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well the oil crisis the oil crisis now and massive oil price cuts are probably exactly what are leading oil or in five year Break Even inflation rates to start skyrocketing Again The Five-Year break-even rate remember what this is this is a difference between inflation-protected Securities and yields on the five years okay that might not sound like English either but basically the higher this chart goes the more Angry Jerome Powell generally gets so this is why over here in February after that hot January data we got these five-year break-evens really ran away and the Federal Reserve had to get quite aggressive really fed speaking us into this idea that hey we're gonna go a lot higher for longer you know we said 5.1 percent remember what Jay pal said on February no uh first and second he says hey you know we said 5.1 percent as a terminal rate in December yeah yeah if I had to redo those numbers now I'd revise them a lot higher partly because realized the break-even rate of inflation was started to Skyrocket you know even though we just had good numbers on the Breakeven or on on pce which is the fed's preferred inflation gauge why would this particular chart be skyrocketing why why would this be going up well it's of course now because we've got OPEC Plus cutting oil by over a million barrels of oil a day now yes we have countries like Brazil Canada and Norway in the United States trying to increase production but I just want you to understand the difference here Brazil Canada Norway and the United States are trying to increase production to the tune of 100 000 barrels per day OPEC plus is now trying to cut production by a million barrels per day why is that well basically because they want more money per barrel of oil they that is the whole point of OPEC to try to maximize profits for oil producing Nations instead of driving prices straight down the idea is let's get as much capacity as possible and basically print barrels when prices are high if prices fall too low then let's just cut production together and prices will go back up and we'll all make more money per barrel of oil unfortunately that's quite inflationary now one of the reasons these Cuts didn't come so sooner is a because oil hadn't been falling that heavily I mean beyond the bubble of sort of that crazy peak in the 120 Barrel range that we saw when uh Putin invaded Ukraine oil's kind of in bobbing around relatively decent levels however in this last quarter oil plummeted and it had its worst quarter since April of 2020.
uh that's uh that's that's pretty extreme in fact oil fell as much as seven percent just last week which is pretty wild uh part of that had to do because of um we uh actually let me rephrase that uh so rephrasing oil had its worst quarter since of April of 2020 but last week we did have some drama that actually it didn't fall last week we actually had a little bit of a rally last week because of the drama between Iraq and turkey those exports are expected to resume uh that is some oil exports were paused in the region there Lee leading oil to actually already run up nine percent now it's moving up another six percent on top of that maybe if that oil production continues maybe we'll see that kind of nine percent rally go away and sort of extinguish that six percent that we're seeing today but the point is a lot of news coverage is focused on what OPEC plus is doing and not necessarily just what's going on between Iraq and turkey why does that matter well much of oil pricing has to do with speculation in the Futures Market why is that important well it's important because if people again start trying to believe that oil is going to go to a hundred bucks a barrel we'll start seeing that pricing into the market now we might not actually make it to a hundred dollars per barrel but you do tend to start seeing that Trend towards it right now Brent said 84.43 and uh WTI is basically at 80 bucks seeing Brent move up another 10 bucks to 95 on these oil uh OPEC price Cuts possible and the problem with that is as oil Ryan sizes inflation expectations unfortunately go up that's why we're seeing the spike in the break evens a because the financial crisis of woes started fading away the fact that oh yeah the banking crisis for sure was going to destroy our economy that seemed to have been a little bit more of a passing moment here this financial crisis and hopefully the riskiest Banks uh have have now gone through their pain and hopefully there aren't any other Silicon Valley Banks out there hopefully but then again remember hope is not an investing strategy so you could always expect for more of a banking Crisis coming but this this surge over here and break evens today really this this surge on the right over here is clearly because of uh the oil price Cuts over at OPEC or sorry the oil production Cuts uh and it is inflationary uh it's absolutely an inflationary impetus in fact let me show you a chart and this chart is pretty neat because this chart basically lines up inflation and oil prices and it's pretty obvious so if I grab this chart here from JP Morgan pop it on screen right here what do we see us CPI which is obviously our inflation gauge and Brent that is the international blend of oil not to be confused with WTI when you hear WTI just think western w Western and then also think when and when you think win think how you could win 12 free stocks with Weeble by going to vetcabin.com free and sponsored but anyway okay so CPI and bread what do we have here percent year-over-year gains okay so this is a chart of year over year gains and it looks like Brent is the first line over here uh the the black line that is and you see this pretty clear correlation in some cases it actually looks like the black line goes up first and then inflation goes up now keep in mind this is not core so it makes sense energy is obviously a big part of headline inflation so it does make sense that you see the black line move up and when it moves down CPI could potentially come down so they're not perfectly uh it's not perfectly clear that one leads the other I think many of us will make the argument though that obviously if oil prices go up inflation is going to go up and look at this oil prices have come down and inflation has come down that's great but what happens now if because of these essentially production Cuts uh inflation takes back up again well then we're stuck with the higher