Hey everyone, welcome back, Welcome back! Thank you so much for being here! This is another Meet Kevin report we are on Meet Kevin report 20. and a little announcement next week we are finally, finally, uh, officially starting. Uh, rather than just a trading challenge with uh, course members which some of which will also be talking about publicly, uh, we will be doing a team trading Challenge And so the neat thing about that is we'll be getting the input from everyone on our team into our trade decisions. and so rather than just sort of having one mindset going in, we'll have everyone involved.

Uh, so it's gonna be really fun. So we start that uh, probably for CPI Uh, next week we'll uh, we'll play some trades and uh Hey win or lose, we'll talk about it and I think it's uh, it'll be fun, it'll be uh, great. uh Education and Training for for everyone. So we're really excited about that so stay tuned for a lot more.

Talk about that next week. then. Uh, we have an update from Nicola that Nicola is working on Hydrogen A Fuel Networks to support their electric trucks. Uh, they're planning on having three stations in California and a total of 60 stations by 2026..

now I want to actually give a compliment to Nicola which is probably the worst thing to do since everybody hates Nikola Uh, well at least after the Trevor Milton rolled the truck down the hill to make it work. look Uh, the the one idea that they had that was absolutely phenomenal and you have to consider it. the one idea that Nicola had that was phenomenal was that if we are going to have hydrogen fuel cell Vehicles we need people to have hydrogen view fueling stations and so what was the best possible trojan horse in my opinion. They didn't even talk about this as much as the Trojan Horse as it was the best possible.

Trojan Horse was tricking. Basically the demand for hydrogen. Think, think about that for a moment. Uh, so so roll with me here.

If you have, let's say we write here You have, uh, you want to buy a hydrogen car and what what are you going to do before you buy a hydrogen car? Well, you're going to look, where can you possibly fill the thing up with hydrogen, right? And if there are no gas stations around, what are you going to do? You're you're not going to buy a hydrogen car. But what if you could buy a hydrogen car that was also an electric vehicle? Well now you could charge the battery at home and then anytime you happen to be around a hydrogen fueling station, you can fill up over there. But by doing this by basically having a hybrid battery, electric vehicle and hydrogen vehicle, which was what the idea was of the Nikola truck, you basically create the demand for hydrogen fueling stations by having electric vehicles first. I Thought it was absolutely brilliant because if you think about it, that's exactly probably the best way to actually get hydrogen fueling stations built rather than you go build them yourself, which is what Nicola is thinking about doing.

Now you induce the demand by giving people battery electric vehicles that happened to also have a hydrogen uh tank on them and so now you have a lot more hydrogen Vehicles out Uh, ready to fuel up with Hydro That was at least the thesis right. Obviously they failed miserably at this. Uh, and and I don't think anybody can go uh as far as saying that Nickel is not a fraud or wasn't a fraud at the time, obviously they're trying to recover from that now. Uh and uh, you know I I wish them the best in recovering Trevor on and you know I hope he doesn't come back.

but uh. I Have to say the initial idea, it made a lot of sense because how else are you going to convince people ever to consider hydrogen? I mean even hydrogen? Trucking It's like, do you really want to You know, have to go 200 miles in one direction to get to one gas station And what happens when that one gas station is is shut down? For whatever reason, the reliability just isn't there. So what do you do? You just pump your truck full of diesel and go carry your loads because there's not enough hydrogen stations, it doesn't make sense to build them. I think when uh Toyota was selling the hydrogen fuel cell uh Toyota Mirai the closest hydrogen fueling station from my home was like 40 minutes.

So am I Really Gonna Go 40 minutes to fill up my car with gas hydrogen gas in this case. But no, of course not stupid. Of course not yesterday. Also, we had this uh, high altitude uh vehicle apparently that was shot down Fox is covering this right now.

Let's take a listen in for a moment like nothing more than for us not to use those oil fields. Um, and our current administration of course is trying to transition us into green energy which will make us even more dependent on the Chinese All of this so complicated. Okay, all right, well what Where Where did that idea come from? That transitioning into green energy just makes us more dependent on the Chinese Is the argument there? because of batteries? Is the argument because of of raw materials? Now sometimes the hyperbole that you get on on some of these channels I mean this is Fox Okay, I mean obviously you're going to get anti-bidden hyperbole. but Biden made it very clear and we we've known this.

The only state that doesn't seem to understand this is: California We know that in order to transition to Renewables even BP Okay, like oil, you do not have to be pro-oil and anti-green I Think that's an important thing to remember is you look at BP and Occidental Petroleum What are these companies doing? EV Chargers Wind Farms Solar Farms Occidental Petroleum is working on massive carbon capture bets. Carbon capture technology probably won't be profitable for like five or six years, but the point is, like you, you don't have to be for one or the other. Like you can actually invest in the oil companies, which are they're basically energy companies. they're trying substantially to become uh green because that that is the future.

But let's be clear, you're going to need oil and natural gas to get there. uh Biden's on the same page of that. The only people who aren't on the same page of that I think is the governor of California California has just lost their marbles, but that's redundant. But anyway, so uh, if you hadn't heard I imagine you had we? Uh, apparently we shot down some kind of cylindrical silver object that was floating around Alaska and uh, it entered our airspace and apparently the Pentagon decided we could shoot it down over here because there's nothing that it could potentially fall on.

and this was also flying around 40 000 feet. which is right around the level that uh Jets travel right? Uh, Air traffic. Uh, the commercial air traffic generally travels between 30 to 35 000 feet. Uh, private.

Uh. air travel is usually somewhere between 35 and probably closer to 40 to 45 000 feet. So you kind of have like you're sort of one layer above there. but uh yeah, that that uh, that? That argument bothered me a little bit.

sorry I can't hear that. Uh, okay, so uh, then we've got what do we got? We got Adidas complaining about potentially losing 500 billion dollars in uh, in operating losses thanks to them not being able to sell Kanye West's or now yes. Yeezys At the same time as apparently Beyonce's sales for her Beyonce line are coming in week. uh, which uh is kind of surprising because in some sense it almost seems like the consumer is finally starting to say, you know what? Maybe we do actually need to buckle up and spend a little less money.

