Wall Street Unplugged
Episode: 945September 13, 2022

How the government is fudging inflation numbers

Federal Reserve
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Markets are down sharply as today’s Consumer Price Index (CPI) data came in hotter than expected—leaving investors worried the Fed will continue its aggressive interest rate hikes. Prepare for a rant on the government’s “creative” inflation calculations… and why the Fed should ignore the CPI figure altogether—but won’t. 

I explain how world governments are contributing to 40-year-high inflation… what the Fed should do to finally tame it… and why markets could drop 20% from here if the Fed doesn’t get its act together.

On the plus side, I expect the Fed’s actions to lead to some great deals on Black Friday.

Inside this episode:
  • Why inflation data came in hotter than expected [0:30]
  • How the government fudges inflation data [3:00]
  • Experts continue to be dead-wrong on inflation [10:58]
  • My advice to the Fed [16:05]
  • Why the markets could fall 20% from here [29:25]
Transcript

Wall Street Unplugged | 945

How the government is fudging inflation numbers

Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from wall street right to you on main street.

Frank Curzio: How’s it going out there? It’s Tuesday, September 13th. I’m Frank Curzio, host of the Wall Street Unplugged podcast, where I break the headlines and tell you what’s really moving these markets. That last part means a lot today, doesn’t it? What’s really moving the markets. Sure going to have lots of listeners just for today’s podcast. The market down sharply. You’re looking at Dow down 2.5%, NASDAQ down over 4%. Most of the large technology companies down over 7% today as the CPI, consumer price index, came in much hotter than expected. The CPI is the gauge. The gauge the Fed looks at as its inflationary indicator. The past 40 years, inflation surged well into the double digits. In the ’80s and before that the Fed revised its index numerous, numerous times to where the CPI… It masks inflation. It hides it. And this is factual. You can go look at it.

Frank Curzio: But hear me out. This is very, very important for you to understand. Nobody really talks about this. These revisions took place between 1983. Remember when we had massive inflation in the ’70s and ’79 into ’80, right? Well into double digits. These revisions took place between 1983 and the mid-1990s, where they introduced the rental equivalence concept. That was in 1983. Then they revised this more than 10 times through 2013.

Frank Curzio: Now, most of these revisions took place from 1983, conveniently after we saw the biggest inflation period in our country’s history outside of World War II, through the mid-1990s. So, I want you to Google it. I won’t bore you with the details. I love this stuff. I love reading it. It’s difficult to read, but when you look under the hood, which I’m going to give you the details now, it’s fascinating. It really is. But you can Google it. Google owner’s equivalent rent and the consumer price index. Click that link and read. It’s incredible. It’s a little bit boring, but I’m going to simplify it to you, because it’s relevant to today. More relevant than it’s ever been in at least 50 years.

Frank Curzio: When looking at inflation between 2010, 2020, it averaged 1.5%. 2010 to 2020, right? You’re looking at just before COVID started and right after the credit crisis. It’s under 2%, which significantly… That’s the benchmark, right? They say as long as it’s under 2%, we’re going to be fine and we don’t have to raise rates. That’s the benchmark, that’s the benchmark, that’s the benchmark. They always change the benchmark. Going forward, I want to talk about that. But if you’re looking from 2010 to 2020, beginning of 2020, you look at inflation was averaging under 1.5%, and that’s based on a CPI. But you and I who buy shit are like, “Wait a minute. That cannot be right. I mean, look what I’m paying for my kids to go to school and tuition. Look at electricity, look at food, look at healthcare, look at transportation.” Almost every bill that you pay was up well over 2% year-over-year from that time period. But it was not represented or had a big weighting in the CPI.

Frank Curzio: Basically, every consumer knew that the CPI was bullshit. We all knew it. But the Fed uses that gauge as that indicator, and this is intentional. Even the revisions were intentional. It allows the Fed to keep rates low. Now, what does that do? It’s great for our economy, it promotes growth while also keeping inflation in check. I’ll tell you why in a minute. While also allowing the government to aggressively spend money supporting the agenda for whatever party’s in power. Which is pretty important to the Fed chair and even the vice chair, since the president is their boss. He’s the one that nominates these positions. They have a very huge incentive to try to keep rates as low as they can and mask that inflation.

