Hey everyone Me: Kevin here. Welcome back to the 10th episode of the meet. Kevin Report a quick note until Friday the third. Thanks to so many emails we got from those of you asking, we have briefly extended the coupon code.

It's the final coupon code for the programs I'm building your wealth link down below 11 59 Friday the 3rd Let's talk today about the FED but we're also going to talk earnings and what's going on with China Kathy Wood and a lot of other information. But obviously today is a Fed day and that is going to be the big Catalyst that everybody is focused on today. and so uh, some of the things that we're going to be paying attention to are going to be my thoughts on inflation. My thoughts on uh, what the FED might do today and I think that'll be pretty critical is trying to guess.

Okay, what do we think the fed's going to pull off and how might we want to be positioned going into the Federal Reserve Fomc meeting. They started their meeting yesterday. Uh, they end it today. They end up releasing a statement at 11 A.M Pacific Time and after they release their statement at 11 A.M Pacific which I'll be covering live on the channel here, which we're expecting a 25 basis point hike from.

After that, we're expecting some insight from them into what the ultimate course of rate hikes will be and so we'll talk about that. Uh, but I think at first it's useful to look into what we've got going on leading into the meeting and uh, that's some of the economic data and some of the earnings that we've been paying attention to personally. I Think paying attention to earnings is one of the most important things that you can do to really understand what's going on in the economy, because ultimately, you know you could get numbers like the unemployment report and realize that it's lagging what's going on in the economy by many months. Or you could look at things like earnings calls where CEOs and Executives of companies that actually make up the foundation of our economy and provide goods and services to Consumers who make up 70 of the economy, the insights they provide us and the warnings and red flags they give us I personally really enjoy paying attention to those and so, uh, that's uh, that's what we'll spend some time doing to try to understand.

Okay, where's maybe the FED going to go? uh, directionally today? Look, One of the first things we've got to realize is we know that earnings are coming down right. For example: EA fell short of estimates disappointing Outlook six-week delay in their Star Wars Jedi Survivor game delaying it back to April which is Q2 and you've got a lot of competition in the game Space Hey, you know there's also a lot of competition in the chip and Hardware space you look at Western Digital for example. Uh, thankfully got a 900 billion dollar investment from the Apollo Global Management Group And then you look at the advertising space. You got problems over there too.

Look at for example, Snap, They reported their first ever quarterly Revenue Decline and not only did they report their first ever quarterly Revenue decline, but that decline is expected to be between two and ten percent. That is a massive cut. and so you're seeing Revenue projections at companies plummet across the board. But it's not just the revenue projections, it's also what they're saying in their calls that's very important to pay attention to.

So in this video, we'll be pulling up some of the earnings calls and going through what do we think companies actually have to say about inflation? And how does that compare to what the Federal Reserve is up to and what the Federal Reserve believes? Quite useful because then you could see are they on the same page actually or are there dislocations? But worth continuing on. Snap For a moment to say look, this is a company that got extremely bloated with a lot of staff for money losing projects. And one of the most common things that happens at businesses is businesses ultimately think they can do everything and they try to get their hands in 27 different cookie jars. and then they end up chasing projects that just are not profitable.

And so finally, Snap is suggesting that they're working on cutting those revenue and money losing projects. Analysts were expecting 1.48 growth, that's app and uh, the company again ending up uh, projecting a two to ten percent decline. uh in growth. still getting hit by the Apple Transparency Tracking or Tracking Transparency Updates which is sort of the removal of uh, a lot of The Advertiser data that companies like Pinterest meta and uh, uh, Snapchat end up using to provide analytics to their customers.

So that way their customers can more accurately Target uh uh. individuals that they want to sell goods and services to Now, uh, one of the companies that I actually believe is is solving the disaster of the Apple uh tracking transparency update is a company called Trade Desk and they actually came up with the Uid to advertising sort of non-cooky cookie if you will. That's sort of the easiest way to describe it. And it's basically instead of gathering user information and tracking the user around the internet, the most simple way to think about it is, hey, look, if certain users behave in a certain way, then they're probably in group A of people.

If, uh, you know, another percent, a 10 of customers behave in another way. Well, they're probably part of group E and if another 10 behave a different way yet again, then they're probably part of Group C Hey, advertisers, you might like to sell your women's clothing to group A right? And so, rather than individually identifying people, Uid2 helps identify the behavior of people and by tracking the behavior of people, not individually identifying people, attracting the behavior of people. advertisers can potentially properly Target their advertisements. and this is sort of a solution that a Trade Desk came up with.

They released that as an open source tool for everybody in the advertising industry to use. and I Think Trade Desk is one of those companies that's actually trying to solve the disaster of advertising. Uh, that? that's basically companies I've been dealing with for now almost the last two years thanks to the Apple Transparency tracking update. But bad revenues? Uh, you know, in a recession aren't uh or bad? Revenue forecasts in a recession aren't the biggest surprise.

Uh, although I'll tell you this: 69 of S P 500 companies at least according to Earnings insight. As of a few days ago, 69 percent of companies that reported earnings actually reported positive earnings. Surprise? That is a positive EPS Earnings per Share surprise And 60 of them reported a positive Revenue surprise. So even though it's easy to look and say oh, everything is bad and guidance is going down and all companies are missing, it's easy to say that it's easy to make a list of companies that are losing uh, money or or their revenues are going down.

Uh, it's a lot harder to actually look at real data. And what does the real data show us? It actually shows that companies aren't doing as bad as the stock market has to some degree been pricing in, in my opinion, this is one of the reasons that after you saw some of the early chip makers' reports such as Taiwan semiconductors or Samsung, you actually saw the companies and their stocks rise rather than fall. This is despite the fact that clearly there have been large cuts to not only forecasts and revenue. And this is really in my opinion because I I Believe the stock market has been sort of teetering on this idea of oh no, Q4 earnings could be the worst ever yet.

and I'm not entirely convinced that's true. Now that's not to say that we can't still have worse yet coming in the future I mean consider Tesla for example, It's entirely possible that uh, that their margins end up worse in Q1 or Q2 In fact, I think that's highly likely than what they reported previously. uh, and most investors seem to be highly concerned about Q4 whether that was conveniently because they tax loss harvested in December and they just needed a reason to get back in and once Q4 earnings cleared, they got back in. or it's for some other reason I Have no idea, but the stock has recovered substantially from 100 bucks to about 173 bucks now 175 bucks in pre-market That's I Mean, if you perfectly time the market which nobody does uh with, especially not with your whole portfolio, you'd be up like 73 74.

