Okay folks, so we've got a big week ahead of us. First, we have to talk about what companies are reporting earnings this week and what to get ready for. and then for the main entree this lovely evening. I want to take you through some of the data that talks about exactly what happens when the Fed has historically raised interest rates and what's most likely to happen this time.

and you may find the data very, very surprising. Okay, first Earnings. So we are heading into a stretch of time where we are about to have a ton of major companies reporting earnings. Last week we had some of the early banking sector reports.

mostly decent numbers, but some fear around rising salaries and higher input costs. But this week we have the rest of the banking sector. We have Goldman Sachs, Schwab, Pnc, Bank of America. Then you go on to airlines starting to report United.

Then you have Proctor and Gamble, United Health Group Thursday you have Netflix, and again another airline company American Airlines. Now this week is going to be very, very big because you had only four trading days and you have a lot of companies reporting earnings. But you also have this week being the preceding week to a massive massive earnings report week. next week, and the week after that.

the following week you start getting the big tech companies and a lot of these sector leaders reporting. Monday you have Ibm, Phillips, Logitech. Tuesday you have Microsoft, Ge3m, Verizon, American Express, Johnson and Johnson. Wednesday you have Big Dog, Tesla, Intel, Boeing at T, Abbott, and Seagate.

Then Thursday you have Apple, Visa, Mastercard, Robin Hood. Robin Hood has just been destroyed since ipo, so it'll be interesting to see what they're reporting. Retail participation and trading rates haven't been super bullish in the beginning of this year because everything's been going down and retail participation numbers tend to go up When the market's going up, a lot of the more meme sectors are going up, but we haven't seen that yet. Friday you have Chevron and Caterpillar, and then at the end of January you have Alphabet, Exxon, Meta, Gm, Qualcomm, Ford, Unity, and so forth.

There are so many major companies from so many diverse sectors reported in the upcoming weeks that our heads are going to spin off. and the market tends to be extremely volatile during an earnings season, but this one is going to be very, very special. We are in an economic environment where a lot of people are completely torn on the trajectory and you can look at analyst reports all day. But when you actually look at what companies and Ceos are reporting and what they're expecting in upcoming quarters, that's when you actually get a real picture on how the economy and how the market is likely to do in 2022 and 2023.

My take is you're gonna see a lot of Ceos have a little bit more of a pessimistic outlook in 2022 because you have a lot of consumers with less personal savings. You have a lot Of the trends of consumer demand bounce back from pent up demand in 2020 that have been almost completely depleted. And of course the ugly s word, supply chain issues are still hurting. A lot of the ability to service the available demand as is.

You also have a lot of companies that were able to raise their prices a lot faster than their input costs rose, specifically because consumer demand was so hot. If consumer demand starts dropping, you have the opposite problem. But anyways, the point is, from now January 17th to the end of the month, you're going to have a ton of different reports and a ton of different companies projecting what the future looks like and it's going to have a very big impact on the market. Secondly, I do want to remind you that on the 19th Lucid's lock-up period for many pipe investors will be ending.

The majority of outstanding chairs for Lucid will now be available to be sold if the holders decide to. One thing to keep in mind though, that a lot of the ones that are going eligible to be sold out are from the Saudi Sovereign Wealth Fund who are holding Lucid specifically as a hedge against the changing energy tide and thus in my opinion are very, very unlikely to sell out. But anyways, Lucid has been one of the plays that really has held up well under this growth crash environment, and I would not be sad to see it get beat down a little bit and provide a better buying opportunity. Okay man, Andre, I hope you're hungry because we got both inflation and interest rates on the table.

Yum! I want to talk about this controversial data set for Marketwatch that talks about what history says the market does during periods of rate hikes. Hiki Hiki Marketwatch compiled a table from the Dow Jones market data, and hopefully it's not too blurry on your screen, But essentially they went through and looked at what has happened during the last five rate hike cycles and the last six rate cut cycles, and they found that the average return during a Fed cut cycle was 23 for the Dow, 21 for the S P 500 and 32 for the Nasdaq. And they found that the average return during a Fed hike period was nearly 55 for the Dow, 62.9 percent for the S P 500, and 102.7 for the Nasdaq, Which obviously, these results are the complete opposite you'd expect. Based on the current narrative around the Fed hiking interest rates, you're supposed to see the tech heavy Nasdaq get bludgeoned the most, and the other ones outpace, at least according to current trend trajectory logic.

