Well folks, this is officially the worst Beige Book. I Have read since the start of this tightening cycle. A Beige Book is a report released from the Federal Reserve that gives insights from their 12 member banks of what's going on in the economy. and well, let's just say it's starting to turn not great.

In fact, it's almost exactly the opposite of what we saw in December of 2021 when the Federal Reserve was just basing their hiking regime on explosive growth in each of these 12 districts. Now before we go into the Beige Book which we are going to go into I want to bring your attention to something we are analyzing this morning in the market open Liv stream and it is indeed this. This here is a chart of initial claims. Now it is so old news to say that jobless data lags and and we don't really get that until it's too late.

But what's very, very interesting is if you look at the monthly change uh, monthly to quarterly change, the they're roughly the same. But in this case we actually went with the quarterly change. If you look at the quarterly change in unemployment claims soon as you saw a 20% or more move on quarterly unemployment claims, you pretty much had a recession and the end of the recession almost perfectly aligns with the peak of unemployment claims. so you could see Peak Peak Peak Peak Peak And then the gray bar obviously signifies the end.

Now what you'll notice uh is that we, uh, at least as of today, uh, don't actually have any kind of indication that we've seen unemployment claims actually. Spike Which means before we get into the Beige Book, it's worth paying attention that within the span of one to two quarters, we could actually see unemployment claims substantially. Spike You have to be careful when you look at these numbers not to look at them on a weekly basis just because they're so volatile. But when you drop this to a quarterly basis, you can see here.

look. we've had a little bit of a surge. went from about 26,000 unemployment claims to 240. But wait a minute.

240 over 206 is about 16.5% Haven't seen the more than 20% move yet. Zoom That out. uh and uh. take Co out of there.

Look at this over history when you get the spikes. The big spikes, not covid kind of spikes, but the big spikes over quarterly periods. They come fast and they come rapidly and they signal that you are in a recession each time you had a large Spike you were in a recession. We've not had the large Spike yet.

You were in a recession. See, you had little pops like this of 10 to 15% Those were not recessionary indicators. You got to be over 20% We found we have not seen that yet, but it can happen very quickly. And the reason I bring that up in relation to the Beige Book is what we're going to do is we're going to go through.

uh, the Beige book from the bottom up. So basically we're going to go from uh, the uh, uh, the San Francisco Disc District and we'll work our way up. and I want you to see some of the things that we've highlighted here in the beige Book: Uh, I've got the beige Book by the way, linked at Eac.org Softness: We're going to write uh a You know, a little markdown and every time we hear about inflationary pressures outside of like isolated inflation pressures I mean like everything's getting more expensive, right? That matters. we'll write down a little note: Insurance doesn't matter so much.

mostly because yes, everybody has to pay insurance, but it's an extremely lagging indicator. A lot of people don't understand this. so I suppose what we could do is just give a a quick little example of how this might look. So so when you think about being an insurance company I want you to think for a moment, let's say you're in January and you pay for insurance for somebody Or or you give somebody an insurance policy for 12 months, right? Very common.

Some insurance contracts are underwritten longer, but I'd say most are probably 12-month insurance policies. Well, now let's say all of a sudden, in whatever you're insuring, let's say is building materials. Okay, let's say there's rapid inflation in building materials in March So all all of a sudden we'll put a little X right here or Star right here and we'll call that the inflationary impetus for building materials. When are you actually going to start seeing higher prices in building materials? Are you going to see it right away In March Well, no, because even if lumber prices go up, it takes time for lumber sellers to adjust those prices.

So there's going to be a lag between an inflationary impulse and actual inflation in commodities like copper and lumber. and otherwise, especially because a lot of these are bought on contract sometimes 6 to 18 weeks out, So you can have another delay here of, you know, two, 3, 4 months. whatever. So let's say you don't actually start seeing an increase in inflationary prices until the latter half the second half of that 12-month period.

Well, you're not going to see a full year of higher costs until you get to the next year. So let's say, for example, example, this is, uh, year one. Okay, you're not actually going to see a full year of those higher costs. Uh, until the next year.

