And so we got a few things to talk about with regard to inflation. It's both good news and bad news. So the first thing we're going to do is we're going to cover some potentially bad news about inflation or some potential news that makes us want to take a pause in suggesting that that state inflation is over. and uh, we're in the clear we we don't want to be in the mindset that inflation is for sure over.

Remember, the big danger that we face in the market right now is believing that inflation is done. There's no way inflation can rise again. and uh, and we're back to the moon. and there's always the risk that inflation pops back up and in the event that inflation starts trending back up again, we're going to be in, um, not a very happy stock market.

dare I say? And what I think is remarkable is that while this risk of inflation remaining somewhat sticky, uh, exists, we're actually noticing that bond yields are remaining very sticky, which is actually quite bad for real estate in order order for the real estate market to really get a floor placed under it. In terms of the pain that we're about to see in the real estate market where we're going to get those year-over-year comparisons showing negative real estate appreciation which I expect will create substantial fear in the real estate market I Believe a sticking around 3.5 percent for 10-year treasuries is bad for Real Estate I Believe we need to get to about two and a half percent on the 10-year treasury. Unfortunately, quantitative tightening contributes to the 10 years sticking around three and a half. But also I think as inflation goes away.

Uh, and and you start seeing inflation recede, you should have more people moving into taking advantage of these bond yields at three and a half percent and you should see the yields fall. But because they're not falling, it's a sign that even the Bond market is still uncertain that inflation for sure is going to fall. This is despite the fact that the bond market is pricing and rate cuts from the Federal Reserve at the end of the year. So you definitely have a very tentative Market I would call it.

And there's a reason the market is tentative when it comes to inflation. Here's a piece from Bloomberg that suggests there are no disinflation signs yet and Jerome Powell's preferred price gauge and that this is the price gauge of basically Core Services excluding rents. And even though inflation on Pce is under shooting the FED summary of economic projections, when we look at Core Services inflation, we're still stuck at about point four percent, which is the same as where we were last month and on an annualized one, three, and six month basis. we're still stuck at Core Services around five percent.

And this is not good, especially the Super Core level, which is where you take away uh, what? you have for Housing Services X Inflation, right? And so this chart right here shows us Pce core Services X Inflation and it shows us still relatively High Inflation Nation is stuck in this sort of core Services segment and this is creating some pain uh, for or or some ammunition that is for Jerome Powell at the Federal Reserve to potentially say hey, you know what, when it's time for, uh, his press conference, he might end up uh, referring to exactly this measure, this core uh, Services inflation measure and suggesting, hey, look, core services are still running hot, We're going to stay higher for longer I Actually think the Federal Reserve is going to have to do exactly that. They don't want to talk inflation or they don't want to sort of talk up markets and reiterate What Markets are seeing Which is this idea that hey, inflation's going away, Inflation's not the problem anymore. Instead, what's the problem is an aggressive fed I Don't think the FED wants to do that because if the FED does that, we potentially create, reiterate a market rally and we potentially lead people to spend more money on services which leads to more services, inflation and then inflation comes back which actually would likely induce a harsher Federal Reserve reaction with uh, maybe maybe truly higher rates, Maybe the uh, concern that rates could end up running to three point uh, or sorry to six percent becomes a reality if inflation ends up popping up again or core inflation core Services Inflation continues to stay high In order to keep massaging this down, you have to make sure people stop spending money as much as they are. and the more people keep spending money, the more that level stays up.

People spend more money when they feel wealthier, when, uh, when they feel that real estate prices are going to start moving up again or stock prices are always hurt. Rallying again. start spending money more Loosely again, usually at least according to Robert Schiller From Princeton a famous economist uh, who has put together things like the case: Shiller Index for Real Estate He suggests that it's actually house prices that lead to the biggest boost in core Services inflation. So it's really when people feel like they're becoming poorer because home prices are coming down.

That is generally when you're going to really start seeing that deflationary hit to spending and then core services. And so I believe the FED is going to have to pretty much have this pretty harsh face on for probably at least the next three to four months whether or not they actually raise rates each of those months. I Think the important thing is them whether they pause or not being very clear that we're staying here. at least until we're certain that Core Services inflation is going down.

especially X Housing: Because we do think housing is going to plummet, housing inflation will plummet. Uh, that has to obviously happen, which if it doesn't, that'd be a big problem. But we think with leading indicators such as current rents versus Old owner equivalent rents that will end up happening and housing will end up being a big anchor to inflation coming up. Uh, we have to see that come through.

