This video is a deep dive on inflation and it's extremely important in my opinion to watch the full video because it could affect your entire investing Journey for the rest of the year. I'll also give some thoughts towards the end of the video in terms of potentially where to invest now: I Do want to also start by saying yesterday: I Am grateful to say we had our very first flight looking for Real Estate areas to invest in for our startup. and if you want to join me on those flights and you want to Shadow me We are booking openings for February and March where you can join me, just use the link down below and you can actually join me on my jet as we explore real estate Together you can Shadow me Maybe we'll even do a barbecue at the studio afterwards. Check that out link down below.

Okay, let's get started. So the first thing that we have to look at is the fact that the Wall Street Journal just put out a phenomenal piece and this is just one of the many things that we're going to look at here. But the Wall Street Journal just put out a phenomenal piece titled what if inflation suddenly dropped and no one noticed and this was a really Incredible One Listen to this over the past five months, which that's actually pretty important because Jerome Powell regularly talks about looking at inflation in three to five months a month brackets. They do that, kind of like technical analysts use moving averages to smooth out those day-to-day or sort of month-to-month fluctuations, right? So they look at three to five month averages over the past five months June to November and and also keep this in mind: June to November.

We just actually had a nice, uh, slow report for November and we had a slower report for October. If we can keep that trend for December with CPI coming up here on the 12th could be good, but look at this: over the past five months: June to November inflation slowed to a crawl. Weather measured by CPI or Pce, the annualized inflation rate has been around 2.5 percent over these five months. That's actually really incredible because remember the Federal Reserve has a policy known as Fate Flexible Average Inflation targeting.

And if they can get inflation to average two and a half percent and the last decade, you know, taking out the extreme that we've just had, or considering it as part of the average, Right it all. Smooths out That way you look at. okay, we had a big spike. You get to maybe two and a half percent after that, but before that, we're sitting at one and a half to one point eight percent.

We could average inflation out to two percent and the FED could argue. We're already there now, and we're not trying to get to Opium here because there's actually still a red flag here, so there is still some work to do. But this data is actually really incredible because it shows that over the last five months, the annualized rate of inflation has only been sitting at two and a half percent. That's remarkably low now.

Unfortunately, the problem with this is if we jump on over here, we'll see core inflation. This is when you take out energy still running a little bit on the hot side. And this is a problem because if you just look at the core, you see that over the last five months, we've been sitting at 4.7 percent annualized for CPI and 3.74 pce. Now what that means is oil and energy prices have been coming down a little bit faster than core prices are coming down.

Now some say that's actually exactly what you would expect because even though CPI you know the Consumer Price Index says that. Okay, here's how much oil went up or down with Energy prices, right? That's our headline inflation number. Oh, here's Core where we take out Energy prices. The reality is Services Transportation input costs to product.

All of these things are often based on how much it costs to actually travel and uh, you know, ship stuff around which includes oil prices. So even though we have a core measure of inflation, how do you really strip oil and energy costs out of core? Well, you don't? You Kind of just say you do on Headline And then what happens is three to six months later you get lower oil prices actually showing up in Core. So this Wall Street Journal article here suggests that we might already be on the trajectory towards a flexible average inflation Target of two percent. In fact, we could already be there.

Now we just need core prices to follow. That's pretty incredible. Now, the Federal Reserve also already sees three forms of inflation contributors mostly falling. With the exception of one.

We know that demand for goods is falling. We know that household inflation is falling. When we look at recent rents, we see household inflation coming down substantially quickly, which is great. We expect that to show up as a big anchor in data over the next six months, and the Fed's already kind of pre-building that in.

But the FED is still stuck on this idea that wages are rising and that wages or wage earners have a lot of pricing power to demand more wages. And they're fearful that we might have a wage price spiral, which is basically where inflation goes up and people keep demanding more and more wages. And then when they demand more wages, companies have to raise their prices and you get this stair stepping up of inflation. and then you get Paul Volcker who comes out in the early 80s and says we can't have this.

we must crush the economy. Well, the Wall Street Journal had another phenomenal piece literally about the wage price spiral. Take a look at this heard on the street the Fed's fear of a wage price spiral. might soon.

