We gotta talk about CPI inflation and the projections for what CPI is going to look like going forward. The next CPI report is on February 14th and boy oh boy. the numbers for the projected CPI are not good. And that's because some of the data that we're starting to get is coming in hot again, including what's going on in the car market.

And boy it is weird. but it actually sets us up for a dangerous Middle Ground Now that sounds interesting. like politically, being in the middle is often deemed like neutral, right? This is not a neutral middle ground. This is a hell of a middle ground.

and I'm gonna reveal that middle ground to you. So first, let's hit the projections and we got to talk about that hellish middle ground because that hellish Middle Ground is a big problem. It is not the middle ground that you think it is all right. So what do we have First on projections? Well, first on projections CPI month over month and the last report was negative.

Point One Percent: What is the CPI projection for this month over month report? Point Five Point Five: That's huge. Point Five represents an annualized inflation rate of six percent. It is a way too hot now. I Don't know if the Market's gonna sell off right before the CPI print or what, but that CPI number is scary high on the month-over-month basis if you strip out food and energy because we know food costs and uh, like eggs.

For example, even though eggs have recently Fallen around 50, they're still way more expensive than they were a year ago. Substantially I mean you're paying like a buck more. Uh, which from the egg point of view, on dozen eggs is is like basically almost paying double uh for a dozen eggs. It's insane.

But anyway, even if you strip out the more volatile food and energy component, you're still looking at point four percent. month over month projected. Now that's uh, slightly up from the point three percent we had last month. But still, that's four point eight percent annualized inflation.

That's bad on the month over month read. Sure, the headline number goes from 6.5 to 6.2 but because that core number is staying strong, it kind of doesn't imply that we're gonna get this rapid disinflation, continuing the way we hope. Now that creates some nervousness in the market and what we want to do is try to understand why. Why is there this this hole in CPI projections? Uh, to where all of a sudden we think CPI will rise again.

Well, one of the reasons has to do with a surprise in used vehicle prices last month. Adding to well, not only car buyer frustrations because prices are starting to go up again for used cars rather than down, but the magnitude was pretty large. Not only have used car prices now gone up for two months in a row, but between December and January used car prices jumped month over month 2.5 and I Hate to say it, but you could do some very simple math here. If you do simple math and you take 2.5 percent and then you weight it weight like like an anchor.

right? like a an anchor weight, you weight it by four and a half percent. So 0.025 uh, at times 0.045 you're going to see that you could actually see the month-over-month inflation numbers move up 1.1 percentage points on the month-over-month basis. Or or I should say 0.11 percentage points on a month over month basis solely from used cars solely from one thing used cars. And those prices are skyrocketing.

I'm going to draw that out for you because I understand it's going to sound a little complicated when you start talking about all these small numbers. I'm usually used to talking about big numbers around here. Uh, and when we start talking about like micro things, it's it's it's a lot harder to grasp. and I understand I think all all the the meet Kevin Watchers are a fan of big numbers too.

But anyway, looking at small numbers, Okay, the last month over month read was Point Uh, one percent on a month over month? Uh, change. Well, used car prices alone, if we start at zero, used car prices alone are are going to bump that Zero by 0.11 percent. So in other words, solely because of one part of the CPI read: you're going to see the month over month CPI read go up by 0.1 solely because of carbs. Now we expect the month over month core read which does include those core prices or used car prices to be 0.4 percent.

0.11 of that alone is used cars, which only makes up 4.5 percent. So that means 0.11 is coming and you still have over 95 of the report to go. That's not great. The used car numbers are a problem and not only are they an issue, but according to the car dealership guy, they're actually potentially getting worse.

This isn't great now I've said before I encourage you to follow this guy I Think he's great. Hopefully you'll follow me on Twitter as well at realme Kevin Uh, but anyway, he says this I Can't stress this enough. The pace at which used car prices are rising at dealer auctions right now is absolutely baffling. As of this morning, auction prices were much higher than January Well, that's not good I Don't want to hear that.

how do we get out of the cycle? Low Supply leads to higher prices. Higher prices lead to lower sales forecasts, which lowers the production of the cycle goes on. So he's a little bearish on the idea that used car prices could actually go back down. But the problem with this is if car prices are still rising and Amar the market is hotter than in previous years and it's only re-accelerating and the official numbers will come out in two or three weeks.

and he's sort of given us this sort of like his he runs a car dealership, right? That's why his name is car dealership. Anyway, if his impression is that the numbers are getting worse, and so far the official numbers over the last two months have been worse, it's a problem. Now it is potentially possible that we could look at this and say look, that's the nature of a soft Landing you have some increase in demand. People are excited again that maybe we're not going to go through a house hellish recession.

So they were getting their themselves a used car again. So you're getting volatility. That's one way. if you wanted to put on the the Bullish hat, you look at this and you call it volatility.

If you were a bear, you look at this and go disinflation. What disinflation? And so the truth is probably somewhere in the middle, but it's a problem. It's a problem that you have used car prices popping off and the expectations for the inflation read are not that fantastic and you've got the break-even rate of inflation jumping to levels we haven't seen since November. So there's some red flags that suggest this next CPI report could be slightly painful.

