Hey, everyone, welcome back to another meet! Kevin report We're on episode number 62. it's March 25th Saturday We've got a lot to talk about. Uh, the first thing we're going to talk about is commercial real estate and the potential for a commercial real estate bubble. So we'll start there and uh, we'll probably move on and uh, you know going over uh, we've got CPI something I want to cover there? Pce is coming up within the next six days here so we can talk about that.

Uh, but of course we'll also, uh, chat about any kind of questions that you have. So let's go ahead and get started. Uh, first thing. So we'll go ahead and start with the commercial real.

estate. Uh, there are some entertaining and dramatic things potentially happening in commercial real estate, so uh, and how that might relate to the banking crisis, right? Uh, so we'll talk about, uh, that starting right now. the Commercial Banking sector has a lot of debt, but it has a lot of one particular type of debt. and that is commercial real estate debt.

And unfortunately, commercial real estate hasn't been doing super fantastically, mostly because of a return. Oh, away from work at the office that is. we've seen Office Buildings and Retail kind of collapse in the needs that companies have and now it's sort of weird because post Covid, for example, we saw shopping malls like the Simon Property Group see this Resurgence of traffic and we saw offices reopen. So you had this Resurgence of traffic to offices.

But unfortunately that Resurgence while it may have been a nice retracement of about 50, it quickly tapered off and slowly continued to decline. And that is not great for people who hold commercial real estate debt specifically because in a rising interest rate environment, individuals or companies who hold commercial real estate debt generally have to refinance after a few years. That's because they don't have the Privileges that home buyers do, which is the privilege of a 30-year fixed trade mortgage. Now, in some commercial settings, you could ask for a 30-year fixed rate mortgage, but typically you're paying, uh, excessively High fees in order to get that.

So instead generally what you're looking at when you're looking at a commercial style mortgage is you're going to be looking at, uh, maybe something, some kind of debt that's amortized over 20 years, but then do in three, five, or seven years, I'll show you how that looks on the iPad here. So if we jump in here and we say you take out a loan of, let's say 10 million dollars a year, uh, zero. And let's say that loan is a three percent interest loan and then time goes on and this loan is amortized over 20 years. Which actually means after year 20, it would be 100 percent paid, right? But instead of actually making it all the way to year 20., this particular loan is going to be due and payable after year seven.

This would be known as a balloon payment where all of a sudden you'd have to make a large payment on the property probably somewhere in the neighborhood of 60 to 70 percent of the debt and what you would do in this case unless of course, you haven't been paying down any principal and you'd have the new paid down zero and you'd have to pay down the whole load. So in this scenario, you would need to refinance. Well, how does refinancing work? If your year seven is potentially 2023 or 2024, Well, rates are expected to be Uh for somebody in this situation, potentially two to two and a quarter times as high as they used to be. That makes it extremely expensive for commercial real estate projects, whether they're office, retail, hotel, or otherwise to actually survive.

Because now all of a sudden properties that may used to have been cash flowing properties are now substantially cash flow. Negative. And if there's one thing we know we need in a recession, it's cash flow. We want cash flow.

We want money coming in. Uh, more money coming in, Then money is coming out obviously. Uh, it makes sense to uh, you know, want more, uh, expenses or or to spend more money on businesses or commercial developments in a recession because it could be an opportunity for you to make money right? You make an investment at a low part in a market. Maybe that's the perfect time to take advantage of fear in markets and actually invest in your business or your commercial real estate.

The problem is in new commercial real estate though, or new business ventures. The problem is all the old stuff. all the existing malls, all the existing offices. what's going to happen to them and how bad could that end up being for the banking system? See if banks hold a substantial percentage of commercial mortgage-backed Securities and if those mortgage-backed Securities potentially start defaulting? What kind of stress could we actually see on the banking system as a result of this? Well, let's analyze exactly that.

JPMorgan has a fantastic piece on this from just about a day and a half ago here. and as you see: JPMorgan Commercial Real Estate Overview: And they talk exactly about the stress in the banking system and we really don't have to go too far we can. They give us a wonderful overview here, but it's it's a slightly dense but I'll give you a good summary here. So so the first page.

fantastic Summary: Let's start here: Commercial Real estate is very topical and top of investor Minds due to weakness in the office Market Driven by work from home trends and this to some extent is true. We have a lot more work from home now than we did pre-pandemic although there is some reversal to work from home and so it's worth making a little note and I'm going to help you answer this in this video and it's also important for my real estate startup House Hack. But keep this in mind: Where is work from home? Reversing right? So where is it going away? Where is that Work from home? Trend Going away And where is it going to? We're going to want to analyze that. So the concern is augmented by the current weakness in Regional Banks and a wall of maturing loans across the ecosystem.

60 of mortgage-backed security Bonds Commercial are held by banks. That means banks have an acute exposure to commercial real estate. Finally, we're also watching retail, but clearly that Outlook is a little bit more dependent on the macro backdrop. In this report, which we jointly published with our colleagues at the SPG research, we take a top down and bottom-up view of real estate and we estimate the total exposure.

All right. So according to the Mortgage Bankers Association commercial Real estate, Mortgage Debt outstanding is roughly 4.4 trillion dollars in total. uh of which 38 of of commercial real estate debt over here. Uh, that's uh to be different from these maturing loans is with banks.

So take I want you to break that apart for a moment because I know that could be a little tricky so let's break that apart. What they're saying is of remember how I made that little chart of the ones that were doing payable right? All of a sudden they have to refinance right of the due and payables the maturing one. All right. these are the maturing loans of those 60 are with banks of the non-maturing which means they still have time in them, 38 are with banks.

So in a weird way, you actually have a disproportionate exposure now in commercial real estate at the banks because of when most of these refinances were conducted initially or initial financing. All right, excluding multi-family exposure. Total commercial real estate is 2.5 billion, of which 44 is at Banks U.S commercial Banks Also if they give us some numbers here, but we want to know what the pain is and and uh, where some of the investors are in this right? So life insurance are major investors in commercial mortgages both on whole loan and uh, uh and Commercial mortgage-backed Security Broadly, these would be outside Uh Banks You could see Banks hold a lot more exposure uh, than life insurance life insurance holding about 11 to 4, so relatively low. but I suppose of of a big number or a small percentage is still a big deal.

