S4 E6: Ding Dong the Witch is Dead…NOT!

The talking heads in the pop-media covering both the financial markets and political scene are CELEBRATING an (alleged) victory in the Iran War with the signing of the MOU and talking about Gasoline prices collapsing back to $2 a gallon.

Politicians and market pundits are suggesting that the upside acceleration in Gasoline prices is DEAD…thus, the upside acceleration in US CPI/PCE/PPI inflation is also… DEAD.

Yes, on social media and in the pop-financial and political rah-rah TV…the song rings out…Ding Dong the Witch is Dead!

The Witch…being Iran’s sponsored terror…Iran’s nuclear program…and, thus…US inflation…ALL DEAD, right?

Yeah, not so fast! The Strait is NOT free-and-clear, Iran just got 60 days to prolong the Uranium supply negotiations, the agreement states that the MOU could be extended INDEFINITLEY…and…the terms have already been VIOLATED. 

And EVEN if the War is OVER, and the Strait OPENED, the fundamental supply-demand situation in both Crude Oil and Gasoline REMAINS BULLISH…and is most likely to STAY that way through the summer and into the November US election period.

Thus, as I stated previously, a decline in prices down to $65-$75 in WTI Crude Oil…and the $2.40-$2.60 level in Gasoline, would be viewed as a BUYING opportunity, particularly with LOW Open Interest in both contracts, removing the threat of a prolonged and deep price decline predicted by a massive liquidation of long positions.

Moreover, the US PPI data offered EYE-POPPING levels of pipeline inflation in most sectors, particularly, again, SERVICES. This just days after the CPI data revealed ANOTHER upside acceleration in…Service CPI inflation!

You NEED to HEAR these numbers! The Inflation Witch is not only NOT DEAD…she is STRONGER THAN EVER!

Transcript

Raspy Voice And A Sports Rant

SPEAKER_00 0:01

Hi, Greg Weldon here, your host for Money Markets and New Age Investing. You'll have to give me a little bit of slack today. My voice may not yet be fully up to speed, even though it is now virtually two weeks since I was in Madison Square Garden for the New York Snicks and the game three of the finals against the Spurs, the game where the refs pretty much confirm for everyone in the building that the NBA tied in with DraftKings, the game is are kind of manipulated to some degree because it's entertainment now, no longer, you know, pure sports competitiveness. But in that dynamic, lost my voice yelling at the referees. Yes, because it was one of the most poorly, it was the most poorly officiated game and the most poorly officiated series I've ever seen. And I've played basketball at every level. And to me, this was mind-blowing in terms of how poor the referee the referees uh did their job, how poorly. But nonetheless, that really wasn't the point of beginning. But I realized now that my voice sounds a little raspy still, so we'll go with it.

Iran Deal Risks And Oil Politics

SPEAKER_00 1:04

But today we're going to talk about Ding Dong, the witch is dead. Not no. And what am I talking about? I'm talking about the witch in terms of Iran, in terms of the MOU, in terms of the Mulas, in terms of the nuclear threat, and in terms of the Strait of Homo's being, you know, open as a result of his MOU. And I would say not so fast. Uh the strait is not necessarily free and clear. Iran's chipping some oil through there because we're going to let them, because we're going to let them get some money, and we're going to try and, you know, put this dangle this carrot in front of them in terms of, you know, dealing with the nuclear issue, which is the primary thing behind all this. So we can't just walk away from this. That would be seen as a loss, and it's difficult. And Trump's kind of painting himself in the corner. And I think it's a it was a valiant and worthy cause for sure. Uh, but I think you stopped short of doing a full job, and now you've left yourself a bit of an issue. Because part of the MOU states, at least the way I read it very clearly, that this could be extended, quote unquote, indefinitely. Indefinitely. So this is just playing right into their hands, as far as I'm concerned. And while there's some good points here, if we're going to, you know, maintain some sense of the dollar as the petrocurrency as a result of this deal, that's a little bit of an underlying thing that is could be very positive to some degree. But if you're talking about giving them more time, 60 days, all right, the MLU could be extended indefinitely. And the midterm elections are in November. And you have a base effect in oil that if oil, if gasoline prices don't come down below $2, not to $2, not to around $2, below $2. In fact, below $1.90, you have a base effect that will remain inflationary through the end of the year.

