URGENT: Federal Reserve Cancels Recession, Prices Fall, Massive Pivot Ahead

What's up you guys, it's Graham here, and you absolutely have to pay attention to what just happened. As of a few hours ago, the Federal Reserve has decided to once again pause any rate cuts for the foreseeable future. Except this time, investors are pricing in the likelihood of something that no one saw coming: another rate hike. That's right, after rising inflation, falling stock prices, and international tensions, the market now believes there's a 20% chance that the Federal Reserve will be forced to raise rates again in the next 12 months to help lower inflation.

As we just saw from today's meeting, they could immediately flip. So given the recent changes combined with delayed mass layoffs, uncertainty for housing prices, stock market jitters, and the strong likelihood that something is going to break, let's discuss exactly what Jerome Powell just said, the realistic impact this is going to have on you, and what you could actually do about it to come out ahead.

On today's episode, groceries are now the hottest new spending category of 2024. Although, before we start, as usual, if you appreciate all the work I put in to try to get this video out within a few hours of the Federal Reserve meeting, do me a favor and hit the like button or subscribe. That's all I ask for; it helps out the entire channel tremendously. And as a thank you for doing that, I'll do my best to respond to as many comments as I can.

So thanks so much, and also a big thank you to Policygenius for sponsoring today's video, but more on that later. Alright, so first, in terms of getting to the bottom of what's actually going on and why we're even here today, let's discuss inflation. This is simply the rate in which products and services increase in value over time. It's typically measured either month over month or year over year.

In really broad terms, the Federal Reserve's entire goal is just to get inflation to return to their 2% target without completely destroying the economy in the process. As far as how they're doing with this, the honest answer is not as good as they'd like. That's because inflation recently came in a lot higher than expected at 3.1%. This means inflation isn't just not going away; it's actually beginning to accelerate in certain categories.

As you could see, prices rose 1.1% after climbing 2.3% in February. Shelter costs rose 4%, up 5.7% from a year ago. Egg prices increased by almost 1%, and medical care services surged by 6%. All of this is slightly concerning since month-over-month inflation has only been increasing since October of 2023. This means it's been on an upward trajectory for nearly half a year.

But separate from that, though, we also have what's known as core CPI, which purposely excludes more volatile categories like food and energy since those could be seasonal. When this is taken into consideration, as you could see, inflation stays the exact same as in there's been absolutely zero progress month over month. All of this suggests that inflation is becoming very sticky in the 3% range, and unless the Federal Reserve is able to see a meaningful decline to their 2% target, the thinking is that they'd be unable to lower rates as much as people would like.

In fact, I mentioned this quite a few times before, but this is something that Michael Burry previously warned us about. He said that in the past, inflation appears in spikes, resolves, fools people, and then it comes back, with a chart showing that since the 1940s, inflation never just occurred once and then disappeared. Even the White House did an analysis on inflation post-World War I, and they concluded that in almost every case, inflation took several years to normalize from the peak, and it never flatlined with higher interest rates alone.

Although before we discuss what Jerome Powell just warned us about and how this is likely to affect you, let's break down what's happening throughout the markets because there's quite a lot to talk about, especially when it comes to stocks. Look, it's no surprise this entire year has been a rollercoaster for stocks.

Initially, the S&P 500 gained almost 10% in the promise of multiple rate cuts. But once it became clear that investors were starting to get ahead of themselves, prices fell throughout some of the worst days since 2023, including a day where Meta stock lost 15% after earnings. Now obviously, some of the day-to-day volatility is completely normal, especially when we've already hit multiple all-time highs this year.

But in terms of where the market is currently trading, according to one indicator, it's really expensive. For instance, Warren Buffett developed his way of identifying how well the stock market is priced. As he said, it's probably the best single measure of where stock valuations stand at any given moment. So how does it work? Well, CNN points out this strategy measures the size of the US stock market against the size of the economy by taking the total value of all publicly traded companies and dividing that by the last quarterly estimate for GDP.

