changegonnacome

The question I have for enterprise tech folks out there is in an environment where say corporate earnings are contracting…..does ‘the move to the cloud’ on a purely immediate basis vs. on-prem/private cloud basis start delivering cost savings to the enterprise straight out of the gates???……or given the implementation costs, decommissioning , re-architecting applications to be cloud first…..that a cloud migration is actually an immediate term upfront expense where the cost savings/revenue benefits acrue to the business years later. Suspect it’s the latter. If it is the latter then cloud migration IT projects will likely get deferred in a cost cutting environment. I’ve been through one of these cycles the projects that survive provide either immediate cost savings or immediate revenue opportunities. Everybody’s thinking gets very short term once the shit starts hitting the fan.

Back to the question of the thread - has the bottom been put in yet?......Jim Chanos (yes understand peeps think he's some kind of monster) but also others on FinTwit using Robert Shiller analysis..... have pointed out that no bear market bottom since late 1950's has ever been put in (except for the COVID panic) that didnt see the market PE relative to the previous peak earnings number hit a multple low of at least 14x - 15x times that peak earnings number............in October 2022 low, that many hoped was the bottom..........we hit a 19 multiple on peak earnings. The more typical or average trough is somewhere in 9x - 14x peak multiple range.......havent checked the math on this one but interesting nonetheless:

Patriotism is the last refuge of the scoundrel, as they say

You use Mauritius, a 0% tax haven, to locate, book and report FAKE profits at subsidiaries for example............last thing you wanna do with fake profits is report them 'on-shore' where you have to pay very REAL tax on fake profits....kind of defeats the purpose. You also potentially use Mauritius via a kind of goodwill stuffing M&A exercise............where you acquire companies to potentially get rid of supposed cash you should have but dont....this is especially important when auditors come to check cash balances you say might have on revenues/profits you told people you had..........so you pay high (but ultimately fake) prices for external acquisition companies and turn fake cash into goodwill on the balance sheet.....but in effect these are related party transactions but nobody knows that.........but again a bit like the above on the fake profit side......the acquired company owners upon acquisition has a fake capital gain problem if located on-shore.....therefore fake capital gains on acquisitions need to be located in a tax havens like Mauritius ...so you dont pay REAL capital gains on this nonsense sale/profit price. The acquiring company books the acquisition, gets to write down the fake cash at the bank and credits its all to goodwill on its balance sheet..... and then auditors come to check the money in the bank its correct, even if your revenues & profits are nonsense......and well goodwill is goodwill its an accounting concept, hard to check......if company XYZ was worth $100m, it was worth a $100m.....one rational unrelated party, paid another rational unrelated that amount....so that must be whats its worth and what happened. Final thing called out in Hidenburg specifically in their report from what I can see is just opaque inside ownership of stock that skirts disclosure rules. Of course lots of legitimate reasons to have an entity in Mauritius....which I'm sure Fairfax is doing.

What screen did you use - and surely LBTYK would have fallen in the top quartile of canibbals

