changegonnacome

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.

Dont forget the 'money illusion' I've spoken about - if a companies YoY quarterly earnings per share hasn't grown by lets call it conservatively ~7-8% nominal (between friends) over Q4 2021's EPS.........the earnings have actually fallen in real terms..........inflation is a silent thief

Portfolio margin I never allow to go beyond 12.5%….…..idea being even in a 50% drawdown…..when 12.5% margin on depressed equity base would jump to 25% it shouldn’t cause any forced selling (I’m with IBKR, they don’t margin call, they just sell ). The reality however with LEAPS is that one can have a long term view and be quite levered and not worry about such things which would be my recommendation. Not unusual for me in 2020/21….to take a FULL position… 80% of which was in the underlying and 20% in leaps for the extra juice. When the Fed speaks, I listen…..they wanted everything to go up back then…now is the opposite. Why would I stop listening now.

@dealraker Agree monkeys pick their bottoms (in the british sense)!!! People shouldn't I'm a fully invested bear - my bearishness is expressed via 5-10% portfolio weighting allocated to bear-ish positioning usually a little levered via put options, some short OTM calls.........if I'm right it provides profitable hedges and some alpha to smooth out the 90% of the portfolio exposed to the beta flow......the hope is for superior stock picking on the long side too that can outdo the beta but sometimes the beta is just too strong .....if I'm wrong and history says the broad market goes up 70% of the time so the odds are your gonna be wrong.....well 5-10% of portfolio doesn't work out so well but 90% does......2022 was the first year I've run things with downside hedges versus 2020/2021 slightly levered long with some margin/calls.......2023 to me feels like another year to be hoping for the best (90% long) but planning for the worst (~10% in negative levered hedges)......I also like now more than ever kind of market neural stuff.....workouts, merger arb etc. Twitter deal last year was a god send on that....maybe Activision is the one this year. My bear hunting is to try and figure out when to remove the 10% negative allocation and go back to my 2020/21 posture which is slightly margined long!

Yep and those forward earnings estimates are looking very very suspect

As I've said before - TINA dominated flows into equities up until very recently.....multiples expanded in response...........could it be that record bond issuances YTD and by extension purchases is demonstrating that TINA is over?.......and equities are facing competition for flows for the first time in over a decade?.......as allocators think about deploying that marginal dollar into competing financial instruments they are being presented with options with acceptable returns that aren't stocks for the first time in a long time. Retail investors/savers likewise - as CD's & high yield savings accounts paying 4% start to look like not such a bad place to be on a risk/reward basis vs SPY/QQQ that took you to the woodshed in 22. In a QT world with shrinking money supply such that marginal liquidity is contracting.......record flows into bonds like this have consequences......the marginal dollar game has become zero sum.......the liquidity/money supply pie is shrinking, not expanding as the Fed rolls off the balance sheet......and so for bonds to 'win' flow, equites have to 'lose'. I myself have a confession to make - I bought a 3M T-Bill yesterday with an annualized YTM of 4.4% with some cash laying around. Never bought a sovereign bond before. It felt weird. Pray for me.

Agree with Mark’s - optimism around falling inflation , the severity or otherwise of a recession and an impending Fed pivot pervade the market at ~3900 - 4000 I also agree with Mark’s about being bottoms up…..I have a top down view…..but a bottoms up methodology & approach….I remain pretty much a fully invested bear

Yep I agree - style drift....as I said The idiosyncratic ideas i spoke about was earlier in the funds history......today it looks like ARKK-lite, this was his downfall on 2022 performance anyway....lets see moving forward..........this is a tough tough game and a humbling one......one swallow does not make a summer........you can look like your winning or losing for quite a long time, even when your making horrible or indeed astute contemporaneous investment decisions......because the market simply going up or down feeds you confirmation bias.

