Foreign. Welcome back to episode 33 of the meet. Kevin Report A lot to talk about today, including the release of the Pce, which is more inflationary data from January which has and has been suffering from massive massive seasonal adjustments. But before we do, let's take a listen in to something that is going live right now and that is Loretta Master she is one of the 50 BP folks over at the FED Let's see what she has to say: Yes, Foreign: ER or lesser Hawk Where do you put yourself in that if at all? Um, are you sorry about the audio glitch? It's fixed average or medium? uh Fed funds? uh forecast for among Fed officials of five and an eighth.

or are you higher or lower than that? So as I always said to you, I'd like to be known as an owl, not a hawk or a dove, but for for his wisdom, right? Exactly. But it's not up to me to call myself that. Um, you know I see a little more impetus in the inflation measures than my colleagues did, at least in December when we put out the last SCP readings the summary of economic projections. so I had my funds rate a little bit above the median um in that projection and I haven't really seen much change in my outlook for the economy since since that time.

So I see in uh, that we're going to have to bring interest rates above five percent and we'll We'll figure out how much above that's going to depend on how the economy evolves over time. But I do think we need to be somewhat above five percent and hold there for for time in order to get inflation on that sustainable downward path to two percent, but it's maybe significant. What you're saying is you haven't seen anything in the interim that causes you to change what your dot was in December No. I think I'm where I was because remember I saw a little bit stronger, more inflation impetus than the medium did.

and I Also think that, um, the the labor markets. I'm not really seeing a trade-off between the hot labor market and inflation I'm really focused on inflation. What we learned over the last expansion the pre-pandemic expansion is that you know the unemployment rate can be very low without necessarily spurring inflation. So I'm really focused on the inflation numbers and I don't see that we have to have this trade-off necessarily between labor and, uh, price stability.

In fact, I would say I'm greedy I Want to have healthy labor markets and a return? My colleague Joe current wants to ask a question but I want to just get one more before before we get to him. Um, the real question I want to ask you is what the heck's going on with the economy. We're supposed to be an economy that was right now either in recession or on the way to recession. We printed a half million jobs for January Um, we had retail sales go through the roof.

Is this all seasonal adjustment? Is this economy weakening or is it ignoring the FED when it comes to Great Questions? No. I don't think it's ignoring I Mean we've seen some of the impact of higher rates. Certainly, if you look at the housing market right, that's definitely clearly slowing, right? Manufacturing slowed a bit. Now we have some impetus that suggests that maybe it's not slowing as fast as we thought.

So you know if you had to sort of characterize what's happened is coming into this year. There's probably a little bit more underlying strength and a lot of forecasters thought, um, but there's also some movement good movement on the the inflation measures they are coming down. It's just that the level of inflation is still too high. which is why coming out of our last FMC meeting the broad you know consensus was among all the participants was that we're going to have to do more, which is why you know the statement said ongoing increases Joe Thanks Steve President Master I'm just trying to get uh, some insight into the idea of maybe 50 basis points and why it might have made sense why it ain't happening.

Theoretically, it could still make sense like I think if if you know where you're going or are pretty sure sure of it and you need to get there, you might as well get there. is the argument I'm wondering whether maybe everybody else is is or some people are more cautious is because they're still data dependency? Is it possible that something happens more quickly in terms of of a weakness in some areas? So that is there a reason to just do 25? Because if you need to do 50, you might as and go higher than that, you might as well do it unless you're leaving it an opening for data to come in that shows that you didn't really need to go that high. Is that why we don't go 50. Yeah.

so Joe It's a good question about tactics about where how you know to get to where we need to get to. You know I I'm on the record saying that at the last meeting I saw a good economic case for doing 50 because my view of the Outlook hadn't changed and I Do believe we're going to have to move our policy rate above five percent and a 50 at the last meeting would have brought the top of our target range to five percent. but you know other people on the committee had different views and so that's what the value of having people sit around the table as we come up with sort of a consensus view. Now at every meeting, right? we go through that same kind of analysis.

We look at where the economy is. We look at the incoming data we project out where we think the economy is going, understanding that the economy can evolve in different ways than expected, and then we set our best policy path. But I think the message coming out of the meeting was we got to keep going a little bit more. We've come a long way.

We brought the funds rate up quite a bit, but we still have a little more work to do in order to sure that we get back to price stability and making sure that we're commit. Making sure we're committed and people understand our commitment is what's going to be able to get us back to price stability. We support a 50 at the next meeting I Don't go I don't prejudge, right? I Go into the meetings and I'm going to look at the data and I'm we're going to have a new set of forecasts and that's going to help guide where we need to get to. But that's a tactical decision that we make at the meeting, right? It's got to be based on where we're going, how much the economy is slowing in terms of getting demand back in line with Supply And of course the supply chain issues are also improving.

So there's two things going on: Demand is moderating. and if you talk to our business contacts and our labor market contacts in my district and I would submit in a lot of the districts right they are businesses are saying that things are moderating. So I know a lot of people think that well the data's lag and you're only looking at the past. We have a lot of contacts across the districts that we talk to all the time and that's very important because that's forward-looking They're telling us what they're planning to do.

Andrew has a question for you President: Can you succeed Um at reducing inflation without raising unemployment? And on the unemployment front? What do you think a politically palatable unemployment rate is? Yeah, Yeah, well. you know this is a interesting labor market to say the least. It's It's shown a lot of strength. There are structural things going on in the labor market, as well as cyclical things.

So I do believe that we can get demand down um without seeing the same kind of uh, rise in unemployment that in in past slowdowns we've seen. and in fact, when you talk to businesses, a lot of them said it's been so painful over the last couple years and they've spent so much effort to hire people that they're going to do everything they can. Even though they're anticipating some slowdown in demand for their output, they're going to do everything they can to keep people on staff. so they after we get Beyond this slow down and get back.

you know on the path of price stability that they'll have the staff they need. and in fact, some of our firms in our district are still hiring because they're anticipating that. If we do have a Slowdown it'll be mild and then we're going to go back to a really healthy economy. So I Do think that in this labor market, we can get back.

We can have both. we can have healthy labor markets, and we can go back to price stability. But I Also think it's really important to know that if we want to sustain healthy labor markets over time, we've got to get back to Christability. So that's why I'm very focused on that aspect, right? We've got to get inflation down.