Yep I think this important - not every uptick in negative metrics foreshadows a recession......and historical context matters....chargeoff rates going to 2019 levels is kind of a nothing burger.........car repos hitting 2009 levels is a very different data point and one I pay attention too.....people do not fall behind on their car payments and risk repos unless under severe strain....its usually the last debt domino people allow to fall. However what I would say also is with 3.5% unemployment......and an economy at full economic output.......how exactly do things improve or get better from here?......the risk/reward feels asymmetric and to the downside......not sure anybody out there is arguing unemployment is gonna drop to 3%, workers are suddenly gonna start getting inflation beating pay increases such that their real purchasing power is gonna go up so their balance sheets get repaired & cost of living difficulties subside......and then most importantly of all massive productivity gains (i.e. real wealth) is gonna show up out of the blue......feels to me like corporate margins peaked in 2021 and the 'real economy' non-government sector/inventory economy peaked sometime in 2022. It sounds terrible - but creative destruction is part of the capitalist system.......artificially low interest rates for a decade + COVID stimulus.....allowed a huge cohort of zombie companies to carry-on operating while creating negative real value.........low cost of equity/VC capital also allowed large cohorts of no business model companies to scale and hire talent and to keep going when it's clear they will never create a $ of positive earnings.......the inflationary fire got lit by COVID stimulus but the kindling was years in the making via the misallocation of capital. There's a reasonable argument to make that VC money is part of the inflation problem.....there just arent that many good ideas......so bad ones got funded......but those bad ones consumed/hoarded human capital....and this was non-productive activity for that human capital to be engaged in which precluded actually productive value creating enterprises from producing more. I've used the example before but health insurance companies have had a terrible time hiring good tech talent to modernize and implement tech efficiency projects front end/back end.....think of the marginal Tier 1 software developer.......he/she can go to United Health and make UHG 0.0001% more efficient which passes through to customer premiums, US healthcare & UHG's efficiency and headcount requirement....UHG is doing the same with less = aggregate productivity gains for the USA......however that marginal software developer in the last five year went to fart.io to work on Fart coins.....zero productivity gains & but alot of fun watching it go to da the moon and back down again! Anyway I think about the huge mis-allocation of human capital in value destructive activities across the economy right now as result of ZIRP & lower for longer. as being one of the culprits of inflation.........Bed, Bath & Bankruptcy in 90's/00's would have gone bust easily 5yrs ago puking out the talent still sitting in there right now instead they kept going, doing buybacks along the way.....but access to cheap debt kept it artificially going.......Party City the same, you see its balance sheet...........think of the immense technology related human capital consumed in the creation of various ponzi/multi-level marketing schemes under the guise of crypto/blockchain......or more innocently the tech bros/hoes working on various 'Amazon of XYZ' start-ups in SF where it was clear ages ago to anyone with a brain who cared to look it was going nowhere (Theranos for example) but VC turned a willingly blind eye, played pass the parcel & money kept showing up to fund pointless endeavors. This economy feels like a cathartic, albeit painful, recycling and re-allocation of human capital is required to get us out of the productivity mystery which has bedeviled the 2010's......I'm coming around to the thesis that the real cost of ZIRP & monetary looseness & low hurdle rates for investment for a decade plus.....is the corruption of capitalisms secret sauce - the efficient allocation of finite resources to their highest and best use.

Yep went through the report - “Core GDP” ex-Gov. spending & inventory build across all the other sub-categories were either negative or trending dangerously close to zero/negative & that’s in a 3.5% unemployment economy. Think we can all agree that unemployment is certainly not going lower from here and so things are asymmetric on that front. So very very hard to see what areas of the economy are turning upwards to rescue some of those GDP numbers (investment/consumption etc)….consumer is running on fumes due to erosion of purchasing power….burning through excess savings point to a cliff….on that front Id take Jamie Dimon’s assessment as pretty good which is no later than mid-year…..but recessionary spending behavior will kick-in before then as some folks notice they are approaching zero….so I’d expect to see some serious weakening in consumer spending/confidence in early Q2…as folks approach that Mid-Year savings ‘cliff’.

Americans Fall Behind on Car Payments at Higher Rate Than 2009 - https://www.bloomberg.com/news/articles/2023-01-27/car-repossessions-grow-as-inflation-slams-consumers?sref=7zqHEcxJ

The trend is your friend, until it isnt! - how many folks jumped into Cisco at year 13 and paid up for dreams of another 13 years of 40% YoY growth....I'm guessing a-lot.....and way more than the people who jumped in at Yr 1, 2 & 3 of that run. What does Howard Mark's say - "first the Innovator, then the imitator, then the idiot"......the life cycle of investing flows.....the first two make money.....and then the idiot gets killed.

