We gotta talk about the Federal Reserve because my gosh, there is a lot of news about the Federal Reserve suggesting that's it. This is it. We're going back to 50 basis points and in this video, we got to talk about the reality about what's going on with the FED because the regular narrative that you're seeing at least in headlines, in my opinion, is blatantly false. But we're going to review all of the information and data together first.

It's worth noting that people are bearish, especially in the institutional world. I Think on one hand, that's because a lot of institutions were caught offsides. First, remember, it's Friday That means the flash sale and the programs on building your wealth or the experiences. Ends Tonight Check it out, link down below and email us for bundle codes at Kevin Meet Kevin.com Institutions were caught offsides.

They were caught very cash heavy or very short heavy And as a result when the January rally came around, they had to save face and argue no, this is just a bear Market rally. This isn't reality. In fact, we have seen the most amount of short covering in January that we have seen since April of 2020. that's insane.

So a massive amount of short covering, Uh, short covering Again, the likes of which we haven't seen since April of 2020. I could show that to you statistically. the higher the line goes on the chart you're seeing right now uh is short covering. Uh, and uh, you could.

Oh sorry I said April of 2020. It's actually since the meme rally of January of 2021 forgive me the highest short covering since the meme rally of 21. Which obviously that says something because the meme rally of 21 had some insane short covering. But look at this on a chart basis.

short covering shows you when the line goes up, you've got the highest short covering. The short covering is insanely high right now and again. I Think that's because here in January of 2, 2023, we had most into institutions thinking okay, first half of the year is going to be hell. We're going to go into a recession, It's going to be very, very choppy.

Let's keep our short positions when we actually ended up seeing the market do substantially well in January relating to a lot of short covering and then of course the safe phasing oh well or face saving attitude of oh well, it's just a bear Market rally and sure, maybe that might end up proving to be true. but I think a lot of Institutions are looking at everything right now to suggest oh yep, things are a lot worse than maybe they are, but who knows, maybe things are worse. But one of the narratives that's spinning up right now is this idea that Loretta Master and Mr Bullard are calling for a 50 basis point hike and a lot of folks are saying that's it. This is going to be the moment where the Federal Reserve actually U-turns and goes from 25 basis points which they've dropped at only raising rates 25 basis points and they go back to 50 basis point hikes.

And the narrative is they are going to U-turn to 50 basis point hikes because the data is coming in stronger when the reality is actually different. Both Loretta Mester and Mr Bullard have always been calling for front loading rates. In fact, Mr Bullard was calling for getting to four or five percent with increments of 100 basis point hikes for over a year. He's been calling for getting to five percent or four percent for over a year, potentially using 100 basis point hikes.

So it's not like all all of a sudden Loretta Mester and Bullard are like oh yeah, let's go for 50 basis point hikes because PPI and CPI came in hot. That's not actually what happened. however, institutions are spinning that narrative and now you're seeing all of these mainstream headline articles suggesting oh my gosh, 50 basis points might be coming back. They literally haven't changed their opinion at all.

They've been of the same mindset, every single meeting, higher, higher, higher higher and they've been always calling for 50. They were not fans of 25. even though everybody ultimately agreed at the Federal Reserve hey, we're going for 25. the individual screaming the loudest right now aren't even necessarily voting members of the Federal Reserve Open Market Committee right now.

But aside from going down through the Nuance of exactly who's voting and their biases or whatever I think it's important to remember that because institutions are caught offside, you have a lot of negativity towards this rally. Now that's not me suggesting that. Absolutely, this rally is. Justified Some things, especially at certain companies that do not have a lot of profitability in my opinion, shouldn't be rallying the way they are.

That's okay. What's important to pay attention to though, is the actual trend of CPI and PPI and I Think the data is quite useful to look at here. So here's a piece from Barclays a Barclays that actually nicely lays out for us: the deceleration that we're seeing on year-over-year CPI and PPI Inflation Yes, PPI came in hotter than expected. But look at the actual chart.

Of course we're going to get volatility. Of course, we're going to see charts that are not just straight down. they never are. Look at them historically.

Going back to 2012 2013 14, 15, 16, 17, 18, 19. Look at how volatile these surveys are. They do this up and down and up and down and up and down all of the time. They are not smooth curves.

