The Stock Market Is Crashing - This Is Why
Summary
TLDRIn this video, Sasha discusses the Federal Reserve's decision to reduce interest rates for the first time since April 2020. Contrary to popular belief that this will boost the stock market, Sasha presents a different perspective. He highlights the potential risks of the Fed's actions, including the possibility of a rapid rate drop in response to economic downturns, rather than a controlled reduction from a position of strength. The video delves into economic indicators such as inflation, manufacturing activity, and consumer spending, suggesting that the US economy might be in a more precarious position than the market anticipates.
Takeaways
- 📉 The Federal Reserve is expected to reduce interest rates for the first time since April 2020, which traditionally would be seen as a positive for the stock market.
- 🚀 Despite the anticipation of a rate cut, the stock market's reaction has been mixed, with big tech companies experiencing a downturn.
- 📈 The stock market had a significant rise in 2022 due to the AI boom, but this has not translated to a broad market uptick.
- 💹 The current interest rate is over double the rate of inflation, which historically has been a precursor to economic downturns.
- 📊 Inflation rates have been falling, with some sectors like discretionary spending showing signs of deflation.
- 🏭 US manufacturing activity is contracting, with factory output dropping for most of the last 22 months.
- 💼 There's a growing concern about consumer spending and personal savings, with credit card delinquencies on the rise.
- 🏠 Housing market indicators show a slowdown, with house prices falling and mortgage rates decreasing.
- 📈 The AI sector has seen significant investment and growth, contrasting with the broader economic trends.
- ⏳ There's a risk that the Federal Reserve's actions may be too late to prevent an economic downturn, as they have been in the past with rate adjustments.
Q & A
When did the Federal Reserve last reduce interest rates before September 2024?
-The Federal Reserve last reduced interest rates in April 2020, setting them straight down to 0%.
What was the market's initial reaction to the announcement of interest rate cuts in 2024?
-The stock market initially celebrated the announcement of interest rate cuts, closing just below its all-time high, with a 19% increase since the start of 2024.
What happened to the stock market after the initial celebration of the interest rate cut announcement?
-After the initial celebration, the stock market opened with big tech companies in the red, indicating a change in sentiment from the initial positive reaction.
How did the stock market perform in the first 9 months of 2022 when interest rates were increasing?
-In the first 9 months of 2022, the stock market fell by 25% as interest rates increased to combat inflation.
What was the impact of AI advancements on the stock market in 2022?
-AI advancements led to a significant increase in stocks of big tech and AI companies, with some experiencing growth of a few hundred percent overnight.
What is the current relationship between the Federal Reserve's interest rate and the inflation rate?
-The current interest rate is over double the rate of inflation, with the interest rate at 5.5% and the inflation rate just below 2.5%.
What historical parallels does the script draw between the 2024 economic situation and previous economic events?
-The script draws parallels with the economic situations in 1994 and during the financial crisis, noting similar interest rate to inflation rate ratios and market reactions.
What is the concern regarding the Federal Reserve's timing of interest rate adjustments according to the script?
-The concern is that the Federal Reserve might be reducing rates too late, similar to their delayed response in increasing rates in 2022, which could exacerbate economic issues.
What economic indicators suggest potential trouble in the US economy according to the script?
-Indicators include rising credit card delinquencies, low personal savings rates, deflation in discretionary spending, and a contracting manufacturing sector.
What does the script suggest could be the Fed's rationale for reducing interest rates in 2024?
-The script suggests that the Fed might be reducing rates not from a position of strength but potentially in a panic mode to stop deflation and economic collapse due to over-tightening.
How does the script evaluate the Federal Reserve's projections for interest rates in 2024 and 2025?
-The script evaluates the Federal Reserve's projections as 'shocking and abysmal,' suggesting that they have consistently been wrong and are currently over a year too late in reducing interest rates.