Uh, and so they gave us some good numbers here. And here are some of their expectations of what they think in terms of default. We expect that about 21 of outstown understanding office loans will end up defaulting 21 default and JPMorgan is going to write down because remember, a default just means you stopped making your payment. It doesn't mean that there wouldn't be any kind of recuperation, right? You wouldn't just lose 21 of all that money.

And the reason is, there's there's still an asset left right when somebody liquidates a property. So let's say you have a 100 million dollar building and the bank forecloses on it. Or whoever whoever holds the note forecloses on it. They might still get 70 million dollars after all is said and done.

So they might only be upside down in this case, 30, right? So just keep that in mind. That's why you might see a lower loss ratio after default. So if 21 of commercial mortgage-backed Securities default on office loans, that could lead to losses of about 8.6 percent. Now that's actually really interesting because uh, and and these defaults could potentially go as high as 28 to or to 35, leading to losses around 13 18.

Basically, Office is going to have a bigger set of losses coming up now. Who owns most of these losses? Well, unfortunately, the banks now. why is that bad? Well, more Bank losses on their mortgages and their portfolios on their commercial mortgages means less cash on hand for depositors and we're experiencing one of the fastest Bank runs that we've seen in history. Part of that is driven by a technological Revolution where it's very simple now to look for a money market fund or go to Treasury.irack.gov and invest in treasuries into a money market into a CD into any Fintech that's offering you higher yields than the large Banks So it's very easy to take your money out of the large Banks Put it into a Fintech or a money market fund and you could do that all from the comfort of your phone.

You don't even actually have to run to a bank anymore. So while at the same time we're seeing this liquidity drawdown, we're also setting up for potentially large failures in commercial real estate specifically in the office segment. So this is really bad. And they talk about separating uh REITs here into two different buckets.

Uh, they're separating them into property owning Equity REITs and then commercial mortgage rates. And they talk a little bit about uh, read losses, but they seem to be less uh Salient or important than um, uh than the office sector. But they do apply here a a loss on some of these REITs as well. and they attempt to calculate some of the pain that could happen here.

They do talk about how potentially loss rates could be lower because of banks willingness to amend and extend loans. However, that could be risky in the environment of a bank run. So uh, let me try to simplify that. What they're saying is, hey, look, when we compare back to the global financial crisis, the great Financial crisis maybe back then Banks were actually less likely to take losses on their loans because they were willing to negotiate payment terms.

Now that's really interesting because if you can negotiate payment terms. you don't necessarily take the loss on the loan. But if you need to sell the loan because your depositors are freaking out, then you're less inclined to negotiate and you're essentially more likely to foreclose because you need the capital. That's essentially a rough summary of some of the argument that's being made here.

Uh, and to some extent, that's actually scary. In addition to that, Regional Banks today are a lot more stressed, which reduces their ability to amend and consent to loan modifications. See, that's sort of the idea here that hey look The more stress the bank is the less likely they're able to work with you if you default on your loan with the banking system. Uh, so the overall exposure ratio to to Uh to commercial real estate is really high.

You can see these substantial losses of Uh tens to potentially hundreds of billions of dollars for banks. And and why that's so important is because think about this: the Federal Reserve's Emergency facilities combined with FDIC over the last two weeks have essentially provided around 300 billion dollars of liquidity. Well, that same amount of liquidity or nearly that same amount of liquidity could evaporate thanks to commercial real estate valuations plummeting. So commercial real estate a massive factor of potential pain that we're paying attention to right now.

But it's not all commercial real estate. and I find this really interesting. A lot of people talking about the next shoe to drop. This here is an interview with Bloomberg and you've got two real estate folks over at Bloomberg discussing this.

They say a lot of people are talking about the next shoe to stop a next shoe to drop being on the property or real estate side. And obviously there's a lot of concern about exactly what's going on with Office Buildings Just the interest rates going up in general tends to be bad for Real Estate as a broader category. So I think this is something we really need to dig into. And so they say, yeah, Absolutely.

I Mean after all, real estate is a highly leveraged industry, and usually when rates are stable, it's actually not terrible to have higher debt on real estate because your payments are predictable, right? and generally your rents are predictable. But right now, rates have become almost unpredictable. So anyway, they hear they touch on this working from home thing. But when they talk about working from home, uh, and and they talk about this, this double whammy basically of like your loan resetting, Your loan resetting is coming up to that seven year uh, refinance window, right? That's your loan reset.

Uh, and then combine that with work from home. All of a sudden, you're in a very, very precarious situation compared to where you were in 2019. Now some are making the argument that all of this is just fun. So the fud argument is, look, uh, work A work from home is great, but offices are needed.

and because of uh, E-commerce fud less building is being done. Uh for offices I mean who really wants to build uh, an office right now, right? So the argument here is okay. On one hand, mortgages for commercial real estate are resetting. people might be losing a lot of their office space as tech companies sort of re-jigger and layoff and downsize.

but because less office is being built, maybe there'll be a supply constraint and maybe there could actually be an opportunity in office. And I always love the counter argument I think the counter argument is always fantastic, but they make a really good point that it's not going to be all office. and this I think is very interesting. Look at this segment here if you're talking about New York City return to office.

We're still well below 50 occupancy rates. People actually using office space are in the 30 to 50 range. Now specifically about New York Before we talk about where they're positive, specifically on: New York You have a lot of office buildings in New York that were built in the 60s and 60s. Office Buildings are not ideal.

I Will explain why a 60s office building is not ideal. a 60s Office Building looks a lot like your uh, very sort of uh FBI style Square building. Uh, let me see if I can get you an example here. You know what I'll do exactly that.

I'll pull up. Let's do like uh, let's go mid century, a little past mid-century 1960s office building and uh, let's see what we get here. Uh yeah, okay, perfect. So we'll go ahead and pull these up.

This is your kind of classic, uh, mid-century 1960 style office building right here where you you see these frequently with Federal buildings. they have small windows at the outside and then a lot of office space on the inside. Let me show you why graphically, that is actually really important why I'm describing them. So if we go here and we say we have natural light that comes in potentially to these: Corners to sort of the edges here of the office building.