Maybe we are walking into a little bit of a recession. Um, now, despite the price Wars that Under Armor is creating between Under Armor and Nike and Lululemon other Athleisure companies, there are suggestions that potentially Athleisure could boom again thanks to China's reopening, I'm not as convinced on China's reopening as a lot of folks on Wall Street are. I Think it's going to take a lot more time. It's going to be a lot more gradual.

Than People Expect I think uh. One of the things to remember is you've got. you've got the people of China I Think they realize there's there's a limit to how much they can trust their government. Here it's sort of like Yay! We got stimmy checks.

Go buy everything and it's YOLO spend all our money I I Think you've got a very different culture in China and I'm not saying one is better than the other, but I think in China you've got a lot more. Uh, how should I say a conservatism with with spending money? Uh, and that is I Do not rely on the government. Uh, probably not a bad idea you have folks. Like Larry Summers Saying oh, turbulent periods are coming ahead, complacency is setting in.

Not sure if we're heading to two percent. Uh, and we've got a lot to talk about regarding inflation as well today. Which we'll do that. uh, inflation.

the fed, the markets will absolutely do that as well. Let's give a take on the strike. Foundation No, maybe I've missed this I haven't heard anything on this. Nicola has lost all trust.

Well, yeah, that's definitely true. That is absolutely true. Uh, the um, uh, you know when you roll down a truck down a hill to defraud investors, you? you basically uh, you basically give middle a middle finger to everybody who's ever even considered investing in. Nicola uh I Personally think they should have probably changed the name of the company after what happened just to really separate themselves from uh, the disaster of uh, the the fraud that happened.

Oh well. so I found this video I wanted to go through because I think this video is pretty incredible. Uh, so let's go ahead and go right into this. This is a Bloomberg Video and it was I Actually really enjoyed the perspective she gave yesterday.

Uh, and I think you will as well. So let's go into it here. We go right there. Barbara Reinhart Joining us now the head of asset allocation at Voya Investment Management Barbara Thanks for being with us, We appreciate it.

Thank you! Are we pushing out that recession call? We are. So we think that the Fallen interest rates that you've seen since October of last year 50-day basis points on the 10-year treasury easing of financial conditions pushes out the recession call. We think that it's probably likely to be somewhere around mid-2024 rather than the second half of 2023.. part of it is that when a lot of people are looking for recessions, they don't tend to materialize what's so important.

Okay, Dad let's just pause there for a moment because that's really interesting. This idea that the recession could actually occur mid 2024., we just started 2023.. Now, what's also interesting about that is we know based on the depth of the inverted yield curve that eventually we expect a substantial amount of cutting. Now, oftentimes that cutting doesn't actually occur until one of two things happens.

Number one: the Federal Reserve destroys something and breaks something, and the Federal Reserve is forced to Pivot That's a negative pivot, or the Federal Reserve achieves its goal: stable prices and maximum employment. And then they can reduce rates and soften. Sort of that, that tightening, uh to bring uh, price pressures down. So is it possible that if the inverted yield curve today is signaling 500 basis points of cuts, that's five percent of cuts.

Think about that for a moment. We're not even at five percent rates, yet. We're expecting to go to about five to five and a quarter. But 500 basis points of cuts being signaled by the Bond Market within the next two years suggests going back to zero.

But what would drive us back to zero, maybe a stagnant economy? Is it possible that we could go to low inflation, but basically be at such a low inflation again that we have to cut to prevent us from actually falling into a recession which Barbara here thinks could actually come in the middle of 2024.? it's an interesting idea because what it really tells us is that Nike Swoosh recovery could take a lot longer than a lot of people expect. Now, do I think we're going to dog leg down even lower than what we saw in October Not really. Do I think we're going to have periods of grain like we have had in January followed by potentially periods of red like, you know, the last few days last week. Okay, we had a tiny little bit of an adjustment down.

Could that continue on? A bad CPI Report down, of course. Is it going to be volatile? Absolutely. But the idea that the recession might not actually really take hold until mid-24 is very interesting because if you're thinking about investing in companies, you want to think about what is that going to do to Future Earnings growth? Well, it's going to crimp future earnings growth for a lot of companies, potentially lead to negative earnings growth at certain companies. So uh, this is something to pay attention to.

Uh, my. I'll give you sort of my thought in terms of which companies the biggest companies that I think face the largest amount of uh pressure when it comes to earnings growth are actually, and ironically, uh, staple companies. companies like a Walmart and the restaurants and companies like Procter and Gamble and companies that have actually done very well in 2022 I think are likely to do very, very poorly. Uh, in the longer term, that is over the next year or two, because even if inflation and I think this is the funky thing that it's very easy to forget.

Even if folks inflation is zero percent. That sounds great, right? But let's say you're selling hamburgers. You know, at Red Robin burgers for 10 bucks and your costs for those hamburgers used to be six dollars, that was your cost, right? Well, you'd have a profit, a gross profit of about four dollars in that case. Well, now let's say you have this massive inflation.

You have 30 inflation, right? and your cost goes up to oh I don't know. Eight dollars out of ten. Now all of a sudden your gross profit in this example is just two dollars. So your gross profit halved as inflation went up about 33 percent.

Now, inflation might be zero percent because you're going to keep that burger the same price. And let's assume this already considers the fact that maybe you raise the price a little bit, right? But now nobody wants to buy your burger for more than ten dollars. People just don't have more than ten dollars to spend on your burger. Well, what happens the buffer is your profit.

Your profit goes down. That's how you can actually continue to raise costs for companies. You can continue to raise producer prices for companies, but you can actually keep a lid on consumer prices because businesses don't have the ability to pass on everything anymore. In fact, there are a lot of companies that don't have the ability to pass on anything anymore.

That's a big difference. Everything to anything. Massive difference. Some companies, especially pet companies and we'll talk about this later, are still suggesting we have a little bit more that we could pass along.

