Inflation JUST Flipped.

folks everybody is pissed at me because

yesterday I made a video talking about

pce inflation and how wonderful it was

that pce inflation came in below

expectations and it looked like Goods

inflation was zero and service inflation

was finally disinfighting to just 0.2

percent and boy oh boy the comments I

got were quite extreme

they were somewhat to the effect of one

like this for example Jane just wrote

inflation is not going to stop we will

not stop buying and yesterday somebody

else which actually inspired this topic

somebody wrote what the f are you

cheering about low inflation my ass when

I go to the store nobody is reducing

prices and everything is still expensive

Kevin you're smoking crack you don't

know what you're talking about unsub

dislike

all right so let's start at the basics

and dismantle this and then I'll show

you some earnings calls from just the

last week so these are not the

traditional earnings calls that I've

been talking about regularly through the

cycle they're actually brand new

earnings calls and we'll go through and

look at some of the latest data so let's

first explain how inflation actually

works all right so in order to do this

we're going to go ahead and show the

little coupon code Banner right here

that is your reminder to get in before

the CPI coupon code expires and then

we're going to go to this little sheet

here and I'm going to draw you how

inflation works again this is going to

start a little basic and then I'm going

to get into some new information on

earnings calls so I want you to remember

this because it seems like I have to

regularly explain this if something

costs 100 at a store you're walking into

and you're pissed off because all of a

sudden that object now costs 110 dollars

how much inflation did we just

experience year over year

this should be relatively easy math

there was a positive 10 move in

inflation because inflation could

obviously be negative as well this

represents a positive 10 move in

inflation

now

if inflation

does the following and that 110 dollar

product

is now one hundred and twelve dollars

how much inflation did we just have

well for Simplicity okay I know this is

not a perfect math but for Simplicity we

had approximately two percent inflation

notice that in this case

did the store ask yourself challenge

yourself here did this store cut prices

in this case would the store have

discount banners up telling you about

how this price is no longer 110 the

price has been reduced

no the store would not do that because

the store actually continued to raise

prices

so your frustration is actually accurate

because prices have gone from one

hundred dollars to now one hundred and

twelve dollars prices are still high

because prices have gone up they have

adjusted upwards that is frustrating

but that is not actually what we're

cheering we are not cheering that prices

are still high we are not cheering that

prices are not going down because

obviously we would love for prices to go

down we're actually cheering is what's

called an inflection point in the rate

of inflation so if inflation is moving

at say two percent and then all of a

sudden it jumps to ten percent and then

it goes back down to say three percent

or two percent or whatever it is

the trend of inflation is towards

disinflation disinflation is moving from

10 inflation to two percent inflation

that is disinflation it just means the

trend has now moved down inflation is no

longer going up in its growth rate

remember inflation is a rate of change

measure so if you kind of relate that to

a car think about it like if you're

slowly accelerating at a red light

because you're trying to save your fuel

economy you're slowly accelerating like

a grandpa your rate of acceleration is

very low your inflation rate is very

very low but if you're somebody who

drives aggressively like let's say a

newly licensed teenager and a BMW you

might floor it on the gas which is

similar to printing a lot of money and

you create really fast inflation and

then you hit the brakes and then you

stop the economy really quickly right

that's kind of the the jarriness that

we're experiencing here now note what we

are cheering again is that disinflation

is occurring and what we're looking for

right now in the economy are signs of

disinflation and this is where I'm going

to introduce you to three different

earnings calls all from the last week to

give you a little bit more color on how

disinflation may occur keep in mind that

deflation would actually be prices

coming down so if that 112 dollars went

down to a hundred and eleven dollars

next next year then you would have again

for Simplicity approximately a one

percent decline in inflation which is

deflation right negative inflation

deflation a falling rate of inflation is

disinflation okay now let's look at some

earnings calls so let's zoom into this

our next call here this is Darden okay

this is Darden Darden is the company

that does restaurants like Olive Garden

LongHorn Steakhouse cheddar scratch

kitchen blah blah blah okay fantastic so

what do we have here

we significantly exceeded the industry's

benchmarks for same store restaurant

sales and traffic outperforming more

traffic than we did on sales so traffic

is outperforming the competition however

what did the company do the company

continued to underprice inflation

resulting in lower overall check growth

relative to the industry so what they're

saying is we're getting traffic but

we're not raising prices as much as

inflation is going up folks there are

two letters that this company does not

have as much of what are those two

letters this company does not have when

you have an earnings call that says we

are not raising prices as much as we

could have well folks it should be

obvious this company lacks pricing power

it lacks pricing power when it is not

able to raise prices with the level of

inflation because what's happening is

their margin is declining right margin

decline is very very normal and then

what we can do is we can compare margin

decline between various different

companies and say well whose margin is