We have to get that to our two percent goal in a timely way. and that's why I'm focused on that right now. The problem President Master is history is not really on your side. You don't have you as I mean the Federal Reserve not.

You Personally doesn't have a terrific track record of bringing down inflation without a recession. And this is the other side of Andrew's question. Which is, do you think a recession is likely? Can you avoid a recession and still get back to your two percent questions? So my forecast is that growth will slow this year and be well below Trend Um, I Still hold to that forecast. So when you're that low, you know it doesn't take much of an some kind of shock that you're not anticipating, which is the nature of a shock you don't anticipate them that can push you into negative growth for a time.

But you know, when you talk to your business contacts you know they're all sort of preparing for that kind of recession. But when you talk to a one, they say it's going to be mild. So again, I I Think we can get back to pricing? What's different now? Is Our commitment to getting back to two percent and all the things we've learned over time about how important it is to have that commitment to communicate it, to be very clear about where we're going right as clear as we can without being present. We're not present right, But to be very clear and that's what's going to get us back to two percent.

There was a very important concept embedded in Joe's question to you, which is one about lags we just had Jim Bullard on from St Louis He said this is 2023, there are no lags anymore I'm overstated what he's saying. Do you think there are lags that are yet to hit this economy that will I guess offset the need for you to go quite so high. So there are two things. One is, we have been very much different this time in terms of communicating where we're going.

So what you saw right when well before we made that first rate increase back last year at the beginning of last year, right markets had already priced in some of that because we were communicating in advance. That doesn't detract from the fact that it does take time for those rate increases to go through the economy. So the financial markets reacted. But it still takes time to get through and we saw that in the housing market, it didn't react immediately.

it took. Even in the housing market, this is very interest rate sensitive. It took some time those lags are still there. So I Do believe that you know we're going to start seeing.

you know more of what we've done in the past affect the economy, but nonetheless if you just look at at what's going on in the economy. Now the strength, the fact that inflation Still Remains High the fact that you know parts of inflation are coming down but other parts including the important service sector X shelter have not moved. We're going to have to do some more, but we are making progress on that path. Joe Uh President Master If if Energy prices um, if something happens there I don't know we're using the Spr.

you know, take your pick on on what could cause a spike there if and I know you could do core maybe to try to factor that out, but then it seems like it filters through to everything else. If if that's why inflation stays stubbornly high, would you continue to work on slowing the overall economy When really, you're not. It's not really. why do we have the inflation? You can't really address the the energy supply problem, so it just seems like that'd be a bad reason to go much higher than you need to go in terms of tightening for something you can't really control.

Um, so Joe It really depends on what's causing that and you know the energy prices arise. If it's because demand is still well outpacing Supply then we're going to have to think about what that means in terms of the path of inflation. If it's a supply shock, which is typical, what you what you're I think what you're talking alluding to, then right, you're exactly right. We have to look at what's the underlying inflation rate, what are inflation expectations doing which are all important, anchoring them, keeping them at two percent over the long run.

So long run, inflation expectations are still reasonably well anchored and so we'll have to do that judgment. But you're exactly right. This is a risk management kind of, uh, a process that we have to go through, so it really depends on the source of that rise in interest rate. We're gonna have to go real quickly, but we've been giving every fan of fish we talked to a hard time about the following.

You guys had it wrong. When it came to the inflation and policy, inflation surged up and the Fed was on the wrong side of that trade. Why should we have confidence? Now you have this right this time. Well, you know we're every other Economist trying to do the best forecasting job we can I Think we reacted well in terms of once.

We agreed that this inflation impetus was there. It wasn't going to dissipate quickly that we were really going to take action. We did that, and we are very committed to getting back to price stability in a timely way. All right President Mister Thanks for joining us and okay, listen to this look I I Just I'll talk about what she just said in a moment, but this was scary.

Okay, you ready for this? Look at this. I've never seen this before. so obviously the FED officials they regularly bring up inflation expectations and I've never seen this before. This just this is the first time I've actually seen this on this particular chart.

And it's not just this chart, it's also when I zoom out even more. But let me explain this to you because it's kind of scary. and then we'll talk about what Master just said. but it.

and it's scary because of how uncertain or how much uncertainty it creates. All right. So what I want you to think of first is this blue line right here? or inflation expectations? This white line are Financial conditions. So the higher the white line goes, the tighter things are.

Think about it as like 10-year treasure yields. interest rates are more expensive, the market is crappier, right? So things things are tougher for businesses and expansion when the white line is up. Uh, and when the blue line is down, it suggests disinflation or deflation. Even right.

So generally what you see is as Financial conditions tighten, the Market's expectations of inflation go down. It was true over here in 18, it was true in the pandemic. It's pretty much always true. In fact, let me show you pretty much always true by zooming all the way out to when this financial uh, this this sort of tightness chart started or or the break Evens chart started over here.

in the.com bubble, you can kind of see the inflation expectations go up over here. On the left when we see Financial conditions come down in Great Recession you see Financial conditions up and you see break-evens down. Okay, all right, so we got that. Now what is happening that I haven't seen before and this is a little odd because it's It's sort of breaking the tradition of what we usually see and we know it's something the Federal Reserve really pays attention to.

Okay, ready for this. look at this chart. Now look on the far right side. look at this.

This is so weird. Financial Conditions are tightening at the same time as break evens are moving up. That's bizarre. Usually break evens come down as Financial conditions loosen.

In fact, you can kind of see this loosening over here and we loosen expectations over here. We had this this uh um, but but I mean I Can't say we have much of a correlation between some of these. so there's a lot of I Guess maybe the way to look at this because as I'm looking at this a little bit more, the way to look at this is it's super odd and volatile right now relative to what we've seen in the past, right? generally. Again, in the longer term as these conditions fall break, evens, uh, arise as the conditions rise, break, evens, fall.

