CPI Report (and Bitcoin)

hey everyone and thanks for jumping back into the macroverse today we're going to talk about the most recent CPI report if you guys like the content make sure you subscribe to the channel give the video a thumbs up and check out the sale on intothe cryptoverse premium at intothe cryptoverse docomo to end by the end of the weekend okay let's go ahead and jump in this is a really interesting inflation report and we're going to try to break it down to fully understand what's going on there's a lot of implications of this inflation report and I also want to talk about the impacts of inflation on bitcoin so one of the things that we've talked a lot about is If the Fed cuts too soon it could lead to another wave of inflation like we saw in the 1970s if they don't cut soon enough right if they if they wait too long then you could get a deflationary crash which is exactly what happened in 1949 right this white line here is United States had inflation and and this is roughly around zero and you can see there was a deflationary crash we also saw deflationary crash during the financial crisis right so it does it does sometimes happen now it's easy to compare to the 1970s it's easy to compare to the 1940s the reality is that this cycle will probably not look like the 1970s and it probably won't look like the 1940s you know why because it's going to look like the 2020s that's the uh the fact of of of the whole situation is that it's not going to mimic either of those two outcomes it'll be it'll probably be something in between it is my guess now one of the things that we've mentioned is that inflation has F had fallen back to just under 3% now we just got a reading of 2.59% so it's great reading I'm sure Pal's going to be pleased to see that but for a long time inflation was stuck right above 3% or very slightly below it and because of that because it had been stuck just below 3% but wasn't really falling you had to at least make the comparison to the 1970s where in the summer of the election year we got the August 1972 report which is what we just got August 2024 headline inflation came in still at 2.9% and then it started to go back up as the FED loosened up policy now I have said many times that I don't think this is exactly like this and one of the reason is because in 1972 right if you were to go back over here to 1972 and look to see when inflation was you know was sort of sub 3% the the the unemployment rate was actually going down during that time right so the labor market was tightening up but now the labor market the unemployment rate is going up meaning the labor market is softening up which should help put downward pressure on wage inflation so this type of a move to 2.59% or so is welcome it's very it's welcome because it it it helps us to at least for the time being deviate from what happened in the 1970s that doesn't mean you can't get a second wave of inflation at some point during this decade we probably will but it might not be as bad as as what we saw in the 1970s so so that's at least welcome news but we also know what happens when the FED Waits too long and that's what ha you know that's what we saw back in the 1940s where we had a deflationary crash again just like we saw during the financial crisis we also got a deflationary crash in the mid1 1950s so it's interesting to make these comparisons the reason I make the comparison about the 1970s and the 1940s is we had high inflation the 1970s uh we had three waves of inflation the 1940s was coming out of World War II where there's a lot of money printing to finance the war so you could argue that it makes sense to compare it to both but it's probably going to play out differently than either of those prior to outcomes so going back to headline inflation this is a great number right 2.59% and you know I've been on I've been in the camp for a long time that they're likely just going to cut 25 basis points the very first meeting the reason is because if they caught 50 that might actually send more of a warning signal to the markets that hey perhaps they've waited too long they don't normally Kickstart um you know interest rate reductions with 50 basis point rate cuts it might imply that something's wrong whether it is or not might not matter so my guess is that they're going to go with 25 basis points be that as it may I was thinking when I first saw this report of 2.5% my initial thought was oh maybe the markets start to price in a 50 basis point rate cut or at least a higher probability of it but in fact markets are saying no 87% chance that the fed's going to cut 25 basis points which probably makes sense right I mean again I I'm in that camp that it's going to likely be 25 basis points that does not mean the FED can't ramp it up from there for instance if you go look at the probabilities for future rate Cuts after a 25 basis point rate cut in um you know for the next month or two the the the markets are still potentially expecting a 50 basis point rate cut at some point this year so you might get one it just might not be for that very first meeting and then I was wondering well why are there is the probability still so low and when you dig into this stuff it makes a little bit more sense one of the reasons um that the FED is likely just going to go with 25 basis points is because of core inflation right if you go look at core inflation it actually went slightly up this past month okay and so that is still a ways off from you know durably going back to 2% I mean it probably will eventually but that's not the data point you would want to see right I mean it could just simply be something like this where it goes up for a single month and then resumes the downtrend but let's suppose the FED Cuts 50 basis points and then core inflation continues to go back up then the FED might look back and think they made a mistake and so it makes it probably makes more sense to ease into the to the to the rate cut part of the cycle especially considering that core inflation has not gone below 3% yet this entire business you know dur this entire downturn in core inflation has not gone below 3% but the other interesting thing about headline inflation is you know when I first saw this number I was expecting a big drop in in housing or something like that right because if you go look at the inflation year-over-year per category if you look at it per category you will notice that let's look at all them right so here's headline inflation a nice drop here it's great to see look at the monthly change pretty nice drop right negative. 