Inflation Hell to Prove Michael Burry Right | Worse Crash to Come w/ Staples Inflation.

as an investor I find one of the most

important things we can do is pay

attention to our weaknesses and I

believe that one of my weaknesses is the

potential that inflation could continue

to remain substantially more sticky than

we believe in this video I'm actually

going to provide you some perspective

into how that could be the case that is

inflation could remain high and maybe

the likes of Michael burry will be

correct that inflation will be dragged

down by certain temporary forces and

then unfortunately we'll

re-rear its ugly head leading the

Federal Reserve to go from Cut to hike

again yet substantially worse than the

first time around and positioning for

this kind of pain is not ideal but we'll

talk about everything in this video so

let me first start by telling you that

you're going to get some new insight

from recent earnings calls in this video

that give you a breakdown of why I'm

making this video in the first place but

I'd like to start with the General

thesis just to catch you up to speed so

the general thesis I think we can pretty

much all agree as much as it's very

difficult for everyone to agree is that

yes inflation has been moderating for

the last 40 years it's been known as the

great moderation and yes we all know

that we substantially over inflated the

economy in 2020 and 2021 with a

substantial amount of inflationary

stimulus basically money printing it

wasn't just the United States it wasn't

just Democrats or Republicans it was

everyone around the world now the belief

was that that sort of inflation would be

transitory which turned out not to be so

great because well we had more variants

of covid we had more supply chain issues

than we expected and we also ended up

with a war in Ukraine which is a big

problem all of these things are making

transitory feel a whole lot more sticky

and yeah maybe the best case scenario is

that that inflation actually comes back

down to Trend or maybe even lower or and

sort of that Trend continues down then

yeah sure if this ends up being the case

yeah we might be able to sit around

drinking beer together in 2030 looking

back and going remember when we had that

transitory inflation and you might reply

yeah thank God it was transitory but

that's the bull scenario right what if

we end up inflating and as Michael burry

warns yes inflation is going to come

down because we all know we could all

see it the housing data is going to give

us negative inflationary reads this year

specifically in the Housing Services

sector which could weigh down the entire

sector right well as we weigh down the

entire sector yes we're going to get

Negative reads if that induces the

Federal Reserve then to panic and

flip-flop so to speak and then they

start reducing rates but then inflation

pops back up the FED could potentially

lose all credibility and if you thought

the break-even rates for inflation were

a good thing that they were while

basically starting to Trend down you

might be horribly surprised when those

Break Even yields for inflation end up

skyrocketing because nobody actually

believes the Federal Reserve can do

their job anymore the federal reserve's

credibility is already substantially

damaged from the initial claims that

inflation would be transitory and this

right here unfortunately is just some

bad news to reiterate the concerns I'll

hide myself in a moment but this is the

five-year Break Even chart and even

though yesterday and the day before

after some really low PPI numbers this

break even chart plummeted to a new low

this year it's still the entire chart

the lowest levels of this chart are

still higher than in 2018

and if I remove myself you'll actually

see that the breakevens while yes they

are volatile have broken to the upside

yet again uh that is still relatively

low we're still on the downtrend but

they are breaking towards a higher level

not breaking down towards the lower

level this says says that clearly even

though the broader bond market believes

the Federal Reserve is going to start

cutting rates at the end of the year yes

we're going to see it probably a pretty

deep recession uh I mean it could it

could I shouldn't say deep uh yes we're

going to see a recession because of what

the bond market is predicting and we'll

see those cuts this break even issue

somewhat sends the signal that the bond

market is also the belief that yes we

could get Cuts yes we could have the

recession but we might end up having to

go back up because again that entire

chart is above the 2018 level so there

are definitely red flags in the economy

and generally when I go look to see well

what's going on in the economy and I

look at earnings calls I want to

investigate which companies have pricing

power and which companies are suffering

from inflation and unfortunately we have

a very very large company that is now

telling us a little about an inflation

story that I didn't want to hear because

so far all of the earnings calls that

I've been looking at have been of one

consistent mindset price pressures are a

lot lower things are inflating at a

substantially lower rate or even

deflating in certain cases you've got

companies like Winnebago the RV

manufacturer who says hey you know what

if our competitors want to start cutting

prices well we can do that too you know

what we'll just all cut prices together

and we'll have a price War to the

downside that's the RV market then you

have a company like Tesla creating a

price war in the vehicle market for

electric vehicles and since we know that

companies like Ford lucid and rivien

lose money for every vehicle they make

