As an investor, I find one of the most important things we can do is pay attention to our weaknesses and I believe that one of my weaknesses is the potential that inflation could continue to remain substantially more sticky than we believe in this video. I'm actually going to provide you some perspective into how that could be the case. That is, inflation could remain high and maybe the likes of Michael Burry will be correct that inflation will be dragged down by certain temporary forces and then unfortunately, we'll re-rear its ugly head, leading the Federal Reserve to go from Cut to hike again yet substantially worse than the first time around. And positioning for this kind of pain is not ideal.

But we'll talk about everything in this video. So let me first start by telling you that you're going to get some new insight from recent earnings calls in this video that give you a breakdown of why I'm making this video in the first place. but I'd like to start with the General thesis just to catch you up to speed. So the general thesis I think we can pretty much all agree.

as much as it's very difficult for everyone to agree, is that yes, inflation has been moderating for the last 40 years. it's been known as the Great Moderation. And yes, we all know that we substantially over inflated the economy in 2020 and 2021 with a substantial amount of inflationary stimulus basically money printing. It wasn't just the United States it wasn't just Democrats or Republicans, it was everyone around the world.

Now, the belief was that that sort of inflation would be transitory, which turned out not to be so great because, well, we had more variants of Covid. We had more supply chain issues than we expected, and we also ended up with a war in Ukraine which is a big problem. All of these things are making transitory feel a whole lot more sticky. And yeah, maybe the best case scenario is that that inflation actually comes back down to Trend or maybe even lower.

Or and sort of that, Trend continues down. Then yeah, sure, if this ends up being the case, yeah, we might be able to sit around drinking beer together in 2030. looking back and going, remember when we had that transitory inflation and you might reply, yeah, thank God it was transitory. But that's the bull scenario, right? What if we end up inflating and as Michael Burry warns, yes, inflation is going to come down because we all know we could all see it.

The housing data is going to give us negative inflationary reads this year, specifically in the Housing Services sector, which could weigh down the entire sector right? Well, as we weigh down the entire sector. yes, we're going to get Negative reads. If that induces the Federal Reserve, then to panic and flip-flop so to speak. And then they start reducing rates.

but then inflation pops back up. The FED could potentially lose all credibility. and if you thought the break-even rates for inflation were a good thing that they were, while basically starting to Trend down, you might be horribly surprised when those Break Even yields for inflation end up skyrocketing, because nobody actually believes the Federal Reserve can do their job anymore. The Federal Reserve's credibility is already substantially damaged from the initial claims that inflation would be transitory.

and this, right here, unfortunately is just some bad news. To reiterate the concerns: I'll hide myself in a moment, but this is the five-year Break Even chart. and even though yesterday and the day before after some really low PPI numbers, this break even chart plummeted to a new low This year, it's still the entire chart. The lowest levels of this chart are still higher than in 2018, and if I remove myself, you'll actually see that the breakevens, while yes, they are volatile, have broken to the upside yet again.

Uh, that is still relatively low. We're still on the downtrend, but they are breaking towards a higher level, not breaking down towards the lower level. This says says that clearly. even though the broader Bond market believes the Federal Reserve is going to start cutting rates at the end of the year, yes, we're going to see it.

Probably a pretty deep recession. Uh, I Mean it could it could I Shouldn't say deep? Uh, yes, we're going to see a recession because of what the Bond market is predicting and we'll see those cuts. This break even issue somewhat sends the signal that the Bond market is also the belief that yes, we could get Cuts Yes, we could have the recession. but we might end up having to go back up because again, that entire chart is above the 2018 level.

So there are definitely red flags in the economy. and generally when I go look to see well, what's going on in the economy. and I look at earnings calls I Want to investigate which companies have pricing power and which companies are suffering from inflation. And unfortunately, we have a very, very large company that is now telling us a little about an inflation story that I didn't want to hear Because so far, all of the earnings calls that I've been looking at have been of one consistent mindset.

Price pressures are a lot lower, things are inflating at a substantially lower rate, or even deflating. in certain cases, you've got companies like Winnebago the RV manufacturer who says, hey, you know what if our competitors want to start cutting prices, well, we can do that too. You know what? We'll just all cut prices together and we'll have a price. War To the downside, that's the RV market.

Then you have a company like Tesla creating a price war in the vehicle market for electric vehicles. And since we know that companies like Ford Lucid and Rivien lose money for every vehicle they make, that's an electric vehicle, well, we expect them to lose now. even more money or just leave the EV Market which in the case of Rivian or Lucid would be bankruptcy in the case of Byd might be going from a profit to negative. If they end up following Tesla with this sort of pricing and Neo and X paying well, we'll see what they end up doing.