So in year two, you're going to go. Wait a minute. We just had a full year of higher costs compared to that prior year. Wow, that's a lot.

You know what we're going to do. We're going to have to raise our premiums for year three because everything got more expensive. So probably from an inflationary impetus to actually prices going up to actually in like insurance premiums going up, you're probably looking at at least a 12 to 18 month flag, but then you got it. Like not everybody signed up for their insurance in January so it could take another 6 to 12 months to roll over everybody to higher rates.

So like when I hear people talk about inflation and insurance I'm like, do you realize that is one of the most lagging indicators could look at for inflation? Motor Vehicle Insurance Health insurance. These are massive laggards. Okay, so once we get past that, let's get into San Francisco So what does San Francisco tell us? Uh, this is the whole like western side. It's not just San Francisco Uh, this includes SoCal and and you know other parts.

Anyway, we'll go through some of this. So what do we have here? Labor availability improved. Ah, okay, so labor availability improved. Okay, well that's not necessarily a bad Catalyst right? But it is easing labor so we'll put a little uh a one tick there for easing labor.

price pressure is eased. Residential real estate softened. Further drop in employment turnover so people are quitting less or getting fired less. At this point, pay increases back to normal levels, so no wage price spiral.

No wage pressors pressures, multif family vacancies increasing in rents falling. Now, this is a big problem that a lot of people are not paying attention to. But when we start looking at Price pressures declining in residential real estate, especially in multif family, you have to be really cautious because if you want to go out there and buy multifam I Want you to know this when you go, buy multifam. It's like insurance.

But in Reverse you could be this happy go-lucky multifam buyer. And and this is something we're studying on a daily basis with House Hack and a seller is like hey, look how beautiful my trailing 12month income is and you're like wow, I Feel like I'm getting a good deal based on the trailing 12 Great! But what are the rents today? How has the property been managed today? How many concessions are built into that trailing 12 and how many false promises are built into that trailing 12 And what's it going to mean for your F12 your forward 12. That could leave you very sad. So you have to be very careful with Multif Family, especially when rents are starting to fall.

If you look at the Zillow Market rent. Trends You are literally seeing rents collapse in certain areas. I mean we're talking down. You know if the average rent's like 2500 bucks, you're seeing rents come down $2 to $400 So you're talking 10 to 20% declines in rents.

It's pretty aggressive. Okay, so that's SF that's the SF District. Oh, but it gets much more entertaining and you're going to be paying attention to something that really causes concern here soon. Dallas What does Dallas say? Although Bankers remain pessimistic and expect future business activity.

and Loan demand to decline. The Slowdown is expected to be more mild than prior expectations or prior Cycles Wait a minute. That's literally what they say. Every freaking recession, every single recession.

It's yeah, you know we're going to go into recession, but oh, don't worry, it won't be as bad as last time. Okay, so what else we hear in other sectors? All right? Well, we hear weakening demand neutral to pessimistic. Outlook Wage growth moderated. Oh, that's the second district for wage growth moderated so far.

nothing on inflationary pressures broad-based increase, right? So, uh, elevated demand for daycare. That means more people are going back to work because they need to to survive. Companies feel overstaffed. Oh no, that's a Prelude to layoffs.

Hello Urgent Care Said wages are unsustainable. Uh, that's also a Prelude potentially to layoffs or longer wait times. but some of these are. these are a lot of these are anecdotes.

remember, so we kind of have to take out the lowest anecdotes, the worst ones, and the highest anecdotes: weakening demand across, and then just look at the averages: weakening demand. a bit of price growth in Services flat Goods Expected price increases of 3 and a half% this year, a lot of companies go in expecting price increases and then they go. oh wait a minute. Uh, price increases were actually way less than expected.

Like, for example, this morning I was reading in the market open live stream somebody's talking about General Mills and they're like, well, General Mills says they had pricing power and they can raise prices as much as they want. And it's funny because like I'm like, bro, what earnings call are you reading Like is this like one or two years old? Turns out they were reading an earnings call a year old. Well like because you read the earnings call from less than a month ago for General Mills And what do they tell you? They say that's because our pricing has basically trailed inflation. Now they've responded to inflationary pressures, but they've been trailing inflation, so in other words, they can't even keep up uh with their their pricing because they would lose too much demand, They would sacrifice too much in volumes and that's not worth it to them.

