 Hey everyone, this is Dan. Since the beginning of this year, S&P 500 is down 19%, NASDAQ 100 is down 27%. The market hit the bottom on June 17th, then rebounded from June 17th to August 16th. Ever since August 16th, it's been trending down again. Fed Chair Jerome Powell made a very hawkish speech at the Jackson Hole Economics Impostium on August 26th. He said the Fed needed to continue to tighten monetary policy in order to fight inflation. Subsequently, S&P dropped 2.4% on that day when the August CPI number of 8.3% was announced on September 13th. It came in more than the 8.1% estimate and caused the S&P to drop 4.3% on that day. The general belief seems to be that the inflation is not under control yet and that the Fed will tighten more. Many people, including the famous hedge fund manager Ray Dalio, predicted that the market will continue to drop. Ray Dalio predicted that the market would drop another 20%. As for myself, after I look into the CPI numbers and looking into the historical data since the 1970s, I came to a very different conclusion. I believe that we still might have a soft landing. In other words, if the conditions are right, we might see a steady decline in inflation rate in the next few months and that the Fed might ease up on QT and rate hikes if certain conditions are met. Once the Fed starts to pivot or to slow down QT, the stock market will recover quickly. Let's get into the details. The June inflation rate as measured by the CPI was 9.1%. The July inflation rate was 8.5% and August was 8.3%. The current inflation rate is definitely very high by historical standards. If you look at the horizontal mine reaching back 50 years, the last time when inflation was this high was around 1974 and 1978. The Fed Chair Jerome Powell mentioned in a May 17 interview that the reason why we have high inflation rate is because there is an imbalance between demand and supply. Particularly, the demand for various goods and services are too high for the limited supplies we have today. That's why the Fed has been tightening the monetary policy to try to reduce demand and to control inflation. In a speech on March 21st of this year, Jerome Powell mentioned that even the Fed was going to tighten monetary policy. He was hopeful that we could achieve a soft landing like what happened in 1965, 1984, and 1994. That brought up the question of whether it is indeed possible for us to have a soft landing in light of what's been happening recently. I will try to answer that question in the next few minutes. Recently, on August 26th, Jerome Powell delivered a speech at the Jackson Hole Economic Policy Symposium. He mentioned that the former Fed Chair Paul Volcker resorted to very restrictive monetary policy to control inflation that was back in the 1970s and early 1980s. Jerome Powell also mentioned that the Fed would keep at it, which means the Fed will keep tightening monetary policy until the job is done. Jerome Powell's Jackson Hole speech was considered to be very hawkish. As a result, S&P dropped 2.6% on August 26th. What is the Fed going to do to bring down inflation? First of all, the Fed has been raising the Fed funds rate, which causes the other interest rates to go up. The Fed has also been reducing the total Fed assets by selling U.S. Treasuries and mortgage-backed securities or by not buying more securities when the older ones they have on the balance sheet expired. The Fed has reduced overnight reverse repurchase agreement or ORR. The ORR might be a controversial topic because most people don't know much about ORR. In my video published about three weeks ago, I talked about ORR and came to the conclusion that by increasing the ORR, which currently, by the way, is at the $2 trillion level, the Fed is actually reducing liquidity in the market, and that will cause the stock market to go down. As Jerome Powell and the other Fed governors continue to talk hawkishly about monetary policy or QT, it has a net effect of causing the stock market to drop, like what happened after the Jerome Powell-Jackson Hall speech on August 26th. I call this rhetoric, which, believe it or not, has been used by the Fed as a tool to bring down inflation as well. What are the results? First of all, the expectation is that inflation will go down because of the tightening of the federal reserve banks. One of the side effects is that the stock market would drop, which we have seen already, unfortunately. We will see slower GDP growth, or even GDP contraction, and some people say that has already started. The unemployment rate might get higher in the next few months. We will look into these metrics one by one in the next few minutes. Let's look at the Fed's fund rate. The Fed funds rate went up a little bit recently, but it's still at a very low level compared to the historical levels. If you zoom into the last few months, we can see that the Fed funds rate went through four increases since April of this year, and it's currently at 2.33%. After the FOMC meeting on September 21, which will happen in the next few days, most people expect the Fed funds rate to be increased by another 0.75%. As for the Fed total assets, it peaked in April of this year. Since that time, it has been reduced by $132 billion. That means the market liquidity has been reduced by $132 billion. Definitely, that has a dampening effect to the stock market. Let's show the year-to-day chart again for the SPY ETF, which mimics the movement of the S&P 500 index. We will now superimpose on the SPY chart the change in market liquidity caused by the changes in Fed total assets and overnight reverse repo agreement, or ORR. Since the beginning of the year, the change