changegonnacome

They want to reduce aggregate spending/demand for goods and services such that, for a period, it dips below the aggregate productive capacity of the economy to produce those goods and services THIS is what re-introduces what they term 'SLACK' (i.e. that demand for goods & services at least equals but more likely falls below the productive capacity of the economy for a period). In doing so supply will outstrip demand....and like any supply/demand curve it will shift to bring things back into equilibrium.....this moderation will REDUCE inflation. This reduction in aggregate demand (via tightening financial conditions) is what they are trying to engineer by manipulating the three sources of funds in the economy (1) Money (2) Credit (3) Incomes. The way these things work is slowly and in sequence beginning at (1) then moving to (2) then ultimately feeding into (3). They have done a descent job on (1). But as I've stated before credit remains abundantly available and its price too cheap (relative to the inflation rate) for the credit lever to have moderated aggregate spending/demand in a way that might have suggested they could back off. Thats why todays news on the healthy consumer in some ways is technically BAD news if you look at it through the lens of the FED attempting to moderate demand & restore price stability.

Nice summary above very momentous indeed, what an interesting time to be alive & investing - yep the future is unknowable......but you can look at the odds being offered in the market that X will happen and decide wether its handicapped correctly.....I take the view that the market is engaged in wishful thinking about a return to ZIRP world in 2023........when all the historical evidence suggests that periods of monetary inflation take longer than one would think to get back to price stability............so you've got two mis-pricing now in the market that one can take advantage off IMO (1) Higher Rates, for longer than anyone is forecasting - see inflation expectations, TNX etc. (2) Earnings recession and/or recession recession based on the Fed's need to quell aggregate demand Take that lense and apply it across industries and companies and I think the view above is going to give you the correct posture moving into 2023

Right me neither, we hold some of the same stuff.....characterized by either high FCF yields, low multiples on that FCF and/or equities underpinned by irreplaceable inflation protected trophy hard assets. I'm looking at you CLPR/MSGE.......kudos to us, its the right strategy for what I'm talking about - but I guess what I'm saying and I'm actually doing this.....is you sure can make a lot of money on short side selling OTM calls on the indexes at their inflation adjusted ATH's, buying puts on things with Price/FCF yields with a 2.x% handle that became 10/30yr bond proxies in ZIRP world and where those same companies have over earned for the last couple of years (ehm Apple). Then you've got the universe of companies STILL trading at like 30 times sales, economically sensitive to a recession that require on-going infusions from the capital markets to deliver on their growth plans all while their cost of capital (debt & equity) is sky rocketing. Thats been my strategy since early Q2 and will remain so until CPE is under 4%. Don't fight the FED!

Credit, its cheapness and its availability to the consumer such that it supports continued spending growth & therefore inflationary price pressures in an economy at FULL employment & at its productive max capacity is a problem.....damn sure its a problem, its part of the overheating problem and why my favorite ice-cream store can only open Thurs to Sunday now cause they can't get staff! They literally can't provide me anymore scoops of ice-cream, thank goodness Nominal spending growing at 10% (supported by rising nominal incomes AND inflation/income growth relative to interest rates), inside of an economy that can only expand its aggregate production of goods & services through 2% productivity gains ALONE because its at FULL employment..........has a problem and that problem is called inflation........too much money, chasing too few goods & services........the classical definition. It's hurting those on fixed incomes & those who's labor bargaining power see's them unable to 'keep up' such that they're purchasing power is falling in real terms. The rubber really hits the road on this soon.....and it will manifest itself in strikes. I sense you think this inflation thing is some kind of market manipulation hoax concocted by Bill Ackman, Jay Powell and Larry Summers to help to drive their interest rate swaptions portfolios....you might be right......I'll keep an eye out for them on the beach in Martha's Vineyard. I'm sure I'll hear them laughing before I see them

Of course they are at 30-40yr lows!!!.....nominal incomes against that debt are rising at ~10% annualized and consumer credit is readily & freely available at ~5% in an economy printing 6% CPE.....real inflation adjusted interest rates are easily MINUS 1% right now.........& debt servicing capacity on both existing old fixed rate debt and newly acquired incremental loans are well supported by nominal income/spending growth.........but what you've just described is part of the inflation dilemma the Fed is facing. That mix will not see inflation come down....a shoe needs to drop to bring us back to equilibrium....and there are three sources of funds in an economy - (1) Money (2) Credit (3) Income/Spending....and the extent to which each lever needs to be pulled to get back to ~2% inflation is the trillion dollar question.