It's remarkable. Uh, it. And so you're seeing a lot of that sort of activity in the market where the Market's kind of like, oh, things aren't really that bad. And that also sort of helps us wonder what does that mean for a potential soft Landing with the Fed and and recession versus no recession? Well, uh, you know, in my opinion, this is where it's kind of worth looking at what the warning was we just got from the IMF.

So the IMF actually suggested that a global recession is actually unlikely due to resilient output at the same time as slowing inflation. Now that's really interesting because this recession has been the most predicted recession ever in the history of recessions. and if we don't end up getting the recession, then it's kind of like, wait, what? Like were the economists just wrong again? And the answer there is yeah, potentially now. Uh, this also comes on the backs of obviously France and Germany suggesting they expect to entirely be able to avoid a recession.

This is, despite the fact that Germany did end up getting a negative GDP print for the fourth quarter of 2022, which doesn't exactly reiterate the idea of no recession. Negative GDP prints are obviously the precursor to being in a recession, given that two quarters in a row of negative GDP typically signals well. I mean it signals a technical recession uh, and often aligns with a real recessionary environment. But the IMF ultimately sees Global growth rising in 2024.

Uh, that would be a 3.4 percent in 2022, a slight dip to two nine in 2023, and 3-1 in 2024.. So you kind of see this sort of return to growth in 2024, and ultimately, the big concern is Will inflation come down. And who's going to account for most of the growth? And is that growth going to be inflationary? Well, the IMF tells us that it's China and India that are likely to be the major engines of growth next year, potentially together accounting for as much as half of the world's Global growth in 2023, and potentially also going forward. So China Clearly something very important we want to pay attention to.

uh, especially Uh India as well, both uh, really enjoying cheap Russian oil to help fuel some of their growth. No surprise, because somebody's gonna buy the cheap Russian oil anyway. Uh, we, uh, when it comes to China, it's uh, worth making a quick note that China is responsible for 97 of global uh solar wafer manufacturing. So when it comes to solar manufacturing capacity, uh, Wafers they're at about 97 and for the actual polysilicon which goes into the panels, they're responsible for roughly 80 and solar cells.

they're responsible for roughly 85 solar modules they're responsible for roughly 75. whereas uh, they only represent about 40 of actual solar demand. So basically 80 of the entire Global supply chain for solar comes from China. So you really want to pay attention to China uh and uh.

The the trade tensions that we have between China I think ultimately makes things a lot more expensive for uh and consumers. Whether that's uh, individual homeowners buying solar, companies buying solar uh, people trying to trade with China whatever. Obviously, we've got a government that's very opposed to China uh, essentially free trade trade with China and the fear there is, uh, supposedly National Security based Although we don't know what lobbyists are pushing the agenda that oh, absolutely, there'll be an invasion with Uh with with China of Uh Taiwan and ultimately, we'll be going into some form of World War Three if unless we have really tight trade sanctions against China and we prevent them from being able to advance their economy. Who knows.

I Have no idea. But it does seem somewhat, uh, ridiculous that here we are, in 2023 when we know sanctions, uh or I should say um, in the case of uh, China uh. trade restrictions such as tariffs which are basically taxes on trade ultimately just end up creating deadweight losses for the economy and end up hurting the end users like consumers by artificially making things more expensive and restricting uh, the proper uh flow of goods and services. So I think from sort of a free market point of view, a lot of the restrictions are a little wild, but uh, then again, you know, hey, if if it's a matter of National Security restrictions are okay Anyway, so uh, look, a lot of negativity around earnings that we're seeing.

It's not even just uh uh, you know the potential negativity that we might end up seeing coming up here with Apple? Amazon Facebook A lot of folks sort of holding on to their edge of the seat their seats to see what will happen there. Uh, but uh, even the earnings calls that we've been getting in earnings reports that we've been getting. A lot of companies uh are are expressing concern about economic Outlook even Pulte Homes which is a home builder in America is, uh, refusing to provide any kind of guidance for 2023 other than the first quarter because uh, they're realizing they have no idea how long interest rates are going to stay high. The reality is, nobody knows.

and I think that's why all of us ultimately like to pay attention to the Fed. And so the FED is a useful thing to talk about, especially in the context of Michael Burry. given that Michael Burry is now telling us you should sell. That's right, good old Michael Burry again coming out and suggesting cell on Twitter and this has a well every time.

Michael Barice says this kind of stuff, he tends to temporarily at least break the internet and everybody talks about Michael Burry. which In Fairness, It's worth looking into what his perspective is because it's pretty dang contrarian to what the rest of the market believes and if we can kind of evaluate Michael Murray's cell warning next to what the Federal Reserve might do. Hey, maybe we could try to understand where Michael Burry is coming from. So Michael Burry tweeted cell uh, or yesterday evening.

That's all. He tweeted just the word sell period. Now what reminds me about cell period is that's what I tweeted in January of 2022 and I got the most backlash I've ever seen in my life from people and I'm like, well, things have changed and when things change, it's important to change your mind. Uh, as unpopular as that might be, it's important for people to wake up and realize the world evolves.

and when the world evolves, you've got to change with it. Otherwise you just end up dying. an old fuddy duddy who refuses to change with the world. So Michael Murray tweets sell and when we put together what he's previously said, we kind of get an idea as to why Michael Burry would suggest.

It's important that now you sell. So Michael Burry has previously suggested that it is very likely indeed, that inflation is going to come down rapidly in 2023.. this is a pretty typically accepted scenario right now. It wasn't last year last year.

folks were saying oh, that's it. The dollar is is Uh, is is going to lose all of its purchasing power, Inflation is going to run rampant, and the entire economic system is going to collapse because Inflation will be uncontrollable unless we get Paul Volcker. Well, sure enough, so far, inflation is indeed proving to be transitory. That, yes, when you print oodles and oodles of money the tune of four trillion dollars money.