But in the meantime I think probably it's too premature to be excited about this idea that the FED is is going to be really nice to us on February 1st which is uh, their their next Fomc meeting a press conference day. Now there's a lot of talk about uh, this CPI change in how the federal or uh, how the Bureau of Labor Statistics or um, uh, the the um CPI release is calculated. so there's a CPI waiting. And there's a little warning on the CPI website at the Bureau of Labor Statistics that says starting with January 2023 data Uh, the the BLS plans to use will be updated with weights using annual weights based on a single calendar year rather than using expense data from two years, which is the usual way they do it.

Now, a lot of folks think that's it. Here we go: this is the Bureau of Labor Statistics rigging data again. and maybe that's true, but I Personally believe the reason that they are wanting to use 2021 weights rather than 2020 and 2021 weights as sort of an average is probably because of the Oddity of a year that 2020 was right 2020 was really coveted in lockdown here, and I believe that's probably why you're expecting uh, the BLS to use weights just from 2021 instead of 2020 and the weight changes could end up being relatively nominal. so we'll see when the next CPI report comes out.

Uh, we will find out. Okay, uh, hey, what? what? What Were the weight changes right? And then we can a little bit more breakdown. Hey, how much of an impact did these weight changes actually have? Personally, I don't think they're going to have a dramatic impact, but mark your calendar for February 14th and we'll see what impact these weight changes have had. Again, this is not saying we're we're not going to compare to 2020 money.

We're not going to compare to 2021 in terms of pricing. It's just to say that because actually, we're not right. We're really only comparing to 2022. It's just to say that what consumers spend their money on is going to be looked at from the perspective of 2021 spending rather than 2020.

When we were in lockdown era, which lockdown era could could overweight. let's say Home Services rather than restaurants and air travel and going out services. so we'll see what, uh, what kind of impact that ends up having. but I think it's too soon to to say that.

Oh, here we go. The CPI is for sure going to be rigged. Now we do have some more good news, but also bad news when it comes to inflation. I Started with bad news.

So I think for a brief moment I'll continue with with bad news. We've already talked about how Johnson and Johnson and Procter and Gamble Staples providers are still seeing High inflation and the impacts of high inflation are expected to be felt in their earnings for at least the next five months. Really? Basically, through the first half of 2023, that's actually a bad thing, right? We don't want to see that Staples or companies that are producing our you know, shampoo or deodorants or whatever, or still suffering from high inflation whether that's freight costs or commodity prices. And even though those commodity prices have come down, they're still seeing year over year pain and inflation.

That's not good. We don't want more inflationary indicators. uh, and Johnson and Johnson and Procter Gamble are really telling us they don't expect to see inflation start subsiding until the second half of 2023.. Now, it's entirely possible that by the time we get to the second half of 2023, we're going to be in an environment of deflation.

Potentially rapid deflation. Certainly, we're already seeing that in the Autos market. And there was actually a post this morning that I saw showing uh, price cuts for certain BMWs Yeah, here it is. South Bay BM This was the car dealership.

Guy This is the faceless guy who actually provides pretty good information on on cars in Uh or on Twitter I Have not verified this, but anytime I've verified any of his other information, it's been pretty right on the money. So I'm gonna go ahead and go with it here. Uh, he indicated that BMW started dropping prices at least. Here's a South Bay BMW report showing that uh, there's a South Bay BMW clearance sale going on uh and that all new and in stock I4's Series 3 Series 4, Series 5, Series 7, Series 8 X3s and X5s uh are all receiving price Cuts Ranging between three thousand, five hundred dollars and ten thousand dollars, probably the average price cut here is about four to five thousand dollars.

So it's interesting to start seeing price Cuts occur at some of the competitors to uh Teslas and I think that's actually quite deflationary and I expect we're going to see a lot more of that. but in the meantime we do have a little bit more bad news to cover. and then I want to get to some good news on inflation and that is what 3M just said in their earnings called. So 3M look I I am I'm the biggest fan of earnings calls and uh, we we continue uh to to read earnings calls on a daily basis to try to study what's going on in the world.

We believe that earnings calls are some of the most underutilized, yet best tools for understanding what's going on. For example, in the Tesla earnings call, we actually believe that Tesla alluded to Future price Cuts coming, but did so by dodging a question about whether or not future price Cuts would come, but reiterated that future price Cuts would actually come via their margin pressure Commons that gross vehicle margins would probably decline to about 20 percent for Teslas and then eventually Trend pack to 30 over time. Uh, that means the worst of margin pressures isn't actually built in yet to Tesla This is something that I think the market is somewhat forgetting is that yes, the margins were not as bad uh for Q4 But this is what I said right I said this going into Q4 like 27 times I said look, most of the price Cuts occurred in Q1 or at the end of Q4 with vehicle credits. you're not actually going to see the real margin damage to Tesla until 2023 in Q1 in that vehicle.

