mattee2264

Other difference with late 2018 is that the bottom of 2500 was cheap representing around 15x earnings compared to a 10 year of 2-3%. Also at the bottom split adjusted you could have scooped up Apple at $40, Microsoft at $100, Facebook at $130, Google at $1000 and obviously their performance from that date drove a lot of the appreciation to date. Even after a 15% decline we are trading at around 20x earnings and I think 2021 earnings are probably peak earnings for this cycle. The best quality mega tech stocks such as Apple and Microsoft aren't close to being cheap. And while Facebook and Netflix have sold off considerably they are facing challenges to their business models with data privacy and competition respectively. Also there was a soft landing end of 2018 with only a very mild slowdown driven by trade wars etc. Whereas we are probably heading into recession later this year. And of course inflation is going to pressure margins and make it a lot harder for the Fed to rescue markets. I think the main parallel with 2018 is the speed of the decline and most likely this is a leg down with a near term bottom but it is difficult to imagine a V shaped recovery and a swift move to much much higher levels. Most likely 4800 was the peak for this bull market and depending on how things turn out for the global economy and depending on Fed policy we will either go sideways with a lot of volatility or head a lot lower

I think the dynamics are very similar to the 2018 flash crash but I agree that what happens next will probably be different. I think this will be a leg down in a bear market rather than a correction that was overdone. The Fed isn't in a position to flood the market with liquidity and while things could turn out a lot better than the market is expecting (soft landing, inflation eases, not much further for rates to go, Fed rescues the market before things get really bad) they could also turn out a lot worse (hard landing, inflation still rages, Fed presses ahead with rate increases refuses to rescue the market). So I think once the selling pressure eases the market will probably go sideways for a while until we get a better handle on what comes next and markets will monitor closer Q2 company releases and economic data. Oh and final snippet of the Dimon quote is interesting re excessive moves in the market....fundamentals do matter but technical factors and sentiment might mean we bottom below fair value (which I peg at around the 3200 pre-COVID market level)

Below 4000 for the first time since end of Q1 2021! Even oil got crushed today. Not very long before we enter bear market territory for the S&P 500. . Feels a bit different from the barely bear markets of 2011/12 and 2018 which were short reversals in the long long bull market and from much more reasonably valued market levels. Of course a bear market rally would be typical and there is likely to be a lot more volatility before the actual low is reached which might not be until later this year or even next year. But 30-35% decline seems more likely unless there is a soft landing and inflation cools more quickly than expected or the Fed decides to rescue the stock market even with inflation still roaring.

How much downside? So far despite all the dramatics the overall index is only down 15% or so from a market top that was clearly based on unrealistic expectations about the economic recovery ("The Roaring 20s") and tech optimism ("The New Normal") as well as an assumption that inflation was transitory and the Fed would keep interest rates low and continue rescuing markets at the first sign of trouble. And usually that level of confidence is only found at the end of a multi-year secular bull market and they generally end with 30-50% declines. .

There is a huge amount of uncertainty so the market is necessarily very reactive and I think that means the range of outcomes is massive. Re earnings: what will earnings look like in a post-pandemic inflationary environment? And if we go into recession this year how low will earnings go? Re interest rates: how much higher will they go before it is clear the tide has turned with inflation or the Fed figures the damage to the stock market/economy is too great and reverses course? I think earnings could be the bigger factor. Earnings yields have been fairly consistently around 5-6% in the modern era despite the variability in interest rates. S&P 500 earnings in 2021 will be around $210. That compares to $160 pre-pandemic. But most likely they represent peak earnings. Big Tech have for some time been able to experience impressive secular growth in a sluggish economy and the pandemic was a massive boon for them. But they are so big that you'd imagine their earnings would not be immune from declines in a recession. Consumer discretionary companies have benefited from consumers receiving stimmies, cutting back on travel, and online shopping out of boredom and with more money going to energy and food consumers will have to cut back. Consumer staples companies could suffer as they are unable to pass on all their cost increases and consumers start thinking about switching to non-branded alternatives. Financials are vulnerable to higher credit losses and a possible housing market correction. Commodities will suffer if demand falls in a global recession. Wall Street are bringing down their 2022 estimates but they are still higher than 2021. But in an average recession S&P 500 earnings decline around 25% which would get us right back to where we were pre-pandemic and could erase the remainder of the post-pandemic market price gains.