likely expected to be most resilient

which company is then High free cash

flow and with the most resilient margin

and those are typically the companies

you want to be in at this sort of time

okay fantastic so what else do they tell

us about inflation well they tell us

look at this food and beverage expenses

Rose 1.1 percent driven by Commodities

inflation of about nine percent which

was higher than we anticipated going

into the quarter and significantly

outpace or out pricing outpaced pricing

of 6.3 percent so in this is a red flag

here right because some food and

beverage inflation is still happening

but look inflation is going up by nine

percent in certain food and beverage

categories but they're only raising

prices at 6.3 percent that shows you a

lack of pricing power

now take a look at this

chicken Dairy and Grains continue to be

categories experiencing the highest

levels of inflation for Darden however

they have improved versus the prior

quarter as we expected however beef

inflation improved this is one of the

reasons we like to take out food out of

inflation measures because it is so

volatile right

so look at this this shows us that

restaurant labor was 120 basis points

better than last year as we benefited

from sales leverage good trying to run

more efficiently despite hourly wage

inflation of eight percent a lot of

year-over-year measures these are

year-over-year measures most of these

for wages and food are still very high

this is normal this is actually

reflected in CPI and pce that you're

still seeing that sticky service

inflation year over year that's normal

but it looks like some of that is

starting to wane why is it starting to

wane in Services why would I show you a

restaurant that is saying hey man some

of the inflation is still high while I'm

doing this because we're starting to see

the company say look even though some of

our input costs are higher we're not

able to raise prices anymore eventually

that actually reduces CPI because when

you have a company that says look our

ppi is high our producer price inflation

is high but we're not able to raise

prices matching our PPI what happens

when ppi is not passed on to the

consumer CPI false and that's what we

want to start seeing happening so we're

starting to see the crack at a sector

that historically has been doing very

well so I'm purposefully looking at a

company that is still showing you sticky

inflation but they're starting to show

you the flip flop what are they doing

they're looking at margin performance

why because they don't have pricing

power anymore now they're talking about

underpricing inflation and in order to

try to offset some of the increased

costs what are they doing they're

reducing their marketing spend red flag

for advertising and they're going

through other cost saving initiatives so

this is really a company that's telling

you like hey look we're trying to get

more efficient but we're going to get

squeezed here so this is not a company I

would want to invest in in 2023 because

they're getting squeezed they're

reducing their marketing well reducing

your marketing is a great way to

potentially reduce your Revenue at the

same time you have cost pressures and

you can't raise any more prices that's a

red flag

uh total uh inflation for Commodities uh

expected over here this gives you some

numbers here expected uh we expect

Commodities inflation between nine and a

half to ten percent so some some large

sticky levels of inflation right now we

expect Commodities inflation that is

solidly in the low single digit range

for the fourth quarter so they're

talking about the last year we've had

very high inflation but now looking

forward what do we expect well they

actually expect potentially Commodities

inflation that'll rotate back to the low

single digit range

and potentially closer to flat

and going forward they expect look at

this and while we don't normally provide

commodity Outlook this early for the

next fiscal year we are anticipating low

single digit inflation for the

Commodities Basket in fiscal 24 led by

high single digit inflation on beef and

produce we expect all other categories

to range from slight deflation to low

single digit inflation

what am I doing here on purpose I'm

trying to show you I'm trying to teach I

personally believe and I'm not trying to

Pat myself in the back I just I really

personally believe this I personally

believe nobody else analyzes this stuff

what I'm purposefully trying to do is

I'm trying to go okay Jerome Powell says

sticky inflation is the problem where's

the sticky inflation restaurants and

hospitality and Retail okay let's go to

the epitome of that go to restaurants go

to Darden what's Darden saying dude the

last year we had hella high inflation

for labor and commodities this sucks our

margin is getting squeezed we have to

become more productive we have to cut

advertising this sucks

going forward we actually expect

Commodities some of them to disinflate

beef is still going to hurt us but

everything else is going to be low

single digits and overall we think we're

going to have low single digits

inflation so now they're telling us

they're not raising prices and they're

expecting low inflation

it's best case scenario

the problem is folks

what I just showed you is called a

leading indicator and that's not the

only company I'm going to show you I've

got a few others I'm going to tell you

but this folks is a leading indicator of

disinflation leading

CPI and PBI are a laggards they lag they

are lagging indicators this is why

people are fed up with the Federal

Reserve being focused on lagging

indicators because they believe the

Federal Reserve will over tighten by

looking at lagging indicators when it's

actually the restaurants that are

telling us uh oh we are actually

potentially looking at a down inflection

here of inflation very very good to know

thank you for that comment uh Rosie

you're right I did make a mistake of

that and I actually mentally thought

about that so the comment here publicly

is I made a mistake by mispronouncing a

Mrs uh or I said misses but they're

actually a Miz a Miz is generally either

