Let's talk about the Federal Reserve and what's going on with financial conditions. The reason we want to talk about financial conditions is very, very clearly important because Jerome Powell In his discussion with Uh Dave Rubin from the Washington DC Economics Club ask Drum Powell Well, where drum Powell was asked hey, Jerome You know what do you think about this latest Jobs report and immediately Jerome Powell responded and said, ah, well Financial Conditions already tightened now I Thought that was really incredible because you immediately had this response from Jerome Powell that suggested hey, look, You know we're just letting the market respond to the data right now and we're going to respond to the data as it comes in Now That actually gives me a lot of confidence. And Faith because it shows the market understands the challenge We Face We must get inflation down and when reports come in hot, guess what happens? Treasury yields rise And that's exactly what happened. Although today they're softening a little bit now.

right after the Fomc meeting, we were down at 3.38 Now we're sitting at about 3.59 Yesterday we were in about the 3.6 range. We're still a good chunk, about 20 to 30 basis points higher than than where we were at the low just, uh, just about a week or so ago. But it's worth taking a look at a sum of the analysis some of the reports that we're seeing. So let's start with Goldman Goldman here suggests the following: that macro data is trimming policy tails and this argues that maybe rates could go lower or rates could go higher.

And basically they're suggesting here that they believe, uh, that ultimately monetary lags are going to be shorter than are commonly thought or traditionally thought. Now, that's actually a little bit bearish because it suggests that the FED May potentially not be able to put too much weight on this idea that monetary policy is going to lag and we could just kind of get to a certain point and wait longer. They might end up being a little bit more aggressive if they need to. This is quite interesting because you know it's not the best and most bullish thing for markets to think.

Okay, if the FED has to be more aggressive, then what do you end up with? Well, the following: the strengthening case for pricing: a narrower path for the policy rate around the projected rate of five to five and a quarter percent, and this, in their opinion, translates to higher, longer maturity yields. Basically, in English yields could be higher for longer. And yesterday we got a little bit of fed speak that ultimately gives us a path for how long could the Federal Reserve end up needing to keep policy restrictive, Especially if the lags that we think monetary policy have are not going to be as drawn out as maybe they had been in the past. In the past, we used to think that the Federal Reserve would raise rates and it would take about 18 months for those higher interest rates to actually trickle through the economy.

Now, the Federal Reserve says that lag could be as little as three to six months. It's pretty incredible, but that does mean the Federal Reserve has to be hawkish for longer. and the question from Goldman Sachs is okay. Well, uh, have have their recent discussions been hawkish? Well, according to Goldman, even though it's same like Dropout was dovish, the Goldman Sachs Economists note that implications for the FED path this year actually leaned a bit hawkish, particularly Powell's optimism on growth despite recent weakness and Survey data, and that his observation was very clear that doing too little was the most difficult risk to manage.

Now that's important because it aligns with some information that we got yesterday about how long does the FED actually think they're going to keep rates high Now this is very important. We have believed based on the Bond Market's expectations that we would end up seeing the Federal Reserve cut rates by the end of the year, and if they cut rates by the end of the year, even though they say they're not going to cut rates by the end of the year, even though the Bond Market's pricing that in it could happen if data continues to come in. We, however, yesterday we had uh Mr Williams from the Federal Reserve unfortunately deliver a little bit of a blow to us. Uh, Mr Williams said that not only is it reasonable to get to 5.1 percent, but we're going to need to maintain quote.

I'll just read you the quote. We're going to need to maintain quote that rate for a few years to make sure we get to two percent inflation. That's terrible. That's very bad.

It is exactly the opposite of what the market has been. Pricing in the Market's been pricing in that we're going to get to a peak. We'll stay there for a few months and cut down. Now this is just one person at the Fed, and it doesn't necessarily mean that because one person at the FED thinks we need to maintain a rate of 5.1 percent for years that we are going to.

But let's just say, when this press conference happened, people were not very happy in the market. And guess who is a Committee Member on the Fed this year? Oh, Mr Williams The person who thinks rates should stay at 5.1 for years that's not good. That's actually quite bad. And this is potentially because even though on one hand, Jerome Powell is talking about how disinflation could be uh, at least inferred as being dovish by markets drum, Powell's making it clear that look, even though we're seeing disinflation in Goods, we need to make sure we actually see disinflation materialized in housing and core Services which so far we have not yet seen.

although we think leading indicators suggest they will, but we still haven't actually seen that come through. That potentially creates the risk that inflation is stickier than expected. This is a little bit of a risk factor, so now we consider. Okay, well, what are markets pricing in right now and we can see exactly that.

there are a few places we can go we could look at. first of all: Financial Conditions I'm a big fan of watching Financial conditions the easiest way in my opinion that you could track Financial conditions and simply look at the 10-year treasury. The 10-year treasury is a very simple barometer, and anytime we see it loosen, we tend to see the FED talk a little bit more aggressively. Anytime we see it soften or or tighten, we tend to see the FED talk a little bit more dovishly.

so. They seem to be very well driven by what's happening in the bond market, not necessarily what's happening in the stock market. Think about that. Jerome Powell doesn't talk about the stock market going up.