Outlines
📉 Anticipating Stock Market Reaction to Interest Rate Cuts
The paragraph discusses the anticipation of the Federal Reserve's decision to cut interest rates for the first time since April 2020. It highlights the market's expectation of a stock market boom following the rate cut. However, the speaker, Sasha, offers a contrary view, suggesting that the market's optimism may not be justified. The paragraph also reflects on the market's performance in 2022 when rates increased, leading to a 25% drop, and contrasts it with the surge in AI-related stocks. The speaker questions whether the reasons for the rate cut are fundamentally different this time, which could lead to a different outcome.
📈 The Fed's Dilemma: Strength or Panic?
This paragraph delves into the possibility that the Federal Reserve might be reducing interest rates not from a position of strength but out of panic due to over-tightening. It discusses economic indicators such as inflation, discretionary spending, and housing prices, which suggest a potential economic downturn. The speaker points out that if the Fed reduces rates in a panic to prevent deflation and economic collapse, the rate cuts would be a reaction to the situation rather than a driver of economic activity. The paragraph also covers the current state of consumer spending, savings rates, and the potential for a deflationary spiral.
🏭 US Economic Reality Amidst AI Hype
The paragraph contrasts the hype around AI and technology stocks with the underlying economic struggles of the US. It discusses how AI companies are investing heavily in technology, driving up their stock prices, while the broader economy, particularly manufacturing, is contracting. The speaker criticizes the Federal Reserve for being out of touch with the real economic situation, focusing on overall numbers rather than detailed data. The paragraph also touches on the potential for a rapid increase in credit card delinquencies and the early signs of financial stress among consumers.
📉 Market Expectations vs. Economic Indicators
This paragraph addresses the market's expectation of a gradual reduction in interest rates and the Federal Reserve's projections. It contrasts the market's expectation of a soft landing with the speaker's view that the Fed's actions are too late and that the economy is already showing signs of trouble. The speaker argues that the Fed's historical pattern of delayed responses to economic changes suggests that they may be behind the curve again, and that the upcoming inflation data could push the Fed to act more aggressively than anticipated.
🚨 The Risks of Fed's Delayed Response
The final paragraph underscores the risks associated with the Federal Reserve's potential delayed response to economic signals. It suggests that the Fed's approach of waiting for clear evidence before acting could result in a missed opportunity to address economic challenges proactively. The speaker uses a metaphor of driving to illustrate the Fed's tendency to react late to economic indicators, which could lead to more significant problems down the line. The paragraph concludes with a note of caution about the upcoming months, given the current economic data and the Fed's track record.
Mindmap
Keywords
💡Federal Reserve
💡Interest Rates
💡Stock Market
💡Inflation
💡Deflation
💡AI Space
💡Discretionary Spending
💡Credit Card Delinquencies
💡Manufacturing Activity Index
💡FOMC
💡Soft Landing
Highlights
Federal Reserve expected to reduce interest rates for the first time since April 2020.
Stock market initially celebrated the anticipated rate cut, but later showed uncertainty.
In August 2022, the stock market fell 25% as interest rates rose to combat inflation.
AI and tech stocks surged significantly following the launch of ChatGPT.
Expectations are that small companies and those with debt will benefit from falling interest rates.
The reason for falling interest rates now is fundamentally different from the reasons in the past.
PC inflation number fell to just below 2.5%, while the upper bound of the FED interest rate is at 5.5%.
The last time interest rates were over double the rate of inflation was at the start of the financial crisis.
In 1994, interest rates went up due to market uncertainty, not because of inflation.
The stock market's performance after the 1994 rate hike was the best in history, increasing by 200%.
The Fed's rate cuts have historically been reactions to market conditions rather than proactive moves.
There are concerns that the Fed may be reducing rates from a position of panic rather than strength.
US inflation data shows signs of deflation, with discretionary spending falling into deflation.
Credit card usage is up, and personal savings rate is at an all-time low, indicating financial strain on consumers.
Food inflation has remained stagnant, suggesting it may be the next category to experience deflation.
