Welcome back to Meet Kevin Report number 30. we've hit a new decade of Meet Kevin reports the 30s. Welcome aboard today! We've got quite a bit to talk about. We'll talk uh, Tesla Russia uh, We'll also talk about how the bull thesis could be wrong and uh, we'll get started by looking at some charts that, uh, kind of start by suggesting, uh, that markets might want to start pricing some of that in as well.

So we'll take a look at all this together and more. so. Uh, the first thing that we want to pay attention to is the five-year break-even rate. Five-year break-even rate we expect really needs to fall a lot in order for the Federal Reserve to really feel confident that they're in a position to pause on interest rate hikes.

Well, unfortunately, the Uh Break Even rate uh measured by The Five-Year Uh, it's the five-year break-even rate is a measure of uh, the difference between tips and five-year treasuries. Ignore really how it's calculated for a moment. But here, when I remove myself on the chart, take a look at what's happened just in January to The Five-Year break-even rate. So if we go ahead and grab Let's uh, grab a line over here and we see this measure of the five-year Break Even We can see it's been rising essentially since the beginning of the year, but I don't have to call it maybe the second week of January and uh, the final year Break Even is now at Heights so we haven't really seen since October and November Uh, it's really been rising quite a bit here.

Uh, and unfortunately, we ideally want to see this a trend down because this would send more of a signal to a Jerome Powell in the FED that inflation expectations are anchored. Uh, and right now, it doesn't look that way. We were on a pretty strong downtrend, but unfortunately, it looks as though that downtrend is beginning to break. Uh, unfortunately.

So as as Breakeven rates move up, we do believe at the same time markets will start pricing in a fear that okay, well, we're going to need a higher terminal Fed Funds rate and that's also exactly what's happened. Here is a chart of the Federal Reserves or the expectation of the FED terminal rate you can see really at the end of the year October Over here on the left: November December We were really consistent with the terminal rate expectation of 4.9 percent. This was despite the fact, the FED saying in December via their summary of economic projections that the Fed was going to raise rates to about 5.1 percent. That was the expectation.

Markets did not even blink in December markets did not even remotely care about the Federal Reserve suggesting that they were going to move break or that they were going to go above five percent. In fact, for almost all of December markets priced in less than five percent and it wasn't really until recently. Uh, and I'm going to assume this is some form of data anomaly. On the right.

You have some kind of really bizarre one day Spike up I I'm not sure if that'll get smoothed out today or what's going on there, but anyway, right now that, uh, that terminal rate expectation is sitting at 5.31 and you can see this trend up really. Since about uh, the uh the first week February when we got our jobs report, when we got our CPI reports, uh, when we got our PPI reports I mean every every report is showing a stronger economy and that unfortunately is leading to the market to start essentially pricing. In this fear of okay, well, we'll have to have a higher for longer regime and I think that, uh, until we get convincingly lower uh figures probably that's going to be the case. higher for longer, we already expect that.

The big problem though that comes with this is because of this potential rise in breakevens. Uh, The Five-Year break-even curve again shown on screen here. Because of this breaking the downtrend, we could potentially end up getting a Jerome Powell at the next Federal Reserve meeting that's a lot more aggressive than and what we would otherwise expect. So I think markets are likely to start trying to position to bearishly price in whether it's through Short Selling or whatever to price in a more aggressive fed come March Of course, by the March 22nd meeting will have a stronger Uh set of data or we'll have more data, we'll have less seasonally affected data January data tends to be the most seasonally adjusted.

It tends to be one that is very winter based and comes off data from uh from the last. Uh, well, that comes off weather data. For example, we if we have a colder December and a warmer January, you could end up getting more spring sales in January and more sales pushed on to December or sorry, on to January which if we kind of just broadly zoom out, is what happened. We had a retail sales disaster in December in a boom in January.

we had colder weather in December and warmer weather in January so it aligns right. But nonetheless, Mark Markets are starting to get nervous again, at least when we look at what the Bond market is doing regarding that five-year break-even deal. And so that's going to be something well as investors we're definitely going to want to keep an eye on. And so far as we've been keeping an eye on it almost every day it's just been take up, take up, take up, take up, so keep an eye on that.

We only get two. Blindly bullish Uh, Walmart Raised its dividend this morning. They beat expectations of a buck 51 for EPS coming in at 171. their inventory year for year for the quarter was actually down 2.6 So you're seeing some of that inventory.

uh, disaster really get fed through businesses? you're not seeing as much of that, uh, oversupply as what we've previously seen. uh, going into last? Uh, or going into the beginning of 2020 too? Uh, when? uh, finally Supply chains were catching up and all of these insane levels of orders were coming in. Were you at companies like Target and Walmart showing inventories up anywhere between 30 to 70 percent? Quite remarkable. Total stock or a total compensation at Walmart was up 8.8 percent.

the revenue beat as well Home Depot posted some strong earnings Uh, with uh, profit coming in three cents above expectations at three dollars and thirty cents. I'll tell you, when you look at the financials for Home Depot you're actually it's amazing how much money this company makes. Uh, they make a lot a lot of money. Uh, and uh, it was pretty remarkable just pulling up their investor sheet, which we'll do right now here.

Look at this: Uh, this is a company that brings in 35.8 billion dollars in net sales and their costs of their sales is only 67. For a retailer that's actually really incredibly good. I Mean you compare this to something like Amazon and you're almost. You're almost upside down.

Uh, on. Amazon it's it's remarkable. Uh, it looks like Walmart right now on this topic, by the way, is providing bad guidance which is actually what Walmart did is or uh, Home Depot did as well. Let's listen in for a moment now.

Uh, looks like 590 to 605 and that is below the consensus estimate of 650. Walmart CFO Also said the company is taking a pretty cautious outlook on the rest of the year and we should also point out that the same store uh U.S Sales number uh, a little bit muted from whereas expectations were two to two and a half percent Now versus three percent uh estimates and don't miss Walmart CEO Doug McMillan on Mad Money with Jim Cramer tonight at Six A.m eastern time, let's continue that conversation about Home Depot That's interesting. So you actually had Walmart initially do quite well uh with uh or at least the market reaction was positive. uh when Walmart initially released their earnings but it looks like that's turned uh, negative on week guide going forward.

same problem you had at Home Depot But just to finish that note on Home Depot here I have and usually we do just. we will go deeper into fundamentals and that in the course member live streams we'll do sort of more course member Q A on fundamental analysis ta whatever. uh, real estate analysis. But uh, so so course members should look at this and go.

