Hey everyone Me: Kevin here. I'm really surprised and shocked to see Mr Ferelli overed. JP Morgan finally start to flip-flop This is a big deal for the entire economy. the stock market, the real estate market.

Look, let's be really clear, there are a lot of bears on Wall Street and that makes sense. It's because there's a lot of uncertainty. I Don't blame any of the Bears I have a lot of friends who are legitimate bearers who are very concerned that the FED is driving rates up so tight that we are going into a recession. and there are others that say there's no way we're getting back to 2% inflation without a recession.

That usually it's a recession that kicks us over the edge now. Fally Over at JP Morgan is an analyst who's regularly been on the side of recession recession recession relatively bearish. It seems like every time the market rallies, the Bears get quoted in news articles and they're like, hey, you should sell this rally It reminds me a lot of Michael Bur in January of 2023. It's like bro, how could you tweet sell now I Know hindsight, hindsight.

but I mean come on, things were pretty dang low in December of 2022. So what did Farelli say this morning? How is he starting to flip-flop And how does this relate to the boiling of the Frog Well, actually, it's easiest to start at the boiling of the Frog another department and then we'll get to Forelli another that's a big one. another department over at JP Morgan Released this piece where they talk about basically data trending towards either a Goldilock scenario where we have this magical soft landing and inflation goes away or maybe we're just boiling. The Frog boiling the frog is basically a way of saying you kind of put the frog in the pot of water when it's you know, maybe 80 nice and War warm.

Kind of like you're at the beach in Florida 85 maybe. Then you turn up the temperature to like Mexico Beach water levels and then you turn it up to like oh my gosh, you're boiling and you don't even realize you're in a recession until it's too late. And then the FED has to cut and they turn the money printer back on and you have panic and more pain and massive layoffs. Problem: The big problem that everybody's trying to avoid right now is layoffs.

Massive layoffs. Now don't get me wrong, we've heard plenty of stuff about layoffs, but the problem with layoffs is twofold. Number One layoffs and jobs are a lagged indicator, so we don't really know how much pain we've had, and looking at news headlines certainly doesn't help. But we don't know how much pain we've actually set ourselves up for until maybe 6 to 12 months later.

Oops, that doesn't do great use. Uh, but the second thing about layoffs is that once you start, like once you start going into the negative jobs, growth, and the snowball of firing people starts, then you often create an unsustainable recession. And so this is why they're saying boil the Frog because oh I'm focused on the back I See I can't have faces on there. The focus changes anyway.

Uh, but they're so cute anyway and I'm talking about me I'm just kidding. Okay, so uh, the the problem is, think about this just from a from a practical point of view. Okay, let's say you're a small business owner, you've run a print shop and all of a sudden you've got. You know you do business cards.

I Know most people do them online. so let's say you're an online your Uprinting.com I actually like them a lot. hashtag notsponsored. So uh, you're uprinting and all of a sudden, uh, you know 20 companies that are your main customers, lay off half their staff and they don't need business cards anymore and you're like oh crap.

Well now we have to lay off. and then you lay off. and then the Paper Mill lays off its employees and the Paper Mill lays off its employees in the paper town and then all of a sudden the local grocery store and the restaurant and everybody else has to lay off employees. That chain is really really slow to to like, like hit or for us to realize it's hit.

and once it's hit, it's really really slow to fix it. It it's hard to fix that chain of unemployment because think about it, even if you end up getting uh uh, you know you drop rates or whatever. uh, and you try to stimulate people to buy business cards Again, it takes a while for those workers in that grocery town at the paper mill to actually get their jobs back cuz you got to see that demand go up. Then you stretch the existing employees.

you have more. You make them work harder and longer hours. Uh, and it actually takes sustained growth again. For those businesses, say okay, yeah, let's hire more people in that Papermill town.

So in other words, one of the worst things the FED could do right now is basically say oh, uh yes, uh, we are, uh, going to ruin, uh, our jobs Market because if you ruin the jobs Market even turning the money printer back on again might not solve things. So that's why Bears have a real argument there and they're not wrong. uh I I Well, I mean they're not wrong to have that fear Anyway, So JP Morgan Not Forelli talks about this potential, uh, boil to frog scenario. They're only giving us, uh, a 20% chance of a soft landing and the reason for that is now.

all of a sudden they think the recession is going to come in 2024 to the first half of 2025. I wrote LOL next to this because I swear all they're doing is like every six months they kick the can down the road. another six months like this summer it was all the an like, well the recession's going to come at the first half of 2024. Now we're basically almost at the first half of 2024 late November here and what are they saying now? Well, you know the recession is going to come in the first half of 2025.