But the point is, at some point the consumers are just not going to buy any more from you. and then what happens is you end up seeing the companies that survive be the ones that actually have the larger cushion I like to call it uh, that actually can see their margin compress while still being profitable at all. Imagine you ran a burger stand and you as well were only able to sell your burgers for ten dollars. But you got into the business during a frothy time and you were operating these burgers with a nine dollar cost because you're doing some kind of fancy premium burger and your gross profit was a dollar.

But now after the inflation and you're stuck at ten dollars with with zero percent inflation on the top line. but your costs have gone up to say eleven dollars. Well now every Burger you sell, you're losing a dollar and basically your business should go bankrupt. And this is how you end up consolidating businesses into larger corporations who are more efficient.

And this is how companies end up dying, right? This is why Sears goes bankrupt. Uh, or JCPenney nearly goes bankrupt and Macy's takes over, right? Because the companies that are more efficient and we're better with their advertising or the marketing or whatever, they succeed because they have the margin. Anyway, let's keep going with what this lady saying because this delayed recession. It's something very interesting to pay attention to because it really means as you're investing in companies, you have to think about that margin cushion not just for the next six months, but for the next two or three years.

Let's keep going here is you have the call that our listeners and viewers in America are comfortable with, which is stay in America and Trust American Multinationals. Why do you push against the international Angle Now and what are U.S multinationals? I'll use Apple as a China proxy, but there's many other names. How are those American multinationals going to react in the coming three years? So let's take this in two parts. You know: International developed equities.

They tend to Rally against the U.S If you take a look Over the past 15 years, there have been four times that there have been substantial outperformance of international versus the US. They tend to last on about anywhere between three to six months. The rally tends to be about 20 percent, and then it tends to give all of it back. It's not to say that that trend line can't be broken at some point, but it looks like it's starting to stall out.

Since January 19th, the U.S has been outperforming International Development markets, and we think that's probably the beginning of a reassertion of the U.S outperformance. It's not a consensus call. There have been lots of fun flows going out to European equities out to developed International what we call IFA. We do believe that the US probably has a better growth dynamic in part yeah, but the FED has been one of the earlier central banks to start tightening policy, which means it's also likely to be one of the earlier central banks on exiting their tight monetary policy as well.

so taking it so. I A quick interjection here. A lot. She mentioned herself: a lot of foreign or a lot of investment bankers and and hedge funds today are screaming about this idea that oh, Emerging Market is is outperforming Emerging Market is outperforming.

She's making the art and this. We've been hearing this since about the end of December She's making the argument that yeah, that happened, but usually after that happens, you tend to have a complete reversal of that and we're already starting to see the reversal happen now. I have my own thesis when it comes to Emerging Markets I like exposure to emerging Emerging Markets with American companies, Probably an unpopular opinion, but it's my opinion. that's what I believe in.

Okay, I I feel like I understand the culture? uh in America very very well. And the reason that's important is because I study earnings I study fundamentals I study earnings calls and I understand what I'm getting bullshitted. that's a technical term that I learned in real estate. But anyway.

so so if I want foreign exposure, what do I like I like Starbucks I'd like uh to some to a more limited degree I like end face uh to a greater degree I like Nvidia I like AMD I like Tesla I like Taiwan semiconductors Even though that's a foreign company, that's an exception here. I'll put a little asterisk on there Taiwan someone connected foreign company Uh, the the idea though of of getting American companies that have exposure to International and a large portion of their sales with an exposure to International I Think is a fantastic way to play international I Mean, look at Tesla 55 is international? Uh, you look at Nvidia AMD You're looking at a 25. Uh, International Starbucks TBD But because they've just blown up their stores in China But I think you're going to see a massive boom in Starbucks China Although I'm not investing in Starbucks yet, I'm still I'm still waiting for the right time on that one. Uh, but that's just my take on on that sort of international exposure.

Let's keep going to uh her commentary in a step further: Are you pushing back against this idea that the rally in January was a fluke and has to be completely reversed? Are you actually seeing any Uh sell-offs as an opportunity to buy more? Well, the rally started actually in October so the U.S is up about 15 up off of its low International Developed markets are off up about 27 percent. It was very oversold sentiment. You had sentiment indicators that we like to watch on a daily and weekly basis that were oversold for over a hundred days. That's only happened three other times in our data series that we go back to the mid-1990s So you have to appreciate that.

there was so much pessimism, so much bad news priced in, so much concern that it didn't take much in terms of a fundamental change at the margin for equities to be able to Rally violently off of that. it can't continue forever. The easing and financial conditions. The easing that you've seen in Bond yields.

It certainly helps for a while, but you do have some sort of a top on the equity market in terms of multiples, so keep them pause there for a moment. Financial Conditions have tightened since the Jobs report. She is referring to the longer run easing for Financial conditions that we have seen since October. So since October basically simple way to put Financial conditions.

Just think about the 10-year treasury yield. There's a reason they have it on screen there. Think about the 10-year treasury. 10-year treasury was as high as 4.25 4.3 around.

October November it's 3.7 Now that's that's a trend down. Now it was lower and it's recently popped back up. So just keep an eye on that that find easing of financial conditions argument because it's actually gotten pretty dang tight again. In fact, if you look at the two-year treasure yield, it's basically at the same place we were in.

November So in other words, we've just straight back to tightened As tight as we were in November Tight Tight tight tight. We're using these opportunities. We reallocated, um, back into the Us. We sold some of our bomb positions after they had done extremely well.

knowing that it's going to be a tougher slog from here. you can easily go up until we think probably halfway through this year. Part of it is because the inflation comparables. The year-over-year comps are very easy.

We see that probably starting to turn possibly in the after the June data which is released in July. That's when the year of your comps on inflation, which is what everybody is worried about this year become a bit more difficult. But between, oh sorry, there we go. Now that's also an interesting argument.

This idea that the easy part of inflation ends the first half of the year and earlier this week we actually talked about what I called the Hump the the challenging hump. Uh, and it. It's kind of drawn a little bit upside down. but I think it'll make sense when I describe it.

So think about it as a quick disinflation first. then you've got your goods. this inflation for goods Ends by June 30th. Let's say then you get this hump period where it's harder to get inflation down.