But right now we're having this sort of bizarre moment where yields are going up, expectations for the market are tightening or getting higher, but inflation expectations are actually also Rising So it's kind of bizarre because it somewhat. The only implication I could pull out of this is that the market is suggesting we need even tighter 5 Financial conditions to actually keep this downtrend moving on the breakevens now that somewhat aligns with what Loretta Master says, which. Look, we've got to get above 5.1 percent. And what did she really tell us? Well, one of the big things that she reiterated was something that we've heard about in the Fomc minutes, which is that look, the housing market is slowing down and Manufacturing is slowing down slightly, but not as much as we'd like.

Notice that kind of combination. There manufacturing is slowing, but not as much as we'd like or expect. Housing is slowing and then kind of like, yay, That's what they want, right? They're trying to engineer a housing slowdown because the housing slowdown is exactly what reduces demand and spending and that brings inflation down. She also it's one of the first folks here.

she was supposed to be the basically the Big Bear who's going oh, 50 basis points, 50 basis points Today she's like, ah, you know I said 50 last time but I don't necessarily have to say 50 this time I just wanted to say 50 so we get closer to the high end rate of five percent. Well, I mean if they do 25 basis points in the next meeting, they'll have the high end rate because remember, it's a range. When they raise rates, they give us a range. So if we're at 4.5 to 4.75 now, well, if we raise another 25, BP what do we get? 4.75 and 5.

right? So you can achieve what she wanted to achieve last time. this time with the 25 BP hike. That just reiterates what I've been saying over the last few days. Uh, and quite frankly for a while that I think it would be ridiculous for the Federal Reserve to go 50 Now, even though that's probably what they should do, they'd be shooting themselves in the foot in terms of credibility for what they have left anyway.

But let's put some of that aside. What else? uh, did she mention that was quite odd? Uh, or maybe should I say different for fed folks? Well, she talked about basically without using the words, the Phillips curve being broken. Now that's really interesting because generally in order to bring inflation down, you have to force unemployment. Especially if there's a wage price spiral.

wage price spiral, you have to kill the economy Force employment bring things back to normal 1980s all over again. Paul Volcker right? Okay, fine so since then, uh and even prior to that traditional Keynesian thought uh and Via even the Philips curve which you know was created in the 90s well after uh, John Maynard Keynes and his economic theories. But anyway, this Phillips curve was was this idea that hey, look in history we always have to force Unemployment uh to to bring inflation down. And she made the argument here that no, we don't think so.

We think there are things happening in the labor force that make quote unquote. this time different because people aren't laying people off because they went through years of struggling to find people. So maybe if everybody's just sort of patient and walks through whatever this is whether it's below Trend economic growth or a shallow recession, maybe as long as we can get through the pain of of you know last year and this year and we suffer with our flat earnings or our negative EPS for a year or two and and then we we basically as American Express says spend through the recession and use the savings we built up to sort of survive and get to the other side as businesses and individuals. Well, there may be things just won't actually be that bad and we don't actually have to force unemployment up for inflation to come down.

That's the argument she just made. I Mean if you go back and just rewind and listen to it, She was pretty clear that we don't need to break unemployment. The unemployment rate can be very low without spurring unemployment. That stands in complete contrast to what the Federal Reserve basically has been teaching for for decades.

Which is this idea that the Phillips curve says if inflation is low, uh, the unemployment rate uh or to get the inflate to get inflation down, the unemployment rate must go up because then in other words, what Labor earners have less pricing power. And if labor earners have less pricing power, they bring inflation down because this, You basically have the opposite of a wage price spiral, right? Labor gets cheaper as it competes for dollars and that enables prices to come down. Uh, as company margins can rise in excess, maybe of even their their labor cost savings. Uh, and so so their need to raise prices evaporates.

and then pricing uh uh comes down. Top Line Pricing comes down. So that's where sometimes pricing power gets a little bit tricky because we generally think of pricing. Powers Oh, they can raise prices.

Well look, Tyson Foods might be able to raise prices, but if their margin, you know if they raise prices 10 and their margins are are compressing 20. Well, they're losing more money, right? even with higher prices. So really like, Ideally for for a company. Uh, you can actually reduce prices and your costs go down even more because now you could be more competitive against your competitors.

Uh, you could be more competitive some more of your product and boom, you win, right? Like you end up making more money at lower prices. That's the ideal scenario. So I think it's interesting. my sort of my big takeaways.

Uh, from what Loretta Master said were a inflation expectations are still anchored. which I agree with her, but they're starting to do something weird. It might just be short-term volatility and that the market is now expecting that. we have to tighten Financial conditions even more.

But sure I suppose if you look out and zoom out more, sure they look anchored. but I I you know I I Don't like this recent rise we've had in inflation expectations I think they're going to to pay attention to that. and if we have to bring Financial conditions back up to these levels, well, that's going to be in 10-year treasury yield at four and a half percent and real estate gets hurt even more, right? Uh, her taking this strong stance that the Phillips curve is broken we don't actually have to force unemployment because people are hoarding employees also quite interesting. And her reiteration once again that the housing market essentially has to keep coming down, which is what we've heard your own policy at the beginning of last year, the middle of last year and reiterate in the minutes really, to me, suggests the FED wants 10-year treasuries up, they want real estate down.

that's the goal of the Fed, and they don't really care what happens in the stock market in the short term. we'll see, but that seems to be what uh uh, what Loretta Master suggests. And it's also interesting that she basically just walked back this idea that she's 50 50. she made it clear, hey, like I was 50 to get the upper end to five percent.

Well, guess what, in the next meeting, you can get the upper end to five percent with a 25 BPI Right? after all, 25 plus 25 is 50. So I have to say if she's a hawk and she's listening to her contacts as leading indicators, if she's considered a hawk, this was bullish and I'm not I don't think I'm trying to be like, you know, put the bias on or whatever and I want it to be bullish. like if this is Rockets I tell you you know Uh, you know this. if she's a hawk that was bullish, you know whether that's the leading indicators they're seeing or the leading contact stuff, they're at whatever right? You know they're Teal books and their economic reports from their industry contacts.

Whatever you say. That was not a bearish Fed talk and she was supposed to be one of the Bears that was driving the stock market down over the last few weeks here. Over this fear. now folks, we've gotta talk about Pce.

The personal consumption expenditures numbers come out in about 20 seconds. Prepare for the expectations. Pce month over month is expected to be 0.5 by some estimates. Point Six year over year: 5.0 Core month over month.

