OMG!! The Fed Just Made A HUGE Mistake
Summary
TLDRIn this video, the speaker critiques the Federal Reserve's recent decision to lower interest rates by 50 basis points, arguing that a more aggressive cut was necessary. By analyzing past economic cycles, inverted yield curves, and unemployment trends, the speaker suggests that the current rate cuts are insufficient for preventing recessionary risks. They dispute the narrative that gradual cuts will suffice, warning that the economy is likely to experience sharper fluctuations. The speaker also addresses concerns about inflation, emphasizing the need for larger rate reductions to avoid deeper economic issues.
Takeaways
- 📉 The Federal Reserve recently reduced interest rates by 50 basis points, which the speaker considers a significant error.
- 📊 Historical rate hikes by the Fed have typically been followed by rate cuts, similar to the recent 50 basis point reduction.
- 📈 The speaker challenges the Fed's narrative of a slow and steady rate reduction, suggesting a more abrupt change based on past cycles.
- 🔍 The yield curve has been inverted for the past two years, indicating potential underlying economic issues.
- 📉 Each time the yield curve has inverted historically, it has preceded economic downturns like the GFC and the dotcom bust.
- 📈 The Phillips curve suggests a relationship between unemployment and inflation; however, the speaker argues that the current rise in unemployment rates contradicts this theory.
- 📊 The speaker points out that the Fed's rate cuts have historically been lower than the 2-year Treasury yields, indicating the Fed might be behind the curve.
- 📈 The speaker argues that inflation, as measured by CPI, is not as high as it was before previous recessions, suggesting there's room for rate cuts.
- 🏦 The speaker suggests that the Fed should have cut rates by more than 50 basis points, contrary to the mainstream narrative.
- 💼 The speaker emphasizes the importance of listening to market signals, particularly the 2-year Treasury yield, over personal opinions or predictions.
Q & A
Why does the speaker think the 50 basis point rate cut by the Federal Reserve was a mistake?
-The speaker believes the 50 basis point rate cut was a mistake because the Fed is responding too slowly to the economic conditions. They argue that the Fed should have cut by at least 75 basis points or more, as the current economic signals suggest a more aggressive rate cut is necessary.
How does the speaker use historical rate cycles to support their argument?
-The speaker refers to past rate cycles going back to 1995 and points out that rate cuts are usually followed by deeper recessions when the yield curve is inverted and unemployment rates rise. They argue that the current economic signals (such as the inverted yield curve and the Som rule) indicate we are headed for a similar downturn, necessitating more aggressive rate cuts.
What is the yield curve inversion, and why is it important in this analysis?
-A yield curve inversion occurs when short-term interest rates are higher than long-term interest rates, which is seen as a warning sign for an impending recession. The speaker emphasizes that the yield curve has been inverted for two years, which historically signals underlying economic problems and is a major reason they believe the Fed should be cutting rates more aggressively.
What is the Som rule, and how does it relate to the current economic situation?
-The Som rule is a metric that looks at the 3-month moving average of the unemployment rate relative to its lowest point in the last 12 months. When the Som rule rises above 50 basis points, it has historically indicated a recession or an imminent one. The speaker notes that the Som rule is currently at 57 basis points, reinforcing their argument that a recession is likely.
How does the speaker address concerns about inflation reaccelerating if the Fed cuts rates more aggressively?
-The speaker acknowledges concerns that a 75 basis point cut could lead to reacceleration of inflation but counters this by pointing out that in past recessions, like during the GFC and dot-com bust, inflation did not rise significantly despite aggressive rate cuts. They argue that inflation risks are overstated in this context.
What comparisons does the speaker make between current unemployment rates and those from past recessions?
-The speaker highlights that the current unemployment rate is 4.2%, which is comparable to or lower than unemployment rates at the start of previous recessions, such as the GFC and the dot-com bust. This suggests that despite low unemployment, the economy may still be headed for a downturn.
Why does the speaker believe GDP growth is not a reliable indicator that the economy is healthy?
-The speaker points out that GDP growth was positive right before the GFC and the dot-com bust, despite the economy being in a vulnerable state. They argue that positive GDP growth, as seen today, does not necessarily mean the economy is healthy or that a recession can be avoided.
How does the speaker use the two-year Treasury yield to support their argument about the Fed’s rate cuts?
