And Beyond This what we're saying is double Dip Recession is most likely what we're going to see over the next few years because there's going to have to be serious damage done to the labor market to get inflation down this cycle. Wow. and I Just don't think that's a dip like 8081 Exactly exactly. I've never heard that that's original like the post-crisis conversation Tom Yeah, 10 years ago before we get to the second recession, yeah, you know what? it seems like every single time there's a recession people start talking about.

oh, it's gonna be a double dip, It's gonna be a double dip. It's literally what I got in the industry uh, in real estate in starting in, uh, like the late uh, 09 early 2010 when I started getting in I'm like, all right, so what do we got here in terms of real estate? Oh terrible. Market Oh dear, worst crash in a very long time. Okay, interesting and as soon as we started recovering and this, the real estate market bottomed out at 2011 which is crazy because it started falling in O5 didn't bottom out until 11, which is about six years later.

Uh, you had ever. Everyone worried about the shadow inventory of homes that Banks were hoarding that they were going to release onto the market and crash the market again. As soon as prices popped up a little bit, it was just a bear Market rally and and the real estate market was going to double Dip crash. Let's listen in more for a moment here just to see what this guy's talking about and we'll do a little bit more analysis on this double dip talk higher income cohorts: They're dipping into savings at an astounding rate as well.

That's probably more sustainable because they've got a huge cushion, but you put it all together. We're seeing shallow recession because eventually the consumer wobbles over and once the consumer wobbles, then businesses stop hoarding that labor like we saw in 2000 with inventories and then you get that Cascade effect. But it should be fairly shallow because we do think by the time this happens, we're talking later this year and now the Fed's starting to Pivot towards cuts for 2024.. Well, that's what I was going to say.

What's the Fed's response to a shallower session is it rate Cuts If inflation hasn't really been killed off I think they're gonna, they're gonna, you know Heaven Hall on this as long as they possibly can. But eventually they will pivot towards rate Cuts But not this year. Now that's interesting because the bond market as of Friday morning before the the jobs number was pricing in Cuts as soon as we'll say October or November of this year. So the market this morning is pushing those cuts further out it looks like, but the FED is still going to have to wobble itself towards cut are pivot towards cuts at some point next year I Believe is just a shallow recession and nothing deeper enough to justify credit valuations where they are given the ongoing rally that people have really played into.

Yeah, I would say no, both in the investment grade and high yield space. No I mean we got IG spreads Investment grade, corporate spreads somewhere around 115 to 120. Even in a shallow recession. Historically, you're talking about 180 to 200.

That's a very shallow recession. And by the way, you can make the same extrapolation to the equity markets where you're looking at what how much the earnings contract in a shallow recession? it's you know, 15 percent? 20 percent, perhaps. So nothing seems to line up with even with that shallow dip in earnings and and output that we're expecting. So this has to be some risk.

Asset Pain: A Chapman Power Volume Two tomorrow. Can we finish that? If we expect anything different from the fetcher? No. I Think What he's trying to tell us is we don't know where where we're going to terminate the funds rate. It could be five, five, and a quarter, Five and a half.

But we're confident we're going to hold it there for a while and we don't know what a while is. but it's probably for the the remainder of this year. Beyond that, he's data dependent I hate that phrase. We all hate that phrase Tom loves it.

But we we need to see numbers. We need to see the jobs numbers, and we need to see how quickly inflation's coming down. And all of it comes down to one important data point or concept that you're not hearing people talk a lot about today. Labor Force Productivity If labor force productivity somehow Rises and participation rate Rises then it's a game changer.

I Don't see that happening though. participation did on. Friday Is there anything about the data at the moment that makes you think I don't really know what's happening here I Can't draw conclusions about the post-pandemic realities of this labor market? Well, we that that's a head scratcher. And what we can broadly say is it seems that 18 to 25 year olds are still to some extent boycotting this.

Market this labor market. We don't know why they're doing that. We can suspect we can give anecdotal reasons, but someone's going to give you one right now. We all have, and we can have our cynical reasons why.