Retail sales Outlook Worsen manufacturing declined. That's not great. That's not a great report at all. Okay, how about the next? District Kansas Consumer spending fell.

fast food even pulled back. That was bad. Look at this. I have that highlight or I need to highlight right here.

Contacts noted: Sales volume at lowcost Quick Serve Restaurants which had been robust during previous pullbacks elsewhere, declined moderately. Bro. When people start cutting back on food and eating less and food insecurity goes up, people's notion that oh yeah, well, people keep spending on food, wrong, they'll eat less because like you basically just start starving when you don't have enough money. This is horrible.

Like the this beige book is A this is a very very different and I'm not saying like from a point of view of this time is different I'm saying like this time's the same. like it's very bad. It's telling you a recession is around the corner. The Atlanta Fed real GDP now indicator which I threw up on Ec.com Uh, it shows 2.4% for last quarter last quarter.

but I have a feeling that's going to plummet. so I'm a little nervous about that Anyway, Loan demand weaken seasonal labor subdued. Oh, there's another one notable reduction in labor utilization SL Hours worked Bro: notable reduction and hours worked in labor utilization That's not good. Consumer spending and discretionary saw substantial declines that's not good.

What's the next one? Let's go to another one. You can read the whole thing by the wayhack.com it's link there I'm just giving you the overview here uh and then obviously adding commentary Minneapolis Declining demand and profits. Price increases were mild. Wage pressures continue to moderate.

so nobody here is really talking about runaway inflation. Nobody's talking about wage price spiral. Job openings flat to negative. Recent hiring demand slowed.

Uhoh, there's another one four. Future Demand expected to rise. Ah, but remember, companies have expectations of Hope but hope is not reality. Okay, uh, hope is not a strategy.

not hiring unless the applicant is perfect. Wage growth flattening. Finally slowing. Price increas is mild.

Substantial majority saw no price increases Exodus From private to public sector has slowed High Food prices are leading people to raising chickens and ducks and selling eggs on the side of the road. bro. Consumers spending moderated. This is literally in the beige book.

This is the what the FED builds policy off of. Let's do another one St Louis Mixed business activity stable wage pressures reduced urgency to hide Uh one firm had daycare prices raised 10% One Brewer saw volumes up but profits down so you have these sort of like anecdotal like either hot points are really weak points, but in aggregate, slower consumer spending, slight decrease in manufacturing reduced urge Mercy to higher and Uh prices continue to rise modestly modestly is like you know, maybe what 2 3% or something like that. Stable rage pressures reduced urgency to higher. Let's look a little bit more on labor here.

Employment levels have remained unchanged. Labor market remained tight. Reports have easing Uh. urgency to hire has slowed More firms are using internships and apprenticeships.

Construction sources indicated an increase of new jobs due to influx. That's good increase of jobs here. Wages have continued to grow slightly since our previous report. Here's the daycare: Logistics Firm reported wages were up about 4% while a restaurant reported that wages were up even more 5 to 7% This is a little bit of a warmer report, so I would call this one I Wouldn't call this one a weak one I'm not going to write this one down on the 1 to four I would call this one.

Um, you like moderate? Okay, so we'll put uh District 5 here. We'll just they're not actually District Five I Don't think but I'll put them down as moderate for this one. Uh, but certainly not booming right? Okay, let's keep keep going here. So that's St the St Louis District What do we have in Chicago Consumer spending up slightly employment up moderately prices and wages Rose Moderately labor market cooling Oh okay, we'll put that one down number six Uh.

Wage pressures eased rent concessions up there. It is again falling rents, manufacturing flat. Did not expect input issues or shortages. that's Chicago uh.

Quick overview of what we have in the Atlanta District Wage pressures eased further Hiring slowed. Labor market cooled. Okay, well, there's another one, uh. weaker demand for goods and services led to reduced hours reduced hiring demand.