Frank Curzio: But due to these revisions over the past 30 years, this is why shelter now accounts for 30% of the CPI. Again, there’s no coincidence here. If you add in food and energy, the next biggest components, you’re looking at 54%. Those three things, shelter, food, energy, account for 54% of the CPI. Stay with me here. It’s going to be extremely relevant to how you position your portfolio over the next few months.

Frank Curzio: Also, conveniently the Fed, what do they do is they’re like, “This is what we’re going to do with this. We’re going to strip out food and energy, because it’s volatile. Moves higher, then lower. It’s not a true gauge.” So, if you strip out food and energy and you look at the rest of the CPI, nearly half of that is shelter. That’s the reason why inflation stayed low for such a long period.

Frank Curzio: Why? Because historically, we don’t see rentals rise by an exceptional amount year over year. We just don’t see it, or even home prices rise by exceptional amount on an annual basis. This is pre-2006, 2005, which basically caused the credit crisis, because housing never crashes. It never crashes, even though it’s going to go up 20% annually for five years into 2007, it never crashes. So what did Wall Street do? Trillions were leveraged to the housing market. Again, they said it’s never going to crash by more than 5%. We’ll be fine. It wasn’t subprime, it was a leveraging. The massive trillions in leveraging to that. Let’s create all these packages and then sell them to Wall Street. Pay off the rating agencies to put AAA ratings on this. No one’s going to look at 300 to thousands of mortgages in this package. No one’s going to look at that. And the chance of them all crashing at the same time is minimal. It’s not going to happen. We know how that turned out.

Frank Curzio: Nobody got arrested in the banking sector. We saw the market crashed. The world almost ended. But it didn’t, because you and I, taxpayers, needed to bail out financial companies, which, by the way, are five times larger than they were pre 2008. What a great scenario. Again, linked to housing.

Frank Curzio: But let’s go back a little further for the CPI. And again, stay with me here, because this is pretty fascinating. We go back to the mid-1990s. That’s a pretty long time ago, over 25 years. You know how many times we saw the CPI break the 4% barrier annually? Take a guess at that. How many times since… You can go back to ’93, ’94, ’95, where the CPI broke 4%. Zero. It never did in all those years. Don’t look at tuition, don’t look at transportation. Don’t look at any other cost, because you’re going to see it went up wildly. I mean, much, much, much, much more than the CPI. But the CPI itself, it never was above 4% ever, until recently. In fact, it only broke the 3.5% barrier once, and that was in 2008. It only went to 3.8%. The Fed made its biggest inflation indicator, the CPI of what they look at, what they tell everyone to look at, basically inflation proof.

Frank Curzio: Of course, down until someone had the bright idea to inject $11 trillion, fiscal monetary money, that amounts to over 50% of our GDP, into the U.S. economy in 18 months. And by the way, the 11 trillion, a little over 11 trillion, that’s just in the U.S. If you look globally, it’s 23 trillion was injected in 2020. You could say, “All right. We close it. We didn’t know the scope of COVID.” Fine. Okay? I’ll give you that. But what about in 2021? I mean, 2020 in November, that’s when the vaccines came out. We saw all asset prices. I mean, we’re looking at March, April when the market came down and all of a sudden it surged and it just kept surging and surging into the end of the year.

Frank Curzio: Then into 2021 where almost every asset class was at a record high, because you just injected so much money into the system. It’s never seen anything like… Everyone had money. Everyone. They were handing out checks no matter what you did. Here, PPP loan? Oh. Look at all the people who have PPP loans. The Kardashians took them out, Harvard applied for it. You didn’t need it, but everyone’s like, “Hey, if the government’s going to hand this money, we’re going to take it. We’re definitely going to take it.” That’s what politics is all about. Have the government pay for whatever it is, Al Gore, climate change, and you’re rich forever.

Frank Curzio: Now we’re into 2021, and another 9 trillion was injected into the markets. Another 9 trillion. Why? Why do we go 9 trillion? Why do we need that? I mean, jobs were back. We’re seeing everything come back. And the funny thing is, if we go into 2022, another 3 trillion. $3 trillion was injected into the system. What the fuck for? Why are we injecting 3 trillion in 2022? Why? We look at globally. Maybe you could see it in some areas, but why? Why are we still going crazy here?