But for whatever reason they are boycotting this market. and when they do join the market, the labor market, they're not putting their best efforts forward. So labor force productivity is negative. One of the great things of Strategus is the inbred optimism of the shop when Jason Turner started? Don't tell me Jason Trenton It's 100 in cash.

What's the equity belief that you shot? No. So we're looking at again, consistent with a shallow recession, a modest earnings contraction, and that means that. Say the S p Let's put a ballpark here. Let's do 200 per share for earnings for this year.

You know, 17 to you know, 17 and a half multiple I Could we'll say 3 500 and if the fed you know pauses and pivots sooner than expected, maybe you get back down to 3 600, but we're still bearish at these levels on equities, we just don't I Just love to hear Bond guys talk Equity I Just enjoyed that I would love to hear Bond guys talk Equity So let's uh, let's let's consider that for a moment. so the individual is not wrong and that the Bond market is pricing in rate Cuts probably as soon as even September and we're pricing in over one percent of rate Cuts in 2023. Now Jerome Powell has been telling us, hey, we don't have any plans for cuts in 2023, But let's be clear, in his last Fomc press conference, he was pretty dang blunt, suggesting that look, we're gonna look at the data and if inflation comes in hot then maybe we have to go higher and if inflation comes in lower and he purposely implied this because he didn't want to say the word Cuts then obviously they would cut rates and respond accordingly. Now I think there's going to obviously be volatility over the next not only year, but certainly the next weeks and months here as we try to get as much data as we can I Think this sort of Nike Swoosh that we're going through is going to be pretty spiky up and down, But this idea of a double dip recession is really interesting.

Really, it's a Michael burry in argument. It's this idea that hey, you know what We could end up seeing a a soft recession here in 2023. Then all of a sudden, the FED Cuts But oh no, those cuts lead inflation to actually pop up again. Now, people can't go and rely on their savings because their savings are gone.

Now, people can't rely on the ability to go borrow and get another personal loan from Sofi or max out their credit cards because they've already done that. And now if you get into a situation where inflation starts popping off again while the Fed's cutting now, the FED has to raise rates again at the same time as people don't actually have a way to spend through the recession anymore. So now what happens? People stop spending And then that's where employers actually start saying okay, this isn't a hunker down style recession. This is now a real recession where we actually have to make meaningful cuts to our businesses.

Now we lay people off which kills spending even more and you get a deeper, ugly, dark double recession. It's possible what the individual is saying and the warning from Michael burry is absolutely possible, especially when you combine with that the U.S China geopolitical tensions, the fear that yes, uh, combat with China could actually be something that occurs in the future. Obviously, we shot down their their darn spy drone of uh, spy balloon uh over the weekend. but uh, look, it's probably going to be months before we're actually able to conduct sort of a dare you say an autopsy on this balloon to figure out exactly what kind of Technology they had, what kind of scanners and cameras and what kind of data they actually had and we're collecting as well as what kind of data Not only they were collecting, but were able to beam back to China before.

uh, this, uh, this spy balloon was shot down. presumably all of the data that was, uh, that was on it was able already to be sent back to China. But look, China does this sort of stuff right? Like 15 years ago, they stole designs for our F-35 a fighter jet. That's the Lockheed Martin F-35 Gen 5 plane.

I Mean this is this is really important and so what they end up doing, they ended up making a pretty similar plane. Now most of their jets are still like Gen 4. you're even older, like the 90s Gen 3 kind of stuff. but I mean they've done this before.

Chinese Hackers have sold in security clearance files from 22 million Americans in 2025. they've sold in medical files from Anthem They've stolen travel records from Marriott The difference with this balloon because they always steal our software, try to steal our stuff is it was sort of like theft right in our face. and that's pretty ugly, right? So so there's certainly the geopolitical risk here there. You've got Ukraine and Russia risks.

You've got Iran and Russia risks. This idea that now Iran is partnering with Russia to manufacture potentially 6 000 Kamikaze drones by building a factory in Russia So that way they can be sent straight from Russia to the front lines. you've got the treasury yields Market That's clearly at least showing some short-term uh nervousness we've had recently Fallen to a low of about 3.35 on the tenure. Right now, we're sitting over 3.6 again, which just drives the real estate market down further.

