Today, the Fomc minutes get released for the February 1st Federal Reserve meeting. There's a lot of concern and tentativeness that the Federal Reserve meeting minutes are somehow going to show some sort of substantially more aggressive Federal Reserve Honestly, I Hate to say it. but I Think that this Federal Reserve minutes set is complete nonsense. That's because mostly we already know what Jerome Powell told us and I'll provide you a rough summary now.

but we also know that these minutes came from before the noisy data that we got from January Noisy and Hot Jobs data Noisy and hot CPI Data Noisy and hot PPI Data noisian, hot Pce data, and of course hot retail sales data and Jolt's data. Yeah, literally every report was pretty damn hot in January But this meeting happened before all of those reports. So of course we know. Just like when things are trending down, one month doesn't make a trend, when things are trending up, one month doesn't make a trend in terms of reports and maybe the seasonal adjustments are going to be so hot for January that, hey, you know what? February We'll be right back to sort of a hope for disinflation.

My belief is things are going to be very noisy. very very volatile this year long term I Expect substantial disinflation and I just hope the Federal Reserve doesn't overdo their hiking. But today, people are going to be looking for clues for exactly this. What kind of recognition of the potential risk of over tightening is the Federal Reserve providing us? That's probably the biggest red flag that I want to be looking for in today's Fomc minute.

So if I sort of had to write down what I was looking for, my number one most important thing today would be indicators of fear of over tightening. Remember: Jerome Powell was the one who originally told us hey, if we over tighten, we can always just loosen again rapidly but then he quickly followed up with that by saying ah, you know, but then again, this was about a month later. You know we don't want to create a tremendous amount of economic pain and hardship for individuals as especially amongst those least able to Bear it in other words, lower income consumers who are already the ones suffering the most from this insane inflation that we've been dealing with. Now yes, their wages have been rising more, but that doesn't help when literally everything is ridiculously more expensive, especially for the lower income individuals, including food and rent.

So my big thing is I want to look at the risks of over tightening and potentially the Fed's willingness to overdo it. Really hurting lower income consumers the most. Remember American Express tells us wealthier people the ones spending through the recession, not poor people. But then again, American Experience generally caters to a higher income demographic where companies like Synchrony or Citibank or a farm are generally catering to a lower credit score and lower credit audience.

As a result, higher default rates, higher credit loss reserves, and really more concerns that uh oh, maybe we're not actually being compensated enough for the risk we're taking. That's leading to a tightening of lending standards and even what you saw at a firm, the Buy Now Later company that obviously generally appeals to a lower income demographic. Uh, Buy Now Pay Later Company: A firm suggesting that hey, we need to raise how much we're charging for these loans because we want to operate a profitable company and we're realizing, oh, we're starting to lose too much money on these loans. This is a problem.

So what did the Federal Reserve have to say about the uh, uh, you know sort of in their last meeting And what could we expect as a preview today? Well, I want you to remember what the Federal Reserve started by talking with: Jerome Powell came out and said the following quote: The full effect of our actions are yet to be felt. Even so, yes, there still is more work to be done. So what he's telling us is very clearly: the FED is acutely aware that there is a lag. Some form of lag? We don't know what that is, Is it Three months? Six months? 18 months? Who knows to their monetary policy.

And so yes, there's still work to do to get inflation down. But how much of that can just occur by us holding or being closer to potentially pausing or right now? what's most likely in most priced in is that we're just looking at 25 BP hikes. So we go 25 in March We go 25 in May we go 25 in June if we need to, we just beat data dependent and patient. But the biggest thing for me today is again, how willing is the Federal Reserve to ruin the lives of poor people? That is your biggest tell.

Jerome Powell In the last meeting, told us that higher mortgage rates continue to a weekend housing weakening. Housing, in my opinion, is actually one of their big goals. Housing weakening is great for the FED because you're basically just taking away from richer people. Biggest tenants are substantially poor like 20x poor than homeowners generally on average.

So let's take away from rich people by crushing housing. I Personally believe the FED doesn't care so much about crushing the stock market. They want yields to be up, and so far they've actually been engineering this perfectly. yields 10-year yields.

for example, while it went down to about 3.39 for a hot minute, but popped right back to 3.94 we're almost. We're knocking on the door of nearly four percent on the 10-year right now. It's insane. You look at the two-year I mean some of the numbers you're getting right now are knocking on the door five percent.

