Welcome back to meet! Kevin Report Number 31. At 10 years, sitting at a 3.92 five-year break-evens complete a disaster. In fact, just like yesterday, today's five-year break-even chart looks even a larger than it did yesterday and we don't like it larger in this case. Take a look at the chart bottom right corner, you can see we're sitting at 2.63 This is the highest level of inflation Breakeven uncertainty that we have experienced since October Obviously, the stock market was not very very happy in December but you can see that doesn't necessarily align with exactly where break even sit.

Today we do get the Fomc minutes from February 1st. Not entirely clear how much that'll really matter given that most of the data and uh Break Even rise here occurred after those Fomc minutes. but we'll we'll talk and give a little bit more of a preview a little bit later in this video. Uh, but yeah, sitting at 2.63 this is definitely something where I I believe the Federal Reserve is going to be paying attention to.

Okay, you know we're starting to see those break evens move up again a little bit now again. Financial Conditions As a result. Titan So potentially those expectations could could remain sort of range bound, but it's nice to see them trending down, not trending up so something to pay attention to. of course.

Another big thing that we've got to pay attention to has to do with a Russia Russia Russia Russia Of course. uh, Russia going crazy sort of again with their threats over Stark treaties. Uh, let's uh, let's explain that a little bit. So in case you haven't heard, Vladimir Putin gave a speech and in his speech, he essentially talked about how they're going to give up United States inspections of their nuclear facilities.

This happens at the same time as China is arguing hey, we want less U.S Big Four Auditors in China Because we're worried about our data security and really what you're seeing is China and Russia trying to align in what I like to call Saber rattling in suggesting that we don't really want the United States to supervise anymore, we want sort of our own freedom and our hegemonial Authority which is one of the big reasons why you have China so much uh being aggressive should I say towards Taiwan because they want power within their region and of course, in the Eastern Bloc between China India and Russia if they can strengthen and fight against the United States that they see themselves as uh, being more stable and at least their economic uh, progress. So you're seeing a lot of this not just with nuclear posturing, but also any other kind of posturing. As an attack against America right now is uh, escalating. Consider for example, the Start Treaty.

The Start Treaty was a treaty that was signed in 2010. It's been used previously as well, it's had multiple versions of it, and really, the Start Treaty is a tool to try to encourage both sides between Russia and the United States to reduce their strategic offensive arms. basically nuclear weapons. Now, they don't really limit the number of nuclear warheads you're allowed to have and stockpile.

What they really do is just limit the launchers you're able to have. So the idea is hey, well, if you have a limited amount of launchers, or if we have similar amount of launchers, hey, you know we're in a place where it's not like one of us has 20 times as many launchers as the other and we can sort of observe each other a little bit more. You can look at us, we can look at you. We'll always buy on each other with satellites.

We do the same thing to China China's been criticizing us for years about building and expanding our sort of nuclear stockpile, and Arsenal all the same time. China's kind of like maybe this isn't such a bad idea, but China is like way behind Russia and the United States in terms of nuclear stop fire file. In fact, there's a phenomenal, uh, infographic that just shows you that really, the two countries, uh, that you really have to worry about when it comes to nuclear arms and nuclear saved or rattling are the United States and Russia out of NATO NATO's got somewhere around 5 900, uh, 43 nuclear warheads. The U.S contributes a 5428 of those, so almost all of them just shy about.

Well, probably in excess here of about 90. Russia supposedly has up to about 5977, but many argue that they've only gone. you know, 1185 uh, launchers and maybe maybe a lot of their crap doesn't work as well as ours, because again, U.S Defense budget is the largest in the world, and China's spending somewhere around 250 million dollars. or at least aiming to spend that on defense this year this year.

Uh, Russia Defense spending? Uh, a fraction compared to the United States. And and really, uh, the United States spending it nearly uh, a trillion dollars is is pretty pretty ridiculous. But uh, to make this clear, if the United States is sitting at 900 to uh, a trillion dollars in in defense spending, uh, this is in excess of 900 billion dollars. Uh, and uh, China's looking at 250 billion, you've got Russia sitting at about 84..

So when you align and see like, oh yeah, Russia's got as many technically nuclear warheads as China or as the United States that is, you've got to ask yourself, Well, if they've got a defense budget that's like seven to eight percent of hours, and their work in Ukraine has been pretty embarrassing so far in terms of expectations versus reality and rumors about, uh, and not just rumors, but uh, quite frankly, videos of of a Russian ration that are 30 years old or bulletproof vests that aren't and helmets that are facades of plastic made to seem like they're actually steel War helmets. It's quite embarrassing now. Some argue that a lot of the making fun of sort of the Russian military's capabilities are just uh, propaganda. uh, and that it's uh, that it's easy to uh on the internet make fun of Russia but uh, then again, who knows.

Uh. This chart, though very interesting. take a look at this. this gives you the nuclear warhead inventory.

and again, I Personally think this is a little bit misleading because it it somewhat suggests that Russian nuclear warheads are anywhere near as capable as those from the United States. Uh, And so this particular infographic suggests. And and there, the estimates for this are not perfect. That's why the numbers I gave with NATO at about 59.43 should be relatively close to where we are.

Of course, the argument here is that Russia has now moved up to about Uh 6, 000 to 200 and 57 Warheads, whereas the U.S potentially sitting at about 5550 relatively similar to estimates provided by the BBC in October. But again, to me, you know, with the fact that you've got the two largest nuclear countries uh, in the world essentially, uh, at a proxy war with each other via Ukraine uh, you know, is is supposed to create fear more so than it is supposed to in my opinion. uh, actually be a nuclear threat Now this is my opinion, but I believe Bo it's It's in the United States's best interests to sort of argue that hey, don't worry, we've got more nukes than they do and the point of that is supposed to make people feel uncomfortable, right? And then that encourages politicians. uh, and people to encourage their politicians to essentially spend more money on defense.

like, oh, prevent the use of nuclear weapons. Right now, Russia has a policy of not using nuclear weapons unless they are attacked with a a nuclear weapon. It's a long-standing policy. There's a reason we haven't used nuclear weapons since 1945.

it's because we know as soon as one side uses them, we're probably looking at mutually assured destruction. This is where everybody starts pointing at each other, and the number of red lines he would cross would be substantially greater than the red lines cross. For example, in Syria would see Syria during the Obama Administration used chemical weapons that ended up being negotiated slightly differently, even though that was sustained on Obama's reputation. Uh, you know some suggest that Congress was able to mediate that situation in Syria substantially actually surprisingly with the help of Russia because Russia was was not too happy about what was happening uh either.