Abate That's the last piece of the puzzle. It's literally the last piece of the puzzle that we're waiting for the FED to flip-flop on. Look at this section that I've got right here with the X's The causation of inflation is less from wages than the vice versa. As inflation heated up, workers asked for higher wages so they could keep up.

That's normal, right? That's the start of a wage price spiral. As inflation goes up, people ask for more money. Right now, inflation has begun to cool, so wages are cooling as well. That would be a different situation than what we had in the 70s where workers were demanding higher wages because they thought that future inflation was going to remain high.

Okay, this right here. That is a very key word. See that word thought there. This has to do with something known as inflation expectations.

And I'm going to show you something about expectations in just a moment. But this time around, readings on people's long-term expectations. Okay, A Little insight here. While higher than before the pandemic are still relatively low.

This means people are expecting inflation to come down. Which, as inflation comes down, means people are less likely to ask for higher wages in aggregate, right? This means in total hey, inflation pressure is coming down. Natural gas prices coming down, Electricity prices coming down. Uh, you know, fueling your car prices coming down, travel prices coming down.

Whatever. As things finally start relaxing like egg prices, milk prices, chicken prices, right, we start seeing these prices come down. Pressure on us to survive slowly. Goes Down And If our expectation is that inflation is in the longer term quote-unquote transitory, then maybe we don't have to push so hard for fear of if we ask for a higher wage.

What if we had fired, then we get thrown out into the market where, ah, crap, maybe we don't even get as good of a job anymore because all of a sudden the good jobs have already been taken by previous people who've gotten laid off from, you know. Google Facebook Amazon Whatever. Although Google not quite yet laying off but the other big text Anyway, so what do we have here? This is a suggestion that or or actually here. The Wall Street Journal goes on to say.

Another factor is that the share of workers represented by unions is far smaller, creating lower bargaining power. Kind of interesting, especially since you see a lot of drama about Starbucks and Amazon and Apple seeing big unionizing fights. But this is quite interesting because if the wage price spiral is abating and because inflation is coming down and the labor market is starting to soften, then the third and final piece of the Federal Reserve's fears about inflation skyrocketing away falls apart. Which actually could explain why we're starting to see expectations for a 25 basis point hike February 1st from the FED go down.

Now you might think Okay, Well, Kevin if the expectations for a 25 basis point hike are going down, then that must be replaced by a 50 basis point hike. right? Wrong! Last week, 98 of the market expected the FED to come out with a a 25 basis point hike. So almost all of the market thought based on the Bond market right Futures curves, we thought we were going to get a 25 basis point hike from the Fab Fab one. Now it's 83 25.

So 83 of the market thinks we're going to get a 25 basis point hike. I'll clarify that Seventeen percent of the market thinks we're going to get a hike of zero. In other words, fed pause that is a big U-turn in the data already 50's not even being considered by the market anymore, and if the FED goes 50, they basically be rug pulling the market. which would be remarkable because we have massive issues with the jobs Market data that the Bureau of Labor Statistics is releasing.

In fact, you should watch my video on this yesterday. But I'll give you a quick summary: Average hourly work week declined or the average hours worked in the work week declined. That actually puts pressure up on average earnings. Explain this all in the other video.

Bottom line: If you have less hours worked and people are on salary, it means people earn more money and it kind of pushes up what looks to be like wage inflation. But the wage inflation numbers actually came in way lower than expected and we had a revision down in the last report which means wage pressures are already falling. We also had a higher labor force participation rate, which is why we saw that unemployment rate fall and implies that more people are going to work because they have to go to work. Which means more people in the labor market, more supply of workers, less pressure on wages.

We also have more people taking multi-jobs less full-time workers, and higher part-time workers. This also implies that we're getting a higher supply of people filling jobs. maybe because they have to because wages have gone up so much, you know? Joe Biden Was bragging about how great the unemployment report was and pretty much everyone on the internet was replying going, uh, the unemployment report only looks good because more of us are taking more jobs because we have to thanks to all the inflation we've been facing over the last year. And they're right.

In fact, full-time workers have fallen and not only do we have less full-time workers, but we have Way more multi-jobbers and Way more part-time workers. Which suggests that all of a sudden, if people are taking more multi-jobs we're actually seeing losses in full-time jobs. Reducing wage pressure. Again, people taking multi-part-time jobs? Yeah, Increasing the headline numbers, making it seem like there are more people on payroll.