It also doesn't have help that the CEO of Hertz you know, the company that went bankrupt but had this massive amount of used car inventory that became extremely valuable which ended up saving the company and helping bail them out and letting them reorganize. Well anyway. They say that the company is seeing big jumps in the prices over the last five weeks, both at auction and at cars sold to retail. In the used car markets, used car retail sales were up 16 from a sales point of view over December and 5 from a year ago.

Though used cars are still about 15 percent less expensive than they were a year ago. So year over year the numbers are good, but the month over month is concerning and usually we look at month over month numbers. Now the good news is uh and and now this could be biased. Okay, I understand this but there is a White House Council of economic advisors and they decided to put together a new wage series tracking measure to only track wages that go into Super core prices.

Super Core is what the FED is paying attention to to see. Are we actually going to see disinflation here? This is where we talk about. You know Chipotle Seeing lower labor costs, many businesses seeing lower labor costs. Those are disinflationary indicators and we know it takes a lot longer for housing to disinflate and for Uh wage Services wage-based services to to start deflating right? We know that takes time.

Well look at what the Council of the the White House Economic Council of economic advisors put together. They say that this chart right here is the hourly wages chart At a three-month annualized change and you can see it is very nicely full. Now don't get me wrong, we want to see people make more money, but we don't want people to be making nine ten percent more money in hourly wages because that leads to an inflationary spiral of wage price spiral. And then you have to get Paul Volcker.

Fortunately, even though we have bad news and I use car data, it looks like we're getting good news in the wage nut. Now this brings up the question about the middle ground. Okay this Middle Ground is an interesting thesis and I want you to think about this because I think it's very important for your investing the middle ground And and keep in mind like I try my best to provide you value that you don't go get anywhere else. or at least perspective.

It doesn't mean I'm right about everything, it's just I try to give you perspective. So let's pretend where uh, we are driving down a road. Okay, and and we're going, we're going downhill. Okay, inflation is is disinflating right? and this disinflation is driven by Goods disinflation.

Well, the goods disinflation according to Bloomberg is expected to be over by June Okay, so we hit a bottom and the the basically Goods disinflation, dragging the markets down right or dragging inflation down I should say Well Then we expect that at some point in the future wage inflation and housing inflation is going to come down right? But before those come down, you could be in this terrible Middle Ground I'll go ahead and say July August September Let's just call that the the Summer hell and the reason it's the summer hell is because you don't actually start seeing housing or Goods disinflation or a housing or wage disinflation. yet you actually start seeing inflation popping off again. So now it's kind of like you're getting the speed bump in the road and it's actually expected to come back down. You get this sort of temporary Goods re-inflation Maybe it's driven by China Maybe it's driven by Americans I Don't know.

and it's not until the second half. like the the actually probably the last quarter of the year that you end up getting past that hump and now it actually drives down the market. Uh, or inflation when I say Market I mean inflation. What drives down inflation is housing, which is your sort of level two of disinflation, goods being level one.

uh, and then wages, wage disinflation being level three. That kind of sucks because it means you still got another Humpy Dumpy To get through. top of that, you got stuff happening like earthquakes in Turkey which I Understand people like heaven I Understand you're sad about people losing their lives in Turkey I know I mentioned it like every live stream and I it's it's a pisser I I I'm so devastated by what's going on over there it is for Children and Families ah, go hug your loved ones. Okay, anyway, what's happening with Turkey? Well now there's suggestions uh that Turkish uh that that uh countries including the United States rely on uh Imports of certain metals and we could actually see steel disruptions due to damages of ports uh in in the Turkish region.

For example, while Turkish steel uh accounts for only about four percent of Uh 2022, uh, U.S Imports of Steel uh, we we import about seven percent of our long steel products. These are like uh, railroads, uh, or like, uh, like railroad tracks or rebar which we use in construction stuff. We import about almost twice as much. about seven percent of our long products from Turkey Turkey likes things long uh, and uh.

And as a global long product per exporter, they make up about 11 of the global market. And so there's an expectation that a lot of metals uh, are going to be affected uh by these Turkish disruptions. uh, and that could increase input costs, producer price costs which potentially could flow through uh through consumer prices. So all of these little shocks that we get they they make the road a lot bumpier so far.

Unfortunately, it doesn't seem like there are are these these terrible catalysts that suggest oh my gosh is this going to be the Black Swan that destroys everything? But it's important. I mean Goldman Sachs had a whole piece on it. The impact of turkey earthquakes are Global Steel Markets now. no notable damage to steel mills, however, we highlight likely supply chain disruptions, particularly given damage in various ports.

Particular one we talked about some of the percentages and the point is all of the issues that we face in our economy. and Complicated by the normal oopsy-doopsies that happen in life. whether it's nature or just normal oopsy-doopsies and everything is just going to seem more frustrating in 2023 because everything that happens like this car information or this turkey metal information, what this ends up doing is creating uncertainty. It creates fear, it creates uncertainty, and it just makes it less clear as to whether or not we're actually on that path to a soft Landing So something to keep in mind, but those are the CPI projections.

I will obviously be streaming the CPI report at 5 30 a.m Uh, on February 14th, so mark your calendar for that and I'll see you there.