in Fed total assets has taken $67 billion out of the market, and ORR has taken $732 billion out of the market. From this chart, we can see from March to the middle of June of this year, when the Fed assets and ORR caused market liquidity to go down rapidly, the market also dropped rather quickly. As if the Fed was trying to prevent the market from sinking even more, the monetary tightening stopped between the middle of June and the middle of August, and the market recovered a little bit. Then the tightening started again from the middle of August until the beginning of September. Sure enough, SPY started to drop again. The Fed added some more liquidity back in the market in the beginning of September. The market rebounded a little until the publication of the August CPI, which caused the market to drop again. From this chart, we can see there's a very good correlation between SPY and the changes in total Fed assets and ORR. Another interesting point is that the change in ORR is about 10 times the change in total Fed assets. That's why in my August 16th video, I said that the ORR is a $2 trillion elephant in the room. Very few people have been talking about the ORR. Hopefully, more people will be discussing the effects of ORR. If you are interested, please check out that video in my channel. If you like what you've seen so far, I'd like to suggest that you click the like, subscribe and notification buttons that will enable you to receive notifications when I post my next video. It will also encourage me to make more videos like this in the future. Thank you very much. Let's continue. We have a lot of interesting stuff to cover. This is the chart showing the CPI numbers. The June CPI was at 9.1%. The July CPI was at 8.5% and August CPI 8.3%. Before the August CPI was announced on September 13th, the forecast was 8.1%. When the actual inflation number exceeded the forecast, many people found that the inflation was out of control and hence the significant market drop that day. Unlike most people, I have a very different perspective on the inflation numbers. I will talk about that in the next few minutes. Let's look at the unemployment numbers. It was at 3.6% between March and June of this year. After that, it dipped down to 3.5% for July and then went up to 3.7% for August. Compared to historical levels, the current unemployment rate is very low. The GDP however does not look too good. The first quarter of this year registered a negative 1.6% GDP growth and the second quarter registered a negative 0.6% GDP growth, or actually 0.6% GDP contraction. With two quarters of negative GDP growth, some people believe that we are already in a recession, which is another reason why the market has been bearish recently. A few minutes ago, we mentioned that the last time we had more than 8% inflation was around 1974 and 1978. Let's look into those two periods to understand what happened. This is the chart showing the period from January 1973 to January 1977. During this period, the Fed funds rate went from 5.9% to 12.9% and back down to 4.6% in order to combat inflation. The CPI went up to 12.3% and came down to 4.8%. S&P 500 was down as much as 50% during this time. Definitely, it was pretty ugly. Unemployment rate went from 5.1% to 9% and then back down to 7.5%. The comparison with today shows that today's Fed funds rate of 2.33% is much lower than the rate in that period. Today's 8.3% CPI is within the range of that period and that's why we single out this time period for comparison. S&P is down 16% yesterday and unemployment rate is at 3.7% which is much lower than back in the 1970s. It is easy to say that because the Fed funds rate went up as high as 12.9% back in the 1970s and therefore we expect the Fed funds rate to be much higher than the current 2.33%. The main difference between now and then is that the Fed has more tools today to control inflation. Particularly, the Fed has duty, quantitative tightening and the ORR in addition to the Fed funds rate to control inflation. Another main difference is that the CPI went above 8% back in the 1970s. It then quickly shot up and went all the way up to 12%. If you look at the CPI chart today, it has peaked at 9.1% in June and since then it has dropped down to 8.5% and 8.3% for July and August. Of course, two months of decreases do not make a trend but at least it begins the possibility that inflation might continue to go down in the next few months. For the period between 1978 and 1982 when Mr. Paul Walker was the Fed chair, the Fed funds rate went up from 6.7% to 19.1% and then back down to 8.9% in order for the Fed to control inflation. The CPI started at 6.8% then it went as high as 14.8% before coming down to 3.8%. S&P experienced a 25% drop and unemployment went from 6.44% to 10.8%. That was pretty much a full-blown recession at 10.8% unemployment. The inflation rate went from 8% all the way up to 15% and if you look at today, the inflation rate peaked at 9.1% two months ago then started to come down. You might notice that the CPI was declining steadily starting in May of 1980. Yet, the Fed funds rate went up here, here and here why the CPI was going down. Why did the Fed do that? They should have stopped the rate hikes when the CPI showed a very steady pattern of decline, right? It turned out that from 1979 to 1982 the Fed changed its procedures and was paying more attention to the quantity of money in circulation such as M1 more so than they pay attention to the inflation rate. Apparently, money supply was growing faster than the Fed wanted during those periods and that's why the Fed allowed the Fed funds rate to go up here, here and here. If the CPI