The recession is canceled or is it and that's the big question we've got to talk about now because now there's a big debate going on on Wall Street about are we going to experience a hard Landing a soft Landing or no landing at all. That's what's being debated by economists now and the Fed's mouthpiece Nikki T is adding some insight and some commentary into it and we'll analyze that as well as providing more perspective. But first, we got to look at what JP Morgan has to say and JP Morgan isn't very excited. JP Morgan suggests that disinflation that we are seeing in markets now might end up just being transitory which this is basically egg in the face of the Federal Reserve It's the idea that hey, Federal Reserve y'all thought that inflation going up was going to be transitory and what ended up happening it ended up skyrocketing and Lasting a whole lot longer and being being a whole lot bigger than you thought it was going to be.

And while that might be what every woman in America wants to hear, it's not what we want to hear in economies. Now you've got folks like Marco Klonovac over at JPM suggesting hey, hey, wait a minute, Now you're arguing we're seeing disinflation Mr Jpow? Yeah, well. we think your disinflation might end up being transitory in this next upcoming CPI report could show us how transitory it ends up being. That disinflation, in other words, right back to inflation.

And JP Morgan of course, picks up on this idea that jobs growth is pouring cold water on the idea of a soft Landing Uh, that uh, ultimately, Jobs growth is reheating the economy. They also suggest that at 68 of S P 500, companies have beat EPS estimates. Now, while that's lower than the long term term average of 75 percent, it's still pretty good. It shows things aren't actually as bad as it seems and wage growth.

while it seems to be tentatively moderating because of higher job openings PMI starting to rotate back up again and uh, reports from Uh from earnings showing that maybe things aren't that bad, maybe we might end up having to crimp the economy substantially further, which this is basically JPM arguing hey, you know you've got a situation right now. Where look, you might end up having a fad that has to tight tighten a lot more than they think, while at the same time companies are choosing well, Do we lay off people or continue to see margins suffer because margins are the big buffer right now and JP Morgan suggests in their belief the stock market is going to end up hitting an air pocket in Q2 or Q3 This is all in reference to kind of like the the soft Landing idea and it's basically suggesting hey, if the plane comes in for a soft Landing that's one thing JP Morgan Thinks we're still flying, but we're gonna hit an air pocket and kind of fall in like a sort of turbulent pattern in Q2 and Q3 And the reason We're going to do that in their opinion, is because the Federal Reserve is likely to hike more aggressively and that is going to end up hitting earnings and especially stocks a lot more than individuals are expecting. In fact, JP Morgan throws cold water on this idea that hey, look, we broke the 200-day moving average. There's a golden Cross.

We've got all these technicals suggesting to potentially the beginning of a new business cycle. What does JP Morgan say no, we are not at the beginning of a new business cycle or or you know, economic cycle. we are actually at the tail end of the current crash And that actually means there's more pain to come. and this idea of a soft Landing is nonsense.

Well, to counter this sort of bearish view from JP Morgan that the soft Landing is nonsense and that things are going to get worse. and if anything, we should actually be looking at a hard Landing. Now to counter that, you actually have this idea of, well, maybe we shouldn't be talking about a landing at all and this is what Nikki T has been tweeting. He posted this article being published in today's print.

Uh, actually, my newspaper should be sitting on my front lawn right now. I'm a big fan by the way of reading print, but I I'm also a fan of reading digital I do both. Uh, and the print is great because you don't miss anything, right? I Actually saw Charlie Munger's op-ed in print and I'm like this is so cool just because it feels old school. but anyway, uh, so hard or soft Landing Some economists say neither if growth accelerates now, this is very interesting because you have JP Morgan suggesting we're going for the hard Landing You've got technical analysts suggesting no, we're going for a soft Landing because we broke the 200-day moving average and the numbers just aren't that bad.

You know companies aren't missing that terribly so Well, what does Nick T say in his article? And where can we add some perspective? Well, he says the following: surprising strength in hiring and consumer spending last month, together with signs that demand for Autos in the housing market might be stabilizing after a decline. Now, have some economists pointing to a third scenario that seemed improbable just a few weeks ago: an actual economic growth upturn. In other words, a no Landing scenario. Now that's really interesting because everybody's been talking about a landing and now let's talk about what if there's just no landing at all? What if we don't actually have to land the economy? What if we just keep on flying could be fantastic now.