You potentially get some volatile data and it's not until housing inflation really starts disinflating that. uh, and then and then wages continue to disinflate wages and housing. There we go that you actually see sort of that second wave of House of disinflation. And then if by the end of all of that disinflation, you have Goods competing for lower prices, housing and wages competing for lower prices.

Now you're potentially in the place where you can convincingly start cutting now. Is that going to be the end of the year? Well, the bond market was pricing in a 1.73 percent in cuts at the end of the year that has been removed. That's gone no more. Cuts in 2023, it's gone.

the Market's already tightened to say no more Cuts than 23. we're now moving that to 2024. uh, it's interesting. One of the things that I've really learned this cycle uh is uh is is like I think it's probably my biggest fault uh was a lack of patience and I think that's still important Today is even though we could thread the needle of the soft Landing it's all going to take a lot longer and so I think it's really important to consider that.

Anyway, we'll keep going here okay now and then. It's probably likely it's just too optimistic. Not one of Ramos friends. Yeah.

I actually think this is fascinating I really I enjoy this greatly and I think well as I bear you enjoy this. As someone who is skeptical of group, think you know there's so much group. think now that there's actually going to be some big fall that I kind of like that. it's it's pushing against that I like the you know counter consensus I appreciate that I appreciate that I appreciate this from Michael Hunter this morning of Bank for America You're gonna love this Tom This is great.

An English strategist moved back to London with a wife from New York After three years, someone asked the wife what's the best thing about living in London The wife replied Paris and what's the best thing about stocks in 2023? Bonds isn't that great. The best thing about 23 about stocks is funds and he puts that this chart I think Michael hand is just tremendous Michael Why don't you come on this show Anyway, puts out this chart. Best start to the year for 60 40 portfolios since 1991. Yeah, is that going to continue? Well, it's coming off of an absolutely horrible year, of course, right? So there's likely to be Sun mean reversion.

The problem that you have in the bond market is you still have the FED acting somewhat aggressively. You know? even though they've had somewhat of a more data dependence, it seems to us as though they're convinced to raise rates at least two more times. Uh, over the course of this year, the bond market is pricing in a big slowdown in growth. But I would say that the inversion on the treasury curve.

while it's a fantastic predictor for recessions, it has a very long lead time on doing so anywhere between. Listen to this. Okay, the very long lead time on the inversion of the yield curve. How long is that lead time? This is important because everybody always talks about the inversion of the yield curve.

That's always the perfect predictor of recession. but she makes a good point. When right? was it Was it, uh, the Q2 Q3 of 2022? No, the yield curve hasn't technically inverted yet. then? Okay, well.

how long has the yield curve been inverted? Well, uh, less than a year, right? Uh, somewhere around seven, eight months. And so let's see what she thinks in terms of how long until we actually see that recession. And it kind of reiterates that idea of what she said originally, which was 2024.. Mid 2024 is when you can actually hit that sort of recessionary environment.

Where now in 2024, What? Oh, that's another thing too. Think about 2024, people are going to have gone through their excess savings. JP Morgan Expects people who have gone through their excess savings by the third quarter of 2023. They say that poor people have already gone through their excess savings.

Uh, American Express says that higher net worth individuals are spending through this recession. Well, at some point that stops. and what if that's in 2024, not 2023. It's interesting.

All right. Let's listen in for uh, again, we're picking up where she says how long until the inversion actually signals a recession. Eight months and 24 months, you've been inverted on the treasury curve for about eight months at this point. I Don't think that you're gonna have a big buying opportunity for bonds, probably until you see your past.

Some of the uneasy or unfavorable comps in in interesting, which probably go through October So you think it gets tricky around the summer around July time when you get the June print David Liebovitz at the start of this hour In that highlight rule we put out over at JP Morgan What did he say? He said that disinflation would go on the Shelf with transitory. Correct disinflation is the new transitory. Do you agree with that? Yeah, look I mean there certainly is a case to be made that a lot of the inflation that you had was transitory after all. Unfortunately, Fed Chairman Powell didn't tell us how long transitory meant uh but you had you know, a 15 up like a 15 month uplike in inflation it's It's unlikely to be able to sustainable at this high as growth is continuing to slow.

We love your thoughts, but the reason we had you on is Voya is with ing of the Netherlands Can you get us tickets to the Vermeer show? No, that's why all right now they're just going into nonsense. So some really interesting arguments that she makes and I think it's worth trying to figure out. Okay, what does that mean? So first of all the biggest argument that she makes is recession 24. the second biggest argument she makes is bonds might not actually be a buy until the summer of 2023 which is wild because everybody thought Bonds were a buy including myself in November and October when they were a lot more.

Uh, you know, juicy. Uh, they were a screaming deal in October and November And and they've rallied since then, so it was a good buy. But she suggests, don't worry, there'll be another Buy in buying opportunity in the summer. It's an interesting idea, and for her, it kind of aligns with this concept of I Don't know.

The Big Recession isn't actually going to be here until 2024., that puts us on a pretty volatile slope for the next couple years. Uh, this isn't at all close to them. a V-shaped recovery. Really, what we're doing now is we're just sort of sputtering along because we still have fuel in the tank called excess savings.

But as people keep borrowing to spend through this recession and people's excess savings are dwindling if inflation doesn't fall quickly, then the whole disinflation argument evaporates, and we're trading sideways for not, you know, just 2022, but we're actually trading sideways for 2022. Well, that was down. maybe sideways, or even down more 23 and then maybe slowly a recovery in 2024, not 2023.. that's pretty crazy.

I Think Practically, this is where I've become a big fan of trying to, uh, consider what companies do I think would have the greatest ability to to maintain that margin cushion uh, throughout a recession. And uh, that's a big question because it it all comes down to well. how long is the recession going to last right if if inflation is cured this year and we cut rates this year and we go back to normal. Great, Fantastic.

We got to wait another year, uh, until 2024 to actually hit the recession? Well, it's going to make it a lot. Uh, you have to be a lot more choosy for which companies you're looking at for a substantially longer period of time. You're going to want companies with a even bigger PP a bigger set of pricing power, uh, than you've otherwise been looking at. So it's a fascinating argument.

Let me know what you think in the comments down below. All right now we've got a someone in the comments asking me about California. Let's answer that question. So why do I live in California I'll make this very simple: I've talked about this many times before.

