*This* Predicted Inflation. Today, It has a HUGE Warning.

The Economist just put out a phenomenal

piece on inflation we're going to touch

on exactly what's in this piece and

we're going to talk about how this

relates to the Walmart and Home Depot

earnings calls what did they have to say

and uh their numbers where are people

spending money where are people not

spending money and is it possible that

the tool that we could use to predict

inflation is something that most

economic forecasters have actually not

been using and maybe if we start using

it we could actually see the true

expectations for inflation that are

potentially a lot more accurate than

what we've been using because who

remembers of course oh don't worry

inflation will be transitory now don't

worry the transitory folks might still

end up winning the war but so far

they've mostly and highly embarrassingly

lost the battle but there's a particular

tool that might give us an idea of how

inflation is going to act in the next

few years but first let's get started

with this piece from The Economist

absolutely fantastic piece here lots of

investors think inflation is under

control not so fast as the February it

says this uh edition of the this week's

edition of The Economist in 2023 it may

yet do the same to the real economy that

is the average economic forecaster

thinks that a recession in America is

essentially a definite outcome when

economists write the history of the

post-pandemic era the Resurgence of

inflation and Central bank's battle with

it will be a defining story they say

fantastic but where's the interest where

are the arguments well you've got two

sides you've got the optimistic side the

pessimistic side and then the side of

data that the economist provides and

it's fantastic let's look at the Optimus

first here so the optimists say they

point to a growing pile of evidence

showing that out of 25 economically

developed countries uh 25 out of 36 of

those countries monthly data is showing

headline inflation is falling and the

good news has been coming in for months

forecasters had actually been

overestimating how much inflation is

potentially coming in for January and

February and the three months to January

America's consumer Prices rose at an

annualized rate of just 3.8 percent the

lowest reading in two years according to

the last CPI report we got on v-day and

that's not to be confused with v-shaped

recovery day it's uh Valentine's Day uh

this time last year central banks were

thinking very different thoughts we

didn't actually have a falling inflation

or inflation moving at 3.8 percent

instead we had inflation expectations

that were highly unanchored and the

worst was still clearly ahead of us with

terrible inflation reads in the summer

followed by some surprises in the fall

and that really led the Federal Reserve

to embark on this incredible tightening

cycle however an interesting note here

researchers at the Federal Reserve Bank

of Cleveland a morning consult and

another University here published a a

new piece on inflation expectations

together and they find that between

August and December the median expected

rate of inflation across rich countries

has fallen by about a percentage point

now unfortunately that started Rising

recently based on bond market signals

that yes inflation expectations had

nicely fallen in the last three months

of the year in fact you could see that

here I hide myself from the screen here

you can see the last three months of the

year yes inflation expectations had been

falling but they're starting to rise

again so I think it's worth noting that

in in the context of this economic

Economist article here

uh but really the argument here is that

hey look we're starting to potentially

see core expectations of inflation fall

below levels that we had in pre-pandemic

America and research suggests that

searches for inflation are falling on

Google substantially in that really

inflationary pressures on on uh any sort

of economic modeling are showing massive

inflection points that inflation is

trending down that's sort of the the

optimistic argument right and the

optimistic argument I believe is

buffered by the fact that most company

earnings calls tell you yeah look we had

to raise wages and prices in 2022 but

people are becoming more price sensitive

we think most of the Embers of inflation

are going to be gone by the second half

of 2023 the labor supply has increased

substantially and so on now

unfortunately

you've got some other information here

as well for example here you have

ultimately uh this this idea uh that uh

financial markets might be overly

enthusiastic about inflation falling and

that's because of this fear that the

labor market is still overly tight when

we look at things like the jolts report

it's exactly what we're getting very hot

jobs report very hot a jobs opening and

labor turnover survey for January some

arguments are being made that hey these

are just seasonal implications from

January and don't worry these numbers

are going to go away in February great

but that leads to a lot of uncertainty

in February between now and obviously

March and puts more pressure on the more

uh the the data reports we're going to

get in March but the concern is you're

starting to get sort of this rhyme of

the 1970s where in the 1970s we

temporarily saw inflation rotate down

and then we saw inflation come back and

that led to really policy failures which

created the Paul volcker of the 70s now

of course there are arguments to be made

that no well this isn't the 70s

inflation expectations are relatively

anchored and that's true even though

they're very volatile they've been

relatively range bound unlike what we

had in the 70s when we left the gold

standard and we left the the era of

price caps government price caps which

when those price caps were removed

artificially led to massive surges of

inflation because the market wasn't able

to properly price goods and services

beforehand the oil shock of the 1970s

right they're absolutely massive

differences but what the Federal Reserve