What you actually have in the middle of the office which is where the bulk of the square footage is the middle of the office is actually a very dark uh, and dare I say somewhat gloomy space for a 1960s office building and you have massive problems in New York right now because that Central Area can't be redeployed into two very important things. There are two very important things you want to do with offices. Number one: can you make condos? Well, no, because people want light. People want a lot of Windows People don't want to be in the red so you've lost most of your real estate on every floor of these old Office Buildings for a lack of light.

Uh, and number two, do you want? How about How about new offices? Oh, but wait, what do people want today in a new office? Modern, contemporary, uh, co-working spaces, right? They want a fiber internet? These these buildings A lot of them built post-war in New York Uh, specifically around like Third Ave and a little bit more. on the east side, they're nearly worthless and it's really incredible. But a lot of the office space that is actually vacant is nearly unusable. So so that actually creates a little bit of a counter argument to this idea of uh oh well.

well, maybe, um, uh, you know, maybe the office uh, segment, uh, will be so terrible because well, actually it could create this double whammy where on one side you have more defaults on buildings like this that are unusable, but at the same time then you have a lack of inventory for stuff that people actually need. they have this weird like banking crisis fueled to the fire, but potentially something that actually props up the quality office. Market It's pretty remarkable. Uh, but let's go back over.

where were we? Let's go back over here and uh, let's go to the uh. Actually, let's go here. and let's go back to the story here. So the story is right here.

So if you go to the Sun Belt in contrast, there is a lot and there are a lot of reasons for this return to office and the use of office space is a lot higher than in New York. It's not surprising then to see that at 60, 70, maybe even a little bit higher than that in terms of occupancy. So there's a big difference between how people and say New England are using office versus let's say Tampa or Florida or Austin and what have you? And now this is actually I Think very, very important Because think about this. So watch this.

If work from home, Uh, work from home trends away, That is less work from home going forward, then where do you want to buy real estate? Well, how about where the new offices are? That would be ideal because where the new offices are. Uh, guess what? People have to live. So that means people want to live there because they have to be close to their office. You can't remote from home work, You can't work remotely and be in the office.

I Mean I Know there's hybrid, but to some extent you still have to be there. So there's this big argument that actually says the Sun Belt regions of Texas Florida North Carolina Atlanta Arizona SoCal Uh, potentially to some degree Utah Although that's not really. Sunbelt Uh, these areas could potentially really be quite desirable for real estate investment longer term in the short term. Yet to some extent we might see some fuel added to the banking crisis fire.

But in the longer term we might actually see opportunities out of this. and this is where those opportunities might be. Let me see if there was anything else we wanted to note here in this story as well. a little bit more.

By the way, it's worth noting that even though I'm not a big proponent of of people using uh, Buy Now Pay Later I I Really don't like it. A lot of people have been asking for it anyway and so we provided Buy Now, Pay Later and I want to give you some stats here. We provided Buy Now Pay Later. For those of you interested in joining the programs on Building Your Wealth link down below and of those who signed up yesterday 50 percent I Want to say it was even slightly above 50? it might have been like 52 or something.

50 to 52 percent of of people who signed up yesterday. Uh, for the programs of Building Your Wealth lifetime Access use Buy Now Pay Later. The most popular was a firm followed by Clara I Thought that was very interesting. Sort of a little insight that there there is I mean like it or not, there's there's a demand for a product.

You know? it's kind of like a grocery store. You could be totally opposed to taking vitamins. You could be. You know one of the the naturalists who's like I'm not taking vitamins, right? But the reality is 50 of Americans take vitamins.

So are you just not going to carry vitamins in your store? So I find it very interesting. But anyway, I thought you all might appreciate that that Insight All right. continuing. If you were to go back to Q3 2022 not so long ago, the read Market was down more than 30 percent here.

Today that's the Reit stock market, But believe it or not, private valuations, we're still up more than 10 percent year-to-date on a year-to-day basis. This is true, that's true. Go back to about June The REITs were super discounted, but that's really potentially because they haven't taken the private markdowns yet. There's uh, what happened is the listed market, so that's publicly traded.

REITs is always a leading indicator for the private. Market That's actually a fantastic way to look at it. They go down before the private Market Well, that's because the stock market is so much faster than the uh, you know, private real estate market. To some extent, you could say this about private Equity as well.

Why is it that? Why is that The case? Well listed reads: get a mark on them every single day people buy and sell stocks. On the other hand, valuing a property can be hard if you get appraisal, etc etc. Yeah, uh, very good point. Um, this is interesting this I completely agree with and so I Want to point this out.

The first way we think about distress is that distressed sales as a percentage of overall transaction volumes right now are very low. Very low. They're very low to stress sales I Just saw my first short sale in potentially 10 years or more. It was crazy I said shorts Hill Like oh my gosh, it's been a while since I've seen somebody selling a property short.

That means you're selling a property that you owe more money on than it's worth the stress. Sales are very low right now I Don't think they're going to stay low I Think they're going to increase, but the reason distressed sales are low right now is that Banks haven't started foreclosing on their loans and the spread between buyers and sellers is pretty wide. Distressed sales are low and while we can talk about delinquencies like Cmbs Commercial Mortgage by Securities and Bank delinquencies, distress sales are the first thing I look at, it's showing signs of ticking up and I think it's going to arise. Yeah, that's that's not great to answer your question up front.

It can historically take 12 to 24 months for private property valuations to correct to what the listed Market is pricing this is talking about REITs This is why I Think there's there's not as much of a rush to buy real estate as as people believe. Uh, right now that's why we're targeting Q3 Q4 for house hack, about 15 to 20 of maturing debt is coming due each year. over the next five years, This has to do again with the commercial. With an average of 500 billion dollars per year, most of the debt coming due in 2023.

Uh was originated between 2013 and 2018. property prices have risen since 13, so the loan to value is lower. Uh, even if valuations fell 10 to 30 percent next year, there's a good chance these loans are not underwater. yet.

