Okay folks, so we got the inflation report this morning and let's just say from the get-go this is some of the best news that we've seen all year. I Want to walk you through the main takeaways of this report and then go over what this means moving forward as well as unfortunately the new Sinister demon that is lurking behind the scenes of this report. They say the demon that you know is better than the demon that you don't know. So I want to help you guys get acquaintant and then I'm going to walk you through Blackrock's new warning and explain where and when they see the biggest opportunity and what they see coming in 2023.

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Okay, so in totality, today's report was the smallest 12-month increase since the period ending December 2021 In in terms of expectations heading into it now, casts were expecting month over month CPI to come in at 0.47 and Court to come in at 0.51 In terms of broader Market expectations for Wall Street on overall CPI all item CPI The expectation was about 0.3 but instead inflation was a lot cooler than both of those estimates and we ended up getting 0.1 on overall CPI I Did not think that the day would come where I would be alive and I could say that we have some good news on inflation, but here we are. And then for Core, we got 0.2 which rose by the smallest amount since 2021 and this brings the year-over-year inflation rate down to 7.1 percent on all items and six percent on Core. obviously both still horrible year over year, but it's all a relative. This is relatively good news compared to everything else that we have this year.

To better visualize this, look at the overall trend on the Core CPI Whether you're looking at the three-month change Trend or the one month, it's clearly trending in the right direction at least for the time being and it's the most convincing Trend that we've seen in this cycle. and I can't emphasize convincing enough. We know how markets look at this trend. They look at this trend and they say it has to continue when in reality it could go right back up next month if some different pricing pressures reverse.

But right now you're seeing a convincing downtrend one that we haven't seen before. and you may not have caught this folks. But if you check the FED futures for tomorrow's Fed meeting and the rate hike decision, they are about the same factoring in a majority chance of a 50 basis point hike. But for the February meeting and this is where it gets interesting, the chance of a 50 basis point hike actually went down and the chance of a 25 basis point hike went up.

Which means what? Well, it means that markets are affirming the belief that the FED is going to be able to start slowing the pace of rate hikes. Markets now are solidifying the trajectory of a 50 basis point hike tomorrow and a 25 basis point hike in the February meeting which creates this Dynamic where funds that we're expecting higher rate hikes and a higher terminal rate. Well, they can go in and buy and they have a new risk managed position. you go over to the treasury.

Yield Also took a dive, expecting the FED to slow pace. but going back to the report, this is the most convincing report we've seen that shows some evidence that prices are not just moderating, but they are also actually falling. Medical Care Service Prices dipped into the negative for the second consecutive month. Transportation services finally dipped into negative.

Used cars and trucks had their biggest drop yet: commodity less food and energy Biggest drop yet to utilities. Negative Electricity Negative Overall Energy Services Negative Energy Commodities Overall Negative Gasoline Negative The vast majority of major line items on this chart were either negative or were cooling down. The pace of increase from the previous month. One worrisome light item that I will highlight though, is shelter.

Still very aggressive in terms of an uptrend down from a 0.8 percent increase, but still increasing at a rate of 0.6 which really isn't that much better. And considering that this is a huge budget line item for consumers, obviously, this is a disaster. I Mean housing is like 30 percent of people's income, sometimes more so. The fact that this is still staying high and accelerating to the upside is not something that you want to see.

However, at the same time, of course, housing is a lot slower to adjust than everything else, and once you're locked into a lease, oftentimes it's hard for the landlord to raise rent on you at least for the first year or every year consecutive that you have a contract with them unless you're on month to month, which a lot of people are after that first year ends. But overall, it takes some time for those prices to adjust. So net and in effect the takeaway is yes, we're getting some disinflation now. What you do have to keep in mind though, is the market sentiment heading into this markets.

Were already busy crafting a new narrative and the inflation print today just added more evidence that they may be right. You go over to the short from Bloomberg Bond Markets were already in the process of doing something that they rarely do, expecting substantial disinflation in a very short amount of time. In Black, you have the one year Break Even spread to the CPI which signifies how much markets think the CPI is going to change over the next year. And in red, you have the 12 month change in CPI that we've already seen.

