Prepare for Friday | The Rug Pull.

This is a big week and it all comes down to inflation expectations for Friday. I'm going to give you a complete breakdown as to what I think is going to happen and why the market thinks there is a reason for the Federal Reserve to hike, but why there actually is not a reason for the Federal Reserve to hike. So, that sounds complicated, but let's understand and break this down backwards. Let's start with going all the way to June of next year. We are pricing in an over 76% chance, a 76.7% chance that we will have more than two interest rate hikes between now and next June. So within the next 10 months, basically a pregnancy, we're going to bear two interest rate hikes. That's what the market is pricing in right now with at least one of those by the end of the year with an about 85.6% chance. Now, why is the market doing this? Is it because inflation is running away? No. It's really because of two things. Number one, the easy one, oil prices are knocking on the door of 100, but we know the Fed can't do anything about that. That's not the kind of inflation or supply shock that the Federal Reserve can really do anything about. So, that's not what the Fed's going to be focused on. Instead, the Federal Reserve is going to be focused on something like the labor market. And in fairness, the labor market is doing better. You have TS Lombard that in their latest piece argues that the labor market is patchy, but I actually disagree with them. They say recent data uh has suggested the labor market looks patchier and that there's volatility. Yeah, there's been volatility, but so far that volatility has really been to the upside. July's negative 23,000 jobs report was revised up to 21,000. August came in obviously at 162. That could yes get revised down. But if we look at the private payrolls because mostly we think these are somewhat you know some rigging probably going on here. We can all be jaded and accept that by the Bureau of Labor Statistics given that back when uh you know there was um apparently rigging in the opposite direction Donald Trump fired the head of the BLS and replaced him and stalled his own favorite. So let's just assume the government one is rigged for a moment. If we go to the 80p private version, we're really stabilizing around 40k a month and that is consistent with the at least about three month trend for what we've seen on uh jobs which is about 70k on the 3month. We get to the six month on BLS, we're like over 100, which is impressive. But let's just say the floor is set by the private payrolls at 40. And that's good in this immigration regime that we're in. It's not like it used to be where we're doing 200,000 jobs, but then the border is not also wide open. So, our population growth has really stabilized to zero. Okay. So, with that, let's look at the economists really quick and understand why markets are pricing in these hikes. I think they're pricing in these hikes because the labor market to some extent might actually be by some start being considered hot. Take a look at this. Unemployment for young workers is holding up remarkably well says the economist with hiring amongst 20 to 24 year olds at a multi-deade low. They argue that while some sectors are seeing below average hiring like professional and business services, they actually see based on some research that LinkedIn has put together that we might have created somewhere around a million jobs because of artificial intelligence. The f well exceeding the 200,000 AI related layoffs we've seen since mid2023. Now the first set of those jobs they think about onethird of those jobs are coming from electrical contractors, HVAC and plumbing, utility systems construction, and just general commercial construction. I don't like hanging my hat on this kind of labor because I think this kind of labor is a little bit more temporary than a longer term, let's say, you know, career inside of a corporation that's not in construction. And the reason I argue that is because I think that at some point we're going to have built out enough data centers and the rate at which we're developing data centers right now will slow. I don't think it'll turn negative anytime soon. We'll still build more data centers, but I think the explosive growth we're seeing right now is not something we're going to see for the long term. So some of this hiring could be propped up by that. But there's more than that. See, according to the LinkedIn data, there's the suggestion that you've probably seen somewhere between half a million to maybe 700,000 new jobs uh for forward deployed engineers or heads of AI or AI related software jobs like deploying agents inside of companies, helping people utilize artificial intelligence inside of their companies. And they suggest this could be up to 640,000 new AI specific jobs created between 23 and 2025 with a boom in people uh with backgrounds in software engineering, mathematics, data scientists, uh engineers, researchers for healthcare companies. Uh you know my one of my favorites is I call it the S&P 500 of healthcare is Eli Liy. I mean you've got a boom in acquisitions going on and hiring for research around artificial intelligence especially with the cancer drugs uh in in you know trials like the Mona drugs biioentech less so but more so Merna along with other companies who are also competing in uh the race to cure cancer with AI it's it's actually pretty remarkable and we've got separate videos on that so we don't need to belabor that here but the idea is that a lot of jobs are being created from uh in part their argument the productivity that's being created because you're able to generate so much more productivity in artificial intelligence that you're able to do more work. Now obviously there's a limit to how much more work a business can do but overall at this point the economist along with the LinkedIn research is suggesting that we're so far generating more jobs than we are in terms of like compared to layoffs. This, in my opinion, drives the motivation for rate hikes. That's at least why the market is pricing in rate hikes. So you got oil and jobs driving an increase in the desire for rate hikes. That's reasonable, economically bullish, by the way, that the labor market is doing very well based on these numbers, at least in artificial intelligence. That's not to suggest that every part of the labor market is booming and not everybody's going to