Hey everyone me kevin here welcome to a discussion of what the federal reserve just mentioned in their minute meeting notes uh from september. This is uh going to be our look into uh. What they're thinking in terms of what's holding the economy back and what's propelling things like inflation uh? One thing i noticed is that uh the discussion in this minute meeting notes was a lot more hawkish. In fact, i wrote that on top a lot more hawkish than the prior reading or prior sort of minutes, uh, which are just the meeting notes of of what came out of their meetings, uh very very much of this, and it's worth noting this before we go And go into some of the details of what they actually said.

It's worth, noting that a lot of the commentary in this has to do with the potential for covid holding us back. So they're kind of saying, hey, like we're, seeing inflation going up but covid might hold us back or we're seeing uh supply shortages, but covid might might change these dynamics, and what's very interesting about this, to consider is that covid has started to plummet like covet. Cases. Are falling, which would mean that if the fed's talking about upside risks as you're going to see in this report and they're, really only downside complaint is covet to maybe keep inflation down, but covet cases go away, then you could potentially just see more inflation, and this Potentially more hawkish attitude from the fed, which might mean that faster tapering or faster rate increase.

So, let's talk take a look at some of the notes here and then draw some kind of conclusions with some of the latest interviews and that that we've uh that we've watched and commented on. So let's take a look here so covet see this. They even start about this right: the spread of the delta variant of coven 19, weighed on near-term growth out a growth outlook. Right, but again you take covet out of the equation because we're starting to see covered cases go out and hopefully we don't see an explosion.

In covet cases in the winter, then we could potentially see revisions up in terms of gdp, which means no stagflation. It could just mean more growth and potentially more inflation, which is obviously different from having inflation without uh growth stagflation's bad. Nobody actually thinks that we're going to the stagflationary direction at the fed, but they're definitely seeing at the moment growth potentially slowing a little bit, at least in september because of coving, while inflation inflation's still moving to the upside, so uh as they mentioned here and revised Projections up for inflation this year, uh and - and they mentioned many times that they sort of are seeing that inflation is definitely lasting longer and it's larger than they originally projected. This was interesting about half of respondents to the death surveys of primary dealers and market participants.

Viewed december as the most likely timing of the first reduction in net purchases, although respondents also attached significant probability of the first reduction coming in november. So this is where some analysts are guessing. Okay, so we'll probably hear that at the beginning of november the first week of november, we're probably going to see the federal reserve say we're going to taper. Then they'll probably start that taper either the middle of november or the middle of december.

It doesn't happen right when they announce it. They kind of schedule it out. It's worth noting, and the federal reserve later in this they're actually somewhat concerned that the market's going to think that if the fed starts tapering that the fed's not being a con accommodative anymore to the economy they're. Actually, they saw that as a downside risk and we'll see that in a moment, but really what that means is, if you think about it, if the fed right now is buying 120 billion dollars worth of bonds, and they drop this to 100 to 80 to 60 And they drop this down over time.

These are still accommodations to the market. So there were some discussions about concerns that hey. If we start tapering, is the market potentially going to think we're not being accommodative anymore and could that potentially slow markets in the economy? Because that's what they don't want to do, they want to still make sure that businesses are empowered and encouraged to hire people hiring uh being something else that we're going to talk about in just a moment here. So let's get to some of the juicy things.

Lots of talk about bottlenecks - obviously we know inflation has been has been rising, especially amongst a motor vehicle, as i mentioned a little real huge lack of supply here, temporary issues, things like hurricanes or whatever but inflation abroad - and this is especially in developing economies. Inflation abroad was elevated, reflecting reversals of price declines in the early part of the pandemic. Past increases in energy and commodity prices, upward pressure from supply bottlenecks, and then you have changes in exchange rates, so in other words, it's not just us seeing inflation. It's other areas like southeast asia, seeing inflation as well.

It's worth noting, and i think this is so important to remember that when every almost every time when we look at an earnings report for some of the companies that are affected specifically by inflationary concerns, almost every time, they respond to analysts and they say look, we Are only able to pass about 50 of the price increase along to consumers, and this makes sense because you don't want to raise prices too quickly. Otherwise, you become uncompetitive, so businesses have to raise prices over time. So, in some sense, even if inflation were to actually start inflecting down, that could potentially just be a signal for businesses to raise prices because consumers might be able to now pay those higher prices or other businesses have caught up. Now you raise prices more to try to get to 100 pass-through which ultimately that's what a business wants.

