Okay folks, so we have three big things to talk about today. Number one: I want to walk you through a very cautionary analysis piece from Morgan Stanley that kind of reiterates exactly what we've been warning about for months on the channel. Number Two, we need to discuss the latest escalation of Fed rhetoric. And then lastly, we need to address the biggest elephant in the room.

But before we get into all of this, this is my last reminder that our Valentine's Day sale on Zip Trader U will be expiring tonight. If you are looking to join us and lock in lifetime access for that one time fee coupon code, Valentine link below. Okay, so you've got the Dell, the S P, the Nasdaq Doroskies all slightly red today in honor of Valentine's Day. A lot of people don't realize that the stock market is really just a hopeless romantic.

It turns red to show us love. And then what does the media say? Oh, the market's read today because of the Fed or rate hikes or Ukraine can't trust the media and their Bs these days. But anywho, very interesting analysis from Morgan Stanley. Equity strategist Michael Wilson contended that the latest Cpi report signifies a top in the overall investment community's fixation with the Fed and rates.

Of course, rate and Fed decision making remain important. He said, but growth should become the central concern from here And raising flags about the economic situation, Morgan Stanley pointed to the depressed consumer sentiment, high prices, and negative real wage growth all posing a threat to consumption for the first half of 2022.. So they're basically saying, hey, wait a second. Consumers can't afford to keep paying these higher and higher and higher prices If consumers don't pay the increased costs, Well, businesses aren't going to be able to sell those increased costs.

Consumption is going to drop. Businesses are going to make less money, they're not going to be able to pay as much, and profit margins are going to be crunched if they do. All of these things are real threats for the economy, and so focusing on just the inflation narrative doesn't really make sense when consumers aren't going to be able to keep paying these increased pricing pressures at this pace. Now, we certainly have an out of control inflationary problem right now, but they are arguing that the real threat for the future is slowing economic growth.

But anyways, Wilson adds as it becomes revealed that demand is slowing more than expected, order books should shrink in excess. Inventory will build. Indeed, that is already happening as the wholesale inventory sales ratio for durable goods is rising. This data lags and only runs through December.

So far, our expectation is that the post holiday January February data points will indicate a continued pickup in this ratio. So a few points here. he's saying it's going to be revealed that demand is slowing more than expected. He's saying order books should shrink, the amount of orders yet to be fulfilled will go down, and they won't refill up.

And as a final result, you'll have an excess of inventory as companies overbought supplies in order to fulfill future demand they thought would be consistent with what it was in 2021. When demand slows what is really going on. Well, consumer driven pricing pressures are slowing. Consumers are like, hey, wait a second.

I'm getting crunch to pay for even my basic cost of living expenses. I'm going to start trying to make decisions to save. I'm going to start making decisions to spend less on things that I don't need or switch to cheaper alternatives. I'm not going to be throwing money and spending like no tomorrow.

I'm going to start cutting back. In that sense, you're lowering the consumer demand side of the spectrum. On the other side though, the supply side. if order books are shrinking and you end up with a huge excess of inventory.

What happens? Well, you have a lot of supply and you also have shrinking demand. So increasing supply, Shrinking demand. You get to a situation where supply overpowers demand and in order to move product, companies have to choose between dropping prices or just not moving product at all. But what Morgan Stanley is saying is, hey, you're already starting to see a very, very small start to this.

The wholesale inventory to sales ratio for durable goods is rising aka the amount of supply for each unit of demand is going up right now. But this logs and we don't have January or February's data yet, just December. But they're saying that it's going to follow that same exact trend. So of course I went and pulled up the U.s Wholesale Inventory Sales Ratio chart.

and one of the biggest reasons for inflationary pressures towards the end of last year was that inventory was so low while sales were so high. But over the last report, you're starting to see a small reversal where inventory started picking up and sales started reversing. If that trend continues into January and February and accelerates, and you continue to have that issue where you're getting lower and lower consumer demand. All of a sudden, you're in a situation where we're no longer having an inflationary problem stemming from too much consumer demand and too stubborn of supply shortages you now have in many categories, a situation where you're ripe for lower prices.

Now Unfortunately, not everything's black and white, and just because you've muted consumer demand and supply chain shortages are easing and inventories are increasingly short up, that all of a sudden, you're guaranteed to get lower inflationary numbers. We know that the biggest driver of inflation right now stems from energy and commodity prices. Many producers, especially in that oil segment, are in no rush whatsoever to raise production to the level where prices start coming back down. And in a situation where a huge geopolitical event like the invasion of Ukraine complicates supply chains even more by sanctioning off a huge supplier in Russia.

all of a sudden, you have a situation where all these prices accelerate even faster. At the same time, our economic growth is again stagnating, and this would hurt it even more because people's purchasing power would go down even more. But anyways, going back over to the Stanleys at Morgan, they also make a technical argument, arguing that the Nasdaq has steadily broken both the 50-day moving average but also the more crucial for direction 200-day moving average. I tend to follow a slightly tighter definition of a long-run moving average at 180, but if you're looking at a 180-day moving average and you're projecting that on the S P 500, you also have the broader market struggling to hold a clear direction above or below it so far, slightly favoring a downward direction.