feel that way. Uh but you've got this leisure and hospitality boost here in the last report of 62,000, but that could be compared to the volatility we saw in June where we had a negative 54,000 read. So yes, there there's some give, there's some loss, but overall over the last two years, the economist is seeing net job growth based on the study by LinkedIn and some of the other research that the economist is pulling together here. I think that combined with lower layoffs that we're seeing in the uh for example the challenger job cuts report you see that right here it's the technology being disrupted the most with 29% of all layoffs. So you're getting sort of a rejiggering but then when you actually look at the overall numbers we are seeing the where is it here the lowest layoffs or I should say um I'll just read it here. Layoffs are down 38% from the same month announced last year and we're at the lowest levels of layoffs since August of 2022. So, you know, layoffs are slower, seeing some longerterm structural growth and employment. All of this driving, in my opinion, this call for rate hikes. Okay. So, why do I think the answer is no rate hikes? How do I reconcile that? Well, it's because of the data that the Fed is going to look at. First of all, we've been really good at actually meeting expectations on core CPI. Hopefully, we do this Friday as well. And so, Friday will be a big catalyst. But these are the expectations. Here's the bell curve of expectations. This is very, very tight. One standard deviation in either direction still puts me at basically rounding to 0.2 on core CPI. 57 economists surveyed pretty clear expectation your point to the labor market usually has a much wider range because it's so much harder to forecast what the BLS is going to come in with but CPI is a little easier to track because you could track your own basket of goods and have a pretty good approximation of what CPI is going to come in at that in my opinion is why this has been relatively accurate by economists whereas the jobs report has not been accurate by economists so if we get a 0 2 in core CPI ad expectations. I really don't think you set up the need for an imminent rate hike, especially when expectations of inflation are really stable. Take a look at this. This is the 5-year forward break even. And then we're going to look at the 5-year break even as well. This gets really complicated when when I sort of pull that chart up. And even just saying 5year, 5year break even, people are like, why are you saying five years so much? Like take a shot every time you say fiveyear. Like that gets complicated, right? Let me just simplify that really quickly. If we look at t0 as basically being now and then we look at this is uh you know we'll call it t10 you know 10 years out if we will um 10 out I guess you could count that at one and call that nine if you want whatever that might be a little bit more obvious there we go we'll call that t1 and that t otherwise we'd go t0 and t9 right uh so 10 years down if we look at it like this the 5-year 5-year break even inflation uh chart measures this right here. That's what we think when we hear 5year 5year inflation break even. And then if we look at a five-year break even, we're right here. Right? So I feel like that is a nice little explanation to to help people understand when I say five-year break even inflation versus 5year 5year inflation break even. Okay. So the first one here is the five-year 5-year. So the longer term one and as you can see we are gloriously and this is a quarterly chart but we are gloriously stable. Uh, I mean, you'll even look at like this the spikes over here. We've had bigger spikes in 2020. What is this? This is 2022 and 2023. We've had bigger spikes than where we sit right here on the quarterly. Massively stable. There's no urgency right here for Kevin Walsh to piss off Donald Trump before the election. Uh, and uh to um not wait for his task forces. I think his bias is going to be waiting for those task forces. That's basically what Andrew Bailey is doing as well is like the inflation's too high, but we're gonna wait. You know, there was just a piece in the Financial Times, I believe it was, about Andrew Bailey and this idea about, oh, yeah, we're going to we're going to sort of wait and uh we are, you know, we're ready to do a hike if we need to, but uh well, you know, basically uh not now. Bank of England here, let me pull it up. So, uh, Bank of England, Andrew, whatever. I gave you the bottom line. I don't know why they make it so hard. They rejigger their website all the time. Anyway, that's basically what they said is like, "Hey, people think we're going to hike by the end of the year. Not urgent, not likely. That's going to happen at the next meeting." That's the Bank of England. I think uh Kevin War is going to follow a similar pattern. Now, let's look at the second chart. So, the second chart is the five-year break even, which we're going to show on a monthly basis. So the chart will be a little bit more liny if you will, right? Because you've got a little adjustment here every month versus every quarter. And that was just to show you a long, you know, a 10-year chart basically over a longer period of time. This uh is the 5-year break even which has also gone nowhere. Earlier this year during the initial portion of the war with Iran, we were much higher on inflation break evens. So, it's weird that oil could be at $100 per barrel and inflation break evens could actually be much lower than where they were earlier when people were really worried about disruptions around Hormuz and now maybe there's comfort in hey well you know we're going to be able to get the oil out either through shadow deployments at night uh or uh you know pipelines coming you know like the east west pipeline or otherwise. In fact, I made a chart uh about shadow deployments because Algazira keeps reporting how low exports are out of Hormuz uh in sort of shipping volumes. And I saved a chart here. I'm going to pull it up. This chart adjusts for that in my opinion. And what we do is we take this neon green color and add back in based on what research we could find how many ships we actually think are going through Hormuz at night but just with their transponders off. So the Alazer data suggests that we're only seeing seven ships come through per day down from 100. If we add the dark fleet, we might be up at 17, which doesn't sound like