Why The U.S. Lacks Oil Independence

SPEAKER_00 2:57

So let's discuss first the energy market, because I think there's big misconceptions out there around the actual underlying supply-demand fundamentals of the petrol patch, petroleum markets in the U.S. First of all, we're not petroleum independent. We might be energy independent when you include natural gas, but we're not petroleum independent. And you're going to see how that works here in the underlying dynamics of supply and demand, where you have the potential here for supply shortages, where you have a supply deficit in both crude oil and in gasoline. So let's break it down for you with the facts, the numbers, the data that tell you what I'm saying is not just opinion. This is a matter of fact. All right, commercial inventories of your own crude oil fell, the largest single-week decline since the war started last week, 8.3 million barrel decline, the eighth consecutive weekly decline. A cumulative drawdown over that eight-week period of 47.5 million barrels. That's a massive decline. At that pace, over the last eight weeks, and of course, this pace doesn't continue. And of course, you have changes in output, changes in demand, changes in imports, all of these will impact what I'm about to say. But right here, right now, the fact is, the mathematical fact is that at the pace we've seen declines over the last eight weeks in U.S. inventories of crude oil, despite the ad of SBR 30 million barrels, so you could be talking about an 80 million barrel decline instead of 47.5. But if we take this eight-week nominal pace of decline in commercial inventories of U.S. crude oil, you would be out of crude oil by October of 2027. You would be down 74% over the course of one year. That's the pace at which this is now happening. I'm not saying that's going to continue. I'm not saying there's not other factors here. But this is the mathematical projected fact of the matter. Now, let's take the numbers. All right. Commercial crude inventories fell 8.3 million barrels. All right. They're almost a full percent below Uruga levels and now 8.5% below the levels of two years ago. So that's kind of significant, too. All right. And the SPR, well, the SPR was down 8.9. So the overall inventory draw was 17.2. And frankly, that's what it would have been in commercial crude oil inventories if not for the 8.9 decline in SPR, which is actually an ad to the market. Do you get what I'm saying? So the real decline in commercial inventories, excluding the ad from SPR, would be over 17 million barrels. I mean, you're talking 16 million plus, over 17 million in a single week. All right. And this would only serve to significantly deepen the year-over-year supply deficit. The deficit and the decline thus in the SBR over the last year is 62 million barrels. Think about that. It's down 15% from a year ago. Without that, I mean you would have been a much higher price. But now that inventory's gone. All right. And in terms of this, you know, energy independent dynamic, all right, we're not energy independent as it in terms of uh petroleum. We're not energy independent as it relates to crude oil, or certainly in terms of gasoline. And here's why. You could say, well, domestic production is at a record high in the US, and indeed you'd be right. All right, just shy of 14 million barrels, the most recent number, 13.8 million barrels per day. Okay. The problem here is that our refinery, the throughput to refineries, okay, the consumption of crude oil is 17.2 million. And that's actually down from a high of 18. It was recently 18. But 17.2 million versus 13.8 in output. Output 13.8, consumption 17.2. Do you get where I'm going with this? This is a deficit of 3.3 million barrels every single day in the US. And when net imports fell, which they did, all right, uh, which is rare, it really is. And we had a uh week or two, I wasn't sure if it's the second week, but I noticed the one week, where you had in uh an increase in net exports. That's a rarity because we still import crude every single week. All right. And with when you see the imports fall, that's why inventories drew down by 8 million barrels. It would have been 17 million barrels, if not for the ad from SPR. This is why. We have more demand, more consumption than we have domestically produced supply. It's that simple. Now, as a result of this, 50 million barrel decline in inventories over the last eight weeks, you know, and a huge decline in SPR, which added to the commercial inventories that were used up anyway. All right. So you're talking about a massive decline in U.S. inventories of crude oil here over the last, you know, 8, 10, 12, 52 weeks, all right. Where you are now puts you below the five-year low. All right. And when you add SPR to the mix, U.S. total crude oil inventories at a 42-year low, the lowest since 1984, at under 700 million barrels. Let me say that again. U.S. total inventories accrued, including SPR, which Biden drew down huge. I mean, it was a massive drawdown, you know, from Biden. And now Trump releasing some of this on a much more reasonable reason, as opposed to I'm going to try and keep gas prices down to win an election, even though some of that's going on here too. Not to the egregious degree that Joe Biden did this, all right, and drained our strategic inventories. Getting him reelected wasn't a need for strategic national security drawdown of inventories of crude oil. But now you're looking at the lowest total U.S. commercial inventories of crude oil since 1984. Do we not think that demand has gone up a lot since 1984? You better believe it. This is kind of an issue.