Frank Curzio: Anyway, you’re looking at these numbers, they’re absolutely insane. You have to put them in perspective. Again, TARP to save the world was $480 billion. 3 trillion in 2022. What for? But who cares? Nobody’s looking and nobody cares. It’s trillions and what’s the difference between 3 and 4 trillion? Are you really going to say, “Holy shit. I can’t believe you went from 3 trillion to 4 trillion. And the government’s going to spend this, or the Fed’s going to…” Would you really? No. It’s the same thing. 3 trillion, 4 trillion, 5 trillion. It’s the same number. It’s the same number. That’s how we’ve been conditioned. That literally is the same number. Nobody’s going to say, “Oh my God. I can’t believe they went from 3 trillion to 4 trillion.” No. Nobody knew that globally central banks injected another 3 trillion in 2022. I guarantee you, nobody knows that fact. I didn’t know until I looked it up. I was looking at the numbers for 2020 and 2021. Thank you, Bank of America, for having this. These numbers are insane.

Frank Curzio: Anyway, let’s bring it in here and let’s fast forward to today. Inflation is crazy high, more than 8% year-over-year, highest since the ’80s, and the Fed has absolutely no clue. Absolutely no clue. They never thought inflation would go this high. That’s why they were saying the transitory speak for the Fed over the past two years. I mean, that and coupled with the way the CPI is constructed. They’re like, “It’s transitory. It’s transitory. It’s transitory. Don’t worry about it.” I mean, we never see rentals… Even during the major move in housing prices, we didn’t see rentals skyrocket like they did over the past two years. We didn’t see that. It’s usually a gauge. “Hey, let’s make this the biggest part of the CPI. 30%.” Because usually, on average, if you look it goes up conveniently around 2%. That’s the median. If you’re dating back to like 2003 when it made so many of these changes.

Frank Curzio: So that’s fixed. And then, we have food and energy, which is going to be, what, 54% of the whole index, including shelter. But you know what? We’ll strip out food and energy. This way the CPI will always remain low. It won’t be high. But again, now look what’s going on. You inject all this money into it and you’re like, “Wow, looking back at history…” Right? And these guys, the Fed, they’re book smart. They’re not street smart. They look at past data showing that rising inflation is almost always transitory. Almost always transitory. But you got to factor in the amount of money that was just injected into these economies, which we all knew. Everyone knew. We’re seeing wild inflation. Everyone who pays a bill, from a 16 or 17-year-old that pays their phone bill or whatever bills that they pay, maybe even more, till 60, 70-year-olds or whatever. We all saw it. We’re all paying the bills. We’re seeing. Look at… And the Fed’s just looking at us with this dumb look. “It’s transitory. You’ve got nothing to worry about. It’s transitory. It’s transitory. It’s going to come down.” They were wrong and very wrong.

Frank Curzio: Now that leaves them in no man’s land. They’re just sitting there going, “What the hell did we do?” Because the traditional indicators that used to study the markets decades and decades, they no longer apply. They no longer apply. That’s why the Fed, what are they doing now? Holy shit. They don’t know what they’re doing. They’re aggressively raising rates. And they’re not just raising rates.

Frank Curzio: In January, you have to look at the economists. These are supposed to be the smartest people when it comes to the economy. They’re not. If they were really, really smart, they wouldn’t be economists. They’d have better jobs. But they’re economists and people look at them and say, “Okay. These are the people we’re going to listen to, and then we take the average of them.” The average of them predicted there would be four rate hikes this year. Four rate hikes of 25 basis points. They didn’t even call them 25 basis point hikes. They said, “We’re going to have four rate hikes this year. You know why? Because 99% of the time, when you raise rates, you do it by 25 basis points.” They didn’t have to justify it.

Frank Curzio: In January, they were saying this. Even in February, they were saying this. Look at Goldman Sachs. They went from, like, “Ah, maybe two to three,” and then they said, “Okay, we’re going to get four total now.” And they didn’t say we’re going to get four total, like a 50 basis and then two 25s. That would be three… Or every 25 basis point hike is one. They didn’t define it, because every hike was considered 25 basis points.