Yes, four to six, Actually, four to six trillion dollars of money. What ends up happening? Yeah, you end up creating inflation to some extent. That's a good thing. Uh, because it actually signals that we're so capable of creating inflation.

I Know that seems wild, but when you have a company or a country like in the Uh Japan in the 1990s and you print money for 20 years and you can't get inflation up, it's kind of a sign that you probably have larger structural issues in your country that restrain growth. And that's bad. Whether that's an aging population, a retiring population, a population that isn't innovating anymore, leading to more spending on goods and services. Whatever it is, the last thing you want is a country that can't create any inflation That is actually really bad, because then you end up having negative growth.

After negative growth, you encourage people to save their money and not spend it, Because why spend or invest if ultimately you can't create growth? Anyway, think about that for a moment. Why hire an Advertiser to help you advertise your company's goods and services if you're not going to be able to grow anyway? So everyone turns inward and what happens is you lower the standard of living for everyone. So to some degree, a country being able to still generate inflation which fortunately for the sake of Japan Japan's actually finally starting to see some degree of inflation again. Uh, it it.

The last thing you want is again being in a deflationary environment where there's it's impossible to create any kind of inflation. You want some inflation. You just don't want hyperinflation. So now, uh, we're in a position where after all of the money printing good? Yes, our economy is still, uh, interested in growing.

which is good. Uh, and so what we end up having now is what? Well, we've got, uh, the idea in the market that yes, inflation is finally proving to be transitory Again, we've gotten over the hump of money Printing and the supply chain crises and war that led to, uh, this sort of inflation. at least the initial impacts of War Given that the war is still going on in Ukraine and now we expect inflation to rapidly fall, this is very much in line with Michael Burry uh and his sort of commentary Michael Burry and his commentary is, hey, you know what inflation is going to come down So we can all agree that inflation is likely to come down. This obviously creates a risk because if even the Bears say that inflation is going to come down and the Bulls are like yes, inflation is going to come down now we have to be really blind or we have to be really unblinded to the idea that, well, what if it doesn't come down as rapidly as we think, right? It seems that a lot of the market is excited about inflation coming down even Michael Murray and the Bears are excited about inflation coming down.

The question is what happens next and what happens next, in my opinion is why Michael Burry is suggesting that you should sell. Now there are two tail risks here. Tail risk number one is that inflation doesn't actually fall as much as expected if inflation ends up staying High Because owner's equivalent rents don't end up coming down as quickly as we think that basically the rental lag of a decline in housing prices which we've already seen line in housing prices and housing rents. If that lag doesn't end up showing, or that result which is lagged by about six to 12 months doesn't end up showing up in CPI data because rents start going up again, Uh, then that's a problem.

Obviously that would be a problem. Now you might wonder, like wait, but how how could that work? I Mean if if owner's equivalent if actual rents are coming down, shouldn't CPI rent, uh, eventually come down as well? Yes, but it really requires owners or actual rents continuing to fall. For example, if CPI rents did this, but actual rents did this well if they continue and CPI basically catches the line, you don't necessarily need uh to get a substantial decrease in housing inflation. So tail risk number one is inflation doesn't actually come down.

Whether that's because used auto car prices stop falling, rents start Rising Again, housing costs start going up again because Financial conditions have loosened. Medical Care Services Basically Super Core which is like Medical Care Services uh, other health care spending stuff like haircuts, those are super core Services Uh, Tail risk Number one is inflation doesn't come down for for any of those reasons. So it's worth writing down what your risks are and and knowing risk number one is inflation doesn't come down. Now that's the biggest risk, especially since more and more of the market is now pricing.

In this idea that oh yes, inflation will absolutely come down. So risk number one. Write it down. Inflation doesn't drop as much as expected.

Now there are some good things to that. uh in that uh, all the Federal Reserve has to do as long as we're trending down, trending down is okay. Uh, we don't actually have to get to two percent. And now this blows people's minds.

But thanks to Flexible Average Inflation targeting, we know the FED has a policy of saying as long as inflation averages two percent over time and this is Pce inflation which is generally lower than CPI inflation. Look, we're okay with that. We don't actually need to hike until the economy is totally devastated and inflation is actually at two percent because we could just say hey, we're good with it averaging two percent. Okay, so that's risk number one as inflation doesn't drop as much as expected and if it doesn't Trend down the FED can't pull the flexible average Inflation Targeting or Fate hat out of the um, uh, you know, out of their repertoire so to speak.

Uh, the rabbit of Fate can't come out of the magician's hat so to speak. Now risk number Two is is what I call the Bury Risk. Okay, so this is the Bury Risk. So again, if the base case base case is inflation goes bye-bye uh, Fed stops hiking and creating job losses because they no longer need to.

If that's the base case, then we always want to be aware of where are the blind sides And right now Blindside Number one is inflation doesn't drop as much as expected. But then tail risk number two is the Michael Burry Risk. Now I Want to just explain that when we're talking about tail risks, a lot of people who aren't in finance might not be able to visualize that. So let me kind of draw it for you.

Tail risks have to do with a typical bell curve distribution and statistics. This is basically to say that 50 uh, the 50 of the likely outcome is is right here and then you sort of have standard deviation moves, right? So uh, we we expect that uh, one-third uh, you know this represents about 33 percent, This represents about 67. uh. And then you have these tail risks over here that are kind of low likelihoods to happen.

So this would actually be like uh, you know, less than five percent chance over here. less than five percent chance over here on the right side. All right, these are your tail risks. So your tails are the left tail and then the right tail.

Uh so uh. tail risks. One of the tail risks I Believe that we have is the bury risk and so if the base case is inflation goes by by fed, stops, hiking and creating job losses, the the the other risk is the bury risk which ultimately is Yes, inflation does end up going down and as inflation plummets what happens. The Federal Reserve ends up saying hey, you know what, We can cut rates just like the market expected.

Remember today, the Federal Reserve is expected to hike rates by 25 basis points. That's not a big deal, the Market's already priced it in the Federal Reserve Historically in this particular hiking cycle has matched exactly what the market has expected almost every single time. Now, whether it's the chicken or the egg that comes first doesn't really matter because all it takes is a text message from Jerome Powell uh and Blasting it over uh uh, you know to or to a text message to Nick T who then blasts over the internet to really set expectations. That's all it really takes, right? That's literally all it takes So you know what.