So you do have a lot of reasons to be nervous BTC back under 23 000 which is sort of like a I always like to consider it uh, your your risk gauge and uh, you know we we got rejected at 24 and and now all of a sudden the stock market's a little bit more tentative. On top of that, you've got the earthquakes that are going on in Turkey which aren't necessarily A lagging risk. Uh, right now to the stock market, but they are. They are something that, uh, guess what? Now Turkey is having to shut down certain uh oil facilities uh, in the Turkish region because of a 7.8 magnitude earthquake that hit, followed by a 7.5 after shot potentially 1300 dead in Syria and Turkey.

And now you got oil. Futures Rising On on that thought and you're back to almost 81 bucks for Brent Uh, which is probably your biggest inflationary impulse. So you have a lot a lot of uncertainties and at the same time as you have a lot of uncertainties, you have mixed data coming in as well, right? The jolts data came in high, which drum Powell sort of brushed off. The employment cost index came in at one percent, but still, that's 4.4 percent annualized for wage gains.

That's still too high, right? It's nowhere near two percent. Uh, Factory orders in Germany coming in stronger than expected. We retail sales in America coming in weaker than expected all across the world. It's sort of like man got some good.

some bad. A lot of companies talking about inflation risks going down, but what do you have? You have companies like Hershey telling you that they still are experiencing uh, inflationary pressures still today and what I thought was the most interesting out of the Hershey earnings call because remember, this is what I do I I read earnings calls I Love reading and sharing the information with you as you find nuggets like this. Uh, Hershey says historically, after they raise prices, you actually don't end up reducing. uh, prices.

That's just not how market dynamics and the candy Market work. So in other words, once you get the inflation, you're stuck with it. Now the good news is, as long as prices stay stable and they don't actually expect to raise prices which they don't uh, but you can actually bring inflation technically back to zero. It's just now everything's been reset to a higher level.

But still, all of these things create substantial uncertainties. And so yeah, this is where people say look, the first recession needs to be aligned with. If we have a recession needs to be aligned with, well, inflation going away, because if inflation doesn't convincingly go away and the fan has to Hawk through a recession, then that's where the Real Pain could come. and Asbury And this Bond dude suggest you could end up being in a double dip recession.

Now this chart is really fascinating as one to pay attention to. This is the probability that the next recession in the economic cycle has started. We briefly looked at this just the other day, but it's important to look at because it's very, uh, historically accurate. Doesn't mean it will be going forward.

But probably one of the most important indicators of a recession or reliable indicators of a recession actually happening are the inverted yield curves. and this one in particular is the Fed's favorite. It's called the three month 10 year inversion and so you could see that on the bottom, which is basically this upside down Little Blue Mountain over here. and basically the depth of this inversion is the deepest that we've seen since the 80s.

It's pretty dang deep and in the 80s we had a pretty darn ugly recession because we ended up having to get Paul Volcker. Now, eventually, the depth of the inversion is correlated with the amount that in the future, the bond market actually expects the Federal Reserve will cut interest rates. So yes, at some point we're going to get massive interest rate cuts. The question is, just: do we end up having a single recession? Do we have no recession? Or do we have a double dip recession? Nobody really knows.

In fact, according to this chart, the odds that we're in a recession right now are less than two percent. In fact, it's more likely that the recession is still somewhere around six months out according to the inverted yield curve that would put us into a recession somewhere around August and then we'd be within a sort of one standard deviation range of the recession being somewhere between August and December. Now, if by that point inflation actually is convincingly low, and how can we get convincingly low inflation, we'll talk about the if. well.

to get convincingly low inflation, you need Goods to continue their Trend down, which they already are that's good. In addition to Goods continuing their Trend down. What do you need You need that household inflation to come through that inflation? Uh, sort of a metric from owner's equivalent rents. Uh, we have got to see that continued weakness in that housing sector, right? But on top of that, we have to see a service.

wage inflation go down. Service Wage inflation is going to be like Medical Care Uh, haircuts, accounting services, basic services that that even car insurance that that you spend money on just to sort of live right. And the hope is that by the time we get to the summer or say June or July hopefully before we walk into a recession, these numbers are starting to convincingly disinflate. Disinflate.