Always good to hear what folks who owns malls and hotels have got to say. He's got one thing exactly right......the Fed hasn't moved unemployment as of now........but they are currently in the process of creating unknown levels of future unemployment that will only reveal itself in time - as PP&E projects conclude and investments/spending that might have otherwise occurred or been green lit at the corporate sector got deferred/cancelled last year in response to tighter financial conditions. The long and variable lag thing is very real.............but so is the inertia that occurs when the Fed, having seen it's done enough or perhaps even too much......then try to restart things........not so easy to do with construction related activities given the bureaucratic hoops required to go from approval to plans to breaking ground that are now endemic everywhere in US. I hope the fiscal side of the US steps up if/when the Fed induced unemployment air pocket shows up - the trillion dollar infrastructure bill should be deployed aggressively at that point.....as we discovered during the pandemic the speed at which fiscal stimulus can positively effect the economy is night and day better as compared to the slow moving derivative nature of how monetary stimulus works.

Yeah and dont forget for all the services talk - Apple is still mainly in the transacting computer hardware business.......even the so called recurring services revenue flatters a bit as it includes one-time App Store transactions.....not inconceivable at all, in a weakened macro environment, that you get a couple of years of folks skipping iPhone upgrades & parents denying those pesky kid requests for extra robo bucks or whatever you call them.....there's cyclicality there on the top line that is under appreciated I would say.....and that Tim Cook has been skillfully & to his credit been trying to smooth out with recurring services revenue plus various iPhone leasing type programs that lock folks into yearly upgrades.

Yep I'm down with this concept.........Howard Mark's "Sea Change" memo is pretty good on that front......the time value, opportunity cost & cost of capital went to zero in the 2010's.....very very unusual time, when placed in the long arc of time....the average COBF investor is going to do way better than the average reddit investor over the next decade......which is another way of saying value is going to outperform growth.

The buy and hold forever meme in investing is overhyped as @TwoCitiesCapital says I'm sure lots of people went over the cliff telling themselves that in GE or Blackberry......outside some outliers (Coke, American Express) the god of buy and hold forever Buffet himself cuts losers in his stock portfolio & churns the portfolio, not like some hedge fund but more than the hold forever meme attributed to him would suggest (more so years ago when size didnt become such a problem for BRK getting in and out of things).........because as he knows the exceptionally durable businesses are rare.......creative destruction in a capitalist society changes the competitive dynamics constantly....what seems like an impenetrable moat gets eroded over time. Price matters Competitive dynamics matter Indexing is the way out of this.........holding SPY forever makes sense.....once you step away from this option......the price is eternal vigilance.....you should only do it if you enjoy it......you should only do it if over perhaps 5yr period you've demonstrated some skill at it (& even 5yrs is probably too short to discount pure luck over skill).

Yeah exactly - couldnt have said it better myself........I'm former longtime bull, who has heard the siren song of the bear......I know for a fact & acknowledge thats the wrong posture.......so as I make clear in most of my posts....I remain a fully invested bear.....expressed via bear-ish hedges & slightly higher than normal allocation to cash/bonds etc.

Think Kolanovic has got it about right above........direction of economy isn't good certainly post mid-year when excess savings go to zero.......earnings follow the weakness........one thing I disagree with is that I do believe that the Fed/Powell is not coming to rescue until it sees the whites of 2% inflation's eyes and the 4% to 2% inflation journey is going to be a slow grind, not a graceful descent like we are experiencing now with MoM inflation prints. The Fed flinching later this year seems to be central thesis for equity bulls (& indeed the smartest guys in the room, the bond market).....if the Fed 'put' doesn't show up........well wow........its gonna get scary out there for lots of market participants. Mike Wilson below is about the closet commentator to where my thinking is....consumer rolling over once excess savings exhausted, margin driven earnings deterioration already happening with a relatively strong consumer backdrop but things about to get way way worse later this year when the consumer starts running on fumes....

@Dinar nice one, thanks....very interesting

Is there a thread on this or write up you could point me too? Came across it mentioned enough times now to trigger my interest. Cheers

Yep love the way Toast, Clover & Square's go-to-market strategy & value prop to merchants is that our fancy PoS terminals can get morons to tip your staff, where they didn't before, & so all things being equal you the employer wont have to pay them as much. Its genius on their part to use social pressure/proof as way to fuel their growth........and as a result I expect to see the things everywhere over time. Incidentally its reminder for me to look more into Fiserv (owner of Clover) its an awesome business and those three seem to have captured the bulk of these types of payment systems.