Which is quite interesting to think that the U.S and China actually, or the US and Russia actually worked together. Uh, but uh. But anyway, my point here is is to say that even though stuff like this circulates and we hear about hey, Russia is now you know, loading nuclear weapons and arms on on warships, something they haven't done since the 70s. the Cold War Really.

in my opinion, this is just sort of a Revival of the Cold War where the goal is to create fear in the opponent, right? The goal is that Russia shows hey, look, we're going to be protected. They don't want Panic uh in their country uh much like in the United States we don't want Panic here. and so I think the argument is hey, well, let's let's all. if y'all don't want to panic about nukes, you know we got the two biggest boys basically fighting with bombs uh uh, or at least uh, threatening to then uh, then let's just spend more money on defense, enlist and join the Army in Russia.

You know, prevent the use of nukes. I Think it's like the best recruiting tool that exists. It's like, well, if we don't spend more money on the war, if you don't join the war effort, we could be using nukes, right? So a lot of this very, very common in War Uh, now it's It's just worth noting that right now the front page of a Bloomberg is talking about the story that someone started with with this idea that China wants to urge State firms to drop big four accounting firms citing a data risk. Again, this is so such a classic slapback at America for really things like the inflation reduction Act and the chips act which suggests hey, we want China to have less of our advanced technology so China ends up stealing it anyway from companies like Asml.

Uh, but let me take a look at it. Here's the article: front page of: Bloomberg Chinese Authorities have urged state-owned firms to phase out using the big the four biggest International accounting firms, signaling continued concerns about data security even after Beijing reached a landmark deal to allow U.S Auditors on hundreds of audit inspections on hundreds of Chinese firms listed in New York Remember this drama that was happening years ago: the thought that a lot of Chinese Adrs American depository receipts could end up being de-listed over here. and if you wanted to have liquidity for your shares, you'd have to somehow figure out to trade how to trade them. maybe in a on a Hong Kong exchange or or Shanghai exchange which is obviously a giant pain in the butt opens up the idea that hey, maybe it's a feature Robin Hood Courier could create.

but then again, you've got companies here in America that kind of get limited by the government because we kind of like this. This tension is by Design The whole purpose here, in my opinion is to continue feeding the military industrial complex and let's spend more money on weapons. I Mean, think about this in on some regards, it makes sense because the idea at least is hey well we should spend more on on on weapons because obviously we don't want China or or uh Russia to have an advantage over us. but this is something that and I I do not recommend Uh, this particular source for the the most potentially factual information, but it does give you a characterization of of sentiment and I actually think uh, it is.

The characterization of sentiment is somewhat pretty accurate, at least for one side. Uh and uh, that is um Tucker good old Tucker Carlson uh, he uh, he showed um essentially Mitch McConnell Hey, you know the most important thing that we could do right now is make sure that we continue to spend money to win the war essentially in Ukraine to support uh Ukraine and uh. and and so Tucker's argument is hey, how come our opposition party is so in support of this war? We're supposed to be have an opposition party. We're supposed to be fighting against more spending.

But it seems as though the entire purpose of of Uh of both political parties is is to expand uh nuclear spending and I don't know if the incentive is is just GDP growth or or having better weapons than shinier toys or more lobbying money? who knows. But you know we should look Top five lobbying companies in the United States Maybe that'll give us a little bit of a view. We know the National Rifle Association is one of the top five. National Association of Realtors I think is Uh number five as well U.S Chamber of Commerce number one National Association of Realtors is actually number two Now big Farm on number three.

Then you've got American Hospital Association Amazon's up there Meadows up there. Actually, that's interesting. You kind of have to go. Lockheed Martin is probably somewhere around if you look at individual companies.

I'll just show it to you here. Lockheed Martin doesn't actually show up until over here next to alphabet and Comcast that's pretty impressive. Uh, it's It's obviously still very high, but I I thought they would have been much higher. but anyway, quite interesting.

This is why it's a good idea when you have a suspicion. Look it up. Fact: Check yourself. Uh, but uh.

but look, I think most of this is saber rattling. Uh, and in some part, it's also politically popular. Right When when you have the threat of nuclear warfare, it's like, hey, vote for me I'm voting to make sure we're safe and protected. Like during a time of nuclear saber rattling.

The last thing you want is to you know, vote out the people who are you know at work to defend your Safety and Security. So a lot of this in my opinion is is political jargon and back and forth. Uh, the same thing here with China and and trying to expel the big Four, it's trying to make these countries seem more independent. Those are just my thoughts.

and that's just my thesis. Uh, but uh, a lot of folks have been asking just because I've been making uh, you know, some videos on on this uh Russian aggression and uh Chinese aggression. sort of. My thoughts on this, uh, surprisingly, I I think that most of the world is pretty much in agreement that the worst thing we could do would have be have, uh, essentially, any kind of unleashment of, uh, nuclear-armed Warfare So it's not something that's in my forecast obviously.

Uh, you know. there's also the argument that if something like that ever were to happen, we're gonna have bigger problems than our finances or stocks. Uh, so, uh, so, so maybe there's a little bit of a bias to that, uh scenario. Anyway, Anywho, uh, that's uh, those are my thoughts.

Uh, let's see here. uh Putin speaking I say I have lobbyists winning? Yeah, no kidding. Uh, no more, no more trumps for? well, there's another argument as well that yeah, well, of course, defense contractors when they've got massive backlogs. but that, yeah, there's there's a very common thesis that uh oh, this war would not have happened had Trump been in office.

