This CPI Report is Bad for MANY Reasons...

Crap. The CPI numbers just came out and they're bad. They're not good. They're just not good. This unfortunately aligns with the fear that we had yesterday. The fear we had yesterday is you just can't win because even if you end up getting a better number on the headline, like .5 or .4, it's still bad. Like even if you win, you're still a loser. Okay? But we just matched a horrible number. That is a 7.2% annualized year-over-year gain in CPI. That's crazy. This is the headline number. See how I kind of put it closer to the head. All right? Uh this set over here, this is our core number. Uh yesterday I also said I'm really disappointed about CPI tomorrow because it this this makes it really hard for us to beat. When you have .2 expected here and .6 expected here, one of these is going to be way wrong. Well, it turns out this was quite wrong to the tune of about what is that? 11.5, so like .015. Uh no, .15. That's how much we were wrong. So, we did the actual math to get the exact number here because they actually round down and they only show this as .3. Now, if you could see this compared to expectations, this was the result. And Bloomberg reported that one of the few economists who got this right was actually a playwright who has no finance or economic background and who bets on CPI reports. And uh he got it right, whereas a bunch of economists got it wrong. As you can see, this is about a three and a half standard deviation move on this bell curve. That's, you know, three and a half sigma. That's that's quite a bit. So, markets really expected about a .21 and we ended up getting a point I mean, really honestly, .3 here. This is rounded. The The star is in the wrong place. We got .35. We got basically here, which is a really far right tail risk. All right, that's what we talk about in data, right tail, the tail is over here. Uh and that's really where we landed. So, it's not good. Like, either way you slice it, when you look at this on a statistical basis, this is bad. Uh and so, as a result, naturally, we are seeing rate hike expectations go up. Using Kevin Warsh's metric, we just put together the spreadsheet. We took all category five levels. Uh and that gives us about 340 readings. Uh and if I go through this on a spreadsheet, I go all the way down here to see if where my year-over-year numbers exceed or equal 3%, I get all the way down to 170 items out of 340 on the sheet. That is exactly equal to 50% of categories on a year-over-year basis growing at 3% or higher. That is exactly the number Kevin Warsh has been talking to us about. Last month, it was 54%, but he's mentioned two or three times now that 50% is just bad, and it generally means more rate hikes. Not good. So, all of Waller's talking over the last two weeks, the sort of bailout function that we've been getting from the Federal Reserve, kind of now falls flat on its face because the expectation was, "Hey, okay, cool. Yeah, maybe we don't need a hike in October. Oh, okay, maybe we don't need any hikes in in you know, 2027 at all. Oh, that's great." Thank you, Waller, for trying to unprice some of the pain in markets for rate hikes because, you know, markets have been pricing in as many as five rate hikes. Well, all of that talk certainly looks freaking cheap right now and leaves us with some problems because take a look at this. We are now pricing in 4.86 hikes in this cycle. We are pricing in exactly 3.86 more rate hikes between now and September 15th of 2027. That's when we peak out on rate expectations. Before the CPI report, we were sitting at 3.17 more, and that's what Waller has been trying to talk down. Sort of like, "Ah, we don't necessarily, you know, we might skip October. So, we really got one more." The market's pricing in two more beyond that, right? Pricing in three. Ah, we don't need all of those. Uh and so, we just saw and even some of the the Doomberg reporters were like, "Oh my gosh, this is crazy." Uh because you just saw this massive move back to basically pricing in a full other rate hike. From 3.17 to 3.86, that's almost a, you know, a full uh full move, especially if you round cuz you're going from three to four, basically. Uh and when we look at October, we just moved from a 23% chance of a hike in October to a now 50/50 chance of a hike. But, uh 49.3% to be exact. There's also very little good here. Very little good. Rubber banding right now above 5.27 on the 10-year, this was my concern. Supercore services are sitting at 0.42 this month. That's terrible. Just so you know how how like why those numbers are terrible. Okay? Usually, what the bureaucrats will do is they try to understand the speed at which some of these are running. So, like, how fast is the car going? And so, what they'll do