But it's the same people just working more jobs to try to get by that reduces wage pressures now. Nick T Even he's like the Fed's mouthpiece. He even came out on Twitter and suggested that the last Labor report marginally reduces pressure on wage prices. So he's kind of playing this a little soft again fed mouthpiece.

But when we actually look at the data, we're like I don't know Man, things are starting to look really soft in wages. In fact, the Philadelphia Fed themselves sees the Bureau of Labor Statistics overstating jobs created in the second quarter of 2022 by 1 million. That means, instead of seeing somewhere around a million 10 000 jobs created in the second quarter of 2022, we only had about 10 000 jobs created. Now, what's remarkable is that stat I just gave you.

You might be thinking yourself: Kevin Why are you talking about Q2 2022? Because that's how long it took the Philadelphia Fed to realize it. It took six months for the FED to realize they screwed up. Now, markets seem to agree that inflation is mostly behind us. That's why we're seeing the expectations of a Fed pause finally show up in the data.

This is a huge freaking Turning Point On top of that, let's take a look at break evens and compare the breakevens to probably one of the most important things when it comes to Burgh. Even so, we're gonna look at that All right. So first, let's look at break evens. That is this chart right here.

so I'm going to hide myself in just a moment. but I Want you to pay attention to this is a one-year chart and look at where we are relative to the one year chart of inflation. Breakeven Expectations These are Market Expectations third bottom. right Here we're at the third.

Bottom Now I Believe we need to see these inflation break evens fall. One of the interesting things that can lead inflation expectations to fall is actually oil prices coming down. This folks is a chart of oil prices in 2022. this is, uh, just briefly after, uh, the War Began You know you had a spike a war Spike Over here, you had a summer Spike over here and you've had a quite a bit of rising going into the third Quarter over here.

But where we sit right now on oil is actually starting to Trend towards lower regions that we almost saw before the war. which is quite exciting. Like we want to see. these oil prices come down without a doubt.

Now What's remarkable here is if we overlay inflation expectations. which is this blue line right here with oil prices. look at the pattern you see going back to 2018. Covet pandemic over here.

Inflation Expectations coming down in 2019 corresponded with a decline in oil prices oil prices rising over the last couple years corresponded with a rise in inflation expectations. Now we have, even though it's pretty volatile, a trend down in oil prices? What do you have? a trend down in inflation? break-evens And what we really want to pay attention to is this dotted line right here. See that dotted line: I Believe that when we break this dotted line and the blue line here goes below the 2018 levels and we start seeing inflation break evens break. To this side, Over here, this will be where the FED starts to.

not just U-turn with pausing, but they actually start reducing interest rates. they start cutting. The reason for that is rates over here were two and a half percent. Right now we sit at 4.25 percent and remember whichever one comes first isn't exactly clear, but what we do think is if oil prices can fall and let's say they fall to here, we would expect break evens to go down as well.

And remember what we talked about in this video: Inflation expectations aligning with oil prices going down Makes a lot of sense because what we talked about earlier was that even though you could say core prices are running hot and headline numbers are coming in at just two and a half percent over the last five months on an annualized basis. Well, what happens when those lower oil prices start showing up in core prices and oil prices keep falling? We end up going into this disinflationary spiral now. Obviously, there's a huge risk factor here. A risk factor is what if oil prices rise? So I would make the argument that the most important thing to do is pay attention to oil prices.

For example, if China opens back up, what happens? Oh, is that going to create a huge demand on oil or not? How quick is that reopening going to be? China is relaxing for example, their real estate lending policies. But how quick are people and Banks who have now been once bitten and are potentially Twice Shy how quickly are they actually going to be to get back into speculative real estate lending? Maybe not as quickly as people think. Which means we could see a lid on the Chinese economy for longer. especially if you have a second covid wave or multiple coveted waves that really kind of keep a lid on.

Rather than seeing some kind of V-shaped recovery in China's economy, you end up seeing more of a slow recovery. which is kind of what we're expecting in our markets right now. What I think is really incredible as well is that the Bond market is actually giving you a prediction for oil prices. Now you might think that's crazy.