-The speaker notes that the Fed typically follows the two-year Treasury yield, which has already dropped to 3.6%, while the Fed's rate is still at 4.75%. This suggests the market expects rates to fall further, reinforcing the argument that the Fed is behind and should cut rates more aggressively.
What historical example does the speaker use to address fears of 1970s-style inflation if rates are cut too much?
-The speaker acknowledges concerns about repeating the 1970s inflationary spiral but argues that today's situation is different because we do not see the same prolonged increase in the money supply. They point out that inflation only reaccelerated in the 1970s when money supply kept increasing, which is not the case today.
What conclusion does the speaker draw about the Fed’s current interest rate policy?
-The speaker concludes that the Fed is making a mistake by not cutting rates more aggressively, as the economic data (such as the yield curve inversion, Som rule, and two-year Treasury yield) indicate that the economy is heading toward a recession. They argue that a deeper rate cut would help mitigate the upcoming economic downturn.
Outlines
📉 Fed's Big Rate Cut: A Mistake?
The Federal Reserve recently cut interest rates by 50 basis points, surprising many who expected a smaller 25-point cut. The video analyzes historical rate-cutting cycles, emphasizing that such cuts are often followed by slower, steadier cuts. The mainstream narrative suggests that the current cut is part of a gradual process, but the video challenges this, arguing that the economy may be in worse shape than it appears, as evidenced by the inverted yield curve and other troubling economic indicators.
📊 Unemployment Rate and Economic Warning Signs
The second paragraph delves into the Som rule, which indicates that when the unemployment rate rises above 50 basis points, a recession is either present or imminent. Historically, this rule has held true during significant economic downturns, such as the Global Financial Crisis and the dot-com bust. The video argues that the current economic conditions closely resemble these past recessions, rather than the stable mid-90s, meaning the Fed's gradual rate-cutting strategy is likely misguided.
🏞️ Low Unemployment, High Risk of Recession
This section counters the argument that the economy is too strong for a significant rate cut, citing low unemployment rates during past recessions. The video highlights historical cases where recessions began with unemployment rates at or below current levels. It challenges the belief that today's low unemployment rate signals economic strength, emphasizing the similarities between current conditions and previous recessions like the Global Financial Crisis and dot-com bust.
📉 Fed Following the 2-Year Treasury: A Misstep?
The video explains how the Fed historically follows the 2-year Treasury yield when adjusting interest rates. Despite recent cuts, the Fed's rate is still much higher than the 2-year yield, suggesting they're behind the curve. The video predicts that even if the Fed starts cutting rates more aggressively, the 2-year yield will continue to drop, implying that the Fed is out of sync with the market and may need to cut even further.
📉 Money Supply, Inflation, and Consumer Prices
The final paragraph explores the relationship between money supply and inflation, drawing comparisons to the 1970s. The video suggests that despite concerns about inflation, recent data shows a drop in money supply, which reduces the likelihood of runaway inflation. Instead, the focus should be on the Fed cutting rates more aggressively to prevent an economic downturn. The argument concludes that inflation fears are overblown and the Fed's current policy is too tight.
Mindmap
Keywords
💡Federal Reserve
💡Interest Rates
💡Yield Curve
💡Recession
💡Unemployment Rate
💡Inflation
💡Monetary Policy
💡Basis Points
💡M2 Money Supply
💡Phillips Curve
💡Marketplace
Highlights
The Federal Reserve has dropped interest rates by 50 basis points, which is considered a significant move.
Past cycles from 1995 to present are analyzed to understand rate hikes and subsequent cuts.
Rate hikes are usually followed by rate cuts, contrary to market expectations of a 25 basis point cut.
The Federal Reserve's narrative suggests a slow and steady rate cut over the next year.
The yield curve has been massively inverted for the past two years, indicating underlying economic issues.
The yield curve inversion has preceded past recessions, suggesting a similar outcome.
The Phillips curve suggests a relationship between unemployment rate and inflation, which is currently being tested.
The Sum rule has been triggered, indicating a high probability of a recession or proximity to one.
The unemployment rate is currently at 4.2%, which is historically low but has been lower at the start of recessions.
Headline CPI is currently at 2.5%, which is lower than the rate before past recessions.
The Fed's rate cuts are compared to the unemployment rate and inflation data from previous recessions.
