changegonnacome

Which is a shame......seems to me that there is window now.......where both might be able to leave the negotiating table with a narrative that vaguely works domestically/internationally. Frankly as I've outlined before....I'm interested and supportive of Ukrainian sovereignty.....but what motivates my thinking chiefly is how to minimize, even the slightest hint of a possibility of nuclear escalation. Proxy wars in far flung jurisdictions not neighboring a nuclear power are one thing......but to bring a proxy war to a nuclear powers doorstep is quite another.

@shhughes1116 really appreciate you taking the time to outline your thoughts Seems like there may be an emerging window coming up where negotiations have a shot at success & where everybody has an off-ramp which allows some victory to be claimed.....Ukraine, for the first time in the war, is on the front foot they can come to a peace deal from a position of strength & claim a 'win'.......Russia is not yet fully humiliated (but possibly is on the pathway to being) and perhaps some de-nazification 'win' could be claimed now to allow a ceasing of the 'special operation'........this winter is also the last where Russia has so much leverage over Europe. Best to use that leverage now before its gone and get some sanctions peeled off in exchange for a structured with-drawl. If things progress much further as you've outlined Russia/Putin will become increasingly humiliated and the possible off ramps for them start to twindle. Very curious to see how this plays.....it hinges, as it has for a long, on wether Putin is a rational actor or one who's mind has been turned to swiss cheese through dreams of an old Russian empire that doesnt exisit anymore except in the paintings that hang in Kremlin.

Good call

HHC aren't dummies.......I'm sure they've tried it.....considered it......clearly something in the model 'breaks' if they do as you say.....perhaps they are foolish and from pure pig headedness have invested a couple of hundred million dollars that they dont care about......& are just happy to utilize this asset at 20% (32hrs) of its theoretically max capacity (24hr x 7 days = 168hrs).......I dont think so......i think the economy is overheating........the inflation figures agree with me.

Yes indeed.......in some ways, as much as I talk about what the Fed is going to do, stagflation left unchecked is its own destroyer of aggregate demand ultimatley......I talk about the three sources of funds in an economy ala Bridgewater (1) Money (2) Credit (3) Income/Spending...........stagflation as you correctly point out ultimately hits income/spending all by itself over time.....however it is more optimal, given directed unemployment supports we have, to proactively hit a smaller number of people (unemployment) via moderating demand via monetary tightening......versus allowing monetary inflation to do it via hitting millions upon millions who sit outside established unemployment supports......the 'working poor' is the alternative reality that a Fed sitting on its hands would result in. What we have right now is a Hobson's choice re:inflation.....there are no good options.....only less bad ones.

Of course it does - its had the largest influx of consumers but not producers (workers ) of good & services = inflation. Ironically NYC should, if you believe the narrative, have the lowest state inflation.....its had an exodus of consumers (millionaires/billionaires) against a relatively flat labor supply.....yet my Howard Hughes friends cant staff up a hundred million dollar food hall in lower Manhattan such that it operates 7 days a week......... even though they've been diligently trying for months & months to hire..........THIS is what monetary inflation looks like my friends.......the economy is overheating......its operating beyond its capacity to produce goods and services equal to demand.....labor shortages/prices rising....christ what more evidence do you need....its staring you in the face. As I stated before......economy at full full employment for sure .............nominal spending growth of 10% .........lousy productivity growth of 3-4%.........= 6-7% price inflation. This is not sustainable.....and the Fed knows it. I expect a market event post Jay Powell's 75bps rate rise and his remarks that follow will indicate a Fed that will go 75bps at the next meeting in November......and if they have to they'll keep going so that Jay-P isnt an Arthur Burns character (who's Arthur Burns, you say - he's the guy who didnt have the balls to kill to inflation in the 70's, you never heard of him, Why? because he lacked courage)