Uh, what? Again, it doesn't really matter with chicken or egg. Whether the FED follows the market or the FED creates the market and then follows it 25 BP is what we're expecting for a hike today. That's the boring part. What everybody cares about is what the FED does next and sort of projections for what the FED does next.

Bury thinks what the FED does next is it actually ends up following the market and saying we're going to pause by uh, potentially May and then we'll end up actually cutting rates by the end of the year. Even though the FED right now isn't talking about cutting rates by the end of the year, the market is starting to price in the idea that the FED could cut rates by as much as one percent by the end of the year. and Burry's thesis is that. Okay, fine.

if inflation goes down, but then you all start cutting rates, then what you'll likely do is induce Financial conditions to basically collapse. In other words, uh, well, to become very, very loose. I should say there are measures of financial tightness Financial conditions Indices: The higher they are, the more tight Financial conditions are which will be higher interest rates, lower stock prices. That's an example of high or tight Financial conditions And when the chart Falls or collapses Financial conditions are loosening.

Usually people use the Goldman Sachs Financial Conditions index to sort of chart that. But anyway, if Financial conditions loosen and we start seeing rate cuts, the thesis is oh okay. well everybody's going to go back to spending. Everybody's going to feel rich again.

everybody's going to go YOLO into stock options and meme stocks and profitless companies and start creating profitless business models. Again, like stupidness. like what we saw with Open Door or Carvana. where Yeah, you end up buying a car through a vending machine.

Yeah, because that makes a lot of sense. Or you try to flip homes and don't consider Market risk. And you don't buy wedge deals. You don't even buy good deals.

You just try to flip homes to try to make a commission on actually flipping the homes. basically. Open Door Trying to systematize being a real estate agent. It's nutty.

Nobody's ever been able to succeed at it. And so this is how these these profitless, money losing companies end up growing. And really what they are is walking zombies. There's zombies that that need to die.

They're companies that need to go bankrupt and because they shouldn't exist, they use Capital that should actually be deployed for business models that actually work and and create a real net benefit to society. And so recessions are actually a healthy thing because they end up killing off bad businesses. But not only do they kill off bad businesses, they end up getting people fired who, uh, potentially are in excess a product at their at the business, they work with it. Now that doesn't mean they suck, but it could mean they suck.

You know, some people, they float around in a business because management doesn't want to fire them because it'd be unpopular to fire them. or maybe a change workplace culture or whatever even if they suck at their job. But in a recession, businesses can just sort of mask that under Mass layoffs and a lot of people end up getting laid off. Some of them were probably really good workers.

Some of them probably sucked at their jobs and needed to be laid off. It's that sort of weeding that needs to happen in order for businesses to actually succeed and Society to succeed. And and so businesses that suck and employees that suck should go away. That's very, very typical.

So the problem is. the bury thesis is that because the FED is likely to cut again, you could end up seeing all of these companies that were supposed to go bankrupt end up staying around. And if those companies that were supposed to go bankrupt stay around and we go back to the speculation that we used to have. uh, and essentially people start spending money like they're stupid again and there's no real pain in the recession because we don't end up having a recession potentially.

Then what happens, We just end up with a second wave of inflation. that is Uh Michael Burris Uh, you know, essential uh uh thesis is we're going to have a second wave of inflation. and the problem with that is if you look at history which obviously the most dangerous words investing or this time is different. If we look back at Uh at history, what do we find? What we find In the 1970s? The Federal Reserve was very start stop-ish about what they were doing with interest rates and that created massive problems because it led people's inflation expectations to plummet Uh or I'm sorry to Skyrocket I Want to clarify that it led people's inflation expectations to Skyrocket unemployment.

Their trust in the the FED plummeted, and as people's trust in the FED to control inflation plummet him, their expectations for inflation skyrocketed, which ended up leading to inflation that ran as high as 20 percent 18 18-ish percent. but the FED had to hike rates to 20. See, the FED uses something known as the Taylor rule. Uh, when the Taylor rule is just basically a formula for suggesting how high should interest rates be and part of the formula is inflation.

Now, the Taylor rule falls apart. When you have negative inflation, when you're in a deflationary environment or a low inflation environment, the Taylor rule has kind of been failing. It hasn't been that good, but now that we have high inflation, a lot of people are talking about bringing the Taylor rule back into prominence. and the Taylor rule has a bias for always keeping the Federal Reserve rate above the rate of inflation.

that creates a negative real yield environment. Right now. we're not even there yet, and Drum Powell himself told us that by the time the FED stops hiking rates, Uh rates will end up being sufficiently restrictive, which basically implies that the FED still has to tighten that it's too early for any kind of pause given that the rate of inflation is in the six percent region. Uh, and the Federal Funds rate is only at 4.25 percent.

So again, expecting more pain from the Federal Reserve is is what you should expect. But again, Michael Burry says, hey, if people start thinking that inflation is falling quickly, uh, then we're We're just going to get back to a speculative spend environment that'll induce inflation. The FED will lose any potential credibility that it even remotely had left, and in such an event, we'll end up with some substantially worse inflation than we had the first time. Much like in the 70s, you had inflation throughout the mid 70s, but you didn't actually have the crushing inflation and then the crushing blow of 20 interest rates until 1980 and 81 and 82 when we had a crash in the early 80s because we ended up having to get Paul Volckert.

Basically, somebody had to put the big boy pants on. Maybe Jerome Powell ends up getting fired. Someone else takes his place, puts on the big boy pants, and says the FED will exert its dominance again and they actually destroy the market and throw us into a deep dark, a depression this time, and not a recession. So that's sort of the the Michael Burry thesis.

now. Michael Burry has been sort of labeled as somebody who's often more bearish than he is optimistic. And that's okay. There are optimists in the world, and there are pessimists in the world.

Doesn't mean you can't go have a beer with the person, just means they have a different outlook on the economy than than you do. And that's okay, But that's essentially Michael Burry's warning is it doesn't really matter what the Federal Reserve does. now. the path to Fed is likely going going on is one that will end up leading the FED to make a massive policy mistake.