But so far it looks like those price cuts are coming there as well. We've already seen some of them more to potentially come. Yeah, so you've got price Wars and RVs You've got price Wars And cars. Where else are you potentially starting to see the rumor or murmuring of price? Wars Well, I'm actually really happy to announce this one, but potentially the airlines see United Airlines in their last earnings call, Started talking about this idea that hey, well, if our competitors start cutting airfares, we are prepared because we have gotten more efficient over the last few years and even though we're still short 15 percent of pilots and even though our revenues are still 15 percent lower than where they were in 2019, we can cut prices if we need to to make sure we can stay competitive.

And since we have better margins than the competitors, if they want to start cutting prices, we will too and we'll win. Yeah, that is a paraphrase of literally what United said in their earnings call because again, I stick my head in these earnings calls and I'm like oh okay, I'm starting to see what's happening. However, all that was pointing to the same direction. Pricing Wars Disinflation Deflation Yes, okay, we know Housing Services are going to go negative.

We know that wage inflation is slowing down even though in 10 days on January 30th we have the ECI release which is the same day of the expiring coupon code for the lifetime access to the programs are building your wealth. Of course, member live streams every day. the Market opens up q A directly with me, but also a low price guarantee. the price won't be any lower three months at least guaranteed.

probably even longer since we tend to bump the prices over time. But what did we get today and this was a little bit of the concerning one. Okay, here we go. So the earnings call we're about to look into is Procter Gamble and it creates some issues.

So first of all, they talk a little bit about how they're making Investments to make sure they have more Supply I Want you to know that every company is saying this almost every company and this is actually disinflationary, right? The more you have companies saying. Look, we have invested a lot to rejegger our supply chains to make sure we're never short of product. Again, the less inflationary pressures you should see the next time either China opens up or people go back to spending because we're coming out of a recession, right? The better Supply chains are, the more they can absorb extra Demand by basically just adding more. Supply The problem with the Covid Pandemic was as demand went up, we couldn't push up Supply because certain factories in China for example, were shut down or we were just never prepared for that level of demand in the first place.

Well, now when we look at what Procter Gamble tells us in the next, Pages it actually should start making you nervous to the tune. Enough with the Federal Reserve is saying. see the Federal Reserve like Mr Waller Who's talking today it? You know all of them first of all are on the same page. They're all like we're going over five.

We're not going to cut rates this year. Uh, but you have Mr Waller saying hey, look, if inflation pops back up, we're just gonna have to keep hiking. Hikes our hiking rates 25, 25, 20, 25 You know, just keep going. Uh, this is obviously not being priced in by markets, so any kind of actual need to continue racing.

uh, raising High raising rates would end up forcing markets down. presumably. So what kind of red flags do we have that? maybe inflation could stick around? Well, let me show you and then break it down. so take a look at this section right here.

Thank you! John As I've said in each guidance outlook for the past two years, we will undoubtedly experience more volatility in the fiscal year ahead. This Rings True as we enter 2023. Okay, fine volatility, but what did I highlight here? the combined year-on-year profit headwinds from foreign exchange rates, freight costs, materials, fuel, energy, and wage inflation are even a greater challenge in Fiscal 2023 than they were in fiscal 2022.. Now this is a problem.

First of all, it's worth noting that their fiscal calendar aligns with our actual calendar. For those of you who get concerned that maybe there's like a mismatch, you know, sometimes it's like we're in Q1 2023 and a company's talking about Q1 2024. It's It's so weird how some of these corporate calendars work, but this Procter Gamble's actually aligns with the real calendar. So when they talk about 2023, they mean 20 23.

And they're telling you that they're expecting to face an even greater Challenge from energy, wage inflation, materials, and freight costs today than they did last year now. I Did find later in their earnings call that the way they handle contracts seems to imply that they might be rolling over contract rates that they had in 2021 to 2022 pricing. Which of course, we know that there was more inflation between 2020 or 2021 and 2022, right? And if they have old contract rates, then maybe that's why they're experiencing this kind of pain. We'll go through this more in just a moment, but let me explain that for a moment here if let's say Procter Gamble which does not Hedge for inflation.

but they do have contract rates. If you're in a situation where in 2020, inflation is here or prices are here, let's say, and then all of a sudden you go into 2021 and you have a a pretty big price hike. So 2020 to 2021 big price hike. But you go into 2022 and you have an even bigger price High like.

and then in 2023, you start seeing prices come down. Okay, great, That's roughly maybe what the overall Market is seeing now, but there's a chance that what Procter and Gamble is actually warning of here is for their profit purposes. Maybe they've locked in contracts here at the end of 2021 and for much of 2022, the inflationary year, they were locked in at 2021 pricing. Maybe for their issues, they are now re uh, signing contracts based on where pricing is today, which is obviously higher than where it was now.

