The FED Just Broke The Market | Dollar Crisis Explained

What's up guys, it's Graham here. So, despite the Federal Reserve's best attempt to bring down prices, as of yesterday, inflation came in at a whopping 8.2 percent, which was significantly higher than expected and a sign that things might continue getting worse, with another substantial rate hike plans less than three weeks away.

However, what's even more concerning isn't that the housing sentiment is already near an all-time low, people are now hoarding cash at the highest level in 10 years, and Pizza Hut is about to sell an Italian Taco to rival Taco Bell's Mexican pizza, but instead the fact that inflation is still not going away, with the reality that an even stronger dollar could trigger the next crisis.

So let's talk about exactly what this means, why these numbers continue to get worse, how this is about to impact your investments, and then finally, what you could do about this to make money.

On this episode of "We Are Totally," although before we start, if you appreciate all the research that goes into making a video like this, it would mean a lot to me if you hit the like button or subscribed if you haven't done that already. And as a thank you for doing that, here's a picture of the cutest nail that I could find on Google.

All right, so before we go into these exact readings and why inflation has yet to meaningfully fall, we have to talk about the latest Federal Reserve warning because this gives us a solid indication of what we could expect over these coming few months.

Now to start, at the latest FOMC meeting, they made it clear that they anticipate that the U.S. economy would grow to below trend pace in this and the coming few years, implying that our markets will likely remain relatively flat for quite some time. After all, the International Monetary Fund warns that the worst is yet to come for the global economy, and for the United States, forecasts are being lowered as people are expected to spend less money.

Second, it was noted that wage increases could put a greater than expected amount of upward pressure on price inflation, which doesn't look good, especially when demand remains strong and the labor market continues to be very tight. Their concern is that inflation won't go down because, quite honestly, people are still making too much money.

So without the unemployment number going up, inflation could remain high. Of course, they do admit that there has been a notable slowdown in residential investment than other interest-sensitive spending, but they follow that up by saying a sizable portion of economic activity had yet to display much response, giving the impression that they're looking for a broad decline across the entire market regardless of how much money you make.

Of course, in terms of how long this could last, they said that inflation pressures would gradually recede in coming years and that it would likely be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the two percent objective.

Or in other words, the expectation is that inflation is not going to go away as fast as any of us thought. They're going to continue raising interest rates for as long as they need to, and then they're going to leave them there for as long as it takes to make sure that inflation is not going to reappear.

However, in terms of what's happening right now, we have to talk about the most recent inflation reports because it was a lot worse than many people expected. See, all of this begins with what's called wholesale inflation. This is an inflation index that measures the cost of goods before they're sold to the general public, and by tracking this, we're able to see how much prices are increasing every step of the way, with this latest report giving us not so good news.

In September, it was found that wholesale prices increased nearly half a percent month over month, which was twice as high as expected, and mainly driven by the higher cost of food and energy. For example, the cost of diesel and grains increased by 9.2 and 6.2 percent in a single month, and that in turn leads to the cost of everything else going up alongside with it.

But second, we have to talk about the most recent inflation numbers across everything else, because here's where things get interesting. As Thursday, October 13th, inflation came in year over year at 8.2 percent, which is a clear signal that conditions have yet to improve despite the Federal Reserve's best attempts at bringing prices down.

But in terms of the exact numbers, you're going to want to hear this. Even though we saw a slight decline from August, it's shown that the vast majority of these gains were fueled primarily by the increase of housing, food, and medical care, which were each up almost a percent month over month.

We also saw a one percent increase in utility services, a 0.7 percent increase in new vehicles, and nearly 2 percent higher transportation costs. On top of that, core inflation, which excludes volatile food and energy prices, was also up 6.6 from a year ago, which is the largest 12-month gain since August 1982.

Overall, these numbers signaled that even though we're not seeing as much inflation as we did the month prior, prices are still continuing to rise throughout broad categories, and much of that will continue to be impacted by global turmoil and higher energy prices, which both threaten to push up these numbers even further.

That means that there's currently a 97 percent likelihood that the Federal Reserve is going to increase interest rates by another 75 basis points on November 2nd, and that also means we're likely to see another similar rate hike in December unless inflation begins to come down.

But in terms of what this means for the future of your money, the markets, and inflation, here's what you need to be made aware of, because between the U.S. dollar crisis, rising energy prices, and tax cuts, there is a lot to discuss.

All right, so before we break down the problems with the most recent inflation report, there is a side effect that's beginning to gain a lot of attention, and that would be the U.S. dollar crisis. See, as it is right now, the U.S. dollar serves as the reserve currency for the entire world. This means that every country trades in U.S. dollars because of its resiliency, stability, and global acceptance.