This is the case. Uh, this is not the case for offices or malls. Mall's effective loan to values are around 90 to 95 percent, which is probably a good case study for where the office Market is going. Office properties account for only about 25 of the 15 to 20 percent of maturing debt that's coming due.

and who holds that? Well, a lot of it are bank balance sheets. And so this is where when Banks hold a lot of this debt that's coming due. You could potentially be amplifying the banking crisis. As we've said, and this will ultimately pressure valuations lower.

And it's not just in commercial real estate, but if there's distressed debt in single-family real estate as well, Uh, then then you're likely to see pain there. Also, I Personally think we're likely to see an explosion of inventory over the next. Uh, probably I would say uh, six months. So if I had to give a prediction, if I had to give a prediction, I would say over the next six months, you'll probably see inventory as much as 5x.

Now that that sounds incredible because inventory is so so low right now and we think to ourselves, why would somebody sell Who doesn't need to sell? Well, the reason people might sell or they're an institution, They need liquidity. They're a bank and they're foreclosing. They're a read. and they need to sell their a pension fund.

And they need to divest their family office and their divesting. Uh, there are plenty of reasons that people might sell. uh, it could be a collapse. and Airbnb valuations potentially because Airbnbs maybe aren't renting as much as they used to.

And then those individuals try to go rent their properties long term and they're frustrated. They think, okay, well, I'll just rent the property for a year or two until the Airbnb Market comes back. But then after they rent out the property, they realize I don't want to be a landlord and all of a sudden they sell that rental or worst case scenario, they leave the house vacant. There's somewhere around a a 15 a set of 15 million properties in America that are vacant.

Most of those are vacant because of poor management. Terrible. Property Management People don't know what they're doing in real estate. They haven't taken the zero to millionaire real estate investing course or the do-it-yourself Property Management course.

But vacant real estate will decay and eventually when that vacant real estate hits the market, it will hit the market at depressed prices. So I believe that over the next six months we could see inventory 5x and there will be glorious opportunities to invest in real estate. Q3 Q4 Q1, It'll be great. We'll see.

Uh, but that's my take regarding the stress on commercial real estate on banking. I Think it's a very legitimate concern that could amplify the banking crisis and could continue to tighten credit standards at Banks which has a very depressive effect on our economy. we can see consumer spend plummet uh, some say up to about 10 percent and that's not so great for especially the lower end consumer. But Ultimately, all consumers even losing 10 percent of the higher net worth individuals uh, and and 10 of their spending goes away.

Now you're comparing to higher comps and you have a little bit more of a uh an earnings per share fight, so it's a rough time going forward as an individual, how all of this applies is again: I would make sure I'm with well within FDIC limits and diversified in my Banks then I would continue to try to make as much money as possible. and I think that's very important to work very, very hard. But I would also consider when you're investing the work from home Trend: take a look at this. This is a Wall Street Journal piece from this morning.

Working remotely is becoming listen to this phrase increasingly rare. Just a few years after the pandemic caused multiple, well, countless of millions of Americans to work from home. some 72.5 percent of business establishments said their employees teleworked rarely or not at all. Last year, according to the labor Department, that figure climbed from 60.1 percent in 2021.

and they s the survey showed about 21 million more workers on site full-time in 2022 compared to the prior year. The new number is also closer to the share of establishments 76 percent. That said, they had no employees teleworking before the pandemic that were open in February 2020.. employers have recently begun pushing harder to get staff to work on site more as recession fears.

Prompt, increased emphasis on worker productivity. It's true, the easy days are over, so now it's now. it's hard work time. You get the same thing happening at Uh at Apple as you have at Meta.

Look at this: Starbucks has also asked office staff to come in more often. Walt Disney is pushing for a four day on-site work week. It's incredible. Uh Robert Half which is sort of a recruiting and temp agency, says that a survey by Global or a global.

A survey by the Global recruitment firm found that 92 percent of managers prefer their teams to work on site. The hypothesis is it's still easier to build trust in person and that those relationships help us work more effectively. It couldn't be more correct. This is why we have a requirement uh at my companies to work in the office.

Any new hires have to be in the office, have to be on site. We don't do remote work, so that's the the first thing we do with an application is a remote work? No thank you. Uh, we're pretty clear about that though. So it's also kind of, uh, not following instructions when people apply anyway.

But that's okay. So I think it's very interesting and to me, this, this is a big deal for Real Estate You know, just in the last golly uh month here I think I've been across the United States I mean countless times. but uh, but on somewhere around 80 to 90 different flights and uh, I I See this this? Uh, this? this trend towards City centers. Again, it's it's incredible.

It's almost on. It's almost Amplified right now. Whether it's St Petersburg Tampa Dallas Austin uh, you name it, it's pretty incredible. Pretty incredible.

Uh, so, but again, as an individual, my thinking is, uh, do whatever you can to make more money. If that means moving to an area where you could work in person with a business that's fantastic, you should do that. Curious to see where you're going. Leave some comments in terms of where, uh, where you're seeing people move in your workplace.

Uh, and uh. make sure you make, uh, make some more money. get ready to invest in real estate. There'll be some great opportunities coming up.

Check out the programs on building your wealth link down below and uh, good luck to the banks. I Would not want to be a bank right now and I would not want to invest in a bank right now given these sort of, uh, stresses and losses that that are still coming and haven't been fully realized yet. All right, that gives us a little update on the banking sector. Let's go ahead and have some coffee here.

Yep, if you're in construction, you're definitely not working from home unless you're an architect. I Suppose three minutes from your new business? see? that's great. That's what we love. Yeah, let's see here.

I'm 18 and trying to interview investors, agents and Banks and it's going well. You're trying to interview or you're interviewing. Uh. All right, so let's uh, let's see what our next topic is I think our next one is CPI Let's see here: CPI or CP lie.

Oh yeah, this is a great one. Cyber security still has a lot of work from home. That's true. That is true.

All right, let's take a peek at this thiefer piece. My office is literally two blocks away from your home. Lucky Lucky Dog is First Republic Bank Toast. Who knows? You know it's uh.

one of the things that's so fascinating uh is uh, I I Technically, if there was no Bank Run the banks would be fine, right? They would just be losing net income. But but that creates fear that uh, your deposits might not be safe now. Fed and treasury know that. but I mean any kind of investment into the banks right now I Feel like is real is quite speculative.

so I would be careful. Somebody here says I do a window or screen replacement in the Northeast and you want to move to Florida Well, everybody needs window screens in Florida You got lots of bugs so it's a perfect place to go. All right, let's get started with the next section here. So the next one is the CPI and the market crash.