Now it's lower than last year, but it's still higher than 21. that is a possible explanation for this ugly warning they're giving us. But let's just be very, very clear here: Freight costs expected to be higher in 2023 compared with the average cost paid in 2022. Given that, remember, not everything you can just contract out a year prior.

I Mean it's one thing if you contract out Plastics uh for a year, but usually Freight is paid at the time, right? So it's kind of weird to see a company like Procter Gamble a huge Consumer Staples company warn that we're seeing headwinds here. This is not good that they're suggesting things can be worse now than in 2020. Uh, too. That's kind of remarkable.

Let's try to get some more color on this though, and go to the important parts. So they talk about reinvesting in productivity. Now the more they talk about reinvesting in productivity. And every time they talk about pricing, they talk about productivity.

You know what signal I glean I glean a signal that what's actually happening to the company is they are losing some of their pricing power, their headline pricing power, and they're seeing their margins start getting squeezed. So in other words, they can only sell you that deodorant for ten dollars, which is already ridiculously insane. And now they're starting to see people spend less money on 10 deodorant At the same time they're seeing costs. maybe go from six dollars to seven dollars from that for that deodorant.

So they're getting squeezed at both ends. They're getting less volume, which means less overall profit and less margins. so they're getting hit on both sides. That is basically the definition of no pricing power.

Right now, it is normal for in a recession people to demand fewer quantities of things, but if at the same time quantity demanded goes down as your profit per unit goes down. Now you really have virtually no pricing power see some companies with substantial price Rising Power can actually maintain prices or even slightly reduce prices as long as their margins remain substantially ahead of the competitors. and in doing so, they can cannibalize their competitors and that becomes those price. Cuts Become an investment into the future.

For a Staples company, though this is a little harder to argue. It's not like we have Network effects for deodorant. This is just people literally saying I am going to make my deodorant last longer. Okay, maybe that's not the best example, but in their earnings call, they actually talk about this idea of their customers going and drawing down on their personal inventory more.

Now this is actually something I personally do usually I like to buy like four deodorants at a time and I stack them up in my uh in my vanity closet and so that way I know when I get to the last one I'm like oh, I don't have a backup anymore I go reorder at that very moment. So that way I always have a backup I never run out of this stuff, right? Well, a lot of people do this, but what happens is over time you start accidentally buying too much and so when the economy gets tight, what do people do? Well they start looking through their stuff a little bit more like oh look I have more than I thought I had Maybe I don't need to buy so early or maybe instead of buying four at a time I'm just gonna go buy one at a time because cash is tight right now, right? That's a recession. Every business goes through pain in a recession. There is really no business that is like, yeah, it's a recession.

You know, some make the argument that uh, lower, uh, or or inferior Goods will benefit in a recession and this is an economic article or argument. It makes sense. You know, maybe dollar stores will see their uh, their their uh pricing power go up. But usually what happens is even though at a dollar store you might be able to get more top line revenue, your margins get destroyed because what happens is people are going into the dollar store and they're not buying the you know, uh, water guns that cost 10 cents to make that they sell for a dollar.

So you have this 90 gross profit. Instead people go in and they start buying toothpaste for a dollar which actually cost you 90 cents to acquire. So you're you're making more money on Tiny margin things, right? So like recessions suck for everyone. Okay, uh.

so anyway, this said. this is a little bit of an issue and what they're talking about is increasing their productivity and their advertising to try to maintain some of their pricing power even though they're seeing a squeeze. So they talk about becoming more effective to try to increase their margins. This is good we can end up seeing in their financials if they're successful at that, but they also talk about shifting more of their TV advertising spend to a lower cost per conversion digital ad.

Now moving from TV is bad for like a Time Warner Cable or Spectrum right to digital being good for YouTube Snap the Trade Desk right. These are great plays when you see companies actually start looking at every dollar and going, where can we be more efficient? This is why I Personally really like Trade Desk as an investment. Uh, now. with that said, let's go through some of the other items here.

Uh, they're talking about their productivity muscle because they need to offset the inflationary pressures they're facing. Yes, we see a private label re-emergence. This is as expected in a recession. People are going from the Planters nuts to the Archer Farms nuts even though they're probably all manufactured by the same company.