It's because I'm married and that's what my wife wants. Okay, all right, yes, that that is the one of the big reasons. Uh, but yeah, a lot of people like Kevin Why California I Mean there's there's homelessness. You've got these this insane Governor uh, that doesn't know how to govern that has insane policies and on one hand says we're going to do these great things.

but then nothing ends up coming of those great things. Homelessness gets worse, the housing situation gets worse, everything ends up getting worse. So why live in California Well, I Personally think the only reason to live in California is the weather. Uh, and that means you really only live in Southern California coastline.

That would be like Santa Barbara to San Diego That's it. That's my only reason. This place is like 70 degrees. uh, somewhere around 80 to 90 percent of the year.

with Clear Blue Skies it's it's awesome. Uh and uh. There's really nowhere else in in the world or in the there is nowhere else in the United States that has this sort of weather. The only other places that have this sort of weather in the world are right around the coast of the Mediterranean Uh, you know you could make the argument that you could live in Northern Africa but uh, that might not be of interest to you.

You could make the argument that you want to live around, uh, the coast of Spain or France but then you're teaching your children a different language and you're not actually Living in America anymore. You can make the argument that you could live at the I think it's the bottom uh of Australia or in South Africa. but then again, you're not in the United States. So if you want the United States the only place you can get that kind of weather is is SoCal Coastline.

Beyond that, uh, yeah, there's probably not that much reason to be out here. I Mean you can go surfing, but I've only done done that once, so that's my rationale. Miami is wonderful I grew up in South Florida so I can speak uh to Miami Well, uh I grew up I grew up uh, 30 minutes from Miami Uh Davey Weston Aventura I've lived in all these areas. Florida's beautiful because of the beach actually having warm water so you have, uh, more sun? Uh, well, you have a hotter Sun uh.

But the problem is, you have a substantially, uh, greater ratio of rainy days in Florida than you have in California. So even though Florida's called the Sunshine State it's click bait. It's generally you have clouds on almost a daily basis. Uh, when you have a clear blue day, in my opinion, it's been more rare in Florida Usually you get the thunderstorms around like 2 p.m and that's obviously not every day, but consistently more rain, substantially higher humidity.

The humidity is an issue. Uh, it's It's a little exhausting. You kind of like you feel like you go shower and then you get out of your shower to go to the grocery store or whatever and you are like feeling like you're still taking a shower as you're walking around outside. It's because the humidity's high.

now that's not to bag on Florida Don't get me wrong, Florida is great I Love Florida Uh, but you know we used to call uh when I grew up in Florida we used to call it uh Beach Mall movies. That's that's all you do Beach Mall Movies uh In in Florida the the malls beautifully air conditioned. Every store is air-conditioned The beach is freaking awesome in Florida when it's not thunderstorming, uh and then obviously movies. but that was uh, that was actually old school because now now movie theaters aren't that much of a thing anymore.

You used to go to the massive uh uh yeah, you don't actually sweat in Florida you just shower exactly so uh, you know, look uh Puerto Rico I've been there as well. the problem? You know that and I've considered that as well. but you out move in with Peter Schiff Well, I wouldn't move in with Peter Schiff but I you know I like Peter Uh, you know I've considered moving moving to Puerto Rico as well. I mean the tax regime over there is fantastic.

I mean you could lower your taxes. forget about lowering your taxes. you know, 13 for state income taxes you can lower your tax is 40. but then you know you kind of get what you pay for right? Like the the the uh uh, per capita income and Puerto Rico is extremely low.

Uh, the infrastructure and the opportunities for schooling are not as great. uh in Puerto Rico and I can do homeschooling but then you know it all depends on ultimately what you want, right? What's Puerto Rico Per capita income? Let's see here: Puerto Rico Per capita income 24K You know per capita income? Uh, I don't know I'll go California Per capita income What are we sitting at over Here: Forty one thousand I Mean you're almost twice, right? What's Puerto Rico's poverty rate Puerto Rico Poverty rate Puerto Rico's poverty rate 40 percent I Live somewhere where the poverty rates 11. They're great places in America that have eight percent poverty. Forty percent poverty from Puerto Rico That's intense.

It's intense. Uh, you know So yeah, don't get me wrong, yeah I mean there's some beautiful places I mean look at Western Hills uh Country Club I used to live there in uh in Florida A beautiful, beautiful area. uh you know, but you're built in the swamp you've got I mean everybody I Remember when when my wife Lauren came to visit me in Florida she's like what the hell is that around your pool and I'm like what are you talking about and she's like that that big black thing I go what's with you and big black things uh and she's like the big screen the the it's like a big screen thing and I'm like that's for all the mosquitoes and bugs so you can go in your pool without getting eaten to death and she's like oh my gosh I've never realized that you have to have those but now I get it because every time I come to Florida I get eaten to death with uh with with mosquitoes and and whatever if you've never seen those I'll put up a picture on screen but uh, you know I I used to have these every patio you know realistically in Florida especially if you're built closer to the, uh, the inlands, you gotta have these patio screens. Uh, that way you could actually enjoy the warm weather, especially at night without getting destroyed.

Uh, but uh, you know it's normal like these. these are just these are just differences of different areas. look: Florida doesn't have earthquakes Florida's got hurricanes instead I Actually didn't really mind the Hurricanes because you know they built the properties generally pretty well for hurricanes. Uh, and you could just, uh, you know, my favorite kind of shutters obviously were the shutters that the accordion shutters.

but those are expensive. You know when I was a child and we didn't have money I had we had to, uh, hang the the I mean I mean most people do this so it's not like, uh, you know, like that uncommon. It's not like you're poor if you have these shutters, it's just you just don't have the accordion shutters. Uh, the uh, you know you'd have to take the the big metal uh, corrugated sheets of aluminum to cover up your windows.

and if you didn't have gloves, your hands got shredded to crop. but uh, yeah, you know? Yeah, sure. Gilbert Arizona You know there's some beautiful, beautiful places in Arizona. You know you've got four months of the year where you kind of are not wanting to be there though, right? So every every area has got its pros and cons obviously.

