Should the Fed Look Through the Latest Inflationary Supply Shock?

追加: 2026-05-26

[00:00:00]Key indicators to track for our ST inflation theme are core PCE and super core PC which are both in strong positive impulses at 4.4% through Methanaliz and 4.5% through Methanoliz respectively. The April headline CPI food CPI and energy CPI data supported our sticky inflation theme. April uh headline CPI is in a strong positive impulse up 7.1% through methanoliz. Food CPI strong positive impulse up 3.6% through methanoliz energy CPI up 63% through methanolized strong positive impulse as well. The April core CPI, core good CPI, core services CPI, and super core CPI data supported our staking inflation theme. We got a weak positive impulse and core CPI up 3.2% through Methanualized. Weak positive impulse and core goods CPI up 0.9%. We got a strong positive impulse and core services CPI up four uh percent. And then we got a a weak positive impulse and super core CPI up 3.9%. Uh all these numbers are comfortably above their trends. uh the April shelter CBI data supported our sticky inflation theme and did not support our cooling housing and labor theme. So shelter CBI uh they basically corrected the uh the la the lapse of of of reporting uh from October and so there was some give back there that uh created a strong positive impulse in the shelter CPI data up 4.4%.

[00:01:12]We don't think that's durable. uh we continue to see the leading indicator of of of of you know shelter CPI and housing PCE which is rents nationwide rents you know got a strong negative impulse in nationwide rents at the lowest level we've seen since going back to uh uh kind of the early days of COVID so ultimately these are going to resolve that's going to resolve itself positively in the coming quarters and this will kind of you know break back down to a downtrend uh as well but for now not not moving in the right direction uh April median CPI data supported our sticky inflation theme so median CPI we got a weak positive impulse there up 3.1% 3 month annualized breaking back out above trend. The April trim mean CPI data supported our sticky inflation theme. We got a strong positive impulse and trim mean CBI at up 3.4% on a three-month annualized basis.

[00:01:55]That number is well above uh trend. Uh and so this is a problem for Kevin Walsh. Recall that he was trying to pivot the Fed's reaction function to trim mean inflation statistics to kind of you know give the you know create more create the conditions for more near-term policy rate easing. But in our opinion uh easing policy at any point in time probably between now and year end will cause a meltdown in the bond market. Uh you know for that may sound counterintuitive but for those who may be unfamiliar with fixed income dynamics easy money is reflationary and inflationary particularly when you already have an inflation problem and so that causes investors to uh shun duration risk. Uh conversely tight money causes investors to want to buy uh bonds because ultimately you're slowing down uh you know the kind of nominal growth in the economy. And so uh you know in our opinion we think the probability of of of of tight money uh coming uh you know the will ultimately kind of calm down some volatility in the bond market.

[00:02:47]But the pivot from pricing in easy money to now pricing in tighty money that that that period of time is the issue. Once you get over uh to once the Fed gets above, you know, out in front of the curve, that's when you could start to, you know, buy duration and and expect that the Fed has your back if you're going to be investing in the long bond.

[00:03:03]But right now, the market is un is not clear whether the Fed has their back uh for for now. And then we'll talk about why that may be the case. And ultimately to the extent that they have to pivot to having the bond markets back, it's going to come at the expense of the equity market. Uh the April headline PPI, core PPI and core PPI X-ray services uh uh goods PPI and services PBI data supported our sticky inflation theme as well. So we got a strong positive impulse and headline PBI up 10.7% through Methanualiz. Weak positive impulse and core PPI up 6.5% through Methanualiz. We got a weak positive impulse and core PBI X-ray services up 5.2% 2% through Methananiel. We got a strong positive impulse in goods PPI up 19.9% through Methanoliz. And then we got a strong positive impulse in services PPI up 7.1% through Methanualiz. All these numbers are well well above a trend. Uh as we predicted over two years ago, the structurally elevated bottom in the core PBI cycle perfectly preaged similar dynamics in core CPI and core PCE strongly supporting our sticky inflation theme uh in the process. So again, we were very clear back in, you know, early 2024.

[00:04:08]We're like, hey, we're bottoming at a very high level in core core PPI. Uh it's been very correlated with core CPI, core PC, so we're probably going to bottom in higher levels uh um you know, in those indices. But again, don't forget you got shelter and housing, you know, kind of the roll through the lagging impact of that on those statistics, you know, allowed those it made those processes take a little bit longer. But ultimately the you know our conclusion was correct which is we're going to bottom at a structurally elevated level in both of those statistics and and that's exactly what we are seeing. We're now starting to accelerate. We've been accelerating in core PCE and we're now accelerating uh in core CBI as well. Uh in fact the 42 macro secular inflation model has accurately forecasted an equilibrium core PCE rate in the high twos uh low uh threes since January of 2022 when we authored the sticky inflation theme.