Point: Four year over year Core: 4.3 and the numbers will be coming out within the next 10 seconds. This is gonna move the stock market today. Let's see what happens. It's been like 10 seconds, it's still not out waiting.

Uh, usually they're pretty on time. Earth is out. Personal income comes in at an actual 0.6 versus the survey of 1.0 Personal Spending, however, comes in at 1.8 versus 1.4 So more personal spending, but less personal income. Here we go.

Pce numbers in month over month slightly hot at that point. Six, although some estimates did hit that year over year comes in hot 5.4 versus 5.0 This is just like the January CPI report all over again. Core: Oh, that's not good. Core comes in at 0.6 That's 7.2 percent annualized.

That's terrible. The prior read was 0.3 and the last serve and the survey was point four. That's a nice beat. Uh in in a negative way.

Uh, Core Year over year comes in hot at 4.7 Okay, now we got the revisions year over year core of the last reporting period. So December was revised up from 4.4 to 4.6 core deflator month over month, revised up from 0.3 to 0.4 for last month. Uh, year over year, revised up from five percent to 5.3 percent Pce month over month for the last report, revised up from point one to point two percent. So what do you have? Well, you literally have people showing now these new reports showing less income, more spending, and higher inflation uh, than than anticipated by survey and certainly higher than what we had last month.

So much in line with the CPI report. It's not good. it's it's all hotter. It's all hotter than expected.

Uh, and uh, no surprise. But at least at this point the market is taking a little poopsie-doopsies now. I I kind of I Have to I Just put my own little spin on this for a moment while we pull up the Pce report and we go through some of the details here personally. I'd Just like to say that I feel like this is redundant I feel like this is just a redundancy to what we saw in the CPI report.

But for some reason we have multiple of these reports like PPI reports and Pce reports. I Get it? So it's no surprise to some degree that this one's coming in hot because we had the heads up that it was going to come in hot by the last again. the Beats on PPI the Beats on retail sales, the Beats on uh CPI Okay, now that aside, let's see what Wall Street is saying about it. Obviously, it's an algorithmic, easy sell trade.

It'll be really interesting once the humans actually start reacting to this data. If we end up buying this dip, that will be very interesting because I Want you to know right now it's Algos Firing off it's It's a very simple formula if expectations or the results come in higher than expectations. So if they come in lower than expectations, buy very very simple algorithm. you could program probably yourself as well.

So not too terribly much of a surprise. Again, that this data is hot. But hey, whatever. 61 sir.

Economist of Okay, here we go. Only six of the 61 economists surveyed by Bloomberg forecast a personal spending gain of 1.8 or higher. Another hot January report? No question. Yep, agree with that.

Pce core accelerated to 4.7 in January above all estimates and the month on month gain matched the high forecast inflation again coming in hotter than expected. Okay, we've talked about some of the headline numbers here. Let's go to the actual release as well and see what they've got. Uh here.

So here's the actual report. Uh, so what do we have here? We've got. uh, personal income for January There we go: 0.6 personal disposable income 2.0 percent on current dollars expenditures 1.8 So again, this is where you can see we're spending more than we're making right now. and this kind of reiterates what we're seeing with the credit card data, right? The credit card data suggesting people are spending more than they're making.

This is where there's a lot of uh I'd like to say clickbait because I like to say it's really. it's kind of just like basic, but like there are a lot of folks going. Oh but Kevin the personal savings rate has plummeted. Yeah, no.

like we're We're probably going through some degree of a recession. So people go into their their savings that they have and they spend money to get through the recession. Businesses do that and people do that. No duh.

People's incomes go down in a recessionary environment when stocks go down and when you know people are getting laid off. duh. So showing the chart of the personal savings rate going down is just it's redundant. It's like childish.

it's it's It's simple. What we need to pay attention to is how much excess savings people have and most people still have four to five times as much money as they had before the pandemic. So so we we have a long Runway of still being able to spend through this. I'm not saying that's a good thing, it's actually one of the reasons we're seeing some of these inflationary numbers come in hot.

Obviously, combined with the fact that you've got crazy seasonal adjustments that happen in January Uh, so so February is going to be even more important because January is like seasonal adjustment month. But whatever. Obviously, this is a hot report. Obviously, that's not good.

Obviously, this is not the trend that we want. Uh, and and obviously that's why the stock market is taking a little poopsie doopsy immediately after the report. However, I Went to see how the day evolves because I'll tell you. one of the most important things that you're going to get as an investor in those stocks today is if the stock market ends up green today.

That's a sign in my opinion that institutions realize we're not going to get Paul Volckard and any dip is starting to turn into a by the dip opportunity. now. I'm not saying this dip is a by the dip opportunity I'm just wanting you to observe the market today and if for some crazy reason we somehow rebound from negative one and a half percent on the QQQ to positive at the end of the day, it's a sign that institutions are realizing. oh damn, we've been offsides for too long.

It's time to start allocating more cash to these levels. Grab these before they're gone in. February When maybe those seasonal adjustments are gone I'm not thinking it's all in time because obviously if we get a hot Fab you know you're going to be like oh, why did I buy right hot Fab would be like worst case scenario because then you're reiterating the January Trend and the argument that January is just a seasonal adjustment disaster. Uh, or maybe January is hot because January was a lot warmer than December and people are buying spring clothes in January that goes away instantly.

look I don't know I mean if you follow me Instagram on Instagram it's basically at this point like following my only fans. okay I don't have an only fans but on Monday I was skiing without my shirt on because it was hot. it was I mean it's like February in Lake Tahoe and I'm like I'm sweating my butt off over here and even after I get you know, splashed with snow uh I'm still hot. It is weird.

It's like um, I don't know. It's just uh, it is. It's a weirdly warm winter I know Obviously that's just an anecdote, but that is also what we're seeing in the data, right? So that motivates you to buy different clothing, right? and then leads to more retail spending in people and of course anyway. Okay, so so take that as you'd like, but obviously prey Market here and maybe at the beginning Market open or whatever.

we get some red if we continue to close, right? Okay, then this is a legitimate concern if we can if we actually rebound like we did yesterday off of this because yesterday was insane I Mean yesterday was just like straight down and then just like straight back up to close higher basically than where we started the day. Insane. But anyway, what do we have here we go? Increase in personal dollar income in January was led by compensation reflecting private wages and salaries. Obviously, these are just the lagging uh, uh, Embers of inflation.