Your right was being slightly hyperbolic…….transmission mechanism for an engineered slow down is the following (1) Money Supply followed by (2) Credit creation followed by (3) Income/Spending. The jobs market gets hit kind of last but it is where all this has to go. Money supply contraction has occurred . Job Done. This only effects financial assets. Credit creation is actually ‘the first data to turn” that will show the Fed is engineering the slow down required….mortgages have clearly been hit but I watch credit markets next……I can still borrow 7-year money at 2.95%…..in an economy with Core PCE of 6%…..thats negative 3% REAL for anyone doing the math….with that money I can demand cars, restaurants etc etc etc….…credit remains both too cheap and too abundant for it to effect (3)…..yet…..but it will……..my little anecdotal 2.95% rate is my canary in the coal mine here……this needs to get to 6-7% for me to start belvieing what the Fed’s doing has transmitted to the real economy sufficiently for it to achieve its aims. This is the FIRST place I’ll actually see Fed having achieved something that looks like a slow down in credit creation…..which is to make credit actually have a REAL cost. But I mean I’m not trying to exactly pick bottoms here (monkeys do that)…..I can just see in the data and anecdotally that we aren’t there yet by a long shot….in terms of really tackling the underlying inflation problem…….and so I remain positioned for the pain to come as Fed gets aggresive and talks tough. There is always a danger in these types of things to look for precision where none actually exists………a half blind monkey can see that financial conditions remain too loose to get the desired effects the Fed wants/needs. I dont need 40 year time series of perfect academically accepted conincident/leading data to diagnosis/recognize an overheating economy with an inflation problem where financial conditions remain too loose, the jobs market too strong….. to engineer the slow down required to ‘get back to 2’. If you want my take on where we are it that we are the end of the beginning…..the market believes we are getting close to the end. The market is wrong IMO and we’ll find out who’s right in a few months. I’ll take my shorts off when I can longer borrow money at 2.95%, the Tin Building is open 7 days a week and BLS MoM data shows 2% annualized wage increases Just kidding but you get my point.

For sure - non-farm payrolls though are MoM and relatively contemporaneous…this is the data I watch most closely to see ‘where we are’…..its a good indicator of labors leverage/bargaining power to secure pay increases….it speaks to both the labor shortage AND aggregate demand. This will be the first data to turn IMO….IF….inflation is being brought under control via a reduction in aggregate demand. But unemployment figures yes will be lagging…….but getting inflation under control does fundamentally require unemployment to tick up and reach at LEAST the non-accelerating inflation rate of unemployment (NAIRU)…..and the sad reality is most inflationary cycles require a period of time where the economy sits for a time below its equilibrium output levels….i.e slack is re-introduced….and this allows for a period of re-anchoring expectations. In practice what it means is that employees are happy to HAVE a job versus demanding wage bumps at every performance review and threatening to leave. My other contemporaneous anecdotal indicator is from Howard Hughes corporation which just tried to open a food hall near me here in NYC down near the Seaport - Tin Building by Jean-Georges……they’ve been desperately trying to recruit staff for this expensive piece of infrastructure since March/April 2022…….and have failed to get a full complement…..the Tin Building opens Thursday to Sunday only (11am - 7pm). Trust me the business plan for this thing didnt have it operating a measly 40hr a week……they literally cant hire the people…..cause aggregate demand is exceeding aggregate supply in the economy…..when the Tin Building opens up 7-days a week I’ll know the Fed has started to get a handle on things.

I could rewrite the above as - "The notion that higher input costs = inflation is academic & unsubstantiated " Once you take your inflation bias out of the sentence....you can see how nonsensical it is. I think Greg that your problem might be that you look at too many GREAT publicly listed businesses to realize that the real world of private SMB's are populated with mediocre ones with low single digit margins......of the type I've described above.

LoL. OK riddle me this......whats your solution to the business owner in a low single digit net margin business.....who cant get or retain staff without raising wages.......said business owner has also, because they are in a low single digit margin business, optimized everything he/she can....the fat was trimmed years ago. They also love owning the business so aren't changing or closing it down but they also wont own/manage it for FREE. So @Gregmal whats your solution that doesn't involve raising the price of the underlying good and service being sold? Let's assume you dont have one.....well because there isn't one that doesnt involve raising prices. You should also realize it just so happens that poorest American's work predominately in these types of businesses AND most importantly again lest 'the little guy' getting a pay raise argument comes back......the majority (80%+) of these folks household budgets are dedicated to buying goods/services (food/ necessities etc.) from these very types of businesses. Higher wages absolutely equal inflation here and you dont need a PHD from Harvard to figure it out.....you also don't need a PHD to realize that 'the little guy' isnt winning in this game.....at best their purchasing stand stills.....at worst it falls behind. If you cant see the problem here at the micro level and how it scales to the macro..........I can assure you the Fed does.......and are going to act accordingly.

I understand base effects…and this aint it…..as I told you before - i look at contemporaneous non-farm payrolls, that are M-o-M…then annualize….this ain’t a year ago inflation….its happening right now….then I gave you the mental model on how to interpret that BLS contemporaneous data…workers in low single digit net margin businesses are securing pay rises because of the labor shortage…….then the goods and services they sell have to go up in price (they have to go up or the biz they work in goes out of biz)….your time lag theory on the data ….is leading you astray I think……your also focused on the price of things that get put on shipping containers and sent to America…..your looking for inflation in the wrong place and your missing the wood for the tress.