And so the way to potentially protect yourself in such an environment is you have to ask yourself, okay, what would happen if Michael Burry ended up being right. Well, how much debt are you in? uh, what does your income look like? Are you potentially in a situation, uh, where where you've run out of money? uh, and you're starting to see the market bear Market rally up and you're thinking, okay, this is it I'm going to go all into the market and you're even going to go into margin And then all of a sudden we do end up in six months getting more of a Michael Murray style scenario playing out. And when that gets priced in because the stock market likes to try to pre-price things in, well, then you're really screwed. That's sort of the Michael burry thesis and that's why he's warning and providing this idea of sell.

Now Interestingly, he is doing so on the eve of the Federal Reserve meeting and that is also leading a lot of people to wonder. Okay, uh, why is he so bearish? Is it because he believes that in order to prevent the Michaelbury scenario, the Federal Reserve has to be really aggressive. Today that's possible. And so my thesis on what the Federal Reserve does today is I Believe they end up walking a tightrope of not trying to sound dovish, not trying to sound bearish.

I Think if I were sitting in the Federal Reserve board today, I would be looking at dronepal and I was Let's say one of the board members and we were having a meeting together. Or maybe I'm Jerome Powell right? It would probably be like all right guys. Look, we know the data is coming in good. All right.

We just had ADP numbers that missed. We had the ECI that missed yesterday. We've got nothing indicating a wage price spiral. We've even got Chipotle saying it's becoming easier to hire people now because there's not that much competition anymore for workers and more people are looking for work which is great.

More labor force participation like everything's going exactly the way we want it. Guys, we're winning. We can't F this one up drone. Yeah.

I Gotta go out there and you gotta hold the straight face and pretend like we just need more of this data. That's all you gotta do Jerome Go out there and tell the world you're not convinced inflation is on its way to two percent. Yep, You're Gonna Keep tight until you're convinced it's at two percent. you're not convinced yet.

And sure, some things are looking optimistic, but that's what we expect because we're winning the game. But we don't want anyone to think that just because we're winning, we're gonna start telling our goalie to go take a coffee break. We're gonna fight even harder to make sure we claim the opponents being inflation the opponent, right? So so that's sort of my impression of of what I would think the Federal Reserve will do today. Uh, and it's really because they're trying to prevent the bury scenario that this, uh, this idea that everybody's going to go back to spending like drunken Sailors because the stock market starts recovering and maybe the housing market starts recovering and then what happens, you end up inducing another wave of inflation.

So I Do not think there's any reason to be optimistic. Uh, highly optimistic about the FED today. Now it's possible that the market is pricing in that the FED is going to be evil today. I Don't actually think that is likely either because the FED does not want to create a recession.

If it does not have to think about it, the FED is doing good right now. It's sort of like if if you're a military. uh, let's say the FED is is an army and they're winning the war. Why pull out the nuclear weapons and create even more long-lasting damage if you're already winning.

If you're winning, just keep doing what you need to do to kind of base. or basically just keep doing what got you there which is not going. Nuclear So I Do not think the FED wants to go nuclear and destroy the economy today. So I am not very bearish on the FED today.

but I am also not very bullish. That drone pile is going to be like we're done. Inflation's over. So if your YOLO and calls or yoloing puts I think you might be playing in it wrong today.

Uh I I Think maybe maybe a way to to play. It is actually you sell scraggles. You sell both puts and calls to people who are yoloing on the FED today. So you sell put, you sell a call.

You don't care what direction it goes, you just expect volatility to go down. Now you want to pick stocks where volatility is actually higher. This is something we often look at in our course member live streams which keep in mind I did extend uh, the coupon code to Friday the third. We got quite a few emails of people asking if we could extend it to the third.

so we're extending that final coupon code until 11 59 Pm on the 3rd of February. But look, Bury has a very reasonable thesis. Uh, unfortunately for Brewery I think it's a tail risk I think it's a risk that uh, that is unlikely, uh to play out uh, but uh, but it could happen and if it happens then then he's uh, you know, he's he's made his point and uh, and then good for him. but again, I think it's unlikely.

Now what of the things that is a little bit concerning though, is this particular chart on screen? Now this is called the US Cleveland Fed Inflation Now index and it's been very accurate at the beginning of the year where it'll actually lead higher CPI changes on a month-over-month basis, so it's accurate. Uh, you know, and around the time of February March it was accurate when it projected the plummet in April May it was pretty accurate when it projected the jump in June and July Pretty accurate as well when it represented a fall over in August and it also I mean it's been pretty consistent. The Cleveland Fed line is the white boxes. Okay, those are the white bar charts and they basically show that the Cleveland fled estimates inflation before CPI or the Blue Line come out.

So the Blue Line follows the white line well. Unfortunately, the Cleveland Fed is now projecting potentially as high as 0.6 month over month. Uh, inflation? Uh, for the next CPI report? Now they were. they were way high.

uh in October when they were projecting 0.8 percent of month over month inflation. But we did end up having inflation rise from about point four percent to about point four five percent on that month over month basis. So true it. even though magnitude wise, they were wrong, they were correct directionally, and uh, that is leading at least to some concern.

That probably the most important thing we need to pay attention to is the risk that inflation does not come down. that is I think the biggest risk and I think it's actually bigger than the Michael burry risk. So this is where I Do think having at least some cash on the sidelines is reasonable because I don't think we're going to get a straight down inflation I think uh, we're probably going to be in a little bit of a bumpy path, but hey, you know what? Uh, so far, things moving pretty optimistically so things are looking good. doesn't mean YOLO Uh, but it does seem like things are going in in a good direction.

and maybe the Federal Reserve can in theory engineer that soft Landing In my opinion, the soft Landing is probably more of because of the inflation and jobs data we're getting. Now the base case scenario where res the potential of inflation skyrocketing again is more of a tail risk and a second wave of inflation is more of a tail risk. So, but then again, maybe I'm being biased uh, in an optimistic manner. Either way, I Uh, this is sort of the Michael burry combined with Feb thesis I Think it's useful to understand that thesis going into the FED meeting today.