Crude Drawdowns And The SPR Math

SPEAKER_00 9:14

Now, when it comes to prices, let's talk markets here. The move in crude oil, I mean the weekly closing dynamic, you got down to 76.50, down from $112. All right, you were up around $114, $119, depending on which contract you looked at on an intradaily basis. But I like to look at different ways of measuring these things. You have a near perfect 50% retracement of the move from 57 in the fourth quarter of last year to the move on a weekly closing basis of 112. It's a perfect 50% retracement, and it takes place right between the 52-week and two-year exponential moving average. I call that my double kill zone. When you see a big move and you get a retracement into between two of the key Fibonacci retracement levels and two key long or medium-term moving averages, that's a double kill zone, meaning you're in the zone to potentially think the correction might be over. All right. Not only that, the long-term oscillator that I, you know, my proprietary long-term oscillator remains bullish. And from a secular term, you had the two-year moving average, just took out the five-year moving average. And the low here, just below $75 on an intraday basis, was right at the five-year moving average, which has held many, many times back and forth, especially, you know, during the 2008, 9, 10, 11, 12 run. That was the post-period when you had crude collapse from $147 to $32 and went all the way back to $115. I mean, now I think you might be seeing something like that. I don't think you're going back to $115 necessarily, but you're certainly not going to 32. And I don't think you're really going below 50. I think you're not going below 65. I think given the supply-demand fund amounts we just talked about suggests a floor around 60 between 65 and $70. And you're at that level right now.