Good Lord Like would you just get it right at this point I Just wanted to bring this up because it's the latest sort of bare Narrative of well we're going to. we're going to get screwed here and this applies to the John Farelli narrative, which is even more bearish, but has a really interesting, potentially bullish tilt to it all of a sudden. Uh, what was fascinating though about this JPM piece and why I brought it up regarding Boil the Frog is obviously the argument of like, hey, if you create this job loss I'm summarizing that right. If you create the job loss, it's hard to fix that and you could create really big issues.

But one thing that you are seeing right now because you're not seeing that job loss yet, is you're seeing sufficient relief from manufacturers. Look at this considerable excess cap. Capacity appears to have opened in Germany and Chinese Industries to large producers that could sustain downward pressure on core Goods prices and less pressure in the labor market to find new employment. This is what they say elsewhere.

less pressure to find, uh, new workers in other parts of Industry actually reduces is Core Services inflation as well. So in other words, more productive capacity at manufacturers as the economy slows down means lower core Goods prices. This is the deflation that we're starting to see at Walmart Vans Levis Pric is coming down. We're going from disinflation to deflation.

It's great. You've already seen it at Autos for a long time. Okay, now you go to Okay. Well now if we have all this excess capacity Maybe we don't have to hire as much.

And so what happens? You get less wage pressures. Less wage pressures eventually translate into ah, less. What? Less Core Services Inflation which is great. Less core Services Inflation and less core Goods means what less inflation pressure? Okay, fantastic.

So we put both of these together. Are we getting going to get boiled by the fed? Well, this is. well, the boil. The Frog fear may actually be reduced by something known as the Wealth effect.

Okay, great wait. We've heard the Wealth Effect before. That's not that interesting. As real estate prices go up, people spend more as stock prices go up, people spend more great.

but stock prices aren't necessarily going up. There's a lot of pain in a lot of various different stocks. Although the indices have been doing pretty dang well, a lot of those growth stocks have been getting whacked. So what is different here? Well, JP Morgan's actually saying the following about the wealth Effect Economic Theory suggests that consumers feel wealthier either in the immediate term because prices are going up or listen to this by some perceived future wealth increase.

In other words, in the boil. the Frog scenario JP Morgan is saying one of the ways you could stick a soft Landing is if people keep spending because they believe that the value of their stocks and real estate is going to go up again, and because they believe believe that what ends up happening, they end up sustaining the economy until that becomes true. That's the flip side that they're suggesting here that on one hand you could be boiling the frog or on the other hand maybe that is Goldilocks So kind of interesting how the wealth effect has played out here, that people really believe this pain we're going through right now will be dare I say transitory. Yes, lot of pain solving the high inflation we've had.

But once it's gone, it'll be gone again. And know this isn't a return to the 1970s of continued waves of inflation though that is another bare argument worth talking about in a different video. instead. JP Morgan's Flli makes a really interesting argument.

JP Morgan Flli Remember, he's the bear. Okay, he talks here about the final miles of getting inflation down will require a softer labor market. Remember how I said a softer labor market is a big risk because if you really start going negative, you really could crush the economy into a recession for quite a while. That is very bad.

Now they believe that there's still a chance of a recession here. This is for Elli and his team believe that there's still a risk of a recession here in 2024, as they expect demand to falter. Well, so two scenarios here boil the Frog Demand falters Goldilocks demand stays up because people expect their wealth to continue to go up in the future I Don't know how sustainable that is, but anyway, they suggest here that a recession next year is a real possibility. We don't see inflation getting all the way back down to 2% Thus, while the FED may have enough Breathing Room on inflation to ease up on the economy, we don't re see the FED returning the funds rate all the way back down to their estimate of neutral instead.

And this I thought was incredible for a bear to say because right now we've got hey, you know, recession coming. Fed's going to stay higher for longer, right? ready to hear what he says. This was so exciting when I saw this I wrote finally right here the Federal Resort to the 90s strategy of opportunistic disinflation. an approach in which the FED doesn't take further pricing action with increasing rates and actually just keeps policy quote modestly restrictive.

That's very different. That's a very key word there, because you're used to sufficiently restrictive right now. modestly would mean we're going to go lower but not as low to quote. unquote.