You know it's always. That's always a very, very political argument that uh, oh well, if so and so were in office, if So-and-so had won the election instead of so-and-so XYZ would have happened, you will never know, right? We'll never know. So I don't know how much that really matters or solves anything right now, but but I I'm uh, I feel potentially blindly optimistic and so I'm aware of that. But uh, you know, based on on study and research here, look if we didn't end up using Uh weapons during during previous conflicts.

uh, just the odds of that happening here in 2023 where it's so publicized? Uh, it seems a little bit more wild uh to believe that that this time is somehow different and that's it. Now's the Time to use the weapons, right? Uh, it seems a little odd. I Think they're much better propaganda tools than they are actually weapons. Not from a propaganda point of view.

They are fantastic from both sides because everybody remembers Nagashak Nagasaki and Hiroshima This is the death and destruction and the instantaneous uh uh, Terror that was Unleashed And and how how transformative that was? Uh, I I Don't think any country wants to go there today because there are no winners in a nuclear conflict, but from a propaganda point of view, they are fantastic tools and we should have more of them. That's the politician argument online. I Think they're pretty terrible. Anyway, all right now we've got to do a little bit of inflation talk.

So let's chat about inflation a little bit. Uh, so let's see here. Oh yeah, now this is an interesting uh piece. and I've put together multiple different pieces here.

Uh, so we can. We can talk as educatively as possible about a multiple of these different topics, but obviously inflation is is the greatest fear right now. Uh and uh, and so it's worth doing here a segment on inflation. So let's touch on this: Uh, you heard about the cycle of War 17.7 years and 53-year Cycles Yeah, I mean there's there's all there's always, of course talk about, you know? Cycles uh but don't worry, this time is different.

Oh I kid I can't uh yeah, it's um. It is interesting how how there can be patterns to uh, uh, to to markets or or conflict. uh I I Don't know how much the the patterns really matter other than potentially you know being an interesting afterthought. but uh I I don't I can't I Can't imagine that uh, conflicts arise after a certain period of time solely out of um, uh, out of uh, timing you know I think there are a lot of conditions that that set in uh to affect so uh anyway.

okay, uh, his history does not repeat itself. but it certainly does. Rhyme It's very difficult because well I will tell you. I I'm having a very hard time finding a rhyme.

uh for the inflation that we're experiencing. Uh, right now. that's because this is such an odd moment where you actually have uh inflation in such a way that you've never had before. Given that usually we have inflation that arises from war or inflation that arises from uh, from from a pandemic.

Uh, but both together is is quite remarkable. So we're uh, we're in a very bizarre time. All right. Stock Inflation.

Uh, The Economist Just put out a phenomenal piece on inflation. We're going to touch on exactly what's in this piece, and we're going to talk about how this relates to the Walmart and Home Depot earnings calls. What did they have to say? and uh, their numbers. Where are people spending money? Where are people not spending money? And is it possible that the tool that we could use to predict inflation is something that most economic forecasters have actually not been using? And maybe if we start using it, we could actually see the true expectations for inflation that are potentially a lot more accurate than what we've been using.

Because who remembers, Of course. Oh, don't worry, inflation will be transitory. Now don't worry, the transitory folks might still end up winning the war. But so far, they've mostly and highly embarrassingly lost the battle.

But there's a particular tool that might give us an idea of how inflation is going to act in the next few years. But first, let's get started with this piece from The Economist Absolutely fantastic piece here. Lots of investors think inflation is under control. not so fast as the February says this.

uh, uh edition of the this week's edition of The Economist in 2013. It may yet do the same to the real economy that is. The average economic forecaster thinks that a recession in America is essentially a definite outcome. When economists write the history of the post-pandemic era, the Resurgence of inflation and Central bank's battle with it will be a defining story.

They say fantastic, but where's the interest? Where are the arguments? Well, you've got two sides. You've got the optimistic side, the pessimistic side, and then the side of data The Economist provides. and it's fantastic. Let's look at The Optimist verse here.

So the optimists say they point to a growing pile of evidence showing that out of 25 economically developed countries, a 25 out of 36 of those countries monthly data is showing headline inflation is falling and the good news has been coming in for months. Forecasters had actually been overestimating how much inflation is potentially coming in for January and February and the three months to January America's consumer Prices rose at an annualized rate of just 3.8 percent, the lowest reading in two years according to the last CPI report we got on V-day And that's not to be confused with V-shaped recovery day. It's uh, Valentine's Day Uh, this time last year, central banks were thinking very different thoughts. We didn't actually have a falling inflation or inflation moving at 3.8 percent.

Instead, we had inflation expectations that were highly unanchored and the worst was still clearly ahead of us with terrible inflation reads in the summer, followed by some surprises in the fall. And that really led the Federal Reserve to embark on this incredible tithing cycle. However, an interesting note here: researchers at the Federal Reserve Bank of Cleveland and a morning consult and another University here published a a new piece on inflation expectations together and they find that between August and December the median expected rate of inflation across rich countries has fallen by about a percentage point now. Unfortunately, that started Rising recently based on Bond Market signals that yes, inflation expectations had nicely fallen in the last three months of the year.

In fact, you could see that here. I Hide myself from the screen here, you can see the last three months of the year yes, inflation expectations had been falling. they're starting to rise again. So I Think it's worth noting that in in the context of this economic Economist article here.

Uh, but really, the argument here is that hey, look, we're starting to potentially see core expectations of inflation fall below levels that we had in pre-pandemic America and research suggests that searches for inflation are falling on Google substantially in that, really, inflationary pressures on, on, uh, any sort of economic modeling are showing massive inflection points that inflation is trending down. That's sort of the the optimistic argument, right, And the optimistic argument I believe is buffered by the fact that most company earnings calls tell you yeah. Look, we had to raise wages and prices in 2022, but people are becoming more price sensitive. We think most of the Embers of inflation are going to be gone about the second half of 2023.

the labor supply has increased substantially and so on now. Unfortunately, you've got some other information here as well. For example, here you have ultimately, uh, this this idea uh, that, uh, financial markets might be overly enthusiastic about inflation falling and that's because of this fear that the labor market is still overly tight. When we look at things like the Jolts report, it's exactly what we're getting.