Yes, we will talk about as the market at the bottom than the CPA CPA disaster CPA disaster and the market bottom. All right. Stifel has a fantastic research piece out on are we potentially at the bottom Market What is the trend likely going to look like for inflation? And let's look at some charts to see if they can guide us, because right now things look pretty tense. Many of you already know.

But in case you don't, I'll catch you up I Personally think markets bottomed uh, likely around October knock on wood some stocks obviously bottomed around June and I think we're in a Nike Swoosh style recovery where we went down relatively quickly and we're going to have a slow but very volatile sort of grow up. And that's mostly because I believe markets today are going to try to price in the bottom of the market sooner than one of the bottom of the market May typically occur. And the reason I Think that is because the Internet has done a very good job of suggesting that the bottom of the market is usually in alignment with when the recession starts. But if markets know that, then they'll buy before the bottom of when the recession starts.

And I think thanks to the Internet, we're actually going to see a slight move up this time around, but that's my opinion. Keep that in mind, catch you up to speed. Let's now take a peek at This research piece and let's see what they think. So what do we have here? Cecil Equity Strategist suggests the following: They see the S P 500 by mid-2023 at 4 100.

right now, the S P 500 is sitting at 3970. uh, potentially all the way up to 4 300 leading to a midpoint of 4200. And they believe that stocks actually fell last year in line with a recession. Now this particular chart is fascinating.

What they did is they took the S P 500 on an inflation adjusted basis. Now that's important because obviously we've had very high inflation and they took this on an inflation-adjusted basis. And uh, they they drew basically your S P 500. So this little black up and down right here.

that's the S P 500.. the green line here is the 200-day moving average. Now if you go back to World War II and you look at all 13 Recession bear markets and you take those on an inflation-adjusted basis, which includes the inflation-adjusted Bear markets of the 1970s. you tend to see that stocks fall on the S P 500 by about 32 percent and take a look at the intraday low October 13th, 2022.

it is about 32 percent down. So on an inflation-adjusted basis, you could actually already start to see the formation of the Nike Swoosh. So if I were to draw it with a light blue pencil, here you see the down. Uh, let's make that substantially larger so we can actually see it.

There we go. you can see the down and let's do that a little better. here. Let's do something like this.

Let's go there. We go. So we have our Nike swooshed down, and then hopefully we have a nice slower recovery that then extends potentially for the rest of the decade with obviously a lot of volatility. That's my expectation of my thesis, and this chart here on the left actually somewhat aligns with that idea, but let's see what else they have.

So first they give us this breakdown of what the Federal Reserve's projections are. The Fed's projections are right here: That interest rates are going to sit right around 5.1 percent, at least until about June. Well, if we look at what the markets were pricing in before the failure of Silicon Valley Bank, you can actually see markets where pricing in a lot more of an aggressive fed much higher as high as 5.5 to 5.8 percent. And that's interesting because Mr Bullard actually one of the Hawks over at the FED just came out and suggested that the terminal rate should be 5.625 percent now.

I Think that's interesting coming from a hawk because that's actually dovish. now. You might think that's wild. But get this for a moment.

just last year Mr Bullard suggested hey, interest rates might end up being between five and seven percent. All right. Well, between five and seven percent implies a midpoint of six percent. right? And where folks is 5.625 percent right? Here, it's on the left side.

it's a left tail. It is Dovish. That's fascinating to consider that one of the Hawks at the FED even though he's talking about a being bearish and hawkish and suggesting we need to do even more than what we've already done. What does he suggest? less Hawk then previously assumed.

it's interesting. But what's also interesting is the separation between what the market is now pricing in for the end of the year. Uh, at the end of 2023, we're pricing in almost 100 basis points of cuts and so you could see how the market how volatile the market is. This is where the FED is.

This is where the market was. This is where the market is now. It's a huge difference. Let's keep going.

This right here Is sort of a question about what What do we think? The Bear Case is here, right? What? What? What is the long-term Trend If we try to take out some of the insaneness of the last few years, we'll take a look at this chart. This chart here suggests that over time since 1976, we have experienced a reduction. A substantial reduction in the real rate of interest. or should I say the neutral rate.

The neutral rate has slowly trended down. Here's the midpoint: the black dotted line in the middle Uh, one standard deviation up the red, one standard deviation down though at Green and what we could see is a A really A a picture of uh, somewhere around 90 what? 90 something percent uh of uh, Well, this is uh, this two standard deviations. Here's the the bulk of results occur: Uh Within These bands and you could see that the trend is lower interest rates over time. Now Yes, inflation has gone up and real yields have risen.

You can see that here on the right, but they're actually not outside or or really far outside. I Mean we've popped over a little bit here here here here. They're really not outside, far outside the long-term Trend And so potentially you were just going to see a reversion to zero percent rates. and we're actually going to be right back to Zerp: Zero interest? Um, uh, Zero zero percent interest rates.

But anyway, this idea that we're gonna have high inflation for a long period of time and high rates for a long period of time really stands in the face of what has been happening over the last 45 years. This chart shows you rates over the last 45 years. Yes, they are volatile, but look at how they even absorb the inflation that occurred not only in the mid 90s which was more nominal, but the inflation that occurred in the uh, the late 70s. They do leave a little note here.

they say unwinding 23 years. It's even more than this when we go all the way back in the chart. But anyway, unwinding 23 years of low real yields is a heavy lift which would crush the financial system. So scary.

Warning here. Now here they talk about the contribution of how CPI is made up. Now this is a neat chart because at first if you look at Core services with shelter here the green, you can see the green is expanding. And that's really scary that the green is expanding right? because Jerome Powell says hike until Services go down.

But if you actually look at Core Services minus inflation, you can see there's already been an inflection point. Core Services minus Inflation has already started to decline, which is fantastic. The only thing that's propping up Core Services right now is housing. However, we expect that housing will plummet.

Uh, and when this section here goes negative, which it will sometime this year, what's left of CPI will be very, very nominal. So we're excited to see uh, that progress happen. It hasn't happened quite yet, and here you can see Core Services excluding inflation. we have inflected and the trend is down.