After all, imagine getting paid back in Colombian pesos, only to then try to figure out how to convert that back into your native currency. It would be a hassle and take a lot of time. So instead, we have a reserve currency that everybody has agreed to transact with. However, here's where things begin falling apart, because inflation has become a worldwide problem.

Countries are constantly looking for the best places to park their money, and because the United States has raised their interest rates the fastest and is seen as the most stable, everyone is buying up the U.S. dollar. Simply put, countries are abandoning their own currency in exchange for buying safe haven government-backed U.S. treasuries.

And that means even though our money is losing value to inflation here in the U.S., it's increasing in value relative to the rest of the world. Why is this a risk, you might ask? Well, without getting too complicated, Bloomberg explains that countries could choose to limit their exposure by shorting the U.S. dollar as a hedge, and that means that if the U.S. dollar continues going up in price, other countries would have to sell off their own assets to pay for those losses.

And so far, that has happened near the end of every quarter in 2022. In addition to that, a higher U.S. dollar means that our own exports also become that much more expensive. After all, one Euro used to buy a dollar twenty worth of American goods, but now it only buys you 97 cents, so everything for the rest of the world is more expensive than it was previously.

Although in terms of how our latest inflation report is going to affect these numbers, here's what you have to consider. Most people don't understand that even though the stock market changes direction in a matter of seconds, rate hikes will not have an immediate impact on inflation. It's not like Jerome Powell could just say, “Hey guys, here's a 300 basis point rate hike, so no more inflation, we're done.”

Instead, it's a lot more like turning the knob on an oven, where it's going to take some time to achieve the desired result. In this case, each rate hike is probably not going to have an impact on prices for at least another 6 to 12 months, with even the Fed Chair saying that policy actions to date will not have their full effect on activity in coming quarters.

So this is not a quick fix. It's also not likely that inflation is going to return back to two percent anytime soon, because even with rate hikes, there are still pressures that are keeping prices high. Because of that, most estimates say that we could fall back to two percent inflation sometime between late 2023 and early 2025, with BlackRock estimating that it's more likely to happen by 2026.

Now another point worth mentioning is that employment is also a lagging indicator, and with jobs continuing to increase, it's likely that the Fed will continue raising interest rates before employment begins to decline. After all, the Fed wants to stop the heightened growth; they want to reset the housing market, and they want demand to slow down.

So there's a chance they don't properly calibrate the rate hikes, and by the time we find out about it, it's already going to be too late. Because of that, there's certainly a lot of comparisons being drawn between 2008 and today.

But in terms of what we do know, number one: some of the largest funds are beginning to stockpile cash. From my perspective, this makes a lot of sense, because why would you go and take the risk in equities when you could get a risk-free guaranteed 4.3 percent return by buying U.S. treasuries with no work whatsoever?

It seems as though a lot of people are taking the wait-and-see approach while they keep an eye on the Federal Reserve and inflation, so until these come down, we could continue to see a lack of growth.

Two: the housing market is falling. Like I mentioned earlier, the housing sentiment index is near an all-time, historic low, as fewer and fewer people believe that now is a good time to buy. As of today, we're back at the same confidence level that we saw in 2011, which in hindsight actually would have been a pretty good time to buy.

But now there's the concern that rates are going up, monthly payments are getting more expensive, and values have to come back down.

Three: the Bank of England is in trouble. They recently came on record to warn that households will face a strain similar to the pre-2008 crisis as their markets begin to crumble. For them, higher interest rates will decrease business activity, higher prices will lead to less spending, and foreign investment will slow as people begin to sell off their assets.

This could probably be a video in and of itself, but as of today, the central bank is no longer backstopping Bond purchases, which is likely going to lead to a lot more volatility.

And four: expect higher unemployment. To me, the writing is on the wall that as companies scale back, employees are going to be the first to get cut, so I'd use this as an opportunity to make yourself as indispensable as possible, and then keep an emergency fund just in case something were to happen.

But overall, in terms of my own thoughts, even though the inflation report was bad, I have a feeling a lot of other investors were just relieved it wasn't worse, and that's why the market is behaving the way it is.

It's also worth noting that everything we see today is a lagging indicator that was based on information acquired a month ago, so what's happening now is going to take another month to play out. However, one thing is clear: I'll be shocked if we don't get another 75 basis point rate hike in November.

So in the short term, we could see a lot more volatility. Of course, in terms of what you could do about it, honestly, nothing makes sense. And even though people are calling for the S&P 500 to fall another 20 percent, anything could happen and we have no idea how much exactly is priced in.

So the best course of action to me is simply to keep an emergency fund on the sidelines, stay employed, and continue buying in as usual. This way, if we see a surprise Santa Claus rally, you don't miss out, but if the market goes down, you get to lower your cost basis.

It's also a good idea to double down and make as much money as you can now while asset prices are falling, and then also subscribe if you haven't done that already.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram. Thank you so much for watching and until next time.