If you take this at face value, more markets are now expecting price gains to slow by more than five percentage points in the next 12 months. That's a very, very fast pace of disinflationary pressures. Today's report puts us on track to meet that goal, but there's a new issue behind the scenes here. A lot of people have this magical fairy tale idea that you can get substantial price drops without having any sort of substantial pain.

But according to Bloomberg, the five percentage Point drop is a pace seen in only three instances in the past six decades, and each of these occasions happen during or just after a recession. Which means what? Well it means that the pace that Bond markets are expected inflationary pressures to drop at indicate that the expectation isn't for a soft landing at all, but rather for a crash landing that forces prices down in a similar fashion to what we saw during the Great Financial Crisis, where our one-year break evens also predated the actual 12-month CPI change pretty accurately. If inflation is expected to be crushed this quickly and history is any indication, that means there has to be a massive recession in the next next 12 months. If you have collapsing pricing pressures, that means that you have to have collapse in demand.

If you have collapsing demand, what does that mean? Well, you have collapsing businesses. The idea of a soft landing and rapidly collapsing demand don't really go together. It's kind of like Taco Bell and a healthy stomach. Those don't go together either, and in both situations, you're in for a shite storm to understand this: I Want to go over to what BlackRock is saying in their recent report: BlackRock says to throw out your old investment Playbook Because we're headed for a new regime of Greater macro and Market volatility Charlie really greater macro and Market volatility.

My rear end cheeks still hurt from getting spanked. In 2022, they start the great moderation. The four decade period of largely stable activity and inflation is behind us. The new regime of Greater macro and Market volatilities playing out a recession is foretold.

Central banks are on the course to over Titan policy as they seek to tame inflation. So three things here. Number one: They are saying that we are leaving a period of four decade overall can consistent, stable growth and in control inflation. which by the way, the inflation of the last four decades was only under control because they changed the way that the CPI was calculated.

And then the second thing they're saying is that we are heading into a new regime where macro and Market volatility is going to be at a scale that we haven't seen in the last 40 years. that's going to be the new norm and number three. The third takeaway from this is that in order to get inflation tamed, central banks will have to over tighten policy and punish economies as much as they see fit. and this is going to be on a rolling scale because inflation is going to be entrenched in our economy at a much higher rate than two percent for the upcoming decades according to Blackrock in their analysis here.

Moving on, we expect to turn more positive on risk assets at some point in 2023, but we are not there yet. and when we get there, we don't see the sustained bull markets of the past. That's why a new investment Playbook is needed. So they are projecting that we get a rotation back into risk on assets at some point in 2023, which is because they believe there's going to be another huge sell-off priced in before that point.

But they also believe that the new bull market isn't going to be like the bull markets of the cast. It's going to be a lot more disorderly and a lot less consistent as BlackRock believes the FED will have to go back and forth on savior missions to fight inflation. You'll get periods where inflation seems to have let up and then boom you're back in spiraling inflation, so on, and so forth. now.

Reasons for this new environment or regime as they call it? Well, they cite ongoing production constraints, aging populations, record debt levels, geopolitical tensions, and green energy policies. They think these things together are just a few of the factors that are going to keep inflation problematically high for years down the road. And thus, they're saying here very boldly. Whatever investment strategy was used successfully in the last 40 years, Well, that's not going to work in the next 40 years.

and it's their view that taming inflation would take a deep deep recession. If you pull up their chart in Orange, you have the GDP and in Green you have where the GDP should be at if we want a non-inflationary GDP level, and BlackRock is saying hey, our GDP needs to fall significantly significantly. If we want to close the gap between demand and Supply in 2023, If The Fed is serious about bringing inflation down to two percent they need. They need to put ice across the economy.

and Destroy these GDP numbers first. They need to cool things down to the point where we're barely moving. You get numbers like this and a lot of people are going to lose their jobs. A lot of people aren't going to have any money to spend on anything.