It's just a matter now of how long it takes, but it does seem like we have hit peak. In fact, take a look at this in. uh, in the green line here we see pre-1980 high inflation versus the Blue Line low inflation post 1980 for what they call inflation Cycles and they line up Peak to low and they tell you roughly how long it's going to take to get inflation down and what do we see here? Well, we see, we're at the red line right here and we might be in about at the level of about eight months of inflation declines. Right now, we might have another 10 months to go, which really puts us at about January 2024 for being back to.

Potentially. If this sort of trend holds, uh, some four percent inflation, and uh, and and hopefully back to that longer term Trend soon, that'll be very exciting to get inflation down. I Can't wait to read inflation reports and actually see them go negative. Um, someone here asks what's your take on market conditions if we head into a deflationary Time Uh, Which looks to be the case? Well, I think deflation rewards, uh.

technology. In fact, there's a chart here. I'll jump to it for you. Look at that.

I'm jumping ahead three or four slides just for you and I appreciate y'all Seriously, thank you by the way for coming and joining this early on a Saturday morning. You have to be insane to be up this early and therefore I appreciate you because I too am insane. We are the same. All right.

What do we got over here? So they tell you here in a disinflationary boom, which is when you have strong economic growth and low inflation. What actually does well are media entertainment software Services Semiconductors Tech Retailing and autos Tesla Nvidia TSM Cloudflare crowdstrike Salesforce right? Our favorites: A favorite: Innovation Strategies do very, very well in a disinflationary boom. Problem is, you don't want to be in a situation where you're here. that's stagflation, which is where you have weak economic growth and high inflation.

Now they suggest in these environments: consumer services Health Care Household and personal products basically Staples do well. I Actually think that the fear of stagflation is exactly why food like McDonald's or Staples or Costco or whatever did so well over the last year. but I don't think that is going to last I Think we are going to see a transition from stagflation to disinflation and a boom, especially when we start turning the money printer on again. Uh, so a good good question.

Thank you for that. Uh, let's see which other charts were important. Okay, here we go. History suggests the S P 500 is in a broad trading range until a recession is more clear.

Now, this is interesting because as we've said, the stock market usually doesn't bottom until shortly after a recession begins. Unfortunately, we don't know when we're in a recession until sometimes six to 18 months after the recession is actually started. It's sort of hindsight analysis. It's It's very frustrating how delayed recessionary estimates are, but this idea that stocks potentially have another 10 to 15 percent to fall is Uh, is concerning should be concerning for long-term investors because you really suggest that.

Well, the recession should begin here in month two, in month three and a half. Now, is it possible that we could go back and revise Uh Q4 and suggest we were in a recession in Q4 See stocks dropped. Yeah, I Mean technically it is. Technically we could have been considered to be in a recession in Q4 but it's unlikely with how unemployment was uh and uh and and how much growth we still had.

so it's unlikely. But it's also possible that we try to front run this. Let's make it an example here. Let's say we think that the recession will start Q3 That's what a lot of folks think.

So let's say June June 23. that would put the bottom of the market probably in historical context around August to another two months later. So October so that would say bottom is Aug October Well, if markets are so convinced of this today, is it not possible that this time around, uh, markets could pre-price in some of that pain? Sure, it's possible. but does that mean it would be possible all the way back to October of 2022? Who knows.

And so it all depends on where that recession starts. But the problem is because we don't know when the official definition of recession starts. When that time comes? Could be this quarter for goodness sakes. Uh, who knows.

Since we don't know when this comes, it's very difficult to look at this chart and suggest any kind of action. It it doesn't seem like the right thing to do it. In fact, right now it seems almost as if the right thing to do is nothing but look at what's doing actually. well, right now in 2023, it's the disinflationary boom Stocks those have done very well so far in 2023 and uh, Financial conditions are actually a pretty big deal.

Uh, Financial conditions are made up by a lot of different things and those are going to be, uh, something the FED takes a peek at deeply. But here are what Financial conditions look like. They take your, your tip, seals your breakevens, your dollar ratios on on the stock market. and uh, we could see that in recessions, you usually get a spike in the 10-year treasury.

Ultra secure and B Double A bonds which are less secure B Double A is is you know, less uh, less than obviously your your A ratings uh, like your let's say your Triple A Bond uh B Double A is is usually the lowest form of investment grade debt. Uh, this is uh, usually a Moody's definition and it puts you around a medium risk. So it's not like a high risk junk bond. But usually what you see is you see medium risk bonds become very expensive as a leading indicator to recessions and potentially that exactly is what we're starting to see right here happening again.

But I think it's a foregone conclusion. Honestly, that we're going to go into recession uh, in other words, in English I I think we expect to go into a recession at this point. Now personally, I find all of this very reiterating and mostly I think this is reiterating because the decline in CPI that we're forecasting is going to make a massive or lead to a massive drop in. uh in our CPI reads specifically looking at how much of that core Services segment including housing is made up of by housing.

as you can see, the inflection point is already in core. Services X shelter. That's fantastic. If you could get the green to go negative, which is likely within the next six months.

Fantastic. Is it also possible that we already had our inflation-adjusted stock market decline? Just like history suggests, while at the same time, we have no idea when that recession technically starts. in my opinion, this set from stifle here makes me more bullish on this particular strategy, which is a strategy that so far this year has been outperforming. But it's a strategy on the right side which is planning for the disinflationary boom over the next 10 years now.

Is it possible we have a lot of volatility? Absolutely absolutely do. I Think we'll end up with stagflation? Unlikely because stagflation suggests we will end up with such high inflation for so long that uh, that that the economy essentially gets pushed into a deep recession? Now that's possible dependent on credit spreads uh, or or credit tightening. but I think it's unlikely and so I'm putting my money where my mouth is. Obviously, if you think inflation is likely to stay high, you probably want to be in some of the lower section sections where if you think we have enough money to keep a strong economy going which I do as well, but you think inflation is going to stay high, well, that's where you'd probably want to be an energy and materials personally.

I wouldn't want to be in the banks. But the beautiful thing is a you could do whatever you want and B I don't care what choice you make, it doesn't make a difference to me. So uh I would. Actually, if I were you I'd probably take a screenshot of this chart right here.