That's that. There are a few things to point out with this data set that are issues. One is that rates are usually cut during poor economic periods to stimulate growth and cutting rates after, say, the Dot-com Bubble, and then after the 0.708 recession was obviously not enough to stimulate a fast turnaround time, and by the time they had turned around, the data was done recording. Because it only recorded data during the period of time that they were cutting, rates Fed tends to cut interest rates very very quickly and raised them very, very slowly.

Flip Side: the problem with the rate hike cycle periods were that they were much slower and stretched much farther than the cuts, which gave them a lot more time to recover and have a much higher average return. For example, you have this decade-long period at the end, really bringing up the average where you had a rate hike cycle from 2008 to 2019, which also happened to be one of the most unprecedented periods of stock market growth, and a decade where interest rates barely moved above two percent, and when they were above two percent, everybody was very, very unhappy. You know That said, the period of 2004-2007 rates did actually climb to five percent. In this period, before the Dot-com Bubble really burst, you had rates on a trajectory to six percent.

In 94, they were on a cycle from three to six percent, and then obviously during this period from 99 to 01, you went from just under five to six point. Five percent evaluations during this period were already deeply on their way down because of the euphoria that you had in the prior period. For the whole tech and telecom.com bubble situation. Funny enough, right after that, rates went back down on a downtrend back to one percent.

So what actually is the takeaway from this data set and why even talk about it? First of all, despite what this article proclaims, and despite outperformance during the rate hike periods, you certainly can't think that rate hikes are good just because you're looking at this data. and you saw that stocks went up during the period where you have to rate hikes. Interest rates rising are a deprecating factor for stocks, and interest rates rising fast are a huge deprecating factor for stocks. It makes future cash flows less valuable, makes taking out debt more expensive, and makes repayments on shorter term debt more expensive if you want to roll it over.

It lowers the amount of risk on trading in a market, and it hurts the ability of companies to do share buybacks. But what you can and should take away from this data set is that the stock market can stomach interest rate hikes as long as the underlying companies and economy are seeing growth. The longer term question on the value that companies provide and the growth their stock prices see are not based on the Fed's short-term decisions and whether they're in a bull or bear cycle in terms of interest rates. The valuations over the long run are based on the underlying fundamentals and the business itself and the macro economy's ability to provide gains that outpace the net dollar loss value in terms of inflationary pressures.

There's a growing amount of people right now, a lot of people that think that any price is too expensive to pay for a tech company because they could just keep going down to zero regardless of how good the underlying business is. And that's because, well, the Fed is going to bludgeon them with interest rate hikes. But if you look at this data, you do see the inclination that if the companies can provide the year-over-year business growth and they're good companies and they continue to grow in an overall macro economy that is doing well, then you still see the valuations trend up over a long enough time horizon. And if you look at the overall trajectory, you can see that interest rates are on a 40-year decline, and we can get into why that is and how that relates to debt repayment in terms of the bursting national debt.

But that's a whole other topic. That being said, the long-term trajectory doesn't really address the current pain cycle, and the question of this current pain cycle is are we going to see inflation force the Fed's hand even more and tighten even faster and more aggressively? How extreme is it going to be? And that really comes down to the golden debate. Is inflation right now caused more because of supply chain issues which will eventually slow down and thus the pricing pressure increase will be more temporary. Or is it caused by monetary policy, extreme monetary policy which will have a more permanent impact and we may just be in the beginning of that cycle.

And of course, there's short-term and long-term effects. My take is that supply chain issues are on the shorter term cause in terms of why we're seeing pricing pressures right now, whereas monetary policy and specifically fiscal policy are more on the longer term effect side effects that we're going to see spread out more over five to ten years than we are in terms of just the day to day right now. And the reason that I say that is because when you look at the personal savings rates that we have going into 2022 versus 2021, which we also discussed last week, the fact is that in the last half of 2021 record personal savings were unloaded into the economy, correlating directly with the highest pricing pressure increases that we've seen in a very long time. In such a short time period, consumer demand was propped up by excessive savings rates and pent-up demand from 2020 and also direct stimulus payments and other direct aid which helped dramatically increase the firepower that consumers had in 2021.

and you saw that get unloaded This time around, a lot of that driving firepower is gone, and savings rates are back to where they were before the pandemic, if not slightly lower. Obviously, getting into fiscal policy and stimulus and whatnot. with that, you are definitely seeing that artificial consumer demand hurting the overall picture in terms of pricing pressures by accelerating demand on the supply chain which is already weak. But that impact is starting to go down because again, personal savings rates are down dramatically.