The argument that the Fed should have cut rates by 75 basis points or more is presented.
The 2-year treasury yield is used as a market indicator for Fed's rate decisions.
The spread between the 2-year Treasury and Fed funds is at an all-time extreme, suggesting the Fed is behind the curve.
Gold price increases are not necessarily indicative of the Fed dropping rates too soon.
M2 money supply increases historically led to inflation, but the pattern was different in the 1970s.
The velocity of money supply is unlikely to increase significantly if a recession is approaching.
The conclusion emphasizes the high probability of the Fed cutting rates more significantly based on historical patterns.
Transcripts
the Federal Reserve just dropped
interest rates by a whopping 50 basis
points and I think this was a huge
mistake I'm going to explain why in
three simple fast step step number one
let's go over past Cycles we start by
looking at a chart going all the way
back to 1995 to today's date this is fed
funds as you guys probably figured out
on the left we go from 0% up to 7% now
what I want to focus on initially are
these red arrows see these are the times
in the recent past when the FED has
hiked rates we'll call it a rate hiking
cycle and as you would imagine the rate
hikes are usually followed by rate cuts
which is what we saw yesterday when many
Market participants were only expecting
a 25 basis point cut and we actually got
a 50 basis point cut so what we have to
do first and foremost is ask ourselves
in the past when have these rate cutting
time frames been nice slow and steady
because right now if you listen to the
mainstream Media or a lot of quote
unquote experts or the Federal Reserve
themselves they'll sit there and tell
you yeah we did this 50 basis point hike
but uh you know nothing to see here
we'll just sweep that one under the rug
pay no attention to this 50 basis point
and why did we do 50 instead of
25 well it's because the economy is is
is really really strong and we just want
it to stay strong so in the future
what's going to happen over the next
year or so we are going to cut rates but
it's going to be slow it's going to be
gradual so if you extend this out until
the next year it's not going to look
like Wet n Wild like
these like a water park slide like these
others oh no no no it's going to be nice
and gradual so it's going to be maybe
right around here and we're just going
to take our time it's going to look a
lot like the rate hiking cycle that we
saw in the mid
1990s this is the narrative they are
trying to get you to
believe but now let's add a few more
layers of data so we go back and look at
this chart all the ups and all the downs
and we have to ask ourselves okay at
what point in
time was the yield curve
inverted you guys know well from
watching my videos that the yield curve
has been massively inverted for the past
2 years that's when short-term interest
rates are much higher than long-term
interest rates as you would imagine this
is very unusual this is atypical it's
unnatural and it tells us there's a
problem with the underlying economy in
other words when you look at the surface
everything seems fine and dandy but once
you get into the details once you look
underneath the hood you see that there
are a lot of economic storm clouds
Brewing so the yield curve definitely
inverted here we know that for sure did
it invert prior to the surveys of
sickness that would be a yes did it
invert prior to the
GFC oh yeah did it invert prior to the
dotcom bust you better believe it did it
invert during the mid 90s
when we didn't have a recession that
followed these interest rate
hikes that would be no we did not have
an inversion of the yield curve but now
let's ask another very important
question what about the unemployment
rate you guys know from watching my
videos the Som rule recently has been
triggered and all this is is a 3-month
moving average of the unemployment rate
relative to the lowest unemployment rate
over the past 12 months and every single
time going back to the 1950s when you
have seen the P rule go above 50 basis
points we have either been in a
recession or very close to a recession
so this is extremely powerful especially
when you combine it with the inversion
of the curve so as we know the psle rule
has also been triggered in fact it's not
at 50 basis points it's at 57 basis
points right now so we have to go
through the exact same process we went
through right here was the Som rule
triggered during the seresa sickness
recession yes it was GFC
Bingo com bust you guessed it how about
the
1995 increase in interest rates nope
the P rule was not triggered so back
here when we had this Fed rate hiking
cycle that did not result in a recession
it's hard to use this as an example of
what the FED is doing now or what we
should expect moving into the
future because the punchline here is we
didn't have an inverted curve we didn't
have the unemployment rate R spiking and
when you look at these two key key
metrics we see this time is likely again
no certainties only probabilities but
the probabilities are extremely high
that this cycle is going to play out
more similar to this cycle this cycle
and this cycle than what we saw in the
mid