You know if a business is selling you know mugs and uh. You know they used to sell them for ten dollars and make a five dollar profit. Now, they're selling them for ten dollars, but they're only making a three dollar profit. They want to get back to that five dollar profit right, so they got to get this price up by a couple - bucks - maybe even fractionally more than that - but maybe they're only able to raise the price a dollar now, and so that's what we're seeing inflation statistics Now, which actually means there's more to come, which is kind of interesting to think about it? That way, because it's certainly the opposite of what the federal reserve has been thinking, the fed has thought look, we're going to have uh base effect inflation, where we're going to be comparing to the whole and on top of base effect inflation we'll have uh inflation.

When we reopen but we're having much more than that, we're literally having companies not only paying workers more but paying more money for uh products, raising prices for for input, products, right, pay, uh, raising prices on the goods and services that they're selling uh - and we don't Really expect those prices to come back down, they might level off, but we don't really expect those prices to come down, so people are going to be paying more for longer and so we're consistently seeing the federal reserve here essentially flip in favor of saying, okay yeah. We're probably still going to be up against inflationary concerns for another year, maybe even longer, and so we'll see some of that here they do uh as we get into some of the earlier pages here. They do talk about concerns over a potential default by evergrand and risks of a contagion, basically being limited on on america and the broader financial picture. So i thought that was that's always nice to kind of at least hear that uh, although who knows maybe they're lying through their teeth right credit quality for large non-financial corporations like in banks like not banks, uh was a very strong, remain positive.

Lots of upgrades more upgrades of credit ratings than downgrades. You want to see this. However, you did see that small business owners, especially in covet sensitive sectors, they said like in food services, arts, entertainment, recreation, educational services - became more pessimistic about their financial prospects, largely because of worsening near-term expectations for sales and general business conditions. So everything goes together in business conditions.

Right. It's politics. It's covid! It's supply chain disruptions. It's wait times all those frustrations go together and uh and hurt small businesses.

So i think small businesses and uh consumers are really getting beat up here. The worst uh investors are actually offer, i mean doing pretty well, given the fact you look at the stock market, it's just so disconnected from the reality of what's happening out there, mostly because uh we have so much uh, uh, so much money printing, that's been happening Right but anyway, increased concerns so again this this to me very interesting: they keep referencing. This increased concerns about delta in august. That's really the only downside risk they see to the economy right now and they keep saying this over and over and over again in this report, but wait a minute that's going away now you look at covet cases and they're plummeting, which is great, i'm very happy About that, because nobody wants to deal with covid everybody's done, wearing masks and we're tired about hearing about vaccines and all the madness.

But if we do a quick search here for uh covet cases, let's see here covet cases united states. Let's just do a really quick look here i mean, thank god, you know we're plummeting, which is good. We want this now. The last thing we want is to see northern states once things start getting colder to start seeing spikes again.

That would be bad right. We don't want to see that again, so it is still a risk and in a weird way, if we get a covet spike in let's say november december january february, that's actually going to temporarily push down inflation again. While it may push down inflation, it potentially will create more inflation on the back end, because you'll exacerbate supply chain issues. So again you have a covet surge.

People spend less money, people save money, they stay indoors more. You then come out of it. You spend money again, you still you're still stuck with the supply chain constraints, so uh. Really.

If, if anything i mean, if covet comes back, it would just be a delaying of essentially the more inflation that we're seeing. Okay, so accommodative conditions for borrowers of residential real estate. We know that uh here we go so the staff's near-term outlook for inflation was revised up further in response to incoming data, at least they're being fluid about it right at least they're, not like. No, it's getting.

My way at least they're fluid about it, and this is really basically their way of saying yeah when we said transitory being like the end of 2021, we actually meant the end of 2022 for inflation to rotate down the 12-month change in total in core pce. Well, above the 2 in july, available data suggests that it had remained high in august and obviously we know now. It remained high in september as well. Staff interpreted interpreted the inflation data as indicating that supply chain constraints were putting a larger amount of upward pressure on prices than previously anticipated.