Report right? That could end up being the worst for Tesla Uh, but I I Think markets are rallying now for Tesla because they they see that the demand for Tesla's is still there and even if they do cut the price of this vehicle because they're now recognizing FSD Revenue their earnings per share actually has the propensity of of growing quite substantially as Tesla recognizes FST Revenue and more people start taking FSD That's the big question. This is one thing to recognize revenue for stuff you've already sold. It's another thing to actually continue to sell and push. FSD Anyway, let me get into this: 3M Earnings call.

So uh, the 3M earnings called uh gave us uh both green flags and red flags. I'll start a little bit with with some of the red flags and unfortunately 3M much like Procter and Gamble and uh, Johnson and Johnson which these are Staples right? These are our like industrial Sables I Like to call them when when they see when they see inflation you know a lot of people are seeing inflation right? They expect inflationary pressures to remain also for the first half of 2023.. So now you have three big companies saying that Johnson Johnson Procter Gamble in 3M They're also seeing slower than expected growth due to Rapid declines in consumer-facing markets such as Consumer Electronics and Retail And they say that Dynamic actually accelerated in December as consumers sharply cut discretionary spending and retailers adjusted inventory levels. Now that actually on one hand is actually deflationary, right? Uh, Taiwan Semiconductors actually came out in response to this and said hey, look, even though we expect fewer smartphone sales, more smartphones today are actually using more semiconductors and so Taiwan Semiconductors thinks they can be somewhat insulated to reduce smartphone sales in that each new smartphone has more semiconductors in it.

I Thought that was very interesting. Don't get me wrong, Taiwan Semiconductors is still see reduced demand uh as as other companies are, but I find that very interesting that yeah, the more advanced products get, uh, the more chips they end up using China has coveted related impacts Healthcare Continued to be challenged in its recovery. a falloff and disposable restorator respirator demand in our exit from operations in Russia uh respirator demand. Not a surprise to see a big decline there.

everybody was buying construction respirators for covet. Initially, inflation continues to impact raw material Logistics and energy costs. The pressure remains persistent and the pressures are broad-based I Believe that people at the Federal Reserve are either asking Jerome Powell to read this drone pile is either reading my videos or watching my videos or uh, or staff at the Federal Reserve is passing this kind of stuff on to people at the Fed. and I I it's not good when you have 3M Just now, they just released this right.

this is on January 24th. They just stated that inflation continues to remain persistent for them. the pressures of this, that's a red flag, right? And so this is another reiteration that unfortunately, the Fed's probably going to have to be uh tight for longer now. 3M Says they address inflation through price actions.

Well, price actions are are really a way of saying that we're going to raise prices. But the problem with price actions is price actions don't necessarily mean you can pass on all your inflationary costs. and I found this very interesting. I actually highlighted this uh right here specifically.

So I'm going to read this and I want to translate it. The key question for us that we have to think through and that's what we are thinking through is as deflation starts showing up in the economy, the discussion that we're going to come up with is the elasticity of price, not just across our company, but across all companies. We found that over time, the company that drives value to the customer can end up having a good price equation. Now I Paraphrased that slightly because this person stumbled over this miserably.

So I'm going to now translate this in in: English Deflation is likely coming in the second half to input costs and output products within the industry. Output products are stuff you buy, input costs are stuff they use to make stuff and deflation is likely coming now. 3M Expects to still be profitable, but it sounds like they still expect to be less profitable. In other words, they expect to be in the green which is their word, but have lower pricing, power, and lower margins.

So this is really remarkable because now you have a situation where you actually have the following: You have United Airlines talking about potentially competing on price with the other airlines that was just in their last earnings report. You have Winnebago talking about potentially competing with their competitors on price. You have Johnson Johnson talking about deflation coming in the second half you have uh Proctor and Gamble talking about deflation coming in the second half. or at least you know, reducing inflationary price pressures.

So I'll call it disinflation for Johnson and Johnson and Procter Gamble And now you have 3M saying what's it going to look like when we start going into a deflationary environment? While everything is not yet good, it is clearly very very clearly evident and in our face that we are probably going to go into a disinflationary environment and then soon hit deflation. Now the problem with that is it's not going to happen fast And that's what I keep trying to convey in my videos is that we are not going to get in my opinion, a v-shaped recovery. The days of a Larry Kudlow v-shaped recovery are over. Instead, what we're seeing is in January of 2020 Everyone is like holy hell, Inflation is terrible.