uh you know I mean when I visit Arizona It's obvious that you know you basically can survive without air conditioning when the temp or you know, just don't even go outside for four months of the year because it's so hot. uh and uh you know I don't know I mean uh Texas gets pretty hot too you know? Uh so I've been to Texas uh quite a few times and you know it's it's look, it's all great like I love all of these different places y'all mentioning like Texas I think there's the food is delicious uh the people were great in Texas I love the freedoms in Texas love the freedoms in Florida uh it's it's fantastic. but if you kind of look at sort of like a weather chart I think the way to look at what what uh the area is that I'm living in is uh well let me put it this way, most areas when it comes to weather they look like a bell curve right? They have this sort of weather where uh and some areas it where in colder areas you could actually see the bell curve kind of look like this and and this is basically saying like you know it gets very very cold uh or it gets very very hot which would be the top over here whereas the area that I live in the the curve of of weather kind of looks like that. It's like super super moderate.

it's like a line through the middle and and your range is like 68 to 72 on average year round. It's insane, so you know. I I We have decided that we're willing to pay for that. so uh, you know that's uh, that's uh, that's just the reality of of the decision we've made.

We've decided that we're willing to pay an extra 13 and uh, and and live in the climate that we want to live in I Get to, you know, go run every day outside pretty much uh, because uh, it basically never rains here. Uh, it it it. You know, sometimes it does. obviously.

uh, when we you know that's when The Californians are always like, well, we need the rain you know? But uh, you know from a selfish point of view again I like that it doesn't rain all the time, that it barely rains and that it's mostly just Sunny around. So uh, you know I've come to love it and I've traveled to a lot of places you know I the northern coasts Europe you know Puerto Rico I've been know a lot of wonderful places and these are great places I will go to on a vacation maybe one day when I actually have a vacation. So my take on why I live in California And don't get me wrong, like yes, the government sucks, the governor is an idiot and And all he's trying to do is set himself up to run for president. You know it, it, it's It's basically like the politics have been corrupted.

Don't get me wrong, there's so many reasons to hate on California But if you think about it, like how much does the government really bother you on a daily basis? Like very little, That's that's the other thing. I Think you know people like about the politics, but the politics. It's like politics don't bother me on a daily basis. Uh then then you look at uh, it's it's like oh, but it's so hard to build in California I Go.

Guess what? I Don't do in California I Don't build. It's just don't build. Then just don't do things where you're inviting the government into your life. You know, just uh, just follow the rules and and uh, just don't build in California Then okay and you know what one of the beautiful things too is.

Uh, because it's so the government is so stupid and doesn't let you build housing in California Guess where there's one place where you can invest in America where you could pretty much guarantee the government won't build, won't allow more homes to be built which basically increases the value of existing houses. California So ironically investing in California you actually have the government giving you this guarantee that they're going to keep your housing prices High And the housing prices are going to continue to get higher because they don't build because they're morons. That's just fantastic though if you own real estate. so uh, you know that's not good for people who want to be able to avoid housing that's terrible for them and I feel bad for that.

But like, if you're like, where in the United States do I want to buy housing and guarantee that the government will basically make it near impossible to add to the housing stock californium, you know. So it's like when when there's a downside, you kind of have to look at the upside too. People always like, well, it's so hard to build in California I go I know and I love it So I just don't build. you know, so don't build it's it's hilarious.

It's like the perspective of how to look at it right? Anyway, Uh, all right, we've gotta. We've gotta go back to talking about uh, markets and inflation and and uh, I don't know what do we want to talk about next? Oh oh, we gotta talk about the weightings. Yeah, the CPI waitings a lot of folks have been asking me about. um uh CPI weightings what's up Christina Thanks so much Uh Armando for being here almost every day.

Um, government impacts Our Lives daily taxes, crimes, schools see. but I don't have those issues really? you know I mean and knock on wood I'm fortunate about that, but our crime is super low where I live? uh and our schools are great. Uh, you know the weather's all I mean we? we just feel blessed so we're happy to pay what we're paying. You know, like if crime all of a sudden got really bad and and other issues started falling apart.

yeah, then maybe we'd want to move right? Uh, canceled? Renton No, no they haven't. It's just not true. Uh so California has horrible high density housing, single family, or over a million dollars in good City Suburbs? Yeah, exactly. Uh, right.

So uh, let's talk about those weightings. Somebody was asking me about waitings here earlier I'll I'll talk about that. But first, let's take a sip of this. uh, looks like we got some anti-venom today.

Uh-huh who played RuneScape did anyone play RuneScape Let me leave me a comment down below. All right, that's CPI ratings All right. CPI Weightings. We've got to talk about a few different things.

First, we've got to understand CPI Weightings. We're going to understand what actually happens when energy shocks affect inflation. which is actually what we're expecting to happen on. Tuesday An energy shock of inflation? What is the Federal Reserve Think about that and what's actually happening with companies passing on pricing increases? Who is left that is passing on pricing increases.

And are there some companies that actually are? Could those potentially be a red flag? Well, let's get started first by as I said, looking at the CPI weighting changes Now a lot of people have been freaking out about these waiting changes coming. We just got the data on how the weights are actually going to change and how those would have affected last year's data if we even consider them as applying to last year, which they don't. So looking at last year's data doesn't really matter because last year's data had the weights that it had. Now we're looking at this year and we're going to look at the weights that this year has and this is how the weightings have changed.

So what you're going to see on the bottom is you're going to see relative importance. So the more to the left they are, the less important they are and then uh, to the right we are going to or and then up or down above the line. we'll see. Okay, well, have they been increased in importance or decreased in importance? And what we find over here is that education and Communications have been slightly increased.

Uh, in an importance. Apparel slightly increased in importance Recreation slightly increased. What's actually gone down has been Medical Care Transportation other goods and services and food and beverages. Which is actually really interesting because food and beverages.

That's where you've got some leftover inflation and you're seeing that get weighted down. but you're also seeing housing get weighted up. Now that's really interesting that housing is getting weighted up because housing in total is going from a 42.4 weight to 44.4 percent weight. Now that is bad if you look at last year.