Gasoline Inventories And Summer Demand

SPEAKER_00 11:09

Let's talk about gasoline, because really this is the more important thing. It's lagging in terms of the decline on a relative basis. You know, it's, you know, got around $140 uh crude oil equivalent. It's back down, but only to around $115, right? Whereas crude oil is down at 75. So the gap between these two, the ratio spreads are blown out to the max. And while in the past, this has been often a time a sign of a peak in the markets, generally speaking, it also can be what was considered bullish divergence because you don't have gasoline falling as much. Why? Because you have a major deficit situation, and it's only the beginning of the supply of the peak demand summer driving season in the U.S. And you have inventories at levels that normally we see in November after the season's over. And the season's just beginning. Let's talk about that. All right, inventories dropped a million, you know, 0.9,900,000 barrels in terms of the total inventories to 214 million barrels. All right. It's down 7% versus a year ago. That's the year-over-year deficit. Versus two years ago, 7.4. You're talking a 7% deficit in inventories heading into the peak demand season, with inventories, you know, 214 million. I mean, last time we saw that was October of last year. Previous to that, the last time we saw that was November of 2024. You're talking about levels that are post-demand season, you know, levels when demand is just starting. So this is a problem. All right. Not only that, inventories fell 900,000 barrels, despite a 386 million barrel per day increase in U.S. production. Hello, holy mackerel. I mean, again, we're talking about you've seen no real demand crunch from high prices in gasoline. And in fact, that's also given to us uh in data evidence in the simple fact that in terms of the dollar growth in retail sales on a month-to-month basis, in March, gasoline stations accounted for 61% of the growth. In April, gasoline stations reported uh were responsible for 47% of the dollar growth in retail sales. People are still spending on gasoline. What they're not doing is going out to eat and drink. Right? Eating and drinking establishment sales on a year-very-year dollar basis posted the two lowest numbers since the pandemic. And if you X out the pandemic, they're the two lowest numbers since 2008. Don't tell me. High gas prices haven't affected the consumer. It's very evident in the data. Vehicle sales, number one, inversely correlated. Number two, eating and drinking establishments, the ultimate in discretionary spending. Big, big negative numbers there in terms of the 12-month change is barely over half half a billion. That's nothing. And every time you've been at this level in the past since 1971, it's a recession. Well, at least as far back as retail sales data goes. Now let's talk about the gasoline price because frankly, it got down to 268 on the September contract. All right. But part of the problem is the September contract last year was 197. Are we seeing where this is going? All right. It's great that gasoline prices are down so much. Okay. And yes, prices have fallen from the peak. But when you talk about the rate of inflation, they are still higher and by a significant degree. All right. And not only that, but 268 is right in my buy zone between 265 and 275. It really is. It's right on the 100-day moving average. It's right in the zone between the 38 and 50% Pibonacti reach basement. So the move up from December's price of $1.82 to the high in the in the harbor uh delivery for September of $3.30. But here's the rub. Okay. With no viable micro or mini futures contract in gasoline, which there is in crude oil, it's interesting to note not only the commitment to traders report, but also the open interest in gasoline is one of the lowest levels in the last decade. All right. When you get down to around 300,000 contracts open, that's a very low level for gasoline. You're there now. And that's kind of an issue. All right. Because what this does is removes the threat of some gigantic decline that is based on a purge of long positions. You don't have that set up here. You just don't. So I think gasoline is at the very worst 240, because 240 is the two-year moving average. Two years, the 240 rather is the breakout pivot that you came through a downtrend line from the again, the low, which in last year the low was the $1.66. So when you look at the calendar, all right, you need to get below $2 by September to have any negative, you know, to have any neutralizing impact on inflation data on a year-over-year basis. This is big, and I don't see gasoline going below $2. You know, you have some of these political talking heads that are rescue cheerleaders for Trump. And, you know, I don't, I'm not a Trump lover, and I'm a Trump hater. You know, I like some of his policies. I'm all for less government. All right. So to me, anything that works that in that context is better for the country. Um, certainly, you know, the Democrats want to move it the other way. So, you know, I'm more of a Republican, but I'm a libertarian and I am able to criticize everybody. Okay, so I don't have any allegiance, blind loyalty to anyone, like some of these people do. And it's it kind of hurts me and pains me and saddens me to see that the people like on Fox, all of a sudden, it's like everything Trumped up is a miracle. It's all rah-rah. I mean, it's gotten to the point where, you know, you have such polarization, which of course, exactly what we expected in my speeches since 2018 to 2020, 2020, rather. The age of polarization is one from which this was born because it's all science. But within this context, again, you know, this talk about gasoline back below $2, just not happening. When you look at the fundamental supply-demand dynamics, where you're well below the five-year average, where you're back to levels that are usually at the end of the peak driving season, where you have a supply deficit in crude oil, and you're pumping out as much gasoline as you can, and inventories are still falling. This is not because of the war, right? Because you haven't seen a decline in demand for gasoline at gas stations because of the war. So this is ex-Iran war in terms of how this is all kind of working.