Uh, I'm not the biggest fan of thinking the FED is going to be super dovish or super hawkish today. Uh, though. uh, we'll clearly want to pay very close attention because I think it'll set the stage for, uh, all, of, uh, all of the our stock market movements really between now, Uh, and the March Fomc meeting now? uh, the March Fomc meeting at least right now based on what the FED is pricing in or the markets are pricing him I Scheduled for March 22nd so we'll have about a six to seven week break here of no fed which I think a lot of people will be excited about, but again, the markets will react based on what they expect the federal do in March In March. We'll also be getting a new summary of economic projections which we will not be getting today.

So important information coming up for why Michael Berry said sell and the Federal Reserve Hope that was helpful and useful. Now it's also useful I think very much so to talk about earnings. Uh, but we did also have a few comments here. so I want to see what some of these uh comments are? Let's go ahead and look at some comments here.

so we have: uh, don't you think that because the market May explode to the upside with a 25 basis point hike that may cause Powell to do a 50 basis point? I No, no, not at all. I don't think the FED needs to shock the market? uh, solely because they're concerned the market might be excited over 25. BPS I think 25 BPS is already priced in thanks for the five dollars By the way, not only do I think 25 BPS is priced in, but I think the markets care more about what Jerome Powell says. And that's why I think Jerome Powell is likely to be somewhat, uh, aggressive.

Uh, but not too aggressive with this commentary. Uh, and so that's why I'm sort of calling it neutral. Okay, this comment always drives me nuts because it's it fundamentally misunderstands what inflation is doing, but then again, fundamentally misunderstanding. Inflation is very common.

Here's a comment that says how is inflation transitory when we're still at six percent which is very high? It's very simple. inflation is calculated using base effects. When you calculate inflation, you actually compare inflation to the prior year. So if inflation all of a sudden spiked quickly and then started plummeting just because you're over here.

And let's just say you're in February right here and you're comparing to February of last year. Just because inflation is a potentially at six percent or five point nine percent or whatever it is does not mean that inflation is still happening. That's why it's really important to look at month over month, week to week data so you can actually be understanding what's happening in the real world. Looking at year-over-year data is no longer the real world because it it ignores the fact that the trend or the trajectory is changing.

I Believe it is highly inappropriate to suggest that. Oh, inflation absolutely can't be transitory because headline inflation is still uh, is still high. Headline inflation has literally nothing to do with what is happening in the economy today. The headline number literally does not matter.

What matters is what's happening today. And what's happening today is inflation is starting to go away. There is not a single earnings call that's implying that inflation is actually expected to stay past the second half of this year. That's not to say that inflation can't rear its head again.

It's not to say that inflation won't rear its head again, but look, for example, at Caterpillar. Caterpillar reports that they've had the highest level of parts available in the history of the company. That basically they are so ready to fulfill the needs of any company's demands. Then they're ready to provide more shipments and more products.

Shows you that companies are on standby to do more that Supply Chains have gotten so strong Again, that companies now are like great. Now we fix Supply Where is the demand? Let's actually provide more. Look in the last inflation report we had month over month inflation reads of negative point: one percent. Over the last six months, inflation has averaged averaged less than two percent I Kid you not, look at the month over month changes and inflation has averaged less than two percent over the last six months.

and then I Always get the reply where people are like oh, but Kevin costs are still high, my food is still expensive I Get it. Inflation can occur and go away. Inflation is not the measure of all your Donuts going back to the 99 cent cost they used to be and now you're pissed that you're paying a buck 20. I Get it.

But that is not what the FED cares about. The FED cares about the change of that price again. So if your donut went from one to a buck 20, that's a problem. And it sucks that you have to pay a buck 20.

But just because it's a buck 20 does not mean we still have inflation. Especially if it goes down to a buck 19 or it stays at a buck 20, or even it goes to a buck 21. That is not inflation that people care about or at least not the FED inflation? Uh, that the FED cares about is what if that buck 20 now becomes a buck 40 and a buck 60 and you get this sort of inflationary or exponential runaway inflation? That's what the Federal Reserve cares about. Again, inflation is a rate of change measurement.

We measure it by comparing to what's happened in the last month, in the last quarter, and the last year, and at least so far, it seems that there's been inflection point to the downside, which is fantastic. And as long as that inflection point to the downside continues, we will end up hitting an environment it where either we get to two percent average inflation or we actually go negative, which again, uh, there are risks to that if rental inflation doesn't come down Services inflation doesn't come down or housing uh, or or other services like uh, air travel or haircuts or personal services, personal care services. If though, that sort of remaining inflation remains sticky and it doesn't come down and prices continue to go up yeah, then we have a problem. But just because you're reading the headline number of what inflation is tells you absolutely nothing about the economy.

In fact, what's more important in my opinion is that you look at leading indicators of what's going on with inflation. and I believe that leading indicators of what's going on with inflation or what companies are talking about. Uh, and that could be uh Procter Gamble Talking about finally seeing lower prices probably by Uh will certainly start showing up in their earnings by the second half of the Year Johnson and Johnson saying yeah, Prices certainly went up, but they're expected to moderate by the second half of the year. Uh, McDonald's complaining about paper costs being higher than ever.

This is kind of like complaining about the headline inflation number. It's like, oh, no, inflation's at six percent, right? The headline inflation is high. Yeah, it sucks. But when you go, look at uh, the International Paper Company which just reported earnings and you look at their earnings call.

what do you hear? Oh, Lumber Costs are going down, fiber costs are going down, pulp costs are going down, material costs are falling, and they expect to see that start showing up those falling costs in their earnings reports soon. So really, yes, inflation can be transitory and it literally reading off the headline number means nothing. It tells you nothing about what's happening with inflation. What's much better is again looking at a company like Chipotle and seeing it's easier for them to hire that they don't have to raise wages as much as they had.

looking at a company like Walmart and going. Sure, they've raised wages, but they also lag Target for years and they've been losing money for years. so no wonder they were slow to start raising wages. Uh, the big thing in my opinion is looking at what is inflation doing.