Credit card delinquencies are increasing, indicating that consumers are struggling to make payments.
Manufacturing activity is contracting, with factory output dropping for 21 out of the last 22 months.
The Fed's projections show a lack of consensus on the future direction of interest rates.
The market is currently expecting a very slow reduction in interest rates and a soft landing.
There is a risk of the US economy experiencing a downturn if inflation continues to decrease.
Transcripts
hey guys it's Sasha in 2 weeks on
September 18th the Federal Reserve will
reduce interest rates for the first time
since April 2020 when interest rates
were sent straight down to 0% and
everybody is expecting the stock market
to go to the moon when the rate starts
dropping but is that what's actually
going to happen is the stock market
about to go bananas is it about to go
jubilant well I want to share a slightly
different take when Jerome pal announced
that the time has come to cut interest
rates in Jackson Hall a few days ago the
stock market began celebrating and
popping the champagne last Friday the
stock market closed just below its
all-time high up over 19% since the
start of 2024 today when the stock
market opened it's suddenly not looking
as rosy what happened all the big tech
companies on the left are red throughout
August the stock market was expecting
the opposite of what happened in 2022
when interest rates started going up not
just in August for the whole of this
year really in the first 9 months of
2022 the stock market fell 25% as
interest rates started going up to
combat inflation then chat GPT arrived
here and big Tech and any company in the
AI space went up a few hundred%
overnight because everybody immediately
made the mental leap from a chatbot that
doesn't suck to the world switching
everything to General artificial
intelligence sometime in the next year
so those stocks absolutely exploded and
the stock market on average went up as a
result but those companies went up
massively but the rest of the stock
market has still gone absolutely nowhere
in the two years since that drop in 2022
so now the expectation is that the
reverse is going to happen rates are
going to start falling small companies
are going to benefit massively companies
with debt are going to benefit the cost
of borrowing will go down stocks are
going to go to the Moon investors will
begin flooding money back into those
companies because bond yields will drop
and everyone will want to be part of
this new massive stock market explosion
and the stock market is going to explode
stocks will go up 30 or 40% but the
important thing to think about is this
is the reason why interest rates are
going down the inverse of the reason why
they went up in the first place or is
the reason this time around fundament Al
different because if the reason for
rates falling now is very different then
the outcome might also be very different
instead of being the inverse of what
happened last time a few days ago the PC
inflation number came in that's the
fed's preferred inflation metric and it
fell to just below 2.5% at the same time
the upper bound of the FED interest rate
right now is at 5.5% so the interest
rate at the moment is sitting at over
double the rate of inflation 3% higher
the last time this happened was at the
start of the financial crisis when
inflation was also around 2.5% and the
interest rate was exactly the same as
now but the time before that it also
happened in 1994 and the situation 1994
was very different inflation was at just
3% and before the rate hike started
inflation rates were also sat at 3% they
were the same in a year and a half the
interest rate doubled to 6% but while
interest rates were going up inflation
was actually going down interest rates
went up and stayed up in 1994 because
there was a sudden increase in Market
uncertainty over long-term interest
rates a whole bunch of stuff going on
bond yield discrepancy between different
time Horizons but
in7 interest rates went down because the
Fed was panicking as the financial
crisis hit this is a chart of the US
federal funds rate and you can see that
starting in August 2007 the interest
rate went down to zero pretty quickly as
Banks were collapsing the same exact
thing happened in 2000 when the dot
bubble burst and there's plenty of other
examples before that but after the 1994
increases the interest rate never really
came down the interest rate was a lot
higher than the rate of inflation all
the way from 1994 to 2000 and this
period is also the best performance
period in stock market history the stock
market went up 200% in those 6 years
when the rides came down in a sudden
Panic the stock market lost 50% each
time because the raid Cuts were reacting
to the market not the other way around
the big question now is is the Fed
reducing rates from a position of
strength like in 1995 you know
everything is great soft Landing
achieved the economy is booming interest
rates don't need to stay as high as they
are right now they can just dip a little
bit lower everything is going to be
