i was wrong

I was wrong in this video I'm going to

explain what I think is really happening

in the economy and what I got wrong

we'll start with some of the things that

went right but most importantly I think

the lesson for all of us is what went

wrong

so let's get started hey everyone meet

Kevin here

what happened is I believe neither what

I expected nor what most of us expected

and I don't know if this analysis is 100

correct but

I think it is

in January of 2022 I warned of an

impending recession and an elongated

fight between the FED to fight inflation

after all we were just walking into some

of the highest inflation that we had

seen in 40 years in every single company

in every single earnings call was

screaming at us the leading indicator

that we are raising prices and we're

raising prices for the rest of the year

if you were unconvinced that inflation

was going to happen all you had to do

was read any earnings call any single

earnings calling you would have known as

a result I encourage investing in cash

and hedging and I met with JPM Bankers

JPMorgan and Chase Bankers who used to

work for the fed and I'm like what do

you manually have a 15 chance of a

recession it's gonna be way higher than

that they thought I was out of my mind

so I encourage investing in cash I sold

my rental properties I invested in cash

I sold my stocks I sold my crypto I sold

everything

people thought I was insane for

recommending cash why would you want

cash after all we were about to go into

inflation and inflation is going to make

your cash worth less right well not

really see inflation makes your cash

worth less if you're buying things that

go up in value like for example if

you're buying a lot of coffee see here's

a rust mug with coffee let's say this

coffee is worth three dollars and it

goes to five dollars well then the cash

I had buys me less coffee but if I had a

thousand dollars of cash and I was going

to buy Amazon at 200 let's say I'd get

five shares of Amazon but if Amazon goes

down to a hundred dollars then I get 10

shares of Amazon right so I win

depending on what you're doing with the

cash so my thesis was that poor

individuals people buying things like

food and coffee and groceries uh and

lower income individuals we're really

going to get crushed by this recession

because that inflation was going to

affect them the most whereas people with

excess cash usually your middle to

higher income tiers they would have had

excess cash to buy assets that had gone

down in value

that was the thesis

but some mistakes were made along the

way we're gonna talk about that because

the thesis also ended up being wrong

I realized this a couple days ago as I

was leaving teeterboro on Route over to

Chicago I just interviewed Kevin O'Leary

in New York City and I was on my way to

Chicago I had a message from my mom that

here's this amazing meal she was having

in Cabo San Lucas and I'm like how does

my mom afford Cabo San Lucas when I know

with certainty she generally Works

paycheck to paycheck and she does her

job well but she likes to spend her

money when she has extra money she

doesn't care about investing she doesn't

want to own rental property she doesn't

want to own stock she wants to live

and I thought to myself well when I was

a child I remember we had no money I

remember losing my childhood home to

near foreclosure my friends in school

were all torn away from me and I

remember this ever optimism of my mom

even after my parents divorce in that

nah that's okay as long as we're still

alive uh we'll make it work and and

we'll get some money together and so on

one hand you know my father who's

running a business and and trying to do

things you know in the way of running

the business and building the business

and owning real estate you know we're

out of twenty dollar bills to buy a

Bionicle because there's no money left

to pay the bills and we have serious

problems my mom who never wanted to

invest a dime in real estate or stocks

or otherwise like ah I'll save a little

extra from from working you know minimum

wage or whatever and we'll get that

Bionicle we'll make it happen you know

maybe not today but in a couple days

we'll we'll scrape it together it's just

like that it was a weird like ever

optimism despite poverty

and it made me think wow you know as

long as you're not homeless or disabled

or Afflicted with substances Americans

my mom being sort of transplant from

Germany still mostly German but also now

mostly in American

usually maybe just people in general

have a way to manage and they enjoy the

experiences and value experiences of

being able to either buy their children

something or go on a vacation even if

you're living paycheck to paycheck uh

even if that meant you had to go on a

shoestring budget you were going to save

up to have money for that flight money

for the state and you were going to go

be there and have a good time even if it

meant you were taking the city bus to

get around you were going to have a good

time it was gonna be like a high-end

ritzy vacation but you were going to

survive and you were gonna live and you

didn't die

and that really made me think wow

how does that compare to our consumption

in the economy today and how does any of

this compare to the whole concept of

being wrong well it actually does

substantially consider this

70 of Americans live paycheck to

paycheck

and consumption makes up about 72

percent of our GDP which is really

interesting because if you multiply

those two together it means that

slightly more than half of the economy

is driven by these spending habits of

people who are living paycheck to

paycheck

that was mind-blowing to me because I'm

thinking of myself like whoa wait a

minute if you're paycheck to paycheck

that means you have no money to spend

anything wrong it just means the money

you do have you are spending that's all

it means

so

that kind of blew my mind when I made

this connection to my childhood and put

myself in those shoes because I realized

wait a second

my thesis that this would be a poor

person's recession was wrong and and

sorry to be insensitive for the word

poor but let's just keep it since simple

here okay we'll get into semantics here

I've been poor and it's okay to say that

but the idea was that if your energy

costs are going up your food costs are

going up your rent is going up poor

people are screwed because they won't be

able to invest

people with white collar jobs Pilots

CPAs real estate agents lenders they'd

survive because they'd be able to make

more money

Not only would they survive but they'd

be able to continue to buy luxury goods

like solar panels for their homes for

Teslas or computers or business

equipment

because they'd have more money to invest

in those things

well what ended up happening

well stocks plummeted in 2022. and wages

skyrocketed specifically for the lower

income individuals in 2022. so what did

that end up doing to wealthier people

and businesses which most businesses

over 70 percent of businesses small

businesses are owned by people over 35.