That's not good yet. The president of this bank I don't even think he read his own beige book because he's like, oh yeah, we don't think we're going to cut until Q3 which would be like July bro. that would be such a mistake. You're going to have to cut rapidly.

Whatever. Many companies are off offering discounts and promotions. There's optimism though. optimism is not a strategy.

Slower manufacturing Freight Insurance and labor still up of course up since pre pandemic. A lot of them reference pre- pandemic, but that's not a surprise. Everything's up since pre- Pandemic Richmond Consumers sitting on Sidelines for Real Estate Loan demand softened. Price growth moderated but somewhat elevated compared to historical rates Services up 3.8% manufacturing up 2.8 Uh, So this was interesting.

They did show price increases and expectations. So those were price expectations. Uh, and those price expectations were 38 and 28, which still a little warm there on Services I will give them that. So I'm going to write them down as uh, warm on Services we'll put number eight as warm on Services Uh, and so let's see here.

Okay, there we go. So less, uh, price pass through. This is a way of saying there's there's a limited. like we're facing higher inflation, but there's a limit to how much we're able to pass through, right? Retail demand slightly up, but profits down? It's when volumes start collapsing.

So did they say what did they say about Labor here? Uh, Labor, Labor, labor. Okay, here we go: Labor Maret. So what do we have here? One company increased salaries 15% of total revenue of total revenue. Okay, I don't know how to significantly decreasing margins.

That's sort of an anecdote. one that's one out fine. What do we have broadly grew at a moderate Pace The tight labor market continued wage pressure, resulting in several contacts making operational changes. A company that manages parking garages reported likely increases in prices and a reduction at Services.

Then we got the Specialized Software Company. As a result of increased wages, this firm expects to cut investment plans uh, since they need to continue hiring workers at higher wages to meet demand. Other contacts reported: expanded Talent Tools to Find Workers Uh, for example, an engineering firm hired Engineers with no work experience and spent time training them. Okay, in other words, still struggling to find Labor Uh here.

Okay, so let's put this District down as well as uh as as a little bit more challenged still with labor. So uh, while we could see hey, Richmond this is like your Virginia area. Not as bad as some of the others that we had seen. Price growth moderated somewhat.

It's you see a slowing here, but this this SE This region here doesn't seem particularly bad. This one seems to be like one of the uh, one of those that's still kind of pushing along so we'll put them at a moderate for um, number Eight. There we go. Okay, so Number Nine, let's see where we're going to put number nine.

This is the Chicago District Bankers not developing pipelines as they used to customers increased use of Bmpl. Okay, this is bad. This feeds into my thesis that if we get a jobless recession, people are going to be heavily indebted. Credit card uh, spend is higher than what it was.

And credit card delinquencies. Let's look at those really quick credit. uh, delinquencies. St Louis Fred We look at these.

they're higher than where they were before the pandemic. Look at this: Credit delinquencies are already rising and joblessness is at record lows right now. like we have record low unemployment. But delinquency rates on credit cards are already higher than every period since 2012.

So now yes, there's still some hot Embers in this beige book. But combine that with the weakness you're starting to see. Talk about increased usage of Bnpl. Strong sales for discounted items, but not elsewhere.

jobs starting to be replaced by automation. some being some some people basically being laid off to right size the headcount at businesses expecting 3% wage growth, but again, rightsizing business and business is skeptical that spending would remain given given high Byy now pay later and credit usage. But we're optimistic that doesn't sound good. That's it's.

certainly not labor pressure and it's certainly not inflationary pressure. In fact, we only have one that was slightly warm on inflation. So far, we've got two that have sort of moderate labor. Everybody else is like labor Market's going poopy This just the start.

Like the cycle of layoffs has not started. It could have happen in the span of one quarter. We could see unemployment claims which came in low today, but it could flip like that. The Op: Here's how it works.

Step one: The optimism goes away. so we get bad GDP reads or bad sales. Q1 Optimism goes away. Then the layoffs hit.

when the layoffs hit unemployment claims Skyrocket Boom, we're in recession. Big fat rate cuts at the FED Who benefits from that? Poor people? Or richer people? Well, quite frankly, probably richer people. People with Expos exposure to assets, real estate stocks, and interest rate sensitive stocks. Who gets left behind? Poor people? The rate Cuts won't actually help.