Like wait a minute wait. You're gonna tell me the Bond market is going to try to make a prediction on oil prices. Yeah, actually exactly what the Bond market is doing. In fact, if you look at the three month 10 year yield curve, what is deemed to be the most accurate for predicting a recession, look at where we sit now.

right here at the lowest level we have sat at ever on this chart going back to 1994. The chart goes back to 1994. we are sitting at a more inverted yield curve than we did at the bottom of the.com bubble, the bottom of Uh proceeding into the uh, the 2008 recession. And this doesn't bode well for oil prices.

Now don't get me wrong, oil prices did have a spike in 2008. they did have a spike right before the collapse of Lehman Brothers. And there's a suggestion that it's actually not the inversion of the yield curve. that's the most damning for company earnings and the stock market.

It's actually the steepening. And so the deeper it goes, the inversion, the more painful the steepening could be. Now, this is where we have to be careful, because if you notice on that chart, the bottom of that 310 inversion actually came before the bottom of each stock market bottom. In fact, let me chart for you.

the stock market bottoms. The stock market bottom in 2003 occurred somewhere right here, which is about February March of 2003. And guess what? That's when the Federal Reserve you turned baby. When did the bottom happen in the stock market for the Great Recession? Well, that happened in about February of 2009..

Notice how the U-turn actually happens when the yield curve is significantly steep again because the economy has been hit so hard and so then you might be wondering: crap Where is Safety in this market because if we have that steepening ahead of us, even if inflation comes down substantially, the pain might still be ahead of us. And this is true. So we do expect that inflation is plummeting. We've seen many indicators of that here.

I'll even add another one just to try to make it more clear. this is the U.S the United States Institute for Supply Chain Management Manufacturing Prices Paid index overlaid with CPI in English Hey yo manufacturers, Are you guys paying more money or less money this month compared to last month? And the more you have them saying we're paying less money for Stuff the more the green line plummets, which is the one that has already plummeted on the right side and this one tends to lead CPI numbers plummeting by about six months. That's the Blue Line the top one that's barely inflecting. So in other words, we expect to see a big plummet in inflation happening.

And summing up the video going now into what to potentially do investment wise: I Think we've made a very clear argument here. We know Goods Prices are falling. We can see that reiterated by manufacturing prices paid. We know that household inflation is plummeting.

We know that the Jobs Report is totally wrong, and we're seeing the wage price fire will get removed from the market. So there's really no leftover argument to say that inflation is going to continue running hot Unless of course, this CPI report coming up on the 12th, which I'll talk projections in just a moment comes in crazy hot. We should actually see it come in pretty dang soft. Based on the three aspects of inflation plummeting, that's great.

In fact, the expectations reiterate that December projections for inflation are a zero percent growth month over month. That's down from point one percent last month, core inflation up actually slightly to point three percent. That's a change from point two percent in the prior. We'll see personally.

I Hope we kind of Miss on Core so we could just Crush that core argument as well. We start seeing core come down. That's the expectation I Don't make the expectation Wall Street Does headline inflation expected to be down from 7.1 percent last month too 6.5 percent. And when I checked this last week, it was 6.7 So that means the expectation is already getting revised Down, Down, Down down 6.5 For headline, it's still very, very high, but shows you it's starting to plummet core year over year.

Expect to be 5.7 down from 6.6 in the last. So with all of that said, how do you protect yourself going forward when that yield curve starts steepening again? Well, in my opinion and this is my opinion Okay, I am a licensed financial advisor I run an ETF I have courses on building your wealth I you know, do real estate? Uh, I have a real estate startup where you could join me and you could chat on me with a a flight on my jet link down below. I do a lot of different things and I say this as a disclaimer because while I do a lot of different things I can't give you personalized Financial advice in this video I can't do that because I have no idea what your situation is right. So this is generic advice, but it's advice that I believe if it works for me personally and it's my opinion I believe that the benchmarks in 2023 to 2024 are going to get reamed the most.

The benchmarks are your classic Vanguard index funds the ones with a heavy allocation to Staples defensives Health cares. Basically, the things that have boomed in 2022. look at McDonald's stock down like one percent year over year and what's McDonald's starting to do well? They're starting to realize crap. We're gonna have to start cutting a lot because not only do we want to automate more, but we're starting to see pressures on our ability to maintain margins as we go into a recessionary environment.

And it's time to start cutting staff and automating more. which shows again, downward pressure on wage price. Uh, you know, with the wage price spiral, which we reiterated earlier. But it also shows that the companies that did the the best in my opinion over the last 12 months are potentially setting up for pain in that steepening of the yield curve.