so what happened with the older folks

people over 35 well people over 35

they're small businesses and the Boomer

Generations what do they do they ended

up spending less money they felt crushed

whether it was their Investments that

lost value they felt less Rich they

ended up spending less money for one

reason or another because of stocks or

tumult in real estate you know real

estate has come back somewhat okay we

could talk about that separately and we

probably will towards the end of the

video but

think about this the older folks are the

ones that took

this why do we know this well we know

that 80 percent of stocks are owned

by people who are not Millennials or gen

Z in other words the older Generations

eighty percent are owned by people older

and so guess what according to American

Express it's those people who actually

have negative year-over-year real

spending

it's the Gen Z's and the millennials

who own barely any of the stocks who

maybe had some stocks or crypto lost

some money and they're like whatever who

are now actually

making more money potentially a lot more

money who are spending more money

they don't give a sh9t about stocks or

real estate in large part now all of a

sudden you're making 18 bucks an hour

instead of 12 bucks an hour you're

getting paid 50 more so you're getting

paid 50 more and you don't give a flying

Hoot about real estate or stocks

not being perfectly precise here but the

implication is what matters

higher wages for the paycheck to

paycheck cohort means higher spending on

travel entertainment restaurants

Chipotle Ulta

normal people stuff

McDonald's Costco whatever

I'm not at all trying to Discount that

inflation is hurting this cohort

yes food costs have gone up but guess

what we're still buying and yes we have

to survive I get that

but people are also making more money so

yes the costs are up but we're also

making more money especially at the

lower income tiers whereas potentially

the higher income tiers those

white-collar jobs they're not actually

making more money real estate agents are

selling less homes lenders are doing

less deals investment bankers are doing

less uh mergers and Acquisitions

companies are buying less computers uh a

corporate spend is is you know American

Express Corporate spend for larger

businesses is up but for smaller

businesses it's way down uh in real

terms year over year and so yeah the

larger businesses maybe have some extra

money but that's probably because

they're laying off people and they're

able to spend more money on stuff to

make investments on more server

equipment or whatever right but that's

what you're supposed to do you're

supposed to trim during a recession and

spend more money so that not is not

necessarily relevant to our human

equation the human equation says that

people with higher wages

are actually feeling this recession more

whereas potentially lower income

individuals are not and again I'm not

trying to be insensitive to inflation I

get it coffee is more expensive food is

more expensive I go to Cheesecake

Factory I'm like what the hell you know

I go to Chipotle I'm dude 17 bucks for a

burrito with guacamole this is insane

but what do we still do we still do it

especially paycheck to paycheck because

making more money

so people want to live and that goes

back to my childhood story right you

want to live so even though you're

living paycheck and yes you have higher

expenses you're able to spend more money

so you're able to pay that higher

pricing at Chipotle at the hotels on

your vacations for your airfare and so

people aren't cutting back on that

especially the ones who haven't been

reamed in the stock market or in real

estate and real estate again not so much

yes okay real estate has started

recovering in q1 Florida is doing just

fine California is not doing as well uh

and and none of that really matters I

didn't want to sell my real estate to

perfectly try to time the market I think

I sold at a fantastic time my reason for

personally getting out of real estate

because I really think most people

should never sell real estate just

Diamond hand through my reason for

selling my real estate is unique to me

because I'm throwing my money into a

real estate startup uh and I don't want

people who are investing in my startup

to think that I'm competing with them

for rental properties so that's more of

just a personal commitment to my startup

uh I think the timing of what I'm sold

was good

but I'm not trying to re-time the buy

and I you know handle the tax

