Okay folks, so I want to talk to you very violently about where we are on the current cycle, in the market and in the overall economy, and some flags that you're going to want to see. I have some good news and some bad news. Okay, so today was the second day of a contrarian rally as we were talking about back on this past Sunday. This would either be the week we get close to breaking a new consecutive down record in the S P or the week we get a contrarian rally.

And it turns out that we ended up breaking not a record, but the losing streak. And on Wednesday, my thought process was that if you were to get a sustained week over week contrarian rally now would be the time sometime between now and June 13th or 14th when the next Fed meeting is. If you think about it this week, you have the Fed minutes released, earnings season has winded down, so no big surprises from that, and there's not many major catalysts on the horizon until then. Of course you have the Cpi Index a few days before that, and you have the employment report next Friday.

But in terms of what could allow for a contrarian rally, the time right now is probably the most conducive. Not to mention that with especially today's Pce report, there's not many people expecting a huge surprise at this next meeting. But in terms of the technicals, I mean the way that I look at short down trends is similar to the way that I look at sharp uptrends caused by some form of chasing and fomoing. No one looks at a huge and sudden uptrend and says, oh, that's sustainable that's gonna last forever.

And likewise, you shouldn't look at a downtrend as ooh, that's sustainable either. You can have an overall uptrend month over month and an overall downtrend month over month. But when you get into a period where bulls or bears are all attacking at once, it just simply leads to overcrowding and you get a correction to the other side. Short sellers or bears overall may be very, very high conviction that stocks are going to continue to go down overall, but when you consider how fast things can turn against you when you get those bear market rallies all of a sudden the risk profile doesn't make sense and you start getting people say okay, you know what I'm going to start covering and then reshort when you get back to higher valuations and you have another fear catalyst.

And as you can see, especially in growth, tickers and some of the big retail names that we watch, rebound rallies can be incredibly powerful. 5, 10, 15, 20 in a day, a lot of the most shorted stocks in the market will see huge huge inflows on days where the market goes, even a little risk gone. And so if you're a short seller and you're watching this, you're like, okay, well I just made a lot of money on the downturn. I don't want to risk that just because the market doesn't have any bad news for a week.

I mean, things have been bad for the last seven weeks. It's been terrible. If you're a short seller, you've been making out like a bandit. Large portions of the market just kind of buy and hold.

But if you think about what's actually moving the prices every day, it's that short-term capital. So short-term capital, short-term traders and their sentiment really move what you see on a day-to-day basis in the market. It's hard to really visualize this, but the market is not moved by holders. It's moved by who's making decisions in the here and now and the people who are making decisions here and now.

always have the largest megaphone because that's what moves the price. But I want to talk to you about the Pce report that dropped this morning. The Pce is one of the most indicative reports on what the Fed is going to do, because that's what the Fed focuses on the most. This is the first bit of good news that we've heard on inflation for a while.

I mean, it was mildly good news, but it's certainly a lot more indicative of being good than previous reports have been. Pce inflation year over year reported for April is 6.3 percent versus 6.6 in the prior month. This is the first decline in this measurement in a year and a half. The secret story here is that this is really before the Fed has meaningfully raised rates or tighten the economy.

Outside of of course, their rhetoric, which has mostly just crunched asset values. Core Pce minus food and Energy, which is what the Fed really looks at is now at 4.9 versus 5.2 percent the month prior. So a lot of the new wave of bears on Wall Street have been saying no inflation is going to continue to get out of hand, the Fed is going to have to vote for the economy to oblivion. This actually says hey, wait a second.

No Inflation is actually decelerating right now, albeit mildly, and actually adds to other indications that we saw last month that outside of the food and energy sector, prices are cooling off a bit, but again, I can't emphasize the word mildly enough. This is mildly good news. The analogy that I would make is if we're in a room right now and the room has filled up with water and we're kind of neck deep in water. Water hasn't really started draining yet.

we're still drowning, but the pace at which new water goes into the room has slowed down to a trickle. This is the least amount of new water being added to that room that we've seen in the last year and a half, but inflation still rose 0.2 right? So we haven't seen any draining, but at least the overall trend is starting to suggest that things are getting a little bit better. But there are some freaky indications in this report that you're going to want to know about because it suggests that while inflation may not be the biggest problem on the minds of investors and the economy six months from now, the big R word probably will be. And I'm not talking ravishing, I'm talking recessionito, which is recession for the non-spanish speakers.

By the way, Learn Spanish. Come on now. look at this. consumer.

Spending is up again. 0.9 month over month. And this is the fourth straight month that you've seen people increase their spending, not decrease it as you'd expect if we were really heading into a deep recession. And this is the one data point that a lot of people are looking at and they're like, wait a second.

Okay, we think we're heading into recession, but the spending is so hot now. Of course, this isn't indexed for inflation, so part of the reason that spending is going up is because things cost more. You have to pay more to get the same level of stuff, but at the same time, if you chain this to 2012, consumers are still spending more and more regardless. So with inflation or without inflation, consumers are spending a lot more.

