SHDL

Yeah that's the game plan for me as well. I might look to hedge at some point but not until I have more conviction. To be fair though I was more negative in late 2019 or so looking at similar signals - but back then things were clearer (at least in my head) as we were not coming out of such a bizarre macro environment. My suspicion is that Mr Market is similarly confused and hence the extended period of go-nowhere index price action.

By "meaningful deterioration" I just meant a "big drop" in things like cash flows and income and employment. Speaking of which, there are signs/leading indicators of weakness for sure as you and others have already discussed but personally I'm just having a hard time seeing how far that trend goes - or put differently I can't really tell if we are just cooling down a little coming out of this strange boom period or if things are about to get much worse.

My own take is that stocks aren't down that much because real rates haven't really gone up that much. Nominal rates are up, yes, but inflation is up too so it is not clear if bonds are all that attractive vs equities. At least personally I look at these ~4% long term bond yields and say to myself okay great but I think inflation is going to be just about has high so my real return is going to be really low and so I just hold on to my stocks. So I think for the market as a whole to go down meaningfully valuation alone won't do it - we need either the economy to deteriorate meaningfully or have the Fed jack up rates much much higher. Those things could happen of course but at the moment I'm not quite feeling it.

Ouch that sounds like a disaster in the making... And IIRC you have rent control laws in place right? Gonna call back that guy from Deutsche who wanted to sell me CDS on Canadian mortgage bonds

I think part of it is that real rates are still kind of low. So for example you have a government with a lot of debt that now has to pay higher interest but, thanks to inflation, tax revenue has gone up automatically and so it has no difficulty paying. Another thing is that US households mostly have their home mortgage rates locked in at low rates and so their financial situations aren't affected too much by these rate increases - and if anything they may have benefitted some (e.g., if you took out a 30 year mortgage at 2.x% at the right time and put the cash you saved into long term bonds at say 3%+ you got "free money").

I'm pretty sure that 1.5% number is just taken from the TIPS yield curve. I do agree that 2.x% inflation is perhaps a bit too sanguine but it is what the bond market is currently pricing in.

Thanks to @fareastwarriors for the link. The reasoning isn't so clear to me from the article but it sounds like the gist is that the yield curve inversion we're seeing now is largely driven by the "inversion" in inflation expectations (meaning short term inflation expectations are much higher than long term inflation expectations) and therefore it is not as strong an indicator of an upcoming recession as it normally is. Anyhow I thought it was interesting that this was coming from the man who invented the indicator.

This may be of interest to you: https://www.bloomberg.com/news/articles/2023-01-04/pioneering-yield-curve-economist-sees-us-able-to-dodge-recession#xj4y7vzkg Just to be clear I don't have a strong view on this matter one way or the other.

Typo I'm sure but I had to laugh. Came for investment ideas, staying for @dealraker's stories...

I should try that too.

I just went with some old COBF favorites for the time being … BAC, SCHW, BRK, FFH. BAC for me is the pure play, SCHW I added for diversification (but have less confidence in), BRK/FFH are more than a play on interest rates but they’ve got a nice tailwind. I haven’t bought WFC and probably won’t until the asset cap is gone (or it gets much cheaper). Also CASH (Pathward Financial) is looking interesting but I haven’t really done any work on it yet.

My portfolio is already 50% JOE and 49.9% MSGE and I really needed to think hard what to do with the remaining 0.1%. Jokes aside, for me this is more of a long term bet on interest rates staying elevated while the economy does okay. Right now I get the sense that the macro outlook is either we get a nasty recession and the Fed cuts rates or inflation goes down and the Fed cuts rates - and at least on the surface it looks like bank valuations reflect this. So … what if the economy actually does okay and the Fed doesn’t cut rates? Not to mention that scenario is arguably closer to what the Fed ultimately wants to achieve. Anyway that’s the thesis for this half-assed macro bet of mine. Is it the best idea for 2023? Nah, I think there are better ones already mentioned on this thread (thanks guys). But it’s good enough for a slice of my portfolio.

Right that is something to keep in mind. It may be part of the reason why some of these banks look superficially cheap.

Yes, I always feel a bit nervous about them. Hopefully the Fed's stress tests are reliable enough and they won't do anything so reckless as to topple the money center banks but you never know for sure. SCHW is technically a bank with a somewhat different risk/return profile - I have some just as a diversifier.

I'm overweight some banks/insurers for this reason. But it's not like I'm looking to 2x in 12 months or anything. If I had stronger conviction and had the time/energy to babysit my positions all day I would probably be trading FF and/or US treasury futures.

Right - which is why I'm not expecting them to cut rates, just keep them at 4% or so as they "watch carefully how the economy evolves." Which btw is bullish for (some) financials.

Yes I am ready for that ... ready to buy the dip on that beautiful red day that is. But then again I'm not holding my breath as I think the Fed will go out of its way to avoid disrupting the market in a big way...

Yes I think that would be a good way for them to move the goal post while maintaining credibility.

I have a different take on this which is that once we're down to 4% or so, I think central bankers will move their goal posts and declare victory and stop tightening. As far as I know the 2% target was somewhat arbitrary to begin with (the reasoning was something like "ok so we want it to be positive and not too high and 2% seems like a good number because it looks reasonably attainable starting from zero") so I have a hard time believing they will try to wreck the economy just to get from 4 to 2.

The fact that JOE was on the other side of the table vs @Gregmal in this transaction makes me want to sell all my shares and go max short.

My vague recollection is that inflation was around 5% in post war Japan until it spiked in 73-4 due to the oil thing. But anyhow this was just meant as an example to illustrate my current thinking.

Yes things can get tricky in the short term when inflation suddenly accelerates but my thinking is that if we were to settle down to a long term regime where the price of everything keeps going up 5% per year like clockwork then revenues, costs, and cash flows should all keep going up 5% per year even if there is no real growth.

Agree that’s an important point. I’m personally not particularly bullish on stocks generally but I’m nevertheless “fully invested” (with whatever is left after buying RE) because I’m pretty negative on fiat currencies. I really think governments have now re-discovered the joys of seignorage and they’ll keep using it every time something bad happens to the economy, the end result being persistently high inflation. Looking at the price action in gold for instance I get the sense that the market is starting to take notice.

One thing I’ll add (somewhat related to thepupil’s post above) is that there can be a meaningful difference between the two in terms of passive investment flows. What I mean is this: Suppose I own SPY and I automatically reinvest the dividends. So every now and then JNJ pays a dividend to SPY, SPY sends the cash to me, which then gets reinvested in SPY. Let’s say my SPY position is such that the JNJ dividend is $1000. JNJ’s SPY weight is around 1.5% so this means I will be passively buying $15 worth of JNJ when the dividend comes. Now suppose JNJ were to scrap the dividend and buy back shares with the same cash flows instead. Then I would no longer get the $1000 dividend but instead JNJ would buy $1000 worth of JNJ stock on my behalf. This means that by switching from dividends to share buybacks JNJ was able to increase my passive investment flows from $15 to $1000. Now this doesn’t have any impact on intrinsic value so it probably makes little difference long term but I tend to think that it can affect how the stock trades in the interim - for instance my own theory is that AAPL would not have held up as well during 2022 if they just had a big dividend instead of their share buyback program.

The SPX EPS series on that website are already inflation adjusted (to Nov 2022 dollars) so you basically just need to take the 10 year average and divide the current index level with it to get the CAPE ratio. I believe the ratio is indeed around 28. https://www.multpl.com/s-p-500-earnings/table/by-year "S&P 500 Earnings Per Share. 12-month real earnings per share — inflation adjusted, constant November, 2022 dollars."