It's a psychological trick here. Look at this. This is where they make that argument. Consumers don't leave the category, but they might look at their dosing behaviors.

This is not like, uh, like steroid dosing. Okay, this this is like, uh, having that backlog of like buying four deodorants versus one, right? and then maybe now buying one instead of four. Anyway, they might look a little bit closer at their inventories and draw that down over a period of time. now.

Keeping my customers are not only retail customers, they're also wholesale customers. And that's probably what they're talking about with inventories. But it works for both sides. Behaviors happen at stores.

So if you're a dollar store, you're like, look, do I really need 100 deodorants stocked or should I just have 50 at a time? This same issue on both sides. everybody does it in a recession. Very, very typical. Okay, so a Walmart indicated pricing pressure in general merchandise and apparel.

This would be like toys, uh, and then obviously clothing. Nobody is pleased about the current inflationary. Trends we're seeing. This is a concern to me.

This is. This is the first report that I've seen that's actually still complaining about inflation. Maybe we'll get more. uh, and and who knows again, maybe it's in part because their Contracting sucks and we'll dive into this a little bit more.

I Don't know, but it's bad. The reaction to those price increases from a retailer environment is what you would expect. Nobody is pleased about the continued inflationary Trends we're seeing, but it remains a constructive discussion on how to best execute which is recovery of inflationary cost. Now, keep in mind when they talk about recovery of inflationary costs, they're not talking about raising pricing because they can't raise pricing anymore.

Instead, they have to try to become more efficient. But if you have not been trying to become efficient already, you're behind the curve and this is not great. This is bad for Procter and Gamble But the pricing we're taking is not covering the breadth of the price increases we're facing. In other words, uh, yeah, we raise prices last year, but it it ain't offsetting all the inflation we're seeing.

We're seeing price increases on private label Brands and on mid-tier offerings that are even in, in some cases, higher than our own price increases. So this would be like comparing to competitors. In other words, they're seeing competitors. Uh, either that have race prices or are raising prices That's not good.

Obvious reason, which is yes, commodity prices have come down recently and you might not feel those benefits immediately. But what's going on says one analyst. Well, they say look about 63 of our problems are driven by Commodities Thankfully yes, Commodities have come down. But remember, on the commodity side, you have Contracting right Again, like you're going to order: Plastics You sign a contract for a plastic, uh, a manufacturing or plastic supply for your manufacturing over the next year at a set price, right? And maybe it has like an inflation adjuster in it of three percent.

But then everybody's like wow, inflation is eight percent. I Guess you guys won on that contract, right? Anyway, we've seen the majority of our commodity basket still increase week over week and month to month. This is a terrible red flag. Why? Why is Procter Gamble seeing yes, some decreases, but still seeing the majority of their Commodities increase week over week? This right here is fuel to the 5 fire of the FED having to keep the boot on the back of our neck.

As much as we're starting to see inflation come down, the fire is not out. There are still smoldering fires throughout this economy, which on one hand is great. If you're trying to increase your allocation to stocks at low prices, you've got plenty of time to do that. It's bad though.

If you're in the market and you're like damn, prices keep going down right now. Look, we are off bottoms right? But this is a red flag for maybe the market is being a little too optimistic trying to fight the Fed. This is why people say don't fight the fat. Okay anyway, so when you look at our overall commodity exposure, it is at this point in time stable to increasing.

That's not good. and our assumption going forward is that spot rates that basically things stay flat is their assumption. At this point we don't hedge. We see slight increases week over week, month over month.

Certainly not to the tune we saw at the beginning of 2022.. Okay, well at the beginning of 2022, we saw like eight percent increases in prices. Slight increases. Look, hey man, if we're seeing one to three percent I'm game, it's fine because even if we get to three percent inflation, the FED can flip flop.

But just by saying hey, we have Fate or we hit fate. Flexible Average Inflation targeting fait Anyway, uh, that's going to be the way they back out of this I'm if if I get like YOLO stock options on the Fed using the excuse to back out of this Insanity we're experiencing by just saying ah, Flexible Average Inflation targeting it's good enough we're close enough to two percent I would put some good money on that bet because I think that's exactly what the Fed's going to do. But anyway, the interest rate differentials keep a widening uh versus the United States so we expect some headwind. Uh, okay, this is on Foreign Exchange That's fine.

Transportation is rolling over. That's good. A Little bit of easing over here. Great.