That's insane for for a Goods seller, right? This is an incredible profit margin that this company has. and uh, it's no surprise that they end up ringing, uh, almost 10 percent of all their sales to net earnings. For a retailer. That's insane I Mean that's really, really impressive.

So, 3.3 billion dollars there to net earnings. So uh, I mean phenomenal numbers that you get out of Home Depot. But but again, both of uh Walmart and Home Depot negative and pre-market on weak guidance. and that's probably one of the biggest fears that markets have is that ultimately, uh, companies will will miss on earnings substantially, right? This is typically what we're hearing as the bear argument.

Uh, just get ready. The earnings misses are coming. so that's that's uh, that's been pretty typical and something we've been talking about regularly. Uh, still.

Nonetheless, go ahead and look at the QQQ Obviously, we're we're off the bottom. Uh, and uh, and we sort of broke that downtrend in the 200-day moving average. But but boy, we've uh, We've certainly, um, you know, gotten rejected at the second Fibonacci level here. Uh, so we'll see what happens.

uh, over the next few weeks as we get, uh, prepared for February data in March uh, that'll be pretty incredible. So uh, all right, so we've looked at, uh, break Evens. We've looked at uh, earnings a little bit here, just briefly from Walmart Home Depot with the uh. One more thing that I'd like to do is look at the Financial Conditions Index.

Uh, let's take a look at that together. So the Goldman Financial Conditions index gives us a good idea of uh, how how at least the market is responding to expectations of higher inflation uh, via break evens or whatever. And the Goldman Financial Conditions index at the very least has been rising in February to potentially compensate for this higher Break Even yield which Jerome Powell in his last meeting indicated. hey, look, as long as Financial conditions are tightening in response to new data, then maybe the FED doesn't actually have to respond in any other unique way.

Of course we we do just continue to expect these 25 BP hikes until we can be convinced that hey, you know the Fed's mission is becoming a little bit more complete. That's still a while out though. and uh, what? You're really what I'm paying attention to a lot obviously is the movement on the tenure. The movement on the Tinier is really incredible.

Uh, we're knocking on the door of Three Nine. It seems like most institutions are convinced it's going back over four, potentially to four and a quarter percent. and uh, as we, as we essentially await, uh, better inflationary data, the the yields here continue to go up, which will just punish real estate even more than we expect. So um, keep an eye on that for real estate I think there was a lot of bullishness that oh, January is back to buying time and and people seem to be a little excited about the marketing and based on at least what's happening in rates, it could be misleading and and could be misplaced.

Could be very temporary so we'll see uh all right now let's talk about Avon Oh Elon standby take out Big old sip of this coffee here. Went skiing Yesterday by the way boy that was fun! uh I I don't think I've I've had that much fun skiing in a while. It's actually been a while since I was personally skiing. It's been about 13 months but the last time I went uh I just I I weighed a lot more.

uh like literally about 35 to 40 pounds more and I I could not ski I couldn't ski without stopping last time. uh, it was tough this this time I I just kept going. It felt great. so uh, really happy about that.

So uh, hopefully uh, hopefully y'all are having fun with the winter as well. Uh, but Tahoe sums up tatao really nice. Okay so let's get into Tesla All right, five seconds for Tesla might take another second here actually. hold on, We must find there's a piece I Want to cover? Ah, here it is.

Got it. Got it. Got it? Got it all right Here we go: Foreign touch on a Tesla and a price Target by a company that has billions of dollars under not only management, but specifically in Tesla stock. We're going to go through what their price Target is for both 2025 and 2030..

But first what I'd like to do is look at an opinion piece by Bloomberg uh journalist and I Have to say that's pretty good I think it really hits on some sentiment and I love the title. Musk has turned Tesla's quote failing into winning And really what? What he's starting off by saying is that there's so much fear, uncertainty, and doubt that's placed on Tesla that it's almost like the old Shakespearean line of me thinks thou protest too much I've changed that slightly, but that's what we generally colloquially say uh And that's really to say that it seems like so much of the hate for Tesla is misplaced. Now there's so much criticism. While at the same time as there's so much criticism, you end up with a company that outperforms over and over and over again.

It's really incredible. I mean I Have to say from a personal point of view, uh I I Could not believe when somebody came up to me and said that they actually uninstalled Twitter solely because of Elon Musk that they won't buy a Tesla solely because of Elon Musk and I'm thinking to myself like how much CNN are you watching because the hate is totally misplaced. They can't actually give you a really good reason for hating on Tesla One of the things people do who hate on Tesla is they talk about uh, recalls and and I love this. This was a fantastic Uh quote here.

It was actually from a Forbes article Sawyer Merit Here, uh quoted this Forbes piece. It was fantastic. since January 2022 Tesla has had quote 21 or quote unquote recalls for about 4.1 million vehicles with some Vehicles counted multiple times. 99 of those Vehicles were fixed using a software update that did not require customers to go into a dealership or replace car parts And remember, like when you get a recall for a car, it is an opportunity for the dealership to sell you more service, right? So in some regard, the recall game is actually profitable for companies.

They get people to bring their cars into the dealership thinking they're getting something for free. But of course, when you go in conveniently taking time obviously out of your day to actually go there and do it and have somebody drive you back and drop you off or whatever. you actually often get sold some form of other upgrades or service because you may as well get that additional service done because you're already there. You've already gone through the inconvenience of going there, so the sunk cost fallacy sets in: people are more likely to spend money on their vehicles because they're already there.

But going back to the rest of this tweet right here from this Forbes piece. Meanwhile, Fiat Chrysler Kia Hyundai VW BMW had no software fixes and Ford Nissan GM and Mercedes did have software fixes, but they were able to only fix one percent of the Ford recalls, two percent of the Nissan recalls, 32 percent of the GM recalls, and 17 of the Mercedes recalls were fixed via software updates, whereas again with Tesla, 99 of Teslas were fixed using some form of software update. Here's that Forbes piece. By the way, if you want to look at it, Tesla recalls 4 million Vehicles since January of 2022.

you could, uh, read the rest of that Forbes article if you'd like. But really, there, there does seem to be this hysteria around hating Tesla And what's remarkable is, despite all of this hate, somehow Tesla continues to get stronger. And this is what the Bloomberg writer here is saying. While everyone thought Musk's entanglement with Twitter would be damaging to Tesla or the recall fud the uh, you know, business practices, lawsuits, whatever, what you end up getting are results that prove otherwise Tesla they say is now turning 100 of Revenue into an industry-leading 26 dollars of profit for their per uh for gross profit.