for longer regime of the Federal Reserve and maybe we have to start undoing some of the price cuts of uh the interest rate hikes that we're expecting for the Federal Reserve markets have started after the banking crisis pricing in that the fed's going to cut rates as soon as June because of the banking crisis and after they cut rates in June then by December they'll have ended up cutting a cumulative 100 basis points which is essentially one percent so a start of a 25 BP cut it potentially in June and then thereafter more Cuts that's been heavily priced in because of the banking crisis but if the banking crisis is a nothing burger and we go back to worrying about inflation and inflation then gets accelerated by oil price cuts and we end our oil production I keep getting saying that wrong oil production Cuts then we end up having larger problems and we're not in the kind of market right now where we really want larger problems now so far even though oil prices are generally speculative in terms of uh Futures pricing so far markets aren't reacting too terribly I mean some tax stocks are down a little bit more than you would expect Tesla's down uh nasdaq's down about point six percent even and after Tesla smashed its delivery expectations which we'll talk about separately but really I think the fear now is okay banking crisis gone means maybe less chance of fed cut maybe time to sell but then again positioning in the stock market is already terribly low I mean consider the data we talked about yesterday Bank of America told us that a positioning in the stock market is at an 18-month low uh Bank of America also told us that cash positions are at a a three-year high for individuals Goldman Sachs says people haven't been this little allocated to stocks since the beginning of the 2000s so in other words a potentially somewhere up to a 20-year low allocation to stocks and Goldman Sachs surveys suggesting that 85 of their clients are either bearish on stocks or neutral on stocks and that's leading them to say where are the Bulls so on one hand a lot of this seems like it would be be bad news if we have more inflationary pressures and we have to start undoing the rate Cuts we're pricing in maybe stock should fall but then again if stocks have such little allocation and people are already so bearish on the market is it possible the market can hold up well if we use Bitcoin maybe as somewhat of a leading indicator Bitcoin doesn't seem to care that much now what's remarkable here about Bitcoin is it has been sitting uh at this uh 28 200 level which is one of its Fibonacci retracement lines here off of the low of 15-4 this is actually a fantastic sign that maybe the fears of this oil price disaster are a little overblown not entirely sure but it's a good potential indicator if you believe that Bitcoin pricing is reflective of maybe more of a market pricing you have an open order book 24 7 rather than uh sort of more of a market-based timing when you're when you're just in the stock market even though we have pre-markets and aftermarkets liquidity is so little in the stock market sometimes Bitcoin could be a good indicator and this would not be an indicator of fear though Larry Summers says we have a 50 chance of repeating the banking crisis this could obviously lead uh to fears that at the same time as a new banking crisis we could end up having sticky inflation we could even be in an environment where we're still doing and conducting quantitative tightening while at the same time uh cutting uh cutting interest rates which then you wonder okay well which is going to be worse and it's possible a quantitative dieting could be worse you could have low rates and a tightening cycle uh and it it would be somewhat confusing to markets because not even markets understand and anytime there's uh or what would happen with the fed the FED itself doesn't even know what quantitative tightening will end up doing to the economy and generally when there's confusion in the stock market stocks tend to go down so that'll be quite interesting uh at the same time you've got the European Central Bank warning look now we've got inflationary concerns that could end up being sticky we've got some Financial woes and on top of that the real estate fund Market in Europe has tripled over the last 10 years it's a 1.1 trillion dollar market and if there's any kind of surge in Redemption requests which we've already been seeing in America then you could end up seeing an increase of housing inventory and Commercial Real Estate inventory leading to real estate pain which potentially real estate pain could lead to Consumer pain as Robert Schiller told us it's not actually stocks going down that affect people's spending it's actually real estate spending or or real estate net worth that affects people's willingness to spend that's scary because if that's true then that means the real pain is still ahead that means the real estate price paying is still ahead but if that real estate pain comes to fruition then we actually get the real EPS paying the EPS pain is of course what Morgan Stanley's Mike Wilson has been pounding the table about for months suggesting hey hey whoa whoa hey we're probably going down because once those earnings prices are and well earnings forecast for companies actually come in uh accurately based on the spending we're expecting and people are have run through the amount of excess spending they are savings they have then we're going to face real problems that's sort of been Morgan Stanley's point of view and it's not only just him it's also other writers over and Morgan Stanley here's another piece from Morgan Stanley just out this morning and they're talking about given the events of the past few weeks we think guidance is looking more and more unrealistic and Equity markets are at a greater risk of pricing in much lower estimates for earnings ahead this is typically how bear markets end I.E PE multiples fall precipitously and unexpectedly catching many investors off guard the recent underperformance of small caps and low quality stocks suggests this could be imminent I mean now you've got Morgan Stanley basically saying there's an imminent massive stock market crash coming and the oil price cuts and fears around inflation start that with the uncertainty of whether or not we're going to get more banking right uh more of a banking crisis and now now you've got too many indicators lining up for Morgan Stanley to be