knows is they do not want to repeat

those mistakes of the 70s and so the

thesis is hey just keep rates for as

high as possible to make sure we can get

inflation done and out of uh out of the

American economy and then of course

we've seen Supply chains catch up we've

got a glut of ships especially memory

cards rather than a lack of apply with a

massive surge of American demand because

of stimulus money that was printed and

there's the argument from the optimistic

point of view that hey well you know the

Federal Reserve operates with long and

variable lags of monetary policy which

some say no those lags have actually

shortened to about six to nine months so

they're actually not that bad anymore

but the big issue that the Federal

Reserve is going to be paying attention

to is wage pressures and so far at least

the economist suggests hey wage growth

is falling and yeah we've got high

vacancies but maybe there's a better

model because so far we've got a lot of

confusing data right we've got data

suggesting okay so inflation is starting

to fall maybe this time is different

from the 70s but how do we piece all of

this together because the data is just

so noisy and it's all over the place and

the data that we've been using

historically has been wrong I mean after

all when the Federal Reserve talked

about transitory inflation they were

terribly wrong after the burst of

inflationary stimulus that we got so

maybe there's a better chart that we

could use to actually model inflation

better because so far what we're looking

at is very noisy hey we look at CPI

reports which suffer from massive uh

fluctuations you look at the jolts

reports which suffer from massive

fluctuations even the labor report can't

seem to count people appropriately or

you count it twice you count it three

times via the differences of the

household survey and the establishment

survey the numbers have been a mess

however

The Economist thinks that they have

found a solution they suggest that there

is one indicator that actually really

appropriately provided the best warning

that inflation was coming and if you

look at that level today you could see

that going back to 2019 the level of

that indicator is 17 above its long-term

Trend today for developed countries and

consumer prices today are up about 14

percent above Trend in other words maybe

this one Supply could be the most

accurate and The Economist went back and

said hey had we applied this one metric

we would have seen that we were about to

get a massive surge of inflation and The

Economist argues that the people who are

actually pointing out this one piece of

data were correct when they said no you

can't print this much money and not

expect inflation however those are the

same people that are now saying

inflation is probably going to turn

around a lot quicker than we expect and

that data set is very simply

The Following on screen now it is the M2

money supply and the growth chart of the

M2 money supply which is really just a

measure of people's savings deposits

their time deposits uh in in Money

Market funds or or basically money that

you have available to spend right and

this idea is that if we just look simply

at nothing other than the M2 money

supply we know that when it surges we

are going to get a massive inflationary

boost and when that money supply begins

to stabilize inflation quickly goes to

zero after a period of time and after

then another period of time you end up

actually with negative inflation which

is what we're seeing with that M2 money

supply Now The Economist thinks this

could actually be the most appropriate

metric to use rather than just the noisy

data that we're getting and so it's

interesting you know they talk about

some risk factors they talk about the

idea of a Chinese recovery the that

we've regularly been talking about the

Chinese recovery not actually providing

too terribly much of a boost to oil so

far there's this idea that hey maybe

it'll increase oil prices by 15 and

that'll lead to another inflationary

boost however oil prices have actually

been falling during the reopening

probably because there was too much

speculation around them this is where we

talk about the money supply being one of

the few indicators to provide an

advanced warning of inflation how we are

are affected by the trends and really

the argument today is being made that if

we look at just the M2 money supply

potentially today we have the best

indicator that inflation is going to

fall rapidly now that's an idea right

that doesn't mean it's a good idea all

right idea but it's fascinating

especially since you've got a lot of

Wall Street Banks right now including JP

Morgan Sadie Bank Morgan Stanley a lot

of folks aren't making the argument that

we're we're going going to see this

rampant surge of inflation but the

argument that's actually being made by a

lot of banks right now is this idea that

I'll draw out here and it's this idea

that yeah if you look at the M2 money

supply inflation is going to fall

dramatically but that's not the problem

the problem is the fact that the FED is

listening to noisy indicators like the

joltz report the labor report or

whatever which would motivate them to

keep rates high for so long that they

end up destroying the economy that's the

big fear so an investor now we have to

look at this and go okay great so

there's a lot of noisy data Maybe the M2

money supply does say that inflation is

going to go down but then yet again

you've got a Fed who thinks oh we're not

convinced that it's going to fall

because they're not really paying

attention to the money supply just like

they screwed up the first time now

they're going to screw up again the

second time and that's a pretty

unfortunate red flag especially since

since the FED might be unfortunately

looking at data kind of like what you're

seeing over in the Home Depot earnings

call where when you go to the Home Depot

earnings call you have a lot of talk

about how in 2022 yeah hey people are

becoming more price sensitive here uh

from 2022 but people have been less