Uh, you know we're kind of over here let's say and and markets are still to fall. Everyone in their earnings call is like inflation is so bad, so bad we're all raising prices. Everyone's racing prices. There was so much unanimousness and and people wonder like Kevin what was your Catalyst They still wonder to this day for selling in in January of 2023 and it was the combination of all of the earnings calls that I was reading combined with the Federal Reserve going oh damn, we've effed up.

They didn't exactly say that, but they basically said that you could still see my reaction to the FED going, oh damn, we effed up uh by looking up a video meet Kevin worst report ever Federal Reserve on YouTube you find it it was from January of 2022. it's it's actually like I think a history lesson to go back. Not because of what I said because I'm not trying to Pat myself on the back here, but because of what the FED said. Uh, and it was combined with all these crazy earnings calls.

Now, we don't have the Catalyst for a V-shaped recovery Because what are the earning lists or earnings calls telling us? They're telling us slow, slow recovery? That's what all the earnings calls are telling us. They're telling us. Still seeing some inflation. Slow recovery, Slow recovery, slow recovery.

There's no indication though that things are hellish to where we would expect a Black Swan event. Don't get me wrong, a Black Swan event could happen. You could have some kind of insane dislocation in the bond market where markets suddenly crash uh, and some Insanity occurs uh, and and stocks could just suddenly break substantially lower. and then the FED has to come in and bail out markets and Save the Day.

But there is a high likelihood in my opinion I would say a 90 chance. Okay, this is my opinion. I'm going on all in here. Okay, so I could be wrong, but I believe there's a 90 chance that we actually end up having the Nike Swoosh style recovery where stocks just continue to recover and they there will be volatile days.

Stocks will go down again. I Don't know from what level they will go down again, but they will go down again. There will be red weeks and there'll be hellish times. they'll be fearful there will always be red and again.

But I think on net unless we have some kind of massive capitulation in because of some kind of Black Swan event I Think the fed's going to keep this aggressive face on and markets are going to slowly very very slowly. Trend back up again. We just broke for the first time the downtrend by breaking the 200-day moving average on the QQQ and the spot if you're watching video rather than the audio podcast, you could see that here if you're just listening. It's simple because now, obviously, uh, after I do these live streams I'm posting these two Apple podcast Google podcasts.

uh Spotify So that way you could listen to these when it's convenient for you. But we've broken the 200-day moving average and we've really begun what could be the beginning of a slow uptrend now I Want you to keep in mind that if we go back to the old days of the uptrend after the V-shaped recovery of Larry Kudlow we basically had two years of an uptrend. We still had dips, though it was a rocky way up, but it was a consistent up. It was higher lows and higher highs.

We potentially could start that Trend again now and that's very exciting to me Now There's also some more good news and it has to do with Chipotle Chipotle Mexican Grill Actually just gave us some very interesting Insight regarding hiring and jobs, which is probably one of the most important parts when it comes to what the Federal Reserve is looking at. the Federal Reserve right now is suggesting that they need to force joblessness to present to prevent the most deadly, financially deadly aspect of inflation which is a wage price spiral and Chipotle just came out and announced that they are hiring 15 000 individuals Across America which is an increase of about 10 or I'm sorry 15 of their 100 000 current Workforce That actually sounds inflationary. That sounds bad, right coupled with Walmart raising wages. But we've already talked about how Walmart weighs and wages is really them catching up.

Uh, and they are probably lagging far behind because they're losing money and they're very sad that they have to raise prices for their employees to keep them. But Chipotle actually gave us some good news. They said the following quote: it's been getting easier to keep hourly staff with December being one of the company's best months in years for retention rates says Chipotle's Chief restaurant officer easier to hire entry-level workers Now that retail demand is softening and tech companies such as Amazon are laying off workers, the workforce is migrating back to Leisure and Hospitality increasing applicant flow now. Chipotle is trying to double its footprint of restaurants across the country and this is potentially the best opportunity for them to do so.

All right. So let's try to understand that for a moment: Chipotle is basically telling us the wage pressures are going away. More people are finally coming out applying for entry-level jobs which reduces the risk of a wage price file. This is good because this is what happens in a recession.