Okay, it's all trickle down. eh. So that then we have the next one. So that was nine, so this should be 10.

Philadelphia Business credit tightened More credit card use again. wage and price inflation appeared to subside further. Again, less inflationary pressures, no wage price spiral. Tourism edged down lower incomes can't afford cars Manufacturers reported fewer workers in shorter working hours.

Boom Another one for labor weakness. Lower income. Paid more on credit and spent less decreased work week More selective hiring decrease in employment wage pressures lessened manufacturing Modest decline consumer spending modest decline Price resistance up don't sound good I Mean I Know we can look at a couple sectors. You know, a couple regions I Guess we should call them not sectors I Keep thinking of the German Coast Guard commercial on YouTube It's a good one.

If you haven't seen it yet, it's a great meme. German Coard s is the German Costard Uh, what are you thinking about? You'll have to watch it. That's good. But anyway.

Federal Reserve Bank of New York declines in some employment Labor market conditions cooled, but remain solid. Inflationary Pressures: Little changed. Prices rising modestly. Manufacturing fell sharply.

Slight increase for services Business Services Firms indicated a decline somewhat and personal service businesses pointed to a sharp contraction, rip declines and employment. Write them down. 11 Sharp contraction and personal services those contribute to core. It's not good, It's not good.

This is a bad Beige Book. This is the worst I've seen yet. Boston Economic activity declined slightly on average. Employment was flat on average.

Wage growth remained moderate. Hiring became easier. Unbalance employment flat on average above average wage increases to compensate for Price Inflation online prices stabilizing, weaker demand for semiconductors in PCs is what this one was. Let's look at the labor market: Employment flat, Wage growth moderate Uh hospitality and Retail counts increased slightly.

While employment remained unchanged at it, firms hiring became easier. Well, I'll write that one down 12 It firms enacted above average wage increases to uh compensate for Price inflation. So a little bit of wage pressure here I'm going to write that one down. So we had one that had an inflationary report that was warm on services, one that had a wage pressure.

uh, like warm wage pressures. We'll call it so out of all of the districts because that's it. That's the beige book for you. Out of every single, District What did we get out of the Beige book? we got 10.

That said, the labor market was Cooling and weakening two that said there was a warm labor market, one that said warm wage pressures and one that said inflation on Services Everybody else is no INF inflationary pressures or low inflationary pressures. If anything, employment is cooling rapidly and parts of the economy are starting to cool very rapidly where it won't be long for. unfortunately, probably the Uh unemployment claims to start skyrocketing and again I'm worried about that because while we know unemployment is a lagging indicator, what I'm talking about right now is a leading indicator of what's to come these reports right here. these anecdotes: The change over time of the Beige Book.

This being a bad Beige book is Not good. I Think honestly what we ought to do. Uh, because I I Quite frankly, I Think this would be quite useful is why don't we do a thought experiment here? Let's pick a random Beige Book. Okay, so what we're going to do is we're going to go to my good notes.

That's where all my old stuff is I Don't use good notes anymore, but I'll go to good notes and we're going to type in Beige Book. And what we're going to do is I'm going to just find an archive Beige book. Ah, here's one 11 months ago. Okay, so let's go to the Beige Book and we'll go to the summary because we don't want to read the whole thing and it's also highlighted.

We'll go to the Beige Book for January of 2023. Okay, so what do we have here? Labor Market Oh my. God Employment continued to grow at a modest to moderate pace. For most districts, only one reported a decline in employment.

Holy crap. We literally just went from one reporting a decline to all of them reporting a decline. Well, I guess a couple maybe. So like 10 out of 12 reporting a decline.

Some districts noted labor availability had increased, firms continued to report difficulty filling positions. many firms hesitated to lay off employees even as demand for goods and services slowed and plan to reduce their headcount through attrition if needed. Okay, so that's pretty big. That's a pretty big difference.

