Now we've got to talk about the Bears Again, let's take a listen to what some of the Bears are saying and we're going to talk about what is being said about. Maybe this time is different new piece out from the institutions we'll be looking at in just a moment. But let's go ahead and get started with the bear piece. Remember the flash sale on the programs on building your wealth is linked down below and expires with investor day.

next week? let's go. I'm trying to contain myself Scott but it's difficult. I Think this move today is one of the most idiotic moves I've seen in the markets in quite a long time. Today's news is not news.

Okay, last week you had the CPI This is talking about Pce, right? So the market moving down on, uh, moving red. This individual is calling the market moving red idiotic because we already knew that inflation was coming in hotter for January. This is nonsensical as essentially we're saying it's an argument I've made before, but we'll also see the counter argument here in just a moment. Let's keep going.

PPI For the month of January, they showed that inflation flipped up in January PC today for the month of January which I will remind everybody was 24 days ago that it ended is once again showing it hot. Okay, that tells us nothing about where we're going. Prior to that, you had three months in which inflation reports came in better than expected. So the question before us Scott before the FED before any investor is which which is the true story is January a blip or is it or is it a new trend And if you look at commodity prices, if you look at Goods prices, they are clearly showing that the trend to disinflation is intact.

The question that hangs there Scott is what's going on with wages I Don't know the answer Nobody Knows the answer until we get next week's labor report. But to Tr: this is obviously the bullish argument here. the person on the right is going to give us the bearish argument I do want to say he says nobody knows the answer about wages I'm not saying I know the answer, but I think we got plenty of indicators. read the earnings calls for this might sound redundant if you've been listening for a while, but I'll say it really quick.

Lyft Uber Massive extreme increase in the avail ability of drivers a cloudflare, massive amount of people applying for very few jobs 1300 open jobs, 400 000 applications in 2022 for those 1300 drops, the availability of Labor is Extreme It's becoming easier to hire people at Chipotle At Starbucks a target of Walmart pretty much at restaurants across the country, labor is becoming substantially more available. It's gonna be a while before we actually see that because we are still going through some of that shifting. Let's keep going pretty damn today. Whether you're an algo or a person on yesterday's news which is what today's PC is is idiotic, Today's news, Weissmester.

Inflation's too high. Do a little more to get price stability, bring interest rates above five percent. hold them there. How do you see it? I mean Jim He used the word idiotic on on the sell-off.

You know if I were on the wrong side of the trade I probably think it was idiotic also. but oh, it's such a slam. He's basically saying, well, you're a bull and the market went red today. Of course you.

you're saying it's idiotic. Oh, burn. but I'm not so I continue to be bearish. This fuels The bearish.

Narrative it fuels The Narrative of being uh, you know, higher for longer with the fed. the FED is going to err on the side of doing too much and I'll go back to what I said yes saying. All these times before those can focus on a single data point they can explain away. say this was expected.

You know, are you guys idiots What's new here? which is essentially what we saw just now from my colleague here. But the reality is that it's directional. the economy directionally is slowing while the FED is raising rates. So it's idiotic is to have multiple expansion.

In that environment, Multiple expansions find when you have trough earnings, we're nowhere near Trot So the market is way overvalued, will continue to decline as the economy versus inflation stays stubbornly now. I Want to just quickly interject and make sure to remind you that when they're talking about multiple expansion, this doesn't mean that every company is overvalued. It's basically saying, why did the S P 500 see its multiple valuation go from 16 to 18. why would you have multiple expansion in this environment? And really there there are two potential reasons.

Uh. one is it's stupid and it's going to fall back down because the FED is going to push us into a deep dark recession. and especially in my opinion, the consumer staples uh, and and the Legacy companies within the S P 500 are going to go into a recession. They're earnings are going to collapse and you should not be paying these sort of multiples for the S P 500.