[00:04:55]Recall that when we authored the sticky inflation theme, uh the consensus at the time was inflation was transitory. That was wrong. Uh when we authored our resilient US economy theme in the summer of 2022, the consensus at the time was US is heading into a recession. That was wrong. Uh when we authored our paradigm C theme, uh aka run hot theme in April of 2025, the consensus at the time was tariffs are going to tank the US and global economy. That was wrong. So uh you know, we know what we're doing here in terms of, you know, fading uh Wall Street consensus on on some of these fundamental themes. And you know, this has been as right as rain. And we're, you know, it's four plus years later, we're still talking about the same exact uh uh information, the same exact chart, the same exact uh theme. And and so it's obviously not going away uh unless the Fed really wants to get out in front of it uh and really, you know, do what it has to do from a business cycle standpoint uh to to to rent out all this, you know, kind of legacy inflation pressure. And that's exactly what the model has been signaling for over four years now. uh reminder, inflation is by far the most lagging indicator of the business cycle and is unlikely to durably return to the Fed's arbitrary 2% target without an actual recession. So again, if you look at the business cycle, we know that there is a, you know, kind of a, you know, rough sequence to how the business cycle process works, particularly when you're heading into a downturn or recession. So policy tends to break down or, you know, kind of get tight. Let's call it about, you know, 12 to 15 18 months ahead of recession. We'll call it 18 months ahead of recession. The corporate profits break down about a year ahead of recession. Then liquidity breaks down about three quarters ahead of recession.

[00:06:20]Then growth and stocks break down simultaneously about two quarters ahead of a recession. Then credit breaks down and employment breaks down simultaneously right when the recession starts. And then finally inflation breaks down about a year after you know 12 to 15 12 to 15 months you know four to five quarters after a recession starts. So unless you go into recession and stay there for a while, it's unlikely that the Fed is going to uh have inflation d return durably to its arbitrary 2% target. Uh so we know that we we've been saying this for years that the Fed doesn't want 2% inflation. The Fed's pretending like it wants 2% inflation to maintain stability in the long end of the curve and and anchor long-term inflation expectations. Uh but the reality is it's that frog slide that is at the end of every 42 macro research report. We're all frogs being boiled alive in a pot of monetary debasement of financial oppression. This is why our KISS model portfolio does not own bonds.

[00:07:11]This is why instead of playing defense with bonds, which are no longer defensive assets for a variety of reasons, not the least of which is they're now positively correlated to stocks, instead of playing defense with bonds, we play defense with vault targeting and dynamic position size.

[00:07:24]That in my opinion is a much better solution particularly uh as these dynamics continue to linger. Uh the 42 micro business cycle model currently signals a low probability of a developing recession in the US economy.

[00:07:34]So if you, you know, going back to how the business cycle process works, we can just look at the current data and say there's no, you know, we have no, we have none of this going on right now in the current data. If anything, we're starting to hook up uh from a business cycle standpoint. Uh so there's a low probability of developing recession in the US economy. So we don't have to be concerned about the Fed pivoting. The Fed should not be concerned about pivoting pivoting hawkishly from the perspective of uh what what what is it going to do to growth and what is it going to do to the business cycle. Uh in fact, initial and continuing jobless claims currently signal a low probability of a developing recession US economy. uh the three-month annualized rates of change on the four-week moving average of initial claims and continuing claims are are well below the recession signaling thresholds. The 42 macro five recession signaling indicators currently signal a low probability of a developing recession resilient uh US economy. If you look at special considerations out of the US, so obviously the US is the the dominant economy in the world. It's that what the US economy does is generally going to dictate uh the market regime. It's going to have the biggest influence over uh uh uh the market uh regime. So uh we looked at a few special um special considerations for the US. So we'll start with US inflation policy drivers, the policy drivers of US inflation. And so we're looking at this in respect of fiscal policy, looking at this from the perspective of monetary policy and looking at this from the perspective of regulatory policy, particularly as it relates to uh the credit cycle. So starting with the top panel here, we got total accumulated US federal budget deficits, which other people would just call total debt [laughter] at $30.7 trillion. Uh we have a we got below trend growth there at 4.4% through math annualize. Uh so below trend growth of accumulated federal budget deficits signals little need for the Fed to respond with rate hikes. But we also have well above trend growth of Fed public debt monetization uh which is the Fed's you know uh exposure to Treasury market in their portfolio. And we have well above trend growth of US commercial bank loans and leases. And so both of these dynamics at 12.6% through annualize and 9.5% through annualize respectively. These growth rates signal the Fed would be wise to tighten in respond to these upside risks to inflation. Again, the Fed is monetizing US government debt at a three-month annualized rate of 12.6%. And the commercial bank loans and leases, US commercial banks are extending credit at a three-month annualized rate of almost 10%. Which is basically double the long the the pre-COVID uh uh trend uh rate.