People look for work and the few companies that are actually expanding are the ones that can really set themselves up for massive success in the future. I'm not trying to again Pat myself on the back, but I I myself and I don't know if this will play out well. It's obviously a massive risk, but I have taken on more spending and more business building for my own businesses. Whether that's uh, the Youtube business or the courses we sell and providing more value within them, or the real estate startup that I have, or the the financial business that they have.

we're putting more effort into these than ever before. and it's because I believe that the time to invest this in a recession and then when your competitors don't invest in a recession because they're giving up and they're throwing in the towel and they're bored or or they're just not winning the way they used to and they're sad or whatever. or they're they're afraid to spend money in a recession. Why I believe I become I have a massive competitive Advantage by spending and so I personally relate to a company like Chipotle on obviously a substantially smaller scale.

In that, now's probably the best time to expand because nobody else is. and this actually sort of reiterates what we're seeing with what the Bank of Canada told us the other day. which is that higher rates take a while to hit Services inflation and even though Services inflation is remaining relatively sticky, it is likely to come down in the second half of the year. And so far, that's what everything is pointing at.

Procter Gamble Johnson Johnson Winnebago United 3M Chipotle they're all singing the same song Yes Prices are still higher today than they used to be. Yes, there's still some persistent pressures, but it looks like by the second half of 2023, they're gonna be gone. and then we're going to be dealing with deflation as a greater risk. And when we deal with deflation, guess what? The Federal Reserve Does they print money, baby? They print money.

You don't have to look far uh, to understand that the Federal Reserve prints money. When we Face deflation. the European Central Bank and uh, Deutsche Bundesbank have been regularly referring back to the times of fighting deflation with printing money. There was actually a piece I can't recall if it was in the Wall Street Journal No, it was in the Financial Times.

That's where it was. There was a Financial Times piece where a member of the Deutsche Bundesbank just a couple days ago was talking about how look when when we Face deflation we print money. That's just what we do now. whether you think that's good or not or sustainable or not, doesn't so much matter.

It matters what in practice occurs and in practice that's what they do. So I find that uh, very entertaining uh to to pay attention to because it's gonna be so weird that when, uh, in the future, uh, we're back to money Printing and in a few years we look back and go Boss, how are we back to money printing? This is incredible I actually found it here. Uh, this is uh, the Deutsche Bundespan. Financial Times Here it is, the article is entitled interested In China Oh, any sorry, that's an ad opinion Eurozone Inflation Eurozone Can beat inflation while keeping Market stable.

It's by Zabeen mother which kind of sounds like murderer. That doesn't sound too good. But anyway, a few years ago, when inflation was stubbornly low despite a series of interest rate Cuts central banks were expanding their tool kit to lift inflation. This resulted in asset purchases in trillions of Euros.

This was written like a few days ago. Okay, this is not like forgotten. The FED knows that when they need to print money again, they will be back to printing money. It's kind of remarkable to think about, but it's coming.

it's coming and the signs are very, very clear. I think it's funny when and I've really stopped caring like 2022 I care too much, Way too much. Yeah, it was a very difficult year psychologically for me. I I'm in a way better way better uh place now a head head.

Statewise, it's great. Yeah, it's important, especially as a Creator I think uh, you know you have to go through those sort of phases uh, or or the struggles and then learning to advance. Uh, but anyway, I'm in a much better place now, which I'm happy for. but um, you know I I look at at sometimes I'll post a video and go.

Here's good news on inflation and then I post a video and I go. Here's bad news about inflation and if you actually watch the videos you see I'm actually painting a very consistent portrait I'm saying I I Don't believe that on Net we're going to have a big capitulation I think there's a lower chance of that and I think we're going to have a Nike Swoosh style recovery where it's slow and steady and you want to be invested in the market because you're not going to get the big fed U-turn That's like a bad signal. it's just not going to come this time. Uh, and and that's why I've been invested in the market now.

I think I invest in the market too too early and we can complain about. you know, my personal moves and decisions all day long. I Don't think anybody's perfect, but I think the message that I'm sending is very consistent. but unfortunately there are a lot of people who don't actually listen and look.

Take a step back and look at the full portrait that we're painting and they just look at titles and they're like yesterday: you said inflation was good Today you think it's bad. this is like flip-flop 127. and I actually think what's quite fascinating about my channel is if you go back and look at all the videos not suggesting that you do. But if you go back and you look at all the videos since January of 2022, I've been pretty dang consistent with the trajectory.

uh and and I don't maintain that consistency for the purpose of saying oh, I'm consistent I do that because the data has been clear. you know the data has been very very. Nike swooshes that things are getting worse. worse, worse, worse, worse, worse.

Okay, okay now we're starting to see changes. changes, change and they're very slow and gradual. It's these very slow and gradual changes that make sort of this portrait that we're in now which I think reiterates the Nike Swoosh Quick Down a stock market crash that fell three times as fast as the.com bubble. No necessary massive capitulation Point Vix stays low.