I Believe this is roughly what he's saying. Uh, Now, the other idea and and potentially counter argument to his idea that the market is overvalued should not be seeing multiple expansion. The potential counter argument is the idea that, well, what if we're not facing a Paul Volcker? What if the markets are pricing in serious fear and have been for the last year that this is a repeat of the 1970s, we're gonna have to go through a deep dark depression to kill inflation. Well, the markets are pricing in massive fear of Apollo Volcker than when the fear of a Paul Volcker goes away, the market could actually expand even as rates continue to go up Because even if rates go to six, six and a half percent, it's still better than a Paul Volcker.

So it just depends how the market is waiting. That negative potential, right? Let's keep going. Be bad now. I Feel really bad because now I realize I just pulled the wife saying idiotic, you're right Steve I shouldn't use idiotic.

You know, because that's your uh, venue talking about yourself. but things are delusional. Insane. Oh, he just called him idiotic.

This is great. Stupid, stupidly insane, criminally insane. I Mean the number of adjectives that you've used when things are not going exactly your way to explain away data points is prolific. But I mean your case.

Let me, let's be honest. Okay, um, it's very easy to be negative. I I Totally get it. But your case is harder to make because a good economy, like you've been pointing out, only means more activity from the FED right? It means more demand that they need to crush.

It means rates are likely to continue to move up, or at least stay elevated. And that's a problem for stocks, isn't it? Regardless of how idiotic you think this move is, that is a problem. And that's what Michael Hartnett talks about today and why. He says when the Bank of America flow show s P goes to 3 800 by March 8th that's you know.

A couple weeks away, he essentially makes the case rates up stocks down not that complicated. yields are going to go north of four percent and the S P is going to go lower. Give me a good job bringing it down to taking the insults out, but I I applaud you for that. Uh, give me next week's labor report.

Let's see how average hourly earnings are I Hate to wait three weeks for the CPI PPI of February But I'm telling you, this is one man's opinion, just one man's opinion. As far as what the FED is going to do and the impact on the markets, you need to see February's inflation report to determine if J January was an outlier or the start of a resurging inflation. Trend All right. So Brenda Vangelo join the conversation, weigh in on this little mini debate that we've had to start the show here on the desk.

Sure, thank you. So I Think that it could be that January just ended up being overly hot. That's the time of year when everybody puts your price increase. usually salaries go up.

We also had that, you know, significant increase in Social Security benefits. That really probably boosted consumption during that time, but at the end of the day I Think if we look at data right now, you cannot deny that the consumer is still incredibly strong. They're not spending on all the things they spent on during the pandemic, but they're absolutely spending on all kinds of other things like travel. As we heard, the booking things are really fantastic.

They're spending on events and concerts. The consumer is still really strong. so I think even though that likely means that is going to continue to raise interest rates here. I Also think it might pay a little bit of a different picture in the shorter term for corporate earnings because I think we had all been expecting that things would be really starting to slow down, that companies would no longer be able to pass along price and higher costs, and that Dynamic might change a little bit, particularly for those companies in the Services Director where we're still seeing demand be really strong.

So I think it's not all potentially a negative here, but are we in for a choppy period? I Think absolutely. until we can sift through all of this and really understand exactly what's happening. In my mind, it's clear that the consumer is really strong and that's such an incredibly strong part of our economy. Uh, that in my mind, that's that's a positive.

I'm trying to continue. Maybe a positive Unless as the bear said, oh, who's sitting on the right of this picture here? Maybe that means the FED goes way too far and I think that's really the Big Bear argument that the problem is. we got to pay attention to the Catalyst The catalysts are quite interesting because the bull here mentioned give me the labor report next week. eh.

I'm not confident that the labor report first of all I know it ain't coming out next week A and B I'm not confident that the Labor report is actually going to be super helpful as long as it doesn't indicate any kind of late wage price spiral, which I doubt it will. It's very unlikely that the Labor report is going to show any kind of real softening that will really help the bullish argument. I Actually think what you're waiting for is CPI Now the Labor report, you want to write this one down. mark your calendar for March 10th.

That's when the Labor report comes out CPI Consumer Price Index Inflation comes out on March 14th and then of course the Fomc meeting is March 22nd. So pretty traditional bear argument here that hey, the Fed's going to over tighten and the traditional bull argument is hey, well, maybe it's like gonna be that bad because consumers still have money to spend through this recession and inflation is going to go away. But is the Islam different? So organ Stanley has an interesting piece over here. and some of this it just makes sense to read Parts too because they make this interesting argument.