Inflation Pipeline From PPI To CPI

SPEAKER_00 17:54

Now, to say King Ding Dong the witch is dead, meaning the inflation witch. Well, we just suggested that it's not going to be such a disinflation, deflationary dynamic from energy as some people are trying to make out, at least not till next year. All right. Number one, for the data, for the data, yeah, maybe you'd be paying a little less at the gasoline station, and maybe that means you might go out to eat one more time than you were before. All right. But again, that's not strong enough growth to support servicing the debt we have. It's just that simple. And the more simple fact is that inflation in the pipeline is like a tsunami. And I did a piece recently where I showed the guy who rode the world's largest wave as a surfer, all right, and how you see at the peak of the wave when he first gets dropped off by the by the wave runner, and he's on his board and he's at the kind of the top of the wave. That was back when, you know, you had Alan Greenspan. I mean, it was a calm sea after Volcker. All right, if you want to look at central bankers, if you want to start talking about inflation, you want to start talking about Walsh and the new the new Fed chief, all right, because that's where we're going to transition here, away from energy. Is that as this wave has continued to run, you see the surfer go lower and lower and lower on the wave until the wave is right on top of them and about the white water is rolling right at them and about to wipe them out. And it's like that's where Warsh is right now. I'd love to send you that piece. And by the way, I produced a special um podcast PDF, 50 pages with charts on every single thing I'm actually using instead of the index cards. I usually write from my notes. I'm using the PDF that I created that I'm willing to send to you people if you want to see it. I think it's great information, just to show you that what I'm what I'm saying is factual. What I'm saying is data. What I'm saying is evidence of all the theories that you come up with from this evidence. All right. The theory here is that inflation ding dong, which is not dead. Not dead. Why? Because in the pipeline, it's coming. And more so because in the pipeline, it's not, you know, it is not just simply energy. This is expanded to services in both CPI and PPI, and it's accelerating at an alarming rate that very few people are talking about. All right. PPI numbers are key because it's always a forerunner for CPI. It's just a simple, it's a pipeline. Taken from production to the consumer. That's the pipeline. All right. So if you look at the pipeline, the the inflation is rushing down the pipeline right now. PPI for final demand. Any breakdown, final demand, intermediate demand, and raw materials. All right. PPI for final demand, which is the kind of the wholesale level, if you will, all right, before you get to the retail level. That's the final stage before CPI. Well, it was 1.1% for the month in May. All right. That's 13% annualized, accelerating from 8.4% annualized two months ago. All right. But here's here's the rub. Okay. Excluding energy, it's 0.8. That's almost 10% annualized. And it's a four-year high in the monthly increase without energy, without food, and without trade services, too. I mean, this is a massive problem as far as I'm concerned. It really is. The largest increase since March of 2022, not including energy. Nothing to do with the war. Nothing. Well, maybe some of you maybe talking some of the fertilizer and stuff like that. Certainly we've seen that. But for unprocessed goods PPI, intermediate demand PPI, 22.2% year over year, highest since September 2022. So a lot of 22s in here. 22.2, highest since 2022. All right. 4.9 for the month, yes, because of energy. All right. 6.9% monthly search in unprocessed energy materials. But here, get This and I've been talking about this for a while. It's going to be a big deal this summer and certainly into the fall. Unprocessed food PPI, 4.8% for the month. Food inflation is the next big thing coming. And you know why I have talked about this, El Nino? They've upgraded the potential for this, El Nino, being the most severe El Nino we've ever seen, from 25% to 63%. That's NOAA. Okay, that's official. And in terms of that, they've actually pushed back the intensity of this from June to where it's going to remain as intense through November. And when you talk about the water situation with the lowest snow coverage ever in the West, when you talk about where your situation with California, all right, then you start talking about food, and we're going to get to that in more detail in a second. Let's not jump too far ahead of PPI because we're still into this. Intermediate demand PPI, the total 12-month rate, 13.3%. This is processed, not unprocessed, we just talked about. 13.3 up from 9.5 in April, 6.8 in March, 4.0 in February, and 2.8 in January. From 2.8 beginning of the year, it's 13.3 for processed goods for intermediate demand. Unprocessed, I just told you, 22.2, up from 14.6, up from 9.3, up from 5.5, and up from minus 0.1 in January. That's 22230 basis point increase in just five months in a year-over-year rate of change in PPI for unprocessed goods for intermediate demand. This is massive numbers. All right. All right. And basically in the last six years, since April 2020, since the pandemic low, it's up almost 60%, 58.2. And the year-over-year rate, like I said, 13.3. Now, let's go down to the stages of intermediate demand, because you have stage one, two, three, and four. Okay, four is the end of the pipeline. Stage one for intermediate demand, and stage one is the beginning. Stage one is 3.2 monthly. Stage 2 is 2.4. Stage 3 is 1.9, and stage 4 is 1.1. In other words, at the beginning of it, it's higher, which flows through to the lower end. It's going to push these inflation numbers higher. All right. And when you talk about intermediate demand PPI for services, services, not goods, not oil, not anything, but services. 4.7% year over year. It's the highest again since 2022. Okay. And there's only one other time you've been above 4% on this number since the beginning of this data series. Only one other time. And that was in 2021, 2022. It's the only other time that you've been above 4% in the year-over-year rate of change in PPI of intermediate demand for services. Services, not goods, not oil, not stuff. All right. And not only that, but when you overlay, and this is the chart you need to see, these kinds of charts, when you overlay PPI services for intermediate demand against PPI services for final demand, the stage right before the consumer. All right. Intermediate PPI has always led the way down and up. And right now is leading higher in a big way. And you can see it's so obvious on this chart. It's a chart like you have to see to really understand how significant this is, historically speaking, what it means to the markets, what it means to the data. And when you take this to CPI, service inflation is rampant in PPI out of nowhere and at historically high levels. No one's talking about it. All right. In the meantime, CPI at 4.2 up from 2.4 at the beginning of the year. And here's the problem with 4.2. Number one, it means that average weekly earnings, the labor market numbers, you know, non-prim payrolls include average weekly earnings, 3.8. You're below inflation now. Real earnings are deflating. Number one. Number two, 3.2, that's also um, yeah, uh wow, hell above the Fed funds target rate range. The top end is 3.75. You have, if you're using the top end, let's be conservative. You let's let's use, we should really use the midpoint. Okay. You have a real Fed funds rate of minus 0.57. That is down from February when it was a restrictive 1.23 positive. I mean, that's almost a 200, it's close to over 175 basis point plunge in the real Fed funds rate since February. Think about that. If Warsh wants to maintain neutral, he's got to raise rates at least two times, if not three. And that's why Bank of America is now calling for three hikes. I don't think he's gonna do it. We'll get to that in a minute, too, because we still got to cover service CPI, right? But let's consider this too. At 4.2, CPI is the highest non-pandemic rate since 2008. Okay. And it's the 11th highest number in the last 35 years. CPI is at the 11th highest level in the last 35 years, and the highest non-pandemic number since 2008, which, you know, preceded a crisis. Let's

