The *Worsening* Stock Market Crash.

well stocks got racked on Friday and in

this video we've got to talk about are

households going to drive us right into

an earnings recession and when could

they potentially drive us into an

earnings recession so far with over 72

percent of s p 500 companies beating

estimates for their earnings which is

slightly less than what you would

usually get in terms of upside surprises

for earnings but still not in an

environment where we're substantially

recessionary what are we facing in terms

of an earnings recession and when could

it actually come well Morgan Stanley has

a piece on when we might actually see a

bottom in consumers ability to continue

to spend money after all after the

reports that we've gotten for January it

certainly seems like the consumers are

still doing just fine unfortunately

leading to propped up inflation which is

creating fears that uh oh the Federal

Reserve might have to do a whole lot

more and it's not just individual retail

investors who are fearing that I believe

based on on stock market activity it's

also institutions we're not yet

convinced that inflation is absolutely

on a downtrend once we have confirmation

that inflation is without without a

doubt on a downtrend I expect a lot of

cash that is sitting on the sidelines

that hedge funds Pension funds

institutions and Retail investor

accounts to start flowing right back

into the stock market we're at some of

the lowest allocations from cash to the

stock market that we've seen in decades

right now and part of that is due to

substantially High bond yield rates look

for example at the two-year or six month

treasury bonds and bills you're looking

at near a five percent yield you could

throw your money into Robin Hood or

wealthfront or even Sofi right now and

earn anywhere between four and a half to

maybe five and a quarter percent in

yield just sitting around even JP Morgan

is picking up the phone calling people

with balances in their bank accounts

going hey want to lock up your money for

six months and we'll give you a CD like

those old things that Banks give for

people who lock up their money and get a

yield in return yeah it's crazy right

now so the question is why would you

even bother investing in into stocks the

only rational explanation is that you

would expect that once inflation

provides confirmation that inflation is

indeed trending down all that money on

the sidelines will look and say five

percent is nice but my opportunity cost

sitting out on stocks might be 10 15 20

percent so maybe now is the opportunity

to hop in even if we're slightly off

lows and ride that wave

of course the last reports that we've

gotten with a hot jobs report that came

out the day after the Federal Reserve

meeting with a lot of folks putting on

the tinfoil hat saying sure y'all

scheduled a Fed meeting for a day after

the labor report and In fairness usually

the FED has their fed meeting a week

prior it's the third week of January

they usually have it here they had it in

the last week of January which rolled

into February 1st thanks to the calendar

of the FED generally holding this

meeting on a Tuesday and then press

conference on Wednesday and then of

course right after that we got a CPI

report that was hotter than expected

with hotter revisions for the prior

month we got a producer price index

report with hotter than expected results

and hotter revisions from the prior

month we got a retail sales report that

gave us a hotter than expected Report

with hotter than expected revisions and

then just yesterday we got a pce which

is the fed's preferred inflation gauge

for January other than expected pce

report and hotter with more revisions

all this while you've got multiple

credit card companies suggesting boy it

just seems like people are still

spending money so when does that

spending go away and is it possible that

this inflation is just going to continue

well let's take a look at what Morgan

Stanley suggests is going on with

individual household balance sheets and

maybe when those excess savings will go

away keep in mind right before we look

at this household report from Morgan

Stanley there are really two trains of

thought right now one is that inflation

is transitory and yeah we might have

some volatile January data thanks to

massive seasonal adjustments or just the

January effect of going from a cold

December to a warm Seas unseasonably

warm January leading potentially to more

spring style sales in January and a

boost in temporary inflation that is

sort of the transitory argument and then

of course there's the argument that well

the numbers we had in the last three

months of 2022 were all outliers now are

facing slowing disinflation and we're

probably going right back to the racist

with inflation so what says Morgan

Stanley well of course Morgan Stanley

says use that investor day a flash a

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that all out link down below so what do