He talks about financial conditions, which, yes, stocks are a part of, but they're a much smaller part of compared to or part of financial conditions relative to the weight that interest rates have. Interest rates are huge because they affect everything. They affect people's credit cards. Their buy now pay later loans, the pay payment on the iPhone they want to borrow.

If they're really stupid and want to buy a plane, they could do that and I want to be very clear about that I think for 99 of plain purchases, they're absolutely stupid. The only reason you can ever remotely suggest it makes sense to have a plane is if for some reason you think it's some crazy, uh, business investment that's actually going to be able to help you build a billion dollar company. Uh, because of the insane plane plans that you have for creating phenomenal growth and cash flow at a startup that you might be creating. But short of that one percent uh, potential delusion? uh, or reality, we'll see what happens.

Knock on wood, No guarantees. nobody should buy a plane. I Don't know why I went down that tangent. but anyway, uh, let's look at Goldman Sachs Financial Conditions Goldman Sachs Financial Conditions index.

and uh, and we'll be able to see a little bit of what's going on uh with financial conditions. And then we'll also be able to look at what we think uh, Traders are pricing in for the uh, the you know rate increases with the Fed So we're going to pull up on screen right now: the Goldman Sachs Financial Conditions index. You can see that here. you can see that Financial conditions were actually substantially low on the left side of the chart.

You can see that here in the left side of the chart, you end up seeing that this is when the Federal Reserve actually ended printing money. Which is insane to think that in March of 2022, the Federal Reserve was still printing money. Absolutely insane. Insane.

Okay, since then, Financial conditions have tightened substantially. They're very, very tight relative to to where we have been uh, over the last, uh, certainly a few years here. and uh, the Jobs report was right here and the Jobs report popped up and re-tightened financial conditions. So I don't think you're in a situation where you could say that oh, Financial conditions are super loosey-goosey Uh, like the days of quantitative Easing And the reason I'm saying that is because there's this bear who posts on Twitter and he's like, oh, Financial conditions are super loose I'm like, what are you smoking? It's way tighter than what it was at the beginning of last year And this is when we had the you know, giant inflation crisis.

So this is something we want to pay attention to. Generally, we want to see that stay relatively tight, right? And so what are markets pricing in right now? Well, if we look at the Fed rate monitor for March we are looking at a 90.8 chance of a 25 basis point hike. That would bring us to 4.75 Uh, for the month thereafter, we're sitting at a 69.8 chance of hiking another 25 basis points That would bring us to about five. and then in June we're pricing in only a 28 chance of a hike to 5.25 and instead 15 chance that the FED actually Cuts rates 25 basis points.

So or that could be representative of a pause the prior probably unlikely to be a cut uh, and then a 53 chance that we stay stable. Some markets are pretty well believing that we're still. we've still got a couple 25 BP hikes in front of us. But then we're looking at a pause and after that pause, then uh, it's just going to turn into the question of okay, Well, when does the FED pivot? Which Yesterday we discussed that the FED pivoting is a sign that we are winning on inflation and it is the best possible news ever.

Unlike those charts, the people who don't like to think next level uh, end up circulating saying oh, when the FED pivots, the market crashes more I'm not I'm not going to go through it again I'm not I Explained it yesterday: the FED pivot aligns with winning on inflation in this cycle. Whatever. All right. Uh, Now another thing that we can do is we can understand because tomorrow we have another Catalyst coming out tomorrow.

The next Catalyst that we have coming out is the Uh University of Michigan sentiment uh report and the U of M Michigan uh sentiment report will also give us inflation expectations. We actually expect them on the one year to rise to four percent versus the prior release of 3.9 percent. It's too high, right? We got to get that down. However, fortunately, long-term inflation expectations remain anchored at 2.9 is the expectation for tomorrow? Great? Fantastic.

We also just had initial jobless claims beat a little bit coming in at 196 000 versus 190. fine. Now what's another thing that we can do? Because there are two main sets of inflation expectations we want to pay attention to. Number one: University of Michigan Uh, number Two, We look at the Bond market.

You can look at something known as the five or the 10-year Break Even inflation rate and this has been a slight bit problematic. Okay, and fairness, this is a little bit of a warning and it's a little problematic that yeah, yeah, there's a chance the Fed's going to have to keep rates a little bit higher for longer and it's not great. So let me show you the chart because I don't like it when this happens. but it is what it is.

and I'm not going to hide it from you because I'd rather tell you about it and we can address it. The Five-Year Break-even inflation rate has unfortunately popped up. You can see that the five-year break-even inflation rate is sitting at 2.47 I Believe that in order for the Federal Reserve to Pivot this needs to get down to about 1.6 percent, which is around the levels of where it was in 2018 when the Federal Reserve flipped. Well, unfortunately it's popped up.