332 per. that's actually the largest drop in headline inflation that we've seen since October of 2023 so that's a great thing to see but but if you go through the categories it it doesn't really paint the picture that you might have expected for instance food and beverage inflation dropped a little bit housing actually went up from 4.33% to 4.44 the reason that's a little interesting is if you look at the the inflation year-over-year contributions per category because again they're not actually weighted the same housing contributes like 2/3 of it right now right so if you look at headline inflation is 2.59 housing is 1.93 of that of the 2.59 so it's more than 2third of of headline inflation is just simply coming from housing so when I first saw the 2.5 number I'm like oh that must mean there was a big drop with housing and then I went over here I was like oh housing actually went up so like well where the hell did it come from right where where is the drop coming from to 2.5% if it didn't come from from I mean food and beverages dropped a little but not much so if it never come from food and beverage it didn't come from housing did it come from apparel no that also went up okay so you have to keep going through the categories look at other goods and services that dropped by about 2% education and communication actually went up but it's still well below 2% so it's still not that concerning Recreation also went up so I'm kind of scratching my head about it you know I'm like what's going on Medical Care went down a little bit but one of the bigger contributions to why it went down was Transportation because Transportation has gone deflationary again right total headline inflation is still inflationary but there are components that have gone deflationary transportation is notorious for occasionally going deflationary if you look at the the larger map you can see it's it's no stranger to it um and it's gone deflationary during you know fairly economic prosperous times so the reason why transportation had the effect is because it's weighted more than a lot of the other categories not as much as um housing but if you were to look at some of the some of the weights here like food and beverage is is pretty small right it's about 10% of it or so if you look at at again here's housing it's like two-third of it more than 2/3 apparel basically nothing right you can you'd have to squint to see the contrib tion Medical Care not a lot right it it went from 253 to 238 not a huge contribution there change Recreation relatively low education and communication relatively low other goods and services again relatively low so the main thing that changed was Transportation because last month it contributed .86 of the 2.92 so almost 0.2 right but this month it contributed NE .12 right negative .12 so it's like a 3 A3 swing so that is is is one of the main reasons right I mean if you subtract 0.2 from that right I mean you you basically get Negative you already get negative and it you can see it went negative by another tenth or so so that I think I mean if you just look at the data like I am here it looks like that's where a majority of this is coming from is from transportation effect because as I showed it's not really coming from housing housing went up and while food and beverages also dropped a little bit again the contribution didn't really change a whole lot apparel you have to squint to see a lot of these you'd have to squint to see so it's really just that drop in transportation which helps so much so because of that right because you're not yet still seeing it across the board it's going to make sense I think for the FED to just ease into this with a simple 25 basis point rate cut because if they do too much then you still run the risk of repeating the 1970s which again is not my base case because the unemployment rate is going up right now as opposed to down like it was in the midnight or in 1972 so it's really interesting to look at the market through that lens now the reason why the FED should probably start cutting is because if you were to look I mean here's here's inflation overlaid with the unemployment rate but what I'd like to do is I'd like to look at interest rates really quick right so let's look at interest rates and what you'll notice here is that interest rates have been at about 5 a half% for over a year right I you know this is like month 13 or so um since the FED really uh really paused race right if you just take a date range here 12 months or so right 12 months um I mean really it's September and that only went out till August so that's why I mean it has been 13 months but you guys get it I mean it's been about over a year but when you think about it what is the real rate because 5 and a half% right if you're in a t bill or a CD right if you're in a fix an income investment and you're earning 5 and a half% you're not really earning 5 and a half% you're earning the FED funds rate minus inflation okay now I get it I know a lot of you guys you know you're going to get your Pitchfork out and you're going to say well you can't trust the numbers guys let's just get beyond that okay I'm not arguing whether you can trust them or not what I'm arguing is that the FED bases their decisions on this stuff so it doesn't matter whether you think they're valid or not this is what leads to different reaction functions by the Federal Reserve so if you need to get out of your system you can get out of your system and put it in the comments below but that's neither here nor there and trying to figure out what's the fed's ACT what the fed's reaction is actually going to be so when we think about the risk-free rate right if you want to go out and earn a return relatively risk-free in say like a t Bill you're earning 55% okay but let's say or you could be earning five and a half it depends on the length right but let's just say you want