Now keep in mind that is expected to go down to about twenty dollars. So I don't want anybody to freak out when we see margin potentially go down to twenty dollars at least in the next few quarters after some of the price reductions that we've seen. And until some of those uh commodity costs actually start flowing through is lower borrowing any or further increases, keep in mind the Tesla in their last earnings call told us this. They told us they expect to potentially see gross profit go down to twenty dollars and then of course the goal would be to see that rise back to thirty dollars.

About that thirty percent margin. But even at twenty six dollars, this is seen as the widest gross margin. Uh, really in the industry. And if you look at their net profit margin, the way this they wrote this and then showed a chart here was a little confusing.

But this chart right here is actually a chart of their net profit margin test. Net profit margin far exceeds any of its competitors. And what you really want to pay attention to is Byd is right here on the right. It's this: Orange Line Let's go.

let's use the laser. here. There we go. Uh, it's this orange line right here.

You can see that their net at least on this chart here for last year, sitting somewhere under five percent, right around three to four percent is where Byd sits Volkswagen knocking on the door of uh, probably what? Half of that, maybe? maybe somewhere around two percent, uh, Toyota is over a little bit higher at about seven percent. Uh, and Tesla on a net basis is sitting up here at Uh 16 to 17 net. That's really incredible. now.

What's also really incredible is you just had the uh, the the uh, who was it? uh uh yeah toy Mr Toyoda? Uh, who's the CEO over at Toyota He ended up saying hey, About a month ago he was interviewed and the Wall Street Journal ran this story. He ended up saying ah, I'm part of the silent majority everybody wants a hybrid car. This is Toyota often regularly deemed one of the most reliable vehicles in the industry, right? Uh, vehicle manufacturers in the industry with some of the highest resale values. They're convinced on hybrids.

yet within a month of that, it turns out he's getting the boot and they're replacing him with the CEO Who realizes no, no, we need to double down on electric vehicles, not just hybrids. But let's keep going with the with the Bloomberg piece here. so you've got 30 analysts have a buy recommendation on Tesla a record for the company since their IPO in 2010 number of upgrades on the company Rose a 32 last year, even though Tesla share price is plummeted 65 amid a nasty bear market for Tech related stocks. Bloomberg's consensus rating which quantifies analyst forecast reveals no other automaker was so emphatically upgraded.

Perhaps the reason why analysts are so enamored is because Tesla continues to prove doubters wrong and these were some interesting quotes here. Listen to this: Model 3 sedan sales increased from basically zero to about half a million units in 2022.. uh, they had so they had less than 2 000 in 2017. ran that up 278 times to about half Mill in 2022.

I Don't think it's necessarily really fair to use that 278 number because obviously if I mean you could just say they increase sales infinitely from Zero, right? But from a comparison point of view, it's very interesting that the Toyota Prius has seen its sales Fall 66 during the same period. And While the next biggest arrival for electric vehicles saw their sales at Byd rise just 17 times now, Byd is crushing it. Okay, don't get me wrong by these crushing it, they do not have anywhere near the margin. Tesla Does they have somewhere around one-fourth to one-fifth of the net margin? We just saw that on the prior chart, but anyway, uh, this was.

this is pretty remarkable. And and I think they make a really good argument here that hey, look, despite all of the hate around, Tesla Tesla's killing it. But beyond that, some of the price targets from people with massive amounts of money like Barren funds which is billions of dollars of assets under management are really incredible. Let's take a look at some of these price targets.

So this is a um, uh, you could actually read this full article in uh Seeking Alpha uh anyway. uh, the Baron Funds letter was was posted here and they talk a little bit about the history of them investing in Tesla first making uh 1.6 of their asset under management uh uh, purchase into Tesla back in 2016. Uh, and since then, obviously a Tesla has grown substantially. They did end up selling around 6.8 million shares between 2020 and 2022.

About a fourth of their shares to reduce their allocation to Tesla because it ran so much much. Their average cell was about 221 a share slightly above where it sits now. Uh, and and of course this was over the last two years here. but they still hold 17.6 million shares of Tesla, which is valued at about 3.1 billion dollars.

Pretty remarkable. But look at their price Target for the Baron Fund and and this is just the show this is. you know, But when people are bullish in the industry, it's It's really interesting to see if they're actually putting their money where their mouth is. And here's an example where they are: We believe Tesla's share price would reach 500 per share in 2025.

now I'll try to Pat myself on the back here, but that happens to be my price target for 2025. maybe they're watching my videos if you are I'd love to do an interview with y'all and if you're not, that's okay because I don't want to read my own opinion I want to read other people's opinions? Uh, but anyway, uh, and their 2030 price? Target which I don't really have a 20 30 price? Target Uh, I mean I I've mentioned some out there. there's somewhere out there we've done some numbers on in the past, but it's not super Salient in the back of my mind. But anyway, 1500 is there 20 30 price Target and they are still reiterating that price Target Today that's based on our expectations for Tesla's long-term sales growth.

High Industry-leading profit margins achieved for its exceptional products. Not only are there approximately 80 million cars sold per year, but the quote car park worldwide that needs to be replaced is more than 2 billion Vehicles These are cars powered by pollution emitting Ice Engines Internal Combustion Engines I Mean that's kind of like saying an ATM machine, right? Automated Teller machine machine, right? It's Ice Engine is kind of like internal Combustion engine engines. Now we gotta be careful online. But anyway, uh, if you just say ice, it sounds a little funny.

So anyway, gas cars, gas guzzlers Fair Simpler Anyway, this is pretty remarkable and a remarkable price Target And it makes sense I Mean after all, the profit margins alone speak for themselves at Tesla Where is it? Where oh they were on my uh in my Bloomberg piece stand by. Uh, the charts over here are ones that we talk about regularly at Tesla and we could really use these and and model, uh, some of the more in my opinion. Worst case scenarios with with Tesla pricing by seeing hey, how what does test look like even if we end up with only a 20 margin in potentially lower growth rates, right? Uh, and so if we do that, well, let's model it together. Let's see what we get.