In other words, this is where the fed is literally saying: oh crap, we were wrong: uh, inflation's, lasting longer uh. As a result, projections holding steady okay - let's see here, the staff continued to judge that risks to the baseline projection for economic activity were skewed to the downside. Now this is what i disagree with, so the staff together, they're saying: well, we still have risks to the downside yeah if you think kovit's going to get worse, but if covet gets better and we don't have that coveted surge in the wind term, you're going to Have upside risks of the economy, which means again gdp growth in the potential for even more inflation temporarily, and now, when i say temporarily for the sake of this, i do think it's going to be. You know a while six months, 12 months, 18 months before we deal with supply chain issues, uh prices in many cases will still keep going up.

Uh, and i i recognize this as a shift, and it's just because i you know the more you go out. The more you're realizing like oh my gosh airlines. They can't figure it out uh people who are hiring. They can't figure it out.

Businesses who are hiring. They can't figure out it's hard to hire, there's so many there's so much business to do. But it's hard to actually function. The whole economy has been so effed up, essentially uh we're manipulated or whatever the cause is it's just all disaster anyway in particular, but i mean it's also worth noting that, even though, if covet is their version of a downside risk, it's worth also mentioning that, if Covet goes away, then we lose that downside risk that they're not really forecasting any kind of recession right.

So this is where, like yeah, you might be like yeah, okay, yeah. We know big, more inflation coming. Does that mean the market's gon na crash? That's not what the fed's saying fed's saying yeah. We may have been wrong about inflation, but if anything, it just means the economy is actually functioning right.

Now, uh and or at least we're trying to get back to proper functioning and it's because people are spending money. Like crazy, because they have crazy amounts of money, but no no alarmism regarding the potential for a market crash, at least not from the fed and who knows it could always be misleading but uh anyway. The staff also continued to judge the risks around possible inflation tilted to the upside, with listen to this with, and this was in september, okay, with the possibility of more severe and persistent supply issues, especially uh, viewed as especially salient. So this is a big line right here: more severe and persistent, okay, so more severe temporary supply chain crises, persistent would mean it just continues and continues and contin continues that war choice actually very, very important.

In addition, the staff pointed to a uh to a risk that long run inflation expectations would move appreciably higher and lead to here's. That word again, it's a big word and lead to persistently elevated inflation. I mean this is like a big old u-turn from the fed. Here, right, uh, because now jerome powell always said hey, we think inflation's going to be temporary.

We don't think it's going to be persistently higher we're going to have that reopening inflation, and then you know things are going to settle down yeah. Well, that's a little bit! U-Turned now now we're like oh crap. This is lasting, uh more and larger than we expected, which is, of course, the perfect place to insert that's what she said, but anyway participant views on current economic conditions. Okay, so we talked about this uh likely outcomes for gdp.

The unemployment rate we've seen this in the summary of economic projections before so, there's not much to talk about so much here, because we've talked about this before uh they mar. We did see a mark down of real gdp growth for the year, pointing to a reassessment of the severity and duration of supply chain constraints. Remember when you can't spend money because you have to wait longer or you get frustrated and you decide not to buy something. A new refrigerator, a vacation or whatever you're robbing gdp right.

So the supply chain issue is it's not just a matter of inflation, you're also robbing from gdp. I personally do think, though, that, as the effect of the delta variant goes away, we'll still see a return to gdp. You know more growth than what we're seeing now, we'll probably see revisions to the upside, but those revisions will be done at higher prices, meaning higher inflation. So, like i don't see, stagflation definitely do see inflation, though, in the discussions of the household sector, participants noted that consumer spending had decelerated in recent months.

But again this deceleration was really because of delta right uh see they even say it here. The delta variant was weighing out spending for consumer services and it always goes back. That's why i keep mentioning it goes back to this right here, the beginning of september. You were still at peak levels of covet.

You were still at peak levels of covet through about september 7th - that's only about 36 days ago, at this point right, so uh all right continuing on over here. Nonetheless, participants expect the accumulated stock of savings, the release of pent up demand and progress on vaccinations to continue to support household spending, see they're being transparent, they're like yeah sure right now. Things are a little bit constrained, but we think that spending is going to come back which, if anything, that spending come back coming back after the delta fears go away, as they are now just reiterates more inflation right, which is not good for inflation purposes, which basically Means by crypto which finally started going up again. It was so weird that this morning, when this inflation report came out, crypto started going down.

I'm like this doesn't make sense. Crypto should be going up. I have a bigger crypto position right now than i ever have had before, i'm at like six percent of portfolio right now, even i think slightly above that all right, uh, let's see respect to the business sector. Participants observed that firms in a number of industries were facing challenges, keeping up with demand due to a spread of supply, chain issues and labor shortages and like this is big.