Very hot Jobs report Very hot. A Jobs opening and Labor Turnover survey for January Some arguments are being made that hey, these are just seasonal implications from January And don't worry, these numbers are going to go away in February Great. But that leads to a lot of uncertainty in February between now and obviously March and puts more pressure on the more uh, the the data reports we're going to get in March But the concern is you're starting to get sort of this rhyme of the 1970s where in the 1970s, we temporarily saw inflation rotate down and then we saw inflation come back and that led to really policy failures which created the Paul volcker of the 7 cavities. Now of course, there are arguments to be made that no, well, this isn't the 70s.

Inflation expectations are relatively anchored, and that's true. Even though they're very volatile, they've been relatively range bound, unlike what we had in the 70s when we left the Gold Standard and we left the the era of price caps government price caps, which, when those price caps were removed, artificially led to massive surges of inflation because the market wasn't able to properly price goods and services beforehand. the oil shock of the 1970s, right? They're absolutely massive differences. But what the Federal Reserve knows is they do not want to repeat those mistakes to the 70s.

And so the thesis is, hey, just keep rates for as high as possible to make sure we can get inflation done and out of, uh, out of the American economy. And then of course we've seen Supply chains catch up. We've got a glut of ships, especially memory cards rather than a lack of Supply with a massive surge of American demand because of stimulus money that was printed. Uh, and there's the argument from the optimistic point of view that hey, well, you know, the Federal Reserve operates with long and variable lags of monetary policy, which some say no, those lags have actually shortened to about six to nine months.

They're actually not that bad anymore. But the big issue that Federal Reserve is going to be paying attention to is wage pressures. And so far, at least the economist suggests hey, wage growth is falling And yeah, we've got high vacancies. But maybe there's a better model because so far we've got a lot of confusing data, right? we've got data suggesting.

Okay, so inflation is starting to fall. Maybe this time is different from the 70s, but how do we piece all of this together? Because the data is just so noisy and it's all over the place. And the data that we've been using historically has been wrong. I Mean after all, when the Federal Reserve talked about transitory inflation, they were terribly wrong after the burst of inflationary uh, stimulus that we got.

So maybe there's a better chart that we could use to actually model inflation better because so far, what we're looking at is very noisy. Hey, we look at CPI reports which suffer from massive uh fluctuations. You look at the jolts reports which suffer from massive fluctuations. Even the labor report can't seem to count people appropriately.

Or you count it twice. You count it three times via the differences of the household survey and the establishment survey. The numbers have been a mess. However, The Economist thinks that they have found a solution.

They suggest that there is one indicator that actually really appropriately provided the best warning that inflation was coming, and if you look at that level today, you can see that going back to 2019, the level of that indicator is 17 above its long-term Trend Today for developed countries and consumer prices today are up about 14 above Trend. In other words, maybe this one Supply could be the most accurate and The Economist went back and said, hey, had we applied this one metric, we would have seen that we were about to get a massive surge of inflation. And The Economist argues the people who are actually pointing out this one piece of data were correct when they said no, you can't print this much money and not expect inflation However, those are the same people that are now saying inflation is probably going to turn around a lot quicker than we expect and that data set is very simply The Following on screen. Now it is the M2 Money Supply and the growth chart of the M2 Money Supply, which is really just a measure of people's savings, deposits, their time deposits uh, in in Money Market funds or or basically money that you have available to spend, right? And this idea is that if we just look simply at nothing other than the M2 Money supply, we know that when it surges, we are going to get a massive inflationary boost.

And when that money supply begins to stabilize, inflation quickly goes to zero. after a period of time, and after then another period of time, you end up actually with negative inflation. which is what we're seeing with that M2 Money Supply Now The Economist Thinks this could actually be the most appropriate metric to use, rather than just the noisy data that we're getting. And so it's interesting.

You know they talk about some risk factors. They talk about the idea of a Chinese recovery that we've regularly been talking about, the Chinese recovery not actually providing too terribly much of a boost to oil so far. There's this idea that hey, maybe it'll increase oil prices by 15 and that'll lead to another inflationary boost. However, oil prices have actually been falling during the reopening, probably because there was too much speculation around them.

This is where we talk about the money Supply being one of the few indicators to provide an advanced warning of inflation, how we are affected by the trends. and really, the argument today is being made that if we look at just the M2 money supply, potentially today we have the best indicator that inflation is going to fall rapidly. Now that's an idea, right? That doesn't mean it's a good idea, all right idea. but it's fascinating, especially since you've got a lot of Wall Street Banks right now, including JP Morgan Citibank Morgan Stanley A lot of folks aren't making the argument that we're not.

we're going going to see this rampant surge of inflation, but the argument that's actually being made by a lot of banks right now is this idea that I'll draw out here. And it's this idea that yeah, if you look at the M2 money supply, inflation is going to fall dramatically. but that's not the problem. The problem is the fact that the FED is listening to noisy indicators like the Joltz report, the Labor Report, or whatever which would motivate them to keep rates high for so long that they end up destroying the economy.

That's the big fear. So an investor now we have to look at this and go. Okay, great. so there's a lot of noisy data.

Maybe The M2 money Supply does say that inflation is going to go down, but then yet again, you've got a Fed Who thinks, oh, we're not convinced that it's going to fall because they're not really paying attention to the money supply, just like they screwed up the first time. Now they're going to screw up again the second time and that's a pretty unfortunate red flag. Especially say since the FED might be unfortunately looking at data kind of like what you're seeing over in the Home Depot earnings call. Where when you go to the Home Depot earnings call, you have a lot of talk about how in 2022 yeah, hey, people are becoming more price sensitive here.

Uh, from 2022, but people have been less price sensitive than we have expected in the face of persistent inflation says Home Depot You know that's not wonderful. We want to hear people are price sensitive, right? Hey, we would expect there to be some moderation and spending because of the housing market slowing down, but so far Home Depot says yeah, yeah, we're actually not really seeing that. so far, our spending uh, has has, uh, normalized and even if we end up having a Slowdown hey, you know what? don't worry, we're only going to see earnings Fall by a few percentage points. But in the meantime, what we're going to do is we're going to raise wages substantially because we still see a healthy consumer.