So usually when we say the word this time is different. What we're doing is we're kind of making fun of the people who are taking the long stance going. Oh well, the market will be fine. This time is different because those are generally deemed to be the four most dangerous words in investing.

Oh, this time is different Well Morgan Stanley makes the argument that well, I mean let's be real here. every time is different. So as markets look to the Future the standard practices assume that Cycles are cycles and taking history as a guide and anyone shouting this time is different is met with skepticism. But of course we have all lived through Covet Now and the fact the facts alone set this cycle apart from others, so it's worth asking what is different this time and what is not I Think this is a great piece, so let's go through it.

The coveted pandemic distinguishes this cycle from the past: World War II Business Cycle demand collapsed in a highly correlated way. Nearly every data economic data series now has a very clear statistical break marking the first difference relative to other. Cycles in other words, is everything in unison. Basically hit a wall with Covid that's very different from from other.

Cycles. The key characteristic of this cycle is what they say here: volatility and supply and demand and how shocks evolved across different sectors. The initial collapse in demand for both goods and services was followed by a Resurgence of demand for goods against the specific supply chain that was basically correct. The decoupling of demand for goods from demand from Services has not been seen in previous Cycles so this is interesting.

They're basically saying hey, like we haven't had a cycle before where everybody's at home ordering crap on Amazon but they're not using Services as much because all of a sudden they're cutting their own hair right? This is a really interesting argument because it's like yeah, like we were kind of stuck at home buying crap on Amazon buying our groceries online and we were cutting our own hair. That's an we're not going to the dentist right? Like that's weird. We haven't seen that before because we haven't been any pandemic before where there was Amazon right? So that's a it's a good point. Uh, and it kind of then explains why we have seen this massive inflation in goods and now the goods deflation is occurring or disinflation is occurring.

But the services explosion came much later. so of course it's going to take longer for that Services disinflation. which again, that's where the Bears say yep, Exactly taking longer is why the Market's going to be in pain for longer. But anyway, the initial collapse in demand led to disinflation.

but the surge in demand for goods in particular led to Goods inflation to decouple from Services inflation. This is to say that when everything hit a wall, companies are like crap. We need to reduce prices to actually get people to buy it. But we had such a quick V-shaped recovery thanks to all the stimi money, everybody went YOLO crazy and would we have massive inflation? Okay, we already know that subsequently Services demand were covered as the economy reopened.

but the reopening was Rife with frictions as a large swath of the labor market reinvented itself or was displaced for a period of time. This is so important to mention the Reinventing of the labor market. This idea that we never before had this normalized work from home culture. It used to be weird and embarrassing to say you work from home like right now I Know that sounds crazy to say, but if you're probably older than like 25, maybe even older than 23 and you've been in the workforce well before, like 2018.

you you know what? I'm saying like when I got into the real estate business in 2010 if you said oh, I work from home, you were deemed as somebody who's just got a side hustle. You're not really serious about the business. Where's your office I Want to go to your office I Want to see you're actually investing in your business like that's old school. It was embarrassing to say you work from home.

Now work from home is like the norm. It's insane how that's changed and that's led to a lot of Reinventing as well. Where you know, some people now work at multiple companies from home at the same time because they're doing like two hours of work here. Two hours of work there, two hours there, right? making a lot of money doing that.

Very, very interesting. But anyway. uh. We've also seen a massive rejiggering in the amount of people who retired from retail and Hospitality who are no longer working there.

So you need a new cohort of people working there. People who were working in retail Hospitality now potentially have moved on to working intact because they got educated in in Tech. Who knows. Anyway, while the collapse in demand was highly correlated, the recovery was not.

In other words, everything hit a wall, but we were covered in very weird ways. One consequence of this uncorrelated cycle is that inflation has been noisy. What an interesting argument because you have seen noisy inflation. Remember last year in March it's like Yay inflation is going down and then it was like June or July I'm on the beach in Germany Live streaming.