is they'll take that number and they'll annualize it. So, we'll take 0.42 and we'll multiply it out. That equals 5% on supercore. That means we're at 5% the speed of 5% on inflation, not including oil, gas, housing. And part of the reason for this is people are still spending. People are still willing to pay the price. Now, I I I I don't know exactly who these people are, okay? I mean, I I'm taking the cheapest freaking plane tickets I can get my hands on, okay? American economy base They now put the label basic on it. I'm reading my iPad in basic. It's not even economy anymore. It's now basic economy. And I'm like, Well, this crap still $650. This is insane. You know, that's one way. >> [laughter] >> One way LAX to Boston. This is cooked up. Anyway. Don't get me started on LAX. >> [laughter] >> Uh so, what what I want to look at though uh is let's go look at the actual individual categories because you could see the pricing power that people do not have. I don't know how people are pulling it off because broadly individual consumer pricing power just got hosed. Individual pricing power just collapsed 0.7% on a year-over-year basis. That is the average hourly earnings. So, average hourly earnings are starting to fall. That's really bad for your consumer sector. That's probably one of the reasons you're seeing this sort of bleed out in a company like Dave & Buster's, for example, cuz the consumer is just getting whacked. It's what they say in their earnings call as well, but it's at every level the consumer is getting whacked while at the same time their actual pricing power is falling, probably in part due to artificial intelligence, which that's another one of the early cracks. And this is what puts the Fed in such a weird place because on one hand, the Fed is Oh, yeah. Hey, guys. We need to hike because we need to deal with all this inflation caused by artificial intelligence and I mean, I hate to say it, but like it is what it is. I cuz I just I hate to say it cuz I don't like to get it getting political, but a lot of a lot of this is because of Trump's actions. New tariffs on liberation, tariffs after IEPA, it's Operation Midnight Hammer, then it's the Iran war, it's the one big beautiful bill enabling expense equipment full expensing, which [clears throat] gives companies a full write-off for buying things from like Dell, which has been great for Dell stock. I mean, Michael Dell's net worth is up $100 billion. He gave $6 billion of that back to people's Trump accounts, but, you know, in part that was sort of like a you scratch my back, I'll scratch your back. You know, trust me, the the suits did very well here. Regular people who are absolutely getting screwed by this inflation, and it's very very broad-based, especially now that housing is coming in a more aggressive as well. I mean, we we saw just on the spreadsheet how broad-based the categories are. Nick T is even even saying that the annualized rate of inflation, so taking the 3-month trend rather than just one point and multiplying it by 12, if you go a little less extreme, you take the 3-month trend, the 3-month trend right now has moved from 2% in August to 3.4%. So, we're really kind of hockey sticking up or certainly going in the wrong direction. Now, I was really hoping that we would end up getting a plummet in in rate bet odds for just one hike, and we're going to talk about how we could potentially still get one hike on on Kalshi so I can place a bet on it. It hasn't happened yet, maybe it'll still happen, but I really want to buy it around 4%, the odds of one rate hike this year, and I'll tell you why. Mostly because 4% is so cheap for what could potentially happen, and you know, is this peak fear? Are we getting worse than peak fear? Where do we stand? We're going to talk about that. Just a quick note, this channel's obviously sponsored the the company my startup is sponsored by Kalshi. So, get free a free $25 when you sign up for Kalshi and make your first trade. Use kalshi.com/r/mevin or code mekevin. So, let's think about this for a moment. When we look at what is left that could potentially bail us out of rising toy prices, rising hotel prices, rising airfare prices, owner's equivalent rent going up 0.3 from its 0.2 where it had been stable, medical care going up 0.3% car and truck rents going up 5.4. Telephone services, fortunately, flattened out, which was the big one last month, but I mentioned this last month, and last month people like, "Oh, but Kevin, you know, telephone services, like, you know, that's such a big part." Uh last month on the CPI report, I said, "Well, even if you strip out those telephone services, you still have a hot core." And so, sure enough, here, wow, telephone services flattened out, still a hot core. It's not good. So, what's