Finish the job. Okay, so how do we reconcile all of this? Because this has been a lot of information and I think it's useful to try to put conclusions together. Let's do that on a piece of paper here. So the way to put this together is simple.

So on one hand you have uh Goldie Locks Okay, Goldilocks is one scenario and then you have the boil the Frog scenario on the other hand, so how do we piece it together? Well, what we have is we have Flli kind kind of leaning over on the boil the Frog scenario from the other piece, which is a way to say that the labor market will soften uh, a likely a lot. it's already in the process of softening. So I think going from a trend of 180,000 job gains, which we've actually been above that and we've kind of been starting to Trend down going to something like 100 to 150,000 not as bad. you start going negative 100,000 That's when you could potentially get an unsustained Trend towards recession.

So I'm going to suggest that this probably has to be around sub 50k growth of jobs per month and that Goldilocks would be above 50k growth in jobs per month. So it's a nice little separation here. Goldilocks In my opinion, counter to what Flli says is actually Op disinflation OPP Opportunistic disinflation again is a way of saying hey, the Fed's okay taking its time I'm shocked to see a bear say this, because if you go back to the 1990s, the '90s were a great time to invest, leading all the way up to about 99 right obviously before the dot bubble. and I'm not saying we're not setting up the next 2,000 I'm just suggesting that we're probably more likely to be in the '90s in my opinion, in the early '90s like the 94 period of uncertainty or 91, uh, or maybe even 1982, right? These are scenarios where yeah, we faced recessions.

We were in the early 80s coming out of high inflation, but then we had 40 years basically of uh, sustained growth in stocks even through shocks and panics and recessions. Stocks basically almost felt like they went straight up during that period of time of the, uh, the early 80s. Uh, anyway. uh, and then throughout the decade of the 9s.

Same thing. So if we're in an early 80s early 90s, that's fantastic because we have probably 10 years, 8 to 10 years of growth ahead of us. Opportunistic disinflation in my opinion, is a way of the FED actually taking the foot off off the the the pain pedal uh and saying hey, you know what, We'll actually reduce rates a little bit because we don't need inflation to be 2% tomorrow. We can afford to be patient, We could use flexible average inflation targeting and we'll just wait for inflation to come down on its loan over.

You know, whether it's through Supply increases or the next big crash. But we're not going to engineer the next big crash right now. So that's why. I Put opport opportunistic disinflation over here with flexible Average Inflation Targeting over in the Goldilock scenario.

I'm going to put 82, 91, 94 those years over in the Goldilock scenario. I Think we very much align with these time frames. Uh and uh. I Think the Forelli argument is jobs crush and that not only do jobs Crush but moderately restrictive will actually be painful enough to continue to drive us into a recession.

Uh, and that would be the sort of boil the Frog POV where you're Oh, we didn't even realize we just drove ourselves into recession. Oh no, the is going to be late again. So call this right here. Fed late.

Which is very realistic because uh, the Fed was horribly late on realizing that they had created a massive inflation problem. So hopefully that doesn't happen again. Now put all of this together. What does it practically mean for us I Think practically you have to somewhat pick pick what percentage allocation you think is likely of each.

If you're 50% Goldilock, then maybe you're 50% in interest rate sensitive stocks that you think will do well going forward. if your 50% Therefore, boil the Frog We're going into jobless recession. It's going to be problematic, then maybe that's why you're 50% in money markets, right? If you're 100% bull, then maybe it makes sense to be 100% stocks right? depends on your personal portfolio, not Financial advice uh and and vice versa if you're 100% No, no, no, no, we're boiling the Frog We're going into joblessness. Maybe that's why you're 100% money markets, right? So uh, and that's okay, but I do think it's very interesting.

Bottom Line: Out of all of this that Farelli a bear is starting to talk about opport opportunistic disinflation. On the bearish side, that's not bearish, that's bullish in my opinion. Let me know what you think in the comments down below. Thanks for being here.

See you soon bye Why not advertise these things that you told us here I Feel like nobody else knows about this? We'll We'll try a little advertising and see how it goes. Congratulations man, you have done so much People love you people look up to you Kevin PA there financial analyst and YouTuber meet Kevin Always great to get your take even though I'm a licensed financial adviser, real estate broker and becoming a stock broker. This video is neither personalized Financial advice nor real estate advice for you. It is not tax, legal or otherwise personalized advice tailor to you.

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