Oh no, Inflation's going back to the Moon right? and then it comes down and then like in October or September it comes up again. it's like oh no and then it comes down for three months and then it's January and it's oh no, it's coming up again. It's been like we've been on the downtrend, but it's been a stressful downtrend of disinflation. Right today, we see that inflation for goods has notably retreated, but Services inflation remains robust even after an aggressive tightening cycle.

We with inflation running harder than at any point since the 1970s, We have another key difference. the Fed and other developed Market central banks is hiking to bring inflation down. This hiking cycle is the first time since the 70s that we have been hiking with that motivation. This, by the way, reiterates the pivot argument that I've made many times before on this channel already that when we go to Pivot the people who think, oh, the stock market's going to crash after the pivot are missing the fact that the only time our Fed today will pivot is when inflation is conquered.

But that's basically the big fear markets have right now is that inflation is going to last long. so a pivot should align and that the Fed's going to over tighten. So pivot should literally align with Euphoria because we will actually be improving by removing basically the cancer of inflation. Whereas in the past, Morgan Stanley has taken a telling us look.

In the past, we would hike rates because growth was strong and when growth was slowing, we would reduce rates and pivot because growth started slowing. That's very different. This time, the FED is intentionally raising rates to slow growth substantially below the prior potential growth of the economy. So in other words, in the past, we would cut rates when the economy was slowing.

This time, we're raising rates to purposefully slow growth. It's literally the opposite of when we usually, uh, cut or raise rates. It's totally the opposite. That's why I'm saying people who are making these and there are a lot of people getting a lot of views making these videos about the FED pivot causing the next crash I Think all they do is they look at one chart and they're like oh well, there's a video for me and they make a video but one chart and they're not stitching together what's actually happening.

Maybe there's like a real economic you know, education that's lacking and I'm not saying I know everything I don't you know I Try to keep challenging myself, but it doesn't make sense. This idea that the markets are going to crash after the pivot. It this this: Associates why the FED would pivot in this cycle. Anyway, this time, the FED is intentionally raising rates to slow growth substantially below the potential growth rate of the economy and plans to keep them high while the economy slumps.

That's the over tightening concern. that's the bear argument. This Central Bank strategy is clearly a key difference relative to other Cycles. So where does this discussion leave us? Why Is it important to highlight the differences in the cycle? Well, we have a soft Landing view have had a soft Landing View for the US economy for a long time.

The pushback has consistently been that previous Cycles have not had soft Landings so it's not reasonable to forecast the soft lighting. Now they're basically saying look, in the past, we've never had a soft Landing when we've or we've rarely had a soft Landing When we've talked about it, we had a soft Landing in 2019. Uh, After the 2018 Fed U-turn and we had a soft Landing in about the mid 90s like 1994. But usually when we talk about a soft Landing we don't have a soft Landing like you go back to 2006 and we're like, oh, real estate's just gonna level off and then it falls off a cliff, right? You get a massive real estate recession.

But anyway, the pushback has been that maybe it's unreasonable to forecast the soft Landing now, but Morgan Stanley These writers are forecasting a soft Landing not to be confused with uh Mike Wilson who's a big bear But anyway, we were comfortable that there were enough differences in the cycle this time to produce a different outcome. The market narrative has shifted towards us, and now the question arises whether we are actually seeing enough slowing or even a re-acceleration So far, we do not think there is sufficient evidence to change our fundamental view of a slowing economy and going back to the FED strategy of intentionally slowing the economy below potential to squeeze inflation out. A no Landing scenario does not really make sense to us, but the data for January do reflect underlying strength. The seasonally adjusted non-farm payrolls were strong, reflecting much less of a contraction in jobs than is typical for January.