Lying with statistics……you’d run out jail cells pretty quick for that particular crime ……. but a crime nonetheless

Part of the style drift I spoke about…..I remember seeing the portfolio years ago……and it was predominantly EMEA……and sector weighting was to financial services, if anything, back then. Everybody started to hear Cathie Wood in their head it seems towards the end of the great bull market Interesting on return fact sheet……if anyone cared too they should email him and ask…..I myself couldn’t be bothered.

See below - European manager so EUR investor base........as European manager then your benchmark isn't really SPY.....however....returns net of fees annualized & including the 2022 drawdown for fund come out at a 12.4% CAGR

RVCapital it seems suffered from kind of style drift.........he started of as value-ish, then GARP.......but GARP worked so well during ZIRP in the late 2010's & his returns so good.....that he went from growth at a reasonable price to growth at any price and ended up owning Carvana in the end with shit loads of debt and growth that had to happen to keep the whole enterprise afloat......difference between RVCapital and Clifford Sosin's/CAS Parters.....who i think RVCapital coat-tailed into Carvana is that at least Rob didn't let Carvana get to be 60% of the fund......and so he'll live to fight another day. Regardless Rob has shown an ability to make the right calls on idiosyncratic ideas. The stuff he does with emerging managers is also to be commended. I would say the price for long-term outperformance in a fund managed by competent manager is occasional & sometimes spectacular underperformance....its to be expected when you hold things that don't look like the index & the cruelty that is mark-to-Dec 31st which by luck alone makes some managers look like geniuses or losers (for a short time).

What broker you using Spek think you said up thread your East Coast?

Jeff Beck ripping it up on Roger Waters tune

3% Risk free rate + 3.5% ERP............is a PE of 15 no?

& thats the point - the Fed hits in order & sequence (1) Financial instruments via money supply tightening/QE/QT (2) Credit creation via Fed funds (3) Income/Spending via a fall in no.2 the Fed can only directly control the money supply (QE/QT) but this only effects financial assets, not "real" assets like cars for example....they print cash, buy a bond and a financial market participant swaps one financial instrument the bond (treasury or MBS) for cash from the Fed then most likely turns around and buys another financial instrument ordinarily further out the risk curve (high yield, perhaps even equities). Anyhow you can see how the Fed 'put' and its transmission mechanism works very well flooding liquidity into financial instruments with relative speed, ease & directness......the Fed put is so attractive as a tool because it works so quickly........the real economy is different..........to effect it as a Central Bank, you need to hit the two source of funds available in the real economy to transact not for financial instruments this time but REAL goods and services......those two sources of funds to buy say a new car are either (1) Credit or (2) income/spending..........in some respects to get to No.2 income/spending....the Fed in a derivative manner has to go through (1) the credit creation channel first........and because credit becomes spending in the real economy.....and because one persons income is actually somebody else's spending eventually you get to a situation where the Fed.....first reduces credit creation but then by extension starts a chain reaction of failing spending/incomes....falls in income which manifest in unemployment & eventually a recession. An inverted yield curve as @TwoCitiesCapital quite rightly points out is EXACTLY what the Fed wants.....it wants to whack credit creation such that spending......and then eventually incomes get whacked. We've clearly seen the decline in credit creation for new homes and now it seems autos too.......so we are clearly firmly at the No.2 point with the most highly sensitive products hit first.......unemployment has held up but once it starts to go up.....what you are looking at in real time is actually like starlight - its an echo of a hypothetical credit creation event that did NOT occur a number of months ago.....these are the long and variable lags central banks talk about.......Sahm's rule suggests once the first 0.5 uptick of unemployment occurs above the 12M average low.....the unemployment rate goes on to complete a full 2 percentage point move up.........makes total sense in some respect the other 1.5 move got baked in the cake months ago as other credit creation events didn't occur and a historical spending 'hole' opens up in the economy and absent a time machine nobody can do jack shit about a loan that didn't get made six months ago.......its credit spilt milk.......rising unemployment in a very real sense then is the trickle down effect of loans that never got created......and this is ultimately why 'soft landings' are so rare........you want unemployment to go up to slow inflation/economy.......but at the time your actually raising rates your never quite sure exactly how much future unemployment your creating at the time.........and when unemployment does show up its only the months that follow that reveal how much joblessness you actually created in the past......and invariably you usually create a little too much given your fumbling in the dark......and in this particular instance the Fed it seems has signposted its willingness to create a little too much via its speed/aggressiveness, as opposed to too little given the stakes. When unemployment does show up............and I firmly believe it will.......and without sounding callous its going to be very curious to see the concentration/scale of jobless claims their unprecedented rate moves in 22 have created in 2023...one might expect in response unprecedented month over month rises in jobless claims at some point mirroring their earlier moves.