Energy costs have retreated. Core Goods have gone down. The housing market is cooling, wages are starting to cool, Nothing is spiraling out of control. Nothing suggests that we're actually expecting to see inflation continue Uh at at this uh, at this insane rate Uh, that we've been seeing again? That's not to say it can't come up.

It's not at all to say that inflation can't end up surprising, but inflation as long as it continues on this trend can absolutely end up proving to be transitory. and instead What markets are pricing in. Right now is the fear that the Federal Reserve is going to actually continue to Hawk during an environment, uh, where inflation and inflationary concerns have actually gone away and prices actually are coming down and yet you still have a Fed that ends up Hawking Which potentially leads to a deeper recession That seems to be what the market is more concerned about right now than actually inflation running away Again, Could there be concerns about inflation picking up again? Yeah, absolutely again. We showed this where we talk about the Cleveland fled and the Cleveland Feds inflation Now index showing month over month.

Uh, uh, CPI reads potentially Rising again. Now that could be because this is not a core measure. This is just a headline number of month over month numbers uh, which measure energy costs more heavily going into inflation. So yeah, absolutely inflation can go up again.

But the argument that oh, inflation can't be transitory the headline number is at six percent is not a logical statement. It's it's a statement that is not based in reality Because again, you're looking at the past. You're not looking at what the market or or inflation has done in terms of inflecting down and trending down. Uh, and when you're on a downward trend, inflation can be transitory as long as the trend holds.

That's what matters. Comparing to the base effects of last year which are higher although they start falling over the next few months is is not. uh is not a logical way to talk about inflation. Uh, let's see here.

then we've got. uh, let's see here. Eventually the consumer is going to break Lumber can go down. but if the consumer can't afford it, really puts uh the data in conundrum.

Well, this is why the market is starting to price in the fear that eventually we are going to break the economy and and the consumers will stop spending. That's why you're seeing sort of FedEx And and UPS freak out over concerns that oh no, what if, uh what if uh um, you know people just stop spending money, right? That's that's obviously a big deal. Uh, if people stop spending money then yeah, you end up going into, uh, recessionary environments and and that's scary. Uh, because then obviously, you end up in a situation where you have substantially, uh, lower earnings that companies in the stock market has to price that in because multiples look high, so multiples compress.

You're paying less for growth because there is less growth. Uh, and then you get this self-fulfilling trend of stocks go down so everybody shorts them and they go down even more. I Mean that's just called the Bear Market As soon as people start making money shorting, everybody wants to short because they tell all their friends go short. You know it makes sense.

Uh, so let's talk briefly about the ADP numbers. ADP Okay, so uh, this morning, we got uh, the ADP Jobs report. Now what's fascinating is we were expecting a survey, uh of 180 000 jobs. The prior release was 235 000.

Uh, the 235 from the last report in the ADP report was actually revised up to 253.. Now what's remarkable about that is, uh, you had a revision up which implies, oh, no, that's bad, right? More hiring implies stronger economy which means more fat tightening. But what you've actually had is a massive Miss On today's read, we were expecting 180 000 jobs. What did we end up getting? We ended up getting 106 000 jobs.

Uh, 106 000 versus uh, 180 000. it's a pretty big Miss in the ADP employment report. Uh, we'll actually go look at the individual report Uh, right here. So this is the the ADP report 106 000 jobs of the uh, uh, private U.S Private Jobs Report estimate.

Now keep in mind the ADP report is put together by a private company and what I think is great about the ADP report is it kind of serves as a little bit of a checking tool on what the Bureau of Labor Statistics does. because the Bureau of Labor Statistics counts jobs in a very weird way. They use two different surveys The Establishment survey and the household survey The Establishment survey really double counts people who work multiple jobs and there's still a gap of about 2 million jobs created between the two surveys. And a lot of folks, including the Philadelphia Federal Reserve Goldman Sachs.

And the ADP report suggests that the Bureau of Labor Statistics is saying the jobs Market is a lot hotter than it actually truly is, and that would induce the Federal Reserve to tighten more than they actually should. but they're making a big mistake in doing so. So, the ADP report I think is a really nice tool for essentially fact checking. Uh, the Federal Reserve and I enjoy looking at uh, well, not just the Federal Reserve, but also mostly the Bureau of Labor Statistics and I enjoy looking at it.

although it can be quite different from the Uh sort of establishment employment report which the next employment report will come out on February 3rd that is Friday morning February 3rd is what we've extended the final coupon code to for the programs on building your wealth link down below 11 59 pm. On the third will be the official final expiration. uh and again, that was inspired by people emailing saying hey, I'm waiting for some trades to settle or or whatever they're waiting for to close a home and they're like, can we extend it just for a few days And so we've uh, extended that on to everyone. But anyway, private sector employment here increased by 106 000 jobs in January annual pay was up 7.3 Again, this reflects a year-over-year comparison and see.

look at this. This is why I'm telling you, the inflection point is what matters I Didn't even know what this report said yet. but look at what it says. Pay growth was flat in January Pay growth for stop job stayers held at 7.3 percent for a second month and most industries were little changed.

An outlier was the information sector where pay growth actually decelerated from seven percent to 6.6 percent. In other words, your your month over month changes was were flat. We're just still comparing to where pay was lower a year ago and we're not actually seeing an acceleration in Pay growth. So yet another measure and yet another tool telling us that we're not actually seeing a wage price spiral where wages are running away.

If anything, they're flat. Uh, in in sort of a more month over month comparison. Pay growth is flat and uh, in some cases, like it, you're actually seeing pay growth full. Now we could sit here and you know, stick our fingers in our ears and close our eyes and go no, No.

7.3 percent Still high. It's still high. It's not how markets work and it's fine If you want to stick your head in the sand and and be of the mindset that uh, oh well, the number's High there. Therefore, we're screwed.

Fine, but I think you're ignoring reality. And the reality is that uh, ultimately as uh, uh, prices stabilize. Yes, for a period of time, they are going to look, uh, like they are still elevated. That is totally normal.

It is totally normal. In fact, let me give you a very simple example because I I don't think I've been clear enough. So I'll provide a very simple example and I can't get there. There We go.

Okay, so a very simple example is let's just draw this out for everyone. since I I think it, it gets it's it's just I haven't made it simple enough. So these are the months: Okay, One two three four five, six, seven, eight nine ten. Okay, let's say they're ten months.