I'm not sure when you're going to accept that US domestically produced & sourced core inflation is trucking along at 6%.......and the ONLY way this is brought back to 2% is by ultimately hitting the jobs market......and how you get there is in steps........first by hitting the money supply (done ), then that feeds into credit demand markets (partially done , but more to go, inflation adjusted negative credit rates still available to borrowers) which ultimately feeds into depressing aggregate spending/income (not done) and by extension the jobs market (not done). The fact the labor market hasnt really been hit yet is not good news and shows how we are no where near the end of this rate hiking cycle.......unfortunately we are still at the beginning....which is a function of what I've been saying for a few months now......the Fed, even now, remains accommodative when you inflation adjust to get real interest rates. There is STILL a major labor shortage. Aggregate demand CONTINUES to exceed aggregate supply in the United States. This is not even close to being over yet.

Yeah nice piece of work only caveat I will add here.........is that a very high FCF yielding company is kind of the canary in the coal-mine for a future value trap................so you still have to answer the most important question....which is the business deteriorating or not underneath the surface......a good business will bail you out of over-paying over time, but paying too much for a BAD business is a one way ticket to hell. So........I like screen's........but the highest FCF yielding companies......sorted from highest yield on down......you could argue might be a rank order filing in which BUSINESSES are the most likely melting ice-cubes available to choose from Mr.Market today.........so I talk a lot about the math of investing in rising rate environment & I stand by that basic math.........but it is not by any means an excuse not to due qualitative assessment on the durability of that businesses competitive position/industry/earnings power. Give me an equity with a FCF yield of 9% on demonstrably advantaged business.....all day long.......... versus one with a 19% yield but serious terminal risk questions to be answered by the prospective investor.

When this interest rate hiking cycle is almost over........and inflation almost 'conquered'......the growth math will be so evident to the casual onlooker on some of these names...... it will hit you over the head, no calculator required......but market participants will be too afraid to touch it then......because of the PTSD of the prior 18-24 months holding similar instruments.....then you buy GARP......but not now I think but I could be completely wrong. We'll find out.

Sure but forget revenues, fools grow revenues....its earnings that matter & EPS more importantly (SBC is going to kill people now).......but what you've described is a situation where the math gets harder........how far into the future does the FCF yield based on the price you pay today start to exceed 5% CPI so your 'money good'....how many years out do you have to wait for that happen and then you've got to use a higher discount rate on that future. Over time a great businesses bail most people out regardless of the price they pay.....but there just isnt that many truly great businesses. There's reason say Bill Ackman dumped Dominos.....which is completely consistent with his swaptions position.....Dominos grows, is a high margin franchise model and has characteristics like you describe but the FCF yield was too low (~3%) & the growth ultimately too modest, too slow for a world where the 30yr is likely going to 5%. Bill still holds low-ish FCF yield quality/growth-ish companies but my guess is Dominos was just way too over the line in terms of what would be required to make the math work. My point in previous posts is that your starting point (FCF yield) matters now more than ever in the positions you take.....the market is no longer paying up for the future .....and wont again until inflation is under control....all while the future macro economy 12/24/36 months is uncertain......which is why I wont really accept holding a company today that doesn't provide a FCF yield 'risk' premium over the 30yr in the future that may sit at 5%....because in the future the market wont accept that either and will 'bid down' assets to make the math work......I want to be invested, dont want to hold cash and I want to retain my purchasing power as it is today but in 36 months time & I obviously believe this is way to do it while remaining net long. We'll see.

As I've been saying for a while - you've got underwrite your portfolio against a FCF yield from 2018/19 company earnings, the FCF has got to be unusually high right now IMO 10%+ and certainly higher than Core CPI & higher than where the 30yr is likely to go, its also ideally got to have prospects of growing FCF greater than CPI in 2023 against a weakening consumer backdrop....the company should have no requirement for access to capital markets (debt or equity) to remain a going concern or grow for the next 36 months at least...........you own something that meets these criteria and you'll do fine.........you own something that doesn't.....your gonna get your ass handed to you (potentially). Nobody knows if we exit this period of rising rates into a new one of (1) secularly higher real rates/inflation for the next decade or (2) revert back to 2010's discount levels......I dont know, I dont care......holding high FCF yielding companies you get to play in both future worlds of (1) & (2)......take one side of the bet holding a basket of 3-5% FCF yielding company......... well if your wrong and (1) happens your toast. Permanent impairment of capital. No bueno.