price sensitive than we have expected in

the face of persistent inflation says

Home Depot you know that's not wonderful

we want to hear people are price

sensitive right hey we would expect

there to be some moderation and spending

because of the housing market slowing

down but so far Home Depot says yeah

yeah we're actually not really seeing

that so far our spending uh has has uh

normalized and even if we end up having

a Slowdown hey you know what don't worry

we're only going to see earnings Fall by

a few percentage points but in the

meantime what we're going to do is we're

going to raise wages substantially

because we still see a healthy consumer

and Home Depot talks about how they're

essentially going to spend an additional

billion dollars on compensation for

individuals they do say that price

sensitivity has been a little bit more

Broad in the fourth quarter compared to

Q3 however they're still very uh

optimistic they see less spending on

some of the discretionary items like

grills and Patio items uh really sort of

optional items since you could probably

just keep what you already have right uh

but this is very similar to what we saw

Walmart talk about as well individuals

spending less money on discretionary

items specifically things like a toys uh

toys and what do we have over here we

had a softness and toys consumer

electronics home and apparel you're

actually seeing Target almost I've

noticed at least anecdotally shrink the

the Home Improvement sector and try to

enlarge other sectors like a beauty so

I'm seeing Beauty encroach more on the

Home Improvement and sort of flowers and

plants and that sort of action and it

sort of aligns with what Walmart's

actually seeing people spending more

money on health and wellness but less on

sort of general merchandise consumer

electronics home and apparel so you're

seeing this this consistency of uh of a

shift in spending Trends now how does

all of this really come together as an

investor well in in my opinion I think

it's really clear that the most

important signal we could pay attention

to is the Federal Reserve when are they

going to recognize that hey you know

what if the M2 money supply is

plummeting and we're about to get a

massive bout of Housing disinflation and

year-over-year comparisons which should

drag inflation down substantially you've

already got plenty of noisy indicators

that are suggested yeah potentially

short-term hotness but when we Trend it

out over three months we're seeing

substantial declines already whether

it's in core inflation service is still

somewhat sticky though right that's one

sector where we haven't seen inflation

roll over substantially yet but then

again Services didn't start inflating

until about a year after Goods started

inflating it sort of takes time for

those Embers of inflation to blow

through the economy so all in all bottom

line out of this sort of piece from The

Economist and and Walmart and Home Depot

well probably my anticipation is hey

this is where we want to stay away from

Staples as investors this is something

I've been pretty consistent with staying

away from Staples in 2023 as investors I

mostly think that pricing power stocks

are going to perform a lot better in

2023 I think those were the easy ones to

sell in 2022 and it was easy to sort of

escape to Staples but the trends that

we're seeing are that most of the staple

companies are expecting uh negative EPS

that's where you're probably going to

see the largest earnings recession which

aligns with this idea that yeah the

fed's probably going to keep rates

higher for longer which is going to

affect poor people the most which means

less spending on Staples and yeah

eventually that M2 money supply should

give us optimism that if eventually the

inflation will blow over and that might

end up being our most accurate signal so

if I had to again simplify all of this

maybe we could take great comfort in the

fact that the M2 money supply is falling

which historically has been one of the

best indicators of inflation falling and

it certainly was one of the best

indicators that we had that inflation

was about to Surge and inflation

wouldn't be transitory at least in the

time frame that the Federal Reserve

thought and instead we then look at okay

well then in the meantime where are

consumers going to spend well

potentially PP pricing power style

stocks where people where companies are

still going to be able to sell their

goods and services because they're

either smaller and still growing or they

appeal or cater to potentially a higher

income demographic or a higher cash

flowing business that is able to sell to

other businesses goods and services that

are essentially Investments like a lot

of companies are suggesting hey maybe

one of the best places to invest right

now could be in battery manufacturing or

or a Fabs for chip making

so that way uh server infrastructure can

continue to be built because if server

infrastructure continues to be built

well then SAS businesses can continue to

succeed and SAS businesses are where

we're actually seeing way less of a

decline than we expected SAS businesses

led by companies like fortnite and

cloudflare and the earning cycle have

actually been doing substantially better

than expected and guess where they're

seeing weakness they're seeing weakness

in the small business sector which is

generally the sector that has the lowest

level of actual profitability and income

that's after all why they are called

small businesses because they haven't

gotten to the level of large scale yet

because they don't have enough of a

profitable product or pricing power so

and to me it all aligns pretty clearly

we could be wrong right knock on wood

that we're not wrong but

The Economist projection here of

massively declining inflation should

give us confidence that eventually

inflation will disappear the question

then is how much did the Federal Reserve

destroy markets and where is that

destruction likely to be worse in my

opinion it's likely to be worse where

the lowest income demographic creates

