THE FED JUST FLIPPED THE MARKET | Urgent Changes Explained

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So, you know the saying that riches are made in recessions? Well, even though housing data fell to its lowest level ever, tech layoffs are getting more and more common, and the price for oil keeps going higher. Brand new inflation data suggests that this market could officially be coming to an end. After all, some stocks have already fallen more than 50 percent in 2022.

The housing market is beginning to decline from its peak, and egg prices have finally cracked and they're coming back down, with the S&P 500 posting its single best days since 2020. That's why it's extremely important to understand that even though this seems like really good news, what goes up could just as quickly come back down. So, it's worth discussing the latest inflation data that was just released, how this is about to affect the housing market, what this means for the future of the stock market, and then most importantly, how you could use this information to make you money.

On this episode of "You shouldn't harass your neighbor with a noisy helicopter," and yes, that's a true story. Although, before we start, if you appreciate all the research and last-minute reporting that goes into making a video like this, the biggest help is to simply leave a like on the video or consider subscribing if you haven't done that already. That's it! And if you want more detail than I'm able to include in a YouTube video, I'll link to my newsletter down below in the description. It's totally free. Enjoy! Thanks so much, and now let's begin.

Alright, so first, when it comes to inflation, before we go into the exact numbers, we need to clear up some confusion because this doesn't give us the entire picture. See, the main category that gets the most attention is what's known as CPI inflation, which stands for the Consumer Price Index. This covers a weighted average of the most frequent consumer purchases and it's tracked on a monthly basis. Year over year, it would be no different than taking a hypothetical grocery basket, throwing in everything from automobiles, rent, gas prices, groceries, and medical care, then seeing how much these products and services cost compared to a month and a year prior.

If it goes up, we see inflation; and if it goes down, it means that everybody who bought calls on SPY makes a ton of money. However, there is a problem with this calculation. As it turns out, it might not be entirely accurate because some of those items in the basket are prone to short-term fluctuations.

And so, they came up with an alternative that's known as core inflation. This purposely excludes food and energy prices that are known to be a lot more volatile based on conditions that are outside of our control. These are also considered to be staple items that are consumed on a regular basis regardless of how much they cost. For example, you still need to put gasoline in your car to drive to and from work, even if it's eight dollars a gallon in California because of a mysterious surcharge.

But in terms of what's happening right now and why the inflation debacle could soon be coming to an end, here's what you need to know because this is about to have a huge impact across everything. I hope you're sitting down because, for the first time in what feels like an eternity, inflation declined in October to 7.7 percent, which was below expectations and half a percent less than we saw the month prior.

This was also the smallest 12-month reading since January, which means that Jerome Powell could actually be doing his job. In fact, the Consumer Price Index rose just 0.4 percent from the month prior, suggesting that on a year-over-year basis, we could be heading towards an inflation rate of less than five percent by this time next year.

So, why is it going down exactly? Well, we signed that decline in the net cost of medical care, apparel, used cars and trucks, gas, and energy. Everything else, like food, shelter, and transportation, still increased, but at a much slower pace than the month prior. It was also found that the only cost to have substantially gone up was fuel and gasoline, which was 20 percent higher than the month before, likely for the news that OPEC would begin cutting production in advance of a potential consumer recession.

Now, of course, it's really important to understand that not all items in the report are weighted equally. After all, you wouldn't expect to spend as much money on apparel as you do shelter and lesser Kim Kardashian. So, because of that, each component affects the CPI number differently.

And in terms of October's report, it was found that the index for shelter contributed to over half of the monthly increase. Of course, we'll talk about why this is becoming such a huge problem very shortly, so you're going to want to keep watching—or I guess listen, if you're anything like me and just play these videos in the background—in which case you're going to miss out on this really cute picture of a turtle.

But in terms of the deeper numbers, we've got to discuss what's called the core inflation. Just like the headline inflation was up 7.7 percent, once you exclude food and energy prices, core inflation came in at just 6.3 percent, finally pulling back from its 40-year high. This was below analyst expectations, and just like the last, shelter made up the majority of that increase with Rent.com showing that in September, housing payments increased by 8.8 percent.

Now, of course, the downside is that these inflation readings don't include actual rent increases, and instead, they use what's called the owner's equivalent rent. This is obtained by asking homeowners if someone were to rent your home today, how much do you think it would rent for, monthly, unfurnished, and without utilities? This brings up the major concern that many homeowners would have no idea what their home would actually rent for.

And because of that, a lot of this is dictated by opinion and not fact. In reality, there's a big discrepancy between the actual rent increases and the rent increases being reported. Not to mention, if you take a look at the chart which compares the Shiller price index to that of owner's equivalent rent, you could see just how far apart they are.