implications to where I'm not like the

tax implications have no effect again

I'm in a unique situation because of

that so let me carve that out and just

say that's a unique situation but let's

understand what this means for an

individual because you might be thinking

to yourself but Kevin like poor people

have to pay higher interest now well

let's actually analyze that for a moment

consider this if you have a thousand

dollars outstanding on a credit card

and your interest rate was 20 before

rates went up you're paying 200 bucks a

year in interest

that's not that much money you're making

way more than 200 a year anyway

like marginally more because if you're

making 50 more maybe instead of making

15 grand a year you're making 25 Grand a

year

that's a really good change right who

cares about your credit card interest

rate at 200 bucks a year or whatever but

wait a minute what if the interest rate

now goes up five percent

okay so you're you know 20 interest goes

to 25 that sounds like a lot but for

credit card debt per thousand bucks

that's an extra 50 bucks

per 10 grand a credit card debt that's

an extra 500 bucks it's not going to

kill you especially when you're making

50 more money who cares so it's one less

meal out or a few less meals out on a

yearly basis right but your wages are up

50 so maybe you're actually up meals and

travel rather than down

go to the business owner now instead and

compare somebody who gets a 50 million

dollar line of credit for working

capital like a trucking business or a

distributor

and they pay you know two percent on

their 50 million dollar line of credit

and all of a sudden now they're paying

seven percent because rates are up five

percent well that means they're having

to pay 2.5 million dollars more per year

for that line of credit that's 200 000

more per month who really gets screwed

now the worker making 50 more money

paying five percent more on their credit

card no

or the business owner paying an extra

salary per month for that line of credit

obviously the small business owner small

business owner gets screwed the big

businesses the massive corporations they

have a low-cost Capital Apple can borrow

for basically rates near treasuries

not that big of a deal and they have a

ton of cash and I mean you have to

borrow that much

so you know what really sucks is when

you look at the last GDP report

you know what's happening inventories

are compressing at businesses why did

what did end face say in their earnings

call inventory sell through is slow

end phase is the manufacturer

wholesalers sell and face products well

if wholesalers say hey I got enough

batteries in solar panel or solar

inverters this quarter I don't need to

order from unfaz and face suffers

so if the working costs of capital go up

for that business they order less

inventory

the same is true for many small

businesses throughout America and really

the globe the reality is that most of

the businesses installing solar

relatively smaller businesses so if

smaller businesses are feeling the crimp

and face feels the crimp

interesting

now what else did GDP say oh services

and consumption up well maybe that's not

stagflation right because what what

anchored GDP down

was inventories that came in way below

expectations but services and

consumption came in above expectations

so maybe this is not a stagflationary

economy maybe we just got the whole

picture wrong so the whole argument here

is wait a minute

maybe this is not a recession of poor

individuals this is actually a recession

of small businesses

White Collar professionals middle and

upper income individuals they are the

ones getting burned because of the stock

market

and business revenue is falling again

I'm not saying poor individuals aren't

selling but this is not the poor

person's recession that I thought it

would be this is actually the middle and

upper class recession

and that's really fascinating because

that means I basically positioned wrong

because my thinking was if this was

going to be a poor person's recession

that you would want to get away from

basically ultimately things that

everybody is buying like Staples are

going to see a lot of a downtrend but

Staples have been some of the best

performing stocks over the last year now

part of that could be because everybody

rushes into those thinking if we're

going to a recession where Staples do

best but those are the best performing

stocks right now

and there's this thesis that oh the

Federal Reserve is going to be able to

