports big Cat Expectations Now inflation is a macro phenomenon and the ultimate resolution will require macro rebalancing. And that's exactly what we're happening having right now with quantitative tightening which JPMorgan will dive into, suggesting when QT might actually end even though it's just now beginning, which is remarkable they touch a little bit. Here on, we're just getting back to normal levels of the foreign-born labor force coming back after the pandemic.

That's because we had a lot of foreign-born workers who were not here during the pandemic who are coming back to typical trend lines, and since the dollar is so strong, it attracts more people working in America. They also suggest that the population is growing older, and that could explain why we're seeing a decline in the labor force participation somewhat along this orange trend line here, where when the population gets older, you get less participation and this isn't not. This isn't necessarily A Bad Thing The way the FED has been seeing it, the FED has frequently been frustrated that the labor force participation rate is falling, the number of people eligible are capable of working who are actually working, and they're frustrated by that. Though there could be a natural reason for that, as they show here in the trend chart from JP Morgan.

Now, given the massive churn in the labor market even a Ma, even a modest slowdown in the pace of hiring can lead to a decline in employment in most business. Cycles More job loss can be accounted for by lower hiring than by higher layoffs. Now this I thought was really interesting. They're basically saying because people are so used to changing their jobs all the time, Quits? Basically right.

Voluntary turnover. You don't actually really have to have a ton of layoffs to see the unemployment rate go up. What you really just need is people to continue leaving their jobs at a normal pace and as long as you're not hiring as much, the unemployment rate will go up. and that'll show the FED that their policies are really starting to work.

They indicate here that hiring reached a peak in February is now 11 off of peak, and there's been some degree of moderation for wage inflation, which is good because we don't want to see wage inflation take off. This right? Here is a forecast for wage inflation. yellow is approximately where we sit now, and we somewhat expect that to Trend down on average here off of peak. now.

they also suggest here that short-term interest rates are expected to increase or have increased almost 500 basis points. That's five percent between March 2022 and March 2023. And this adds substantial costs for corporations, which is a red flag for companies with a lot of debt. Keep in mind, there's a reason that Elon Musk is potentially looking to refinance Twitter debt which is around 11 with a margin loan against Tesla debt because that debt would probably be a lot less expensive and it would help the cash flow of Twitter Which actually cash flow at Twitter would potentially help the stability of Tesla stock price.

But one thing that is beautiful about Tesla is they really don't have any debt you have to be careful of Highly indebted companies like movie theaters, cruise lines, and Airlines right now because of that interest expense. Really? Weighing on earnings per share. Also, what do we see here? We think that consumer spending declines about two to three cents for every dollar lost in household wealth. So the more we continue to see housing prices fall as well as potentially stock prices fall although more likely a heavier impact on home prices fall, consumer spending should continue to fall, which would lead to hopefully declines in inflation.

All right. continuing on with the report here: disposable income was down to was down 2.9 percent year over year after adjusting for inflation, and some estimates are suggesting that by the middle of next year, households could be completely out of the excess savings that they've earned right now. As Jamie Dimond has said, we expect excess savings to be around one and a half trillion dollars and we expect them to be completely out of excess savings by the middle of next year, which could also lead to more disinflation. The effects of Fed rate hikes are also generally clearest on the housing market relative to other parts of the economy, and this hiking cycle looks no different.

Real residential investment declined 16.3 percent across the first three quarters of 2022, and our past Research indicates that total home sales decline by about 10 percent for every 100 basis points in increase in mortgage rates. Given the roughly 400 BP increase in mortgage rates, our research search suggests we could still see another on top of the declines in housing sales. We've already seen another 15 to 20 percent declines in home sales, and obviously when home sales go down, we expect home prices to go down with them. Although home prices did keep climbing in early 2022 and we'll see what ends up happening because right now we expect that home prices likely peaked around Q2 of 2022 and there could be according to JPMorgan a complete 10 percent Peak to trough decline in home prices obviously still much higher than where we were in the pandemic, but this is one of the lower estimates JP Morgan and Redfin closer to five to ten percent declines.