This labor hoarding is a key part of why we have been in favor of a soft Landing In past Cycles where there has been a Lowdown there have been waves of layoffs. This time we have seen that pattern in Tech but not across the rest of the economy. So maybe indeed, this time is different. In other words, maybe it will be possible we could stick the soft landing and this is where I just want to reiterate because sometimes I don't think people listen and I just want to be very clear not to say that I'm going to be right.

but it's my opinion and I think my opinion is very clear that a soft Landing is bad for Staples Industrials uh a stables Staples industrial Staples being like your McDonald's your Costco your grocery stores I think also bad for your restaurants I think it'll actually be good for pricing power stocks especially stimichek Swan a stimichek ones which would be things like Nvidia Tesla end phase things that have gotten hit pretty hard right now but could do pretty well going forward in, uh, into the future. So so that's my my thesis that 2023 is going to and these companies have already done well over the last about eight weeks here. But I mean even substantially better than what we've seen over the last just six weeks. Uh, but uh, going forward through the rest of 2023 And the reason I say stimmy check is because a lot of money is obviously being invested into uh chip sack inflation reduction energy.

So that's why these are some of my favorite pricing power stocks right now. Uh, but anyway, very interesting argument that maybe maybe dare we say it? is this charm different? Who knows? We'll see because there's also the very common and typical argument if I don't know, man, say whatever you want but don't fight the FED Loretta Masters a bear. Well what did we learn yesterday? Yeah. Loretta Master was a little bearish and last time suggested maybe we need to go 50 BP and a lot of people are sending me emails and shouting at me in the comments going we're going to go to 50.

I'm like let me just reiterate I talked about this yesterday, but let me just reiterate what Loretta Master said Loretta Master said I want the upper end So the UE the upper end to be at five percent. The upper end today is at 4.75 percent. In the last meeting, the upper end was 4.5 percent. So if we're already past 4.5 at the upper end, we're at 475 now.

Guess what? The difference is between 475 and 0.5 or or five percent rather, 25 BPS Man I I I Don't think there's any way the FED shoots themselves into the foot and uh and and goes for a 50 BP They'll kill any any nominal credibility that they have left. Question here about the inverted yield curve and why is everybody ignoring How Deep The inverted yield curve is so let me explain that. I've explained that in Prior videos before, so sorry if it sounds redundant. but I Want to make it very clear what the inverted yield curve tells you is that today you're going to demand a higher interest rate than you will in the future.

That's the basic principle. and usually when the yield curve inverts, it's because we think we're going into a deep dark recession. and so we're going to demand more money to be invested today as we go through the recession than we will in the future. That's usually what the inverted yield curve tells us.

however, and this: this is like the only counter argument that it that exists for the Bulls Regarding the inverted yield curve, it could be right. Historically, what I'm about to say is wrong. So history is in favor of the bears, But the bull response is yes. Of course the yield curve is so inverted today because we think the very high inflation we have today is going to plummet very quickly.

see because usually let me try to depict that for you. Okay, usually when you go into a recession, you take GDP growth which let's say GDP growth is 2 percent here. I'll draw it like this. So let's say GDP growth is two percent.

So usually if the market thinks we're going to go into a recession, the yield curve substantially inverts because we think GDP is going to go negative, right? So let's call it negative point five percent. Uh, and then eventually after a recession GDP recovers again, right? This is traditionally what a recession looks like and so the idea is. Well, the yield curve starts inverting here and then re-inverts Uh, you know, maybe somewhere over here and then you actually have the depth of the recession still ahead of you. So during this part, right here, you have an inverted yield curve the Iyc and and that's sort of the traditional belief of what the inverted yield curve signals now I Want to show you the potentially different chart? Okay, that kind of looks the same, but watch this.

Okay, instead of talking about GDP what I'm going to do here is I'm going to say seven percent inflation, right? And then you potentially get to negative one percent inflation. and then maybe you get back to I don't know Positive, You know I don't know 2.5 inflation which they explain away via the uh, you know, flexible average inflation targeting or whatever. It is possible that the yield curve is actually describing what you're going to see in the plummeting of inflation, and because after all, the Bond market is dictated by yields, right? So it's possible that the yield curve is telling you no, No, we think the reinversion of the yield Curve will actually align with basically the the like negative inflation. And then when inflation gets back to normal, the yield curve is is already then normalized right? So we don't know.

But traditionally the Bears are right to say yield curve this inverted hell ahead of us whereas the Bulls are saying yield curve this inverted well it's just pricing. In all the disinflation we're about to see, it's crazy. I'm telling you their perspectives on every side here I Think it's very cool. Think about.