And uh, Home Depot talks about how they're essentially go going to spend an additional billion dollars on compensation for individuals. They do say that price sensitivity has been a little bit more Broad in the fourth quarter compared to Q3. However, they're still very, uh, optimistic. They see less spending on some of the discretionary items like grills and Patio items.

uh, really, sort of optional items since you could probably just keep what you already have, right? Uh, but this is very similar to what we saw Walmart talk about as well. uh, individuals spending less money on discretionary items specifically things like toys, uh, toys and what do we have over here. We had a softness and toys. consumer electronics, home and apparel you're actually seeing Target almost I've noticed at least anecdotally shrink, uh, the the Home Improvement sector and try to, uh, enlarge other sectors like a beauty.

So I'm seeing Beauty encroach more on the Home Improvement and sort of flowers and plants and that sort of section and it sort of aligns with what Walmart's actually seeing people spending more money on health and wellness, but less on sort of general merchandise, consumer electronics, home and apparel. So you're seeing this: this consistency of of a shift in spending. Trends Now, how does all of this really come together as an investor? Well, in my opinion. I Think it's really clear that the most important signal we could pay attention to is the Federal Reserve When are they going to recognize that? Hey, you know what if the M2 money supply is plummeting and we're about to get a massive bout of housing disinflation year over year comparisons, which should drag inflation down substantially? Uh, you've already got plenty of noisy indicators that are suggested yeah, potentially short-term hotness.

But when we Trend it out over three months, we're seeing substantial declines already. Whether it's in core inflation. Uh, service is still somewhat sticky though, right? That's one sector where we haven't seen inflation roll over substantially yet. But then again, Services didn't start inflating until until about a year after Goods started inflating.

It sort of takes time for those Embers of inflation to blow through the economy. So all in all, bottom line: out of this sort of piece from The Economist and and Walmart and Home Depot Well, probably my anticipation is hey, this is where we want to stay away from Staples As investors, this is something I've been pretty consistent with staying away from Staples in 2023. As investors I mostly think that pricing power stocks are going to perform a lot better in 2023. I Think those were the easy ones to sell.

In 2022, it was easy to sort of escape to Staples But the trends that we're seeing are that most of the staple companies are expecting. uh, negative. EPS That's where you're probably going to see the largest earnings recession, which aligns with this idea that yeah, the Fed's probably going to keep rates higher for longer, which is going to affect poorer people the most, which means less spending on Staples And yeah, eventually that M2 money supply should give us optimism that eventually the inflation will blow over and that might end up being our most accurate signal. So if I had to again simplify all of this, maybe we could take great comfort in the fact that the M2 money supply is falling, which historically has been one of the best indicators of inflation falling.

and it certainly was one of the best indicators that we had that inflation was about to Surge and inflation wouldn't be transitory at least in the time frame that the Federal Reserve thought. and instead we then look at okay, well, then in the meantime, where are consumers going to spend? Well, potentially PP Pricing Power style stocks where people where companies are still going to be able to sell their goods and services because they're either smaller and still growing or they appeal or cater to potentially a higher income demographic or a higher cash flowing business that is able to sell to other businesses goods and services that are essentially Investments uh, like a lot of companies are suggesting. hey, maybe one of the best places to invest right now could be in uh, battery manufacturing or a Fabs for chip making. Uh, so that way, uh, server infrastructure can continue to be built because if server infrastructure continues to be built well, then SAS businesses can continue to succeed.

And SAS businesses are where we're actually seeing way less of a decline than we expected. SAS Business is led by companies like Fortnite and Cloudflare, and the earnings cycle have actually been doing substantially better than expected. And guess where they're seeing weakness. They're seeing weakness in the small business sector, which is generally the sector that has the lowest level of actual profitability and income.

That's after all, why they are called small businesses because they haven't gotten to the level of large scale yet, because they don't have enough of a profitable product or pricing power. So to me, it all aligns pretty clearly. We could be wrong, right? knock on wood that we're not wrong. but The Economist projection here of massively declining inflation should give us confidence that eventually inflation will disappear.

The question then is how much did the Federal Reserve destroy markets? And where is that destruction likely to be worse? In my opinion, it's likely to be worse Where the lowest income demographic creates the highest amount of spending and that's in Staples it's in groceries, it's in Foods Tyson Foods plant-based Foods Uh, it's uh, it's in your targets your Costcos your Sam's Clubs your Walmarts any. it's the dollar store. Essentially anything where you you are selling to uh, basically everyone right? lower income, middle income, and higher income. Those are probably going to be hit the most in 2023.

Just my opinion. Even even a McDonald's reason for that is you are seeing more price competition. There's a reason and I know this one sounds crazy, but there's a reason Whole Foods is saying hey, we're going to start cutting prices even though it's going to cut into our margin. It's an Amazon company obviously.

and that's to put pressure on companies like Walmart to try to bring higher income consumers back to Walmart right? And this creates pricing Wars and I think the place you're going to see the largest pricing Wars are are actually in areas where we're looking at things people generally quote unquote have to spend on. uh Foods because foods will see a limit. How much foods can really raise prices? Now people think that's remarkable. But if you really want to see where there's a limit on some of these staple items, read the earnings.

call from a company like Energizer or Tyson Food and you'll see they're basically as I've been saying, taking it in the margin in my opinion and maybe in like an eerie way. it all aligns too well because usually when things line up too well, you kind of Wonder like hmm, what are you missing? Well then, of course, yeah, you've got risk factors like okay, well, what if China has a Commodities uh, you know, put so much pressure on Commodities that we have seen commodity prices Skyrocket again. But then you wonder how much has that idea already been been built into trades and so far it hasn't been materializing that trade has been failing. This idea of a hundred dollar a barrel oil so far has not materialized remotely.

If anything, it's trending in the opposite direction. We're seeing more fears about a recession, right? and actually staple price is therefore coming down now, rather than fears about, uh, about this right away. Second wave of inflation? Uh, so again, that reiterates to me that, okay, a fine. unfortunately.

Uh, that's bad news. Uh, for potentially Commodities Uh, you've got bad news for uh, companies selling Staples because there's a limit to how much they could raise prices. yet they're also having to raise wages. Now some would say hey, well, wait a minute.