No surprise. uh. government social benefits decreased in January reflecting a decrease in other benefits fine one-time refundable tax credits Social Security Cola adjustment. Oh, that's another thing to remember too, is you have, uh, you have, uh, the cola adjustment that took effect in January So people's incomes actually Rose thanks to getting more Social Security money starting in January Remember when they announced the cola adjustments and like, when do they do it like September August or something like that, they're like, oh yeah, you know, 8.7 Bomb! People were like, oh, great.

Inflation is wonderful. My social security is going up almost 10 percent, you know? Uh, obviously inflation's not great, but but anyway, uh, that that could be what we're seeing some of in January as well Cola Cost of Living adjustment and not Coke Okay, anyway, uh, so what do we have here? 3 12.5 billion dollar increase Pce reflected spending on 162 billion and spending for goods 150 for spending for services within. Goods The increase was widespread, led by motor vehicles and parts, as well as other non-durables durables or like cars, washing machines, dishwashers, and stuff. with Services the largest contributor for the for the increase with spending for Food Services That's interesting because Food Services is actually part of Core, but food is not part of Core.

see what I'm saying? So it's like even if food increases and then you're like oh well I want to look at Core which takes out food and energy, you still have food services that are affected by food prices. And so if Food Service prices go up because they raise menu prices, that's an increase in basically Food Services and it's related to food going up. even though it's supposed to be part of Core which is excluding food and energy. it's the same thing as saying like you know, oh uh, you know, my delivery fee for my new gym is a hundred dollars more expensive because gas is high, but my gym shows up as more expensive on my CPI report even though the Core CPI says here's your gym without the uh energy costs right? So so you could see how in like food and energy which is very volatile still continues to flow through even in Core.

But anyway, personal outlays increase personal savings uh, decrease uh from prices from the prior amount, blah blah blah Okay, real. Okay, let's uh. let's see here. let's look at some of the other data or related materials that we have here.

full releases and tables. Yes, this is what I want? Let me get this up. Uh, In the meantime, let me quickly see what Wall Street is saying. Uh, PC reflected to increase both goods and services spending.

Food led the way. Yeah. See, they're picking up wall Street's picking up on this as well. Hey, they just picked up on that 30 seconds ago.

Maybe maybe they're watching us right now. Hey, fine with me. Hey, if you're watching me. Hi.

Anyway, so uh, there was really no disagreement across the raft of indicators. In January strong for the economy, jobs, consumption, inflation. Will this be sustained? That's the big question right now. A lot of strategists right now talking about will: Is this a re-accelerating of inflation? Is this the second wave that everybody's been fearing? That's maybe why the stock market is falling and then sort of selling off a little bit right now? Yeah, that is a very fair question.

That's why. or uh. well. the report that comes out next month for February would be so important.

Okay, is there anything else interesting in some of this data? I Do think that food services item was very, very interesting? Uh, and quite important. No, not really. I mean we'll get some tables here. Oh yeah, yeah.

Okay, Okay, okay. this actually will be really interesting. So let's go to: I Want percentages? Please give me percent changes because now we can see categorically what's happening. Oh dear, here we go.

Percent change from proceeding month? Uh, this is so bad. I'm like choking and dying. Uh, Anyway, so uh uh. here we go.

Wages and Salaries. Oh good Lord. Uh. 0.9 seasonally adjusted monthly rates? That's absolutely horrible.

0.9 good. Lord You realize how high a 0.9 Reed is? Oh my goodness gracious, it was 0.4 in November and December 0.9 I Mean this is going to make people scared of a wage price Barrel that's 10.8 percent annualized, but again, some of that has to do with like Cola going up. But damn. 0.9 That's not.

That's bad. Uh, personal interest income. Wow. With rates this High it basically you're sitting at point one percent of an increase.

That's nothing. Personal dividend income. Boy, that's a volatile category right there. Uh, rental income of persons with capital consumption adjustment I Don't even know what that is.

Uh, we can figure that out. So this is. You know this is percent change from prior month. so these numbers are just nutty.

What is this? Uh, personal contributions from government social insurance? Yeah, there you go. Look at that. One point. Five percent I mean that's a massive boost.

That's the cola adjustment taking effect. Uh, okay. can we get a little? Can we get percentages on like specific? Goods Um, maybe food really popped off over here. Percent change.

This is from a year ago one month, but a year ago this is from one. Okay, yeah, I mean that's fine. Eleven point one percent. That's sort of what we've been expecting for food.

Uh, this table. Not too terribly insightful, but um, let me see a little bit more of what Wall Street is saying. And then let's try to Fed swaps. Okay, yeah, here we go.

Fed swaps are now fully pricing in rate increases in March May June Yeah, we've kind of been expecting that already though. Three more of 50 basis point hikes, right? That brings us to five and a quarter percent. So from four point five percent to four point seven, five percent uh, in in the next meeting to five in the next, and then five and a quarter in the next. Yeah, that kind of is what we've been expecting.

So the question now is is the terminal rate moving up? It probably will on this, The terminal rate was before this report at a high of 3.7 or 3.3 What am I saying 5.37 was the terminal rate before this and okay, it's moving up a little bit. There's now this expectation that potentially there's a rising risk for a 50 BP move in the next meeting I disagree with that I think if anything, they would just add a 25 BP or the market will start practicing in a 25 BP for uh, July if it needed to. but I don't really honestly like bottom line on all this. I don't think this really changes anything because again, it's just like it's literally like replaying the nightmare of uh of of a personal consumption or uh PPI retail sales and CPI for January it's literally like we're playing the same movie over and over again.

for January like we get it, the January numbers are hot. We get it. Like how many more times are we gonna play the same movie over and over again? It's like watching the Titanic on repeat and being sad that people are dying. It's literally what these reports are.

It's over and over and over again. For January it's the same crap. we get it. January was hot I Know it was hot for winter as well.