El Nino And The Next Food Spike

SPEAKER_00 27:51

talk about the weather. Let's talk about the lack of water in California. Let's talk about the El Nino, which, if it's, you know, it's already, I'm telling you, I'll send you that one too. You know, all I got all the Noah's charts, this the sea surface temperatures, the subsea surface temperatures, the radiation uh degrees underneath, how it's affecting coral reefs now off the coast of Australia, how it's affecting sugar in Thailand, how it's affecting rice in China, how it's affecting the monsoon in India. It's already having a major impact. A major impact. All right. And let's then look at the CPI numbers for food. Fruits and vegetables, 6.1% year over year. 6.1% CPI food for fruits and vegetables. All right. 95% of tomatoes used in the U.S., processing tomatoes for sauce, pasta, ketchup, that kind of thing. Tomato prices up 24.9% year over year. 70% of the lettuce consumed in the U.S. is grown in Arizona and mostly California. Both places under major water problems. All right. Lettuce prices up 32.0% year over year. I mean, this is a problem. Price vegetables up 11.9 year over year. Canned fruits up 7.1 year over year already. And this is only starting. But we jumped ahead of ourselves a little bit because I left out one of the biggest things, which is again CPI and services. You have this huge intermediate demand to final demand and to CPI push in services that is continuing to intensify and is continuing to intensify in its pace of intensification. When you talk about 84 CPI uh indexes for services, 56 of them, 67% are above 3% year over year, and that's up from 66% above 3% a month ago. 41 or almost half, 49% of all these indexes for services, nothing to do with energy. Uh uh above 4%, half, above 4%, two-thirds above 3%, and 30 of 84 or more than one-third at 36%, over 36, over one third, 36% of service sector CPI indexes are running at 5% year over year or greater. And a lot of them, there's 13 of them in double-digit territory. And all of those are things that people have to buy, have to buy, like automobile insurance and stuff like that. So again, you know, you have inflation now that it's above the rate of average earnings, inflation that's above the Fed funds rate, and you have a new Fed chairman.