There is no survey data that is a smooth curve. but what you're looking for is the longer run. Trend Look at the longer run trend of 2012 to 2015 stable even though you had a sink in 2015 and 16.. if you continue the 2012 to 2015 Trend Look at what you end up getting.

basically a continuation of inflation Trends into 17, 18, 19, 20.. Then of course we get the covet pandemic and this is where the trend changes. We have a clear Trend up of inflation, but what do we clearly have now in terms of an inflection point? Even though data is noisy in the short term, what is the very clear trend on inflation? It is straight down and again there are going to be bumps along the way. We're going to get noisy data that shows indications that inflation is pushing up temporarily and it's not falling as fast as we like.

and every report isn't perfect and and you know, coming in lower than expectations. But this is headline year over year CPI and PPI Let's now jump on over to core measures. Core okay, less the volatile components, less food and energy and what do we actually have? Look at this. All measures of PPI are showing a decline in inflation.

All measures, of course, some parts are still feeling a little bit more sticky than we would like. Of course we're still dealing with some higher costs for longer. We know that. But what have I been saying regularly and I'm going to now give you evidence for this as well.

And I've also been giving you evidence. You should already know this and I know part of this is going to sound redundant and I want to say it to catch you up and then I'm going to move on to some more evidence. I've been regularly talking about how companies are telling us inflationary pressures that still exist are expected to be gone by the second half of the Year those are your Industrials, your Pepsi your Procter and Gamble your your Consumer Staples Right, you're Johnson and Johnson Yes, there are still inflationary Embers We still have Embers of inflation, but we're seeing those pricing pressures go away and expect them to be gone by the middle of the year. That's still going to take a while to show up in all the survey data.

Of course, there's a lag that's logical. What are we seeing at companies that are hiring in labor-intensive fields? Wow. Health Care Not issuing signing bonuses anymore like they used to have because they actually have the availability to hire people again. What about uh, the uh, the sectors within retail? Uh, it's easier for Starbucks to hire people Chipotle Finding it easier to keep people and easier to hire people.

You're seeing this consistently as a trend throughout company earnings. but Bank of America finally put out a piece which I thought was very very useful. Uh, and they mentioned and their piece over here. take a look at this.

I'll read you this paragraph right here. U.S Earnings call and then this piece by the way, just out. So yeah, this came out last night February 16th right here and I've been talking about this for weeks but now I got a an actual like institutional piece saying the same thing because I've been observing this in actually reading the earnings calls while Bank of America just went through with their little algorithms or whatever. And here's what they write: U.S Earnings Call analysis suggests improving availability to hire, mentions of quote, improved labor availability or of quote ease of hiring end quote by Management on earnings call calls continue to rise through the earnings season, so more of the commentary that is becoming easier to hire easier to get labor.

This is the same thing we saw by the way with Uber and Lyft right Uber and Lyft What did they tell us? massive increase in the supply of available labor leading to lower Peak pricing leading to lower margins, especially at Lyft. Anyway, to some extent, recent Staffing Cuts have further helped ease the labor market situation. Our analysis recorded a substantial rise in the mentions of layoff slash Workforce reduction on earnings calls, mentions per company were the highest for Tech and financials. while industrial mentions are low compared to the last two cycles remember Industrials like the Johnson and Johnson or sort of your more industrial producers Procter and Gamble they're kind of still in the hey we've got Embers of inflation stage hoping they're gone by the second half of the year.

but you do also have companies like the Aerospace sector GE Boeing Embraer They are still facing labor issues. That's probably the last sector that's going to recover and generally recessions align with when industrial layoffs are the highest. That is, In other words, like the worst, the worst is marked and demarcated by a peak in industrial layoffs. So they're usually the last last to lay off and and they're still struggling.

So In Fairness, we're still in that phase where you're still seeing like Aerospace and certainly the defense sector having struggles uh to to uh Master uh, sort of their margins and inflation and labor. Embers So you still have Embers of inflation, right? But the trend now is down and that this these Embers are getting extinguished over time. Anyway, continuing with what was written here, mentions of wage growth and wage inflation on earnings calls are still near all-time Highs but modestly off the Q1 2022 levels. So in other words, you're seeing companies that are still saying look, we still have higher wages, we still have higher wage inflation that we have to deal with in the face of margins, but now it's becoming easier to hire.

We're starting to see that inflection point right, which is great. And that's not to say that the Federal Reserve doesn't have to keep rates higher for longer. but it is to say that as we saw in the Barclays piece, we are clearly on an inflection point of inflation rotating down again on screen. Now again, the trend is clearly down and certainly when we get Uh inflation data for housing start rotating down, we can actually maybe more meaningfully see this drag down.

So yeah, 2023 is still going to be the environment of fighting the Embers But I Personally believe the big Wildfire of oh crop inflation is going to move the moon. This is hell is over. The hell is over. But we still have the lava that hell left us with and that is still feeding through our economy.