Why? Because we're Nike swooshing I Get the question all the time: Kevin Why is why is the pixel? Why is the pixel because we're Nike swooshing I Don't know if that'll it'll stay that way, but that's a belief that I have. Uh, It's also interesting that Americans are actually working fewer hours right now Americans aged 25 to 39 are pulling back on work the top earning 10 of men in the U.S logged 77 few hours in 2022 compared to 2019. now I I don't know I don't know what to make of that? uh I I Think that in some sense has a little bit of, uh, a disinflationary, uh, push to it because if people work Less hours, then you actually suggest that there's less demand for their labor And that is disinflationary, right? compared to a two-tenths decline last month. So yeah, all right.

So one of the notes in the actual report shows us here at the bottom that within Goods the decrease in Pce was widespread. So this is good. Within Goods decreases were widespread. We want to hear that right? We want widespread decreases and in prices led by gasoline as well as motor vehicles and parts.

Thanks! Tesla Within Services The largest contributors to the increase were spending for housing Transportation mainly air transportation and health care. Now again, we expect housing to plummet as long as it does. We should be okay. Uh, put that in the wrong spot.

There we go Air transportation Now This is fascinating because we do continue to see pain in air transportation. and this actually brings me to a a report on Southwest which gives us some more insight into some of the actual inflationary impulses that we're still seeing at the Airlines And we've been studying the airlines here. not as a potential investment, but more is sort of an indicator of what inflation could be doing going forward. Southwest has new 737 Maxes which fortunately, are more fuel efficient.

However, there's the expectation that China's reopening could end up pressuring ticket prices. and the Assumption right now is that if fuel prices stay stable, we're still going to be putting more pressure on flying. And given that the entire industry is still smaller than what it was in 2019, in other words, it's smaller today than what it was in 2019. Pilot costs are expected to continue to go up.

Salaries in the Uh Airline Industries are expected to continue to rise for Pilots. Pilot salaries could rise as much as 18 percent as soon as early this year. potentially another five percent by the end of the year. according to research by Bloomberg, Fairs are expected to need to rise from today: 19 to 27 percent just to get to 2019 levels of profitability? That's insane.

Think about that. Prices still have to go up 19 to 20 percent on airfares just to get to 2019 profitability? Now that doesn't mean prices are actually going to rise to 19 to 27 because they might not have the power to do that. Consider: for example, what United Airlines said in their earnings call. they said that if our competitors start cutting prices, we are prepared to cut prices as well because we think we're more efficient.

That does not mean you're going to get back to 2019 profitability. And guess what? you have more of today than ever before. Debt: In my opinion, that makes the airline industry a terrible investment, but it certainly continues to increase the inflationary dynamic in concern that we have. And if you couple with that Chinese reopening, there's there's concern that we're going to continue to see inflation, at least in the air transportation sector, which apparently was one of the leaders in inflation for Pce and the report that just came out this morning.

Now there is a suggestion that by a lot of Institutions and hedge funds and I think it's nonsense, but a lot of Institutions and hedge funds are calling for 100 oil upon the Chinese reopening. I Personally don't see it, but it's possible Brent's sitting at 88.42 right now. it's been slowly sneaking up. But one of the things that I think is quite interesting is what you saw when China shut down and Russia invaded Ukraine is you saw Russian oil instead of going as much to China because of the covet pandemic and their lockdowns, their three years of lockdowns, uh, and and also a removal of Russian oil from other parts of the world like the United States or otherwise.

Well, you actually interestingly saw him was you saw a substantial amount of Russian oil? Go! Guess what to India A lot of Russian oil while it's still flowing to China went straight to India this year and you could see that on this particular chart here. While this orange level is expected to rise uh, because this is all representative of a Chinese lockdown era, what you actually have is right After the invasion, the other parts of the world such as Europe and the United States saw the purchases of Russian oil almost disappear to nothing whereas you have India's purchases of Russian oil Skyrocket and basically more than absorb more. you could see that more than absorb over here more than absorb of air available oil from Russia. Now what I think is remarkable about that is, guess what kind of companies are starting to all of a sudden dump a lot of money into investing in India Well, you happen to have one of the largest companies in the world which happens to be an American company and it happens to be a company that probably 50 percent of you are watching me on.

Right now it's Apple folks. Apple Apple wants to see 25 of their Manufacturing in India in the future that they expect to have 25 of their products manufactured in India And guess who's taken all? Well, maybe not all, but a ton. Literally millions uh of barrels of oil. Uh, hundreds of millions.