we have here Morgan Stanley telling us

households have been using their excess

savings savings level now uh however now

under shooting Trend okay this is this

is the usual thing that I talk about

where I get a little frustrated when

people only look at the savings rate

because excess savings are still so

positive after the pandemic but just so

you can visualize the savings rate some

of y'all were asking that we visualized

the savings rate this is where you can

visualize the savings rate you can see

here we sit roughly at the beginning of

2023 and that savings rate bottomed

roughly around October September of 2022

that savings rate is returning slightly

to Trend however we still sit below

trend on that savings rate you can see

obviously during the covet bubble we had

a massive increase in the savings rate

and generally we match Trend right after

all that's why it's called Trend we kind

of make the trend and then the trend

line comes afterwards but anyway right

now we are still substantially below

that trend line uh we're approaching

that trend line though uh we're expected

to approach that trend line uh by about

2024. see if I draw this maybe to q1

2024 let's see let's draw a line up to

that yeah I'd say that's about q1 2024

still got a little bit of work to do

maybe by Q2 Q3 2024 you actually get to

Trend again on the savings rate but

right now where we sit we're still quite

a bit below trend on the savings rate

generally the personal savings rate

sitting somewhere around five to seven

percent us right now sitting at about

3.4 percent so this is where a lot of

folks are concerned hey how can the

consumers hold up right well graphically

here's one we expect maybe we see a

bottom in earnings right so first and

we're going to align excess savings to

try to figure that out because we assume

that if the savings rate is below Trend

then people right now are still able to

spend money to sort of avoid a recession

but people are only able to exp

essentially spend money to the point

where they have excess savings or excess

available debt right there are two ways

you can continue to spend money when

your income goes away and that's either

debt or money that you have saved up and

if we first start by aligning where we

sit right now I'm going to draw a red

line going up roughly to where we sit

right now and when we look at cumulative

excess savings this chart here suggests

we're still sitting at levels that's

somewhere around uh two billion I'm

sorry this is two trillion dollars of

excess savings the chart is provided in

billions and uh we are we're looking at

thousands of billions which are

trillions and we're still sitting at

quite a bit a high level of excess

savings it doesn't really matter so much

how much that number is though I think

what matters more and what is more

telling is where's the inflection point

where do we go potentially and this is

Morgan Stanley's estimate from excess

savings to a deficit of excess savings

so a negative excess savings means you

have less money than you had before the

pandemic right and so where does the

chart go negative well in my opinion

based on the sort of analyzing and sort

of drawing a line on this chart it looks

to me like we don't go negative in

excess savings until May of

2024. now that's pretty remarkable that

really suggests that consumers have

roughly another 14 to 15 months of

excess savings which is really

interesting because if you look at the

inversion of the three-month 10-year

yield curve which usually projects a

recession within the next 6 to 18 months

it's worth worth noting that we've

already been inverted for about seven to

eight months so if we take that off the

inverted yield curve we're looking at

maybe about 10 to 11 months to go that

potential recession signal of of the

latest the inverted yield curve would

generally signal a recession somewhat

aligns with the beginning of 2024 which

is pretty close to aligning with when

Morgan Stanley thinks we're going to go

to negative excess savings so maybe the

inverted yield curve is approximately

saying q1 of 2024 for a recession excess

savings are roughly saying Q 2 of 2024.