1990s meaning we're not going to have
slow and steady like the mainstream
media and the fed and the experts are
trying to get you to believe we're going
to have Wet n
Wild and I think the huge mistake is not
the fact that they dropped 50 basis
points instead of 25 basis points I
think the huge mistake is that they
didn't drop
75 basis points or
more step number two now I know a lot of
you right about now are saying George
have you completely lost your mind 75
basis points are you crazy don't you
understand that the unemployment rate
yeah sure we've triggered the Som rule
but it's still low it's still at
4.2% and remember we've got CPI we've
had inflation problems hello and If the
Fed cuts by 75 basis points or more
we're gonna have this
reacceleration in inflation because
they've cut too much and the economy
will overheat for heaven sakes and I get
it I get it I get it that's a fair
argument I know a lot of people get
passionate about this stuff but let's
look at the data just like we did in
Step number one first and foremost let's
start with the argument that yeah George
we've seen unemployment Spike but
historically it's very very low which
would
indicate the economy is doing great
we've got nothing to worry about for
heaven's
sakes especially not enough to worry
about that would warrant a 75 basis
point cut all right let's look at a
chart of the unemployment rate and let's
remember that right now we are at
4.2% so let's just try to figure out
where we were prior to the surve of
sickness and that would be
3.6 but let's go back to the
GFC and there you go you see the
beginning of the recession right here
when the Fed was really dropping rates
we're at
4.7 not at 4.2 George
hello
okay fair enough now let's go back to
the dot
bust and you see that right when we
started the recession
we were at
4.2% exactly where we are today but
let's not stop there let's also go back
to
1969 we see at the start of that
recession unemployment rate at
3.5% let's go back
to
1957
4.2% in fact part of 1953
recession we were at
2.6% and then we go back even
further to
1948 and we were at
3.7 in other words there's probably just
as many recessions if not more where the
unemployment rate actually started near
or less than where it is today but now
let's go ahead and look at headline CPI
because the argument there is that the
fed has dropped way too much so we're
going to ignite the inflation and we're
going to go right back to the
1970s we should never ever ever be
cutting rates by 50 basis points heaven
forbid 75 when we've got the headline
CPI at
2.5% well let's just start by going back
to the GFC and prior to the global
financial crisis which definitely
resulted in a recession in fact the
largest recession we have seen since the
1930s when in 2009 we actually had
deflation deflation with a d where
prices actually went down not to mention
the massive asset deflation where the
housing market and the stock market over
time the span went down by
50% and we see going into this
catastrophe the inflation
rate was
5.6% headline
inflation now I know that it understates
the level of inflation but we're using
the same metrics the same formula today
pretty much that we
used in
2007 2008 so again back then the CPI
5.6% today 2.5 but now let's go back to
the com bust and we see inflation rate
back then
3.6% but wait a minute wait a minute
wait a minute wait a minute how on Earth
could there be a high probability that
we are going into a recession or we're
in one now or we'll be in one within the
next let's say six months if we have
positive
GDP I mean if you look at the last
number I did not see negative
GDP and and wouldn't this be a
prerequisite therefore if we don't have
a contraction in economic growth how on
Earth can you argue the FED should be
cutting 75 basis points in fact how can
you even argue that they should be
cutting interest rates at all for
heaven's sakes well let's go back to
2008 and we see in Q2 GDP was almost 2%
2% positive not 2% negative so my point
here is that there's very little in the
macroeconomic data especially when you
look at this through the lens of history
that would lead you to believe the FED
even at
4.75 has interest rates too low if
anything they've got interest rates much
too
high step number three whatever you do
don't listen to me don't Listen to
George gamon you've got to listen to the
marketplace more
specifically you got to listen to the
2-year treasury yield and is Jeff
gunlock always points out correctly the
FED historically just follows the 2-year
treasury let me show what I'm referring
to going to look at a chart going all
the way back to 1995 to today's date on
the left we go from 0% being the middle
then we go up to 2% down to a negative
2% % this represents the spread between
the 2-year Treasury and the FED funds
now it's important to not just look at
the Delta we're going to do that in a
moment but we also have to notice editor
go ahead and throw up the chart that
what Jeff gunlock was saying as far as
the FED following following the two-year
meaning the twoyear moves first is spot
on editor go ahead and highlight the
Cycles we referenced in step number one
to give the viewer a visual as to how
this always happens the 2-year goes
first and then the FED catches up so now