It's crazy. Financial Conditions are very, very tight and if if the housing market can solve it, that should drag everything else down. Not so true as Princeton Economist Robert Schiller has told us for the stock market. Now keep this in mind drum.

Powell Does realize that yes, there's some signs of wage growth easing, but we're still out of balance. Job vacancies are very high so we know that he gave us that heads up. but he says despite job making sees being high and even after the Hot Jobs report came out Jerome Powell's response was hey, you know what Financial conditions already responded and tightened, that doesn't necessarily mean we have to do more. That's what he said in an interview.

uh with um Mr uh Ruben Dave Rubin the day after the jobs report, it was fantastic. Uh, so really, in my opinion, I'm just expecting a reiteration of just hey, look, we're going to keep it slow and steady. 25s, 25, 25-25s We don't want to cause unnecessary hardship. any kind of indication like that to me is is somewhat bullish and I like to say somewhat bullish because I think we've already tightened.

potentially too much. Um, but uh, but anyway. uh Jerome Powell Also, and it's fascinating to go back to my notes I Love going back to my notes because you pick up things differently than you do the first time around. But um, you know he talks about this idea that our policy should reflect Financial conditions, which in his words quote have already tightened significantly.

Now Their belief is that they still need to raise a little bit to get policy rates to be somewhat in line with those financial conditions. That's pretty clear, but we don't got to go too far because remember, there is that dual mandate. uh. and so of course, regarding the terminal rate they haven't decided yet for March and may that's fine.

We expect to see a reiteration of that because we're going to get a whole nother set of data in March here. Uh, Now the other thing is this is probably the biggest thing for the Federal Reserve is they say it's very difficult to know if we've done too little and they're very cautious about prematurely loosening and so this is fair. I Do think when Jerome Powell tells us the disinflation process has started and M2 money supply is falling and wage growth indicators and the the Embers of inflation are showing that they're going away I Do think it's clear we're going to have higher rates for much longer, but I Do think we're leaning towards that pause pretty soon. Now, that's not to be confused with a Fed pivot, right? The Fed's certainly not going to cut rates until we actually see confirmation that inflation is falling.

And remember every time I Bring up the pivot. It's important to remember the famous words. This time is different. The most famous dangerous forwards.

Uh, in investing. However, the reality is If the Fed actually Cuts rates. This time around, they're doing so because their convinced inflation is basically going away, right? Uh, and they've potentially just gone too far. But anyway, big thing uh for the Federal Reserve on on their forecast is hey, look, still some work to do, but we want to be very, very careful that we're not unnecessarily crushing jobs.

and Jerome Powell told us about the wage price spiral that looked so far. So far, any fears of a wage price spiral are actually becoming less Salient that there's less evidence in the surveys they're doing and the monitoring that they're doing uh, that there are the conditions for a wage price spiral are actually present. Instead, we see a drum Powell Who says look, we see Goods deflation We see housing deflation and then we're not. We're basically neutral on service inflation.

that, yeah, look we hope he says we hope that the disinflation process that we've seen in goods and housing will carry over to the core Services segment X housing and he believes that we will see that very soon that process begin. He does say look, I'm neither optimistic nor pessimistic, but his suggestion is look, we should see that disinflation process starts soon. So let's be patient. we're as long as we're not cutting, we're potentially not over tightening, right? So that's what I expect is a stable, neutral fed in these minutes that come out today that don't necessarily give us any cause for alarm.

If anything, they'll give us cause for patience. and I think that's the most important thing to have in the market right now, because again, that Nike Swoosh is going to be very, very volatile because there's so much fear or uncertainty and doubt that pops up, especially around every time the Federal Reserve farts or says something. Uh, but but a few big things to really take away from this number one: I Don't think today's minutes really matter that much because I think the Market's just going to Discount the fact that that happened before, uh, the release of all the crazy negative reports that we got. However, if you're looking for something bullish, look for potential indicators that the FED fears over tightening.