Next month's data is going to be very important. We want to break this trend because the last thing we want is all of these reports next month to be confirming this trend. That's what matters at this point. I Don't think this changes anything in terms of the FED going for 25 BP next meeting I Don't think there's any way they go for a 50.

uh I I'll I'll you know I don't know I'll I'll make a we'll have to make some kind of bet on that because I feel so confident on that. but uh, sure. you know, like if this stuff is a trend, it's bad. If it's not a trend, it's a buy the dip opportunity.

which I still believe that we want to pay attention to what the market does today because even if it's super red at open, if it recovers towards the end of the day, the more the institutions and they could be wrong too. Institutions are wrong all the time. Institutions could be yelling at you going, especially if that boost happens towards the end of the day. Remember that most ETFs do their transacting at the end of the day, so if you get well, that could also be representative of some retail influence.

Rep: ETFs are an institution, but they get both retail and institutional Investments right? But often if you see big inflows at the end of the day or big kind of moves up or down at the end of the day, it's usually institutions pulling the trigger. So they come up with sort of their strategy. uh for for the opening belt and then the closing bell. So you usually get the most volume at those times because of the institutional strategies going in.

Kind of interesting. kind of fascinating. play the By the Dip video. Well, let's see what happens throughout the day.

See, But remember, you know, like Alex Kerr here says disinflation is transitory, poor Jpal. This is just a reiteration of the same crap from January right? Like this is this is not a trend. Uh QT Yeah, look Steve's talking about QT You know. Yes, the Federal Reserve is quantitatively tightening right now.

It's similar to what we saw in 2018 and 19. Uh, in terms of the runoff. Uh, the contraction of the money supply. The contraction of the money supply from an Austrian economics point of view could actually be providing us all of the evidence we need to suggest that inflation will end up being transitory.

Uh, but uh yeah, I mean that's that's part what. Nobody really knows how quantitative tightening is really going to affect the broader Market Nobody really knows. and I think that's why the FED is going as slow as they are on that. They don't want to break anything, so we'll see a little really interesting.

Uh, but yeah, it'll be fascinating to watch the institutional reaction today. Watch how the market closes today? Uh, obviously 10-year treasury yields still holding on to that 3.94 We saw a pump when, uh, in real estate when treasury yields fell to 3.3 percent because people were under the impression that this is it. this is the bottom. I'm like, not so fast.

We'll see Bottom's not in yet. Uh, for real estate in my opinion. so you know I I don't ever want to come across as like I'm only a bull like I'm definitely bearish on certain parts of this economy. but anyway.

uh, we'll see what the next data sets show for. But in terms of PC and am I really like oh my gosh, this changes everything. No, this is just like again. it's Titanic all over again like I Saw this movie I Saw this movie on Javas report I Saw this on the PPI report I Saw this on the CPI report Why am I shocked that Pce came in hot.

It's like the last indicator of the month. It's boring. It's like thank you thank you for playing this for me again. Now start paying me for watching the same movie over and over again.

All right. Uh, now we got some more stuff to talk about like Tesla we always gotta have something to talk about with Tesla uh actually there's another Morgan Stanley report out which I think is pretty fascinating along with uh Steve's favorite Commodities plummeting. We got to talk about that. so let's let's do exactly that standby.

What do we got? Well, we've got some news for Tesla Not only do we need to talk Investor Day lithium a shocker, but we gotta talk about rumors around that small car. But first, let's see what Morgan Stanley has to say with their Tesla Investor Day Preview: Here's how EVS will be made. Dot dot dot. Yes, that's literally the headline of the investor day.

Uh, presentation preview here from Morgan Stanley and I Have to say the dot dot dot is actually a really brilliant placement of a dot dot dot. Now you might be thinking Kevin What do you mean like it's just an ellipse? It's not that big of a deal. Why would the dot dot dot matter? Well, the dot dot dot actually matters a lot. I'll show you why in just a moment.

First, remember what Brett Whitten said with extreme confidence that Tesla was probably going to announce a new vehicle on investor day. That kind of shook me to the core a little bit. Brett Whitton So obviously from Arc Invest and I'm like really it I I mean I I thought the next master plan to read the MP3 uh, who remembers playing MP3s on like a Walkman back in the day? Anyway, Uh, Master Plan Three MP3 You know I thought it was going to all be all about scale, right, copy and pasting gigafactories. which it may be.

but I didn't think they were actually going to announce a new car but written from Arc Invest thinks they are going to. But now I'm talking about this dot dot dot and why am I doing that? Is it? because I have a flash sale going on built around Master plan. Threes reveal for March 1st when the mass and the Flash sales already begun but it'll expire on on March 1st. Uh well, maybe or it has to do with this dot dot dot right here.

look at what Elon Musk says Elon Musk says Kevin's courses are amazing and you should join the private. Oh so I'm reading a different screen. okay Ev1 to t0 to Tesla Roadster the original the OG Tesla Roadster to Model S 3 X and Y to semi-truck to cyber truck space dot dot dot Elon Musk himself teasing the dot dot dot which is in reply to Tesla uh talking about being the largest manufacturing employer and uh, you know, starting as a long shot startup founded 20 years ago in San Carlos And so this tease right here is really teasing. something missing something to come.

And it's also fascinating because that's what Reddit Arc Invest suggests. and it's also what at least this title is toying with from Morgan Stanley So what does Morgan Stanley say? Well, first of all, they have an overweight rating for the stock, so they're bullish. They have a price target of 220 dollars for the stock and let's just read what they say with investors: a Tesla's investor Day just one week away from now, investors are focused on what can change the narrative. To continue to Stock's recent rally, we look for Tesla to unveil a suite of Technologies.

We're crowd required for the mass adoption of EVS at far lower price points a critical component of Master Plan Three Now this is where one of the things that we've talked about was this idea that if Tesla can reduce their margins by 50 percent or reduce their cost of goods sold by 50 on a vehicle, they could reduce the cost of their vehicle their headline price of a vehicle by potentially 35 to 40 percent, which is phenomenal. Now some people challenged me on the math on that because they they in my opinion, they were doing it wrong. They're trying to take like the pers to go like wow, 50 costs less of Anyway, let's let's just do the math together really quickly and then you can see uh, if this seems logical to you. So a model 3 right now, uh, sells four.