Warsh Signals A Tougher Fed

SPEAKER_00 30:43

And what did Warsh say at his press conference? We're gonna round it out here today with the press conference. Because he came in and I did a piece last week called The Terminator on Schwarzenegger coming at the police station. All right. Because here's the thing he says we recognize it, and this is Wars talking. We recognize inflation running ahead, well ahead, of the Fed's long state inflation goal 2%, and it's been going on for more than five years. Persistently high prices are a burden for American people, for the American people. But the recent past need not be prologged. I'm pleased to report that members of the FMC are unambiguously and unanimously agreed. This committee will deliver price stability. And when asked later on about price stability, he was very specific to say he's about the left side of the decimal point, meaning the two. Meaning 2.1 is not good enough. The left side has to be a one to achieve their goal. It's four. You get it to one. Do you not think that's going to require some tightening when the Fed policy rate is negative? Holy mackerel. Wars did exactly what I told my clients he would do. Come at it hard from an inflation vigilant stance because he needs to win credibility because he has to delink himself from Trump and he's going to cut rates no matter what. He's in a position where he can't cut rates. There's no way, man. All right. So again, ask the question in the QA. How patient can the Fed afford to be to be waiting for inflation to come down? And what circumstance would you support the Fed raising rates? And he says, I've said for years inflation's a choice. You bet it is. Today I am announcing the committee is unambiguously and unanimously decided that we're going to deliver on that, meaning the inflation uh uh mandate. And that's pretty strong words. He said unambiguously and unanimously twice. Twice. I mean, Fed doesn't do that unless there's a reason that he wants to do that. And then, you know, again, he says this we have the capacity and the commitment to deliver on our price stability objective 2%. That's exactly what we're gonna do. Today I'm announcing the committee as so on and so on and so forth. That's the third time, the third time that he said this. And on this slide, in the PDF I'm offering you, and in the PDF I sent my clients last week on this, it's the picture of Arnold Schwarzenegger coming into the police station with a with an automatic automatic weapon and killing police officers. And in that case, this is kind of like Warsh is the Terminator shooting down inflation. I mean, you know, so and when you look at the inflation projections, by the way, all right, it's pretty interesting because the Fed expects inflation to be below 2% next year. I mean, that's pretty interesting to me. And the bottom line is that's going to take some real push in the dot plot that really isn't there. All right, the Fed is very complacent about all this. They're complacent about the labor market, they're complacent about that, and they're complacent about even their own policy