Isn't that indicative of a wage price spiral? Well, not necessarily because a lot of the wages that are rising are in lower income sectors like your Walmart staff your your Home Depot staff which actually bring your average hourly wage in America down, average hourly wage in America somewhere around 32 bucks an hour whereas the average hourly wage is somebody working at a Walmart or Home Depot or fast food places somewhere around 17 to 20 an hour. So you actually end up bringing wage pressures down. Of course, what do you do? You end up as long as and that that the theory is that that should show up in consumer prices, right? because companies will continue to pass on their prices. But so far, nobody's really still talking about hiking prices.

There's some hot segments Aviation still being one of those segments and some of the companies like Johnson and Johnson and Staples providers suggest hey, we've got. We've got our last sort of price increases setting in now, but that's it. We're done. Even the Pet Food suppliers are like, look, you know we've We've got a little bit more of of pricing elasticity in us, but we're seeing a massive decline in in pet household formation.

People are starting to spend less money, Our pricing power is waning like we're almost done. We can't do any more much longer, so things in an eerie way are really aligning to suggest inflation will not be a substantial long-term issue. However, there is a lot of fear now that we're not terribly worried about that second wave of inflation. We're actually because, especially if we look at a strong leading indicator like M2 money supply as The Economist told us.

But we're actually more fearful about the Federal Reserve overdoing it and over tithing because of the noisy data we're getting. Uh, and that unfortunately, is a potential reality that yeah, we could go through a very uh as I've been saying a very volatile Nike Swoosh recovery I Think when we when we talk about the Nike Swoosh people think I'm drawing something that's very, very smooth like this. Uh, but they're forgetting the noisy part that I talk about right? And the noisy part is are set up by days like what we had yesterday. we had substantial pain uh in the stock market so uh, my, Theses uh, you know, but so far you know we'll see Financial Conditions definitely are tightening in the 10 years sitting at about 3.95 Certainly a tightening of financial conditions which is going to sort of continue to crimp, uh inflation without even the Federal Reserve doing anything that again.

I Think the Federal Reserve is cognizant that they do have a dual mandate. They want to make sure that we don't unnecessarily force people into joblessness. Uh, so we'll see someone here says so you're telling me not to hoard eggs and chickens to resell them. Yes, both of those have very small peepee.

Very, very small PP lacking pricing power. Just read some of the earnings calls for companies who, uh, who actually Supply those system. Be careful about that. Uh, the inverse Nike Swoosh I'm gonna inverse Nike Swoosh Uh, that would imply a slow decline in a rapid increase.

or unless you're saying I just didn't draw it well enough. Well, okay, uh, there. draw it kind of a little bit more like this. All right.

But the idea is that this is a very rapid Decline and this is sort of a very slow. uh, slow and volatile up. right there you go. a little bit better.

a little bit better of a drawing. Uh, Anyway, my thesis, we'll see. We'll see what plays out. But I I I think a lot of it.

Uh, makes logical sense. But then again, I'll tell you one. One place that isn't logical is the stock market. All right.

let's go ahead now. Uh, we've got to talk about. um. next piece, let's jump into a little bit of a Fed preview because we've got the FED today and this one's a mess.

Uh, and we've got to talk a little bit about bears and, uh, their Theses But let's jump into the Fed so do that one sec. I'll take a little drink here. All righty. what do we got? All right, let's talk about a Z effect.

today. the Fomc minutes get released for the February 1st, Federal Reserve meeting. There's a lot of concern and tentativeness that the Federal Reserve beating minutes are somehow going to show some sort of substantially more aggressive Federal Reserve Honestly, I Hate to say it, but I Think that this Federal Reserve minutes set is complete nonsense. That's because mostly we already know what Jerome Powell told us and I'll provide you a rough summary now.

but we also know that these minutes came from before the noisy data that we got from January Noisy and Hot Jobs data Noisy and hot CPI Data though easy and hot PPI data Noisy and hot Pce data and of course, hot retail sales data and Jolt's data. Yeah, literally every report was pretty damn hot in January But this meeting happened before all of those reports. so of course we know just like when things are trending down, one month doesn't make a trend end when things are trending up. One month doesn't make a trend in terms of reports and maybe the seasonal adjustments are going to be so hot for January that, uh, hey, you know what? February We'll be right back to sort of a hope for disinflation.

My belief is things are going to be very noisy and very, very volatile this year long term I Expect substantial disinflation and I just hope the Federal Reserve doesn't overdo their hiking. but today, people are going to be looking for clues for exactly this. What kind of recognition of the potential risk of over tightening is the Federal Reserve providing us? That's probably the biggest red flag that I want to be looking for in today's Fomc minute. So if I sort of had to write down what I was looking for, my number one most important thing today would be indicators of fear of over tightening.

Remember Jerome Powell was the one who originally told us hey, if we over tighten we can always just loosen again rapidly but then he quickly followed up with that by saying ah, you know, But then again, this was about a month later. You know we don't want to create a Treme tremendous amount of economic pain and hardship for individuals, especially amongst those least able to Bear it in other words, lower income consumers who are already the ones suffering the most from this insane inflation that we've been dealing with Now Yes, their wages have been rising more, but that doesn't help when literally everything is ridiculously more expensive, especially for the lower income individuals, including food and rent. So my big thing is I Want to look at the risks of over tightening and potentially the Fed's willingness to overdo it? Really hurting lower income consumers the most. Remember American Express tells us wealthier people the one spending through the recession, not poor people.

But then again, American Express generally caters to a higher income demographic where companies like Synchrony or Citibank or a firm are generally catering to a lower credit score and lower credit audience. As a result, higher default rates, higher credit loss reserves, and really more concerns that uh, oh, maybe we're not actually being compensated enough for the risk we're taking. That's leading to a tightening of lending standards and even what you saw at a firm, the Buy Now Later company uh, that obviously generally appeals to a lower income demographic. Uh, Buy Now, Pay Later company firm suggesting that hey, we need to raise how much we're charging for these loans because we want to operate a profitable company and we're realizing, oh, we're starting to lose too much money on these loans.

This is a problem. So what did the Federal Reserve have to say about the uh, uh, you know sort of in their last meeting And what could we expect as a preview today? Well, I want you to remember what the Federal Reserve started by talking with Jerome Powell came out and said the following quote: The full effect of our actions are yet to be felt. Even so, yes, there still is more work to be done. So what he's telling us is very clearly: the FED is acutely aware that there is a lag, some form of lag.