I think earnings matter far more than interest rates. And what we are seeing in a lot of companies is that earnings gains during the pandemic were not sustainable either for cyclical reasons (we are heading back towards a recession) or because of changes in spending patterns (consumers aren't spending as much online and businesses will probably have to cut back on advertizing etc). And it is interesting how many companies have gone on complete roundtrips back to their pre-pandemic levels or lower with the likes of FB, AMZN, JPM, BAC prominent examples of this. So it is somewhat of a surprise to me that the market is still 20% higher. Obviously there has been a bit of a rotation towards defensives and things like consumer staples and utilities have done well, and commodities while a small component of the index have been on a roll, and the likes of APPL and MSFT have held on to a lot of their pandemic gains. But it suggests some vulnerability as inflation was much lower pre-pandemic and while the economy was slowing a recession wasn't imminent until COVID hit. Generally bear markets do coincide with recessions. So what happens next depends a lot on whether we go into a recession and how severe it is. An average recession brings S&P 500 earnings down around 25%. Taking 2021 earnings of around $210 that would bring us back to around $160 right in line with pre-pandemic earnigns and even if you still give a 20x multiple to that (despite interest rates going higher) that gets you to 3200 on the S&P 500 which suggests quite a bit of downside and is also consistent with the idea of the market giving up all of its pandemic gains which is the usual outcome if most of these gains can be attributed to speculation/cyclical/temporary factors. Of course how low we go also depends on at what point the Fed pivots, slashes interest rates and prints a bunch of money. And I don't think we know yet whether the Fed's hands are tied because of inflation. Most of their confidence in pressing forward with rate increases seems to be based on their belief that the economy is still pretty strong and they can engineer a soft landing. And they don't really care about the speculative stuff selling off when the overall market is holding up pretty well. Whether that changes if markets continue to fall and economic data worsens remains to be seen.

This feels a bit too obvious....reminds me of Howard Marks distinction between first level and second level thinking. I still kinda feel the bubbles are too big to burst and while the Fed is OK with letting a bit of air out especially in the more speculative areas of the market if a mild tantrum shows any signs of turning into a market crash they will quickly reverse course and rescue markets once again. So the Fed put is probably still relatively intact and while there will be continued volatility and perhaps a further downside of 10-20% the Fed will step in long before it gets any worse than that. The aim is still a soft landing rather than doing whatever it takes to break inflation recession and market crashes be damned.

Historically high inflation does seem to lead to low P/E ratios and the relationship seems to be mostly due to rising interest rates which affect discount rates. So presumably investors are not adjusting their discount rates because they believe that a) interest rates are not going to rise that much and will eventually be lowered again b) inflation is indeed temporary and is close to peaking and will fade away within the next year or two But when the inflation genie gets out of the bottle it does tend to be difficult to get back in and the Fed will probably be forced to tighten significantly to put a lid on inflation expectations and maintain any sense of credibility as they can no longer seem to lull people into a false sense of security by claiming it is transitory. And with all the debt in the economy rising interest rates do present a risk to financial stability which you'd expect to be reflected in lower P/E ratios. As for earnings most forward earnings estimates for the S&P 500 are over $200 a share. I would also question how real and sustainable these earnings are. a) not all companies in the S&P 500 have sufficient pricing power to offset the impact of inflation on margins b) Big Tech obviously do have pricing power but a lot of their customers do not which might mean cuts in online advertizing budgets, economizing on cloud storage etc. c) The composition of spending will change with more allocated to food/energy/services and less to consumer goods/entertainment/technology which will hit revenues d) higher interest rates will have some impact on interest costs and therefore earnings e) Even if the US economy holds up better than expected a lot of S&P 500 earnings come from overseas and overseas there hasn't been the same level of generous fiscal stimulus and there is more exposure to the war due to energy dependence on Russia and reliance on food from the Ukraine etc. And I am sure I am missing other factors as well But seems quite obvious that lower P/E ratios and lower earnings create a very large downside risk. And the Fed put is unlikely to be as reliable