raise rates and crimp spending of

everyone but the reality is like the

credit card example I gave that's not

true the FED could raise rates

but it doesn't even affect poor

individuals because they're making more

money

they don't care who cares the business

owner the middle to Upper income

individuals those are the people who

care about higher interest rates for

individuals who are living paycheck to

paycheck it's like pushing out a string

when you raise rates who cares

which means potentially we could have a

higher for longer scenario where you

have to buckle up and you have to deal

with the FED being higher for longer so

again it's not a poor person's recession

it's a middle and upper class recession

so what does that mean well again it

means stocks like Tesla and end phase

are under stress longer potentially a

lot longer whereas stocks like

McDonald's Walmart Chipotle Ulta they're

doing just fine and they might do fine

for a wee bit longer now does that mean

it's time to flip-flop

well my opinion the answer to that is no

like

how do you go bearish right now

on stocks that have already gotten

hammered as much as some of these higher

income stocks like you've already gotten

whacked on some of these

but to go from those bearish positions

over to Staples now in my opinion would

be moving from underpriced stocks

to overpriced stocks that are doing well

in the short term

so I think that would be a big mistake I

think repositioning now to the expensive

stuff would be like a sheep following

the herd of all right we're going to

reposition well that did well the last

year let's double down on that

I think that's a mistake

so the bottom line out of all of this is

if you're invested in growth you

probably have to buckle up for some more

pain for longer because the fed's

interest rate increases aren't really

affecting that Services segment where

people are spending their money which

they have more of on the paycheck to

paycheck side and in some cases we're

still trying to get back to trend

and it all makes sense comparing back to

my childhood

all makes sense

you're gonna you're gonna make more and

you're gonna spend more

but in the meantime the people who have

invested in stocks did hurt but now I

think the biggest danger would be moving

from stocks that have gotten hammered

to stocks that have performed well now

would I short the stocks that I've

performed well no because we don't know

how much longer this is going to go

is it time to go all in on margin on on

the growth stocks no of course not I

still believe we are going to be in a

volatile Nike Swoosh recovery now we

know we have you know the Federal

Reserve and oh but what are they gonna

do and are they what are they gonna

pause and all this kind of nonsense look

the Nike Swoosh takes time I really

believe that if we look out on the week

chart for uh what's been going on with

the NASDAQ we'll go to uh I haven't

turned on night mode on this computer

but we'll go to this um

we'll go to this input right here uh

there we go so

here's the NASDAQ here's your down

that's the tip of your Nike Swoosh this

is the volatile

upswing now we've had quite a few red

days in a row here which you'll actually

only see if you go to the data ah here's

your red red red red uh and then we're

seeing some green over here I guess

we're somewhat flat uh these are the

average candlesticks so if I go to the

normal candlesticks yeah all right so

we'll see we'll see where we are

nasdaq's doing pretty decently but

anyway you go back to these average

candlesticks over here

and you go out to the weak chart look at

what you have you still have the Nike

Swoosh this is the beginning of it

this is the elongated recovery part of

it I really believe this this phase from

here to here will come in a very Lumpy

multi-year period multi-year period

so

that's my thought uh I do think the

positioning was wrong uh initially but I

do not think that at this point it makes

sense to repair that positioning

but I think it's very useful to

acknowledge that mistake and learn from

it and recognize where we are now and

recognize why we have this continued

inflation uh and this is why the Federal

Reserve says until we have more job loss

we might not see control of that service

as inflation I hope that's not the case

because that means we're gonna have to

keep hiking higher for longer or at

least stay higher for longer

so we'll see anyway thanks for watching

good luck out there we'll see in the

next one

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