to know your real return meaning out if you subtract out inflation now again some people are going to say oh well inflation is really much higher get it out of your system take that to another channel that cares okay I don't care about that you have to look at interest rates minus inflation so when you do that right when you take us interest rates minus the US inflation rate year-over-year you get something that looks like this what do you notice about this it's starting to go up pretty quickly here the reason is because the FED funds rate has stayed constant but inflation has gone down so it's now at 3% right your your your real return for a fixed inome investment earning 55% is actually 3% that might sound low and it kind of is but it's higher than it has been for a while right the FED if if if the FED wanted to get back to the level of restrictiveness that they were at say back in um you know a year ago right September 2023 they would have to cut 125 basis points because you can see back then the real rate was about 1.75 % again interest rates minus inflation but now the real rate is 3% so in order for the FED to just get back to where they were a year ago when they stopped raising rates they would need to cut 125 basis points so you see how the business cycle goes right the issue is let's suppose they cut 25 basis points but then but then let's suppose that inflation comes in next month at I don't know 2.2% then this could actually still go up if the fed's cutting at a less aggressive Pace that inflation is going down so that is why you can get to parts of the cycle where the FED starts to cut more aggressively than most people think right so when you look look at at the FED funds rate and you look at likely outcomes right now it's kind of all over the place but a lot of times you'll see you know you would just see a systematic 25 basis point rate cut at each meeting we've seen that for a long long time and and some people say well how's this possible like the FED doesn't normally just cut 25 and then 25 and then 25 forever right they cut a little bit and then if the economy you know basically goes into a recession then they cut a lot and if the economy doesn't go into a recession they stop cutting so how can you get something where it's just a steady cut I've said this before what you're seeing on this table in my opinion is a bodal distribution where some Traders are pricing in aggressive rate Cuts where in a year the FED funds rate is two and a quarter right but then other investors are pricing in a soft Landing or maybe even no Landing where that doesn't happen and so the results that you get on this page just there's something in between right this outcome that you see right here is likely not what's going to happen it's probably going to be something different but if you take both opinions if you take both extremes and then you put those Traders together in a in a prediction market then you get something in between so that's why I say it's more of a bodal distribution where there's two likely outcomes and Traders are placing their bets on which of those outcomes is more likely and then therefore the actual probabilities something in between those two outcomes right because one outcome is that the FED just cuts to say 4% and they stop there another outcome could be they cut to 2% and they stopped there but again it could be somewhere in between my guess right since you're here on my channel you probably want to know my opinion I've said it before but my guess is that the FED funds rate unless we go into a deep recession right the FED fronts rate I'm guessing is going to go back down to around 3 to 4% right it's kind of convenient because I've said e Bitcoin to 03 to 04 now I can say the FED funds rate to to to 3 to 4% right not not the real rate because the real rate's already at 3% I'm talking about just the uh you know if you if you take it back down right if the FED funds rate goes down how low could it go I'm thinking 3 to 4% if you get a hard Landing it could go lower absolutely it could go lower if you get a hard Landing but again timing is everything and if you get a hard Landing it's hard to know EX when that's going to be so going back to this chart this is the highest real rates have been since 2007 you can see this and what's interesting is when you look at the real you know real rates you can generally see that it's been in a downtrend for a long time I'm sure some of you might be tempted to do some technical analysis on a chart such as this but the point right the general Point here is that the trend of the real of real rates has been going down since 1981 and now you're potentially starting to see it go back the other way now it could do something like this right where it it just sort of you know does something like this where it just oscillates in that range rather than go onto a steady path higher but it looks like it's potentially turning around for a little while the last time we saw real rates drop this low at least with the data we have is not not at least since the 1970s because even in the 1970s real rates were not that low negative 8% in April of 2022 it shows you just how far behind the curve the Fed was I mean the Fed was so far behind the curve that real rates were 8% even when even when inflation was was you know what was it back in um in the 1970s like 15% or something crazy 15% right even when it was 15% the real rate was nowhere near that and the reason was because the FED didn't wait so long to start cutting it's still I mean it's somewhat baffling that they did wait this long but again it's easy to be the armchair Economist and criticize when most of us if we had been in charge of the FED we probably would have made a thousand mistakes so again I would implore you not to do that it's easy to point fingers after it's all a sudden done but the reality is is when in February 2022 real rates were at 8% and the only other times in history where at least in recent history where we saw something like that happen was back over here in 1975 and in 1980 now poell has said many times that he does not want to repeat the mistakes from the 1970s you know with with Burns and and and basically just getting all these waves of inflation