But when you start getting into the longer effects of dramatic monetary policy, you have to look back to what happened to inflation after 08 and 09, where you had unprecedented, at least at the time, stimulus and using a monetary policy without much fast recovery in terms of consumer demand. At the time, it was expected that those interventions were going to cause unprecedented inflationary pressures, but that didn't happen. The record expansion did not result in high inflation at all, despite the fact that interest rates barely budged for the entire decade. And why is that? Well, a lot of it has to come down to the Velocity of Money.

Who is getting the money, Where is it circulating, and how often is it being spent? Despite unprecedented fiscal stimulus and monetary policy expansion in 08 and 09, and through the upcoming years, you saw Velocity of Money drop dramatically and continue on a decade-long downtrend, which contributed dramatically to helping inflation being kept at bay because the money put into the system wasn't really circulating as much as your average dollars do on Main Street in 2020 and 2021. During an even more unprecedented expansion M2 money supply velocity dropped substantially more and now is at record lows even lower as the economy has recovered. Which means that despite more money than ever being in the system, more money than ever isn't moving around the system. If you have a total of a hundred dollars in an economy, let's just say, and you go and you print 80 more dollars.

The fact that that has on prices isn't really black and white. It depends on who you give the 80 dollars to how many times the 80 is spent and where it is spent. Stimulus payment or other direct aid to citizens is going to go much farther in terms of bolstering consumer demand on Main Street and thus increasing pricing pressures. Then, an infusion of cash into banks that then treat it as excess liquidity and give it back to the Fed in overnight reverse repos that are at unprecedented levels right now.

Now, don't get me wrong, the Fed can certainly do a lot in terms of reducing consumer demand and in terms of taking money and sweeping it out of the markets. And a lot of the money that we did put into the economy and created out of thin air is going to have a negative impact over the years. But when you consider what is motivating pricing pressures right now in the short to medium term and not over the long run, you have to look at that supply chain first and foremost because that is what is making this issue non-manageable And when you consider some of the most painful pricing pressures that you're seeing right now, they are in mandatory goods like food. In those areas, you can't really reduce consumer demand by raising interest rates.

You can raise interest rates to 20. But if people buy beef and they need beef to feed their family, then they're still going to be buying it. With the money that they have, they're just going to have to spend less money on discretionary items, taking away excess liquidity from banks that are just parking it at your overnight repos. Anyways, isn't going to do much in terms of making it cheaper to deliver beef to grocery stores and then sell it.

So when you have all these mandatory items getting more and more expensive, it creates this issue where the Fed, they can try and try and try to reduce consumer demand. It can raise interest rates as much as they want, but they're not going to be able to really get these under control unless the supply chain, what is actually providing these goods and services is in and of itself under control. The Fed could certainly make it a lot more expensive to borrow money and put a down payment down on a house, and that could screw with the valuations of the housing sector over a while, but the Fed can't tighten their way to fixing the supply chain. They can only tighten the demand side of it.

And if anything, I would almost argue that by raising interest rates, it makes it a lot more difficult for supply chain partners to what raise capital, build out better infrastructure, or hire more people to fulfill demand that they're seeing. But on the bright side, at least in terms of inflation, we are heading into an environment where consumers have less firepower. supply chains are on a healthy recovery cycle despite still being pretty damn bad, and the Fed, if they over tighten, will provide a very, very nice rebound opportunity if inflationary expectations are actually a lot lower than the market is pricing in right now. I think the biggest threat right now in terms of inflation is another variant that causes the supply chain to get bludgeoned again.

Nobody can tell you exactly what the odds of that happening are, but that's what I would argue is the biggest threat. I think a lot of the printing of fake money out of thin air is going to have a long-term impact, but a lot of it is going to be taken back by the Fed. A lot of it hasn't been circulated around the economy, and a lot of it. If it's allowed to spread up like a decade plus like the last round was, we'll get a chance to be annualized and spread out, and also be counteracted by a lot of those innovative productivity increases and overall gdp growth.

Or maybe I'm just a wishful thinker, but hey, we'll see what happens and over the long run. I believe that companies that have very, very strong business model growth rates in very strong growing industries are going to outperform, and I think the Fed's uncertainty in trajectory around this inflation situation is another opportunity to buy at good prices, slowly add to your highest conviction plays, and then waited out. Understanding that we as individuals don't really have much choice in what happens with the broader economy, but we do have a choice in choosing the right stocks and companies. So anyways, that caps off this video.

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