If we pick a brand new model three right now, the least expensive Tesla Vehicle sells four. Here it is on screen 42 990. But you don't want to. Uh, oh, I didn't get to really show that you don't want to take 50 of a cost reduction off of this number because that's actually not the number.

you've got to pull the margins right. So if the cost of the vehicle is 42 990, and now what we're going to do is, we're going to minus the margin. Let's go ahead and take off 20 as margin today as things are still potentially relatively expensive today. So if we take off 20 right now, the cogs, cost of goods sold for this vehicle are three, four, three Nine two.

If we can take 50 off of that, then what we're really doing is taking off minus 17196, right? So now we're saying three, Four Three Nine, Two, minus 17 196 which should just be half right? What we're doing with that is, we're saying the car now costs 17.196. So that's that means the new cogs equals 17 196. Well, if Tesla is trying to achieve a 25 margin, then that actually represents 75 percent. So we can just divide that number by seven seventy five percent.

And if we divide that number by 75 percent, we get to a new vehicle price of 22 928. Look at that. there's your 25 000 vehicle. If they can reduce their cost of goods sold by 50 percent and they want a 25 uh uh, cost or a profit margin, if we change this to 70, which would be a 30 profit margin, that is the long run goal, right? 30 profit margin.

Well now all of a sudden the new vehicle price would actually be. watch this. It's Eerie 24 564 dollars. There's your 25 000 vehicle.

So if they can reveal how to get their costs down fifty percent, the twenty five thousand dollar vehicle is basically in the bag wild. Uh. So as we wrote about in its 1913 all over again, Tesla's recent price cuts are close to unprecedented in the auto mode in automotive history. Since the early days of mass vehicle production when Ford launched the Model T Henry Ford introduced the moving Assembly line in Highland Park Michigan in 1913, revolutionizing auto manufacturing.

Subsequent deflation transformed the competitive landscape and drove out much of the industry's players at the time. Now that's really interesting because if you think about it, who are some of the competitors that are not profitable on EV Ford is not profitable. On 2020 on EVS probably won't be until 26. GM probably not profitable on EVS They're not showing us the numbers Toyota is not even trying, not even trying right now.

although they will in the future. Byd is barely profitable on on EV and they're probably only prom comfortable because they're doing hybrids. Lucid and Rivian are basically a joke in reference to profitability. I mean they're spending money, hand over fists just to get people to buy their cars.

And Lordstown Motors I mean we don't even need to talk about them. They've produced like 32 cars and they just pause production because they can't figure it out. I think Ford's actually still under pause because of their their uh production issues as well. But anyway, look at this comparison they're making of a Model T production line compared to Giga presses over here.

Uh, it's uh, you know, quite quite impressive. We think the investment community may be underestimating the obsolescence curves underlying much of today's EV and Battery Technology in production. It is very possible that Tesla's March first investor day may have greater significance on the Market's perception and ultimately valuation for Tesla's EV competitors than for Tesla itself. In other words, maybe Tesla stock doesn't move much, but maybe just maybe what happens the other company? They start trending more towards bankruptcy because they realize they're not even close to what Tesla's doing, and that just makes it easier for Tesla to compete for Tesla to become a massive Mass Market Manufacturer introducing lower price points is necessary to have a meaningful impact on the carbon footprint.

However, for this to be possible, Tesla will need to successfully lower the average price of their offerings. ideally also cut margin or cut costs to leading to into you know, sustained margins basically. But this is their suggestion. We or with a stated Target of a competitive offering at twenty five thousand dollars, Tesla will have to make significant progress on their costs of good per vehicle.

A redesigned interior of the Model 3 project Highland and the subsequent learnings could be a step in the right direction. Yeah, I mean this aligns with the math that we were just pointing out right. Totally aligned and this is where I I Have long term had the belief that Tesla is actually going to be relatively recession-proof now. I Know that sounds like a joke because obviously Tesla has done horribly over the last year.

but I think a lot of that is driven not by Tesla's performance or their valuation. Sure, in part maybe there's some there get given that growth has moved from about 50 percent to like 38 percent, right? I Think most of Tesla's Pro performance was actually due to Elon Musk selling and some people laugh at me when I say that, but then I don't think they know the data that remember Elon Musk sold about 24 billion dollars of Tesla stock last year. How much in billions did retail huddle like buy and huddle last year? 15 billion? That means if retail just hoddled and bought and that's net, right? 15 50 more. So like if you bought ten thousand dollars of Tesla last year and you and everyone else bought another five thousand, so fifty percent more, you would have just broken even what.

Elon Sold Okay, he milked like pardon my French here cover the children's ears. He milked the out of us. Okay, but anyway. Uh, Tesla's Model Two.

Okay, so this is potentially the idea that maybe the Model 2 will be what leads to these margins. or will it just be a refined model three? Who knows what does Morgan Stanley say? Reuters Reported in in November that the aim of project Thailand is to significantly ramp the Model 3 components and interior. Remember the numbers that I just showed you were based off the Model three? You could actually turn the Model 3 into the Model 2 pricing of a 25 000 vehicle. Like you don't actually have to announce a new cheaper car even though there's some speculation of that.

uh I kind of. I've been convinced by what Brett Whitten at over at ARC Invest says and the convincing he gives is that you know what you do not need a cheap vehicle in the American Market because people won't buy it. People want a car for that. That odd time they're going to go a long distance, they don't want a smaller car.

Now there is this suggestion that what about that design of a smaller car that Tesla teased when they announced their uh, their Shanghai expansions? We'll take a look at. Uh, let's see here. Oh, hold on I Want to share the screen but I broke something? Uh Tesla basically a teased this smaller form factor Tesla in sort of a mock-up design. There it is.

it's on screen right now. Tesla has previously teased the smaller car, but maybe Tesla doesn't actually need that. Maybe they just need to make the model 3 so much less expensive to build. They've got the 25 000 car in the bag.

Alternatively, there's also this idea that a smaller like model 2 gets announced in China only. So for like the Chinese and Indian market where smaller vehicles are actually normal, they're not. Heavily, They're not super normal out here, so that's possible. Continuing more with Morgan Stanley here.

images of the model 3 with a covered front rear end have sparked further debate about whether the exterior would also see changes. Why it matters. Well, obviously because of margin. And then they say here.

