Guys, after hours on the phone with Apple support, nothing helped.
I posted above but basically I have the 14 inch m1 pro, 12.0.1 was fine, then upgraded to 12.1 created the problem.
I had just bought the computer a few days before so hadn't done a time machine backup.
In the end I followed instructions on the net because Apple support couldn't help.
I had to connect my old macbook to the new one with a usb-c cable (not any cable, the one from apple), before that I completely wiped my new computer clean. (BTW - reinstalling the OS in recovery mode did not help nor did updating to 12.2 beta, even made it worse and my magic mouse also started acting up)
So after wiping the computer I opened it in DFU mode which requires precisely clicking left option-control + right shift + power for exactly 10 seconds (took 30 tries about to get it right).
Then I on the older computer had already downloaded the ISPW file for 12.0.1 which also took me hours to find.
I flashed that over to my new computer using apple configurator 2 on my old computer connected to my new computer in DFU recovery mode.
12.0.1 is back on my new computer and problem is gone.
Using the pre downloaded ISPW file it took less than 30 minutes.
Now the question is why this happens only to some of us and not the rest.
Is something faulty with the hardware that only surfaces in certain versions of the OS? What could it be.
Here is the article that saved me:
Seems I can't put links here so look for mrmacintosh
restore-macos-firmware-on-an-apple-silicon-mac-boot-to-dfu-mode
You will also need his DB so look for:
macos-12-monterey-full-installer-database-download-directly-from-apple