Uh well, you know I don't want to do that I want to actually do the full full year because otherwise it'll just confuse people. We don't want to confuse people. So we're writing on a piece of paper from left to right, one through twelve. That's all we're doing okay.

and let's say that Meet Kevin instead of raising prices for his courses every three weeks, only did so once a year. Okay, and so let's say that the year is uh, 2020. Okay, it's 2020. Let's say so Red is going to be the 2020 line and Kevin let's say keeps his prices flat for his courses until September And in September Kevin raises the prices for his courses about 10, right? So assume this line is mostly flat.

Right Here There we go. that's pretty flat and Kevin raises the prices for his scores instantly. 10. Uh, and now all of a sudden it stays flat.

Well, what would the data show you? Well, the data would show you that between September and October there was a 10 hike in prices. But between October and November, What was the appreciation and the prices? What was zero percent? You had zero percent inflation between October and November because prices stayed stable. So you had flat growth between November and December. What was the growth? Zero? It was flat growth.

The month over month data is flat. Okay, now we go into the next year and this is where we start suffering from something that people don't understand called base effects. Okay. So now we go into January of let's call it 2023, right? Sorry 2021 in this example.

So it's 2021, we draw a purple line and all of a sudden now prices are up here. which is in line where prices were raised in September of the prior year. But now you compare January to January and people are like Oh My Gosh prices are up 10 10 Inflation Oh my. God This is terrible.

How could inflation possibly be transitory? And guess what? The same numb schools are saying the same thing in February Oh My Gosh Prices are up 10. This is insane and they say the same thing in March and April in May in June in July because all they're doing is comparing to the prior stupid year and they're saying oh My Gosh prices are higher 10 And this is where the people who actually have an understanding of Finance or or math and this is very simple are like dude, the price has changed one time now. it's Zero percent Zero percent, Zero percent, Zero percent Zero percent Zero percent on a month over month basis. This is why it's so important to look at the month over month data because the year over year number uh is is really heavily affected by Base Effects.

Uh, and when you ignore uh, what's actually happening on the month over month basis, you get really, really confused because you're not paying attention to logic anymore and so this is where for an entire year, you could have people going. Oh my gosh. Inflation is so high. It's so high.

Yeah, because you're comparing again to a low. Oh my gosh, it's so high the world's gonna end. But if on a month over month basis, it ain't changing much, then you don't have an inflation problem. The last six months, inflation has averaged less than two percent on a month over month basis.

Less than two percent for the last six months. You know people are still screaming. But the headline number six percent. It's just.

it's a fundamental misunderstanding of how the markets work. And it's exactly why. When you look at the ADP report and it says that pay growth was flat in January Yes, the base effect number of 7.3 percent year over year is still high, but it shows you that it's not increasing relative to the last month. In fact, it's staying flat.

which is the same thing that I just showed you. If anything you're actually seeing, certain areas decelerate. This is good. These are the good news Things that we want to see: Multiple inflation reports coming in: Negative, especially on the month of a month basis.

retail sales coming in, negative employment reports coming in lower than expected. Uh, these are good things. In fact, we just got the Joltz Report. Literally.

Uh, uh. Actually, no. the Joltz Report I'm sorry. The Jolts report comes out in an hour and 10 minutes.

Uh, The Joltz reports. Some folks say not the best measure because it's a little inflated. In fact, Goldman Sachs Just did a big piece on how the Jolts Report is. Uh is is, uh, overestimating how many job openings we actually have.

You've got a survey of a 10.3 million job openings expected. People think that number's actually a lot lower. Uh, we want it to be closer to a one-to-one ratio, which would be closer to about six to six and a half million. That means job openings would match about the number of unemployed.

But uh, most importantly, Look, the ADP report here is showing us that so far we are not seeing a wage price spiral and that has been consistent with not just what Bloomberg economists are suggesting in multiple reports showing. Look, we're not seeing evidence of a wage price spiral, but it's also consistent with uh. the numbers that we see uh or have seen in Prior labor reports I mean we could go back to the beginning of of January and uh, we could look at some of the Uh changes in in non-farm payroll and our average hourly earnings. and uh in the average hourly earnings report for January which is actually based on December numbers.

We actually had the average hourly earnings come in again less than expected on a month over month basis. We're expecting 0.4 We got point three percent. We got a revision down on the November data on Uh on jobs, right? So I mean like start writing some of these things down: ECI lower than expected ADP lower than expected ADP Wage growth flat uh November Wage growth per the Bureau of Labor Statistics What did we get for November Wage growth Pro the Bureau of Labor Statistics Well, we actually ended up getting a revision, uh, a revision to 0.4 instead of the 0.6 that was previously reported. revised down to 0.4 from 0.6 which an annualized rate would be about 4.8 percent.

Still higher than 2 percent. Understandably a problem, but what happened in December with wage growth on a month-over-month basis? Well, the Bureau of Labor Statistics came out with 0.3 percent, which works out to 3.6 percent on annualized basis. So it's clearly slowing. And it reiterates what we're hearing with Chipotle suggesting it's becoming easier to hire and they're not seeing as much wage pressure as they have been.

The same is true is in what you're seeing with industrial layoffs. Industrial layoffs frequently associated with a a bottoman markets and a recession. An industrial A layout starting to to jump at companies like uh, uh, Well, 3M talking about layoffs, but then also Dow Industrial is starting to lay off folks. So you start seeing industrial layoffs.

It's a red flag that you're in a recession, but uh, the peak of industrial layoffs In a good news case, uh, seem to align with the bottom of the stock market. In both of the last two large recessions the.com bubble and the Great Recession. Ignoring the covet pandemic for a moment, but continuing again here with the ADP report. What do you have? Well, you have natural resource mining, uh, and sort of goods producing here leading uh.

wage growth service though, uh, service showing you that's still the hottest sector of wage growth is Leisure and Hospitality, which to some degree it still makes sense. Now, we're not trying to explain away an inflationary concern because price is going up in Leisure and Hospitality are an issue. You do fortunately have United and Southwest Airlines telling us that they're prepared for a deflationary fight and reducing prices