We're still fighting those fires. but the trend is very clear that it doesn't appear inflation is going to be as horrible as the 1970s and inflation expectations say the same thing. Is it possible we're going to get a second wave of inflation? Yes, But I Personally don't think so. You do see that there is an alignment and this is actually does give Credence to the idea that maybe there would be a second wave of inflation.

You do have a similar you have sort of this environment where inflation tends to be worse in countries with excess savings and inflation tends to be worse in countries with less excess savings. When we look at for example Spanish Inflation and and inflation in Spain One of the things that you're actually seeing is when you have elevated inflation in Spain Uh, it's when savings are higher but excess Savings in Spain have fallen a lot quicker than excess Savings in other countries. And what's interesting is as those excess savings is in other countries. or rather in Spain has come down.

Here's a chart for example of excess Savings in Spain You can see at the top right: Spain's excess savings rate has plummeted relative to other countries like Germany or the United Kingdom Ireland the Netherlands blah blah blah. As you see excess savings shrink in Spain, you're actually seeing inflation in Spain fall a lot quicker. and so to some regard, we still have a lot of excess savings as well in the United States But the excess savings rate is falling. People still aren't buffering their excess savings the way they had been certainly not during the pandemic.

So yes, it is true that all and it should be obvious, right? it should go without data. But it, yes, more savings leads to more inflationary pressures and the reality is people still have a lot of excess savings. We went through this yesterday statistically showed that Bank of America suggesting that people with an average bank balance of two and a half thousand to five thousand dollars now have an average bank balance. Uh, this is pre-pandemic right? Pre-pandemic now have an average bank balance of twelve point eight thousand dollars and it's only Fallen 4.4 percent over the last year.

So there's still a lot of excess savings out there, right? But the new rate of the rate of growth of excess savings is now negative, which is good. and hopefully that means we can reiterate the downtrend without a second wave of inflation. It does not appear based on daily research, so we're conducting that China is going to be somehow this magical double inflationary push what people are spending money on in China seems to be local travel and entertainment, not necessarily solely on goods and services where we expect supply chain nightmares again. Supply Chains are very, very loose right now.

Uh, which is good especially and certainly becoming looser and looser. That doesn't mean there still aren't problems, but they're becoming lot looser. Automotive Still has some supply chain issues, but look at this chart as well. This is a A A chart that basically shows you PPI overlaid with Uh operating margins and guide on operating margins and you basically see that as Ppi is coming down, margins are coming down as well.

And that's actually really interesting because it suggests a a lack of potentially pricing power at companies to continue to pass on higher costs and actually preserve their margins. So even though Ppi is falling, you are also seeing margins come down. and that suggests that we should continue to see a decline in CPI Consumer Price inflation because again, the buffer of of basically cost is not solely the consumer paying more, but it's out. It's actually the consumer saying I'm not paying any more and then companies taking it in the margin.

We've regularly been talking about companies taking it in the margin and I think this graph really represents that to us that as uh, forward margins are coming down. Ppi is coming down to see this sort of happen together Now at some point, uh, or some argument can be made that, well, margins aren't falling as quickly as they should. Suggesting that you know, maybe uh, either uh, companies are able to still pass on pricing or they're becoming more efficient I Hope the truth is, companies are becoming more efficient and that's what we're seeing via layoffs. We'll see, there's still though, uh, what? what some companies are calling a lot of excess bloat I Found out very interesting.

There's this argument that companies like Meta so Facebook have a lot of excess uh, headcount And what they basically did is they calculated uh, earnings, uh, or sales growth so Revenue growth for companies and they compared that to pre and post layoff employee growth and they found that Facebook still has 20 more workers than their sales growth would justify after the layoffs Amazon still has 24 excess workers Microsoft still has one percent access workers and companies that have actually laid off more than their growth are companies like Google and a sales force which have actually potentially become more efficient uh, via layoffs than Uh and their sales growth has actually now exceeded their employee and head count growth. So kind of interesting. So obviously we'll see I'm of the big believer that yes, things in 2023 are going to be very, very noisy. so sort of bottom line out of everything I'm reiterating uh, that even though we're getting all this noisy, noisy, noisy data, I think it continues to reiterate what we're talking about with the Nike Swoosh which unfortunately, the Nike Swoosh in this case is not very smooth and we never expected to be I've always drawn it as a crazy swiggly line.

So yes, expect, expect the madness. but I think as the analysts we talked about yesterday, you're starting to say maybe buy the Dip is back, right? Maybe buy the Dip is back because the trend is slowly towards a repaired economy, not an economy that's necessarily going into the 1970s and runaway inflation.