Broadly in line with my model & a good explainer why longer duration assets are so sensitive to higher rates. Higher risk free rates just crush the NPV of earnings that are 10-15 years out in the future. Discount rates IMO have more to go just based on the rising risk free rate but you’ve touched on the second shoe to drop which is earnings. The Fed is engineering a slow down in both money growth and credit creation and spending, it’s inevitable and actually required (to fight inflation) to bring nominal spending levels down which will affect SPY earnings relative to their 2021 peak….now add rising cost pressure at a firm level via wage demands and the strong dollars effects on SPY earnings plus underlying weakening in the Euro area & China and really I’m not too sure what the bull case is for SPY earnings growth heading into 2023? If you’ve seen it I’d love to read it. Which is why it’s the second shoe to drop on index valuations.

I’d usually agree but think of the people on the bond desks driving the bus on the TNX & TYX right now……what’s the average age?…..these folks haven’t seen 6%+ inflation before and a Fed fighting broad based entrenched inflation with rate rises & QT….it’s never happened in their adult lives and certainly never in their professional career. I’m not surprised those markets are muted, nobody has the playbook and if there is one it has dust on it and they’re looking for it right now.

Yeah it matters - wealth effects and money multipliers means it’s bigger than you might think. Don’t think narrowly in terms of withdrawals, there are never really withdrawals…it’s confidence & optimism that drive purchasing decisions. Don’t forget also that the value of the stock market and the multiple placed on earnings is really a cost of capital assigned to each company….companies make investment decisions relative to their cost of capital…all things equal lower cost of capital they make more investments & well the opposite. So your question should be do companies invest less in P&E with lower multiples….well just ask the O&G guys….then ask is business investment a relatively important spending line item in the American economy. Finally its just not the stock market valuations Powell et al is after it’s the net present value of anything with a cash flow. If you aren’t thinking about a world where the 10yr T yields 4-5% and what implications that has for your portfolio positions I don’t think your doing yourself any favors.