many Wall Street Analysts are expecting 15 to 25 percent declines though we shall see Capital Spending decisions should be determined by the cost of capital and therefore they expect that higher rates are going to lead business investment deployment. They actually mentioned that 40 percent of businesses either export or come straight up just come from outside of the United States and therefore with higher interest rates and a stronger dollar, we should see a substantial decline in business investment, which should help lead to more disinflation. Notice how so far everything is pointing to disinflation right now. On top of this, the JPMorgan report suggests that a mild recession may actually be met with a modest degree of fiscal stimulus Could You actually imagine us going into a recession, the FED turning the money printer back on again, which Jerome Powell has alluded to, and Congress potentially sending stemi checks Or is that just going to put us right back into an inflationary environment? Both possible, both possible.

Kind of scary. It's just maybe the Fed and Congress need to stop doing stuff I Don't know. Maybe that could really extend pain during the bottoms. But anyway, now that rates are more convincingly in restrictive territory, this period of policy making, this difficult period of policy making appears to be behind us.

that's actually quite bullish. potentially. Now they suggest that the Federal Reserve is going to be outcome oriented, and after this 50 basis point hike in December could end up moving down to 25 basis point hikes for the February meeting, it's right around February 2nd and could continue delivering 25 BP hikes until they're convinced that inflation is trending down and potentially even pause in May. Boy, what a pause in may be quite bullish, thereby avoiding the mistake of the Stop and Go policies of the 70s where they would raise rates, pause lower rates than raise rates again.

Big mess. We don't want that to happen because that could potentially allow inflation to Fester, but if and in fact, we might be much more like a 2006 where we raised rates to about five and a quarter percent, which is actually what the Federal Reserve's terminal rate expectations are now and then, the FED maintained those rates there for about a year. However, if inflation plummets, we could see a much speedier unwind of this restrictive policy, and a lot of folks are actually calling for a substantial, massive rate cut. once inflation starts proving that it's going to plummet.

and this JPMorgan report is really telling us that plummet is coming Now, A lot of people are worried about quantitative tightening. However, they suggest that the Federal Reserve's balance sheet should decline a little over a trillion dollars next year. Banks hold about three trillion dollars in reserves, and they suggest there could be an end to quantitative tightening by as late or as soon as late 2023. That's because they believe that Banks usually like to sit around two trillion dollars in reserves.

However, the reverse repo facility with another 2 trillion in reserves could keep tightening going for a little bit longer, potentially up to two years longer at this rate. So while there is some hopium that quantitative tightening could stop at the end of next year, it's probably going to continue through 2023 and 2024. But again, a flip down in inflation and a rotation down in rates could mean we're quantitatively tightening while still inducing the economy for more spend with lower interest rates. and so, in my opinion, this entire report is actually quite bullish.

Think about what they're telling us: JP Morgan is looking at all indicators of inflation, suggesting that we should see inflation come down easily to three percent by September of next year. and if it comes down faster like it did after the post uh, after the Korean War we could actually see larger and faster rate Cuts Now obviously it's probably too soon to actually get bullish on this sort of news since we've got to actually see those reports and data come in. but I have to say I read reports every single day and usually they're really bearish. This report from JP Morgan almost across the entire board reads very very bullish and I'm very excited.

Knock on wood that maybe just maybe this December CPI coming out next Tuesday could finally Mark the bottom of the market and I'll tell you if I could choose when to ring the bell at the stock exchange, it would be to Mark the bottom of the market. So fingers crossed. let's hope. But remember hope is not an investing strategy and even though I'm a licensed financial advisor and I run an ETF this video is non-personalized advice.

This is not personal advice for you. It's always consult a professional if you need personal advice. Thank you so much for watching! Check out the programs on building your wealth and we'll see in the next one. Goodbye.