great that's the impression that Wall
Street has right now it seems that's the
message that the FED is selling that is
the what the media is printing every
single day but what if the truth is that
the FED is now panicking that they have
kept rates too high for too long what if
they realize that in a month or two
month time in July's inflation data we
saw that all discretionary spending put
together fell into deflation for the
first time in a very very long time I
went back a few decades and I couldn't
find the last time that this happened in
the last 6 months food inflation has sat
at 0% and might be the next category to
dip into deflation house prices in the
US fell in June the latest data that
just came out after being flat in May
mortgage rates have fallen half a
percent in the last month as interest
rate cuts are approaching retail prices
on food and clothes appear to have
dropped at the end of August with true
inflation showing a 1.2% rate of
inflation in the US at the moment the
market seems to be expecting a 1990
style rebound the consensus is that
we're just at the start the Fed will be
reducing rates from position of strength
the AI is only just getting started
everything is going to blow up it is the
good times soft landing and all that but
that sentiment can change pretty quickly
if the First Rate cut is just 25 basis
points then the impact of the rate cuts
through to the end of the year will be
relatively small and only come through
in terms of limited effects starting
sometime next year in the meantime
unemployment rate has started increasing
very fast it's up to 4.3% now we'll get
the next update for August in a few days
wage growth in the US is slowing down
while at the same time the average
number of hours worked is going down
every month oil and gas are both trading
lower than this time last year so
there's a chance that energy inflation
will remain flat or go negative in the
next few months so what happens if
instead of the FED reducing rates from a
position of strength the FED is actually
going to reduce rates fast in panic mode
to stop deflation to stop the economy
collapsing because they Mass ly
overtightened well if that happens then
the rate drops themselves are no longer
the driving force of what's happening in
the economy they become a reaction an
attempt at mitigating the situation if
this was a football game then instead of
attacking and trying to score with an
intricate play the FED would suddenly be
defending deep standing on their own
goal line here is what's actually
happening in the US economy people have
run out of money credit card usage has
gone right up after covid and at the
same time the personal savings rate is
the lowest it's ever been except during
the financial crash down at 2.9% in July
and falling sharply inflation and poor
economic decisions by the government
mean that people are suffering this is
not the roast tinted stuff that
the FED talks about or that you read in
the media this is the harsh reality the
real data of what's happening and what
happens when they're fed over Titans so
now that people have run out of money
they have stopped spending I talked two
weeks ago about how all discretion
spending is now in deflation cars TVs
Furniture appliances clothes toys
everything that is not absolutely
necessary to buy is now in deflation
prices on those things are falling this
is not the same thing as disinflation
disinflation is when prices are still
growing but the rate at which they are
growing is reducing right they're not
growing as quickly no right now the
prices on discretionary spending in the
US are falling because people don't have
the money to replace their old car or
their old TV with a new one so demand
for those things is dropping and the
companies making cars and TVs are having
to drop prices to keep selling now we're
seeing a deflationary pattern emerging
food the PC index for food hasn't moved
in the last 6 months neither has the CPI
this is important because food is next
in line of what you would expect to
start falling in price in typical
deflation Spike because the only other
things available the only things that
are not part of the discretionary group
are things like rent and mortgages
energy and finance payments and things
like insurance no finances things like
credit cards loans car payments stuff
like that before you go defaulting on
your credit card or stop paying your
electricity bill you will cut back on
food spending that's how it goes you'll
start replacing more expensive food
items with cheaper ones you'll buy
chicken instead of steak you'll buy more
grains and potato and Less meat so as a
result we'll probably see the effect of
food spending in PC Data before we see
it in CPI data because CPI data shows
you the change in the price of
individual things it only changes the
weights the distribution of how much
those things go into the overall total
of individual items once a year in
January so if prices are things stay the
same but less people are buying meat and
more people are buying potato you won't