We don't know what that is. Is it Three months? Six months? 18 months? Who knows to their monetary policy. And so yes, there's still work to do to get inflation down. But how much of that can just occur by us holding or being closer to potentially pausing Or right now, what's most likely in most priced in is that we're just looking at 25 BP hikes.

So we go 25 in March We go 25 in May We go 25 in June If we need to, we just be data dependent and patient. But the biggest thing for me today is again, how willing is the Federal Reserve to, ruin the lives of poor people? That is your biggest tell. Jerome Powell in the last meeting, told us that higher mortgage rates continue to a week in housing weakening. Housing, in my opinion, is actually one of their big goals.

Housing weakening is great for the FED because you're basically just taking away from richer people because tenants are substantially poor like 20x poor than homeowners generally on average. So let's take away from rich people by crushing housing. I Personally believe the FED doesn't care so much about crushing the stock market. They want yields to be up, and so far they've actually been engineering this perfectly yields 10-year yields.

for example, while it went down to about 3.39 for a hot minute, but popped right back to 3.94 we're almost. We're knocking on the door of nearly four percent on the 10-year right now. It's insane. You look at the two-year I mean some of the numbers you're getting right now are knocking on the door of five percent.

It's crazy. Financial Conditions are very, very tight and if if the housing market could solve it, that should drag everything else down. Not so true as Princeton Economist Robert Schiller has told us for the stock market. Now keep this in mind.

Drone Powell Does realize that yes, there's some signs of wage growth easing, but we're still out of balance. Job vacancies are very high, so we know that he gave us that heads up, but he says despite job vacancies being high and even after the Hot Jobs report came out, Jerome Powell's response was hey, you know what? Financial conditions already responded and tightened, that doesn't necessarily mean we have to do more. That's what he said in an interview. uh with um, uh, Mr uh Ruben Dave Rubin The day after the Jobs report, it was fantastic.

Uh, so really, in my opinion I'm just expecting a reiteration of just hey, look, we're going to keep it slow and steady. 25s 25 to 25. We don't want to cause unnecessary hardship and any kind of indication like that to me is is somewhat bullish and I like to say somewhat bullish because I think we've already tightened. potentially too much.

Um, but uh, but anyway. uh Jerome Powell Also, and it's fascinating to go back to my notes I Love going back to my notes because you pick up things differently than you do the first time around. But uh, you know he talks about this idea that our policy should reflect Financial conditions, which in his words quote have already tightened significantly. now.

Their belief is that they still need to raise a little bit to get policy rates to be somewhat in line with those financial conditions. That's pretty clear. we don't go too far because remember, there is that dual mandate. Uh, and so of course, regarding the terminal rate they haven't decided yet for March and may.

that's fine. We expect to see a reiteration of that because we're going to get a whole nother set of data in March here. Uh, Now the other thing is this is probably the biggest thing for the Federal Reserve is they say it's very difficult to know if we've done too little and they're very cautious about prematurely loosening. And so this is fair.

I Do think when Jerome Powell tells us the disinflation process has started and M2 money supply is falling and wage growth indicators and the the Embers of inflation are showing that they're going away I Do think it's clear we're going to have higher rates for much longer, but I do think we're leaning towards that pause pretty soon. Now, that's not to be confused with the FED pivot, right? The Fed's certainly not going to cut rates until we actually see confirmation that inflation is falling. And remember every time I Bring up the pivot. It's important to remember the famous words.

This time is different. The most famous dangerous forewords. Uh, in investing. However, the reality is If the Fed actually Cuts rates.

This time around, they're doing so because their convinced inflation is basically going away right? Uh, and they've potentially just gone too far. But anyway, big thing uh for the Federal Reserve on on their forecast is hey, look still some work to do, but we want to be very, very careful that we're not unnecessarily crushing jobs and Jerome Powell Told us about the wage price spiral that looked so far. so far, any fears of a wage price spiral are actually becoming less Salient that there's less evidence in the surveys they're doing and the monitoring that they're doing uh, that there are the conditions for a wage price spiral are actually present. Instead we see a Jerome Powell Who says, look, we see Goods deflation.

We see housing deflation and then we're not. We're basically neutral on service inflation. That yeah, look, we hope he says we hope that the disinflation process that we've seen in goods and housing will carry over to the core Services Segment X housing and he believes that we will see that very soon that process begin. He does say look, I'm neither optimistic nor pessimistic, but his suggestion is look, we should see that disinflation process starts soon.

So let's be patient. we're as long as we're not cutting, we're potentially not over tightening, right? So that's what I expect is a stable, neutral fed in these minutes that come out today that don't necessarily give us any cause for alarm. If anything, they'll give us cause for patience. And I think that's the most important thing to have in the market right now because again, that Nike Swoosh is going to be very, very volatile because there's so much fear or uncertainty and doubt that pops up, especially around every time the Federal Reserve farts or says something.

Uh, but but. a few big things to really take away from this number one: I Don't think today's minutes really matter that much because I think the Market's just going to Discount the fact that that happened before, uh, the release of all the crazy negative reports that we got. However, if you're looking for something bullish, look for potential indicators that the FED fears over tightening. We already know they fear prematurely loosening.

That's okay though. The solution to that is easy. You just stay level like you just get to five and a half percent. or five and a quarter percent or whatever.

Just stay there and wait. Uh, that's that's the easy part. And we've got potentially three Cycles But they're like three Fed meetings to do so and actually gives us a February data March Data April Data May data. Uh, that's four months of data before the June meeting which would really take us above uh, the average of of where the FED it was expecting to go in December Got plenty of time for data.

So really, the big thing is, what can you do to remove this idea from markets that? oh, that's it. The Fed's gonna somehow all of a sudden. uh Paul Volcker. So we're gonna get 50 BP hikes again or we're gonna go back to 100 basis point hikes I Don't think they're trying to send that signal volatility.