When the inflation genie was back in the bottle the Fed has had some serious mission creep with the emphasis on full employment and desire to prop up the stock market to achieve positive wealth effects. But I do not think it has quite got to the point where it is actively trying to stoke inflation. The average inflation targeting framework was basically buying them some time to accommodate higher inflation post pandemic but clearly now requires decisive action. And there is now political pressure to get inflation under control and a serious credibility problem if the Fed isn't seen to be taking action.

Interesting theory. But in the real world I don't think people sell bonds and buy goods and services because they are worried holding bonds to maturity will result in a massive loss in purchasing power. More likely they will buy equities which at least are a partial inflation hedge. And that is doubly true when real interest rates on bonds are still highly negative. But agree with the general logic that if people believe governments will try to inflate away debt then inflation expectations will be higher and that will feed through into wage expectations and wage-price spirals can result and those can be difficult to break even after the underlying causes of inflation have tempered. The inflation genie is out of the bottle! Also agree with the argument that fiscal policy is a major cause of the inflation we are experiencing. And that is something the government is unlikely to acknowledge and will instead put pressure on the Fed to deal with inflation while continuing to push big spending bills. And as pointed out the Fed doesn't have the nerve to push interest rates high enough to cripple the economy and bring inflation down via a deep recession. One argument floating around is the Fed might be thinking in terms of reverse wealth effects and is starting to figure that a stock market crash is the least painful way to bring down aggregate demand and therefore inflation. Of course such wealth effects are very weak and did little to stimulate the economy post GFC (but a lot to increase wealth inequality!). But it would be typical of the Fed to try to use the same failed playbook in reverse before taking necessary stronger action.

Most of the inflation is coming from unprecedented fiscal stimulus, supply chain issues, labour market tightness and commodity prices. Some of those pressures will ease over the next year or two as the fiscal stimulus wears off and supply chain eases and labour market participation increases and there is some kind of supply response to higher commodity prices. Even if the Fed does ramp up interest rates by 50 bps every meeting we are still way way way below the neutral rate of interest let alone an interest level sufficient to push down inflation or cause a recession even with all the debt floating around in the economy. So I think the plan is financial repression plus look as if they are doing something to try and keep a lid on inflation expectations while waiting for inflationary pressures to ease naturally.

I think that markets are worried about inflation and realize it is not transitory so see it as a positive that the Fed is taking a more aggressive stance to nip it in the bud before it becomes endemic and therefore requiring much more aggressive action to tame.

I get the feeling we are in a sideways market rather than a bear market. So a lot of volatility and risk on/risk off trading based on the newsflow and changing sentiment. The S&P 500 is still heavily weighted towards quality growth which should hold up reasonably well if the economy slows down especially as that should stop interest rates rising high enough to cause significant multiple compression. As we've seen coming out of the GFC a weak economy (and therefore low interest rates) is a positive for secular growers. Also they have pricing power so they can continue to grow EPS in nominal terms which will help offset any modest multiple compression in response to rising interest rates. The one question mark in my mind is to what extent pandemic earnings are sustainable and how markets will react when future growth is a lot less impressive than that achieved in the past. Also I think that while inflation is not transitory it will ease significantly as the effects of the fiscal stimulus wear off and supply chain issues start to ease and people return to work.

wabuffo: question for me is how healthy the USA economy really is. During the pandemic the fiscal stimulus was unprecedented and via multiplier effects etc has some persistence but is surely by now starting to wear off. How robust will aggregate demand be without the massive assist from government spending? So when you have an economy that is pumped up on steroids and slowly tapering off them it is tough to say what will happen. Another factor helping the economy run hot is the animal spirits unleashed by the vaccines and re-opening of the economy and the benefits of pent up demand. But again these influences will eventually wear off. The policy error risk is that: a) The US backs off on fiscal stimulus fearing it will add more fuel to the inflationary fire and also worrying about the debt load b) The Fed feels the economic strength is durable and robust and believes it can be aggressive in taming inflation and faces political pressure to do so Markets seem untroubled because they have learnt from the pandemic that recessions are a positive because they lead to rate cuts, QE and fiscal spending. But historically recessions are associated with bear markets and when you have inflation raging at the same time there is a lot less leeway for aggressive stimulus measures.