Yep curious for @shhughes1116 latest take on things….is this a true turning point and what options does Putin have remaining to him now?

https://www.brookings.edu/wp-content/uploads/2022/09/Ball-et-al-Conference-Draft-BPEA-FA22.pdf

Broadly speaking when I think about housing - I think like this.......nominal house prices & interest rates change all the time up and down........but over time the socioeconomic PROFILE of the people who own those houses doesn't change much at all, certainly in lets call them developed stable metro areas (think NYC).......a posh neighborhood populated by doctors & lawyers, 50 years later is populated by doctors & lawyers.......then the other thing that doesn't or isn't supposed to change is prudent lending standards that use debt service ratios against disposable income thresholds.......and so over time one can figure out based on the socioeconomic profile of a neighborhoods historical residents, the prevailing wages certain careers command, income tax rates and interest rates what house X should broadly sell for.......one could determine using these criteria whether a particular house or neighborhood is cheap or expensive relative to its historical mean. Gentrification is a bet at the margins that an area is transitioning over time to have a very different socioeconomic profile than it did in the past and hence permanently higher nominal house prices. Smaller estate taxes/dynastic wealth distort my mental model of course too.

Yeah agree but math isn't even required sometimes....when the price of things seem so improbably high relative to your capability to buy them or they require implausible projections of the future required to get you an adequate rate of return relative to the risk I dont need to do the math on the purchase of Ferrari........I just know that I cant afford it......that doing even the math would be a waste of my time. There are lots of assets out there right now.....where I dont need to do the math anymore.....they are improbably high relative to FCF....that they dont provide an adequate return in and of themselves.....and certainly relative to alternatives like T-bills & inflation adjusted.

Correct - and this is why millennials and kids feel so pessimistic about their future......financial & hard assets (houses, stocks,) have been bid up (1) beyond their ability to even acquire them in the case of houses (2) so high in case of financial assets that all the return has been brought forward to the current holder of those assets through multiple expansion, that if prices remain here the next holder of those stocks i.e. younger investors looking to build an investment portfolio have absolutely no chance of repeating the average 8-9% CAGR return enjoyed by previous holders of say SPY. They feel pessimistic about their financial future......and why wouldn't they........the simple math embedded in assets doesn't paint a rosy picture.

They sure will - companies with a FCF yield of 3% would be a good place to start pulling your cash from to put into this stuff........for the next 36 months do you wanna hold Apple at 3.x% FCF yield (& hope they launch the car & grow revenues & dont get caught on anti-trust) or you wanna hold Uncle Sam paper.....its not even a contest in my mind.....and in hindsight folks going over the cliff holding FANGMA at these FCF yields will ask themselves what the hell was I thinking?? Apple/Amazon 'feel' safe, but they're literally rat poison right now.

You know my view on inflation…..one man’s inflation hoax is another man’s persistent, pervasive & entrenched inflation……as you and I have said before……..Mid-2023 is when we should know who had the right take……..the next few months is going to be filled monthly with inflation hoax narrative confirming data….……I won’t poo poo every 0.5% drop on here as ‘fake news’ cause I don’t have time…..but I fully expect it to happen and I welcome it…….but as energy & supply chain inflation rolls out of the YoY numbers…….underneath all that COVID/Ukraine inflation noise, folks are completely missing the signal……..traditional made in America 70’s style monetary inflation has taken root in the US economy……if you listen to Jay Powell he has finally separated that noise from the signal….but he’s only one man on the FOMC…..but I think and I’m betting he/the FOMC now ‘get it’……which is to say that a spineless central banker of no character would take the roll off what they deep down know to be a top layer of transitory inflation as an opportunity to chicken out and do the populist thing….….pause, pivot and rally assets……I’m seeing something new in Jay-P…….a man of steel that has finally got the memo that 2% inflation isn’t magically coming back on its own and it’s time to ‘get behind the mule & plow’ as my man Tom Waits would say…. very interesting times ahead thats for sure.

Yep that’s the consensus built into pretty much every asset + forward curve I look at…..for your CRE Taco 4 cap buyer on the previous page the above NEEDS to happen, if the opposite occurs & high yield savings accounts from the likes of Marcus & Synchrony start offerIng ‘4-cap’ yields & then Mr.Taco needs an exit, uh-oh SpaghettiOs

Free money - have fun staying poor PenFed