Auto Prices have moved up, but it's worth noting that mortgage rates uh, which which somewhat potentially signals a bottom in the used auto market. But this idea that the housing market is picking up I think is a little bit of Click bait because unfortunately, even though mortgage rate rates fell in December Look just on screen Now here at the tick up that we're seeing in mortgage rates going into February, they're taking right back up at a 740 credit score, You're still sitting at nearly six and a half percent at 6.44 For a 30-year fixed rate mortgage that's not necessarily conducive with the housing market that's going to pick up again. If anything, it's conducive with a housing market that's going to fall again. But anyway, let's keep going and add some perspective for this idea of a hard or soft Landing So here's an individual who talks about.

There's a huge reluctance to admit the obvious. Which is this idea that the economy is re-accelerating Full stop says this particular individual from the research firm Renaissance Macro. Now this is the idea that look, people gaining jobs is actually a good thing. Remember Jerome Powell's dual mandate.

His dual Band-Aid is stable prices and maximum employment. If we have stable prices, he does not need to force a recession. That is very important to remember. Drum Powell does not need to force a recession and create unemployment.

As long as we do not have the symptoms of a wage price spiral, which so far it doesn't look like we have the symptoms of a wage price spiral. If anything, it's becoming easier for companies like Starbucks and Walmart and Chipotle to hire individuals. And as you saw with Lyft and Uber, there's been a massive rise in the number of people willing to drive 36 percent increase at Uh at Uber and as Lyft calls it an extreme increase in the availability of labor at Lyft leading to a reduction of prices leading to a reduction in Peak pricing leading to a reduction in margins for companies like Lyft. Now moving on, there's some talk about here how the Federal Reserve has raised rates at the fastest Pace since the 80s and while wage growth slowed in January, there was an increase in hourly hours worked.

Which kind of implies this idea that hey, maybe no wage price spiral, but you're actually having an economy that's recovering a bit which is good now. I Think this so calls for patients and real estate because of the the Uh pick up again in raids. But you know you've got this idea now that what if we have no landing at all now some people like folks over at Morgan Stanley respond and they say well you know uh the longer we fly, the longer we have a risk that we run out of fuel and we break something I Personally actually think sure it's possible we could have a Black Swan but I actually think this analogy is kind of flawed. this idea that we have to come in for a landing at all and it's true.

You know if maybe maybe we were coming in for a landing but now we're doing a go around or where you know what we're like. We don't want to land anymore, we're just going to hit the gas and fly again. You know, planes that are coming in for a landing. They can just hit the gas and take off again like they don't actually have to touch the ground at all.

I Think it's It's easy to forget that. Uh, and and so this idea of of constantly comparing the economy to a plane. It kind of suggests that. Well, why didn't we run out of fuel in 2014 or 15 or 16 or 17 or 18 or 19? When the economy he's just continuing to grow the in my opinion, we have to remember that work is basically fuel for the analogy of the plane.

So the more the economy functions and grows, the more fuel it actually has. So this idea that we have to force a recession uh, or land the economy I I think is actually a fair one to say that we don't need to. It is fair to say that maybe there is a no Landing scenario at all. Uh, and that really, we are seeing the biggest cushion come into play from uh, margins at companies and we'll talk about that in just a moment.

But regarding the economy itself, we're now sitting at a 90 chance that we're going to hike rates to five percent by June That's double that. odd from a 45 uh from 45 percent ago. Uh, just a month ago and we're seeing more spending, right? We saw retail sales rebound, consumer spending rebound Visa Mastercard all reiterating this: Uh, Nick T apparently forgot that mortgage rates have already moved back up and now this is an interesting one because Nick T doesn't provide all of the color that he should hear and this is where I always like to provide additional perspective. see: Nick T here mentions that Unilever the maker of Dove and Ben and Jerry's ice cream mentioned that Revenue was up nine percent in the fourth term, even as volumes fell and Prices rose 11.

Pepsi talks about increasing sales prices as well. Well, Fortunately, I actually have those earnings calls. And one of the things that I noticed going through these earnings calls that's very, very clear, is that these companies, while the yes, they do talk about increasing prices, they talk about no longer being able to increase prices, suggesting that the consumer is burned out of price increases. Let's look at Unilever a little bit in detail and let's look at Pepsi a little bit in detail.