let's get back to the spread more
specifically and we can see that we are
at an alltime almost at an alltime
extreme right now as we speak in fact
we're pretty much at the exact same
level as we were when the FED started
cutting rates prior to the GFC and if we
also look at the com bust we see we were
at a 1% spread in other words the
two-year treasury was 1% 100 basis
points lower than fed funds but it's not
even close to where we are today now
another thing I want to highlight is
when the FED drops rates and catches up
to the 2-year treasury it's not like the
2-year treasury just flattens out goes
sideways and then starts to go up
absolutely not the 2-year treasury
usually goes down even further and in
fact it usually goes down a lot further
so we have to ask the question where is
the 2-year treasury yield trading right
now and we can see that it's right
around
3.6% while the FED just dropped but they
dropped to
4.75% that means the Delta is still over
100 basis points and if history is a
teacher it reveals that even if the FED
starts dropping a lot faster then they
would currently admit the two-year
treasury will just go down at the exact
same Pace in other words the FED is way
off sides according to the market even
though they've dropped 50 basis points
from
5.25 down to
4.75 and I know right about now I'm
probably getting a lot of push back from
the viewers in fact I was probably
getting it starting in Step number
one and they're saying oh my gosh George
how could you be so ignorant the
elephant in the room is obviously the
1970s in fact the gold price lately has
been ripping higher telling us that the
FED is dropping rates too soon not that
the FED hasn't dropped rates enough all
right well first let's go back and I
want to compare two charts I want to
compare a chart of the gold price over
the last let's say year and a half two
years and look at the gold price prior
to the GFC and you can see that these
charts line up almost exactly so the
fact that gold is ripping higher isn't
exactly proof in and of itself that the
FED dropped rates too early and now
let's go ahead and look at the 1970s
because the argument there is well we
had these inflationary recessions and
the mistake Arthur Burns made or the
Federal Reserve at the time was they
dropped rates too soon and this led to a
re acceleration of consumer prices and
it took Paul vulker coming in and
jacking rates all all the way up to
18% to actually break the back of
inflation okay that's a fair argument
but I'd like to point out that during
the 1970s we had periods of
disinflation meaning consumer prices
were going up at a much slower rate so
let's compare this to the S rule so we
see that in the 1970s when the S rule
was triggered and we're just using this
as a proxy for the the unemployment rate
or the labor market softening and we can
see this was followed every single time
by the inflation rate going down not
going up meaning we didn't have a
reacceleration of inflation unless the
unemployment rate was going down or at
the very least flat and now we have the
opposite where the unemployment rate is
going up now I'm not saying the Phillips
curve the inverse relationship between
unemployment and inflation is correct
because we see the 1970s disproves this
but what you have to look at is the
trend not just the inflation rate or not
just the unemployment rate throughout
history do we see examples of the
inflation rate consumer prices
skyrocketing while at the same time
unemployment is spiking straight up as
well I can't find any at least not in
the 1970s but George George George what
about the money printing you're
forgetting the fact that M2 money supply
went up by
25% between 2020 and
2021 my gosh the fed's balance sheet is
at 7 trillion for heaven's sakes and all
that money is still slashing around the
system okay fine but let's go back to
the the 1970s and we see that it is true
every single time we saw a massive
increase in M2 money supply it was
followed by an increase in consumer
prices but it was just followed by one
wave of consumer prices it wasn't
followed by multiple waves of consumer
prices so my point here is that once you
have that money supply work its way
through the system prices adjust
but they don't keep going up and up and
up and up unless you're adding more and
more and more money supply which is what
we saw in the
1970s and we've seen the exact opposite
over the past two years that once we got
that spike it didn't even flatten out M2
money supply and M1 went down therefore
I would argue it's extremely difficult
unless you get velocity to really really
crank up and that's going to be unlikely
if we are headed toward a recession but
it's extremely unlikely to see a re
acceleration in consumer prices
regardless of what the FED does assuming
the amount of currency units chasing
goods and services doesn't Spike once
again to be clear there are no
certainties there are only probabilities
so I'm just sharing with you my thought
process behind why I think the
probabilities are high
when we look back on this time frame
let's say a year in advance we'll see
the FED should have cut not by 50 basis
points but a hell of a lot more for more
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