not declaring that they're married or

are unmarried and then a Mrs is a

suggestion that you are married I'm

really bad with like these these little

acronyms and pronouns and stuff I'm

trying to get better but thank you for

pointing out my flaw and helping me

learn

okay next earnings call that we have to

look at is this is actually one of my

faves we're going to look at the Dave

and Buster's earnings call we're going

to be very brief about our business here

I want to jump in over here

uh this is the financial position page

hold on where is that where is it where

is it

I think it's right here here we go look

at this

I'm going to start with labor inflation

we are seeing some relief here what have

we been talking about remember how many

times have I said Starbucks Chipotle uh

and all these various different

companies Uber Lyft are giving us the

heads up that labor inflation is going

away that there's no wage price spiral

and you know how many times I got pissed

off uh or people got pissed off at me

about that yeah ooh somebody noticed

Somebody by the way just commented thank

you for using the banner at the bottom

of the stream instead of puking adds

Kevin that's true this individual is

thanking me for having at the bottom of

the stream here get life insurance in as

little as five minutes paid promotion

and sign up for 12 free stocks with

Weeble by going metcavin.com free we

just have a scrolling banner down there

so I don't have to read it out and look

there's even one for uh Kevin's ETF and

courses metcat meet kevin.com whatever

they all go kind of cool uh

even though I just read them all out

anyway uh okay oh somebody's making fun

of me saying restaurant is your leading

indicator LOL no actually a

consolidation of all earnings calls or

my leading indicators remember what I

just mentioned Uber Lyft Johnson and

Johnson uh uh Procter and Gamble Tyson

Foods and Industrial it's not just

restaurants it's everything broadly you

can easily look look at cloudflare in

the tech space you can look at the

availability of Labor it's insane

cloudflare had 400 000 job applicants

for 1300 positions

it's crazy

all right so what do we have here Dave

and Buster's I'm going to start with

labor inflation we are seeing some

relief here I think when you look at

hourly wages quarter sequentially so

quarter over quarter they stayed

relatively flat holy smokes folks how

could you bet that we are going to have

hyperinflation when the leading

indicators are obvious

flat flat flat flat

Now Dave and Buster's telling you we

feel that we've stabilized and the same

for Commodities we've actually seen a

nice decline so when you're looking at

call it quarter sequential inflation

which means Court over quarter we went

from about 17 year over year and came

down and down and down and in Q4 we saw

inflation at just roughly four percent

we've been able to get commodity

inflation down

we're looking at relief around proteins

like chicken breasts and wings this is

good

this is good

uh this is actually very very good news

let's look at one more can we get

underwear inflation the only underwear

inflation that exists are these short

shorts that I'm wearing I I gave

everyone

um a little preview of them yesterday in

the course member live stream you'll

have to check that one out but these are

amazing these are 19 I've shared them

all with course members and they're

godsend I love them they have little

zipper Pockets too on both sides dude

let me just rant for a second here okay

this is deflation in a good way for you

I went to and then we're going to talk

about we have one more earnings call to

look at we have to look at um

Canadian Solar

um I went to I bought uh shorts at Hugo

Boss running shorts at Hugo Boss and the

Hugo Boss running shorts did not have

uh or no I'm sorry the Hugo Boss one's

ripped so the Hugo Boss one's ripped and

then I had an aloe uh uh set of shorts

and the aloe shorts they didn't rip but

they didn't have any Pockets I'm like

what the hell each of those were like 60

shorts one of them the Hugo Boss ones

rip and I love you the aloe ones don't

have any pockets and I'm like what the

hell is this so now I'm wearing 19

shorts

they're like a three inch inseam or

whatever uh but anyway I'm wearing a 19

shorts and these are like indestructible

they don't tear they don't rip they're

comfortable I get them on Amazon they're

phenomenal and I'm just like why the

hell would I spend more money this cheap

stuff is fantastic anyway yeah no

pockets that should be illegal I know no

kidding ah

you know

need that three inch uh inseam for the

big peepee

anyway take a look at this this is

Canadian Solar

if you look at the past two decades raw

material costs increased meaningfully

due to covet recently some of the raw

material costs have started to decline

and that's disinflation for you such as

that of polysilicon as new capabilities

ramp up

but we are not quite at the bottom of

the cost curve yet given the

technological innovation and pipeline

that will help us receive basically lead

to further cost declines

the key point is that we're getting very

close to the bottom of the current cost

curve for solar at which point value and

Technology technological differentiation

become prominent drivers of

profitability not cost with that we

expect to see greater PP and operating

leverage as our cost structure

stabilizes basically Canadian Solar is

saying they have no pricing power right

now but they are seeing commodity costs

decline I'm not a big fan of investing

in solar panels because I basically

think they're a commodity I'm a big fan

of investing in

um

in in end phase solar inverters and

batteries not a big fan of investing in

the panels themselves so something

something to keep in mind so

um yeah anyway so what do we learn from

this well we actually learned that in

disinflation is everywhere uh it's all

around us the disinflation and it's

actually a phenomenal thing now uh some

of you have been asking how I put these

banners up like this and how I've got

the little scrolling thing at the bottom

just go to metkevin.com stream yard

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