And what do Smas really tell us? Is it just an astrology move for stock traders? Well, they simply give us a bearing as to the point of time that we declare that a new direction has been created. At what point in time has the market trended in a way that signifies a statistically significant change of direction. And from a technical standpoint, Morgan Stanley is arguing that it's taking a downward direction, going back and connecting this with yesterday's Goldman Sachs fundamental analysis piece. Their view is that two of their three predicted scenarios either an economic contraction or inflation remaining will result in the broader market dropping.

so you combine that with the technicals and the argument that Morgan Stanley is making. And obviously, there's a lot of reason to be alarmed. In the short to medium term, it's tough to be a short to medium term bull right now. You have a lot of bad factors: It's a terrible macro situation, but firstly, the more volatile and more fear the market factors in, the more excited and more of a bull I'd be for the near future.

By the time that all the negative catalysts are actually happening, you're going to be in a situation where the market has already factored it in. And that's why even my bearish arguments aren't really bearish. They're more like, hey, great opportunity to buy the bears shares and sell them to the next generation of bulls that have to fumble back in at the top Because oh, now everything's calm. Saint Louis Fed President James Bullard, who has obviously been very, very hawkish, said some more things he said in an interview with Cnbc this morning.

I do think we need to front load more of our planned removal of accommodation than we would have previously. We've been surprised to the upside on inflation. This is a lot of inflation. obviously.

he was saying last week that he wants a full point hike before July, but now he's seemingly at least rhetorically more hawkish, saying that he wants to front load the removal of accommodation. He even suggests keeping what he calls some Plan B in their pocket where the Fed might actually directly sell the assets aka bonds, rather than letting the proceeds run off passively. He's saying here that as early as the second quarter, he wants the Fed to sell the assets outright, rather than letting proceeds run off passively, perhaps suggesting a fast, aggressive offload as a way to preemptively strike a further acceleration of inflation. Obviously, the more that inflation gets out of whack, the more relevance a hawkish argument is going to have, and the more easily it's going to be to convince the other members of the Fed that they need to be more hawkish.

That said building on what we're talking about the biggest elephant in the room right now is that the Fed is very, very dovish. Even members like Bullard are extremely dovish. How can that be Charlie? Well, don't get me wrong, there's a scale of relative hawkishness. Bullard thinks we need to do more to remove accommodation than say Daley or even Jerome Powell.

But on an overall basis, they're all very dovish. They are proposing in response to four decade high Inflation to simply remove accommodation and bring us back in terms of rates to pre-covered levels. So think about this. The proposal to fix historically high inflation is simply to go back to the status quo of what we had when inflation wasn't high at all, and the status quo of a trend that followed four decades of inflation that never really got that far out of whack and act as if the last two years of extremely easy monetary policy didn't happen.

Poof gone. There's nothing awkish about that. They're just suggesting going back to normal policy that we had two three years ago. Even if the Fed came out and said by July, we want rates to be up to two percent, That would be a huge shock.

But still, in terms of fighting inflation? Not really. They are literally saying we don't need to take abnormal measures to fight extremely abnormal inflation. Now of course, I'm in the boat where my opinion is that the economic slowdown, consumer behavior shifts, stagnating or even lowering of purchasing power despite raises and overall increasingly excess inventory are going to do their parts to bring inflationary pressures down and in check. But if you sincerely believe that the Fed is the only way or at least the primary way to bring down inflation, they're not acting as if they are one, two, or even three percent in interest rates ain't gonna do too much to stop seven percent inflation.

If you borrow money at five percent, and the inflation rate is seven point five percent, your real rate is still very negative. Essentially, you're getting paid to take out money, so five percent in that scenario would still be very, very accommodative monetary policy. Obviously, you don't have to bring short run rates up that much to get five percent in long-term rates. But the point is going back to a normal monetary policy schedule, which historically is very abnormal in that it's very, very low and accommodative shows that the Fed doesn't see itself, or at least isn't positioning itself as the primary driver of bringing down those inflationary pressures.

In fact, it seems its only goal is to stop stoking the fire. But the real fire is that people have had tons of cash and they have been using it to chase a shortage of goods. As long as those problems are present, you're not going to get inflation under control, and only time will tell if it's going to be the economy slowing down, consumer behavior shifting, or if an actually hawkish Fed is going to have to step in to stop it. I think it's the first, But it's worth mentioning that the last resort, which is the Fed stepping in hasn't really happened yet.

The Fed is stepping in only in the sense relative to where it was before on this issue. But they're still basically saying we're not going to be the primary driver of bringing down inflationary pressures. So in the short to medium run, tough time. but in the long run, we're going to have some of the best opportunities that you've ever seen.

The one last thing that I do want to remind you of before I shut this video off is the Producer Price Index is coming out tomorrow. That is something that the Fed looks very very carefully at and closely on. Keep an eye out for that because when it drops the market's gonna shaky shaky. Anyways, have a good one and I'll see you in the next video.

Make sure to use that coupon code Valentine if you are interested in signing up for Zip Trader U before today ends. And besides that, have a good rest of your day and I'll see you tomorrow.