So let's go to a 20, uh, gross margin. Let's assume 20 vehicles. Uh, or we're here by 2025. Let's assume 4 million vehicles and we'll go with Uh 47 000 Revenue per vehicle.

We'll keep everything kind of stable here. Uh, that we generally do So, sort of re-explaining this whole sheet. again. if we go with just a 20 gross margin, which is pretty weak, we expect that to rise up to 30 again at the end of the decade.

maybe within the next few years? Who knows? Uh, At Uh at a 30 percent assumed growth rate which is lower than that's probably the lowest part of the range that that Wall Street is generally expecting. you're still sitting at about 400 bucks per share at a 30 growth rate. And then a 1.67 x Peg which is a very reasonable ratio. Very very reasonable for for a company growing at 30 to be selling for 1.67 times Peg We're closer to like Point Eight Point Point Nine right Now on on what Tesla's selling for.

Uh, but it's it's a long-term average is substantially even above 1.6 but anytime. anyway. So uh, if we just change that to where the margin is approximately right now and we go to say uh, oh, I don't know, let's go with an expense of 74 that gives us profit of about 26. So if we go with about a 26 margin, uh, that number changes to 533 bucks pretty quickly.

but you could see how every one percent makes a difference. Go 533 bucks. We just change margin one percent. Uh, 533 turns into 511.

So you're looking about 20. Every one percent of margin at Tesla is worth about 22 dollars per share. It's quite a bit because that margin is going to fluctuate. uh.

and I do think there's going to be some fear around what happens in the Q1 Q2 earnings for Tesla Uh, specifically because margin will probably be its weakest during those quarters. And those will be quarters that, uh, that that were also still evaluating. Hey, is inflation ever going to go away? Is the Fed ever going to relax? So uh, these These are, uh, you know these. These are things to uh, uh, pay attention to.

Uh, from some comments here. Uh, we've had someone saying Mr Toyota is a genius slash sarcasm. Someone's laughing too. How much CNN are you watching I mean I Hate to say it whether they seem to be one of the pure ones that seem to be bagging on them pretty pretty heavily here.

Have you guys seen The Electric Solar powered? Yachts You know I think I Hate to say it. but I think a lot of anything. Any solar powered engine for now, probably just clickbait. Most of the solar power that we can actually support on any kind of vehicle right now just goes into pre-conditioning cabin temperatures for either cars or boats.

Uh, you know anything wildly. If it's if it's powered solely by solar, it'd probably take you know, 12 hours or more of sitting in the sun. potentially days of sitting in the sun to actually fill up your batteries. Is it possible? Yeah, I mean to some regard, we could put a Tesla you could put a solar panel on a Tesla and potentially charge the sucker up if it sits out in the sun for a couple weeks.

you know I mean eventually it'll it'll it'll charge it up. Uh, solar power isn't quite there. uh for for compact form factors yet? Now can you do it with solar? Farms Absolutely Big fan, Big fan of solar Farms I Think we should have a lot more solar Farms out in in uh, you know, the desert areas of California or Vegas We've already got solar Farms but we should have even more I Think that's a phenomenal way to do it. and now you're also producing solar at scale, throwing solar panels on on smaller Vehicles though I think is mostly just click bait and and trying to make people you know be able to say oh I'm green you know that'd kind of be like oh my jet has a solar panel on it.

it's like that's it's just it's like excuse me but for for you know the what what it's actually producing. So I'm not I'm not a fan or a believer in any kind of solar panels on vehicles and I probably won't be for a very long period of time because the solar panel technology its capture rate is still very, very weak. I mean its efficiency is gosh. a solar panel efficiency has got to be somewhere in the 20 range, so it's still really inefficient.

But what's remarkable is as much as we're seeing solar panels spread, imagine if we could just increase the efficiency of solar panels. Uh, I mean they're already good in in bulk Factor Good enough to be on the roof of your house, for example. Good enough to be in a solar in a solar arm. Not there yet for vehicles, but but there's still so much potential science that can go into making the capture technology for solar so much better.

Uh, that, uh that that in the long term there'll be some pretty neat advances. and yeah, I think in the long term in the future. Sure, solar panel of vehicles I think uh would be a possibility, but I don't think we're anywhere close to that I think we're 20 30 years away from seeing that. but uh, you know it's interesting.

Still interesting anyway. Uh, yacht was unveiled in Dubai Uh, the hull of the yacht was all solar panels. That's interesting. Thank you for sharing that.

uh, what's up Hostile, smart? Um, you guys still don't buy it, especially the hull of the ship. I'm like you really need the angle of incidence matters so much and I mean maybe You could argue you're getting some reflectivity off of the water to try to power uh, this but I wonder how much how much efficiency Falls now if the hull of the ship instead of you know, actually pointing at the sun is exposed to um, uh to solo the solar radiation uh that that brings the solar energy I don't know I don't know I'm not buying that one. and then and then when I hear Dubai too I'm like okay, like a world of like facade man, come on and I'm like sorry if you live in Dubai but you probably know it, there's been a device. it's all facade.

Uh, but anyway, so you know what. It's very fitting actually that the facade of a solar panel boat was unveiled in Dubai the World of Facades or the the the Capital of facades I should say anyway, keep going. So let's take a pre-check of markets here and uh, see how we're doing and let's see again, really paying attention to those 10-year treasure yields And then we've got some other topics to cover. Uh, so Futures everything's down about one percent of Futures I Don't really buy future movements that much though.

but I will go ahead and jump into looking at BTC let's take a look hahaha. All right yeah, a little bit. a little bit of a drop there. uh on on the five minute charts for BTC starting uh really around midnight.

Nice little cell down there right at midnight does that? Almost almost Makes you feel like it was somewhat algorithmic here, but look at that again. about 35 minutes past midnight. Drop, drop, drop we, uh, we lose that. Uh, over 25 handled sitting now at 24 6.

uh, zoom out though on the day chart. Uh, and you could say you're you're still sitting Uh, above? well above 20 000? Well off the 15K that we were dragging along for a while there in November and December Uh, which we visited in the summer as well. So a pretty nice recovery over here. Nothing super alarming here, really.