Yeah I guess my main concern is what a secular rise in interest rates could do to the London property market as you could then get hit by the double whammy of falling prices AND rising mortgage payments as it is not possible to get a 30 year fix like it is in the USA. Stock market I am less worried about this possibility because a falling multiple will be offset by higher EPS over time and I'm not buying stocks using leverage. I'm primarily looking at London property because Id like to buy one day (at the right price) not necessarily as an investment

Like a lot of property markets London property has enjoyed an incredible run. Operative factors seem to be: -Foreign interest with a lot of Asian buyers treating London property as a bank -Affordability helped by very low interest rates (most mortgages are variable in the UK with only short term fixed e.g. 5 years available -Housing shortages as it is difficult to get permission to build new houses to meet the demand -Banks easing lending requirements as they become greedier and complacent and want to take advantage of the housing boom -Everyone overstretching to get on the housing ladder because of FOMO and believing half-truths like "Property is always a good investment" "House prices always go up" "Paying rent is throwing money down the drain etc" -Government schemes that aim to increase affordability but have the unwelcome side effect of increasing prices for new builds (the most popular requires a 5% down payment with the government providing the rest of the funding for the deposit) And of course the new one is inflation. Rising rents make yields more attractive and if accompanied by rising wages will increase nominal affordability. Obviously interest rates are slowly starting to creep up which will have some impact on affordability. But it is difficult to imagine foreign interest diluting so long as prices continue rising and also difficult to see supply shortages ever getting resolved. And there is a lot of political pressure to keep house prices high. Anyone have any further insights on this?

