Here's everything you need to know about what Jerome Powell had just said at the Washington DC economic Summit with Dave Rubinstein The message here was a reiteration of what we got at the Fomc meeting with some small adjustments. and these adjustments are really, really interesting. Before Jerome Powell came out to speak. I actually pulled up this document from Bank of America and it talked about why it could be that this unemployment report came in so hot for January that all of a sudden we had so many more jobs and where did they all come from and everybody thought that Jerome Powell was going to freak out and have to raise rates substantially and aggressively re-posture because of this report that came up.

but he actually said something phenomenal that was also pointed out in this report. Jerome Powell Talked about this increase in Immigration and it's literally what Bank of America here talked about. Who knows? Maybe uh, Jerome Powell Read this report. but this year's update in the increase of Civilian non-institutional population of 954 000 was driven almost entirely by an 853 000 person increase in the population of men over 20..

while we can't say with absolute certainty, we suspect this increase was driven by a recovery in net international migration and that's exactly what Jerome Powell actually ended on drum. Powell ended on this idea that hey, maybe one of the reasons we are seeing that companies are having an easier time and there's a less pressure for a hiring workers is because we are seeing more immigration because recently immigration data has come up again. That was his quote Now at the same time as he talked about hey, maybe this Jobs report is being explained away basically by immigration. He also when he was asked hey, would you change your position of what you said then versus now and he based quickly said hey, Well after the report came out Financial conditions tightened he basically said without saying hey, the market already did my job for me.

Remember the morning of Jerome Powell's talk uh and the afternoon of Jerome Powell's talk, the 10-year treasury yield fell to 3.38 Think about that, it was under 3.4 3.38 Well after the Jobs report and today, look where it sits now. 3.63 In other words, it's up over 25 basis points. It's up a quarter of a percent. And Jerome Powell In this press conference today, even though he didn't directly say it, he said look, we know things are going to be bumpy.

We know the data is going to come out, you know Left Right Center All it's going to come in all over the place. But you have to realize the market has already significantly tightened since that Jobs Report came out. Those were his words. The market has significantly tightened since then.

That's what he said. And when you look at the Goldman uh, the Goldman Sachs Financial conditions index, the same time you saw that Jobs report come in is the same time you saw the 10-year treasury yield jump. 25 basis points is The same time you saw a jump in the goal Goldman Sachs Financial Conditions index You know Jay Powell sits with the Bloomberg terminal in his office or refinitive or cap IQ or one of these and he's sitting there studying the markets the same way we are. And he actually explains away this Jobs report not just by suggesting hey, well, we had more immigration which is exactly what Bank of America saw, which just reiterates the Bank of America report.

But he also explains the way the Jobs report by saying yeah, you know we seem to be on the right path because even though we had something that came in a little bit hotter, guess what happened Boom Market adjusted instantly. he's like, huh, barely have to do anything, is basically kind of the way he's coming across. So now he does say that, look, it's obviously going to be bumpy. We're going to get some data that comes in strong.

some data that comes in Weak That's the way it is now. One of the things that I thought was incredibly bullish that he talked about was this idea that a few months ago, probably about six months ago, he's like, look, we want the jolt spread between, uh, the jolts is the measure of job openings and labor turnover. uh, survey and we want that spread to be in line. So basically zero spread.

So in other words, if there are 11 million jobs we want there to be, uh, maybe six million jobs available because that would line up with 6 million unemployed people. Right now, we're at almost a ratio of two to one, which is too high. originally. Jerome Powell Wanted to see this go down to one, but it hasn't gone down to one.

So what did Jerome Powell Do he goes? eh? He gave up on the indicator. That's an indicator. Why did he do that? Well, He finally gave us a rationale for that today. He said today that the difference in the Jolts spread, which used to sit around 2 million.

That is, there were about 2 million more openings than there were unemployed people. That difference is now 5 million two and a half times as large. and he says that actually quote feels structural. That is actually a bullish statement because it's basically a way of saying, you know, and I hate using this phrase.

but it's basically Jerome Powell used it himself. He basically said, look, this time's just different. The pandemic basically created so many dislocations in the marketplace that people don't really know what they want to do. and so everybody's kind of rejiggering.

Like do we like work from home? Do we like in the office More And all of this re-jiggering is creating This Disaster in the labor market. And it's one of the reasons we've had the supply chain nightmares that we've had. Now this morning, we talked in depth about Supply chains and how Supply chains are substantially loose right now. Goldman Sachs On a scale of one to ten, one being the loosest, 10 being the tightest puts us on a two for a very, very loose and open Supply chains right now.

but we still have to see the next two factors of inflation come down. Unfortunately, these sectors lag like crazy. Jerome Powell Made it very clear as he's made many a time before. the good service Goods Inflation is already coming down.

Fantastic. We're already winning on that disinflation is present and he reiterated that that is likely to continue. However, we need to see how housing disinflation come in. The problem is that stuff lags a lot even.

Jerome Powell Said himself. We don't expect to see the housing disinflation of owner's equivalent rents falling until the second half of the Year Well, I Hate to say it, folks. we're barely in the second month of the year. That means we got another four months to go.