Frank Curzio: Now look what the Fed is doing. They’re raising by 50 basis points, then two 75 basis point hikes immediately. Month-to-month. And now, they’re going to do at least another 75 basis point hike based on this number, the CPI that came out. Ran a little hot. Based on this number, the Fed futures are predicting that in, what, two weeks, less than two weeks, week and a half, they’re going to come out and they’re going to do a 75 basis point hike. There’s an 80% chance that they do that. The 20% isn’t for 50… It’s 20%. There’s 0% chance that they’re only going to raise it by 50… The other 20% is that they’re going to raise it by a full percentage point.

Frank Curzio: There’s zero consequences for making this massive decision between how much to raise rates. I mean, you’re looking at it. There’s no playbook. There’s no playbook out there for how fast, how aggressively the Fed is raising rates, to where we were at zero in, what, January? And where are we going to be, 4% in December? I mean, I know… Maybe the people who aren’t familiar with the markets, that might not sound like a big deal. We’ve almost never seen that in history, of how fast… The consequences that are going to take place from that are massive. They’re not even close to being factored into the markets right now. Even the last 75 basis point hike is not factored into the markets.

Frank Curzio: The latest CPI number, which came out earlier today, is not good if you’re long stocks. And this is what scared me, because the Fed’s tone… The Fed has the ability to create a really nice, healthy market next year, but they’re not going to do that. They’re going to make a huge mistake, and it’s going to be even bigger than the mistake they made a year ago, 18 months ago, 24 months ago, when they said that, “Hey, this inflation…” 5% it was last year. Last year’s Jackson Hole was 5%. The Fed went out there, spoke Jackson Hole and said, “Look, hey, it’s transitory guys. Don’t worry about it.” When we hit 5%. And that’s the first time we hit 5%. Again, we haven’t seen CPI at 4% since the ’80s. Since we made all these adjustments. And that’s why he’s like, “It’s transitory. It’s transitory. It’s shelter. We got nothing to worry about. We’ll strip out food and energy. We’ll be fine. It’s not going to go much higher. They cure for higher rates is higher rates. People will stop paying higher prices. Inflation’s going to go down by itself. It’s going to be transitory.” Wrong.

Frank Curzio: They’re going to make a bigger mistake this time than they did back then, and look how big that mistake was. Look what it did to the market. If they aggressively raise rates, which the futures are suggesting, and calling for 75 basis point increase in a little over a week when they meet, 20% chance they’re going to raise by a full percentage point, and then come out with the same tone they came out with Jackson Hole and saying, “We’re going to continue to raise rates aggressively for the rest of the year,” where we still see no indications of inflation slowing; if they come out with that tone, look out. Look out.

Frank Curzio: Because my advice to the Fed… My advice, and who the hell am I to give anyone advice? But my advice to the Fed… And I think we’ve been pretty steady on this so far for the past two, three years when it comes to getting in and out of the market based on the stupidity of the Fed and what they’re going to do, and doing the opposite of what they’re saying. My advice, ignore this CPI report. I know it’s hard to do. We all think short-term. Oh my God. Inflation. No, it’s going back higher. It’s going back higher. It’s an anomaly. Rentals are going down. This is based on data reported by DANO. They’re gone down. They’re not going up as much. They were going up four times faster, and they’ve cut back. It takes a while for that to filter through the system when it comes to rentals. It takes a while. Just like it takes a while, as they thought, for rentals. It’s usually a steady amount, and it doesn’t go up by a lot or go down by a lot. If it does go up a lot, it’s not crazy. That’s why they constructed the CPI and made 30% shelter. Now it’s come to bite them in the ass, because that’s the biggest component.

Frank Curzio: And yes, we saw food go higher, but energy came down. But if you are looking at rentals… You can go to rentals. Let’s look at the reasons why inflation’s higher. Rentals, which is coming down based on data today. This is a lagging indicator. Today. They’re coming down, and they’re going to come down even more sharply. The housing market, it is done. It’s done. If you look at the housing market, holy cow. You wanted a screeching halt to a massive growth market? You just did it. You just did it.

Frank Curzio: You’re looking at the velocity of money, which I talk about in past podcasts. It’s already crashing. That indicates money is coming out of the system. It indicates recessionary times. We’re already at levels right now not seen since the great depression, and you want to continue to raise rates. You’re looking at housing. I mean, just to put it in perspective, mortgage rates were 3% in January. They’re 6% today. What does that mean? The average home right now at 500,000, put 20% down, you’re taking, what, a $400,000 mortgage out. Just on a $400,000 mortgage, the difference between 3% and 6% is a monthly payment that’s $700. Monthly. Not yearly, monthly. $8,400 a year, right out of your pocket.