We already know they fear prematurely loosening. That's okay though. The solution to that is easy. You just stay level like you just get to five and a half percent.

or five and a quarter percent or whatever. Just stay there and wait. Uh, that's that's the easy part. And we've got potentially three Cycles But they're like three Fed meetings to do so, and that actually gives us a February Data March Data April Data May Data Uh, that's four months of data before the June meeting, which would really take us above, uh, the average of of where the Fed was expecting to go in.

December got plenty of time for data. So really, the big thing is, what can you do to remove this idea from markets? That, oh, that's it. The Fed's gonna somehow all of a sudden. uh Paul Volkera.

So we're gonna get 50 BP hikes again and we're gonna go back to 100 basis point hikes I Don't think they're trying to send that signal volatility. In fact I Personally think that would actually hurt their credibility that they would rather stick with the 25s because they don't want to be seen as changing their minds too often. they want to be seen as no, no, this is we're on the right path. remember when drone Powell came out I think it was uh, was it December I think it was the December meeting.

yeah man, it's like he suggested oh yeah the the soft uh CPI reports we're seeing. you know we saw in November and October oh yeah, uh, we we expected those. You know it's kind of like okay, they're trying to make it seem like they're still very much in control and I think one of the best ways they can do that is by exhibiting patience, but also by making it clear that they don't want to cause unnecessary pain, that they'd rather be patient at a certain level than just getting ridiculous. And and Paul volckering us when it's not necessary now of course.

and I think they can massage these minutes after the fact. The one place the sort of the other place that I would be looking is are they trying to massage any kind of messaging about inflation break evens? that might be a little bit more concerning giving given that inflation break evens have been popping up on the right side though. you know, even though we've had this run-up in inflation break evens mostly on the backs of the January data, you know I'd suppose if there's any kind of optimistic way to view this, you could. You could try to view this optimistically and say hey, look okay, it's noisy, but it's still a ballpark downtrend right? Or you could even say Hey you know, whatever it's it's stable.

look we could just Channel this see look okay. Look, even the channel trend is slightly down. Just wait for some more disinflationary reports and that goes away. So I think there are ways to talk that away and the Federal Reserve might do them.

But bottom line: out of all of this: I'm not terribly bearish on the Fomc minutes today. To me. honestly, the fact that we have minutes coming out today is slightly a bit of an eye roller. Uh, but hey, you know what? if we could take anything away, including fears of over tightening I think that would actually be a a bullish element so we'll see.

But anyway, those minutes come out at Uh 11 A.M Pacific Time. So uh, buckle up. Yeah, what will happen if we return to a 75? BP Hike? No No no no no no. like I I There's no way.

Uh, and I mean let me just put it this way: I Think you're probably looking at like a less than one percent chance that can happen because really I think the Feds in this this mindset of if we send the signal that we're changing our minds, then they will lose whatever credibility they have left because it will send the signal to markets that things are out of control. uh and that the Federal Reserve is incapable of doing their job and then you will literally send a signal to markets that oh damn uh, we're going to need to get Paul Volckert Uh and I Don't think that's necessary right now because the leading indicators are not suggesting that as we've talked about with the M2 money supply as we've talked about with with uh uh, you know leading indicators I I think I don't even think there's a likelihood of you seeing a 50 BP because again, it changes The credibility of the FED they're they're kind of thick. 25 25 when they pause. Like when that pause actually happened, they're going to be willing to stay there for a while.

I'm not expecting Cuts anytime soon and neither is the Bond market anymore. Originally we were thinking Cuts maybe at the end of this year that's been pushed off to next year and also the idea that of a recession this year has somewhat been delayed. So uh uh, so what if they do a psychological hike and cut? Wait, what do a psych hike and see? But no, no, no, that's not what the Fed's trying to do. Like they're not trying to psychologically, you know, f with you.

Uh, like they're trying to be very clear about their messaging and then do what they say they're going to do right. They don't want to send volatility because that's how you break things. It's literally how you break things. like the financial markets are very fragile and what you don't want to do is start like throwing around Stones Like the Fed's kind of walking through a glass house right now and you don't want to happen.

What happened in the United Kingdom where you break the bond market and the Federal Reserve has to bail out markets. It's the last thing the FED wants to do right now because then you could get your double dip of inflation or or sort of your your double bump of inflation and a double dip crash, right? So the last thing the FED wants to do is is like start throwing stones and start being like a loose cannon here. That's that's not. That's not at all remotely the the indication of of what the Federal Reserve's goal is whatsoever.