that's an electric vehicle well we

expect them to lose now even more money

or just leave the EV Market which in the

case of rivian or Lucid would be

bankruptcy in the case of byd might be

going from a profit to negative if they

end up following Tesla with this sort of

pricing and Neo and X paying well we'll

see what they end up doing but so far it

looks like those price cuts are coming

there as well we've already seen some of

them more to potentially come yeah so

you've got price Wars and RVs you've got

price Wars and cars where else are you

potentially starting to see the rumor or

murmuring of price Wars well I'm

actually really happy to announce this

one but potentially the airlines see

United Airlines in their last earnings

call started talking about this idea

that hey well if our competitors start

cutting airfares we are prepared because

we have gotten more efficient over the

last few years and even though we're

still short 15 percent of pilots and

even though our revenues are still 15

percent lower than where they were in

2019 we can cut prices if we need to to

make sure we can stay competitive and

since we have better margins than the

competitors if they want to start

cutting prices we will too and we'll win

yeah that is a paraphrase of literally

what United said in their earnings call

because again I stick my head in these

earnings calls and I'm like oh okay I'm

starting to see what's happening

however

all that was pointing to the same

direction pricing Wars disinflation

deflation yes okay we know Housing

Services are going to go negative we

know that wage inflation is slowing down

even though in 10 days on January 30th

we have the ECI release which is the

same day of the expiring coupon code for

the lifetime access to the programs are

building your wealth of course member

live streams every day the Market opens

up q a directly with me but also a low

price guarantee the price won't be any

lower three months at least guaranteed

probably even longer since we tend to

bump the prices over time but what did

we get today and this was a little bit

of the concerning one

okay here we go so the earnings call

we're about to look into is Procter

Gamble and it creates some issues so

first of all they talk a little bit

about how they're making Investments to

make sure they have more Supply I want

you to know that every company is saying

this almost every company and this is

actually disinflationary right the more

you have companies saying look we have

invested a lot to rejegger our supply

chains to make sure we're never short of

product again the less inflationary

pressures you should see the next time

either China opens up or people go back

to spending because we're coming out of

a recession right the better Supply

chains are the more they can absorb

extra Demand by basically just adding

more Supply the problem with the covid

pandemic was as demand went up we

couldn't push up Supply because certain

factories in China for example were shut

down or we were just never prepared for

that level of demand in the first place

well now when we look at what Procter

Gamble tells us in the next Pages it

actually should start making you nervous

to the tune enough with the Federal

Reserve is saying see the Federal

Reserve like Mr Waller who's talking

today it you know all of them first of

all are on the same page they're all

like we're going over five we're not

going to cut rates this year uh but you

have Mr Waller saying hey look if

inflation pops back up we're just gonna

have to keep hiking hikes our hiking

rates 25 25 20 25 you know just keep

going uh this is obviously not being

priced in by markets so any kind of

actual need to continue racing uh

raising High raising rates would end up

forcing markets down presumably so what

kind of red flags do we have that maybe

inflation could stick around well let me

show you and then break it down so take

a look at this section right here thank

you John as I've said in each guidance

outlook for the past two years we will

undoubtedly experience more volatility

in the fiscal year ahead this Rings true

as we enter 2023 okay fine volatility

but what did I highlight here

the combined year-on-year profit

headwinds from foreign exchange rates

freight costs materials fuel energy and

wage inflation are even a greater

challenge in fiscal 2023 than they were

in fiscal

2022. now this is a problem first of all

it's worth noting that their fiscal

calendar aligns with our actual calendar

for those of you who get concerned that

maybe there's like a mismatch you know

sometimes it's like we're in q1 2023 and

a company's talking about q1 2024 it's

it's so weird how some of these

corporate calendars work but this

Procter Gamble's actually aligns with

the real calendar so when they talk

about 2023 they mean 20 23. and they're

telling you that they're expecting to

face an even greater Challenge from

energy wage inflation materials and

freight costs

today than they did last year now I did

find later in their earnings call that

the way they handle contracts seems to

imply that they might be rolling over

contract rates that they had in 2021 to

2022 pricing which of course we know

that there was more inflation between

2020 or 2021 and 2022 right and if they

have old contract rates then maybe

that's why they're experiencing this

kind of pain we'll go through this more

in just a moment but let me explain that

for a moment here if let's say Procter

Gamble which does not Hedge for

inflation but they do have contract

rates if you're in a situation where in

2020 inflation is here or prices are

here let's say and then all of a sudden

you go into 2021 and you have a a pretty

big price hike so 2020 to 2021 big price