Frank Curzio: You know how much money that is for most people? Simply because you didn’t buy a house nine months ago. The same house that you were looking at, that you were like, “Oh, okay. Well, let me just wait a little bit and see.” Now, what’s changed? Nine months ago. You know how much money that is? Put that in a calculator and go over 30 years and look at that amount. I mean, 8,400 times 30 years. Here you’re looking at hundreds of thousands of dollars in extra payments simply in a nine-month period, because the Fed went nuts on rates at 6%. 8,400. And that’s for a regular middle class home. What about lower income levels? I mean, think about it.

Frank Curzio: Now, look at energy price. Energy prices are coming down. Which by the way, people are like, “Well, energy price are going to go up. The strategic oil reserve, they’re taking so much out of it.” And true. True. Energy you could see go higher. But I’m going to tell you, energy is a good place. I think the stocks are going to do well. But I think energy prices stay around here. I mean, I think you’re going to see them between 70 and 90 pretty much. Maybe they go higher. I still think oil is a good sector to invest in. Oil has come down and you notice how the stocks continue to go higher. I mean, you’re going to see those profits, you’re going to see earnings potential. It’s the one place that you’ll see growth year-over-year, where you’re not really seeing growth and earnings.

Frank Curzio: If you look at earnings, they’re down 4% year-over-year if you strip out energy. That’s big. Companies generate less earnings. That’s the S&P 500 as a whole. Those earnings are down 4% year-over-year. If your earnings are down, what do you think that means for the job market? I mean, so these higher rates are resulting in consumers cutting back on spending. That results in less pricing power for companies and that translates into what I just said, lower earnings, which are being lowered. Not only were earnings down 4% year-over-year if you strip out energy, which is every other sector, 10 of the 11 sectors. But they’re being lowered significantly into next quarter at one of the fastest rates in years.

Frank Curzio: Which is why, according to PricewaterhouseCoopers, PwC… They just came out with a recent survey, and it was over… I looked at the details, because sometimes surveys are like, “Well, we surveyed five people. And based on these results, the market’s going to go down 97%.” Right? I mean, this is what they do. Consulting.

Frank Curzio: All right. So PwC, this is 700 companies, executives, spread out. Real survey, 50% of companies said they expect to lay off employees over the next couple of quarters. Look at Goldman today. Goldman laying off employees. What is that? Rent The Runway stock, or whatever that is, cutting 25% of its staff. PVH, power company cut. Netflix laying off 20% of its staff. Snap, 20% of its staff. Alibaba, one third of its staff. REMAX, 17% of its staff. Peloton, Robinhood, Spotify, Rivian, GameStop, Tesla. What about JP Morgan and 7-Eleven? Those are businesses that should be thriving. I mean, higher rates are good for banks. JP Morgan’s laying off. 7-Eleven, 40% of their sales comes from gasoline. They’re laying off. Everyone’s laying off. And it’s going to be almost every company, because profits are going down.

Frank Curzio: Which means what? What has the Fed been saying? “We’re not in a recession. We’re going to redefine recession. It’s not two quarters of negative GDP. No, no, no. Why? Because the labor market’s strong. The labor market’s strong and higher wages.” Those two catalysts the Fed is citing as reasons they need to raise rates, or the reason why, “Hey, you know what? Our economy is still pretty strong,” they’re guaranteed 100% to get significantly weaker going forward. Guaranteed.

Frank Curzio: But if you’re looking at all those details: Rentals coming down, companies losing pricing power, the housing market shut off, you throw in China and Europe already in a big recession, where’s the growth coming from? The Fed significantly raising rates. How do you expect a job market to say strong? Look. Look. Stop looking at data from the past and just do a little homework, and use your freaking common sense. Listen to the companies, listen to what they’re saying. They’re reporting. Listen to the conference calls. They’re telling you exactly what’s going on. Listen to their tone from this quarter compared to last quarter, compared to the quarter before. Two quarters ago they’re like, “Hey, we’re still seeing…” Last quarter, half of the companies are like, “Well, we’re still weathering okay, but we’re cautious.” Now look what they’re saying. Different tone. “Well, we’re laying off employees.”

