Hey Subscriber,

OK--Take another deep breath...in...out...in...out.

So it's Fed Day tomorrow and we have advised our All-Access members to take appropriate hedging with SQQQ put options in case Jay Powell and the Gang get a little jiggy with new hawkish "anti-inflation" positioning now that the 9.6% inflation rate of production goods inputs came out this morning.

What the "Street" Expects To Read/Hear

The Street consensus is that the Fed will announce a dramatic policy shift Wednesday which will clear the way for a first of multiple interest rate hikes next year in June. Markets are anticipating the Fed will speed up the wind-down of its bond-buying program, changing the end date to March from June--which then opens the Fed Funds rate hike lane.

The end of QE allows the Fed to be free to start raising interest rates from zero, and Fed officials are expected to release a new forecast showing two to three interest rate hikes in 2022 and another three to four in 2023.

Remember, until the most recent Fed meeting, there had been no consensus for even one rate hike in 2022.

And of course, at the end of its two-day meeting Wednesday afternoon, with consumer price index up 6.8% YOY in November, and undoubtedly in December too, the central bank will have to officially acknowledge that consumer and producer price inflation is no longer the “transitory” or temporary problem officials had thought it was, and that with wages rising/product and service costs rising, the wage/price inflation spiral could become a big threat to this post-pandemic recession business cycle.

What is the grave threat to the 2020-2022 business cycle? That 2022 CPI/CPE inflation does NOT taper/deflation and that the Fed has made a monetary policy "mistake" that requires snapping the neck of the economy with interest rates high enough to reduce demand for goods and services aka "Pull a Paul Volker" and tamp down the inflation fires with demand killing interest hikes.

We have to think the chances of JPowell going all Rambo on Fed Funds rate hikes are very low.

Interestingly though (at least to me), a big part of the 70's stagflation was because 29% ish of the workforce at that time were in union jobs that had inflation-based wage/salary protection. Those wage/salary rate hikes (combined with the two oil embargos from the Middle East) created a negative feedback loop of higher final end product prices which fed into the calculations of overall price inflation which then upped wages again and then the wage rise spiral.

Granted today, we only have 9% of the labor force in inflation-adjusted wage contracts. But we have 70+ million Americans on inflation-adjusted Social Security monthly benefit payments (that means higher withholding rates for current labor which means less cash money after-inflation take-home pay).

AND--within the 155 million American workforce (adjusted down for 2 million long haul Covid patients not able to work and 6+ million who have retired/dropped out of the US labor market since 2020 with few coming back), we now have about 30 million people in the service industries/package logistics industry where 4-6% hourly wage hikes are rolling across every region of America where there is an Amazon/FedX/UPS delivery hub (i.e., everywhere).

That means low-skill food and other services/retail joints that have to move wages higher to compete with the rising hourly pay for logistics and national franchises.

My point? In 2021, we have about the same percentage of labor with locked-in wage inflation benefits as the Stagflation 1970s--are we at risk of a NEW wage-price/cost feedback spiral ala the 70's??

Especially when the giant rise in apartment/home rental rates + "owners rental equivalent" aka "cost of shelter" is added to PPI starting in March 2022 (it has a 6 month lag--for no good reason I can think of). It's a major component of CPI — making up a whopping 32.8% of the CORE CPI ex-energy and food prices — and has been included since its inception in 1913.

The two main components of the shelter index are the owners' equivalent rent of primary residence (OER is 23.8% of CPI) and rent of primary residence (5.9% of CPI). OER figures out what average house would rent for vs. the average mortgage payment a person would pay for the average home/condo.

Now, in reality, the price rises in OER and actual rental cost of living rates have never been remotely been accurately reported by the official CPI ex-food and energy. Last April, for example, while OER and actual rents were up 12% yoy, the "shelter cost" used in figuring overall core CPI was 2%.

Final Point: As the average median cash balances in US checking accounts is about $1250, during the "free money" sent from the US Treasury aka "money heaven" median averages doubled and tripled for homes with a few kids (plus money saved from not going out to eat/no commuting/entertainment etc.).

Since that free money dealio is NOT coming back, normal demand for services will return somewhat to normal but demand for GOODS (think all that stuff you bought for your home/office/outdoors in the pandemic) will be coming back to relatively normal, too.

Now--since consumer consumption is 70%ish of the US economy, and you have probably already replaced your crappy TV, speakers, laptops/desk Zooming gear etc. etc., the days of 6%-8%-9% annual GDP growth are about to go into the GDP rearview mirror.