This ratio then signals if investors are getting a little bit too greedy or if stocks are trading below what they're fundamentally worth. With this gauge, a reading of 100% is said to be fair. At 70%, stocks are a bargain price, and if it's near the 200% mark, investors are playing with fire. I think you could see where I'm going with this: at the time I'm filming this video, the current Buffett indicator stands at 193%, suggesting that the stock market is trading beyond what the economy is able to handle and signaling that potentially there could be some rough times ahead.

After all, the last time it was above this amount was back in late 2021 before the market fell 20%. This is also one of the first times ever that the stock market has been trading this much higher relative to GDP. This basically means that all a company has to do is mention the words AI, and their stock seems to surge 5% after hours, which probably isn't healthy.

However, in fairness, the Buffett indicator is said to be somewhat flawed; it doesn't take into account how current interest rates affect a company's valuation. But that hasn't stopped the economist John Hussman from saying that, "My impression is that investors are presently enjoying the double top of the most extreme speculative bubble in US financial history." He's also previously pointed out that non-financial stocks are currently trading at levels that we have not seen since 1929 and 2001. Because of that, he believes that these levels indicate that the S&P 500 is likely to return around -5% annualized over the next 12 years.

In addition to that, CNN also mentioned that the former Treasury Secretary Larry Summers fretted over the markets last week and said, "I certainly think we're at least at the foothills of bubbles," while a separate wealth advisor warned us of something similar, saying that every single indicator seems to tell us we're in a historic bubble. But critics of the doom and gloom say that in the past, bubbles are the result of hype, but these days, AI is not just hype because it's being deployed at an alarmingly fast rate.

Just take a look at Wendy's; they're testing another brand-new AI menu, and if you take a look at it, it's actually quite impressive. "Can I have a chocolate frosty?" "Which size for the chocolate frosty?" "Medium." "Can I get you anything else today?" "No, thank you. Please pull up to the next window."

Anyways, proof that markets are settling into new valuations. Senior investment analyst of Charles Schwab pointed out that about 23% of the S&P 500 companies made a new 52-week high last week, and the equal-weighted S&P 500 is up by nearly 25% since its October 2023 low. Plus, even a BlackRock strategist said that the equity market rally we've seen so far has been driven by earnings growth. If the earnings growth wasn't taking place, I may have been more open to acknowledging the bubble concept.

Of course, in terms of who's right, it's yet to be seen. But one thing is for sure: in 2024, dumb money is getting a lot more confidence. And when that confidence reaches an equilibrium with smart money, that generally means the market moves upwards in the near future since bulls see any dip as an opportunity to buy back in.

Although there is another market that's beginning to take some of the spotlight away from stocks, and that would be real estate. Although before we go on that, I get it; times like this could be stressful. There is a lot of uncertainty in the markets, and just like the lack of rate cuts, there is nothing in life that's guaranteed except for death and taxes. After all, I like to think of myself as being fairly optimistic, but there are some things in life that are just outside of your control.

Like, I recently made a will, and even though that's something I never wanted to think about, it's something that's smart to have. The same thing also applies to making sure you have the proper life insurance coverage so that your loved ones have a financial safety net to cover expenses in the event that something were to happen to you.

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Thanks so much, and now let's get back to the video. Alright, so in terms of what's happening with the Federal Reserve, before we go into Jerome Powell's latest comments, let's talk about the topic that you've been waiting for, and that would be housing prices. On a broad scale, the mortgage giant Fannie Mae found that single-family home prices increased a whopping 7.4% year-over-year, with 1.7% of that coming in just the last three months.

Why? Well, the easy answer is that there's still a severe lack of inventory, as existing homeowners refuse to let go of their record low mortgage rates. So, as a result, new home sales are surging. In fact, it said that the supply of new homes for purchase rose to 477,000 in the month, the highest since 2008.

And the good news for buyers is that those homes are actually selling for 1.9% less than a year ago as the market begins to somewhat normalize. Of course, in terms of what's happening nationwide, look no further than Redfin, who compiles a very comprehensive list on precisely what's going on throughout every single market. And this last month is very interesting, as they say even though home prices are higher year-over-year, the rate at which they're increasing is beginning to slow down due to higher mortgage rates.