I Suppose I I should add uh, you know, but make sure to get the coupon code right, which we should add that there you go. Now you can take a screenshot, don't rewind and take a screenshot without that there. That's that's very important. But uh, with that said, uh, that is the end of our CPI segment.

Thanks for watching the CPI segment. All right, let's see what Q and I we have. uh commentary I Really need more coffee? Oh well. I'm drinking cold Hotel coffee here.

If the low is broken this year. Uh, would that invalidate the Nike Swoosh uh I mean yeah. I mean to some degree, right? Because the Nike Swoosh theory is that the low is in. You know it would look like a really weird Nike Swoosh I mean I Suppose you could argue it if it happened briefly.

but I mean you know if you had a if you had the sharp down and then you, you had, uh, let's draw it. kind of like this. very very long up and then this was pretty volatile I Suppose you could say you know something I know that doesn't look like a Nike Swoosh anymore though. I don't think that works so no.

I I don't I don't I don't think so I think if you break the low I think the Nike Swoosh is dead, the Nike Swoosh is wrong and then you short Nike Somebody wants to know why Am I always in a hotel? Can somebody give an answer as to why I'm always in a hotel All right. Next stop. let's see here. See, we already talked about Bullard All right, Yeah, we got.

We got more information here that we can cover. All right. So let's see here is this: we covered this. We covered.

Um, all right. So remote work we covered. Cautious optimism from a Lennar we talked about Zot. A lot of people have been asking me to respond to this video.

so let's go ahead and pull it up. Hold on a second. Uh, all right. stand by for the President of Mexico video.

That's what we're gonna do. It's a President of Mexico has a little video for us so let me figure out exactly how to do that. I need to share this screen I do not have my switcher board but that is okay. Okay I think I have done so.

Oh very nice. Um I wish I could just do just the video player because then I don't know if you could still see me I know what? I'll do I'll pull myself up and watch myself just to make sure we're good. There we go. All right.

Fantastic. Uh, leave me a comment if there's a problem, but uh, I'll come right back to that. All right? Um, huh. Now we've got to talk about what the President of Mexico has to say about America And should it be concerning to you, let's take a look at the President of Mexico our Southern trading partner part of the North American Free Trade Agreement part of the Inflation Reduction act.

Big part, big deal by the way, for Tesla Tesla stock. Big deal for the auto manufacturers down there. Big deal for battery manufacturers Uh, solar equipment manufacturers. Big trading partner, bigly trading partner.

But first, we need to see what does the President of Mexico have to say for us. Let's listen in right now and uh, leave me a comment if you have any kind of issues with audio. here we go. Okay, I'm I will translate because I'm gonna just read the caption.

Uh, in fact, you know what we'll do is we'll just kill the audio then and I'll just I'll just pretend to to be the president. So uh, if we were evaluating them here, uh, that is if we were evaluating them. Okay, so we're evaluating to see human rights we're talking about America Hey here, why don't you release Sanchez Ooh prisoners of Wars If you were talking about journalism and freedom Because you have Sanchez imprisoned, why is he so slow? Come on man. if there is dog of acts of violence, how is that? An award-winning journalist in the United States assures that the United States government no man sabotaged.

Here we go: No extreme baby. The gas pipeline, the NORAD stream pipeline. How could you do that from Russia to Europe Yeah, I know I I Don't think I can increase speed on Twitter can we not all the way? I think they just increased out of that feature to phone but not on uh, not on the web browser? All right. Why is it allowed in the United States to operate a cartel or several cartels that distribute? well? This is too slow for me.

Uh uh. So basically let's put it this way: the President offended or President Fentanyl oh my. Lord the President of Mexico is pooping on the United States a little bit here, giving a little bit of counter attitude back, suggesting that hey, y'all talk about all this freedom of speech. Uh, and you talk about freedom of the world.

Uh, but uh yeah, y'all are the ones we know who bombed the Nordstream pipeline and uh, y'all are the ones who uh, who who don't seem uh as um, uh uh like it's more of a do as I say, not as I do with style attitude. So it was interesting uh to see that sort of posture from the President of Mexico specifically because in in China even though you're seeing frustration with Chinese sanctions uh or American sanctions against Chinese products, you're seeing a lot of uh, support for entrepreneurs who want to create businesses in China Uh, And so there's this desire to attract Americans or Europeans and I'm surprised the a president of Mexico would would bother sort of going out of his way, uh, to um to discuss these complaints in uh, kind of a really slow way. Oh yeah, yeah. All right.

what else? Let's see what other topics I'm running out of stuff talked. Uh, we talked about uh, Crypto a lot yesterday. I'm curious to see how BTC is doing right now. We've got a pretty important support line support line sitting at about 25 200 on BTC right now.

Ask some questions. There we go, we'll do some Q A. All right, let's see what we got. BTC Weeble We're sitting at Wow 27 4.

It just exploded. Fantastic! Uh, well. okay, let me see here. Let me go back to the Daily and wow, it ran all the way up to about 29 000.

that's fantastic. Well good job. BTC Uh, I think there's probably a heavy response and I've mentioned this in a video before from BTC to the Liquidity Press is turning back on over at the Fed Uh, they you see you see the money printers on and boom there goes. Uh there goes.

BTC Up check Discord sent you a swoosh. Oh I'm scared I'm scared to check. Now What? I don't know what section you you're supposed to post it in? Let's see, is it me? Kevin Report? no I have no idea where you posted your swoosh. You'd have to let me know I'll check tags someone says good night from Tokyo What's up Oh there it is.

You made me one. All right You put it in NYSC Chat Okay here? Oh yeah, yeah, Excuse me? Okay, um, let me see. How can I go back to this monster here? Uh ah yes, let me make that a little inconvenient. There we go.

Thank you. appreciate that. Thank you for the Nike Swoosh Kathy's selling Tesla for coinbase. I'm not a big fan of it, but I think it's in line with her strategy, right? It's it's her signaling that she has an unwavering belief in in these companies.

So she's being consistent. Yeah, just being very consistent. Southern Pollen Yeah, maybe it is spring after all right? let's see here. I don't know what else do we have? Do another.