Thanks @dealraker had a quick look - he doesnt go into much on the economic side inflation etc.......more on historic market parallels to previous busts but funnily enough and @Gregmal will hate this , he makes a point similar to Greg which is, perhaps, just perhaps the big moves have already happened and he's less certain now on the predictability of next move down or up! So while Im sure its uncomfortable for @Gregmal to sound like Grantham!......its doubly uncomfortable for me to more bearish than Grantham (although he does talk about SPY 3000/3200)...... I'm coming around to the following thesis based on anecdotal evidence (but waiting for BLS data in early Feb to back it up) that were going to have continued linear falls in inflation into the year to about ~3.75% to 4%....but then find ourselves stuck in the mud around there with disappointing MoM flattening, maybe some annoying flare ups........then only serious weakness in the economy/labor market will be shown to be capable of moving us below this.......Grantham does talk about excess savings and chimes with what Jamie Dimon has said about these savings running down and then OUT by the middle of this year.......H2 2023 feels to me like the real wiley coyote moment....excess savings run out, dis-inflationary MoM progress stalls out, the Fed doubles down on its resolve to remain higher for longer to get us from 4 to 2%, the economy weakens, unemployment moves up AND most importantly the Fed just sits there doing nothing talking about the risk of doing too little being greater than doing too much........... all while the corporate sectors ability to pull levers to 'make the quarter' run out.......and you just start getting horrible earnings prints. Let's see. It's the best show on earth to see how it all plays out and then you've got all the unknown unknown's out there waiting in the wings. I'm hiding out in companies mainly outside the US where valuations aren't so challenged, companies that are the beneficiaries of consumers trading down & companies where higher rates for longer are a good thing. I'm a slightly less than a fully invested bear right now......as some trimming on gains has been recycled into short duration bonds where I can live with 4%+ 'safe' returns and wait for some fat pitches to show up.

I tend to skip all the hedonic adjustments nonsense….and all the broad measures….I think about what Joe six pack buys each week….and so I look at nominal food & housing services + some measure of domestic services inflation…..energy matters but is volatile and requires sustained periods of elevation to really really start to matter. But really forget all that..….in a full employment / output economy……like we have now…….where there’s little question USA Inc. is at its productive capacity with no slack or capacity on the sidelines to be brought on…..it’s very easy to get a descent gauge of inflation & inflationary pressures…..and that’s by looking at % productivity growth against MoM increases in non-farm payrolls from BLS and then annualize…..the delta between those numbers in excess of 2 (the Fed’s inflation target) is a very good ballpark for undesirable inflation. I’m anxiously waiting for January’s figures to come out in early Feb….I’m getting some sense that there was a modicum of wage restraint in EoY 22…due to inflation expectations remaining anchored…..but as I’ve said a billion times I don’t worry about the journey from 9% to 4-5% inflation prints….it’s a zinch and a slam dunk….it’s 4% down to 2% that will disappoint many with its persistence & stubbornness as well as the time it takes. Using my methodology above - 1.5% productivity growth met by ~5% increase in non-farm payrolls (or aggregate income growth) lands you with ~3.5% inflation….you can see how even with wage restraint & modest-ish increases in incomes…you overshoot the Fed’s inflation target by a lot….no wonder the Fed is counseling for rates to remain elevated for longer than what’s priced in in the bond market.

Yeah I think as I’ve laid out - we had multiple contraction last year…..now it’s earnings contractions turn….for the reasons I stated….don’t think you need an economic recession per se…..for earnings to take a significant tumble….in fact I’d argue the Goldilocks scenario requires the corporate sector to absorb pain enough to bring us “back to 2”….pain enough that actual employment holds up and GDP doesn’t go negative….frankly we should all be hoping it’s the E that’s acts as the shock absorber for the Fed’s disinflationary zeal. Inflation is solved by depressing aggregate demand to bring it back in alignment with supply. Better the demand destruction occurs only in the corporate sector…..for sure zombie companies through bankruptcy puking out labor such that it’s allocated to more economically productive activities is one answer to growing supply….likewise big tech trimming the fat and reducing America’s population of full time foosball & air hockey players and recycling that human capital back into actually writing code to make insurers/banks/factories more efficient. This is all good stuff in the productivity and aggregate supply battle. Something is gonna get it the neck from all this financial tightening & consumer weakness, better it’s the corporate sector and not the household sector.