he he'd prefer I guess the path to vulker where they actually got inflation under control and you can see that this looks somewhat similar to what we saw back over here in the 1980s however you could also argue that it still looks somewhat similar to what we saw in 1973 so it still might be premature to completely take off the 1970 view from the Outlook it could be premature because real rates right real rates right here 3% you can see that over here in 1972 1973 they Wicked up and then they came back down and then they had to go back up again so if you were to Overlay the US inflation rate year over-year onto this chart you'll see that inflation right it went up and then it came back down and then it went up and then it came back down right so it went up here and then it came back down so the issue is If the Fed pivots too soon and the only reason inflation came in at 2.5% was because the trans transportation and housing starts to go back up then maybe it is repeat in the 1970s again my base case is that it's not because my base case is the unemployment rate continues to slowly go higher and and that they will go as long as they have to to make sure the job is complete the nice thing about the 1980s is once it was complete then we had a you know basically a full decade of economic expansion the problem with the 1970s is that they pivoted too soon right they pivoted too soon and what ended up happening was the S&P just kept in putting on you know it kept on putting in higher highs and lower lows for the better part of a decade right and and and no one really wants that right no one really wants that it'd be better to to you know to to get this over with so we don't have to worry about it later as much um like you can see like in the 1970s it was you know it was a series of um slightly higher highs and then slightly lower lows right and I that would be a very painful path right and I you know we've talked about this before I hope that's not the path we take because if it is you know it's just going to be a really boring decade and back then you know back then the uh the the S&P increased 15% above its prior high and if you look over here it went up about 15% above the prior high so like I don't know like is this the beginning of of that again hopefully not right as it relates to bitcoin you know which I'm sure people are interested in as it relates to bitcoin it's kind of eerie because Bitcoin did poke its head above the prior highs and I'm like well is it is it just doing something like that where it's a slightly higher high it's possibility again it's hard to say one of the things that I think about and I I've shown this before is when you take the S&P divided by the unemployment rate squar multiplied by us interest rates multiplied by US inflation rate year-over year when you do that you get a chart that looks like this and it pretty clearly shows all these bubbles that have formed throughout the decades and then I'm like what's going on here you know like is this just a larger one than we've seen But if you think about it this will likely quickly come back down down here the way it could go back down there is if the unemployment rate keeps going up and you keep dividing by that number squared then this number is going to go down and we're multiplying by inflation which is going down and we're multiplying by interest rates which are likely going to start going down so this chart will likely continue trending down even if the S&P goes sideways this chart could go down because it seems like all the other three metrics are going in the direction that they would need to to make this chart ultimately go down that doesn't mean the S&P can't go higher right anything's possible and in fact some of the uh you know in the 1970s the S&P often topped out in December of the election year in the 1940s it topped out in the summer of the election year and so far this time the all-time high is in July right it's in July so we you know when I look at at at these inflation charts I say look it's welcome news that inflation has dropped to 2.59% that's absolutely terrific uh you know core inflation we still have some work to do I think it makes absolute sense for the FED to to just only do 25 basis points get another data point right if you go look at at the meetings they're going to they're going to cut next week so then we'll get um we'll get October inflation not only will we get get October inflation and October unemployment but we'll also get November unemployment I believe before the FED has to make another decision and they might get a nod as to what inflation might be and because pal has previously said sometimes they'll that they will get the number in advance um you know just in advance especially if they're about to make a big policy decision so that seems the most likely path right cut 25 basis points get more data over the next couple of months make make sure it's not the 1970s should be pretty simple to do right if if inflation goes to say 2.3% or something like that you know the next couple of months then it it's pretty clearly not the 1970s and it's already pretty clearly not that considering unemployment's going up while in 1972 it was actually going down so really interesting way to view the market um as far as Bitcoin goes as I've said previously um it's likely just going to keep absorbing that liquidity from from the rest of the market uh one of the interesting things I was looking at two things two wee candles have been kind of interesting for Bitcoin for a while because it's like you know you get a big green one and then a red one that takes out sort of like an engulfing candle where it completely takes out the green candle and then you get another green twoe candle and then a red one where it engulfs it and goes down and now we've just started another two week candle what's interesting is that this two-e candle will end right after the FED cut rates and last cycle for bitco coin it was right after the FED cut that Bitcoin then got another drop now you should know that the fed the Bitcoin might not follow it in terms of that particular outcome like it might not do the exact same thing it did back in 2019 as it relates to rate Cuts I'm somewhat torn