A lot of people's quality of life are going to be downgraded substantially, but this is what BlackRock is saying is going to be necessary to be forced upon the population in order to get inflation to two percent. Although at the same time you have a lot of analysts that are saying no, Actually, you can have your cake and eat it too. You can get away with all the money printed, you can get away with all of these sloppy policy making of the last several decades, and BlackRock is saying no, we're sorry, But actually, you have to have some pain to get rid of this inflation. You can't just get out of it without any pain.

Historic inflation is only cured by historic pain, but BlackRock also seems to be suggesting that the FED isn't going to be able to do what it takes. They're not going to be willing to do what it takes. Instead of fighting inflation and getting it down to two percent, they're going to quit far far above that two percent Target rate, which is going to prolong the inflation battle for many, many, many years to com. Which is the whole thesis that BlackRock is operating at.

When it comes down to this new regime, prediction signs of a Slowdown are emerging, but as the damage becomes real We Believe they'll stop their hikes, even though inflation won't be on track to get all the way down to two percent. So BlackRock Here is saying that the FED won't achieve its two percent goal because it won't be willing To destroy the economy nearly enough. Charlie Is Blackrock full of idiots? Don't they see inflation is already down several months in a row? Don't they see that? That guarantees that inflation must go straight down to two percent? Well, according to them, they call that simply wishful thinking. This is a chart that shows just how Wishful Analysts inflation predictions have been since mid-2021 Each of them expects inflation to plummet in the periods in the future, but each time it went up afterwards, rendering them wrong very very quickly.

Some of them really wrong. And so BlackRock is saying, hey, are we going to fall for the analyst prediction that inflation's going down again This time now again. I'm just reading you Blackrock's take on this. In my view, a lot of commodity prices are going down.

A lot of Trends seem to be pretty aggressively down, but if you look at this on a broader picture, are they going to go down to two percent? How fast is that going to be? Could they not just motivate backup to the upside? Three, four, five months from now, and all of a sudden, there's a new cycle where the FED has a problem. I Think without a massive recession, restricting demand and restricting the circulation of that. Capital Well, I Think it's highly likely that you just get another inflationary spiral sometime down the road once inflation starts heating up again once spending inevitably comes back. If you don't get a recession and I think that's what Blackrock's arguing here.

Hey, you're either going to get a massive recession or you're going to get a mini recession. A mini cooldown that then just leads to the FED having to continuously go and fight back and forth with inflation for years And years And years. So what does Blackrock's Playbook Then Well, right now they are positioning risk off and are of the Viewpoint that damage has not yet been priced in. They are underweighting equities and long-term bonds and overweighting credit.

But once we head into a risk-on period, which they believe will happen sometime in the back half of 20, E3 they are going to start overweighting equities again, and they're going to start really overweighting them if you get sufficient damage priced in ahead of time. Now, it seems like they're playing a little bit of a Fed pivot here, thinking, okay, once the FED pivots all of a sudden, you get that massive massive rally and you go. And before the FED has to go in reverse course again and start trying to crank down on the next wave of inflation, they go. They sell out, and they take their profits.

They also seem to think that the beginning of 2023 is going to play out in their favor quite a lot. They expect the Central Bank to stop hiking, an activity to stabilize after a dump. But first, they expect an earning shock because earnings expectations, according to them don't yet price in even a mild recession, and this is pretty well known if you look at official analyst price targets. Very very few of them are even mentioning the idea of a mild recession, which BlackRock is saying.

Well, that sets you up for a systematic problem because if you're too optimistic and all of a sudden, you get numbers that are missing all of these cheery estimates, well, all of a sudden. Anyways, tying this back to the inflation news: If inflation relief is down, that's a big win. but that's just a win for now. It is my view that if you want to see inflation go down to the Fed's Target rated two percent anytime soon, you're going to need a massive recession for that to happen.

So buckle up folks, We've got a lot of volatility coming in 2023. and Beyond Anyways, that caps off today's video. Let us know your thoughts down below. Make sure to hit that ravish and like button and subscribe and we will see you in the next video.