Yep - early stages of inflationary cycle feel & look quite good flattering financial results.......firms push price, those prices land without hurting volume, margins expand & increased revenue drops to the bottom line.......so you get a peaking of margins in the initial stages of an inflationary cycle.............but peak margins are now firmly in the rearview mirror........2021/ 2022 will be something of historical peak on that metric for SPY......https://www.barrons.com/articles/stocks-profit-margins-fall-51674239840 Margins start falling because soon after you've successfully pushed price, your suppliers/employees start demanding pay/unit increases due to the wider inflationary pressures they themselves are feeling........Central banks having observed inflationary pressures, start to raise interest rates hurting credit creation and by extension spending, then incomes...........customers feeling cost of living pressures/credit contraction start trading down to lower margin products (own brand/non-organic) and/or reduce volume.....pushing price, growing/maintaining volume becomes discounting & failing volume...........and you get to about where we are now and things start to roll over - Which is 2023 earnings downgrades are at fastest pace since 2009 (see vid). I expect consistent with this thesis that many companies will just barely 'make the quarter', many will probably miss in this earnings go round .....lots of management games & one-time levers being pulled like Apple releasing iPhone's a few weeks earlier than usual to pretty up Q4 numbers........then the oldest tricks in the book come out to keep the show on the road ..which is cutting advertising budgets.............first budgets to go are the marginal non-core advertising buckets those that go to the likes of SNAP/TWTR/CDLX etc., but eventually you have to cut into core budgets.... digital advertisers like GOOGL, META.....you then also start layoffs..........but as I've said before in a circular economy with everybody in unison attempting to tighten their belt....ultimately NOBODY achieves said belt tightening because aggregate demand across the economy falls........the 'paradox of thrift' in action.

Yeah listen YoY earnings require some inflation adjustment to get to a true approximation of the purchasing power of those earnings & by extension true 'wealth'........................because whatever way you slice it we've had some above trend inflation the last couple of years........the average bear will look at YoY 2022 vs 2021 earnings per share growing perhaps 1-2%.....and say to themselves "not bad things going in the right direction.....value is compounding here".........but in reality thats not the case......you held an instrument that, in real earnings power, did not in fact maintain your purchasing power. It destroyed it. It’s doubly painful when many have seen the multiple paid on those earnings contract also and then to think that the earning stream itself has contracted in value (inflation adjusted) is just too painful a thought. I get it. I’ve got one stock in my portfolio in nominal terms everything looks ok…earnings flat-ish YoY, stock down slightly in nominal since I bought it in 2021…..but that SOB is a real dud and its destroyed at least 10-15% of purchasing power I put into…..cause it failed to outrun inflation with its earnings…..and the mark-to-market losses on the equity ticker itself are larger than just the nominal decline if i were to sell today. Inflation allows those who wish to delude themselves a convenient psychological 'out' as they play the nominal game and buy into the 'money 'illusion'.......I try to be brutally honest..........

Oh yeah whats your finger in the air ballpark for 2022?

What was it then? What real versus nominal adjustments are you making? It can't all be fake @Gregmal......we can definitely argue about what the inflation rate is EXACTLY right now this minute some arguements that have merit that MoM inflation is now showing 'normal' type numbers consistent with 2%.....but the US economy experienced genuine, real and recorded inflation in the 2021/2022 period...to deny that is to pretend in an alternative universe, its delusional ....so what do you think the Q4 2021 to Q4 2022 real inflation rate was if not the reported inflation rate?.....you'll see from my message I down regulated my rate to ~7-8%. People who are intellectually honest with themselves have to inflation adjust in an inflationary environment.....to not do so is to trick yourself around the basket of goods and services your 'earnings' can now command.