from a Time based perspective if I didn't know anything about sort of the macro side of things and you just looked at the chart you would simply say well this downturn lasted about 6 months and this one also lasted about six months so why does it need to keep going on right that's one way to think about it the other way to think about it is to say well the the drop to the 100 we moving average didn't even occur until after the FED cut rates right until after and you can see that the last two cycles Bitcoin fell to its 100 we moving average last cycle Bitcoin fell to the 100 week after the FED cut rates the FED cut rates like right here and then shortly thereafter Bitcoin fell to the 100 we moving average so is is this area right here that area right there I don't know you know and I again I do feel somewhat torn one of the other things you have to look at is if you look at Roi from the low for Bitcoin right if you just look at Roi from the bottom sorry that's the wrong one if you look at Roi from the cycle bottom for Bitcoin it's where it normally is at this point in the cycle right so that's also something you have to consider with that said you know last cycle got ahead of the prior cycle and then eventually it went below it so you could always get a a you know a selloff after the First Rate cut where Bitcoin ends up going below the ROI from the last cycle it ends up over here and it still could be somewhat similar again if you take bitcoin's Roi after the cycle Peak it is still ahead of schedule as crazy as that sounds it goes to show you just how far ahead Bitcoin got this cycle but Peak to Peak bitcoin's still ahead of where it was in the last two cycles at this point in the cycle it's fascinating so even if you did get a drop after the First Rate cut right even even then so what what if it just drops down to where it was last cycle at that time possible the other thing Bitcoin right 0482 what did I say I've said this for years and years and years in the end even the Giants will fall and I've said before the bottom for eth Bitcoin in my opinion is between 03 to 04 it already went to 04 it's possible that low but you have to remember last cycle eth Bitcoin did not bottom until after the FED cut rates and once the fed pivoted from QT to QE so a lot of people are probably interested in whether the fed's going to cut 25 basis points or 50 basis points next week I don't really care honestly what I'm more interested in what do they do about their balance sheet do they continue reducing the size of their balance sheet or do they stop and start expanding it that's what I think is going to be more important to hear what they have to say because it wasn't until that pivot that eth Bitcoin bottomed it wasn't until that pivot that e Bitcoin actually bottomed out everything else before that was noise just like everything this cycle has been noise right oh this was the merge remember this was the merge this was the ETF right this was the Bitcoin ETF every single one of those things did not matter it's not that it never will matter it's just that it doesn't matter during a late business cycle environment but you can see the narrative right I mean you can see the uh the the merge the Bitcoin ETF going into the uh the Bitcoin having the eth ETF every single one of them was a lower high every single one even the merge was a lower high I tried to convince people back then and I got a lot of hate for doing so but I wasn't wrong people don't a lot of people don't have the patience to watch it play out so this stuff was always going to play out it was always going to play out just like it did last cycle just like it did the cycle before that my guess is that eth Bitcoin is going to bottom out you know somewhere over here and then go up in 2025 okay base case is that it it it you know bounces sometime you know before the end of the year and then goes back down and and maybe puts in like a double bottom or something before going back up but this stuff I I know it's complicated but I think the more you look at it the more it does make sense how how the markets actually work and I mean you can see like Bitcoin dominance is going up right it's going up all Bitcoin pairs yeah I'm still scratching my head on on why they haven't capitulated yet uh but I think in in due time they will perhaps after everyone has given up on it actually happening that's when all Bitcoin pairs will finally go to their range low so this is your monthly CPI report and how it affects Bitcoin how to fix RIS risk assets uh we'll talk more about it later and I mean you know I know it's some of the things can be you know can be scary especially when talking about the 1970s I've said this before right hope for the best plan for the worst right I it's not that I hope for that stuff to happen what I hope to see I hope to see inflation go back down to 2% we get a landing whether it's a soft Landing or a hard landing and then we just build it up from there right and I don't know how long it's going to take maybe it's already over with but still seems like there's a lot of data that's going to be coming in over the next few months that's going to help dictate whether it's a soft Landing or a hard landing and also it's going to be interesting to see how fast inflation Falls while it's good that inflation is falling the the bad part of inflation falling which is kind of weird to say like obviously everyone wants inflation to fall but not everyone but the bad part about inflation falling is that you know if businesses can no longer just pass on higher and higher cost to their consumer if they have start reducing prices that's going to hit their bottom line that can impact earnings if earnings get impacted that could affect the labor market that could lead to layoffs and then it could just be like sort of a downward spiral right so there are risks to inflation dropping too quickly even though I think everyone here would like to see inflation drop anyways what it up there thank you guys for tuning in make sure you subscribe give video a thumbs up and again check out the sale on into the cryptoverse premium at intothe cryptoverse decom that sale is going to end by the end of the weekend I'll see you guys next time bye