really the only hope, and where do we stand in this realm of peak fear? Well, at the same time, workers are losing their pricing power, which is a really bad position for the Fed. Really bad position for the Fed. Why is it so bad for the Fed? It's bad for the Fed because they hike for oil or AI. They don't actually stop oil prices or AI. The only thing they're hiking for is people's expectations. But, the problem is workers are seeing their pricing power decline 0.7% year over year. The workers are getting crushed. And we're going with that low of worker pricing power, it's a sign that layoffs are going to start coming soon. I don't know when, but layoffs are probably going to be the Grim Reaper that kills this party. Because once layoffs stop getting absorbed, labor force participation goes up as well. Both of those happen at the same time, the unemployment rate's going to skyrocket. One, then two, then three percent, we'll be at 8% unemployment. And then people will go, "Uh see, AI does kill jobs." And then you're going to drive in socialism. And then you got to start asking yourself in 2029, what socialism stocks are you going to buy? You know, I I I tweeted this two days ago. I was like, "2029's probably going to usher in socialism. What socialism stock do you want?" Uh and and I said, "I'll go first, solar." >> [laughter] >> There are a lot of people who don't actually think solar's going to have sort of another moment in the sun. Yeah, that's funny. But uh but anyway, let's uh let's take a look at expectations here. I mean, look, if you look at the Qs, the Qs actually didn't perform as badly on this read. They're still above 735. We called for peak fear on the Qs back at 700 on the Qs. And then we you know, we set alert out going, "Hey, we're buying this dip." Uh on at Reinvest One. You all already know about that. I don't need to pitch Reinvest One, but a lot of wonderful uh course members have upgraded and a lot of new members have joined us. So, we're happy to have you. But you look over at uh bonds right now, we have still rubber banded above that 5.27. Now, I hope this fades today because 5.312 is high, you know, we'll see where we actually close. But so far, I will say the market is holding up decently. And as usual, the cash-rich companies are doing the best. That's Apple. We've been talking about that pretty regularly, not only in the alpha reports uh but but broadly. Uh and then of course, the highly indebted companies who are going to see their debt service costs increase are doing even worse. It's like your CoreWeave. So, peak fear is indeed still behind us. But what we really need now is a massive bailout. And what bails us out? Is it the Fed? It isn't talking from the Fed. It's Donald Trump making a deal with Iran. I know it always It seems annoying that we always come to this bottom line, but that's just the bottom line. It sounds like a broken clock, right? The Iran deal, however, just became much more critical. Is it possible we can actually just get one rate hike this year? Sure. If we get a deal with Iran. October 20th to 27th is the window. If we don't get a deal worst case before the election, but ideally in that window, then the Fed's going to justify hiking not just in October, but they'll probably end up justifying hiking in December for fear of losing inflation expectations. So, we got to see the 10-year Treasury chill out. The only way that happens at this point is on an Iran deal. The Iran deal just became more important because inflation's just not receding on its own. So, all of these numbers really are bad because they put more pressure on Donald Trump to solve the quagmire that he got America into. Which is really unfortunate because it's not the easiest problem to solve. Uh that said, I remain optimistic. Okay, I remain Luigi cup optimistic. My opinion has not changed. [music] My bear bull scale has not changed. My I'm not you know, this isn't the level where I want to buy the dip because it's not much of a dip. I like peak fear [music] time for buying the dip. So, I'm not jumping up and down about uh buying at these levels. And it's surprising, but the market is relatively holding up. We'll see if that continues. So, with that said, we got an alpha report to send out, and we got a course number live stream to get to. >> So, we'll see you later. >> If you like that video, check this one out. I think you're going to love it. >> Why not advertise these things [music] that you told us here? I feel like nobody else knows about this. >> Well, we'll try a little advertising and see how it goes. >> Congratulations, man. You have done so much. People love you. People look up to you. >> Kevin Paffrath, the financial analyst and YouTuber, [music] Meet Kevin. Always great to get your take.