Frank Curzio: What does that tell you? If they’re laying off employees, it tells your business is not strong. They’re seeing weaker demand across the board. The reason why technology companies are getting smoked today. They get more impacted from higher rates. Because they make all their money from spending, and consumers and businesses are going to spend a lot less if they’re making less profits. Does it make sense? Did I lose you? Hopefully not.

Frank Curzio: But just based on that, you’re looking at this report, it’s enough reason to ignore this data that came out for the CPI, which is going to make these guys go absolutely nuts in September. In a week and a half from now, when they meet, they’re going to go nuts. “Oh my God. What do we do? What do we do? What do we do? We got to raise. Holy cow. We got to raise, because we said it was transitory. We don’t want to look like idiots on both sides.” You’re going to look like idiots on both sides. You’re going to make a bigger mistake.

Frank Curzio: But if that’s not enough reason to ignore the report, just look at the inverted yield curve between the two-year and 10-year. It’s widening. It’s widening as both of these yields are approaching their highest level since the credit crisis. But the widening of that yield curve, it’s negative yield curve. Not only is this an extremely reliable recessionary indicator when we see that, it tells us right now that what the Fed is doing, raising rates aggressively, it’s not working. That’s why it’s widening.

Frank Curzio: That’s what we have when the two-year yield is much higher than the 10-year yield. Inverted yield curve. And it’s widening. It widened today because it’s telling you that the Fed… It thinks the Fed’s going to raise rates and it shouldn’t. Stop raising rates. That’s the indicator right there. One more cut, fine. 75 basis point, fine. But focus on reducing your balance sheet, less on raising rates, because it’s clearly not work… It is working, but it’s not working as fast as you think, because you’re looking at past data. But just look at what happened. Look at the velocity of money. Look at the money coming out of the system. Let’s look at the restaurants. Listen to Walmart, listen to Target. Look at the inventory levels.

Frank Curzio: These guys are hoping and praying that we’re going to see a bounce back and inflation’s going to come down. They could sell us inventory at higher prices. Just wait. If you’re a consumer, just wait to Black Friday. You’re going to buy a 70-inch TV and they’re going to give you one for free. That’s how much inventory these guys have on the balance sheets. That came from everyone. Kohls, Best Buy, across the board retailers.

Frank Curzio: It’s why they’re cutting staff. You don’t cut employees when business is good and strong. And you’re seeing every single day that comes out, more and more companies are laying off employees. And the more employees there are in the market, that’s when you’re going to see that wage. Right now, you could come in… Not even now, but for the past two years post COVID, it’s hard to get employees. Why? Because the best people could sit home, and they’re still getting paid by the government, and they don’t care. Whatever. But now, there’s going to be a lot of smart people on the market. So, your existing employees who want those raises, good luck. Nah, there’s really good people out in the market right now. Sorry. That’s when you’re going to see wages come down. That’s what happens.

Frank Curzio: But you’re looking at a Fed where one more cut’s okay, but right now, with the tone… If they come out with the same tone, they go 75 basis points, even a full point higher, and they raise rates, and they’re coming out and saying, “We’re going to 4%, 4.5%,” man, look out. Look out. Because raising rates is not just going to really hurt the U.S. economy. We’ll be okay. We’ll see stocks come down, home prices come down. But it’s going to destroy, absolutely destroy, the global markets, which is saddled with debt. All because why? Because you’re getting information and data that is not reliable. It’s not reliable.

Frank Curzio: You can’t tell me shelter should be 30% of the CPI and the reason why you did that… There’s a reason why inflation. Again, I gave you the data. It stayed below 3% almost every single year. It barely broke through 3% almost every single year since the mid ’90s. Why? Because hey, let’s… And look at it. Read what I told you and look it up. You’re going to see why, how they kept revising it and revising it and revising it. Where they won’t include the costs of homeowners who are renting that actually pay the electric, and… I mean, it’s fascinating the way they twist it around. These are all algorithms that they’re using. These are all algorithms and algorithms work until they don’t, and then you get the housing crisis.