I’ve been saying this for weeks/months. Like Jay-P said inflation is broad based and becoming entrenched….as I’ve told people to do before….go look at the monthly non-farm payrolls from the bureau of labor statistics they are pretty up to date and give a good picture of things pretty much right now….….not a popular thing to say but when ‘the little guy’ is getting annualized pay increases of ~10% its nothing to cheer about…..the ‘little guy’ works in low single digit margin businesses and his pay increases get transmitted directly to the products and services he sells….and you get broad based price inflation. 4% Fed Funds might be dovish…..I think it is a cert……..5% is on the table IMO in 2023………of course the larger the correction in asset prices (& negative wealth effects) or weakening in the economy the less the Fed will have to do on nominal rates alone….it’s all reflexive………everybody who rallied asset prices in July/August have effectively forced the Fed to be MORE aggressive on rates than they might have otherwise been if SPY had just stayed down 20%! But nope buy the dip habits die hard….and ironically the Fed has to go higher now. For those with a price target of 4800 on the SPY, IMO you should have a Fed funds rate target at year end of 6% to go along with it….cause that’s effectively what your saying…..assets prices stay high, the higher the Fed funds needs to go on rates to get the economy back to equilibrium. It’s clear to me that Jay Powell, at least, has read the history books on inflation in the 1970’s…….and that to ensure the return of price stability you really have to see the whites of the eyes of it really really turning & then wait and put a mirror under its nose to make sure its dead dead….…..I’ve read a lot about the 70’s in recent weeks and it seems that the big mistake of Volker’s predecessors was their inability to stay the course to really seeing both price stability return AND remain in place……financial tightening really works…....the problem was the Fed in the 70’s was always rushing to loosen financial conditions at the first sign of economic weakness or the first sign of dipping inflation (it’s not popular to keep financial conditions tight!!)……it’s also human nature to engage in wishful thinking believing it might just magically go away…..….Larry Summer's has the best analogy I’ve heard so far for this which is that an economy with self sustaining broad based monetary inflation is like a patient with a viral infection, you go on antibiotics (financial tightening) and you begin to feel better (inflation begins to moderate) but like lots of people who go on a course of antibiotics as soon as they start to feel better, they stop taking them and they never finish the prescribed course……and then the virus returns. This is what happened in the 70’s……until Volker took over and gave the patient his antibiotics and he made them take the whole damn course of pills, even as the patient squealed. It worked. Bob Prince from Bridgewater has some very basic math on this and if you don’t get the implications then I can’t help you, but he’s 100% correct on it: - Nominal spending growth in the USA is ~10% - we can all agree the US is at effectively full employment and therefore operating at its maximum productive capacity of goods and services it can produce (there is no slack in the economy). Right? Therefore aggregate productive capacity increases in goods and services can only come from underlying labor/capital productivity gains. - Productivity growth is abysmal in the US at best it’s 4%….I’ve seen worse estimates like 2-3%.Different measures out there but you get where I’m going. - 10% nominal spending growth minus 4% at best productivity growth = 6% inflation gap……which is made in America inflation. Too much money, chasing too few goods…Milton Friedmanomics writ large. There are three sources of funds in any economy: (1) Money (2) Credit (3) Income (the other side of this coin is spending) they are the same thing my spending is someone else’s income. So the central bank tightens and contracts the supply of money….this it controls …….which effects & transmits directly to financial assets only…..it prints money, buys bonds, holders of those bonds get cash and they go buy other financial instruments so and so forth….….conversely the Fed sells bonds, gets cash that it then incinerates contracting the money supply. Raising the Fed funds overnight rate is different it transmits to credit markets but slowly (check your savings account has your savings interest rate gone up yet?) which in turn over an even longer time frame transmits to incomes. It takes time for (1) to flow to (2) to flow to (3). As I’ve pointed a zillion times here…..look at credit right now……I can borrow still at 2.95% fixed for 7 years…..but nominal spending/income is potentially growing at 6-10% as we discussed above…..I can easily backstop any daily spending shortfall I might have with credit that can easily be supported by nominal increases in my income..…..why because nominal spending/income is rising at ~10%……the 10yr is at 3%, retail credit can be had at 2.95%, easily at 5%…..how the hell is nominal spending growth of 10% right now going to drop to match the 4% productivity growth and bring us into price equilibrium if debt remains this cheap? It wont and it can’t. Nominal spending growth needs to be brought back from 10% to perhaps 4-5% to at least match productivity growth at 3-4% ……..but bond yields/debt costs need to rise too, to maybe 5% to contract credit creation sufficiently, any lower and people will just substitute falling incomes with incremental credit creation keeping the flywheel going…….they’ll just borrow to spend cause it makes sense to do so which in turn will support spending growth which you won’t get to fall sufficiently to get to equilibrium meaning your inflation won’t go away……..all very circular but ultimately rather simple. Anyway the levers above have to be pulled and they can get pulled in various ratios to get the same effect. Maybe Fed funds doesn’t need to go that high if the stock market drops 50%, while at the same time spending falls off a cliff from negative wealth effects or productivity gains accelerate through smart government investments and we get back to equilibrium & price stability but right now we are a long way from any sort of equilibrium……as I’ve said on other threads……two movies were about to see….…..”Higher for Longer (Lower Multiples)” and its sequel “Earnings Recession”……its kind of what just has to happen from here to get back to 2% inflation. Discount rates go up, credit creation slows, the economy slows & spending decelerates or contracts with corresponding rise in unemployment. End of story. I’m seeing a backbone to Jay in his recent pronouncements and I think he’s been reading the same books I have……he wants to be like Volker, not the shithead spineless technocrats who came before him that nobody remembers today. I was bearish before, but now I’m convinced that this Fed is not gonna do re-run of the 70’s….it’s gonna stay firm in the face of stock market falls & rising unemployment/weakening economy till its sure inflation is dead and buried.

Yep for context - I bought $90 March strikes........this is calamity insurance and I think its underpriced.........I have a view that I've shared widely on here that what we saw in May/June was just the opening credits for a movie called "Higher for Longer: Multiples get crushed" and its sequel "Earnings Recession".......it might take longer than March for both movies to play out, I'll see, I suspect there will be a good exit point somewhere in there for my puts and I can reload again with longer duration so I get front row seats to both movies............anyway Apple gets me a descent ticket to both given its touching its ATH COVID highs (its like Oracle in 1999, there's no investment management career risk going over the cliff holding Apple), its PE is priced (3% FCF yield) like the 10yr is going back to 1% pretty soon ( i personally think the 10yr is going to 4-5% and staying up there for 2023/24) and I think that they've over earned like nobodies business because of COVID WFH lockdowns and a technology super-cyle (5G & M1 processors) in their main revenue products, now throw in dollar strength depressing overseas earnings + their end markets of Europe/China weakening significantly.....you can see why they are rushing to get the iPhone out the door so early this year.....they need to hurry because their European (Energy prices) and Chinese (zero covid/property crisis) customers sense of wealth is depleting daily and these folks are running out of disposal income and fast. The iPhone 12/13 will work perfectly fine for these folks as they assess household budgets into winter 2023....they can skip iPhone 14, no biggie but Tim Apple is doing the exact thing Id do....push up the release date ASAP before the macro deteriorates any further...juice up fiscal Q4.....and then with everybody else and in the bosom of the crowd start in early 2023 to report YoY earnings declines...joining the chorus of other companies blaming macro, dollar, inflation & rising costs. Better to fail conventionally, than succeed unconventionally....Tim is making sure his rockstar CEO status inside the FANGMA complex is retained by not stepping out into the firing line first, Netflix & Reed Hastings already did that and got his head blown off (for the record I think Tim is a rockstar)