My opinion, the companies that survive that steepening of the yield curve are the ones who don't go through the earnings EPS recession. and those aren't the McDonald's of the world or the Walmarts or or your Staples that have done pretty well. In my opinion, those are the growth stocks who can prove that they can actually still grow earnings per share and free cash flow in some of the most challenging macro environment times in the last, quite frankly, over decade, probably the last 14 years since the Great Recession In my opinion, those are companies that have pricing power which I Know this sounds crazy, but I think those are companies that can lower prices to continue to be competitive while actually maintaining thick margins, increasing free cash flow, increasing their bankruptcy buffers because they can make it through this and they're companies that end up taking market share during the recessions because the ones with low margins or low free cash flows end up having to reduce production of uh of of money losing products, let me give you an example here. in my opinion, when you take a company like Byd which is a Chinese auto manufacturer that has a net profit margin of 1.45 percent, what do you think happens when prices get forced down in a recession by five percent? Well, they potentially go negative.

and if you go negative, it's a sign that you literally have zero pricing power. You have negative pricing power. You have unpricing power. Right now.

every company, even good companies with pricing power are going to have to adjust prices down down in a recession. That's normal. You raise prices in Good Times You lower prices and bad times. but the ones with actual pricing power are companies in my opinion that maintain High net margins.

like I Know it sounds redundant, but I Say it all the time. Tesla brings about 14 not including energy credits in net to the bottom line. So even if Tesla has to drop prices across the board and maybe their net margin goes down to 10 percent or nine percent. 8A Negative.

That means companies with negative margins have to slow their ability to aggressively expand and take market share. who ends up taking a market share? The company that still has net margins. And so if you could find companies that have that kind of pricing power that have fallen out of favor in the last year because you have a rotation into defensives that are detached from fundamentals, you just have institutions going. Inflation is high.

Okay, what do we do? Well, the textbooks have as we go into defensives and we go into Staples Oh crap. But what if when we actually go into that EPS recession, these companies start losing free cash flow. And yes, inflation might go away. but you start getting screwed.

What happens? Well, all of a sudden you'll slowly start seeing a rotation back that the companies that are actually still growing throughout the recession because those are going to be the safest plays because they have the greatest free cash flow. and in my opinion, if you could find ETFs that are focused on investing in High free cash flow companies not profitless companies you want to be careful about Innovative companies that are losing money because Innovative companies can be very Innovative But if they're losing money during a recession, big risk. If you have an Innovative company that's actually increasing the amount of cash flow they have during a recession and eating market share. In my opinion, that's where you're planting seeds for the real future Now when it comes to real estate I Urge a lot of caution: I Read about real estate every single day.

whether it's online or in the paper or whatever I Study real estate I Study the MLS I Fly For Real Estate I Meet people on the ground. Let's just give it to you this way: someone who's also a real estate broker. although I don't represent clients I Know how to talk to real estate agents. Okay, okay, the inside scoop is stuff still getting a lot worse before it's getting better.

Okay, that should be obvious. It's not like it's a real Insider secret here Point in my opinion is these inflationary numbers coming down are going to be really good for companies that have fallen for reasons that are not fundamental but have fallen for Trend changes towards defensives and Staples and when that inflation proves to coming down and the FED pauses and eventually u-turns the companies with the biggest market share growth stand in my opinion, the biggest and most massive gains over the next decade and I'd like to have a lot of my money positioned into an ETF that has exposure to those for one simple reason: when those stocks run I don't want to pay capital gains to rebalance my portfolio appropriately and ETFs allow you to potentially avoid capital gains. That's because if you hold the ETF the ETF manager can rebalance within it by trading stocks and not actually passing capital gains to the invest the individual investor. That's insane.

So that's my belief and I really see inflation plummeting. But we have a CPI report coming out on the 12th and we gotta see that what I just said is getting reiterated by the month over month reports. I Hope so because everything's pointing that way. But always remember, hope is not an investing strategy so you have to be cautious and in my opinion, that means stay out of margin debt and survive.

Make more money, survive, but then invest where you think it's best for the next five to ten years. Thanks so much! Thanks so much for watching. Check out those uh Shadow day options link down below and we'll see in the next one. Good Luck.