[00:09:48]And obviously in a strong positive impulse uh there signals that hey you know the the bank credit cycle which is exactly what we predicted when we authored the paradigm C run hot theme back in April of last year. We said hey one of the things that is going to be very underappreciated is the deregulation particularly the deregulation in the financial sector which is ultimately going to cause a pretty meaningful uh upside risk in the credit cycle here in the US and this is exactly what we're seeing here. So, in the context of a Fed that is monetizing debt and a meaningful strong positive impulse in the credit cycle here in the US, the Fed has to take this into consideration uh when it decides it wants to quote unquote let the markets do the work for them. Hey, you guys aren't getting paid hundreds of thousands of dollars a year to let markets do the work for you. Do your job. We have a nationwide affordability crisis that they were roughly 60% responsible for uh because they thought the markets were going to do the work for them back in 2020 and 2021. But I digress. uh if you look at uh the monetary drivers of US uh inflation so we have well above trend growth in the monetary basis is obviously you know a lot of this is from the Fed's reserve management purchase uh program at 5 point uh 6.3% through methanoliz it suggests the Fed should truncate reserve management purchases the repo market is healed we talked about that last week the repo market is fine it's as good as it's been since prior to the issues that we started highlighting in the repo market uh any uh early fall of last year and so the repo market's fine so there's no reason for the Fed to be annualizing uh the purchases of of monetization of US government debt uh to the tune of about $650 billion. There's no reason for the Fed to be doing that in the context of having headline inflation at 7.1% through methanolized core PC inflation at 4.4% through methanolized trim mean CPI at 3.4% through numbers are all way too high relative to the Fed's uh you know arbitrary 2% target.

[00:11:30]Uh if you look at US uh money supply M1 money supply tracking right at trend at 7.2% 2% through my annual highs. M2 money supply tracking right at trend at 5.9% through myth annual high. So you know that's okay. It doesn't it means the Fed can perhaps you know wait and not be too concerned. But what is concerning is the context that money money velocity we have just a higher velocity economy uh both from respect of M1 money supply. If you look at the ratio between M1 and M0 uh that's a 3.6 relative to a uh pre-COVID trend of 0.9 and then M2 money velocity. If you look at the ratio of M2 to M0 at 4.2 two that is way higher than the pre-COVID trend of 3.7. So you just have a higher velocity of money economy. Uh we're going uh above trend from of of base money. We're going trend we're going at trend from the perspective of narrow money and going at trend from the perspective of of broad money. And so uh the risk is is that the pullback that we currently see in accumulated federal budget deficits actually starts to widen again, which is exactly what we're expecting in the next six months. uh we talked about that a couple of weeks ago.

[00:12:32]And so if we get the fiscal thrust uh starting to uh to ramp back up again in the context of the Fed monetizing debt, in the context of explosive growth in uh commercial bank loans and leases and in the context of uh uh you know structurally elevated uh money velocity, this is how you can get another inflation accident. And so uh you know wrapping up the fi the probability of the Fed contributing uh to another inflation accident uh is rising according to the market's estimates of the neutral rate which is currently 50 basis points above the Fed funds rate the effective Fed funds rate and the market's estimate of our star which is currently 75 basis points above the Holston Lobach Williams model estimate.

[00:13:09]A Fed that does not act to take away the punch bowl will fan the flames of an overheating economy and stock market bubble. Again, the market is now saying the Fed needs to hike twice to remove its accommodative bias. The Fed is now accommodating nominal GDP growth at a time where every meaningful statistic of core inflation or underlying inflation is either in a strong positive impulse or a weak positive impulse at a level at a three-month annualized rate that is wickedly inconsistent with the Fed's 2% target. And so, there's this, you know, lazy thought process out there. I keep hearing about it, which is the Fed should look through supply shocks. They got to all these banks got to look through supply shocks. Well, tell that to the people who can't trade down anymore with the grocery store. They just now have to do without. We have a fiveyear long nationwide affordability crisis that is only getting worse.

[00:14:04]Obviously, we got nation gas prices and five, you know, heading probably heading to $6 this summer. Uh, you know, this is this is you the Fed's got to make a decision here.

[00:14:13]Does it care more about the stock market than it does about the people with whom it's entrusted to maintain sound monetary policy for? I mean, I think we know the answer to that. If anybody's read The Creature from Jack Island, we all think we I think we know the answer to that. And and so I think we're going to find out a lot this year about uh the Worsh the Kevin Worsh Fed. This guy was a hawk the entire time throughout his career until he needed to pander uh to President Trump to get the job. And I don't I look I pander away my friend. I am not judging. You're now the Fed chair, the most important central bank in the world. So congratulations. I wish you well. I hope I hope he sticks to his knitting and prevents and and it has the cumption the courage required to sacrifice the stock market to protect the livelihoods to protect the the well-being of the folks at the bottom of the K of this increasingly K-shaped uh US economy. And if he doesn't, then we're going to bubble. So, wrap it up there. If you have any questions regarding the pre any of the preceding content, as always, hit us up in the community uh chat. Uh check out these educational resources which you can access in this hamburger menu. And we'll catch you back here uh next week.

[00:15:22]Cheers.