continues to decline for the next two, three months, based on how the Fed operates today they will most likely not bump up the Fed funds rate much more because CPI is declining steadily and that's why it is less likely today for the Fed to over tighten and cause a major recession like what happened back in 1982. That's why I believe we are more likely to get a softer landing than when Paul Walker was running the Fed. Let's look at a soft landing in history that was mentioned by Jerome Powell. From 1994 to 1995, the Fed funds rate went from 3% to 6% and back down to 5.8%. The CPI went from 3.2% to 2.28% then 3.0% and then to 2.5%. Not much of a variation. The Fed actions were able to bring down CPI by about 0.8%. S&P was up 41% during this period. It was certainly a very soft landing, actually from the perspective of the stock market. It was a lift off and not a landing. Unemployment rate started at 7.3% and dropped to 6% then dropped again to 5.6%. The CPI back then was much lower than the CPI today. The Fed certainly has a tougher job to do today with fighting inflation then back in 1994. I still, however, believe we have a chance of getting a soft landing in the next few months. Jerome Powell also mentioned the soft landing of 1984. When we looked at this period, we see that the Fed funds rate went from 8.6% to 11.6% and back down to 8.2% during this period. CPI went from 3.7% to 4.8% then back down to 3.8%. S&P was up 53% and unemployment went from 10.4% to 7.2% then to 7%. Again, the CPI back then was much lower than today's 8.3%. So how is a soft landing possible with today's high CPI of 8.3%? I can show it with mathematics. Let's go to the next page. This table shows the month-to-month increase in CPI and the year-to-year increase in CPI in the last 12 months. The June year-over-year CPI was at 9.06%. July was at 8.52% and August was 8.3%. The month-over-month increase was 1.3% for June, a very high number, but it dropped to 0% for July and it was a very low 0.1% for August. These two numbers are what gave me the hope about a soft landing. If we are able to maintain a month-over-month CPI increase of just 0.1% for the next 12 months, I estimate that the year-over-year CPI will decrease to less than 2% by June 2023. Even if the month-over-month CPI is at 0.17% for the next 12 months, the year-over-year CPI will still be within 2% by June 2023. In other words, if the month-over-month CPI number can be kept between 0.1% and 0.17%, we will see a steady decline of year-over-year CPI in the next few months. With progress like that, the Fed would most likely ease up on QT and also stop or slow down its rate hikes, which would then allow the stock market the opportunity to recover. To sum it up, I believe the Fed has more tools today, including using the Fed total assets and ORR to control inflation. These tools were not used in the 1970s. The Fed also does not target M1 money supply anymore and will not overtighten like what Paul Volcker did in 1982. The July and August CPI numbers this year showed inflation had peaked in June, which makes today very different from the 1970s when inflation hit 8% and kept going up and up. The interest rate hikes in combination with reduction of Fed total assets and with the increase in ORR have been effective in bringing down inflation since July of this year. Hopefully, this trend will continue. If the month-over-month CPI increase is less than 0.17% from now on, we will see the inflation rate within the Fed's target of 2% by June 2023. Therefore, a soft landing is possible if the CPI continues to trend downwards like what happened in the last two months and if the Fed will react to the improvement and stop QT and rate hikes at the appropriate time in the near future. I'd like to emphasize that I'm not predicting an immediate market rebound. What I'm saying is that if the CPI numbers do not get higher than the current 8.3% in the next few months, a market recovery will then be very likely. What are my investment strategies? I will continue to monitor the CPI changes month to month. If the month-to-month CPI changes are less than 1.7% in the next few months, I will gradually increase my long positions such as TQQ, SPXL, ASML, AMD, and Alphabet. If the month-over-month CPI changes are more than 1.7% in the next few months, I will keep more cash in my portfolio and I will probably sell some of the long positions or buy short positions such as SQQQ and SPXS. I will continue to swing trade oil and gas-related ETFs such as UCO and UNG which are more influenced by the Ukraine war and not so much influenced by inflation rate. I posted a video on July 27th about UCO. You might want to check out that video in my YouTube channel. At this point I'd like to suggest for you to subscribe to my Twitter account which is DanMarketL in addition to subscribing to my YouTube channel. By way of my Twitter account, I share with my subscribers almost on a daily basis about important news developments as well as some of my trades. If you like what you've seen so far, I'd like to encourage you to click the like, subscribe, and notification buttons. As usual, I will very much welcome your comments, questions, and suggestions. I'd like to remind you that I'm not a financial advisor. I share my stock trading strategies and analyses for educational and entertainment purposes only. If you want to buy or sell stocks, you should make your own decisions and you should definitely consult with your financial advisors before you do so. This wraps up my video for now. I will chat with you again in the next few days. In the meanwhile, I'd like to wish you the very best of luck with your financial investments.