see that reflected in CPI data but you
should see it come through in pce data
because pce tries to track the total
spending in the different categories so
total spending on food may go negative
before we see the prices go down as a
reaction at the same time you should see
delinquencies begin increasing on less
important Financial payments car
payments and mortgages are relatively
protected insulated people don't want to
lose their home on their car right but
people don't care as much about getting
a $30 late payment fee on their credit
card if they don't have the money to pay
the monthly bill and they have to choose
to not pay something and what do we have
here look what's happening with credit
card delinquencies 11% of credit card
balances in the US are now 3 months
behind on payments the last time there
was a spike like this was during the
financial crash notice how mortgage
delinquencies have not started going up
at all it's the orange line they started
going up quite fast in 2007 and 2008
because mortgages were the thing that
crashed the whole system they were the
front runner but if there is a general
Financial downturn scenario a general
Financial mown you only expect to see
mortgages begin ticking up later on
because people stop paying other things
first but look at the yellow line on
these two charts the yellowy Orange Line
see how the number on the left people
who go one month behind on their
mortgage is creeping up but the line on
the right is not that's how many people
are 3 months behind so people are
struggling sometimes their monthly
payment bounces now a lot more than it
used to or people don't have the money
to pay that monthly payment so they
might go a few days behind but then they
go and work it out they go find the
money somewhere they take on more debt
maybe borrow on that credit card take
out a loan something like that maybe
they spend less on food and on
discretionary items maybe they have to
wait until the next paycheck arrives but
then when that happens they do go and
get that mortgage payment paid because
it's really important so the number who
missed the first payment has doubled in
the last few months but so far those
people are figuring out how to stop it
getting worse how to stop it rolling
further towards repossession territory
also mortgages benefit from being
somewhat sheltered from inflation if you
don't buy a new house if you took out
your 30-year mortgage before the
inflation happened then your mortgage
payment stays the same while everything
else goes up 20 30 or 50% or whatever so
relatively speaking making that mortgage
payment is well in a way easier because
it just stays the same you can budget
for it but what happens if food dips
into negative territory in the next
three or four months what happens if
Finance payments and energy also follow
and what happens if then people who
missed the first payment on their
mortgage don't suddenly have a way of
figuring it out and you know begin
missing the second and the third payment
well the FED is going to do a U-turn and
they're going to be dropping that
interest rate very very fast but the
problem is going to be that the damage
has already been done it's a bit like
building a shed and then noticing that
your wood has completely rotten and at
that point deciding well maybe we should
apply some treatment to the wood you
know to stop it rotting to stop it
getting worse and yeah sure okay if you
do that maybe you'll save yourself a few
extra months but the damage is already
done it's already broken and maybe you
should have done that treatment a year
and a half ago instead this morning the
ISM Manufacturing activity index came in
at 47.2 below expectations again and
most importantly below 50 again this
means that us manufacturing is
Contracting fact Factory output is
dropping and has been dropping for 21
out of the last 22 months do you know
when it started dropping in October
2022 right after inflation shot up the
Fed was way too late dealing it with
back then and then the stock market fell
25% from November 2022 the stock market
has been going up because of AI but the
reality is that the US economy is
struggling ELO mus just posted on
Twitter that xai his new AI company just
launched their colossal a superc
computer it has 100,000 h100 graphics
cards and will double in size in the
next few months including all the
peripherals that's something like $4
billion worth of graphics cards bought
by just one AI startup and they're going
to spend that much again and then
there's open AI Google Microsoft Apple
Tesla and dozens of others doing the
same exact thing when you add up all of
those numbers it is insane and they have
converted into the huge stock market
increase for AI companies that we're
seeing this insane bubble and in exactly
the same time since that started since
late
2022 factories in the US have been in
Decline every single month except for
one and regular people have run out of
money the FED has been too busy looking
at overall numbers and not understanding
the detail there's not even any detail
in pce data which is their preferred