Dollar Strength And Trouble For Stocks

SPEAKER_00 33:44

rate. Now, what's interesting is the market's not so complacent. All right. The 12-month overnight interest rate swap, which is a proxy for Fed funds, got to 4.01% last week. And I'm recording this first thing Monday morning, all right, uh the 22nd. Um 4.01, suggesting a you know funds rate uh uh hikes of at least 25, if not a second right of 50 in the next 12 months. The two-year no yield is even higher, it's four and a quarter. But this is still low because all of these things are still below the wave of inflation. And if you use CPI, we get PCE data, I believe, later this morning. But here's what's interesting, too, that the Fed fund swap rates for next year had been actually pricing in rate cuts because they thought the Fed would raise rates this year, and thus you'd have to cut them next year, and now it's actually pricing in hikes next year, too. Okay, this drives the dollar higher because the interest rate differential now, U.S. rates are rising faster, and now you even have because the ECB has raised rates, the thought process is they're ahead of the game and fighting inflation, and the bond yield is kind of coming down relative to the U.S. And as a result of that, the U.S. interest rate differential is expanding a positive premium for the dollar, which is driving the dollar higher, which is bad for asset prices. You have the prospect of tightening by the Fed that could be more than people might think if if they're gonna, if, if, if let's put it this way, if Warsh is true to his word, there's more coming. All right, you already have monetary conditions tightening because the dollar's rallied. All right. And this has impacted gold in a big way. I still think gold has a chance. If the dollar really clears this parse 65 level on the US dollar index, and all the technical indicators suggest it will, is the two-year moving average, the oscillator and the stochastic on a long-term basis have turned higher. You held the trend line, it goes all the way back to the 2008-2011 double bottom. I really thought you were going to break down, it's gonna be boom for commodities. That will still happen. It's just now delayed because Warsh has to defeat inflation. He wants to sound like Volcker. Now that means bringing down the economy, too. And the economy is already on its on his back, frankly, as far as the consumer is concerned. That's for sure. So, in that context, the dollar's breaking out against gold. And that's a major tightening in monetary conditions. And in that context, gold and silver remain at risk, although I think they remain major buys on big dips. Gold gets down into the 3,500 range, silver gets down, you know, anywhere south of $60 an ounce, 54-ish. It's a major buy because the next thing will be once the inflation, you know, if they want to beat inflation, you know, and then if they beat inflation and bring the economy down, they're gonna have to reverse. And they might have to reverse even though inflation is high. And that's the whole thing I've talked about acquiescing to higher rates of inflation to protect growth, because the consumer is is is hurting, inflation is not rising again. If the Fed tightens policy again, it's gonna be another knock on the consumer. And in that case, the stock market remains very much disconnected from this. The biggest, most single, tightest correlation, it's really an inverse correlation between any two markets in the last 20 years, any two, is the dollar and the SP 500. Dollar lower, SP higher. Dollar lower means the Fed is accommodative. Dollar higher means the Fed is not so accommodative. Right now, the disconnect between those two things is as big as we've seen since you know the market kind of tanked in 2020, early 2025. But you can go back to you know 20, 2008 and 9, you go back to 2018, you go back to 2022. The dollar higher led stocks lower. If the dollar gets above par 65 on the dollar index, because the Fed's going to be hiking rates potentially with a very hawkish warch, this is going to spell trouble for stocks. Right now, it's still protection in stocks. And I still say what I said in the last podcast, it could be the war ending causes people to look at the economic data again more closely. And is an epiphany moment for stocks, and even the SpaceX IBO could be the kind of thing you look back because you're talking about amazing valuations predicated upon having data centers orbiting the Earth and on the moon. That's beautiful. I love it. I love the vision. But the problem is the valuations suggest that that's going to be happening a lot more soon, sooner than I think is even physically possible. In that case, it could be a denouement moment for the stock market, the SpaceX, IPO, in the combination with the end of the Iran war, and everyone thinking inflation is going to come down on that, and it doesn't. And Warsh has to act more aggressively.

Where To Follow And Get The PDF

SPEAKER_00 38:33

Follow me on Twitter at Weldon Live. Uh, get uh any of this stuff. I'd love to send you some stuff, and specifically the podcast PDF I put together this morning. It's like three in the morning here right now, and then my voice is totally gone all over again. But um email me at Greg Weldon G-R-E-G-W-E-L-D-O-N at Weldon online. Follow me on Twitter at uh Gregory underscore weldon and follow the podcast at money underscore podcast. Thanks for listening.