Which indeed, that would be a very indicative sign of a healthy economy. But the problem is when you start getting beneath the surface level here, and you start asking when this stops, this is where it gets freaky. Cnbc posted a survey this morning that said two-thirds of American workers say their pay is not keeping up with inflation. That's two-thirds not one-third not one-five-hundred thousandths.

Two-thirds How can as The New York Times reported earlier today, Americans keep spending even as inflation erodes their buying power? And considering that a lot of American companies not all of them, but a lot of them are already projecting falling guidance and really bad macro environments and a weaker consumer into the next few quarters. Despite the fact that the consumer based on this data is still very alive and well, what can we look at to see why they've been able to keep up the spending? And when this is going to stop and the consumer's going to say you know what? I'm going to cut back hugely, You have to look at that S word, which is certainly a cuss word in American society. And that cuss word is savings. If you look at the data that came out today on savings rates, this number hither.

This symbolizes the number of billions of U.s dollars consumers had saved up in 2020. 2887, which adjusted for the units, is 2.9 trillion dollars or 16.6 of disposable personal income. In 2021, that number dropped down to 2.2 trillion or 12.3 percent of disposable personal income. Both years were high, largely because we gave people stimulus money, which in a lot of families, ended up being completely disposable and was allowed to go and circulate around the economy.

and especially in 2020. You not only had that stimulus, but you also had people saving a higher percentage of their income if they had jobs, But you look at that overall trajectory. it's now 2022, a lot of the fiscal stimulus has dried up, are no longer sending checks, we're no longer sending huge checks to businesses to bail out, and we now only have savings at slightly over a trillion or 5.6 percent of disposable income. And I know I've made a lot of arguments in the past that if you want to look at how the American consumer is doing when their wages aren't going up, you have to look over at this savings rate.

But to my surprise, consumers spent a lot more of their savings than I would have anticipated in this beginning first quarter or two, but there's an end to how much they can actually spend. Bloomberg reported this morning that the savings rate fell to the lowest since 2008. and it's just simple math. If your wages aren't going up at the same pace of inflation, but prices keep going up, the first option is to deplete your savings, which they've largely done, and the second option is to get into debt.

Debt costs are going to the moon, so it's simple math. If you really want to understand the biggest threat right now, you have to look at what's holding the economy up right now. And it's the fact that American consumers are dipping heavily heavily into their savings to subsidize their lifestyles that has allowed a lot of companies to continue either raising prices or keeping them high because there's still demand. Even if demand is slowing down, there's still a lot of American consumers that are willing and able to send out their savings in order to buy different products.

But eventually, as personal, disposable income evaporates and savings rates are down to like nothing, there's just not much money extra to buy some of these other goods and services that aren't 100 mandatory for survival. And when that happens, a lot of those industries start cutting back. Employment numbers start looking weaker, Economic growth starts looking weaker right now. You're kind of in the middle of that cycle where you're seeing a lot of conflicting data.

On one hand, a lot of companies are reporting. hey, our consumers are spending a lot less money. On the other hand, other companies are reporting the consumer is alive and well and different income brackets are being affected in different ways. But as time goes on, more and more people get affected and all of a sudden they start cutting back across the board.

And I think, if you want to look at the biggest red flag and the biggest ticking time bomb, it's the savings rate. It's also true that corporations and even small businesses are going to be looking at that overall monetary policy environment and thinking, well, I'm not going to be raising wages significantly into this environment. I don't even know if my business is going to be doing good numbers in six months to a year. So to me, overall, if you look at the overall economy, there's nothing to suggest that consumers or American workers really are going to get their pricing power back to be able to pay increased costs and continue with the spiral.

Now of course, there's the disease, inflation. and without a wage price spiral, inflationary pressures, especially the ones caused by commodities, eventually lead to the American consumer having to cut back on expenses, which causes some sex with the economy to start lowering pricing pressures on their own, albeit very very slowly. That's sort of the natural immunity and natural response of an economy. But of course there's that bazooka cure for an infection, which is the Fed and the Fed's policy of tightening.

But most of the Fed's policy shifts don't have much of an impact on the average American consumer and their behavior for about six to 12 months. and what they've said is going to happen moving forward has had mostly an impact on asset classes, not really on the economy, yet obviously in the equity markets, you have the Nasdaq down 23 year to date, the S P down 13, even the Dow down almost 10. And this is after the little recovery we had the last couple of days. Then if you look at the housing market, you're starting to see weaknesses here as well.

Fortune ever. the drama queens are calling this the Great Deceleration and I think it will be a pretty damn great deceleration. As rates go up. you have less house that you can afford, less car you can afford, less risk you can afford to take out on stocks, and less reason to take out that risk.

People that live and breathe Fed Policy are the ones that make decisions the first, but the consumer doesn't make decisions until they start seeing. oh, this costs more. Oh, I have less money. So that means even though it seems like the Fed has cranked down a lot if you look at equity valuations, especially in tech stocks.