So what do we have over here? So uh, we have. uh, we have volume being impacted more than expected. Volume was less than they would have modeled at these levels of price growths. And that's because they have experienced extraordinary inflation.

This is Unilever So it's important to know that yes, these companies have experienced uh, inflation and there is still inflation in the pipeline and that yes, as China comes back, we should see potentially some pressure on Commodities. But what does Unilever say here? Gross margin was down 210 basis points reflecting the fact that the fact that despite stepping up pricing and Landing higher delivery from our savings programs, we were very mindful of the pressure on consumers and chose not to fully offset the extraordinary level of inflation through pricing. In other words, they didn't have the big enough PP to pass on all of the price increases. This actually shows you that even though oh, even though you still have inflationary pressures, companies are realizing we can't keep raising prices, We can't keep raising prices because we don't have that big of a PP And this in my opinion, is not a sign.

as Nick T implies in his article that oh my gosh, these companies are raising all this pricing. That's where he stops in the article. But Nick Bro, you gotta go a step further man, you got to go a step further and analyze. Is it possible that those price increases are done or that they're not actually a full price increase That could be made? And the answer to that is absolutely yes.

The companies themselves are telling you that even with the increases, we are getting hit with margin, we are not able to fully cover the price increases currently. And even though we were able to cover a lot of them, we are not going to be able to continue doing that in 2023.. in fact, Unilever is now talking basically about scamming people. Okay, I'm being a little facetious with that, but they're basically talking about yeah, we're looking into our architecture for how we package products to basically try to pass on higher pricing while giving less product.

Right When they talk about price pack architecture, that's what they're talking about. It's like your beer that was ten dollars used to be 12 ounces. Now it's 10.9 ounces, right? That's basically shrinkflation. Uh, and and they're They're frustrated because they're realizing their margins are getting crimped.

Listen to this quote right here: I'm I'm literally reading it from the horse's mouth here. So that's a bit of a comprehensive Tour On the last year characterized by high levels of pricing and pack price architecture and lower levels of promotion. That's 2022.. this year there will need some.

We will need some level or some list pricing and probably use Mix more in 2023 than we have historically in English Peepee Down, we can't raise prices as much anymore. Volume is expected to be negative going into the next year because of price elasticity being limited. People have a limit to how much they are able to pay and so you are seeing that limit show up. Over here.

you're seeing PP falling that is Unilever But Nikki T didn't just mention Unilever He also mentioned Pepsi So what does Pepsi tell us? Because after all, Pepsi raise prices a lot, right? Well, let's go over to Pepsi and let's just briefly look at what Pepsi has to say for us. Okay, first thing we have right here is on inflation. I Have a couple of comments on that number one. Obviously, inflation is still out there as a factor for us.

Partly the fact that inflation is still high. It's not as high as it was before, but then the numbers are still relatively high. So we know this in the food and beverages space and Aerospace space space, you still have lingering Embers of inflation. We know that we know that with certainty.

But what do they talk about Instead of raising prices, what does Pepsi talk about? Yeah, um, this year we really want to grow productivity. They literally say that we're looking to drive a lot of productivity this year and put Investments back into the business and consumers are responding positively to this. but our expectation is to hopefully have margins in line with 2022.. So listen to that For a moment.

they're going to increase productivity in 2022, but have margins in line with 2022.. in other words, their costs might be going up, but they're not able to pass those costs on to their consumers. Instead, they're going to increase productivity to preserve their margins. Think about that visually for a moment.

Okay, if the red line is pricing and the orange line is cost on the left, it's 22. On the right, it's 2023.. If the company is saying hey, we want to have the same bottom line which is the X we want the bottom line to be at the same level Margin: If we want margin to be at the same level and we're not increasing pricing, Instead, we're going to increase productivity to absorb uh, the the orange increase here, then we are preserving margin through more productivity. Not by raising prices.

That's what they're talking about here. We're not raising prices anymore. Uh, or we're not able to anymore because people are starting to react negatively. right? That's a problem.

So I wanna? So here's somebody who wants to ask about pricing and the higher range and stuff they're Or they're talking about winning. Uh, uh, winning. Uh, winning market share. They talk about how in the last two years there's been more pricing increases in the last two years.