Just does this inflate is different from deflation, right? Deflation is falling prices. Uh, whereas disinflation is prices that are growing at a slower rate, right? So that's falling versus slower rate of growth. Anyway, as long as we can get this and we can confirm. Okay, we have a slower rate of inflation in wages than the Federal Reserve can actually preemptively try to soften the blow of us walking into recession and maybe we completely avoid a recession entirely.

However, if we don't get that service side, deflation or disinflation I should say then yeah, it's entirely possible that we walk into a recession. Not only do we walk into recession, but then the FED cuts, but inflation still stays sticky. and then we end up getting the worse double dip recession on the heels of that thereafter. Now again, unfortunately, it looks like wage inflation is actually stabilizing.

This is important. You look at a company like Starbucks and what are they telling you? Wow. It's a lot easier to hire people. a lot Less labor turnover.

What is less labor turnover mean it means less wage inflation? Very very important. Less wage Inflation is exactly what we're looking for here. Now the fascinating part is that a year ago companies were telling you exactly the opposite They were telling you, oh no, Oh, we are having a hard time keeping our employees and we're having to pay more to get more employees Right now, the only place you're really seeing that now is in certain sectors of the airline industry like Pilots. It's still very difficult to hire Pilots because there's so few of them.

You still have a smaller industry now than you did before the pandemic. and that's the problem because you had so many retirements. But you are still seeing hope and good news that that wage inflation is going to go down. same thing Starbucks is saying is what Chipotle is saying and a lot of companies suggesting hey, look finally we're seeing those wage pressures go away.

That's great, but right now it's just hope that it continues to move in that direction. Now on some good news. We had earnings this morning from Tyson Foods Tyson Foods A year ago was bragging about how much their margins were exploding. They're bragging about how big their PP is they're bragging about.

Look at my PP Look at my pricing power. It's so large it's so huge. That's what they were bragging about last year. And now what are they bragging about? It's a small PP basically, which is probably not trying to brag about it, but basically, chicken prices were so high it was easy for them to have high margins.

But unfortunately, chicken is a commodity. and when you have a commodity, the price of a commodity generally Trends down over time, especially chicken because you get more producers in and when you get more producers in, what happens? Oh wow. Chicken prices plummet. Now what's happening? Well, the company did grow revenues relative to last year.

They grew less than expected 3 or 13.26 billion versus 13.5 expected above the 12.933 from last year. but their earnings per share missed bigly. They were expecting 1.31 cents of Eps markets where we got 85 cents. And that's because as chicken prices plummeted, the company's costs were still rising and so all of a sudden you're getting squeezed on both sides.

This is an example of where it's easy for every company to have told us they had big PP last year. But the reality now is who is actually able to continue to sell product with decent margins while not actually missing estimates as terribly as Tyson Foods did and destroying the margins? So in other words, where can you remain competitive in a recession while still maintaining profitability? Tyson Food A little little bit of an oopsy-doopsy today with substantially less profitability than expected. and this is totally the opposite of what we saw last year. So this is great.

But but look, you know we are still waiting for substantially more certainty on what's going to happen. You've got Morgan Stanley's Mike Wilson Going See Told You Bear Market Rally: Everything's going to go down again. Uh, obviously Futures right now are red just about one half to one-third or two-thirds of a percent depending on which index you've got. Goldman Sachs Saying hey, the January rally is as good as it gets.

You've got Dell Announcing that they're cutting five percent of jobs citing the lack of PC demand you've got Deutsche Bank Now looking at Strategic Job Cuts Yeah, you've got uh, portfolio managers talking about this regime shift of potentially higher rates staying for longer. We saw this double dip guy. uh, and the double dip guy. You know on one hand, he's kind of like, hey, look uh in this I'm giving them Credence here.

or you know, credit. Essentially here, he's talking about how right now people can kind of spend through this recession. right? They can hold out because they can just take on debt or they have the savings they can spend through. The downside? Uh, well.

I Hate to say it. but when I looked at the earnings call for American Express they used the phrase that consumers right now, especially American Express users are spending through this recession and that's basically reiterating what this double Dip individual is suggesting that. Hey, look right now, people aren't actually yet treating this like a recession because they're just taking on more debt or loading up credit cards to spend through it. Sort of like the idea that hey, you know what, we just have to get through the next six months and then we're good.