If anything, just aligning with the indices down about uh, 0.9 in the last 24 hours. Interesting. Very, very interesting. So what we'll see ends up.

uh, we'll see how that ends up. Uh, what's it called? Uh, performing for the day? Uh, sort of a leading indicator, but we'll see how the week goes. Okay, uh. so the next thing we got to talk about, we got to do a little bit of talk about Russia And then we've got to talk about I Really want to talk about how I could be wrong? I Think that's it's really important to talk about.

so we're going to talk about that as well. Uh, so uh. But first, let's get a little bit of talking about Russia out of the way. let's pull this up here all right.

The temperature of the solar panel has to be around 100 Fahrenheit to capture solar radiation efficiently. Oh, that's interesting rage For some refresh, we'll look at that. Thank you for that. Uh, not the whole not getting direct sunlight this way.

Yeah, I don't know I just call me, call me a tin foil hat skeptic I Don't believe you're a solar powered boat? I'm sorry, but I will take a look at that. Thank you All right now we've got to talk about Russia because we've got the financial Times a reporting of potential attacks getting set up on Western infrastructure outside of Ukraine. We've got to talk about that because that would essentially be inviting world War Three unless of course it was done under the guise of sabotage. We'll see, we'll see, but tensions continue to rise and we've got a big Catalyst coming up in three days, which is already starting to set up over today.

Actually, we've got a top Diplomat from China who just arrived in Moscow about an hour ago. that's this morning here on February 21st. And what's remarkable about this is the timing lines up with the three-day Catalyst that we have the one year anniversary for the Russian incursion into. Ukraine.

Why that matters is because China is actually widely seen as potentially trying to broker peace in offering a peace deal in three days. Maybe that peace deal is already being negotiated now since the top Diplomat has just arrived uh in Moscow But this is coming at the same time as we have warnings that there could be potential attacks on Western infrastructure. We'll talk about those attacks in just a moment. But first, let's talk about this piece right here.

Here's a Wall Street Journal piece where: Uh, the Wall Street Journal makes this case that China is worried about potentially losing one of their strongest allies, one of their strongest trading partners. Obviously, China is widely trying to reduce its Reliance on the west. Uh, and they're already sort of engaging in a different style of warfare with the West not only with uh, you know, the drama over the nonsense of the the White Balloon or spy balloon, but also via the theft of our Trade Secrets. We just had another massive theft over at Asml chip Manufacturing Company by Chinese individual, uh, and uh.

And and this is partly because of uh, well, essentially programs and and rules where the United States has passed laws like the Chips act Banning China from using Advanced manufacturing technology. so China now steals the information and then tries to copy it. This is similar to what they've done with for example, our fighter jets. The plans for our F-35 fighter jet were stolen by China and then China.

a few years later, ended up coming out with a very similar looking jet Gen 5 jet. Now, most of China's Fleet is still the older Gen 2 Gen 3 stuff, roughly about 50 percent according to Bloomberg of China's Air Force is still the older generation the 1990s vehicles I I don't I mean they're certainly not spending as much on defense as we are in America. By some accounts, their estimates are that China would spend somewhere around 250 million dollars on defense. or as we're spending closer to a trillion dollars on defense, closer to maybe 900 billion.

But still, that's roughly 4X what China is spending. But anyway, obviously Russia is very important to China And there there was even talk that potentially Putin Uh scheduled his incursion into Ukraine around the Olympics which were held in Beijing last year. Which what's remarkable about that is it. It somehow suggests that how convenient, right after the Olympics in China were over what happened, the incursion comes uh, and there is almost this sort of Uh deemed respect from from Russia Uh to China and potentially vice versa.

And this Wall Street Journal article gives us a little bit of insight into maybe one. So what they talk about is Beijing potentially fearing a really weak Russia after this war and how the war is starting to maybe weigh on Russia's capability of actually being a supportive trading partner for them. and as a result, China is potentially considering helping Russia and this war either by brokering a peace deal or be becoming a weapon supplier for them. Now they're already deemed to be supplying things like aircraft equipment, jamming equipment.

but they're in recent days talking about potentially supplying actual lethal weapons to Russia. Now the West sees that as an escalation in Beijing. The way they're trying to spin the narrative is basically saying Hey Look, if we start providing weapons to Russia, Russia becomes more reliant on China and if Russia is more reliant on China, China potentially has the opportunity to twist Russia's arm into brokering a peace deal between Ukraine and and Russia. And there is the potential that China could pull that off.

And that'd be fantastic because I think everybody wants this war to end. But listen to this. You do also get harsh rhetoric, right? example: China's foreign Ministry on Monday hit back against U.S Allegations that providing lethal weapons would really provoke a World War III And they say it's the U.S side not the Chinese side that's providing an endless flow of weapons to Ukraine. The U.S isn't qualified to point fingers at China or order China around.

We would never accept uh U.S criticizing Chinese Russian Relations: Well, yeah, of course I mean that that is a fair point. Uh, the U.S criticizing China for potentially supplying weapons to Russia is a little ironic. and obviously the U.S is going to do that and be angry about it because they want Ukraine to to uh with and this war to end. Uh.

And that was really characterized by Joe Biden getting on a train for 10 hours to hang out in cave in a in, you know, secret, uh, secret visit uh to the capital of Ukraine and and reiterating this unending support for Ukraine which is also evidenced by the uh, you know, nearly 100 billion dollars of of U.S money that's gone to support Uh Ukraine Now uh, this Wall Street Journal article Dives in a little bit more on potentially Beijing now trying to step up the negotiating uh posture to end this war. Uh and I think I think that's a good thing actually I mean obviously I think everybody wants to see this, this war come to an end. but it's also a good thing that makes sense. It makes logical sense for China It's doing its best to really rebuild its economy after three years of a coveted lockdown, and so far things are going great in terms of travel and entertainment spending.

Subway Traffic and car congestion by some measures is actually higher than 2019 pre-pandemic levels. So you are seeing a travel and entertainment and and really, consumerism. Rebound in China But remember, consumers only make up about a third of their GDP housing makes up two-thirds It's the opposite in America In America the consumer makes up 70 of of the economy. so China is really reliant on industry uh, or the real estate market and consumer everything firing to actually have the growth that China is looking for and having a trading partner with Russia that is not crippled because it's basically destroyed itself.