On top of that, home prices actually fell in nine of the 50 largest metros, with San Jose seeing a 1% decline from a month earlier. Although in fairness, San Jose was also one of the areas that went up the most year-over-year at 17.5%. So falling 1% is still kind of like a drop in the bucket. Now separate from that, Zillow also has a lot to say in their monthly housing report, and in terms of where they think the market is headed, they're forecasting a 1.9% growth over 2024, which is slower than long-term norms but a welcome slowdown for first-time home buyers.

In this case, their reasoning for more growth is the fact that the higher mortgage rates go, the less likely existing homeowners are to sell. Coincidentally, as a result, the higher prices tend to be. That, of course, is squeezing a lot of people out of the housing market and is somewhat feeding into this article, which found that nearly half of all baby boomers couldn't afford their current homes if they were to buy them today.

In this, homeowners were asked, "If you were looking for a home to purchase, do you think you'd be able to afford a home like yours in your neighborhood?" And almost 40% of respondents said they probably or definitely couldn't, especially since most of them had bought their home at least 5 to 10 years ago. This is all causing quite the double-edged sword because even though existing homeowners have benefited from rising property values, they can't access that money without giving up their mortgage rate or selling, and they can't afford to buy a new property without their payments dramatically increasing.

Now to make matters even more complicated, rising insurance claims, combined with higher replacement costs, is causing some insurance companies to straight up leave certain areas because they're no longer profitable, like California. In this case, several large insurance companies, including State Farm, are no longer issuing policies, leaving a lot of people at risk of paying new premiums they can't even afford.

Why? Well, certain locations are more prone to natural disasters than others. This could include floods, fire damage, and earthquakes. So when materials are going up, labor is more expensive, and the risk of disaster increases, premiums have to go up to compensate for that level of risk.

When that risk is just too high to take on, those companies leave. And that's a massive problem. In this case, seven of the 12 largest insurance groups in California have either paused or restricted new homeowner policies in the last year, which basically means inflation could be on the rise again.

Although lastly, before breaking down what Jerome Powell just said in his conference a few hours ago, let's talk about one final topic that's beginning to gain a lot more attention, and that would be Bitcoin. Even though its prices stayed relatively flat after the long-awaited halving, where fewer Bitcoins are mined, Hong Kong just recently approved their own Bitcoin ETF, which has officially begun trading yesterday on April 30th.

In terms of how big this could potentially be, the United States Bitcoin ETF saw inflows of $56 billion in just the first three months, and Hong Kong has the potential to add another $1 billion, which is small in comparison but could lead to a lot more Bitcoin ETFs being created around the world.

Now, even though this might seem overall bullish for the future of prices, keep in mind that inflows to bitcoin ETFs have recently begun slowing down, with BlackRock's fund recently seeing a zero day for the first time since its inception, or in other words, just as many people are selling as they were buying.

It's also warned that we might see both diminishing returns and a shallower total drawdown effect over time, which is a natural result of the growing market size and scale of capital flows required to move it. Basically, to summarize, all this means is that the higher the price goes, the more money it takes to move the price even higher. When that happens, it's probably going to rise at a slower pace unless we see a large influx of cheap money to boost it up.

And in terms of what Jerome Powell is here to say about it, here is what you came for. Like I mentioned earlier, as of a few hours ago, the Federal Reserve has decided to once again not lower rates for the foreseeable future, which means this is now the eighth month in a row that they've decided to hold steady without making any changes.

Objectively, since then, inflation has really done nothing but trade sideways between 3.7% to 3.8%. In addition to that, one of the largest changes that came out today by far is the fact that they're slowing down their quantitative tightening by $35 billion a month.

If that sounds confusing, here's a super quick explanation: Throughout the pandemic, the Federal Reserve purchased trillions of dollars worth of treasuries and mortgage-backed securities as a way to ensure the markets were functioning normally. But as a result, they're left with this massive portfolio that has to go somewhere. So in June 2022, they decided to reduce the size of their balance sheet by simply not reinvesting the proceeds. Essentially, if one of their loans matures, they just take that money and poof, it's gone. It's gone, it's all gone.