Frank Curzio: The CPI doesn’t work. It’s not telling you… It’s not giving you a good depiction of what’s going on with the economy right now. And if you just sat on your hands, one more rate hike and sat on your hands, you’ll see it. You’re going to see it. It’s all out there for you to see. Just look under the hood a little bit. But if you’re going to aggressively do this, look out. You’re going to see food and rent… See prices fall likely sharply in these areas in the months ahead as the labor market, wage growth shits the bed. Housing, the biggest driver of growth for the past few years is basically a non-factor. And the Fed removed this growth component by raising rates so quickly, but immediately removed that component. I mean, how much stuff is bought when you get a new house? And that fuels the economy. Turned off. Two seconds.

Frank Curzio: But right now, after this number, you need to be careful here. It’s why the markets are selling more sharply. We’re already in a global recession right now. We’re in a global recession. The definition of a recession, we are in a recession in the U.S. They could change it and say whatever they want and say the labor market’s strong. Well, when the labor market is not strong, you’re going to go back and say, “Hey, we were in a recession in 2022.” When wages come down tremendously, the job market’s shitty in the first, second quarter of next year, you’re going to come back and say, “Wait, wait, we were in a recession.”

Frank Curzio: But we’re looking at being in a global recession right now. You look at Europe, you look at China. And the Fed is about to aggressively raise rates further, removing almost every growth component. Again, housing, China, Europe, tech from the market. Without growth, what does that mean? If you’re looking at S&P 500 in multiples, where were we? The average over the past five years, we’re trading at 16, 17 times. We traded above 20 times. Deservingly so, because the economy is growing. Companies were putting up amazing numbers. You see Google, Microsoft, Apple. You see the numbers they were putting up like a year and a half, two years ago? It was like three quarters ago. Now it’s different. The numbers are coming down. They’re not as strong.

Frank Curzio: You’re not seeing a lot of growth. Again, growth year over year for the S&P 500 moving energy is down 4%. Now the Fed’s going to go nuts on rates, so where should that multiple be? Should it be with growth slowing significantly? Should it be at 16, 17 times the average? It’s not going to be at 20, 22 times, because we’re definitely not growing that fast. But we’re not even growing enough to where we should be trading at 16, 17 times. So, should it be 13, 14 times? If that’s the case, based on growth and based on what the Fed is doing, we have another 20% downside here. Which is scary.

Frank Curzio: This is all controlled by the Fed. The Fed has the ability to raise and come out and say, “Hey, we’re going to wait and see, and look at the data in October and November, which is going to be significantly different from what you just saw.” Significantly different. And this is higher than even what I thought. I didn’t think it would be that high. I thought we’d see a minor decline. A little bit more of decline. That’s why you’re seeing this huge reaction in the stock market, when everyone’s on one side of the trade and we went up a few days in a row, when everything’s all great, great, great.

Frank Curzio: This is the thing that I was worried about, is the Fed. It’s very bullish. About a week or two before we finally bottomed months ago, saying, “Listen, we’re seeing inflationary indicators. A lot of them are coming down, which is good, and we still are. They’re going to continue to come down. They went up a little bit higher than expected.” Okay, fine. But this is one report. If they’re really going to look at this report and determine what they’re going to do for the rest of the year, look out. Look out. That’s what’s scary. It’s very scary, and you need to be careful. You need to be careful.

Frank Curzio: I’d say buckle up. Have some cash on the side lines. Because by mid-2023, they’re going to be aggressively, super aggressively, lowering rates. Because that’s how terrible the market’s going to be. Probably by March. If they’re going to raise above 4%, they’re going to come off that 4% number so quickly, because you’re halting all growth in the entire market. And at that level, with the amount of debt all these countries have right now, look out.

Frank Curzio: But that, if they do start lowering rates, is going to ignite a huge bull market, because prices are going to be a lot lower. So, have cash on the sidelines. Not saying that this is definitely going to happen, but the Fed is in control. You don’t want to fight the Fed. And if the Fed is going to aggressively raise rates, don’t fight it. Regardless of all the data I gave you of why they shouldn’t, don’t fight it. If they do it, be smart. Say, “Okay, I’m taking some off. Take 30% off.” Again, I could be 100% wrong and don’t know what I’m talking about. But now you’re going to be able to buy lots of assets for pennies on a dollar. Very, very cheap. And you thought Microsoft was cheap here, you thought Nvidia was cheap here, which, at 40 times earnings, Nvidia’s not cheap. At 40 something times earnings, Disney’s not cheap here. I don’t know how companies like that have those growth multiples in this type of market.