So, in terms of what this means for the stock market, the housing market, and the future of housing prices, here's what you need to know because this is the actual data. Now, before we talk about what's soon happening in the stock market, we first have to talk about the real estate market since this makes up almost half of our entire inflation reading on a broad scale.

Like I mentioned earlier, consumer confidence fell to its lowest level ever since the survey began in 2011, meaning people now believe this is the worst time to buy in the last decade. Even more alarming is that almost 40 percent of people expect home prices to drop in the next 12 months, and that might very well come true.

But the issue isn't so much whether or not housing prices will come down, but instead what the rents will do. See, when it comes to inflation, rental prices tend to be sticky in the sense that once you sign a lease, you'd lock in those payments for one to three years, regardless of what's happening with the overall market.

So even though you might be paying four thousand dollars a month for a 300 square foot studio in San Francisco, someone else might have to pay four thousand four hundred dollars a month if they were to sign that exact same lease today. This means that rental prices tend to lag other economic indicators, and calculating exactly how much rents are increasing or decreasing is rather difficult.

The good news for tenants is that rental prices are beginning to drop, with some of the largest cities currently down two to six percent. Now, this might not sound like a lot considering that rents are already up 50 in the last two years, but as conditions begin to soften, landlords are beginning to price their properties in line with reality. Over time, this should be reflected in the CPI numbers hopefully.

Although, in terms of what's happening with home prices, researchers at Goldman Sachs expect the decline of five to ten percent peak to trough, with their official forecast model predicting a 7.6 drop. Now others, like Moody's, expect housing prices could drop by as much as 20 percent in areas like Nashville and Idaho, along with 10 to 15 percent in locations like Phoenix. Or basically, all the areas that saw a massive run-up during the pandemic are likely to come down to late 2020 pricing.

However, the housing market usually takes a long time to adjust to new information, unlike the stock market, which is immediately beginning to feel the effects on the news that inflation came in lower than expected. The Federal Reserve president of Philadelphia came on record to say that I would be okay with taking a brief pause from rate hikes, seeing how things are moving, and then if we have to, we can continue to tighten.

This wound up leading to the single largest day rally of the S&P 500 since 2020, and the stock market is beginning to price in the chance the Fed may pause the rate hikes in early 2023 as prices begin to come back down. Of course, Michael Burry has warned us in the past that inflation appears in spikes, it resolves, fools people, and then comes back, with the chart showing that since the 1940s inflation has never just occurred once and then disappeared.

In fact, in every circumstance through today, inflation will temporarily subside, people celebrate by spending more money, and then it comes back for as long as a decade all because of what's called the velocity of money. This tracks how often each dollar is actually spent and then how often it recirculates throughout the economy.

For example, if I spend ten dollars at a restaurant, who then pays their server ten dollars, who then spends ten dollars at the grocery store, who then spends ten dollars to their wholesaler to pay for food, who then pays ten dollars to the farmer who makes the food, who then pockets the money and makes a YOLO investment that works out to be a money velocity of five because the money exchanged hands five times.

Because of that, Michael Burry notes that despite the Federal Reserve taking money out of the economy by raising interest rates, the average dollar is now being spent more frequently, leading to a higher velocity of money. And because of that, inflation will continue to remain high, even though in the short term it could temporarily subside.

It's also worth noting that even the White House did an analysis of inflation for every year post World War II, and they determined that in every case, inflation took several years to normalize from the peak and it never flatlined within just a few months.

So, even though this is fantastic news, it's also worth it to be cautious, with even the billionaire Carl Icahn believing that we're still in a bear market. In terms of where we go from here, there is some good news because with midterms about to wrap up, we could see a boost in prices.

So here's what I found the most interesting when it comes to elections. Historically, the highest returns have come from a Democratic president with a House and Senate split between parties and an average annual return of 13.6 percent. But ultimately, what's had the most impact isn't so much the president, but instead the importance of having a divided Congress, which had the highest returns at 17.2 percent.

In fact, according to past stock market performance, a divided Congress is better than having one side or the other. Why, you might ask? Well, at the end of the day, the stock market loves predictability. And when you have equal representation of both sides, it's less likely that a new bill will pass, keeping everything relatively the same.

This means that we would be unlikely to see any tax rate increases, stimulus payments, or any other changes that could affect the market, and so as a result, it rallies. Now keep in mind that these are averages, and there's always going to be an exception regardless of who you vote for. But in the big picture, this could keep prices relatively stable, especially if you hit the like button and subscribe if you haven't done that already!