If you look at last year, it actually makes inflation somewhat and the year worse. Here's kind of graphically what that looks like. You can see over here with the new changes: inflation ended higher that blue line is with the new revisions. Uh, and the dotted line is before revisions, but the Blue Line ended higher.

That's because housing inflation actually popped off more at the end of the year. Uh, than earlier in the year. Housing inflation has still been rising and now housing is becoming more important. But what's fascinating about that is if we go to my thesis, my my thesis of the hump of inflation which is that the first phase of inflation is, we have Goods disinflation.

Then by around June 30th we hit the end of goods inflation, we start getting harder CPI comps. Which basically means it's harder to show that we've had a larger decrease over last year. Uh, it might take a moment before we actually start seeing that housing and wage does inflation come towards the end of the year. But when we actually start seeing that housing disinflation, we really think that we're going to see inflation plummet.

Now, housing disinflation specifically comes from a measure known as owner's equivalent rents. and we expect owners equivalent rents to really plummet I mean substantially plummet. And that's because CPI reads are really delayed when it comes to owner's equivalent rents CPI Reads: if you look on screen now here, show increasing CPI Rent even though actual new tenant rents are trending substantially down. now, we are just about to hit the crossover point where we should start seeing CPI rent start falling, but most estimators suggest we won't actually start seeing CPI Red Realize that actual rents are coming down until potentially the beginning of Q3 And that's because rents skyrocketed so much higher than CPI rent that you're actually still playing the 6 to 12 month lagged catch-up where in a weird way, CPI Rents are still going up because they're chasing how high rents have gone even though rents are already on this downslope.

I Think the easiest analogy for this is think about it. kind of like a roller coaster CPI Rent is going up the sort of chain lift of the of the uh roller coaster. but everybody on the uh, actual new rents is already like in the trough. Everybody's already gone like wee like.

or maybe not even at the trough. you're just on the downslope. so you're kind of like that next car on the roller coaster, you're that. CPI rent Where you're kind of like, well, we're still going.

We expect for CPI inflation to come, but because we're still going for for rental inflation and CPI it actually means we're still getting higher inflation reads even though we know the way is coming. So it's It's like kind of weird and kind of broken and then some people are like, well, what if what if the Wii doesn't happen because you know we get derailed off the tracks or something and and then obviously we have bigger problems Then nobody wants to fall off the roller coaster because they you know Then you've got real big issues. But wildly or widely, the Federal Reserve and institutions believe that housing inflation is actually going to plummet uh, in 2023.. Now what's remarkable about that is if these CPI weights are actually giving more weight to housing in 2023, than it actually means we probably will see even more disinflation than we would have had if it weren't for these weighting changes.

Now, why are these weights being changed? Well, there are two ways you can think about why the weights are being changed. One way is you put the tinfoil hat on and you go. They're trying to rig it to make Joe Biden look good before the election. Okay, that's one thesis.

The other thesis is the Bureau of Labor Statistics looks and says okay, based on where prices are today, how much of the average consumer spending goes to housing? Well, we think more of the average consumer spending is going to housing this year than in previous years, and honestly, that's probably true. They also think that people are potentially going to spend less money on maybe going out and spending money at restaurants and dining. So they're lowering the relative weight of food and beverages. That doesn't mean you eat or drink less.

Uh, it just means that you might be spending Less on that relative to housing because housing costs have gone up so much. So that's why they make these waiting adjustments. Really in the grand scheme of things. Looking back to how these new weights affected inflation last year, doesn't matter because that's already in the books.

So there were a lot of Articles circulating on how inflation was higher last year. Because of these changes and weights, it doesn't matter. Forward not going back. Uh, the other issues that we have to talk about regarding inflation and that is the potential that inflation is still being is still relatively sticky.

Now, one of the ways that we could potentially see that inflation might be sticky is by looking at companies that are still raising prices. So you've got this: Uh, this. Uh, you had a course member who actually reached out sent me an email of uh, their pet stores. They operate seven pet stores and and uh, uh, you know one part of the country just to keep it private I won't mention where uh, and uh, they're They're talking about how all of their food costs are increasing.

And this is very interesting because when you look at the list of and then they also anecdotally say that uh, you know they're even seeing the cost of toys increase and they expect to pass on some of these these price increases And so this is this anecdotal argument and also with their evidence that that prices are going up for Foods Now interestingly, you could actually look at a company like Tyson Foods and you can also see that prices are going up uh for uh, certain like Meats Fish is getting more expensive, meats are getting more expensive uh, beef is getting more expensive and one of the reasons you're seeing this sort of increase is because uh, cattle, uh has been uh, less uh available and when there's lower apply the cost of meat goes up. But it's not as simple as saying okay, cost of meat's going up therefore everything's going to get priced in uh and you're going to see food costs go up. What you actually end up happening is you get to a limit where at some point the consumer will no longer pay the higher prices and so to try to corroborate what the individual was saying who sent me this evidence that that food prices were still going up at pet stores and potentially toy prices as well is I Looked at the chewy earnings call so we know Tyson Give you the bottom line on that, we know Tyson's saying yeah. Look our food prices.

Our input costs are going up. Those are producer prices. Our producer prices are going up for Meats but get what it? Tyson Tell us Tyson's like the problem is, we can't raise prices anymore because people aren't buying Meats as much as they were. Now you might think that's crazy.

Like how are people buying less chicken and beef because it's a food like that should be an inelastic good, right? Wrong. When food or prices for Meats go. Well, people, just go buy something else. They go buy eggs.

Price of eggs goes up, which they have substantially. okay. Then you go buy rice and beans like you have the ability to choose different force or sources of calories. You don't have to buy the expensive stuff anymore.

So what a Tyson Foods complain about? Just to finish the argument on Tyson We'll tie some foods like dude, we are having a problem. Our margins are getting squeezed substantially and uh, this is why they're warning here it is on screen. They're warning about how Q2 is going to be some seasonally softer variable pricing models lag. We caught up with pricing as much as we could basically, and they had somewhat of a confusing earnings call.