Frank Curzio: Where you going to see growth? You better hope consumers spend. Yet, how are they going to spend if you’re in a recession? I don’t know, especially when you’re seeing people get laid off, which they’re getting laid off like crazy right now. Consumer spending is going to grind to a halt. You think they’re going to go on vacation and spend a ton of money like they’re doing in the past couple of years? No. But just be careful and be smart. There’s ways to play this. Listen to what we have to say in our newsletters going forward. It’s not… I’m telling you to sell everything. Holy cow. But we could see a pretty steep decline where you got to position yourself rightly.

Frank Curzio: Energy should still do well. Yes, during every recession over the past five years, we’ve seen oil come down. Usually, it comes down during recessions, especially global recessions. It goes up just like it went up, and now it’s come down. I still think it’s going to remain relatively high. And people don’t think it’s high now, because it was 130. But 85, 80, that’s incredibly high if you’re looking at the past four years. And if you’re staying above 75, 70, 65, these guys could print money like crazy and you’re still going to see growth.

Frank Curzio: Energy’s a good place to be. Be careful of the aggressive sectors, the speculative stuff. It’s probably going to get nailed. Look for dividend paying securities, company’s generating cash flow, and wait it out. Have cash on the sidelines, because you’re going to be able to buy a lot of stuff at a discount. Don’t get fully out of the market. Again, I’m not a genius. Sometimes I’m wrong. I could be wrong on this. Maybe the Fed comes out and says, “75 basis point hike. And you know what? We are seeing inflation ease a little bit, so we’re going to see the next couple of months of what we’re going to do.” That would help the markets, because that’s why the markets went up the past few days. We thought we were going to see a decent number that shows inflation moderating, and the Fed won’t go crazy and raise rates and have the same tone as Jackson Hole. That’s why we went up the past few days heading into this report. That’s why everyone’s leaning on the wrong side and this just punched you in the face.

Frank Curzio: Let’s see what the Fed does. Pay close attention. You could rail at the Fed, you could hate the Fed, you could say whatever you want. The only thing that matters is your money. Play it right. If you play it right, you’re going to make money. I say it all the time. You can go out and hold up a sign and protest all you want, which I don’t know how many people do and… I don’t know. Those people should be getting jobs right now. It’s not going to be easy to get jobs in a couple months from now. Or you could do something about it and position your money the right way. You don’t believe in climate change? Whatever. There’s tons of money going to climate change. Buy the right stocks.

Frank Curzio: So, take the politics, take the feelings, out of it and just be smart. The Fed’s going to be aggressive. Have some money in the sidelines that you could inject into this market, because you’re going to get a lot of these stocks and great names a lot cheaper if the Fed continues to raise rates, which I’m pretty sure they’re going to do throughout the rest of the year. Let’s see.

Frank Curzio: I’ll be back tomorrow with Daniel. We’ll break this down again. See how much the market goes up or down, how it rebounds tomorrow. It’s going to be interesting, but definitely join us tomorrow again. That’s the podcast. Lots of listens with Daniel on it. Should be a lot of fun. I’m going to cover a lot of this and I’ll see you then. Any questions, comments, feel free to email me, frank@curzioresearch.com. That’s frank@curzioresearch.com. I’ll see you tomorrow.

Announcer: Wall Street Unplugged is produced by Curzio Research, one of the most respected financial media companies in the industry. The information presented on Wall Street Unplugged is the opinion of its host and guests. You should not base your investment decision solely on this broadcast. Remember, it’s your money and your responsibility.

Frank Curzio
Frank Curzio, founder and CEO of Curzio Research, is one of America’s most respected stock experts. His research is regularly featured on media outlets like CNBC’s Kudlow Report, The Call, CNN Radio, ABC News, and Fox Business News. His Wall Street Unplugged podcast—ranked the No. 1 “most listened-to” financial podcast on iTunes—has been downloaded over 11 million times.

Editor’s note:

If the Fed makes good on its promise to keep raising rates, we could see more pullbacks in the coming months…

If that happens, it’ll send the Moneyflow Trader strategy into overdrive… and could easily hand members their seventh triple-digit win of the year.

Here’s how Moneyflow Trader can help you profit from a falling market.

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