hike but you go into 2022 and you have

an even bigger price High like and then

in 2023 you start seeing prices come

down okay great that's roughly maybe

what the overall Market is seeing now

but there's a chance that what Procter

and Gamble is actually warning of here

is for their profit purposes maybe

they've locked in contracts here at the

end of 2021 and for much of 2022 the

inflationary year they were locked in at

2021 pricing maybe for their issues they

are now re uh signing contracts based on

where pricing is today which is

obviously higher than where it was now

now it's lower than last year but it's

still higher than 21. that is a possible

explanation for this ugly warning

they're giving us but let's just be very

very clear here freight costs expected

to be higher in 2023 compared with the

average cost paid in 2022 given that

remember not everything you can just

contract out a year prior I mean it's

one thing if you contract out Plastics

uh for a year but usually Freight is

paid at the time right so it's kind of

weird to see a company like Procter

Gamble a huge Consumer Staples company

warn that we're seeing headwinds here

this is not good that they're suggesting

things can be worse now than in 2020 uh

too that's kind of remarkable let's try

to get some more color on this though

and go to the important parts so they

talk about reinvesting in productivity

now the more they talk about reinvesting

in productivity and every time they talk

about pricing they talk about

productivity you know what signal I

glean

I glean a signal that what's actually

happening to the company is they are

losing some of their pricing power their

headline pricing power and they're

seeing their margins start getting

squeezed so in other words they can only

sell you that deodorant for ten dollars

which is already ridiculously insane and

now they're starting to see people spend

less money on 10 deodorant at the same

time they're seeing costs maybe go from

six dollars to seven dollars from that

for that deodorant so they're getting

squeezed at both ends they're getting

less volume which means less overall

profit and less margins so they're

getting hit on both sides that is

basically the definition of no pricing

power right now it is normal for in a

recession people to demand fewer

quantities of things but if at the same

time quantity demanded goes down as your

profit per unit goes down now you really

have virtually no pricing power see some

companies with substantial price Rising

power can actually maintain prices or

even slightly reduce prices as long as

their margins remain substantially ahead

of the competitors and in doing so they

can cannibalize their competitors and

that becomes those price Cuts become an

investment into the future

for a Staples company though this is a

little harder to argue it's not like we

have Network effects for deodorant this

is just people literally saying I am

going to make my deodorant last longer

okay maybe that's not the best example

but in their earnings call they actually

talk about this idea of their customers

going and drawing down on their personal

inventory more now this is actually

something I personally do usually I like

to buy like four deodorants at a time

and I stack them up in my uh in my

vanity closet and so that way I know

when I get to the last one I'm like oh I

don't have a backup anymore I go reorder

at that very moment so that way I always

have a backup I never run out of this

stuff right well a lot of people do this

but what happens is over time you start

accidentally buying too much and so when

the economy gets tight what do people do

well they start looking through their

stuff a little bit more like oh look I

have more than I thought I had maybe I

don't need to buy so early or maybe

instead of buying four at a time I'm

just gonna go buy one at a time because

cash is tight right now right that's a

recession every business goes through

pain in a recession there is really no

business that is like yeah it's a

recession you know some make the

argument that uh lower uh or or inferior

Goods will benefit in a recession and

this is an economic article or argument

it makes sense you know maybe dollar

stores will see their uh their their uh

pricing power go up but usually what

happens is even though at a dollar store

you might be able to get more top line

revenue your margins get destroyed

because what happens is people are going

into the dollar store and they're not

buying the you know uh water guns that

cost 10 cents to make that they sell for

a dollar so you have this 90 gross

profit instead people go in and they

start buying toothpaste for a dollar

which actually cost you 90 cents to

acquire so you're you're making more

money on Tiny margin things right so

like recessions suck for everyone okay

uh so anyway

this said this is a little bit of an

issue and what they're talking about is

increasing their productivity and their

advertising to try to maintain some of

their pricing power even though they're

seeing a squeeze so they talk about

becoming more effective to try to

increase their margins this is good we

can end up seeing in their financials if

they're successful at that but they also

talk about shifting more of their TV

advertising spend to a lower cost per

conversion digital ad now moving from TV

is bad for like a Time Warner Cable or

Spectrum right to digital being good for

YouTube snap the trade desk right these

are great plays when you see companies

actually start looking at every dollar

and going where can we be more efficient

this is why I personally really like

trade desk as an investment

uh now with that said let's go through

some of the other items here