Uh, obviously we know that we've had a lot of inflation the last two years, so that's not a surprise. And then over here we have uh Revenue growth still growing at a healthy rate and we feel good about that guide. Uh, and volumes. Yeah, volumes might go down a little bit, but let's see how the year plays out.

So and they say right now, the consumer is still quite good, but we're planning for multiple scenarios. So what do you have when you actually read the entire Pepsi earnings call? You don't have a company that same thing at Unilever You don't actually have a company that is saying hey, we're going to keep raising prices. That's not what you have at all. So Nick T in his article is like basically ending the article by saying uh, well, you know I have still inflation.

Uh, but the reality is these companies are out of steam. These companies I'm going to write it down are out of steam to raise prices. Instead, they're talking about productivity and volumes going down. That's what they're talking about.

Productivity to preserve margins and volumes going down. They're also talking about packaging, uh, stuff differently to basically trick the consumer. I Mean that's just what shrinkflation is, right? It's a trick of the consumer. Uh, and so even though there might be higher input costs, they realize the ability to pass that on to Consumers is limited.

and I think this is something very important to remember is that the Federal Reserve right now cares about C P Lie oh sorry, I meant to say CPI There we go. The Federal Reserve right now cares about CPI They do not as much care about B P I and the Fed's version of CPI is P C E personal consumption expenditures. Anyway, this is important because these are very different. Consumer and Personal is very different because it's the end product price.

The end product price at companies even like Unilever and Pepsi or other companies like Starbucks and Chipotle and Whole Foods Uh, at the clothing companies, All of the companies that I'm reading about that sell stuff to Consumers are like we are tapped. We can't raise prices anymore. The only places I'm actually seeing price increases are like in Aerospace or Industrials and in some of these raw material impact inputs for producers. So we could be in a situation where yes, you still have producer price inflation, but you don't have as much CPI or Pce.

So what does that mean Because you might ask yourself but Kevin but Kevin if input costs go up. So in other words, if costs go up, the PPI goes up. How is it possible that CPI doesn't go up? What's simple, it's the elasticity of demand puts a limit, there's a ceiling, and that ceiling is measured by CPI. But Cavett if the producer price goes up, doesn't the a ceiling have to go up? No, because people stop demanding the goods or the services if it goes up.

So then who pays for it? Kevin Simple margin margin go down. Profit at companies goes down. Let me make that even more simple: Earnings go down. And so this is where you can actually potentially go back to this JP Morgan article where they talk about seeing equities hitting an air pocket during Q3 and Q2 Why? Because earnings go down, earnings go down, not inflation go up for consumers, That could actually potentially lead to the No Landing scenario.

So what is a potential No Landing recession is canceled scenario look like Well, here's what it looks like. Throw that up on screen. a No Landing scenario looks like the following: It looks like basically, uh job growth wage stability so in other words more people employed but wage stability? It looks like Consumer Price stability. It looks like Embers of inflation still coming through, but new Embers not forming.

It means earnings down, especially at food. and Staples This is a red flag because if you are, If you have been investing in Staples in 2022, you're probably going to see the margin impact in 2023. So that's something to keep in mind. So how do you potentially avoid that impact? Well, potentially you look for pricing power stocks.

Where could those be? Maybe and it depends how the economy moves. This could flip-flop but maybe that could end up being uh in Renewables If the economy does well, if the economy does poorly, uh, then and you actually do go into recession Renewables would probably do poorly. Uh, it's potentially in, uh, uh, in tech and and AI in in stocks that have substantially, uh, been burdened. But now these companies have hopefully streamlined their margin a little bit by laying off and maybe we go back to uh, economic growth and then generally these companies that have sold off over the last year would be the beneficiaries of that.

maybe right. but it depends. So these Renewables of tech AI would be great in a re-acceleration environment. If we actually do go into recession environment, this is the the the riskiest scenario because this is where you just ultimately have a selldown of everything right as we've seen over the last year.

But anyway, the no Landing scenario is actually bullish in my opinion for for growth Renewables sort of a re-acceleration in that area and not so great for restaurants. and uh, your uh your your more uh, price sensitive uh areas. So uh you know again you're looking at uh uh, evidence of this. this cap on pricing even coming from Tyson Foods right price and foods like yeah, look some of our costs are going up, but we we just can't raise prices anymore because our PP is getting small.

Something important to keep in mind. very very very important.