But basically Reuters had a very good summary of it. They're like, look, they took a hit because there was weakening demand for chicken and uh, and basically their margins are getting hit and they don't think it actually makes sense to keep investing in even more production because people are just demanding less and so it's kind of like do they want to go through the Capex? No. So they're kind of between a rock and a hard place. as really a commodity supplier, right? they're supplying a commodity.

chicken is mostly a commodity. Now they try to argue that they have pricing power on some of their branded products. but what is Tyson Seeing margins getting smashed? And when margins are getting smashed, you really don't have much pricing power. And to the point where you start potentially losing money because your margins are getting smashed, you're in a bad situation.

So what does Chewie tell us? Well Chewie was an interesting earnings call because Chewie says look, we're still able to pass on price increases and I thought that was very interesting and actually somewhat concerning. Now Chewie mentioned this as of the earnings call of December 8th, 2000, 20, uh 22. Now keep in mind I don't want to be the guy who comes up with a narrative and then only feeds you information for that narrative. I am going to give you red flags and I'm going to give you counter arguments to what I believe right? I Believe we are going to see massive disinflation Over Time However, there are still Embers and Chewie actually gives us an ember.

Chewie talks about how. uh, at least in the initial part of their report, they talk about how they're still able to pass on price increases and that they have strong pricing environment. Uh, and we believe that You know that's how the pricing environment looks great at the end of Q4 going into the first part of of 2023. So pet suppliers still passing on these price hikes.

But what was fascinating was this. and I'll sum it up here, they basically talk about how we're no longer going to pass on multiple rounds of increases. we're going to do maybe one more set of price increases. and by the second half of the Year we're done.

We can't pass on any more price increases. And that's partly because we think if we keep passing on prices, we're going to see that drop off in demand. But on top of that, listen to this one. I Never thought of this one before, but they say pet household formation is flat or negative.

Yeah, listen to that. Pet household formation is falling. Okay, When people and you have to think about this, it's like there are certain amount of animals. Animals have a choice.

Well, they don't have a choice. but but people with animals have a choice. But animals either end up uh, like basically in a shelter or they end up uh, in in a poor household which will put in the same bucket as a shelter. I Know that sounds harsh.

Okay, a a poor household can be loving as well. But I'm making a point here. is that a shelter is going to feed Uh, the the Kibbles the the hard food right? the dry goods. We'll call it dry food for the animals.

So a shelter gives dry food for the animals and a poor household is going to provide dry goods for the the food to eat a wealthier household is going to provide. you know, new toys and and the fancy like the salmon meals and the chicken meals that come into cans for like the cats and the dogs right? They're going to spend money on all the premium food rather than basically the basic food. And so if you create less new households, that means you potentially start seeing people who are spending a lot of money on their pets, spend less. So you potentially start moving wealthier households to the style of spending of poor households.

But if you're also creating less new households in the get-go Well, who's most likely to spend on their pets like crazy? Well, the newer households and then eventually people like damn, we're spending way too much money on the animals. We got to start spending like, like the poor households, right? And and so that's where lower pet household formation actually reduces. Uh, the the demand for premium foods for animals. So this is where Chewy Even Chewy is telling us.

Yes! Look, we are going to be able to In 2022. We were able to do let's just say, four price hikes. In 2023. We think we're going to be able to divide the year in half and we'll be able to do one price hike in the first half and zero price hikes in the second half.

So you're even seeing where the Embers are the disinflation charted and this is why I Really believe that that disinflation is coming? Because even where the Embers are, you're seeing that disinflation. Come now. One of the very few places you're still seeing like hot inflationary Embers is Aerospace Yesterday in the course member livestream, we were looking at the GE earnings release and as well as the GE earnings call and that is one place you're definitely still seeing inflation. and I can tell you as a plane owner, the shortages that still exist in the plane industry suck ass.

They're really, really bad. Uh, that's okay. should be flying again next week. Uh, I got a new windshield put in.

Uh, my plane got upgraded. Let's go. Uh. anyway.

so uh, so there are still Embers in the economy, right? But we want to pay attention to are those Embers going away or are they still burning stronger? Yesterday we were talking about how we're starting to see this massive wage disinflation happen, right? Uh, and uh, Uber 36 more drivers Lyft Extreme surge of new drivers as you increase the labor Supply you decrease the pressure on wages so everything's pointing to disinflation. The question now is how long is that disinflation going to take right? And now this is interesting because Nick T He shared a piece on the impact of energy hikes on inflation and he basically shared this piece which when he shares a piece, we think it's basically the FED giving it to him and sharing it. And so he shared This research about the inflationary impact of energy prices on longer term inflation. And basically they make the argument that contrary to popular belief, The Surge of inflation in 21 and 22 was not primarily caused by Energy prices.

And they say in the Piece that Covet shattered these popular beliefs that even though it feels so similar to the energy shock of what we saw in the 1970s, inflation ultimately is driven by people's ability to spend money, not by Energy prices. And they talk about how yes, eventually higher energy prices could get passed on uh through the prices of other goods and services. But the limit the ceiling on those prices is ultimately what people are able to pay and as a result of their modeling. And this is just you know.

One one study here. Uh, that's shared by the Federal Reserve Bank of Dallas uh and Mickey T. They suggest that one-time unexpected increases in gasoline prices do sharply increase headline CPI but that impact only persists for about two months before having an indistinguishable from zero impact on future inflation. In other words, there's no evidence that persistent inflation is caused because of a gas or energy price shock.

That basically you end up only having the energy price shock to the extent that energy prices keep. Rising But as soon as Energy prices fall, that longer term inflation impact doesn't exist, you go right back to sort of that disinflation environment. That's interesting. But what's more interesting is that they're sharing this piece right before a CPI read that we think is going to be hot because of energy prices.

Energy Prices went up over the last 30 days and we think the CPI read on Tuesday is going to be hot. Uh, so you know this is. this is kind of interesting, right? Uh, So now the reason this is so important is because everybody and I hear this all of the time and I just I I ideally want to try to put it to rest just by making it really really simple. People are like, have it.

but Kevin prices went up so much. How are we going to get them to go down again When inflation six percent? That is not the question. The question is not. how are we going to get prices down? That's what's so important to remember about t