Uh, spending to Oblivion Uh for for what feels like a very somewhat pointless War Mostly I would say the Western argument is pointless War Uh, of course the the argument from Russia is that they were forced into this because of the expansion and threat of the expansion of NATO. But either way, this in my opinion and Chinese visit visiting Moscow is actually a very good positive. Uh, Catalyst Uh. And hopefully there is a negotiated end.

However, and unfortunately, there's still talk as running in the financial Times today about potentially attacks by Russia on Western infrastructure. Now look, we've gone through this idea that Russia sabotaged the Nordstrom pipelines. Uh, there have been arguments from journalists that know it was actually the CIA in conjunction with with some of the Uh European navies that ended up planting C4 and uh on these pipelines and blowing these pipelines up leading to massive methane leak. Uh, that is a climate change disaster.

and of course the United States doesn't want their actual hands on on responsibility for that, which the United States clearly denies. But there's a lot of circumstantial evidence clearly pointing to the idea that the United States was heavily involved in the destruction of the Nordstrom pipelines. But anyway. Uh, the Netherlands now warning about Russian attempts to sabotage their energy infrastructure with the Dutch intelligence authorities warning that Russians have been essentially scouting Uh, the Uh, the the Netherlands energy infrastructure.

specifically their wind farms. They're offshore wind farms and what they're what they describe in this article is essentially Uh ships that have been showing particular interest to the offshore wind farms in the North Sea and that uh, the Netherlands are stepping up their security and and they've been escorting multiple ships out of their particular you know economic zones and regions and and they believe that Russia could potentially try to attack Uh some of the energy infrastructure uh of of Uh, the West in particular to force them to rely more heavily on Uh, potentially re-established relations with Russia uh and Russian gas or Russian oil as a way of saying no, no, don't go renewable, continue to rely on Russia Of course that makes sense on one hand that Russia might do so. Of course, the last thing we want is the expansion of of a potential World War three. This is why the sooner this war ends, the better.

But look at the way, you've got these axes setting up right. You've got Russia loading strategic nuclear missiles, uh, on on their warships, something they haven't done since the 70s. You've got Iran building suicide drone factories in Uh Russia just 600 miles outside of Moscow uh, that just announced by the way. so not built yet.

but but Iran's been selling weapons uh to Russia you've got the United States taking uh weapons stolen essentially from Iran and and or I should say seized uh and and potentially being delivered against U.N Conventions to Ukraine Uh, you've got Russia Now stepping out of the Stark treaty which limits how many Icbms you can produce, you've got Uh, of course, the belief that uh, uh, Japan and Taiwan and the United, Kingdom and NATO are all supportive of Ukraine on one side, on the other side, you've clearly got uh China, Russia, uh, and Iran heavily working together. uh to support uh Russia And and we'll see Uh. But but so far, things are very very much brewing in negative directions and it seems like every day there's more negativity around the potential trending towards a World War III, which which is terrible. Obviously, that would be the worst case scenario.

So hopefully in this segment we've been able to cover that there's at least hope because it does not seem like the West or Ukraine uh, have really been able to propose anything that's remotely interesting to Russia and hopefully China can pull off some form of negotiation to actually make that happen. Because otherwise we're trending towards World War III and it's scary. So hopefully that comes to an end. Uh, we'll see anyway.

Uh, that. uh, that's uh, that's my piece on Russia for now. All right, let's take a look at some commentary here. Welcome reaching for reality for being a new member here.

This is Biden's fourth climate change natural disaster, but nobody wants to hold Biden accountable says Wally Here someone else says uh I wouldn't sell home in DC Now if the national average drops 10 percent DC will only drop five percent at most. That's an interesting uh um, how how should I call it projection? Uh, reaching for reality says the problem is electric cars are too expensive at this point for the common person. I Run a restaurant and not one person in the company could afford a Tesla aside from the owner, that's one in 300 people I mean In Fairness. You are also pointing at a a worker that that is in a was less a lower.

How should I say this in in just sort of the most PC way. You're you're talking about workers who are a lower income worker, right? Yes, it's true. At this point, electric vehicles are not affordable for most service industry workers. restaurant workers uh, you know, expediters, hosts of course, not.

uh, even managers of restaurants, right? Some chefs are paid very, very well, but probably lion Cooks of course that makes sense. uh and I certainly wouldn't encourage uh, somebody, uh at that income level to even buy a new car, let alone a new electric vehicle. So I agree with you: electric vehicles have to continue to fall in that cost curve and hopefully we get some insight into how that cost curve is developing from Tesla's investor day on March 1st. But uh, but that doesn't make electric vehicles a bad problem, right? It just suggests that still a newer technology and the cost curve declines haven't occurred yet.

So I I Don't think that's a way of saying that somehow electric vehicles are a problem or a bad investment. Uh, I Feel like a diversification of energy is what would truly be best: The fact that Lithium for batteries to get everyone on electric is 50 50 years out from being mined. Yeah, you know. Here's the thing though, there there will be more technologies that come up.

For example, we're already looking at iron sulfur batteries uh, that essentially are no longer use Lithium in the chemistry. So it and we don't. We don't yet know exactly what battery chemistry is going to take over, but there are a lot of, uh, different types of batteries. Whether they're solid States or different chemistries that get away from lithium, there are a lot of ways to potentially or.

And then, of course, we could see advancements in refining technology. Uh, I'm not so terribly worried about Commodities being able to catch up to support the demand for electric vehicles. Somehow we always end up innovating and finding a way to to get around it. That's not to say we shouldn't work hard and invest in finding that solution.

You know, that's how we end up getting the solution, but it's much like you know. Oh, when I was a child hearing, oh, we're going to run out of oil in 50 years, that's it. You know it's over, uh and then what ends up happening? Oh wow, we find fracking and and uh wow. all of a sudden we've got enough oil.

You know it's it's This is why I Personally in the long term generally don't like to invest in Commodities because I think there's generally a way to change. Uh, if certain Commodities are too expensive, we innovate around it. uh, or if certain Commodities are too expensive, we innovate ways to make them more more available. Uh, it's really remarkable.

So uh, you know I I Suppose in my opinion, a bet on on Commodities is almost like a bet against uh, human ingenuity. Yeah, I'm sorry. if you're a Commodities Trader you you know Steve's here. For example, you know I'm not a big fan of Commodities and sorry, uh, that's that's just my POV uh, it's no offense to you.

we can still have a beer okay, and we could still hang out together but not. but not a big fan of come off the chase. uh sub Max course member here. welcome, welcome.