I Don't see that at all. Who knows. I could be wrong. At least I'm willing to make it.

willing to make a point here. And uh, really, You know what I think suffers the most from higher? for longer? it ain't stocks. Folks, it ain't stocks. stocks will be I So strongly believe stocks will be totally fine once we're convinced that the big problem of a potential Paul Volcker goes away.

That's the biggest fear I think markets have I Don't even think markets give a crap about the potential for a recession or negative EPS I Really don't think that's what people really care about. Not at all. Why do I not think that well I Don't think that mostly because the Fed or Markets care most about these potential exogenous shocks of getting a Paul Volcker right? That that you end up having to absolutely destroy markets. Uh, that I think is what the market is most worried about and most hedging for a slight recession.

Whatever. man. Okay, so Staples are going to have negative earnings GDP slightly negative. Whatever the Smart Companies will go will just be investing and using it as an opportunity to build right.

My belief could be wrong, but it's my belief. So what actually gets destroyed when in the higher for longer element real estate housing housing is where the Sh9t show shows up because that is directly affected by rights. substantially so higher for longer. When you hear that like it's like when the FED pauses and we're at the higher for longer level or even we're doing these nominal 25.

BPS This is a sign the Fed's in control slowly getting the inflation out of the system. things are looking better and better and better as time goes on. like the trend is going in the right direction. Just gonna be patient here.

that patience ruins real estate. It's actually good for stocks. There's a reason we're off the lows because the the fear of of uncontrollable inflation is going away of course. January reactivated some of those fears.

but that's okay. We expect that sort of volatility. Uh, you know Carlos here says dream on if you believe in two percent inflation. See, But your problem is you're not actually referencing a time frame here I Don't think the Federal Reserve thinks inflation is going to go to two percent this year? Sure, that might be a dream, but that's because it takes time for inflation to fall out of the system.

I Mean look how long it's taking for rent inflation to go to work its way through the system. Rent inflation's still going up and we already know the current data is saying it's plummeting. so it takes a long time for this data to actually show up. Such lagging garbage.

It sucks. But look, when are we going to go back to two percent inflation? Who cares? It could be 26, 27, 28 29 Doesn't matter as long as we're trending towards that. I'm a big believer that the that stock markets can go from hedging for a new Paul Volcker to of recovery the slow Nike Swoosh recovery. We don't actually have to get back to two percent.

Remember folks, they could pull hat the the um uh, the the Fate Genie out of the bottle right? Flexible average inflation targeting. We could. We could literally have a 10 year cycle folks of inflation above two percent and a 10-year cycle before the pandemic of inflation below two percent. And guess what the FED does? Oh look, the average was 10 or was two percent over a 20-year period.

Like hello, Yeah so so there's uh like this this this idea that oh yeah, we're not gonna stop until we get two percent. Man, everybody's forgotten about fate and and the patience that's possible. But again, that patience screws housing. So my belief about housing and this is a very important one I Want you to like? You know this is I Really believe this I Believe you are better off not buying real estate where you think the bottom is like right here.

I Think you're better off focusing on real estate when you have absolute confirmation that you're not actually double legging down, right? So in other words, I would rather buy real estate here than I would buy real estate here even though that's roughly the same level. I Would rather be patient because I I Think that as as long as these 10 years sit around four percent, we and we might be here with some silly January and December data. and I think that's what's ahead of you. Uh, and that's solely looking at the 10-year and what we're seeing in terms of the potential for year-over-year fear, rents, and uh, institutional liquidations.

So uh, anyway, when was it set in stone? We needed to be at two percent. Well, I was actually really the problem. That was the fault of the FED uh, they they. uh, over the last three years, they've basically massaged that into markets.

Uh, you know, back in the 70s actually the late 80s. What am I saying? But after Paul Volcker, the Federal Reserve utilized a strategy known as opportunistic disinflation and they basically just took their time to get back down to Uh two percent inflation. and that time was somewhere around 25 years. Uh, to get back down to Uh, two percent inflation.

So it took took a dramatic amount of time. It's really incredible.