Posted March 12 So where does the global economy go from here? My macro crystal ball is pretty cloudy these days. We have war in Europe - on a scale not seen since WWII - with little near term visibility on how it will resolve. We have inflation running at the highest levels since the 1970’s and all commodities are spiking in price leading some to predict we are in a new super cycle. We have global central banks just beginning to tighten financial conditions (trying to do something about out-of-control inflation). Consumers are starting to get cranky about ever rising prices. Covid remains a factor - global supply chains are still a mess and China is continuing with its zero covid policy. What is an investor to do? Certainly, the extreme market volatility is creating some juicy short term opportunities. Overall, i am getting more cautious; my usual playbook when things get ugly. So I am back up to 65% cash. Why? Buffetts first rule of investing is don’t lose what you got. Second rule is don’t forget the first rule. If i was younger i wouldn’t be 65% cash. I have enough. Don’t need more. Would not be happy if my portfolio fell 20-30% from here. And i am finding as i age out my ability to stomach volatility is changing (diminishing). Moving to a very high cash weighting (for short periods of time) has been a strategy that has worked very well for me over the past 25 years. At the start of the year i was way overweight oil so my total portfolio is up about 8% (was up 12%) so i am happy to largely lock in my YTD performance and sit in the weeds. I will continue to take advantage of all the volatility. But i am going to try and be a little more patient with big decisions. And wait until i get more clarity on some of the questions i ask below. 1.) How long does the war in Ukraine last? Can it escalate? - result is flight to safety trade in the short term. - how do consumers react, especially in Europe? Absolutely no idea. I think most likely the West will prefer to stick with sanctions, Putin once he has achieved his limited objectives in Ukraine will get a favourable peace treaty, China will stay on the sidelines and little changes. 2.) What happens to inflation? - will US inflation increase from 7.9% in 2H? - how long will inflation remain elevated? - how do consumers react to $+100 oil? Do they get cautious? I think a combination of an economic slowdown/recession and easing supply chain issues will bring inflation down to a moderate range. But it will persist to some degree because experiencing inflation leaves scars and results in higher inflation expectations going forward even after the operative factors causing inflation have eased. 3.) Are we in the early innings of a commodity super cycle? - how high will oil prices go in 2022? How likely is $150 oil? Will high prices persist? - at what point does high commodity prices affect consumer behaviour (pull back in spending)? Free market forces are broken as there cannot be a significant supply response because of all the obstacles and disincentives to further drilling and replacement energy sources are nowhere near ready to pick up the slack. So demand destruction will be the main corrective mechanism and demand is still very inelastic so prices will have to go pretty high for that to happen. Fuel costs are not as high a percentage of consumer spending as they were in the 70s. And in real terms oil prices even if they get up to $150 are much lower than in the 70s. And $100 oil was pretty common before the shale supply glut and the economy did just fine. So while a negative I don't think it will be enough to plunge the economy into recession. 4.) How aggressive does the Fed get, starting this week? - does liquidity matter? - purchases of bonds has just stopped (no longer adding liquidity). - how many times will the Fed raise rates in 2022 and 2023? - how aggressive are they with balance sheet run off? I think QT is the major unknown. It is possible to model the impact of interest rate hikes and the Fed will be very gradual and keep hoping that inflation will ease long before interest rates reach levels that start to cause issues for a debt fuelled economy and markets priced on the basis that TINA to equities. The bull case is that QT after the GFC did not have a major impact. But the QE during the crisis was different as it mostly went to repairing bank balance sheets. The QE during COVID seemed to go straight into risk assets. So without all this excess liquidity sloshing around you'd imagine they'd be a lot less money at the margin to go into propping up stocks so if sentiment does turn negative (and signs of that already) you'd imagine the bubble would continue to deflate. But I think the Fed also doesn't quite know what will happen so will be very gradual and slow down the process as soon as there is a major market reaction. 5.) What impacts will covid continue to have on the global economy? - does China continue with zero covid policy? - how abrupt with consumer shift from goods to services be? I think most countries are at the "we can live with the virus" stage. In emerging markets it will still take a toll but these countries cannot afford lockdowns so the impact will be humanitarian rather than economic. 6.) Have we seen peak globalization? - will countries look to have more domestic production of critical inputs/goods? If so, is the inflationary? - if the war in Ukraine persists will it put a chill on relations between West and China: will we see start of economic decoupling here? 7.) How does all these different factors fold into financial markets for the next 3-6 months? Next 12-18 months? Next 3-6 months.....probably a sideways market with mild volatility that is eased by profit taking and dip buying. I think there is still confidence that the Fed will bail out markets, inflation while not transitory won't break the economy and will ease over time without requiring drastic policy measures, and earnings reports will still be pretty positive as 2021 benefited from massive fiscal stimulus, release of pent up demand and a bonanza for tech related companies. Next 12-18 months....not so great. The economy probably can't avoid a slowdown as the effects of massive stimulus wear off, inflation starts to impact consumer and business confidence. Big Tech obviously benefited massively from the pandemic but at their massive size they won't be able to grow that fast in the future and will be more utility like. Still deserving of a premium multiple especially with low interest rates but are pandemic earnings really sustainable and they are so big that if the economy takes a hit their earnings will surely decline as well. Also while the Fed put probably still exists their hands are tied to some extent as the inflation genie is out of the bottle. We also have an entire generation of buyers who think markets only go up and a lot of leverage still being used to buy stocks. So cannot imagine many of them staying the course during a market decline.

After the V shaped recovery narrative seems to be panning out and reflation trades are all the rage we've moved on to Roaring 20s headlines in the Economist, Bloomberg Businessweek and Money Week. Predictions of a lasting global boom driven by post-pandemic animal spirts, re-building better, productivity gains from cloud etc., supportive fiscal and monetary policy, and so on. All of which could result in a multi year bull market. How plausible is this prediction given we struggled to get much above 3% GDP growth pre-pandemic and we now have more debt than ever before and a lot of jobs are not coming back? Obviously massive transfer payments can juice GDP figures considerably and show no signs of stopping and there will be even more spending with infrastructure programs up next. And there will be some pent up demand released this year resulting in higher consumption and investment. But will the result of all of this be a much healthier and stronger growing economy or will we just revert to pre-COVID stagnant growth as soon as the fiscal and monetary stimulus starts to be tapered? And are we really going to achieve full employment or are we most likely heading towards being far more of a welfare state which if you look at Europe has never really been a source of a robust and fast growing economy.