much more, but it's like twice as much as markets might be anticipating. Uh, and so certainly gets us closer, nowhere near as where we were, but certainly gets us closer and helps somewhat mitigate some of this as markets really got into pricing this drop from 100 chips to zero. Uh, and this is now back to 17 plus the offset that you're getting with trucking and pipelines elsewhere. getting some oil out of there, which is good. Unfortunately, still expectations are that this war is uh uh expanding, which isn't great, especially with the news about the Houthis taking control of the capital in Yemen uh as well as attacking Saudi oil infrastructure. All this driving oil prices to 100. But again, that's not something that the Federal Reserve responds to. And so that's where my base case is. There'll be nervousness going into the CPI report, understandably so. But I think when that CPI report comes in benign, it sets up for very clear no hike between now and the end of the year. It actually ends up being relatively bullish. If by the end of the year, we could get some good news on geopolitics and we take advantage of buying the dip on geopolitical issues as they occur. Uh but we go into the end of the year hopefully uh in uh sort of a Santa Claus rally enthusiasm mode and that could really continue until next year until there's more concern around the canary of the AI bubble which would be uh you know how anthropics earnings develop over time. Now if we look at TS Lombard they're still of the mindset that they should hike that the Fed should hike and sort of establish credibility and you know all this nonsense. They just don't think that they're going to uh until later, which is fair. You know, December is the base case anyway for the earliest hike. I think by the time they get to December, we'll have better data and they won't have to uh the labor market will be cheered as an economic foundation that broadly makes you bullish on the economy and inflation uh hopefully stabilizes. I wrote down a list of, you know, the inflation shock thesis. Wrote it down somewhere. Oh, here it is. So they actually end up arguing that we're in this sort of permanent new inflation regime. And a lot of people believe that. I don't. I think that our permanent inflation regime has really just been a confluence of shock after shock after shock, co inflation, Ukraine war, Red Sea supply disruptions, tariffs, midnight hammer, now the full-on Iran war, the inflation reduction act was inflationary uh you know from 2022 on. You have uh immigration tightening labor supply creating that that wage sort of I I don't want to call inflation because wages haven't been like growing really fast 2.3% per month. Uh which is fine. It's not mega inflationary but it would probably be zero if we still had all the immigration which that was the whole point of the populist you know limit immigration because you boost wages for existing Americans. It's just another inflationary impact which which is fine. Um then you've got the Trump capex 100% write-offs for compute build equipment whatever this reduces supply more which increases pricing power for companies. All these things there's sort of like one after another. It's death by a thousand cuts of inflation. And so now people are like I'm going to have to live with these cuts for the rest of my life. And and in my opinion the answer to that is no you're not. Like eventually we stop having this we'll go through a cycle of wow we've had three years with no inflation shock at the same time we're ushering in tech and artificial intelligence deflation or worse if we overbuild in the AI bubble then you're ushering in true deflation. So um you know I take an opposite stance to TS Lombard here but they do argue even though they think that the dash for growth will end badly that's fine. uh they think somehow even after arguing that the dash for growth will end badly that we're going to have an inflationary regime. But whatever. My view is simply this. I think people are nervous right now between now and CPI because the anthropic S1 is expected to get released and we get the CPI report. We'll get the CPI report. I think it'll come in at expectations. Uh that's on the 11th. So that's coming up on Friday. By September 16th, we get the Fed meeting. We don't get a hike. people are like, "This guy's not credible." But then you look at inflation expectations and they're totally stable. And then I don't think he's going to hike one week before the election because that would just be a pure middle finger to Donald Trump unless for some reason data went really bad. I just don't see it. So I don't really see them hiking at all until December at the earliest. And then by then I think they'll have new excuses as to why we're not going to get hike. That means once we get through some of the catalysts over this next week, anthropic and CPI, I'm pretty bullish between now and the beginning of next year, maybe even into the middle of next year. I'm pretty optimistic. I do think once we start getting more like memory and hardware supply online, that some of that pricing power at memory companies or, you know, with high bandwidth memory prices probably peaking within the next couple years, more of that supply comes online. more of that supply comes online for storage like you know flash uh and um you know ultimately questions around how stable is anthropics revenue all those issues become more of an issue later in 2027 in my take so that's my point of view on uh inflation optimistic on it on jobs I actually think that reiterates an optimistic look for the economy right so if I think inflation's going to come down and the labor market's going to be strong that's bullish train America very bullish train America and I think these rate expectations are being driven by what's actually a good and and stabilizing economy even though there's been rejiggering uh in in where the jobs are and ultimately some of these fears uh will create some nervousness shortterm but they'll end up turning out to be buying opportunities. So that's my take on rates and inflation. >> Why not advertise these things that you told us here? I feel like nobody else knows about this. >> We'll we'll try a little advertising and see how it goes. >> Congratulations, man. You have done so much. People love you. People look up to you. >> Kevin Praath there, financial analyst and YouTuber. Meet Kevin. Always great to get your take.