Uh, pretty sad you have to put a disclaimer before saying anything nowadays. I know it is. it is, uh, it's um, the world has gotten very very sensitive. uh I was just uh with uh with a family yesterday and uh I won't get into too much detail, but they they felt they had to disclaim uh certain objects in their house for fear of offending people in California and I'm like my goodness and I don't blame them for that I Blame society for that.

It's um, it's weird. You know what's happening in California it's very weird I Uh, I believe and I Mentioned this yesterday as well I Believe there will be not an armed Revolution but a revolution in California Uh, within the next 10 years I would make the projection that within the next 10 years there'll probably be a substantial sweep uh towards a different ruling party in California I I I Don't know with certainty of course, but I would not be surprised anyway. Uh, someone here says they blame Tofu. Okay, you showed a chart comparing the NASDAQ versus spy earnings from the tech bubble.

It's possible they were propped up by the top tech companies I mean even the top tech companies uh of the NASDAQ were not very profitable in the early 2000s. And if you're referring to recently propped up by the top yeah, that's possible. Don't get me wrong, I Think companies with bad pricing power uh, or are going to suffer this year Even still, that's why I'm personally sticking to investments in companies that are heavily exposed to a lot of free cash flow, strong margins, pricing power in the products uh, that they sell, or the services they provide, and uh in in a Relentless uh focus on profit as opposed to uh, you know, negative cash flowing businesses that are still trying to figure out how to drive a profit I would stay far away from that. and and we get speculative runs in in companies like that all the time.

I Mean you look at the speculative runs that you get in in, you know, Carvana or Open Door or Rivian? Uh, it's just it's ridiculous. Those are sell opportunities. Those are short opportunities. You just have to be careful shorting any kind of momentum stock.

Uh, and it's a it's a great way to lose a lot of money short of momentum stock. but uh. anyway, it was just dangerous. Let's see here you like Commodities because they are real I Mean that's like an argument that like oh, the you know I Think that's like basically saying all the dollars just fake money I Mean that's it's.

essentially making this this argument that our economy is just fake. You know it's everything fake news? it's it's extremely tinfoil haddish. It's not to say that it's not true I Mean our dollar is backed by nothing other than trust. but that trust has substantial value.

And again, I'm not here to tell you that there aren't things that are rigged. Uh, but uh, for the country with the most trust is the United States Whether that's right or not, the dollar does mean something, it is the most trusted fake money of the world. Uh and uh. Economies and lives are built around that trust.

Uh, yeah. and so I think it's It's overly simplified to just say oh, because it's backed by nothing other than trust. It's it's bad. It's not to say at some point the dollar won't become completely worthless.

Every currency to every ever exist has has become worthless. Uh, and you know the Dollar's only been around for a couple hundred years and it's only been backed by air for what 50 something years? So yeah, I think 50 50 actually years this year. So you know we're still pretty young on our funny money. But I I Don't think that is something that that should somehow dissuade you from maybe investing.

If anything, it should actually encourage you to invest. It should encourage you to invest in in real assets like real estate or stocks. I Think that might be somewhat of an argument that some people make too is oh, stocks are just, you know, stock certificates such as paper, You know I like Commodities because I can pick them up and touch them like excuse me Really? That that disregards the fact that Shares are actually a representation of your legal ownership of a company that produces real profit, employs people, and actually makes Goods or provides real services to people. Anyway, All right.

So uh, let's now. Uh, let's uh. now. jump over as someone says they ran out of tin foil.

Good one. Senator Sanders writes Google CEO on workers right to unionize. Why is that even a headline? I mean of course Senator Sanders thinks that like what else is new. It's like saying the Pope's Catholic Anyway, uh, all right.

I Want to take a moment to jump into uh, how how we could be wrong? Right on on the longer term bull thesis. So let's touch on that. Uh, so that was uh, what do we talk about commodities And Fiat Sure, All right. What if the Bulls are wrong? What if the Bears are right and we're going into not just a temporary, uh, tough period of time? Dare I say quote Unquote tough Because oh no, our stonks have gone down over the last year.

What if we're as Bulls long term wrong that is, five to seven years of Hell could be ahead of us. Would that change our investing? Outlook And and how could that actually manifest well? I Think this is really important to pay attention to because markets right now are starting to price in and just starting to some potential wrongness. In fact, look at the expected terminal Fed funds rate up from 4.9 stable to 5.3 A suggestion that maybe higher for longer will end up being much longer years longer rather than just a little bit longer. especially if inflation break evens continue to break as they are on this screen right here which show you the long-term downtrend that we've had over the last year of inflation expectations rotating down on the five-year Break Even curve.

That Trend down has now broken back to the upside since the beginning of the year, over the sign that the economy is still doing pretty dang well right now. After all, consumers still have someone who on an average bank balance had two and a half thousand to five thousand dollars now sits at somewhere twelve point Eight thousand dollars of excess savings. Yeah, the excess savings rate has gone down because people are drawing down the excess savings, but those excess savings are substantially higher, leading to an economy that today is just as American Express says spending through this recession or whatever it is. But what if the real recession is actually ahead of us and not behind us? What if the real pain is in front of us, what could end up happening and how could that end up manifesting? Well, it could end up manifesting in that when we actually see a meaningful decline in real estate, then we could potentially see a meaningful decline in household spending, which could then actually set our economy into a real meaningful earnings recession and actual GDP recession.

And that could mean that we are in an environment where maybe the Federal Reserve doesn't break anything, but where we're actually in a recession where the Federal Reserve cannot cut because inflation has stayed sticky for too long. Meaning we're sitting at five percent rates and real rates that are substantially positive and US re uh, or sort of undoing the unverted yield curve as history has shown us actually providing the most painful part of the recession that is still ahead Said another way: the most painful part of an inverted yield curve is not the inversion, it's actually the re-steepening and that suggests that the pain is still ahead. So the Bears have an argument. The strongest argument the Bears have is that inflation will be sticky and that the yield curves steepening will actually be the most painful part, and that could be combined with a real setup of fear from households leading to a real Crush of spending which has not happened yet.