Year-over-Year real GDP (minus inflation) 2022 over 2021 has no chance of repeating 2021 v.s 2020 comps. YoY inflation 2021 to 2022, on the other hand, has a good chance of staying elevated for all issues stated above plus
1) US Energy production (and thus prices) will stay in the same range in 2022 of 2021 due to scarce interest in financing the fracking of wells that cost $55 per barrel to drill and produce
2) While supply chains will come back to somewhat normal after Omicron runs its course in 2022
3) The "reshoring" of manufacturing to the United States from China/Vietnam/Malaysia will elevate product costs + higher wages for actual union labor
4) 11 million job openings with 5 million actively looking means wage inflation does not go away.

My point? The odds are MORE than 50/50 that with the Fed's 2% annual CPI inflation goal (that was never reached for 11 years in the good old disinflationary days of 2009-2020) is NOT GOING to get below 2% by the end of 2022 (and realistically 2023).

IF the Fed, with newfound inflation bogey man religion, is still seeing 3-4% CPI prints after raising their Fed Funds rates 2 times in the first half of 2022, stocks selling for 20+ times expected 2022 revenues are going to get smashed again as they raise rates 4+ times starting June 2020.

And let's be real--the "uninvestables" in the 2021-2022 stock market already include:
1) 20X+ revenue cloud software and other big concepts no income stocks
2) the 80% of 485 in 2020-2021 IPOs (NOT including SPACS) selling UNDER their IPO opening price
3) Chinese stocks listed on NYSE/Nasdaq
4) Higher interest rate sensitive stocks
5) the 90% of 550 SPACS in 2021 selling under $10-$11 that the SEC is going make get rid of their 5-year Pro-forma projections
6) ANY stocks owned by Cathie Wood and the ARK ETFs now hemorrhaging $5 billion a month in redemptions
7) MEME stocks getting maimed
8) EV stocks without substantial 2022 revenues

We had a lot of fun (and made a s___ ton of money) playing the SPAC craze as the new marginal buyers of US stocks (again marginal buyer of anything is the price-insensitive investor)--the "Zoomer/Millennial YOLO FOMO DIAMOND Handers--threw millions of market orders and $billions at NKLA and other plays.

But those folks have never seen a bear market of a market mania get strangled to death (see Dot Com mania 1998-March 2000) or Phoenix/Las Vegas residential real estate bubble collapse 2008-2010.

The stock market mania stoked by the Federal Reserve "Put" and then free after inflation money we have talked about for years (and rode to amazing profits) is finally getting the butcher's knife.

The bottom of any mania is when a majority of the new players can't take the brain damage and "tap out" of the market licking their wounds and then get their Lambo repossessed.

The crypto economy in many ways is comprised of greater fools as well--with some notable Web 3.0 exceptions that are delivering a real use case that delivers 50% lower cost of anything digital.

Final word: Omicron rise is NOT going away soon in the United States...here are the latest infection doubling rates (i.e, exponential growth rates) in the United States

We will once again position ourselves for this onslaught.

IF you have gone into travel/leisure/indoor entertainment/gambling/cruise ships and food service stocks recently betting on a quick pandemic end, my advice is to sell them, take losses and write that off against the winners you sold this year.

On our energy transportation names, we are working on a hedge and will publish it tomorrow after the Fed shows its stripes.

PS: For those of you who ask me "So Toby--what are you doing with your managed accounts?" I will share we are at 58% cash/25% closed-end funds and MLPs/Preferred Stocks-and about 17% Microsoft Apple Google Facebook Taiwan Semiconductor

PSS: If the Fed fails tomorrow, we will officially sell Spotify and Adobe--great companies just too high revenue multiples.

Action Plan: 1) We need to get a 36+ VIX panic sell-off day with our beloved Mega Cap Apex technology companies i.e., market leadership getting hit too--that will be the sign of real capitulation. We got close today at 33 VIX.

Trust me: We will send out a "TIME TO BE BRAVE" email when appropriate.

You must remember in the simplest but most accurate description of how any live auction stock market works, the market bottoms when all they who HAVE TO SELL (margin calls) and those who can't take the brain damage of seeing their beloved stocks drop below their cost basis (aka "weak hands") have sold.

2) The biggest risk to the market right now is obviously there are too many known unknowns about Omicron:


TR Wealth Management remains over 40% in cash or variable rate closed-end funds that benefit from higher longer-term rates) and 60% in our Global Apex Digital Dominators and our Ultra Income stocks/MLPs/ETFs.

NOBODY needs to be a hero here--you DO need to be aware of actual reality, have a plan (reread the above if still unsure) and have the liquidity to take advantage of ALL the delayed spending on travel, services, and the transformation of our work lives, the coming metaverse, and lots of great emerging companies too.

Toby