now that's really interesting because it

suggests that uh oh well if we go into a

recession that could mean the most pain

is still ahead of us right

well that's maybe something where we

have to look at history a little bit and

think about this so uh we'll look at

history and we'll we'll make some sort

of uh conclusions in terms of what we

think in terms of stock market pricing

so first of all let's look a little bit

historically so if we look at the S P

500 at least as of the last recession uh

well that goes back to to I can't really

get a chart going back further I'd like

to get one to go back further the covet

pandemic was a little bit of an outlier

I'd like to get uh the S P 500 going

back a little bit more so let's go ahead

and look at this together here let's see

if we can get the S P 500 historical on

St Louis fed uh or the Fred website this

is a fantastic way uh to see or to

visualize what uh what valuations for

stocks are doing going back uh over time

oftentimes able to Overlay this with

recessions but right now we're having a

little bit of trouble getting that graph

so let's just Google it say it let's go

let's just go with S P 500 uh overtime

with recession chart so that way we can

kind of visualize that okay let's try

what yardini has for us S P 500 with

recessionary Cycles there we go okay

that's exactly what we're looking for

sorry for the delay there all right so

what's interesting here is recessions

when we zoom in we see these sort of

bluish lines here oftentimes we go back

to recessionary eras we'll see that

recessions align potentially at least in

the last crisis it looks like the

recession almost aligned with this with

the start of the recessional line with

the top of the market and we know that

the recession and stock market bottomed

in about February of

2009 which is interesting because it

potentially suggests uh-oh as

historically this start of a recession

really where stocks bottom out and this

is something where Goldman Sachs told us

about three weeks ago that recessions

are usually when recessions start they

usually start the bottoming process for

stocks and that's because when we align

the start of recessions with when we

have a bottom of an earnings cycle we

could see that the stock market usually

bottoms out about six to nine months

before the bottom in earnings so that's

interesting because if we go back to

2009 potentially because this

recessionary period over here lasted uh

really about two years it's possible

that we bottomed out in earnings

somewhere around the end of 2008 and we

didn't actually hit our stock market

bottom until the Federal Reserve broke

something in February of 2002 and so

that makes us Wonder today okay well if

earnings potentially are going to be at

a bottom in well October of 2022 then

maybe we've already hit a bottom in the

stock market right although what if

earnings don't actually hit a bottom

until we inflect a negative in excess

savings well that would align more with

q1 of 2024 which potentially suggests

maybe the bottom is still ahead of us

right if the recession is maybe in the

bottom of earnings is the first part of

2024 oops let's actually go ahead and

show the screen there there we go bottom

of 2024 does that potentially forecast a

bottom of the stock market and a leg

lower still coming before the worst gets

priced in and this is really where you

have two trains of thought you have the

historical argument that yeah look we

aren't going to hit bottom until in the

stock market until we actually price in

that bottom of earnings and that bottom

of earnings if it wasn't Q4 2022 more

people are still spending through this

earnings quote unquote recession so

maybe the worst is still to come so this

is where there are really two trains of

thought that you have to evaluate okay

what works best for your situation what

do you believe because I believe there

are two trains of thought train of

thought number one is if we're going to

have a bottom in earnings in q1 Q2

bottom of 2024 bottom of eps

then you're probably looking at a bottom

in the stock market of somewhere around

Q3 to Q4 23. that probably aligns with

another large leg lower and it probably

also aligns with sticky inflation right

because if we have sticky inflation

we're going to see that terminal rate

from the Federal Reserve likely move

from where we sit right now which is

about

5.43 percent when I checked this morning

to potentially a rising of six to maybe

even 6.5 percent some even say seven

percent as a terminal rate this is one

scenario where when we align

this this sort of historical data which

is provided by Goldman Sachs and of

course we can see this chart wise as

well that generally

the stock market bottoms about six to

nine months before the bottom in

earnings and the beginning of a

recession can often start the bottoming

process so that means stocks eventually

pull you out of a recession so you don't

generally want to invest in stocks at

the sort of technical end of a recession

right then you can almost sort of align

this here see let's draw this

graphically because there's a lot to

align so if we go over here and we

suggest that a recession might be over

by q324 let's say let's call it

recession over well and then we have a

stock market that pulls us out of a

recession and maybe that recession

begins somewhere in

q423 where earnings basically hit rock

bottom and that recession begins then

potentially that stock market bottom

sits somewhere over here between Q4 and

maybe q1 2024 right if we look at our

crystal ball maybe that's what we're

looking 2024 that's the thesis of sticky

inflation aligning with excess savings

are gone and that is provided obviously

by Morgan Stanley because that's what

we're looking at here so again if you

want to see that here when do we go to

negative excess savings where consumers

can no longer spend through a recession

well that's potentially uh you know Q3

Q4 or sorry rather uh bottom of of

people's ability to spend right uh

potentially aligns with Q4 q1 Q2 2023 to

2024 and when does that align with the

bottom of of potentially earnings well

potentially that Q4 to Q2 as well and

then

according to Goldman Sachs bottom of the

stock market might be six months before

that so going back to this drawing over

here that might say bottom is somewhere

Q4 2023 I would say probably out to yeah

q1 2024 in this scenario because even if

earnings bottom in Q uh three a Q2 Q3

with that excess savings right Q2 Q3

bottom and earnings over here you've got

that six to nine month rule that aligns