the highest amount of spending and

that's in Staples it's in groceries it's

in Foods Tyson Foods plant-based Foods

uh it's uh it's in your targets your

Costcos your Sam's Clubs your Walmarts

any it's the dollar store essentially

anything where you you are selling to uh

basically everyone right lower income

middle income and higher income those

are probably going to be hit the most in

2023 just my opinion even even a

McDonald's the reason for that is you

are seeing more price competition

there's a reason and I know this one

sounds crazy but there's a reason Whole

Foods is saying hey we're going to start

cutting prices even though it's going to

cut into our margin it's an Amazon

company obviously and that's to put

pressure on companies like Walmart to

try to bring higher income consumers

back to Walmart right and this creates

pricing Wars and I think the price

you're going to see the largest pricing

Wars are are actually in areas where

we're looking at things people generally

quote unquote have to spend on Foods

because foods will see a limit how much

foods can really raise prices now people

think that's remarkable but if you

really want to see where there's a limit

on some of these staple items read the

earnings call from a company like

Energizer or Tyson Food and you'll see

they're basically as I've been saying

taking it in the margin in my opinion

and maybe in like an eerie way it all

aligns too well because usually when

things line up too well you kind of

Wonder like hmm what are you missing

well then of course yeah you've got risk

factors like okay well what if China has

a Commodities uh you know put so much

pressure on Commodities that we end up

seeing commodity prices Skyrocket again

but then you wonder how much has that

idea already been been built into trades

and so far it hasn't been materializing

that trade has been failing this idea of

a hundred dollar a barrel oil so far has

not materialized remotely if anything

it's trending in the opposite direction

we're seeing more fears about a

recession right and actually staple

price is therefore coming down now

rather than fears about about this

runaway second wave of inflation uh so

again that reiterates to me that okay a

fine unfortunately uh that's bad news uh

for potentially Commodities uh you've

got bad news for uh companies selling

Staples because there's a limit to how

much they could raise prices yet they're

also having to raise wages now some

would say hey well wait a minute isn't

that indicative of a wage price viral

well not necessarily because a lot of

the wages that are rising are in lower

income sectors like your Walmart staff

your your Home Depot staff which

actually bring your average hourly wage

in America down average hourly wage in

America somewhere around 32 bucks an

hour We're where's the average hourly

wage is somebody working at a Walmart or

Home Depot or fast food places somewhere

around 17 to 20 an hour so you actually

end up bringing wage pressures down of

course what do you do you end up as long

as and that that the theory is that that

should show up in consumer prices right

because companies will continue to pass

on their prices but so far nobody's

really still talking about hiking prices

there's some hot segments Aviation still

being one of those segments and some of

the companies like Johnson and Johnson

and Staples providers suggest hey we've

got we've got our last sort of price

increases setting in now but that's it

we're done even the Pet Food suppliers

are like look you know we've we've got a

little bit more of of pricing elasticity

in us but we're seeing a massive decline

in in pet household formation people are

starting to spend less money our pricing

power is waning like we're almost done

we can't do any more much longer so

things in an eerie way are really

aligning to suggest inflation will not

be a substantial long-term issue however

there is a lot of fear now that we're

not terribly worried about that second

wave of inflation we're actually because

especially if we look at a strong

leading indicator like M2 money supply

as The Economist told us but we're

actually more fearful about the Federal

Reserve overdoing it and overtighting

because of the noisy data we're getting

uh and that unfortunately is a potential

reality that yeah we could go through a

very uh as I've been saying a very

volatile Nike Swoosh recovery I think

when we when we talk about the Nike

Swoosh people think I'm drawing

something that's very very smooth like

this but they're forgetting the noisy

part that I talk about right and the

noisy part is are set up by days like

what we had yesterday and substantial

pain uh in the stock market so uh some

of my Theses uh you know but so far you

know we'll see Financial conditions

definitely are tightening it's in the 10

years sitting at about 3.95 certainly a

tightening of financial conditions which

is going to sort of continue to crimp uh

inflation without even the Federal

Reserve doing anything

that again I think the Federal Reserve

is cognizant that they do have a dual

mandate they want to make sure that we

don't unnecessarily force people into

joblessness

uh so we'll see someone here says so

you're telling me not to hoard eggs and

chickens to resell them yes both of

those have very small PP very very small

PP lacking pricing power just read some

of the earnings calls for companies who

uh who actually Supply those system be

careful about that uh the inverse Nike

Swoosh inverse Nike Swoosh uh that would

imply a slow decline in a rapid increase

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or unless you're saying I just didn't

draw it well enough well okay

there draw it kind of a little bit more

like this right but the idea is that

this is a very rapid Decline and this is

sort of a very slow uh slow and volatile

up right there you go a little bit

better a little bit better of a drawing

anyway

my thesis we'll see we'll see what plays

out but I I I think a lot of it uh makes

logical sense but then again I'll tell

you one one place that isn't logical is

the stock market