If you are a business well, if you're a business owner, you probably already know, but let me put it this way: if you're, not a business owner, you you got to picture the implications of this you're. A business owner and people are like kevin. We want to hire you to do stuff. We want to hire you to make stuff, but you're, like i can't that's frustrating as a business owner, because you want to service your customers but you're getting reamed because of these bottlenecks.

Creating challenges for a number of manufacturers, especially acute for the motor vehicle industry, which is also a shocker. How well tesla, is getting through this. It's pretty and crazy. Pretty crazy.

I mean look at this. It's right now on cnbc supply, chain struggles and a picture of a semi truck right. It's the same thing continuing on and on a couple of participants noted that inventory to sales ratios were at or near record lows in many industries and the need to rebuild them would boost business investment see. This is something that actually contributes to gdp.

Is businesses investing in new machinery in in new trucks, uh in in more efficient products and whatever uh, manufacturing products or or supply chain? Uh management? Uh? That's big! All right! Let's see a couple of other participants motivated that elevated crop prices were continuing to boost income and agricultural sector labor market conditions had continued to improve, but we're still below one thing they mentioned. Look at this. Various participants suggested that a complete return to pre-pandemic conditions was unlikely, as the pandemic had prompted reductions in the workforce that were likely there's that word again to persist, including a large number of retirements and other departures from the labor force. This means this right here.

In my opinion means the federal reserve is saying: look we need to worry less about jobs, the labor force participation rate is going to be lower after the pandemic, because we just let more people retire. As they said here, people's careers have changed, maybe they're working from home. Who cares whatever working you know for themselves or whatever uh, which i suppose they'd still be considered, part of the labor force, if they're working for themselves. But whatever point is uh, we had we've made this analysis before here on the channel that, if you're apple and you lay off 20 000 workers in march of 2020, and then you come back and hire 10 000 of the most efficient people back well great, you Just shaved your labor force, 10 000 people.

Your company is now much more efficient. Your margins go up, you're, putting more work on individual people, but you have less net people less net workers right and the fed here is basically saying - that's probably going to last, and that will be what continues to weigh on labor force participation and the labor force. Participation rate and that basically uh, we just shouldn't even be paying that much attention to labor force participation going up because it's going to stay low, especially for women with young children and people with lower incomes generally under that 40 000 uh dollar income is what they Consider as being lower income, so we're going to see that which means they're going to have more of a focus on inflation rather than on on unemployment. Most participants saw inflation.

Risks has weighted to the upsides to the upside, because supply chain disruptions and labor shortages might last longer and might have a larger, more persistent effect on prices and wages than currently assumed, and this is interesting look what they wrote here. Most see upside risks to inflation, but only a few commented that there were downside risks for inflation uh, like the uh existing long-term effects that we have in place since before and those are the deflationary facts of technology, for example, or an aging population. Okay. So then we have, let's see i'm just gon na get to most of the just generally.

The highlights here: labor force participation lagging, but despite labor force, participation lagging remember what they say here on the basis of cumulative performance, whatever, basically substantial. Further progress toward maximum employment had been met. So, even though you're seeing that lag in labor force, participation, they're saying, hey, look, you know substantial further progress has been met because we got to start preparing to be able to raise or to taper and to be prepared to raise rates. If we need to see several participants several indicated, they prefer to proceed with a more rapid moderation of purchases than described in the illustrative examples.

So in other words, you know how they do like the dot plot, with like the raising of rates or hey. When should we tape or whatever they're? Basically here saying hey, we kind of think forget about the charts. We want to taper sooner and faster, and this is where we really think there's this, and we talked about this a little bit yesterday, where we think that the taper could come could come to an end conclusion as soon as potentially april uh to may the current Forecast is that we might end somewhere between june and august, some have suggested, maybe as late as as september uh. This is all being of course 2022..

So uh. This is this orange section here is kind of the current, but we're seeing a lot more talk at the fed about maybe getting this taper done earlier, like in that april may time frame so and then, of course, commencing in either mid-november or mid-december. You could see it directly from the fed right here, they're being extremely clear about this taper coming, so there should really be no surprise in the market. Risk management considerations, number of downside risks again all of the downside, risks or anytime.

They mention downside risks. It's always covid 19., but honestly, once you take away covet 19, you don't have that many headwinds left. They do give three headwinds. They give potential tightening of financial conditions.