your bottom a little bit earlier there

which aligns with the inverted yield

curve right this is what the 310 is

telling you so bottom line scenario

number one suggests sticky inflation

higher terminal yield when do earnings

potentially bottom and how much before

uh earnings bottom does the stock market

tend to bottom that's your scenario one

where a lot of bears right now are

saying you've got Morgan Stanley's Mike

Wilson you've got Goldman Sachs you've

got JP Morgan the the bear position is

hey look we've still still got another

big leg lower and that could potentially

align with that recessionary Dynamic

we're seeing now or oh yeah maybe you do

still have another leg lower and maybe

that's what you want to be prepared for

and that's roughly what the timing would

look like when we look at negative

excess savings and also looking at Q4

2022 is basically not that bad like

sorry not there yet right that's

scenario number one scenario number two

is this idea that okay well maybe maybe

that bear case could play out but maybe

inflation proves itself as declining in

the months of February remember these

are February reports which come out a

month later so we would get these

reports in March April May and those

reports would be for Feb March and April

maybe these inflation reports end up

proving hey don't worry

the January data was an anomaly and if

the January data was an anomaly then you

know what maybe inflation will prove to

be transitory we top out at 5.25 percent

we level off and the stock market starts

pricing in all right the bottom is

behind us we can continue to spend money

and by the time we actually get to where

we get to negative excess savings what

potentially helps refill the savings pot

well this is where in the favor of the

Bulls in scenario two you look over here

at your savings rate rebounding roughly

at the beginning of 2024 second quarter

of 2024 to where you could then even

though you've depleted all your excess

savings you're going right back to

spending the money that you're making

it's a thesis both the Bears and the

Bulls have an argument here

the bear argument actually calls for a

substantial amount of patience right

think about the bear argument the Bears

right now are saying look we're not

going to hit that earnings bottom

probably until Q2 2024. we got a long

way to go that means the reset the

bottom of the market might not be until

Q4 2023 to q1 2020 uh four and uh and

that essentially also aligns with the

three-month 10-year treasury so you get

alignment with the inverted yield curve

negative excess savings a bottom and EPs

and there's your bear case whereas your

bull case is no no the January data is

an anomaly January is an um you can't

spell that at 5am uh January is an

anomaly and don't worry Feb March and

April data will be great and we'll be

back to the Moon

okay those are your two Theses and your

two scenarios uh and I think ultimately

there's probably a case for making a

balanced portfolio allocation here where

you increase a higher level of uh of of

your savings so that way you're prepared

in the event we do go through another

layoff cycle which is entirely possible

no matter what job you have it is

entirely possible to get laid off and

that's unfortunate right it's very

difficult right now especially on small

businesses to survive I was just talking

to a commercial property manager about

uh which divisions in the commercial

real estate space they're anecdotally

seeing as most pained and it's small mom

and pop retail stores very difficult to

get new business formation right now

taking leases at least yesterday when I

was in the Vegas Market to explore um

uh real estate there where the most pain

seems to be medical real estate

obviously doing well but hey you could

still have pain in medical real estate

if rents go down cap rates go down

because you're saying Office Buildings

or other spaces that could become

medical spaces drive those rents down

so a lot of various pain it seems like

uh lower income and smaller businesses

likely to get hit hardest the most

though that doesn't mean larger

companies aren't going to go through

their layoff Cycles as we already know

they very well are Wells Fargo laying

off lenders almost all of the large

Banks whether it's Goldman JP Morgan

layoffs in multiple different

departments from Financial advising to

trading to Consulting consulting's

getting hit texts getting hit I would

guess small businesses right now or

potentially still jaded about having a

hard time hiring and so there's this

idea that some of that employee hoarding

is going on but what if that that

employee hoarding ends up turning into

employee paper handing in this bear case

right employee paper handing could

actually align with the bear case I hate

to say it because obviously I lean more

bullish that's my bias but the more you

know I study the bear case the more I

realize yeah there's there is a very

much valid argument and we'll know

within the next few months which

scenario is more likely to play off we

can't just keep trying to explain away

High inflation as an anomaly the January

reports fair game massive seasonal

adjustments uh and massive uh a massive

potential for anomaly with higher energy

costs in January compared to December so

pushes up your month over month cost

both core and non-core thanks to the

flow through of higher energy costs but

also going into a much seasonably Warner

warmer January right that's that's the

way you could try to explain that away

but seriously the the paper handing of

the hoarding of employees so let's write

that on paper handing of employee

hoarding that's not going to happen in

the first quarter of 2023 first quarter

of 2023 people still have hopium people

still have this belief that it's okay

let's use our excess savings let's get

through this recession let's just keep

trying to expand the business and maybe

take on a little bit more risk to expand

the business once we once we bottom out

and the reality is that's not a bad

Strat strategy if we end up having great

reports in Feb March and April if we

have great inflation reports Feb March

and April and you are a small business

that invested heavily at the end of 2022

you're going to get massively rewarded

going into a bull cycle with more

employees more efficiency and more

capability of selling your goods and

services

however if you go into the bear cycle

and you spend money on yourself or your

business or whatever going into higher

debt well now all of a sudden you're

going to have those higher debt payments