After all, if we look at Robert Schiller he's an economist from Princeton famous for the case Shiller indices for Real Estate He warns that it's actually not stock declines that lead consumers to spend less money. After all, we still have positive GDP and how we had a couple potentially negative quarters of GDP last year, which technically say we were in a technical recession, but nobody actually felt like we were in a recession from a sentiment point of view in 2022. In fact, as we've proven multiple times to the Channel people are spending through whatever this technical recession is that we're in right now. But what if that's spending through stops And what does Robert Schiller tell us? Well, Robert Schiller tells us it's not stock declines that lead people to stop spending money.

it's a real estate declines that lead people to stop spending money. and real estate is actually setting up for its most meaningful set of fear and pain this summer, that's still ahead of us. So if real estate hits pain in say, May to June where all of a sudden interest rates for Real Estate are potentially at seven percent roughly where they sit Now as the 10-year treasury yield continues to rise up and condition Financial conditions continue to tighten. What if real estate does continue to suffer and Peak fear is hit at the same time as rates are around seven percent.

real estate prices year over year start actually showing 10 to 20 percent declines year over year in most markets Peak To now that's already what's happened. It would take a price recovery to not show to a 10 to 20 declines once we hit May numbers. And when that fear sets in, is it possible that even less people buy, real estate institutions begin liquidating their real estate and now home prices actually fall even more. Especially as rents decline.

As rents decline, it becomes more desirable to rent rather than buy. And the argument that hey, I'll just pay seven percent because I could rent out my property for a near Break Even or whatever goes away even more because rents fall leading then eventually less people to buy Real Estate Investors Buy less real estate. Home buyers buy. less real estate.

prices come down even more now. What you potentially actually set up for is no floor put under the real estate marketing. Consumers actually spending a substantially less amount of money. Because now we realize uh oh, here's the real recession.

Real estate hits the real Recession, which actually leads consumers which make up 70 percent of our economy 72 by some accounts to stop spending money And that drives us into a real recession during a time where thanks to people's excess savings again. I Understand, the excess savings rate right now is low, but people's access savings are substantially high right now. By some accounts, two to five times as high as they were before the pandemic, but because of the fear that comes from actual household declines of wealth. Now you walk into a real recession.

This is the Bear Case. The Bear Case comes out and says it's actually a substantial earnings recession that is that is still excuse me. I'm starting to lose my voice a little bit substantially ahead of us and not behind us. This is what we see day in day out in reports and equity research that I'm reading.

here's one from today from Barclays you can see it dated February 21. That's today and short of going through all of it, basically earnings declines are still substantially ahead of us, with the most at-risk sectors being consumer discretionaries and growth stocks still trading for elevated multiples relative to the rest of the indices. You can actually see that I believe in one of these charts. Uh, but short of going and finding exactly where the chart is, I'll just sort of give you the bottom line.

But really, Barclays makes this argument that look, we are seeing recessionary levels of earning surprises. that is, we're looking very very similar to 2006 and 2007 by many metrics when we're looking at some of the red flags popping up from earnings. This right here showing you the that the second quarter of a 20 uh, 22 or sorry, the fourth quarter of 2022 has seen the weakest earning surprise since the great Financial Crisis, with a modest 72 percent of companies beating forecast uh EPS Cons: or or yeah, a forecast Q4 EPS But the Uh earnings surprise level being at the weakest level since 2007, suggesting Maybe that the quality of forecasts going forward could actually be very, very low. And this sets up your bare case, right? This is the what if Kevin's wrong case, right? And it's really a a path of a combination of sticky inflation combined with Peak housing fear Uh, by let's say May 23 combined with the earnings recession, the red flags of which we're already seeing combined with higher terminal rates and consider this a lot of folks right now as American Express says, are spending through this pain right? The same thing is what's actually happening with businesses and a lot of home buyers.

Home buyers and businesses right now are actually hiring to spend through the potential recession, right? The I'll put quotes around it because maybe we haven't hit the real recession right? And that's a problem because if everybody believes that all this inflation is going to end up being transitory, then what you have right now is earnings at companies and hiring of people and businesses that are spending and investing based on the belief that everything's going to be okay. But when the world starts realizing, oh crap, everything is actually not going to be okay. Well then what do you have? Well, that's when you actually have layoffs. That's when you actually have people spending less money.

That's when you actually have home buyers who don't go into buying a home right now because they think they can refinance in two years. That's a big problem by the way. People right now are doing three to one loans, buying down their interest rate for a few years because they really believe that they can refinance in a few years and be back at a three percent interest rate. So the segment here on what if Kevin is wrong.

Let me be clear, there is a very real Fair case that exists and it is one of sticky inflation leading to interest rates that are so high for so long that we do end up creating a peak fear environment for Real Estate Again, that's rents declining. That's high mortgage rates. That's people realizing. Okay, maybe we're not going to be able to refinance.

Maybe it is cheaper to rent rents declining. Now all of a sudden, rents are declining. Now you potentially walk into a bubble door uh, a breaking which is not to be confused with open Door which should go bankrupt uh, but actually an Airbnb and vacation rental bubble which uh has potentially artificially inflated the asset value of real estate because people are under this impression that you can make so much freaking money from investing in real estate because real estate only goes up and oh, rents only go up and oh, you can rent it out on Airbnb and make even more money. That's been true, but what if it's not anymore? What if all of a sudden more inventory comes on because people can't sell their homes and all of a sudden rental rates do crash? Then we do create an environment of peak fear where businesses, consumers, homeowners, and Investments start drying up.

and even though we have excess savings once the the belief that inflation will go away, breaks and inflation expectations become unanchored which they already are starting to Just look at the chart, it's already starting to happen, right? We have broken the long-term downtrend over the last year here of inflation expectations Fallen Now it's it's still I Mean we could draw this line slightly differently too and suggest that. Okay, well come on, like it's still mostly okay. Like sure, fine. I Could draw the line like this and like this and say okay, we're still on somewhat of a downtrend right.

Sure, we could play with it as much as we want the problem. and look, this has been volatile, right? and remember: I I'm a bull at heart I'm a bullet heart. but I'm providing the bear case because I like to be aware of what the bear case is and the bear case is not good. The bear case is potentially one that suggests what we're actually walking into is or or where we are right now is essentially we're on.

We're on a pencil pedestal right now is I Think the best analogy: We're on a pencil pedestal and and the blue and we're wobbling. And the belief is that hey, look, all these numbers are great right now. Hey, look, people have more money in their bank accounts. Everyone still feels Rich Everyone's still hiring, everything's great, peo