This would imply that banks are potentially less willing to lend we're not seeing that right. Now. We're we're seeing businesses being somewhat unwilling to borrow, but banks are extremely willing to to lend right now. So we're not seeing this this first one here we're not really seeing that as a risk.

The second one is covid, but cases are going down for that. So we're not seeing that as a risk as much and number three you've got the headwind of maybe less stimulus coming from congress providing a headwind for the economy. But quite frankly i mean we have the child tax credit we're expecting to potentially expand that uh. I don't really see that as as a headwind i mean maybe less ppp and so on and so forth, but i don't know about that uh.

So, let's see here, okay, so then we have more persistent inflation, more persistent supply chain shortages - public, oh yeah, see this. Was that part? I was talking about earlier, where i mentioned that one of the downside risks to inflation included the possibility that a decline inflation expectations might occur if the public assumed the fed was actually being less accommodative than it really was. So i thought that was kind of an interesting mention, no direct signal about interest rate policy, but they do expect to be at or near the lower bound of interest rates over the next couple of years, which would be through kind of the mid 2023. That doesn't mean no interest rate increases, just means low, uh rate increases, and this makes sense because for 2022 remember we're expecting to go to 0.25 to 0.5 in 2022 and then at 23 at the beginning, probably like q1 will go to like 0.5 to 0.75 and Then 0.75 to 1, maybe by like q2 of 23, and we might even go to like 1 to 1.25 by q3 of 23 sort of the expectations right now.

Okay, any other comments here, a little bit about the counterparty upping what they'll take at the repo markets. We've talked about that before the reverse ricoh repos, the fed will now take up to 160 billion per bank or depositor that was it so uh. This kind of gives you this this overarching view here of the fed that, yes, there is more inflation. Yes, it's more persistent and it's probably likely to continue quite frankly for another year, which is kind of crazy to think about that the supply chain shortages are going to keep going for a year.

Uh businesses, however, are much more efficient. Debt and liquidity is very, very high. Household liquidity is very high as long as covid doesn't come back. We don't really have a big negative catalyst, and so this is where i've regularly talked about over the last six weeks on the channel here, like what negative catalyst do we actually have for a market crash like at this point saying: oh no inflation's going to go Up really like okay, we've heard that a million times before like tell me something else, that's new and i think that's why we've had the the s p today, uh really just brush off this uh, this inflationary data, because it's like okay, we we know big deal Like give us some other news, i mean look at the indices today in fact, seriously.

Look at this look at this. The dow jones industrial is flat and the s p is nearly flat, but look at what's not flat. It's the nasdaq technologies up 5.6. So, in other words, companies that would be sensitive to inflation like expensive companies or lower earning companies are going up.

Hey look shout out to hippo holdings up 5.46 percent. Let's go. They were way oversold, where's owlette. Let's get outlet up here.

I know a firm's kicking butt. Look at that four point: four: five percent trade desk dude: you do not invest in a firm or trade desk if you think that inflation is going to kill the economy right. I think the market has just gotten to this point. Where, ah, we got enough money, whatever i'd rather be invested than not invested, and the negative market catalysts have kind of evaporated.

It's scary to say that, and i don't want to come across as like blind to potential negative catalysts right, and so this is why i always subscribe to the channel join me in the stocks and psychology of money program, a link down below or the other programs. You can bundle up use that coupon code before the 29th, because pricing is going to go up new lectures coming out on the 24th in the stocks group and really this is just the market that it makes more sense to buy and then wait than to sit Around and wait because the crashes that we've had have been minor, i mean we had. I plowed like four million dollars into the market uh over the last like three weeks because we had a dip as as recently as about a week ago. We've had lots of dips, but beyond you know now it's like now we're going back to the moon and it's really because again the negative catalysts are gone.

The only negative catalyst you just saw from the federal reserve, literally the only one from the fed was delta, and all you have to do - is type covet cases into google to realize. Why crap that ain't, that much of a of a negative catalyst so uh, i still okay, jolly anderson, says i still see mark and margin as a possible doomsday negative catalyst. I agree with that. I do think there's a lot of extra leverage in the market right now.

I think that is a red flag to pay attention to. I don't know if i would go as far as saying like this: is a market crash catalyst yet uh, but yeah there is more leverage in the market, i'm not happy about that and in this kind of market i would highly encourage you to get out of Leverage take some attendees on some options that you have or some stocks. You have pay down your leverage and just be happy. Okay, all right! Thank you.

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