We're talking about one talking about cooling versus 10 talking about cooling. Okay, that's interesting. prices. Manufacturers reported easing freight costs.

Uh, many retailers noted increasing difficulty passing through cost increases, suggesting greater price sensitivity that's very similar. If anything, that's worsened. More discounts and promotions than they had a year ago. Good to know that's consistent.

A consistent lack of price pressures. Uh, what else do we have here? We have, uh, unbalance contacts generally expected little growth in the months ahead. Uh Auto Sales were flat on average, boosted inventory, tourism moderate to robust. Uh, what else? Non-financial experience stable demand? Well, that's changed because we've seen loan demand plummet and credit card usage up.

labor shortages remained An In: Uh remained an issue rate of Price: Uh. Input Price pressure increases slowed. Now we're talking about input price decreases. Wage pressures grew at a moderate Pace that's worn away Sheriff Contacts reporting uh, higher costs and selling prices declin.

Noticeably, it's very interesting so it it shows you some difference. Let's look at one more. Let's go back. even a little bit more ready.

Now this one's going to be extreme. I Think we're going to go to June of 2020. Are you ready for this? June of 2021 The Expect: The the effects of expanded vaccination rates were perhaps most notable in consumer spending, with increases in Leisure traveling restaurant spending augmenting ongoing strength and other spending categories. Home builders noted: Strong demand uh supply chain disruptions pushed costs higher uh employment and wages.

Employment growth was strongest in food and hospitality. Difficulty hiring new workers, especially low wage workers and truck drivers. Uh, wage growth remained moderate, but signing bonuses and increases in wages were starting. This is like you know, the precycle, right Price pressures increased further.

This is all the lead into inflation. Look at that change over time like this was telling you in May of 2021 of the pain coming. Okay, in May of 2021, it's like yo poop's about to hit the fan. Okay, and so what happened? Poop hit the fan What? 7 months later starting in December of 2021.

So 7 months later, poop hit the fan in May of 2021. Now we might be 7 months early in a bad beige book going. We could be in a recession in August With that same sort of lead time, that wouldn't surprise me Q2 Q3 Recession massive spike in unemployment claims Fed Cuts twice as much as people think I don't know I'm I'm bearish for recession. ironically bullish for what that means for interest rate sensitive stocks.

and I realize that's bizarre, so it's like wait a minute. Shouldn't things go lower in a recession? I Think you'd be surprised I Think what goes lower in recession are the stocks the bottom 50% buy. Why? Well, because of this, you ready for this? Go to the Beige Book. now.

go to today's Beige Book. Type in the word freely. Enter right here. Where is it Freely freely freely fre There It is: lowincome households spent less yet paid more on credit, while affluent households continue to spend freely.

Who's that going to be? When rates go back down? Well, the chips are going to keep spending freely because those are cash Rach companies. But now you have. Ask yourself: what do wealthy people spend money on when rates are really low and what are things that other people can't afford that wealthy people can. expensive cars, homes and Home Improvements like solar it's saying I've been positioning for this for two years.

You know people are like give the flip flow. No man, this so far that's going along with the script. St Ready to flip-flop but that that's that's a sign. Big problems are coming.

It's going to mean big cuts. Why not advertise these things that you told us here? I Feel like nobody else knows about this? We'll We'll try a little advertising and see how it goes. Congratulations man, you have done so much. People love you people.

look up to you Kevin PA there financial analyst and YouTuber meet Kevin Always great to get your take even though I'm a licensed financial adviser, real estate broker, and becoming a stock broker. This video is neither personalized Financial advice nor real estate advice for you. It is not tax, legal, or otherwise personalized advice tailored to you. This video provides generalized perspective, information and commentary.

Any thirdparty content I show should not be deemed endorsed by me. This video is not and shall never be deemed reasonably sufficient information for the purpose of evaluating a security or investment decision. Any links or promoted products are either paid affiliations or products or Services which we may benefit from I personally operate and actively managed ETF and hold long positions in various Securities potentially including those mentioned in this video. However, I have no relationship to any issuers other than House Act nor Am I presently acting as a market maker.