But again, things not everything has rolled over into contract rates, right? But maybe maybe maybe maybe if we start getting contract rates at a lower level, you could actually see a Tailwind So they're feeding us some opium. Or if you're already in the market copium see if you're gonna YOLO It's hope. if you yoload and lost, you're coping. Copium opium.

They're both bad. Uh, anyway. uh, these are problems. These are not good.

and there's a drawing of mine. and here's an unhighlighted page because there was nothing there that I found interesting. And here's another comment on pricing. My answer is going to be quick.

It's going to be a combination of pricing, productivity, and innovation. In other words, how they stay competitive. Let me be clear with you: I am calling their Bluff I Do not think they have any ability to raise prices I Think they are going to try their best to advertise to their customers more which is great for digital advertising by trying to convince them that somehow their deodorant is more Innovative than the next guys. I would hate to be a Staples manufacturer I would also hate to manufacture Staples if you know what I mean like deodorant or like paper Staples those both seem really boring anyway and productivity is like basically working your existing employees harder if any of my employees are watching this.

I Love you and you need to work harder and I'm just kidding you guys. You guys do great. I Love you guys! Uh, keep it up so this is bad I Don't like this report now. I'm going to caveat this and I think this is why it's very important to stay to the end of the video.

Not so you can get every coupon pitch that I throw at you because the next expiration is January 30th, but because I have a little bit of a concern. What if What if Proctor and Gamble is yapping about how well we're still seeing inflationary pressures as a way to excuse performance? Think about that for a moment. What if Procter and Gamble is actually starting to see some of the rollover? But it's not enough of a rollover and they have to blame something. And they don't want to blame themselves.

So what do they do? They blame inflation after all. After this report, their stock kind of fell off the cliff a little bit. I Mean not that much. It's like seven percent.

It just looks like it fell off a cliff and it's actually done pretty decently year over year. I Mean a year ago the thing was at 147 bucks. Uh, you know, now it's at 142. Like this isn't that big of a deal.

Which in part is because during recessions, people move into Staples But if you're actually looking at the real fundies, what if Procter Gamble is blowing smoke and they're like, yeah, yeah, we still got inflation. Damn, our numbers suck. But don't worry when that inflation goes away, we'll do great quick. Everybody become more efficient in the factory.

That's a jaded Outlook Okay, my opinion. Summing this whole thing up, my opinion is: reports like this are going to keep the Federal Reserve boot on our neck longer. They're going to keep us in the mud for longer and we it's our jobs to survive this and not die literally and figuratively. Okay, we don't want either of those to happen.

We don't want to die in markets. and you know, IRL is kind of important too. so stay alive. Obviously a lot of pricing pressures are receding, but not everyone is seeing them yet.

and because not everyone is seeing them yet and they're still smoldering. Embers That could turn into wildfires. The FED is probably going to be more aggressive for longer. ironically.

I Don't think that's necessarily going to be terrible for the stock market, as long as we continue our trajectory down inflation. I Actually think it's going to be worse for the real estate market because the more inflation smolders, the less people are going to buy bonds. The less people buy bonds, the higher yields go. and in an environment of quantitative tightening which means basically higher yields and people buying less bonds because maybe they want to eat into stocks because those are starting to recover first.

Probably end up having more damage. Looking ahead to real estate than you do stocks. I Know that's wild. but remember this when we look at an economy.

An economy is not just one market. An economy is a combination of multiple different markets. This has been the oil market, and you know it's kind of doing this. Maybe it'll keep going down.

The stock market has kind of done. uh, probably. let's see as oil was Rising probably done something like that. like substantially higher, uh, of a start and uh, and some more pain, right? So there's sort of your oil.

Market There's your stock market, and the real estate market is quite frankly there. so it is entirely possible that and this is just pure speculation at this point. Uh, that the oil Market it could go down, which would be fantastic Oil: Market goes down stock market booms. but but, but because of quantitative tightening and a lack of bond buying because people are more interested in stocks than bonds because bonds are still getting hit partly because of quantitative Tiding the real estate market actually continues to Trend down.

That's my base case scenario. Oil down, real estate, down stocks up. and I Believe in Earnest that the stock market will bottom before the Federal Reserve actually u-turns unless there's some kind of capitulation event I Believe that. but this right here from Procter and Gamble Bad news for inflation and this is this is what I want to pay attention to.

These are the kind of indicators that tell me: nope, way too soon to start yellowing. Anyway, thank you so much for watching I Wish you the best out there. Good luck, Thanks for watching Subscribe share the video If You appreciated it and we'll see in the next one. Goodbye.

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