I kind feel moderate inflation is going to be yet another positive for stocks especially as with financial repression (Fed keeping interest rates low) it will be impossible to hold cash. And kinda agree with Powell that you don't just go from 1-2% to 6% overnight. Inflationary pressures tend to build slowly over time although agree could be some short lived effects due to supply shortages/pent up demand etc which might push it to 3-4% this year. Also different economy from the 1970s. Far less manufacturing based so high input prices aren't going to have the same kinda impact. Remember commodity prices were super high in 2008 and inflation was still moderate. Learning Machine. Guessing the PE of 39 you are using is 2020 which is obviously trough earnings. If the strong growth everyone is expecting comes through that multiple could come way down. Also for the S&P 500 not sure how relevant CAPE is given a lot of S&P constituents are fast growing so average earnings are less relevant than future earnings and a lot of the cyclicals could enjoy very strong future earnings compared to the stagnant economy post GFC if all the stimulus juices the economy. I think the Fed hiking rates and the bond market hiking rates are very different in effect. The former leads to tighter financial conditions. The latter not so much and it will be a while before bonds become credible alternatives to stocks.

yeah james i fell into that trap. Especially when some of the initial price moves have been so explosive it is hard to jump on the latest hot trade but if it is still very undervalued it can still be a buy. agree that it is much more reassuring when you buy a little too early and have the opportunity to average down. but buying a little too late is equivalent and can still produce good results if there is still a large margin of safety.

I think Buffett probably sees the AGM as a better format for some of those questions. I think the style shift is to allow for continuity/comparability for future reports he might not be authoring. No doubt he has private views on some of the crazy speculation. But I suspect that for the S&P 500 he probably feels the same that it is cheap if interest rates stay low.

What I find a bit suspect is that he obviously knew the stock became way overvalued but still held on and kept cheerleading the stock. He's a smart guy so he must have known the dynamics of what was going on. So while I don't think he went into this trying to engineer a short squeeze he certainly rode it for all it was worth and encouraged others to do so.

Fed have already said they won't talk about raising rates until we achieve full employment which is going to be pretty near impossible because the entire service sector has been gutted and a lot of those jobs simply aren't coming back. Also their favoured measure of inflation includes rent and wages which are going to be under pressure for some time. And even after the next round of stimulus checks the Democrats still have all the infrastructure and green spending lined up.

Chevron seems like a pretty good investment. Short cycle projects so should be a nice cash cow and make hay as oil enjoys a final hurrah before green energy starts to take too much share.

Yeah I think there are a few reasons why this could continue for a few more years: 1) Fiscal and monetary policy are going to be supportive for at least the next year or two given the new emphasis on full employment and willingness to let inflation run hot (and there is probably a limit to how hot it can run in the short term given the size of the output gap and absence of wage pressures and falling rents) 2) The pandemic has reinforced the notion that the Fed won't let markets crash and that will continue to encourage a buy the dips mentality as well as keeping confidence levels high. 3) There are still quite a lot of investors worried about market valuations and speculative activity in the market. "1999 again" isn't the same as "this time it is different". And probably some of the residual health and economic uncertainty is keeping some investors out of the market. 4) Markets don't generally crash when the economy is getting better so if a V shaped recovery plays out (and that seems a lot more likely now with fiscal stimulus and effective vaccines) then rising earnings should support rising stock prices and expensive valuations 5) There is nothing obvious on the horizon that would break investors confidence or lead to increased risk aversion. Perhaps rising interest rates will result in some degree of rotation into bonds and value stocks but if it is gradual that should be a fairly orderly and healthy rebalancing of the market and not result in a market crash.And perhaps mutations will delay reopening but you'd expect investors to look past this and expect more stimulus to soften the blow.