uh they're talking about their

productivity muscle because they need to

offset the inflationary pressures

they're facing yes we see a private

label re-emergence this is as expected

in a recession people are going from the

Planters nuts to the Archer Farms nuts

even though they're probably all

manufactured by the same company it's a

psychological trick here look at this

this is where they make that argument

consumers don't leave the category but

they might look at their dosing

behaviors this is not like uh like

steroid dosing okay this this is like uh

having that backlog of like buying four

deodorants versus one right and then

maybe now buying one instead of four

anyway they might look a little bit

closer at their inventories and draw

that down over a period of time now

keeping my customers are not only retail

customers they're also wholesale

customers and that's probably what

they're talking about with inventories

but it works for both sides behaviors

happen at stores so if you're a dollar

store you're like look do I really need

100 deodorants stocked or should I just

have 50 at a time this same issue on

both sides everybody does it in a

recession very very typical okay so a

Walmart indicated pricing pressure in

general merchandise and apparel this

would be like toys uh and then obviously

clothing nobody is pleased about the

current inflationary Trends we're seeing

this is a concern to me this is this is

the first report that I've seen that's

actually still complaining about

inflation maybe we'll get more uh and

and who knows again maybe it's in part

because their Contracting sucks and

we'll dive into this a little bit more I

don't know but it's bad the reaction to

those price increases from a retailer

environment is what you would expect

nobody is pleased

about the continued inflationary Trends

we're seeing but it remains a

constructive discussion on how to best

execute which is recovery of

inflationary cost now keep in mind when

they talk about recovery of inflationary

costs they're not talking about raising

pricing because they can't raise pricing

anymore instead they have to try to

become more efficient but if you have

not been trying to become efficient

already you're behind the curve and this

is not great this is bad for Procter and

Gamble but the pricing we're taking is

not covering the breadth of the price

increases we're facing in other words uh

yeah we raise prices last year but it it

ain't offsetting all the inflation we're

seeing we're seeing price increases on

private label Brands and on mid-tier

offerings that are even in in some cases

higher than our own price increases so

this would be like comparing to

competitors in other words they're

seeing competitors uh either that have

race prices or are raising prices that's

not good

obvious reason which is yes commodity

prices have come down recently and you

might not feel those benefits

immediately but what's going on says one

analyst well they say look about 63 of

our problems are driven by Commodities

thankfully yes Commodities have come

down but remember on the commodity side

you have Contracting right again like

you're going to order Plastics you sign

a contract for a plastic uh a

manufacturing or plastic supply for your

manufacturing over the next year at a

set price right and maybe it has like an

inflation adjuster in it of three

percent but then everybody's like wow

inflation is eight percent I guess you

guys won on that contract right anyway

we've seen the majority of our commodity

basket still increase week over week and

month to month this is a terrible red

flag why why is Procter Gamble seeing

yes some decreases but still seeing the

majority of their Commodities increase

week over week this right here is fuel

to the 5 fire of the FED having to keep

the boot on the back of our neck as much

as we're starting to see inflation come

down the fire is not out

there are still smoldering fires

throughout this economy which on one

hand is great if you're trying to

increase your allocation to stocks at

low prices you've got plenty of time to

do that it's bad though if you're in the

market and you're like damn prices keep

going down right now look we are off

bottoms right but this is a red flag for

maybe the market is being a little too

optimistic trying to fight the fed this

is why people say don't fight the fat

okay anyway

so when you look at our overall

commodity exposure it is at this point

in time stable to increasing that's not

good and our assumption going forward is

that spot rates that basically things

stay flat is their assumption at this

point we don't hedge we see slight

increases week over week month over

month certainly not to the tune we saw

at the beginning of 2022. okay well at

the beginning of 2022 we saw like eight

percent increases in prices

slight increases look hey man if we're

seeing one to three percent I'm game

it's fine because even if we get to

three percent inflation the FED can flip

flop but just by saying hey we have fate

or we hit fate flexible average

inflation targeting fait anyway uh

that's going to be the way they back out

of this I'm if if I get like YOLO stock

options on the fed using the excuse to

back out of this Insanity we're

experiencing by just saying ah flexible

average inflation targeting it's good

enough we're close enough to two percent

I would put some good money on that bet

because I think that's exactly what the

fed's going to do but anyway the

interest rate differentials keep a

widening uh versus the United States so

we expect some headwind uh okay this is

on Foreign Exchange that's fine

transportation is rolling over that's

good A little bit of easing over here