Quite frankly, when you add it all up, who's taking it all? India So it's kind of interesting as Europe and the United States on one hand say oh, we're going to make sure Russia pays and we're gonna stop buying their oil and we're gonna put price caps on fine, put price caps on that, creates shortages of oil, and increases the cost of oil for us in America But what does it also do creates an Arbitrage opportunity where countries like India can buy the oil cheaper and so now you actually have potentially cheaper domestic production in India and what companies are take taking advantage of it. Oh, American companies that are swooping in to take advantage of a cheaper cost of production. It's pretty weird when when you think about geopolitics and how on one hand you, uh, you have to politically show oh, we're gonna punish Russia but on the other hand, American companies are hopping in to benefit from exactly that. Uh, it's expected that India could be getting somewhere between a 25 to 40 dollar Arbitrage on the cost of oil.

Uh, cheap oil. Kind of fascinating. Now this uh, by the way, is also expected to uh, impact the Uh, or be impacted by uh uh Chinese reopening because as India has started taking so much of Uh Russian oil, if China does reopen as strongly as expected, uh, now all of a sudden that Russian oil might not be eaten up by a Chinese reopening, creating again shortages because now what was otherwise displaced by other countries is getting eaten up by India So an interesting potential thesis that, yes, maybe it is possible oil could still take up to that hundred dollar range personally. Again, I don't think so.

I'm not a big believer that oil prices are going to run I think we'll end up relatively stable and if anything, we might Trend down, but that is a big trade that's being done right now or being made right now. Do keep in mind as well China itself is expecting uh, some substantial uh Investments uh, not only into the real estate sector, but also the auto sector. And it's worth considering that for a moment right now. and and this, all of this, by the way, contributes to the Chinese reinflationary.

Boom The first number that you have to remember is that China's discretionary savings is sitting at about 700 billion dollars. That's about one uh, third the size of what uh, the American discretionary savings were. And when you look at that on a per person basis, it's even more wild. Given that India has about a 1.4 billion individuals, you're really only looking at about 500 of savings whereas Americans had about 12 times that, or about six thousand dollars of savings contributing to that inflationary nightmare.

So the per person increase the per capita increase in in uh sort of available cash is not that high in China relative to what we saw during the U.S boom if you will, but in Aggregates hey, 700 billion dollars of a potential uh built up savings rate uh or amount is is still quite a bit, and it still has that potential for driving some form of inflation, especially since China is now providing guarantees to their developers to help them finally get the real estate industry moving back again. China makes a lot or Chinese Cities and towns make a lot of their money from property auctions, so they're very incentivized to keep the real estate market going. We've seen a uh, say an 18 decline in sales from from January to November of 2022. However, that's only down to Uh down at about a six percent decline if you go year over year January to January And that's because in December and January, you've seen a lot more support for the real estate market in China which could also be inflationary.

Again, it's easier for real estate companies to issue bonds now because some of the debt is being guaranteed or the performance of developers is being guaranteed, making Chinese uh, Bond debt for real estate companies less risky. That potentially means okay, great, less of a crazy housing crash. but then it also potentially means uh oh, Are we going to go back to that speculative real estate bubble that we had in China Where Chinese developers are building ghost cities literally cities with high rises and no one living there because the thought of oh well, if we build it, they will come wasn't actually true. So you had a lot of developers building properties that didn't end up actually being sold or rented to anyone.

So there is that risk of creating another bubble environment. And if if you create another real estate bubble in China yeah, you're going to have some more real estate uh, or induced inflation. especially as more real estate uh, development increases the cost of concrete, it increases the cost of iron, increases the cost of copper, which as commodity prices go up. what happens we have uh Supply induced inflation which eventually ends up showing in Consumer Price numbers.

So there is a claim to the idea that China is going to be inflationary again. I Think because of my rubber band scrunchie analogy that Supply chains have become so much more resilient. We probably won't have as much inflation as individuals are expecting, but China doesn't want to be held back and so they are doing everything in their power on the Chinese Communist party to make sure they continue to invest. such as the likelihood that China is potentially going to become the world's number two exporter of vehicles surpassing both South Korea and the United States uh and and certainly Japan hand as well.

These are all a pretty substantial exporters of vehicles and you've got companies like Pollstar being manufactured by Volvo and getting investments from the Chinese parent company. Geely really hoping to take advantage of the Chinese export. Market Though cars exported by China are a lot less expensive than cars produced by companies like Pole Star or even Tesla, China is really known for its cheap cars. usually exports cars about 30 percent cheaper than their Japanese counterparts.