metric you can't even go and dive into
any of the subcomponents the overall
numbers have been masked by the AI hype
wave at the moment the majority expect
the FED to only cut rates by a quarter
of a percent at the September meeting
the market is pricing in a 70%
likelihood that the interest rate will
only drop by 1% or less by the end of
this year and there are three meetings
in total before the year ends so the
expectations that at each of those
meetings it's only going to be a very
small drop so the market is currently
expecting a very slow reduction in
interest rates the latest projection
materials from the fomc from the June
meeting show that the majority of the
members expected the rates to stay above
5% at the end of 2024 four of those
people thought that the rate would not
come down at all this year in June two
months ago and then almost all of the
fomc members said that they expect the
rate to be above 4% at the end of 2025
at the end of next year this is
incredible it's shocking it is abysmal
it's shocking and abysmal because this
is clearly showing that the Federal
Reserve has no idea what it is
that they are doing again they are
saying they're showing you what they
think is going to happen I have
absolutely no idea how just a few weeks
ago those tweo Dums could reasonably
expect to not need any rate drops at all
this year and hardly any next year I
don't understand how anybody who has any
brain cells in their head who
understands the most basic economic
principles can be so exceptionally wrong
I don't get it then again those same
idiots back in December 2021 thought
that interest rates would not need to go
up above 1% in 2022 remember inflation
at that December meeting in December
2021 was already at 7% and a year later
instead of interest rates sitting below
1% the interest rate was already at over
4% I keep seeing CNBC and the YouTube
Finance space listen to every single
word that Jerome Powell says as though
it actually matters they cling on to
every single word oh was J own power
slightly more hawkish or dovish or maybe
parsh whatever or did you notice he used
this word instead of that word oh my God
this is so important and that means that
maybe interest rates are going to go
down slightly faster or slightly slower
every single word is so important none
of that matters Jerome power in the FED
are 100% completely full of just
like they were a year ago just like they
were two years ago just like they were
late in 2022 with increasing rates by
over a year they are once again over a
year too late reducing interest rates
and just because right now everybody's
expecting a slow reduction and a soft
Landing doesn't doesn't mean jack
if unemployment creeps up towards 5% if
inflation numbers go to 2% but don't
stop there and keep on going down
towards deflation the FED is going to
have no choice it doesn't matter what
Jerome Powell said it doesn't matter
what they're thinking we're in September
right now and in 2 weeks we're going to
get the August inflation data right now
the overall inflation level is at 2.9%
August inflation last year went up 0.5%
month on month and in September last
year it went up 0.4% month-to month if
inflation for August and September is
around 0% then inflation in September
the month we are in right now is already
at 2% so the FED has been waiting for
evidence of when they should maybe start
cutting interest rates and the first
month in which they actually start doing
it inflation is maybe already probably
already sitting at around 2% it's a bit
like driving down Road at 80 M an hour
and seeing a red light ahead at a busy
intersection the way that the FED drives
is this you keep going at 80 M an hour
you do not slow down you tell all the
passengers that you might need to
accelerate to 100 m hour to make sure
that you get to the red traffic light a
little bit faster to show them that you
really mean business and then when you
are exactly level with the red traffic
light as you are entering the
intersection
still going at 80 mph only then you
start pressing the brake pedal but you
do it very gently just a 25 basis point
drop you don't want to press it too hard
you know because it might be
uncomfortable for the passengers you
don't want that so you just plow right
through the busy intersection through
the red light at 80 M an hour and Jerome
pow who is the driver says well we had
to get to the red light first before
taking action that's a mandate right it
was impossible possible to know 200 yard
earlier that we should slow down
absolutely nobody could have seen it
coming what if I pressed the break too
early and we didn't get to the traffic
lights at all the next few months are
now very very risky because the FED
completely up there's a chance
that the US economy pulls another rabbit
out of a hat it's happened before it
could happen again but the data is just
not looking good and it's incredibly
frustrating because this was extremely
predictable it was incredibly obvious
and it didn't have to happen
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