Fact is that people are just anticipating what the Fed's going to do in the future, right? So the Fed hasn't really done much in terms of the actual economy yet. I think in terms of what you're going to see in the economy, you're going to start seeing those impacts this summer and then, especially about maybe in mid-fall But I think the freaky thing is that we are raising rates into an economy that is already in all likelihood slowing down quite a lot. Which means that by the time we start feeling the actual impacts of Fed policy, it's probably true that we're already going to be in a pretty damn weak economy. Yes, the market has been trying to factor in out-of-control inflation, and it's been trying to factor in how much the cure for that out of control inflation from the Fed is going to cost in terms of multiple crunching in terms of economic numbers going down and so on and so forth.

And by the time it starts peaking, a lot of those Volcker catastrophe bears are starting to calm down a little bit. Way that I see what the market is really looking for right now is about three or four things. Number One, it is looking for inflation to meaningfully meaningfully drop. not mild little decelerations like we saw this month, but actually meaningfully drop in order to really feel like, okay, I'm convinced that inflation and the inflation problem is at least in the past.

Number Two: we need to get into some future quarter where companies are reporting their earnings and they're saying yeah, this was a terrible, terrible quarter. The bad guidance that we projected for this quarter last quarter came true, and it was terrible. and you already killed our stock price because of that. But now all of a sudden it seems like we're at the bottom of this economic cycle and we're starting to think things are turning around a little bit slowly.

But they're turning around and all of a sudden people start thinking, oh, wait a second. the worst is behind these companies and they're starting to see a trend Go back up Now might be time to buy these low valuations. Number three, You want to start seeing the situation where employment has weakened, economic growth has weakened, and people start anticipating that the Fed is going to reverse course soon. And then number four, you want to see the situation where the Fed's acknowledging sooner or later that numbers are looking bad in terms of employment and inflation is now under control, or at least reasonably near their target rate.

That means that all of a sudden it makes sense to start pausing course, or perhaps even reversing it, depending on when this part of the cycle is reached. If it takes another 18 months to hit this part of the cycle and employment numbers are looking bad, you better bet based on the historical trend that the Fed is going to be lowering rates again. But if this happens somewhere around that neutral rate and the Fed's like, okay, maybe we should just pause. That's still very, very bullish.

At a certain point, whether that's Q4 of this year, Q1 of next year, or even Q2 markets are going to realize, wait a second. a lot of the worst headwinds for companies are behind us. now. inflation is under control, and economic prospects are looking better and better.

and I think the Fed is going to reverse. That's when all of a sudden you have the market start really building on rally after rally after rally Right now, the markets need to go through the process of inflation coming down, the fed, cycling back up to normalized interest rates, and then the economic pushbacks that follow, and then all of a sudden you can be back in that situation where you get a nice rebind cycle, but you do have to allow the Fed to overcorrect slightly, and that's what the market is trying to factor in right now. At the end of the day, when you're sick with some sort of bacteria and you go to the doctor, the doctor prescribes you antibiotics. If the dog puts you on a 14-day schedule where you have to take the pill every single day, they'll tell you even if you start feeling better halfway through, you still have to keep taking it.

That way you can make damn sure that you've killed all that bacteria, even if inflation starts coming down on its own and people start feeling better about it. Fed has stated that they're still going to be raising rates and the Fed will likely have to overcorrect in order to make sure that inflation isn't entrenched and it goes down, but at the end of the day, the treatment is based on the infection and if the infection starts showing signs of being cured and going away eventually, you know and the market knows that the Fed is going to be reversing course. But if the infection starts getting worse again, you may need a bigger and more aggressive treatment plan, something that maybe Dr. Volker would have prescribed.

However, once this is cured, if you're too aggressive, you may end up with recession. Rabies and rabies are a virus. It can't be cured with antibiotics, so stay tuned. The market and the economy are going to have to go through cycles where they deal with these diseases and at the end of the day, it's very, very important to keep in mind that markets work on trends, right? Analysts work on trends.

People that are buying, look at trends. They don't really look at what's happening in the day to day, they look at what's happening in the day to day, and then project that moving forward even if you're in a very, very strong economy. When numbers start going down in that strong economy, people assume that it's going to keep going down until you get into a recession. But the minute that all of a sudden you get into a situation where you have the worst behind you, well, the market is already bottomed, and the minute that it starts seeing companies start projecting a growth in earnings and revenue and all that kind of stuff, you start seeing boom in the market.

I would say today was mildly good news and makes me a little bit more optimistic for the future and how long we're going to be in this crisis. About one mildly good inflation report may indicate that inflation is calming down. We have to actually see that continue to be true, and then you have to see how we actually deal with the economic blowback and how entrenched this recession becomes. Anyways, that caps off today's video.

let me know what you think about our chances of heading into a recession. Make sure to hit that ravishing like button and subscribe if you're looking to learn how to trade rather violently with our step-by-step lessons, private chat, daily morning briefings, and so forth. I'll go ahead and put a link to Zip Trader you below coupon code Charlie Fever If you're looking to get up to five free stocks we never like to leave free money on the table, make sure to go ahead and check out Moomoo down below. Great trading app.

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