Yep me too - personally I think Central Bank's should be given a floor on rates to stop them playing these silly monetary games......all investment should have a hurdle rate..........lets call the floor 2%.......crazy ZIRP world undoubtedly led to a lot of misallocation of resources......and why.......well because the god damn politicians didn't have the balls to step up and do what they are elected to do.........so they left the 2010's to a bunch of unelected technocrats in Central Bank's to figure out how to 'fix' the economy and we got ZIRP........it was IMO a real failure of the political class that didn't have the imagination/fortitude to tidy up after the GFC

I dunno @Gregmal we can chat & debate the other stuff...inflation and it sources/persistence etc.............but its been unusually and crazily and yes historically unusual labor market..........3.5% unemployment really isn't 'normal' see here https://fred.stlouisfed.org/series/UNRATE. In the historical record you've got to go back to like the 1952 - 1954 period to find any persistent period of anything similar...this post-war period was when USA was the only game in town industrially with Europe in ruins.......and the Marshall plan requiring the undamaged industrial base of the USA to rebuild Europe......now did unusually low unemployment back then trigger inflation? The answer is No - but the country was still 'young', easy productivity enhancing investments could be made..............Eisenhower built the god damn inter-state highway system for gods sake! Imagine if Biden had such a no brainer productive capacity enhancing project available to him......then you had women and immigrants from Europe joining the labor pool. So I dont accept cherry picked point in time as it pertains to the labor market - there is an anomaly there and one with likely consequences vis-à-vis inflation. We can debate the quantum.....but a 'hot' labor market clearly has an influence on inflation in an economy like the US which is as 'developed' as one can imagine...........and an economy which steadfastly seems to refuse to accept any immigration of scale/consequence to bolster it workforce/output capacity..............all against the backdrop of deteriorating demographics.

Yeah I agree - its a question of who is right or wrong here....... Option 1 - if inflation is going back to 2% all by itself then the Fed is wrong to turf a million people out of jobs for absolutely no reason. Guess this is your view @Gregmal that you know the inflation thing is a bit of nonsense at this point based on the data.......and 2% is just around the corner and really the first sign of trouble in the labor market the Fed should immediately pivot and deliver some cuts so as to support employment/the economy. Option 2 - The alternative view of course is that an historically unusually tight labor market is contributing to inflationary pressures that are real and not going away without meaningful intervention........those inflationary pressures if not dealt with expeditiously could result in a sustained persistent period of inflation one where inflation expectations become unanchored making them even more difficult to remove later............and so the lesser of two evils is to accept some labor market turbulence now and weaker economic growth, restore definitively & irrefutably price stability and then build out an economic recovery & jobs market from there with stable prices as its bed rock. When I think of the two options from both a risk management point of view and then from an unelected bureaucrats point of view attempting to minimize his career/reputation/legacy risk........overwhelmingly I can see why Powell is choosing the latter option. To choose Option 1 and turn out to have gotten it wrong (again, remember transitory!) would be a serious egg on the face moment and would resign Powell's tenure as Chair to the funny pages of Central Banking history books......Option 2 on a pure self-interested ego legacy driven Powell basis is the 'right' option. It ensures he's the Fed Chair that slayed the inflation dragon not the next guy or gal. If incentives drive outcomes - his 'incentives' are clear.......you go for Option 2 all day long