Before you see that, housing disinflation number three. you've got to see Services come down, which are heavily driven by wages. They make up 56 percent of inflation reports, and that 56 percent is heavily driven by services. But if immigration is helping keep a lid on wage inflation, Jerome Powell does not need to kill the labor market.

Uh, by forcing a recession. As long as inflation goes down and wages stay stable, we don't want wages to go down, We just want wages to be stable. as long as wages are stable. He does not need to destroy people's jobs and livelihoods by crashing the economy.

And I think that's why you're getting at least a slightly more bullish uh drum. Powell And you're getting a slightly positive reaction from markets. Markets aren't as jubilant as they were when he started talking, but net net, they're higher than where they were when he, uh, before he started talking. Now when he was asked multiple, he was asked at least three times about, look, how would you change your mind if you had the jobs data beforehand and he's like, hey, look, you know what basically says this cycle is different Okay, so in other words it kind of suggests.

Look, it's been explained away. We've got the immigration, the economy is, our markets are already pricing it in and he was pretty clear that look, it seems like we're on the right path and now the goal is stay the course and let's see what the data brings. And so far the leading indicators, not the lagging indicators. The lagging indicators are actually what's happening in service, inflation, and what's happening in the housing market, right? The leading indicators are very, very clear and you can see those very clearly by actually reading the earnings calls of businesses that are hiring people.

Chipotle Reports today after the closing bell I Highly encourage if you are worried about the wage price spiral, listen to: Chipotle Chipotle reports tonight or this afternoon and they are trying to hire 15 000 workers for burrito season. That's a lot of people and it could create a lot of pressures in the labor market if other businesses do the same thing Chipotle is doing. But both Starbucks and Chipotle aren't seeing that wage inflation yet. We'll We'll see what's confirmed in the earnings report from Chipotle later today.

We also have end phase later today. so there are a lot of things to pay attention to. But so far I would say while this wasn't like a uh, you know fomo pump of a of a speech from Jerome Powell This was very clear that really, this one strong labor report doesn't really make a difference and if anything, he actually gave us more bullish information. This idea that the spread in the Joltz report is probably just struck actual.

At this point there are differences and eventually we'll get to two percent over time. He didn't indicate that we had to get to two percent by a certain date and just look, we're gonna hold the two percent. We're not gonna go for three percent. We're gonna stick with two and we're gonna work in that direction now.

of course. Could there be black swans that happen? Absolutely. And what kind of black swans did he mention? Well, he used mention or he made mention of potentially War being a Black Swan war with China being a Black Swan And he also talked about the debt ceiling basically being a debt SWA or a Black Swan And and that's that. essentially Drone Power would have no ability to Shield markets from a crisis if the Federal government did not pay their bills and that ultimately there there is no choice but Congress increasing the debt limit to ensure that we can pay our bills.

that was made Crystal Clear by Jerome Powell So there was. There was no question at all that even with 31.4 billion dollars of debt already outstanding, He says there's only one way this ends and that is that Congress pays its bills and if that doesn't happen, no one should think we can Shield the economy or markets now is this. You know what Jerome Powell said today. Is this somehow you know, massively bullish to where it's like this big bad signal that to you says bye bye bye? Absolutely not.

Absolutely not. What happened today was just a reiteration that look, we're starting to see some disinflation, but the process ain't over yet. Sure, leading indicators look good, but we've got to get through all the crap. So this is a game of patience.

And I think it's one game that probably is won by owning shares not in margin and slowly increasing your exposure to pricing power style stocks. You want to increase your PP. It's very simple: everybody wants a bigger PP in their life and so do companies. And it's very important to make sure that you can look at companies in my opinion that have high free cash flow, positive net income.

And in addition to that, ideally you want to find companies with positive operating leverage positive operating leverage are companies where if revenue is stable, their Opex is going down, or if revenues are growing, then their Opex is growing at a slower rate than those Revenue views are growing. Things get concerning when you start seeing companies with increasingly negative operating leverage that would be like revenues are falling and costs going up. That would be the worst case scenario and unfortunately you're seeing a lot of that with SAS companies. and so I'm not the most bullish on SAS companies for 2023 and I'd rather be investing in some of the more stick and shovel plays like chip chip equipment manufacturers and actual durable style manufacturers.

ones uh that have performed poorly in 2022, but I think are set up for increasing operating leverage here in 2023 as Supply chains now reward those companies for refining their supply chains. That's my thesis. So again, is this some somehow Mega bullish? No, not at all. It's just it's more.

punting is what it is. it's Jerome Powell putting on the hard face. Okay, look, we're gonna acknowledge there's some progress, but we still got work to do. He's gonna say that for the next two years and maybe even beyond that.

In fact, that's what he said in 2018 too. Hey, you know we still have work today He says, oh, it's the same story over and over again. So uh, short of a quick trade I don't think there was much here that has changed anything and I'm going to continue looking forward to earnings and seeing where I could pick up some sweet deals. And if you want to learn more about some of the earnings, I'm looking for the trades uh that? I'm planning for this month.

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