Peak Over here. let's just go to the Journal for a moment see if the journal has anything fun for us. I don't know why people say I look like Dennis Rodman But uh, thanks. All right Hollywood Bets on Fearless Talk: We've got.

uh. indictment? It could be death. Yeah. I mean you could talk a little bit about that I Suppose we could do this.

a little bit of trump talk possibly. Hmm, it's a Rodman Oh, it's a Twitter joke. Okay, yeah, I don't know anything about that. All right.

Um, if we look at the Trump situation, um I don't know that we really want to cover that right now, do we? I Guess we could look at Saturday is quiet. we could look here. Why don't we jump into this? Why don't we talk a little bit about the Federal Home Loan Savings Bank A lot of people have been asking me about that one and uh, that would be, um, something we can maybe learn a little bit about. Let's do that all right.

Uh, occur. I Told people right here and this would be right here and got it okay, ready. So obviously we know we're in the midst of a banking crisis and there's an institution that not a lot of folks know about, but it's actually quite important. It is the Federal Home Loan Bank.

Now, this isn't just for home alone. This a banking system is actually a banking system that's chartered by Congress It operates somewhat like the FED. It's sort of like the next version of the Fed the small like If The Fed had a baby. It would probably be the FED Home Loan Banking system and the question is, who's borrowing from this and could it be a signal of potentially which companies are going bankrupt? Next, take a look.

for example, at this following chart that I'm going to pull up here. This will show you loans in 2007 taken out by banks for the Uh or or from the Federal Home Loan Savings Bank in 2007 and these highlighted in red here were banks that didn't make it and so look at the borrowing that you had in 2007 and 2007. You had advances of 63.9 billion for WAMU They went under and ended up being acquired by JP Morgan Countrywide 18.9 billion they went under acquired by Bank of America and then you have the others here as well Merrill Lynch Wachovia They're gone. These companies absolutely gone I Remember being a child in fourth grade, being invited uh in the school to listen to a presentation about how important savings accounts and checking accounts were and how we should have our parents come to a Wachovia branch and open up a kids bank account with them.

Yeah, they went bankrupt anyway. Uh, so what is this, This institution and why does it potentially matter? Well, first of all, we have a new chart that shows us which banks are potentially at risk of uh of of collapse as well because of their borrowing from this institution. Now, uh, this institution is generally considered to be a source of liquidity. We have seen borrowing for this Bank Skyrocket to 304 billion dollars in just one week.

It provides liquidity. So it's basically if a bank is having problems, they can go. hey man, can you lend me a little bit of money? That's what they do. They're kind of the the secondary backdrop.

Think of them as like there's the discount window at the FED which is kind of embarrassing to go to because it's public record And then there's going to the second stop which is the Fhlb which is also not great. This, uh, this banking system. By the way, the Federal Home Loan Banks uh set up is is a private Cooperative So again, it's it's chartered by Congress Uh through the Federal Home Loan Banking Act of 1932. So it's been around since the great the end of the Great Depression era.

It's really a network of about 11 Regional banks in the United States and it's primary purpose is to be a stable source of low-cost funding for banks. and uh, that enables commercial Banks savings institutions Credit Unions insurance companies, financial institutions of of other types to be able to have access to to Capital And and those loans to make sure the Cog wheels of the economy keep going now. Uh, Fhl Banks together on the 13th. So about 12 days ago, we're looking to raise about 64 billion dollars via bonds.

That's actually how the Fhl makes most of their money. So it's not actually another quote-unquote fed facility. it's actually another banking system. It's a whole whole other group of banks.

And they make money by issuing bonds. And people think those bonds are safe. That's why they buy them providing that liquidity to the banking system because they believe they're basically a baby fed and there's no way they're going to go bankrupt. That's the belief, Although, there's no such guarantee.

Now it's worth looking at that facility this. well. Well, the facility from the FED which is the Um I like to call it the buy the FED pivot facility, but uh, it's the bank term funding program. That facility, uh, the bank term funding facility plus the Federal Home Loan Bank facility uh, will give us a lot of data into who is borrowing which banks are actually borrowing from these facilities.

And take a look specifically at this chart here and you're going to see Federal Home Loan Bank borrowing from the Bank of San Francisco as of December 31, 2022 So this is Q4 which banks borrowed the most money from the Fhl and it's scary. You ready for this? Check out the links down below for the programs: I'm building your wealth That's the primary sponsor of the channel. Oh sorry. had to do it.

Had to do it. But when 50 of you now who are signing up or using buy now, pay later. got a pitch that it's available. A firm followed by Clara is the most popular.

All right here we go. You ready for this. Look at this. Look at that look on the left side.

Do any of those Bank names seem Familiar of banks that are going to the Federal? Home Loan Bank Yeah, they do the first one. Silicon Valley Bank Well, they went kaput. What's the next one? So this one's already gone. What's the next one? Oh look at that.

First Republic Bank Oh, what do we have over here is that Silvergate which also went BK How interesting. So this is just the San Francisco bridge, but it shows you I some of the heads up warning signs that when Banks start going to the Fhlb for loans, it might be a little bit of a red flag. Uh, that uh that there could be some more stress coming to the banking system. It is a sign of stress.

Remember Washington Mutual when when this happened? uh, the last time around look at this: Washington Mutual Receivership gets bought by Chase Countrywide Merrill Lynch both purchased by Bank of America Wachovia bought by Wells Fargo These were the ones that one could put and they borrowed from the Fhlb. Just like these right here that are either kabut or on the cusp of going Kaput now. Reuters is presently reporting that the Uh Fhlb is continuing to experience heightened demand as Regional Banks look for more liquidity support and they're not just resorting to the discount window of the Fed or the F uh, the buy the FED pivot facility, but they're actually also going to the Federal. Home Loan Bank That's because everybody right now is trying to avoid a major banking failure and this is deemed to be a very important system for low-cost funding that enables essentially cheap uh, housing, borrowing, or or, uh, you know, cheap credit lines or cheap loans for startups.

Look at that. Silicon Valley was one of the big borrowers and they were able to take cheap money. And unfortunately, when that cheap money became expensive money, they went bankrupt. The New York Times repo