happy over here suggesting hey hey hey we're going too fast here inverted yield curve has never been wrong before why would it be wrong now and this is actually something that JP Morgan reiterates as well let's go back to that JP Morgan piece here and if we go to their chart of the inverted yield curve which you probably already familiar with this consensus view for a soft Landing but the yield curve thus far has never been wrong I suppose then the question is okay well who says uh you know a soft Landing can't just be a little shallow recession like a little baby recession but then the question is well there's a baby recession actually going to be enough to get inflation down that's the big question because if you can't get rid of inflation then uh then you end up with higher for way longer and that's something that nobody's looking forward to so how do we reconcile all of this well look I've I've been of the mindset pretty heavily that the best way to get through this is with pricing power style stocks and a goal a Goldman Sachs analyst here I think made an interesting point they actually wrote here a bull case for Tech and they talk about basically how if there ends up being growth scarcity that is if if the market overall ends up having less growth and that is basically companies that or Staples defensives oops spelled out wrong defensives real estate health care and utilities if if these and even some discretionaries if these slow down and we end up having a growth scare where all of a sudden a lot of the S P 500 stocks are actually starting to suffer what could do well in a low growth environment or a slow growth environment well Goldman Sachs goes as far as suggesting it's tack it's actually tech tech is going to potentially be that Survivor where when there's a lack of growth everywhere investors just go okay well then let me go back to growth stocks which is mostly Tech right now now I personally refine that further and I suggest you want pricing power style Tech and that's where I like investing in the miners so to speak of uh of of um pricing power artificial intelligence which to me are high free cash flow companies that are potentially getting those big fat stemi checks from the government whether it's uh energy like an end phase or autonomy plays or AI plays like Nvidia I think these are great opportunities and I think those are the ones with pricing power now some people say oh Kevin it's Google but I get really worried about Google as we talked about in the course member livestream uh just last week which remember you can get lifetime access to those course member live streams linked down below the course member live stream just last week we were looking at Google and 69 of their revenues come from search how the hell are you going to tell me that if 69 of Google's revenues vanish Google's gonna do good from AI now yeah they could grow their AI income but you're starting at zero whereas the big bulk of your income is advertising Revenue based around search but if AI replaces 50 of search now you've just lost like 34 35 of your Revenue a value I replaces the need to ever use a search engine you just lost 69 of your Revenue good luck growing from there now all of a sudden you go from looking cheap and like a value play with your multiples to actually being a value trap and people actually paying five times the multiple they think they are paying today scary things to keep in mind fundamental analysis is a lot more than just plugging data into an app and then looking at the app outcome and going oh the PE Ratio looks good oh yes I've advised this stock because the ratios look good like the story also has to make sense around it and it doesn't make sense for Google right now it's not to say that Google can't float up with the rest of the equity Market but all in all yeah I mean these these are things that create nervousness I personally think most of the inflationary concerns uh will will be that we require more patience uh but that we continue with downtrend uh and these fluctuations and oil prices I think will be offset by the fact that oil prices and oil demand rather natural gas demand has been declining since 2019.
we peaked out an oil demand in 2019 and we're obviously trying to uh manufacture more or produce more we can't produce as much as uh as OPEC plus chem so we can't fully offset it so we're going to have some price increases but then the question is how much of that is just pure speculation because if we do end up trending towards even a shallow recession oil prices will probably have a lot more to fall one of the reasons by the way you are seeing oil uh not do so well at the beginning of this year and one of the reasons it had its worst quarter since April of 2020 which I realized that's a month compared to this first quarter uh that just kind of that was a magnitude drop which was insane in April of 2020.
the point is to compare this quarter this first first quarter and say it's been bad okay it hasn't been this bad in a while for oil one of the reasons is because the speculation that China's reopening was going to lead oil prices to Surge and commodity prices to Surge I remember pounding the table in December going that's bullcrap it's not going to happen sure enough it didn't happen now uh you have speculation okay well without oil Opex cutting whatever eventually OPEC will be irrelevant yes in the near term they're still very relevant so yes there is some headline inflationary impetus uh to this and a lot of it I think is based off oil speculation so it is a downside uh risk however and hopefully it's transitory now I don't like using that word but it is entirely possible that the speculation of oil is going to 100 oils going to 100 leads to short-term rally in oil and then people start taking their attendees just like they should have done in January when oil kind of capped out before this quarter began we'll see all I know is this is a perfect opportunity to remind you you beckham.com life met kevin.com join or just go to meet kevin.com you can see everything I got there Affiliates the ETF I manage the courses on real estate or stocks and psych and really I'm sticking strong to my strategy I put my money where my mouth is I put my money all in my PP uh uh you know pricing power stocks and and I think we're gonna keep doing well so we'll see I'm optimistic hope you are too and I hope we're right thank you
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