great but again things not everything

has rolled over into contract rates

right but maybe maybe maybe maybe if we

start getting contract rates at a lower

level you could actually see a Tailwind

so they're feeding us some opium or if

you're already in the market copium

see if you're gonna YOLO it's hope if

you yoload and lost you're coping copium

opium they're both bad

uh anyway uh these are problems these

are not good and there's a drawing of

mine and here's an unhighlighted page

because there was nothing there that I

found interesting and here's another

comment

on pricing my answer is going to be

quick it's going to be a combination of

pricing productivity and innovation in

other words how they stay competitive

let me be clear with you

I am calling their Bluff I do not think

they have any ability to raise prices I

think they are going to try their best

to advertise to their customers more

which is great for digital advertising

by trying to convince them that somehow

their deodorant is more Innovative than

the next guys

I would hate to be a Staples

manufacturer

I would also hate to manufacture Staples

if you know what I mean like

deodorant or like paper Staples those

both seem really boring anyway and

productivity is like basically working

your existing employees harder

if any of my employees are watching this

I love you and you need to work harder

and I'm just kidding you guys you guys

do great I love you guys uh keep it up

so

this is bad

I don't like this report

now I'm going to caveat this and I think

this is why it's very important to stay

to the end of the video not so you can

get every coupon pitch that I throw at

you because the next expiration is

January 30th but because

I have a little bit of a concern

what if

what if Proctor and Gamble

is yapping about how well we're still

seeing inflationary pressures

as a way to excuse performance

think about that for a moment what if

Procter and Gamble is actually starting

to see some of the rollover but it's not

enough of a rollover and they have to

blame something and they don't want to

blame themselves so what do they do they

blame inflation after all after this

report their stock kind of fell off the

cliff a little bit I mean not that much

it's like seven percent it just looks

like it fell off a cliff and it's

actually done pretty decently year over

year I mean a year ago the thing was at

147 bucks uh you know now it's at 142.

like this isn't that big of a deal which

in part is because during recessions

people move into Staples

but if you're actually looking at the

real fundies what if Procter Gamble is

blowing smoke and they're like yeah yeah

we still got inflation damn our numbers

suck but don't worry when that inflation

goes away we'll do great quick everybody

become more efficient in the factory

that's a jaded Outlook

okay my opinion

summing this whole thing up my opinion

is reports like this are going to keep

the Federal Reserve boot on our neck

longer they're going to keep us

in the mud for longer and we it's our

jobs to survive this and not die

literally and figuratively okay we don't

want either of those to happen we don't

want to die in markets and you know IRL

is kind of important too

so stay alive obviously a lot of pricing

pressures are receding but not everyone

is seeing them yet

and because not everyone is seeing them

yet and they're still smoldering Embers

that could turn into wildfires the FED

is probably going to be more aggressive

for longer

ironically I don't think that's

necessarily going to be terrible for the

stock market

as long as we continue our trajectory

down inflation I actually think it's

going to be worse for the real estate

market because the more inflation

smolders

the less people are going to buy bonds

the less people buy bonds the higher

yields go and in an environment of

quantitative tightening which means

basically higher yields

and people buying less bonds because

maybe they want to eat into stocks

because those are starting to recover

first

probably end up having more damage

looking ahead to real estate than you do

stocks

I know that's wild but remember this

when we look at an economy an economy is

not just one market an economy is a

combination of multiple different

markets this has been the oil market and

you know it's kind of doing this maybe

it'll keep going down the stock market

has kind of done uh probably let's see

as oil was Rising probably done

something like that like substantially

higher uh of a start and uh and some

more pain right so there's sort of your

oil Market there's your stock market and

the real estate market is quite frankly

there so it is entirely possible that

and this is just pure speculation at

this point uh that the oil Market it

could go down which would be fantastic

oil Market goes down stock market booms

but

but but because of quantitative

tightening and a lack of bond buying

because people are more interested in

stocks than bonds because bonds are

still getting hit partly because of

quantitative Tiding the real estate

market actually continues to Trend down

that's my base case scenario oil down

real estate down stocks up and I believe

in Earnest that the stock market will

bottom before the Federal Reserve

actually u-turns unless there's some

kind of capitulation event I believe

that but this right here from Procter

and Gamble bad news for inflation and

this is this is what I want to pay

attention to these are the kind of

indicators that tell me nope way too

soon to start yellowing anyway thank you

so much for watching I wish you the best

out there good luck thanks for watching

subscribe share the video If you

appreciated it and we'll see in the next

one goodbye