for longer you're not going to be able

to refinance your home or your property

or or your rental property or business

as quickly as you thought your credit

lines for your business or your

properties are more expensive now all of

a sudden you potentially actually have

to start paper handing your employees

because even though you thought you

could hold on to everyone now all of a

sudden you're like crap I actually can't

that's the bear case that's the bear

case and so that that's really going to

be a personal decision for you in terms

of what you want to hedge for but boy I

mean I I mean some people come to me and

they say Kevin what do you think about

my situation I'm like 20 in margin right

now because I think we've bottomed out

and I'm like well that's fantastic if

you're a scenario number two that's

miserable if you're scenario number one

you know even if you're all in right now

but you're not in margin okay great yeah

scenario number One's Gonna Hurt but at

least it won't take you out uh right you

just have to basically dime in hand uh

yeah however if you're leveraged and

you're going into a scenario number one

it's gonna suck and that's the case for

still having some cash in my opinion you

know whether that's 10 15 20 whatever

that's roughly what I've been looking at

in terms of uh allocations now

then then at least you have a little bit

of insulation going into the scenario

number one so uh that's that I think is

very very important and hopefully brings

together some of the madness that's

happening uh look there is still there

is still an argument for Rapid

disinflation occurring I mean look for

example at uh at what's happening with

with uh vehicle inventory and new

vehicles I mean uh you're getting

smashed Morgan Stanley talks

specifically about that let's go a

little bit further here let's go through

some more of these charts here we go

look at this uh motor vehicle spending

weaker than other durable goods due to a

5 million unit Supply glut notice I I

wrote this here in red but GM pause

production to optimize inventory

according to Detroit News uh the

shutdown should be lasting two weeks in

light uh in due to light duty

um truck inventory being so high that

they're just pausing production

completely because there's so many new

vehicles right now and we're potentially

expecting tighter land loan standards

destroying demand for lower income

vehicles but also a glut of inventory

leading to Rapid disinflation that's

your Kathy Woody in argument right now

we've had some signs that used car

prices popped in November and December

which is a little bit of a concern these

charts right here showing you the CPI

metric for used vehicles and new

vehicles uh and so uh there is an

argument that hey you know rapid

disinflation is coming but the counter

right away to that is well we've

actually still seen household wealth

hold up pretty dang well mostly because

a lot of household wealth is in in real

estate and this is why I suggest when

people want to start becoming a

millionaire the easiest way to do it is

real estate that's why I have a course

called zero to millionaire real estate

investing link down below I've got a

flash sale going on anyway you you look

at the decline in in household net worth

and it's nominal I mean here's a chart

on the right side that goes all the way

back to the 90s and you can see net

worth as a percentage of disposable

income has never been as high as it is

now if for a moment I take for example

I'll take a a white eraser here sort of

and I'll just draw over the top of this

chart to get rid of the fact that right

now we're a little bit lower than the

peak right but I just want you to

compare where are we now there we go

okay so now compare the chart to where

we are now we're substantially higher

than anywhere we've been during the

pandemic and 17 and 14 in 2006 in in the

90s substantially higher net worth as a

percentage of disposable income today

even though that's come down in 2022

it's still so much higher and that's

helping support some of this excess

spending and while yeah we're starting

to see an inflection point in wage

growth which is good it's still

incredibly High we haven't seen some of

these inflation levels for job stayers

since before the.com bubble we've never

seen this high of wage inflation for job

switchers uh and uh and yeah hopefully

we get rapid disinflation of goods when

is that actually going to show up

Services well what if it takes another

year right well then you reiterate the

bear case if it takes another year to

get rid of the sticky inflation you're

just reiterating the bear case scenario

number one over here which aligns really

with sticky inflation actually I already

wrote that there on the left the bare

case aligns with sticky inflation so you

actually don't have in the long term

bears and Bulls who are too terribly

different right I think that a lot of

bears and Bulls agree that look in the

longer term you don't want to bet

against America right but that that next

leg down seems to be the case or that

individuals make as a bear versus the

Bulls and there's data supporting

arguments on both sides uh although

leading indicators in my opinion lean

heavily towards the bull case via what

we're seeing in earnings calls

it's unclear if the Federal Reserve is

going to align with what we're seeing as

a leading indicator in earnings calls of

Rapid disinflation a rapid availability

of workers I should say a supply chains

normalizing substantially and rapidly

and really a lack of pricing power any

lingering or or should I say the ability

to raise prices since pricing power is

really the ability to raise or lower

prices while still maintaining margins

the lack of uh sort of

inelastic or a demand elasticity right

so uh back in the day uh and like you

know beginning of 2021 uh demand was was

almost uh I should say perfectly

inelastic in other words you could raise

the price as much as you wanted and

people were still buying and now you're

seeing a return to demand elasticity

which is basically saying eh you raised

the price I stopped buying right my

demand becomes flexible as opposed to

perfectly inflexible uh anyway so

TBD but this is the bare bull case and

which side I think will be heavily I

mean we know it'll be heavily dictated

by what happens in these February March

April reports the January is is is I

mean the Bears are cheering January and

if we get a bad Feb March April report

the Bears will probably end up being

right so fingers crossed uh you know for

for a bullish Feb March April