Cars tend to be exported at an average price of just thirteen thousand seven hundred dollars. China right now exports about two and a half million passenger vehicles, but get this: they expect that to grow to 8 million Vehicles by 2030.. that is 3.2 times the export vehicle market for China by 2030. Now personally, I actually think that is a big positive for a company like Tesla You want want the winds at your back in China You don't want China saying oh, Tesla's American let's put a lid on them China wants to do whatever they can to ensure they can get as many vehicles out of China as possible.

They are encouraging exports, building more, Railways expanding ports as much as possible and a strengthening U.S dollar or sorry, a weakening US dollar could actually be good for companies that like American companies like Tesla that export uh vehicles from China to other areas. but also keep in mind only about 45 percent of revenue for for Tesla comes from the United States. So a weakening dollar is going to increase the value of that 55 percent International Revenue which is great. Uh, okay, so this is interesting, right? So when it comes to inflationary impulses, you have oil concerns.

You do have the real estate concern of China. You've got this blowing up expanding car market in China. You've got inflationary concerns from the airlines, but you've also got inflationary concerns from Staples I Hate to say it, but the other day I reported that Procter and Gamble was showing us some pretty concerning uh, inflationary. Trends Uh, and that that kind of slaps us in the face of thinking that oh yeah, we're definitely going to see deflation, right? I Mean, take a look at this.

this is Procter Gamble This was one of the most critical portions of the report. On the commodity side, we've seen our some of our Commodities annualized as you say, showed some decreases. that's great, but the majority of our commodity basket still sees week over week and month over month increases. so they're still seeing pain from inflationary pressures at Procter and Gamble and I was hoping to get a different story from Johnson and Johnson Johnson obviously another Staples provider, but unfortunately what we got at Johnson and Johnson was not that we actually got more warnings about inflation.

In fact, Johnson and Johnson told us that in consumer health, they expect to continue to utilize strategic price increases across the portfolio to reduce inflationary demands. You have, uh, comments, uh, that inflationary pressures are affecting almost all of their cost of goods sold, that their operating margin is expected to be flat driven by inflationary pressures. Again, that they're expecting to increase prices in certain areas. They do expect that inflation will be better in the second half of the year, but not in the first half of the year.

which Echoes What We've seen some of, uh, the inflationary complaints that Proctor and Gamble Again, they don't expect deflationary relief until the second half. And if anything, they're expecting a worse inflationary impact in the first half. So you you have some inflationary concerns, it's it's not like I I don't want to be the person that's saying you to you, you're only expecting to see deflation. No, there is still a large inflationary Catalyst And it's sitting in the following areas: It's sitting in airfares.

It's sitting in healthcare. Which is literally what the Pce report this morning reiterated the Pce report that just came out 20 minutes ago from the time of this recording within Services the largest contributors to the increases we're spending for housing Transportation mainly Air transport and health care. So Procter, Gamble and Johnson Johnson are telling us. yep, still seeing that inflationary impulse at least for the first half of the year.

So you do have some red flags for inflation: You've got the China concern, the oil concern, the China China concern being broken into two parts autos uh, and sort of their expansionary Investments uh leading to not necessarily higher average selling prices for cars, but a higher demand for Commodities and you got a housing sector that potentially could boom again in China leading to again more pressure on Commodities and you have again Airlines complaining about increases uh in inflationary pressures from Pilot pay to just regular wage pay in Uh in in the job sector for airfares. but then also you have Johnson Johnson Proctor and Gamble telling us Staples are still seeing inflationary pressures and those are likely to continue for at least the next six months. so everything is not great. Yes, we have a lot of disinflationary impulses uh, the average price of vehicles coming down substantially chip sector price is coming down substantially uh, a good generally deflating across the board Commodities have come down about 20 year over year, but uh, it's it's reports like this that unfortunately are going to send a signal to the United States that uh in the Federal Reserve that maybe just maybe we've got to keep some pressure uh on markets because there are still what I call inflationary Embers and that's a problem.

Inflationary Embers mean higher rates for longer. Higher rates for longer potentially mean more pain in the stock market for longer. However, and fortunately, following the Pce report that just came in about 20 minutes ago, the stock market has slowly started to Trend higher. Maybe just maybe? the stock market is willing to look past the next six months of inflationary impulses that may still exist And the Embers because remember even Procter and Gamble and uh, Johnson and Johnson told us we just basically have to get through the next six months of inflationary impulses.

That's good. And the FED is also aware that it takes time for higher interest rates to really affect every part of the market. Uh, so potentially the light is at the end of the tunnel. Even for the Staples and commodities, that would be great, but obviously we'll be paying attention to China in the meantime.