In fact I Personally think that would actually hurt their credibility that they would rather stick with the 25s because they don't want to be seen as changing their minds too often. they want to be seen as no, no, this is we're on the right path. Remember when Jerome Powell came out I think it was uh, was it December I think it was the December meeting. yeah he suggested.

oh yeah, the the soft uh CPI reports we're seeing uh, you know we saw in November and October oh yeah, uh, we we expected those. You know it's kind of like okay, they're trying to make it seem like they're still very much in control and I think one of the best ways they can do that is by exhibiting patience, but also by making it clear that they don't want to cause unnecessary pain, that they'd rather be patient at a certain level than just getting ridiculous. And and Paul volckering us when it's not necessary now of course. and I think they can massage these minutes after the fact.

The one place the sort of the other place that I would be looking is are they trying to massage any kind of messaging about inflation break evens? That might be a little bit more concerning giving given that inflation break evens have been popping up on the right side though. you know, even though we've had this run-up in inflation break evens mostly on the backs of the January data, you know I suppose if there's any kind of optimistic way to view this, you could. You could try to view this optimistically and say hey, look okay, it's noisy, but it's still a ballpark downtrend, right? Or you could even say Hey you know, whatever it's it's stable. Look, we could just Channel this see look okay.

Look, even the channel trend is slightly down. Just wait for some more disinflationary reports and that goes away. So I think there are ways to talk that away and the Federal Reserve might do them. But uh, bottom line on all of this: I'm not terribly bearish on the Fomc minutes today.

To me, honestly, the fact that we have minutes coming out today is slightly a bit of an eye roller. Uh, but hey, you know what? if we could take anything away, including fears of over tightening I think that would actually be a a bullish element so we'll see. But anyway, those minutes come out at Uh 11 A.M Pacific time. So uh, buckle up Yeah, what will happen if we return to a 75 BP hike? No no no no no no.

like I I there's no way. Uh, and I mean let me just put it this way: I Think you're probably looking at like a less than one percent chance that can happen because really I think the Feds in this this mindset of if we send the signal that we're changing our minds then they will lose whatever credibility they have left because it will send the signal to markets that things are out of control. Uh, and that the Federal Reserve is incapable of doing their job. And then you will literally send a signal to markets that oh damn uh, we're going to need to get Paul Volckert? uh and I Don't think that's necessary right now because the leading indicators are not suggesting that as we've talked about with the M2 money supply as we've talked about with with uh uh, you know, leading indicators I I think I Don't even think there's a likelihood of you seeing a 50 BP because again, it changes The Credibility of the FED they're they're kind of thick.

25 25 25 when they pause. Like when that pause actually happened, they're going to be willing to stay there for a while. I'm not expecting Cuts anytime soon and neither is the Bond market anymore. Originally, we were thinking Cuts maybe at the end of this year that's been pushed off to next year and also the idea of a recession this year has somewhat been delayed.

So uh uh, so what if they do a psychological hike and cut. wait, what do a psych hike and see? But no, no, that's not what the Fed's trying to do. Like they're not trying to psychologically, you know, f with you. Uh, like they're trying to be very clear about their messaging and then do what they say they're going to do right.

they don't want to send volatility because that's how you break things. It's literally how you break things. like financial markets are very fragile and what you don't want to do is start like throwing around Stones like the Fed's kind of walking through a glass house right now and you don't want to happen. What happened in the United Kingdom where you break the bond market and the Federal Reserve has to bail out markets.

It's just the last thing the FED wants to do right now because then you could get your double dip of inflation or or sort of your your double bump of inflation and a double dip crash, right? So the last thing the FED wants to do is is is like start throwing stones and start being like a loose cannon here. That's that's not. That's not at all remotely the the indication of of what the Federal Reserve's goal is whatsoever. I Don't see that at all.

Who knows I could be wrong. at least I'm willing to make willing to make a point here. and uh, really, you know what I think suffers the most from higher for longer. It ain't stocks.

Folks, it ain't stocks. stocks will be I so strongly believe stocks will be totally fine once we're convinced that the big problem of a potential Paul Volcker goes away. That's the biggest fear I think markets have I Don't even think markets give a crap about the potential for a recession or negative EPS I Really Don't think that's what people really care about. Not at all.

Why do I not think that? well I Don't think that mostly because the Fed or Markets care most about these potential exogenous shocks of getting a Paul Volcker right that that you end up having to absolutely destroy markets. Uh, that I think is what the market is most worried about and most hedging for a slight recession. Whatever man. Okay, so Staples are going to have negative earnings GDP slightly negative.

Whatever the Smart Companies will go will just be investing and using it as an opportunity to build right. My belief could be wrong, but it's my belief. So what actually gets destroyed when in the higher for longer element real estate housing housing is where the Sh9t show shows up because that is directly affected by rights substantially so higher for longer. When you hear that like it's like when the FED pauses and we're at the higher for longer level or even we're doing these nominal 25.

PPS This is a sign the Fed's in control slowly getting the inflation on the system. Things are looking better and better and better as time goes on, like the trend is going in the right direction. So be patient here that patience ruins real estate. It's actually good for stocks.

There's a reason we're off the lows because the the fear of of uncontrollable inflation is going away of course. January Reactivated some of those fears, but that's okay. we expect that sort of volatility. Uh, you know Carlos here says dream on if you believe in two percent inflation.

see, But your problem is you're not actually referencing a time frame here. I Don't think the Federal Reserve thinks inflation is going to go to two percent this year. Sure, that might be a dream, but that's because it takes time for inflation to fall out of the system. I Mean look how long it's taking for rent inflation to go to work its way through the system.

Rent inflation's still going up and we already know the current data is saying it's plummeting. so it takes a long time for this data to actually show up. Such lagging garbage. It sucks.

But look, when are we going to go back to two percent inflation? Who cares? It could be 26, 27, 28 29. doesn't matter as long as we're trending towards that. I'm a big believer that the that stock markets can go from hedging from a new Paul Volcker to uh, recovery. the slow Nike Swoosh recovery.

We don't actually have to get back to two percent. Remember folks, they could pull hat the the um, uh, the the Fate Genie out of the bottle right? Flexible average inflation targeting. We could. We could literally have a 10-year cycle folks of inflation above two percent and a 10-year cycle before the pandemic of inflation below two percent a