It's not good. We are at the highest levels that we've seen since about the end of November Now, as long as we continue this downtrend, it's good. But we do not want to see this start breaking and making new highs over relative to uh, the second half of last year. So we have to absolutely pay attention to this.

Let's take a brief listen over here to see if there's any commentary coming from this guy over here. Hold on. From the FED Industries being in Pebble Beach and talking to a bunch of CEOs there, it really feels like most CEOs are a little concerned about the broader economy, but most of them feel pretty good about their own businesses. Is that what you heard too? Absolutely.

Uh, So noticeably we saw that, um, the expectations going forward have moved very positive. So when we asked them about the likely Outlook over the next six months to last time around, roughly 74 of them said, do they expect things to worsen over the next six months in this survey, that number went down to only 48 percent. So I think it's fair to say the majority of them are feeling much better and they think things will probably be gradually improving. This is good.

This is the former Vice chair of the Federal Reserve uh, Mr Ferguson here. However, however, however, however, it's one of the reasons you're starting to see some areas of inflation expectations rise. And this is the weird thing about the soft Landing Okay, the crazy thing about the potential for a soft. Landing is that it it in order to engineer the soft.

Landing Well, I'm just I'll I'll like. Picture this: Okay, imagine you're a plane. Okay, you're coming in for a landing and and don't get me wrong on here. Okay I I Had like two weeks of thinking I was gonna become a pilot and then I quickly flip-flopped on that idea.

So so I Don't blame me if this explanation is not great. Let's say as you're coming in for the soft Landing you get these crazy uh yeah, you know wind shears that are that are pushing you all over the place as you're trying to land this plane on the soft. Landing What you're trying not to do is crash right? So you don't want to get slammed into the ground. Getting slammed into the ground would be a recessionary force, right? would be too much of an economic slowdown Because you don't want to crash.

You don't want to push the economy into a recession, but you also don't want to push up inflation too much because then you never come in for the landing and then you have to stay aggressive for longer and then things could get worse because you could run out of gas. Okay, running out of gas is like inflation expectations going up and it's really bad because it shows you're not capable of Landing it right? You got to be able to stick it so you don't want wind pulling you up and you don't want wind crashing you into the ground. But it's a very windy day so this Landing isn't going to look like a smooth Landing Even though the goal is that the wheels touch Softly on the ground, in my opinion, it's going to be very much like that, which is basically like a very aggressively drawn swiggly line and even when we hit, it's going to be very like. it's gonna be like one of those bumpy air Landings it's gonna be like uh, it's gonna be like a Ryanair Landing Okay, you come in for the landing.

you're like oh God Ryanair Landing brace for impact and you're just gonna go bouncing along the runway because you know you paid 49 for your flight and uh, and and you know the time that you actually have a soft Landing everybody's like, did that just happen and then everybody claps, right? So uh, that I think is is the goal but uh I think uh uh. In in the the interim we're gonna get data on both sides. it's gonna look oh my gosh, it's hot. This is good.

Oh my gosh, this is bad. This is bad, right? and I think that's all part of the nature of trying to come in for a soft Landing I Think the big risks that we have right now are that inflation expectations right away and the FED says look, we're staying at 5.1 percent until 2024 and the market I'm not sure has priced in rates staying higher longer, however. uh, the Market's also been fearful about an earnings recession. so in a weird way, if the economy picks up and lightens up, then maybe you don't have as bad of an earnings recession.

and the nominal earnings recession that has been priced in is actually even too much. And this is why you end up having what I've been calling the Nike Swoosh stock market recovery. So as we're trying to stick that Landing you could actually still have this rapid decline in stock prices that was 2022 which is sort of your uh crash. that was three times as fast as the.com crash and then you have that Nike Swoosh slow sort of recovery I think that's what we're seeing now I definitely think they'll still be legs down, but uh, I'm I'm uh.

overall that the data that we're seeing people are asking me they're like heaven. but but this is huddle but this is weak or whatever. So far, what I'm looking at is relatively consistent with what I would expect for a soft Landing I'm not like as soon as everything points One Direction That's when you get concerned and I'm not talking about the band either. I'm talking about in January 2020 every company is telling you we have massive inflationary issues and we're raising prices like crazy.

The only earnings called so far that I've seen where people are talking about raising prices is Unilever and uh, they're like yeah, we're gonna have to raise prices like maybe one more time on some shampoos but but that's it. We're done like everybody else is, like we're not raising prices and the companies that are like, yeah, we're raising prices. they're like, yeah, we we like Pepsi Well, we raise prices less than our costs increase. But we did have to raise a little bit and uh yeah, we don't want to raise anymore like people are losing the ability to raise prices.

Price elasticity is going away again. These things are consistent with the soft Landing So that's my thesis. Uh uh, you know Kevin is the oxygen mask that pops down and gives you a slight bit of Hope Damn it. Steve.