In this case, the Federal Reserve was reducing their balance sheet by a total of $90 billion a month, but beginning in June, they'll only be reducing their balance sheet by $60 billion a month, basically just slowing down how fast they get rid of their portfolio in addition to keeping interest rates the exact same.

In terms of what Jerome Powell had to say about this, he mentioned that right now, given the strength of the labor market and the progress on inflation so far, it's appropriate to allow restrictive policy further time to work. He also reiterated that inflation is stickier than expected and they're still committed to bringing inflation down to their 2% target, but it's going to take some time.

They're still making all of their decisions on a month-to-month basis depending on the data, without ruling anything out. In terms of how long this could take, though, let's be real, Jerome Powell's not going to tell us; he would be an idiot to tie himself down to a specific rate at a specific time because, as we've all seen, anything can happen.

However, other analysts have speculated that the chances of a Fed interest rate cut this year are slim to none, and that an interest rate hike is possible. The chief economist at Deutsche Bank also now expects only one rate cut this year in December, followed by modest rate cuts in 2025. Beyond next year, he expects the Fed to cut rates just below 4% by the end of 2026.

Even looking back throughout history, we could see that we're currently in the second longest pause ever in history, only beaten by the 2006 and 2007 timeframe, which went 15 months without a single change. Basically, at this meeting, it's clear that the most likely scenario is that there are no changes being made whatsoever until inflation begins to subside, which hopefully is at the end of the year.

And if it doesn't or conditions worsen, there's always the chance of another rate hike. I know it's not the ideal scenario, but the Federal Reserve is going to remain data dependent, and they'll do whatever it takes to bring inflation down without completely crippling the economy.

However long-term, it's currently anticipated that the Federal Reserve may end up stabilizing rates around the 4% range, which is currently only 1.25% lower than it is today, and that's mostly boosted up by a very strong economy, strong labor market, and a stock market that doesn't seem to care that much that rates are this high.

So as far as what I have to say about everything, I think it's a bit of a mess. On the one hand, GDP recently slowed down to a 1.6% annualized rate, which was much lower than expected, and that's not a surprise given how two out of three Americans are more worried about running out of money than they are dying, which is absurd.

Of course, in terms of why these numbers came in so much lower, it was largely due to a lack of government spending, combined with some businesses beginning to scale back. But if inflation continues to accelerate, then it's unlikely we're going to see any rate cuts anytime soon.

That's because it was reported on April 25th that price pressures heated up by the most in a year, with a measure of inflation in the economy increasing at a 3.1% rate after rising at a 1.9% pace in the October through December quarter. In this case, the category in question is called PCE, or personal consumer expenditures, and it's mainly driven higher by two categories that we talked about earlier: insurance and housing.

This all suggests that a rate cut might not happen until the end of the year at the very soonest, and there's also a chance that a rate cut might not happen at all unless something dramatically changes. Personally, I've been saying this the entire time, or really for the last year and a half, that I don't think the Federal Reserve is going to lower interest rates unless we see inflation coming in below 2% or unless something breaks within the economy, and lowering interest rates is a way to keep stability.

I mean, just think about it: why would they lower interest rates unless they absolutely have to? For them, lowering interest rates is almost like the safety net to our economy, and it should not be used as a way to boost stock prices, make people happy, or influence election results.

I know it's kind of unpopular to say, but I tend to believe that they're going to keep interest rates as high as the economy will allow and then will only lower it when they've either accomplished their mission or absolutely have to. There's no other choice but to lower rates. After all, just imagine what would happen if interest rates were at 0%, and then we have an event that requires them to stimulate the economy even more.

What would they do? Print more money? Go negative? I just can't see that happening in our lifetimes. But then again, I'm just a guy on YouTube. I know absolutely nothing, and I'd love to hear your thoughts down below in the comment section. I'll do my best to read and respond to as many as I can.

So thank you so much for watching. As a reminder, make sure to hit the like button and subscribe if you haven't done it already. Thank you so much, and until next time.