Ultimately, we believe if Tesla is to successfully fulfill the goal of having a 25 000 model, there will need to be further improvements related to the Giga press and Battery manufacturing. Now look, battery manufacturing is great. I mean the 4680s are phenomenal, right? We saw that on battery div I Do have my speculation though about how great the 4680s really are now. I Know that sounds kind of Blasphemous it's potentially like a Tesla Bowl but uh, it.

You know we could jump on over here and just sort of draw this out. but I want to ask you this for a moment and this is just me being super jaded. Okay, super super jaded. but watch this.

Jade Okay and I think it's mind-blowing Jade Okay, I'm gonna draw a very bad drawing of a battery and let's call this. Have you ever heard of a C cell battery? Of course you have. They're the big fat round ones right? And then have you ever heard of a D cell battery which is bigger like you put it in your Nerf gun guns and stuff right? Okay, like I don't know exactly what the numbers are, but the D cell is obviously 25 larger. You use like 25 fewer cells.

It's got more energy, right? The 4680 in my opinion, might be cheaper to manufacture and create like cost benefits of maybe 15 to 25. But is it possible that some of the excitement around the 4680 and again I'm tin foil hat I'm not an engineer here and I know they're going tablets design? Maybe it'll be cheaper to manufacture? Okay, we can get rid of Cobalt and stuff on, but is it possible that a lot of the excitement around the 4680 is is just because it's a larger cell, right? I mean think about it when they pitch on battery day. uh Hey look, it's it's got more energy or whatever. Well yeah, it's a larger cell than the prior battery.

So like, for example, let me show you this the screenshot over here. If I show you this screenshot from investor day and then I hide myself, they're showing a larger cell that has five times the energy, sixteen percent more range, six percent, or six times more power I'm like, yeah, it's a bigger cell, you know, like I'm sorry a little tin foil you hat there? Don't get me wrong, I Do think there will be some cost improvements, but I think the better battery is really just about better margin for Tesla which obviously has a Tesla investor I'm a fan of. but you know I I I don't get as excited about the 4680 as other people do. sorry I just I just tin foil a hat in here a little bit, you know? Anyway, Uh so I mean like eventually you know I Was talking to people about this yesterday as we were looking at real estate and one person's like, you know, maybe they'll just have one battery sell in the future and then we're all joking like this battery's a thousand X more powerful than the 4680 because they use about a thousand forty six eighty cells per car and it's like, well, if it's all one cell, it's a thousand X more powerful.

It's like you didn't really engineer anything other than a larger battery Excel right again I'm not trying to tin foil hat I Just think some of what we saw on battery day was kind of clickbait I Hate to say it. But anyway, so uh, announcing the introduction for the the Giga press of the model Y at battery Day 2020. Okay, now we got five Giga presses. Obviously they'll be the Giga press for for the Cyber truck.

Okay, these are things that could help us reducing uh uh, components right? Going from 80 pieces to one of the rear floor, going from 90 to 100 pieces to one other structural components. Whatever. Like all of these unibody castings, big deal. uh and so look at Holy Smokes Wait, what is this? Our forecast has the global Tesla Oh, car park.

Okay, Okay, yeah. uh. so basically they Morgan Stanley actually thinks that Tesla's going to get to 33 million vehicles on the road by 2030. and they think that Tesla's going to deliver 7.2 million Vehicles by 2030.

Okay, uh yeah. I think Arc invest is at like 20 million vehicles and I'm at 4 million for 2025. Interesting. Okay, uh, they think we expect 2.6 of that.

So about a third of that to be the model 3 or a future compact vehicle I Think any future compact vehicle will end up just being in China Okay, fine. front end Gigapress is now available 4680s running off the line. Fine, lets you change sort of the structural battery pack. That's another benefit, right? Obviously, structural battery pack helps Gigapress has multiple advantages.

Okay, I mean this gets a little like now. they're just trying to get a little bit you know detailed here showing you how they're going from look lots of parts to one part. ooh lots of parts to one part. I mean we've all seen this kind of stuff before.

Uh, this is quite interesting though. they've got there. You know this whole presentation, sort of reiterating the structural uh information that we learned on battery day like hey, look, you know, planes put their fuel in the wing. so why not put our batteries as part of the structural elements of the car? So that way, uh, we we have maybe a stronger carb that is more simply designed to increase margins.

So in other words, what they're really suggesting Morgan Stanley here saying hey, um, we're just going to give you an update on all of these advancements that we've made in manufacturing to get uh, margins up. That's Morgan Stanley's take here. But I did promise Steve that I would talk a little bit about Commodities So let's just touch on Commodities a little bit for the lulls. so uh, sorry Steve but Lithium prices are plummeting Lithium prices even though production has remained stable.

apparently. in China you've got a substantial decline in EV demand, which is a potentially red flag for Tesla unless Tesla is the one holding up demand and other EV demand is slowing although that's unlikely. That's kind of like the Goldilocks hope. Apparently, the China reopening has not really supported much of a floor in Lithium prices and Lithium prices are down 30 percent in China.

And recently here and demand is down 52 percent for lithium in China and Lithium prices in America are down about 10. Now that's quite interesting and maybe, uh, actually really good for Tesla margins as well. And who knows. maybe we'll hear about that as well on investor day.

But what do we have over here? Goldman Sachs Talks about this being the first leg, potentially of many lower for Ev Uh. pricing on Uh pricing pressures on Lithium Lithium now dropping to a 12 month low, broadly unchanged production, leading to a rise in inventories and a bigger correction here than expected for Lithium pricing. Obviously, some other Commodities are still moving, but apparently here's some charts: weak battery supply chain activity has halved Lithium demand in China. Catl's actually been reducing their prices, trying to become more competitive.

Catl is a Chinese battery manufacturer. Tesla actually buys a lot of batteries from Catl and they're actually reducing their pricing. Uh, very interesting. Why would Tesla consider buying a Lithium? Miner if prices are going to come down and say down damn Checkmate Steve's back at it again.

Damn it. That's it. Cancel the deal, Don't buy the mine anymore. That wasn't nice.

Steve I was supposed to be right. Yeah, that's a good point. Yeah, but but anyway, uh look I mean Commodities are very volatile. Uh, But obviously if commodity price pressures can come down and Tesla can buy cheaper u