Uh, and then we'll pay off the debts that we accrue. That's great and it relies on the hope that this is over After you know we, we can prove disinflation. But if we don't then yeah, double dip becomes possible. So you want to hedge for that possibility and the best way to generally Hedge for that sort of possibilities, making sure you're not in, exposed substantially to deaths that could get margin called short amortization periods, and you're not exposed to potential job loss.

Now if we actually look at reports from Goldman Sachs and Morgan Stanley, we can get a little bit of insight into sort of their thoughts. We get first of all insight into the European Central Bank hoping that inflation is mostly now conquered or at least on the path to being conquered. and they're actually starting to taper how much they are basically quantitatively tightening. So they're reducing their tightening efforts already and they're pointing out to a more balanced inflation.

Outlook That's great. Uh, this is sort of the European Outlook from Morgan Stanley but Morgan Stanley and a lot of investment. Banks Right now are saying that emerging markets and Europe are actually faring a lot better than the United States that the United States is more at risk of an earnings recession than other countries or Emerging Markets if we look at a piece from Goldman Sachs Over here we talk about uh, the the this idea here. that uh in the quick disinflation right now is what's being priced into markets and that actually creates a risk in itself that now all of a sudden everybody is too optimistic that we are pricing in so much disinflation, that if that doesn't happen in the face of mixed data and then we start getting realistic data like maybe potentially uh, you have uh of car prices starting to rise again.

uh, then then what you end up having is forces that were disinflationary in the last few months starting to become inflationary again. And if it takes longer for the housing market to bring home prices or rents down, yikes, then uh, then that quick disinflation of the rate Cuts markets are pricing in is all for nothing. Now one of the interesting notes here from Goldman Sachs is that hey, look, you know, housing starts uh coming out uh, over the middle of this year will probably help Drive inventory up substantially. As home builders actually try to finally finalize some of their building, they get through the construction backlogs and you can actually see some downward pressure on real estate in the second half of the year.

Uh, and yeah, the market is pricing in that sort of disinflation. But be careful because even though we have signs that hey, these numbers should come down if for whatever reason, they don't got a big oopsy-doopsy coming your way, so be careful. Uh, and they suggest here that it's probably going to be until the end of the year according to this particular individual at Goldman Sachs Uh, before the FED is actually confident that the inflation fight has been won. and so Goldman doesn't actually think you're going to see a 50 basis point rate cut until December even though we've been hearing about Raid Cuts coming as soon as September based on what the Bond Market's expectations are Goldman here, suggesting that we'll probably end up sitting around three to three and a half percent as sort of a neutral rate once we get into the cutting cycle.

Uh, be it next year. Uh, we'll see, we'll see but a lot of uncertainty and is it possible there could be a double dip? Yeah, numbers are still very mixed and so I think it's important to sort of stay the course on. okay, be conservative, have have long exposure, but don't go YOLO not just yet. Uh, anyway, this gives us some insight here into some of the madness and uncertainty that we're going to be dealing with.

I think it's actually great? Uh, that, uh that that we are starting to see more of a balanced labor force for businesses. Even as the unemployment rate is as low as it is, it seems like at least from the front lines companies are suggesting look no real concerns of a wage price spiral which reiterates what Jerome Powell had suggested in his Fomc press conference. So I think there are reasons to be optimistic, but there there are definitely risks and and nervous uh, dry or nervous Catalyst that should make us nervous. uh that we want to pay attention to uh, this week we do get some more earnings as well Powell Talks tomorrow Biden's got a state of the union tomorrow as well.

that's Tuesday You've got sentiment data coming out Friday You've got Waller and Hawker talking Friday You've also got earnings from companies like KKR the real estate business BNP BP Nintendo Pepsi semiconductor manufacturing International seam and SoftBank Toyota Uber Disney Tyson We just got talked about Energizer Royal Caribbean Hertz Fiserv CVS Hilton and Credit Suisse all coming out this week. so we'll get some more data, but we know what to look for and uh boy oh boy, there's a lot to look for.