Timing is everything with these.......which is why Ive shorted underlying too and juiced it with puts.........AAPL, IMO, will without even a deterioration in earnings (which is coming but might not come quick enough for my puts) will re-test and likely break the lows from June ~$130......this will be a pure, oh shit, higher for longer Fed/discount rate move.....if the 10yr is at 5%...you have to ask yourself wtf your doing holding Apple at 3.8% FCF yield and where the biz has been over earnings such that at the current share price the FCF yield could easily drop to a 2-handle once earnings revert to 2019 levels + inflation....so thats the thesis......macro and micro.....lets see. This is not investment advice. I still think Tesla, Coinbase, Robinhood etc. are gonna puke again soon so have got some of those on the short side. AAPL is just a kind of better version of an SPY short given its re-touched it ATH's (SPY hasnt).....think SPY earnings are gonna puke too but AAPL's will puke worse....the grind lower as both the numerator AND denominator come down is gonna be worse for AAPL i think just given its more highly geared.

The UK especially and most of Europe have very strong social safety nets & are extremely wealthy economies......subvention will be provided to those that cant afford higher fuel prices. The key question is whether there will be fuel shortages, that is a different question and the more important one. I'm not saying this will be easy or that household budgets wont carry some of the incremental costs (with the downstream effects on the broader economy) but fiscally European countries can & will write a cheque to 'solve' this problem & when your already wealthy and a few % of your income/wealth can solve 'the problem' you have to ask the question is it a problem at all!

Yeah timing might be a little difficult and why I'll mix with the underlying but for the first time in a long time with Fed funds where it is.....you get paid a little spread on shorts while you wait even with owing AAPL's dividend the spread is still good enough

Yeah I'll mix it up with just some straight shorts of the underlying....I consider myself a good Apple bellweather.....I've switched my whole family setup over to M1's & 5G iphones over the last 18-24 months......I've no reason to upgrade to anything for a few years now....the products are great and will stay good enough for at least 4-5 years on the computing side and another 2+yrs on the phones.....my nerd friends are the same...AAPL is gonna hit an airpocket of demand i think on just pure COVID/product supercycle dynamics & then added to that just the macro in their end markets.

You think they're expensive? Relative to what I think is going to happen I consider them cheap.

APPL Puts......lots of fund managers hiding out in APPL.......but the confidence termites are making their way up to even the mighty fruit......was gonna buy SPY puts....but from here I think APPL is a superior market hedge...higher P/E, higher beta, lower vol, COVID beneficiary so over earning in 2020/21.......tougher COVID comps moving forward.....APPL is moving up iPhone launch date to try to squeeze a week or two of iPhone sales into their fiscal 4th quarter....artificially moving launch dates up & trying to 'make the quarter' is a robbing Peter to pay Paul game......maybe they make 4th Qtr but fiscal 1st Qtr could be a disaster...buying Leaps to capture both

Same concept......listen lets distinguish between two things (1) Energy costs go through the roof (2) Energy shortage/not available/ rolling blackouts/factories shuttered etc. If its just (1) its a pain but Germany can subsidize both citizens and strategic industries and nurse them through the period........(2) is clearly much more serious but its unclear to me if that scenario is going to come to pass in a meaningful way.....lots of Euros currently buying global gas/diesel and alternative energy from the four corners of the earth and moving it to Europe right now.....as I said, broadly speaking if you have the money (& Europe/Germany has the money) you can pay up to secure substitute energy supply. I am not saying this is nothing burger.....better it wasnt happening......but this is one of the scenarios where being a wealthy trading block that money can solve alot of problems

Agree reading some articles one would swear we are not talking about a region thats one of the wealthiest on earth.......I'm not saying there isn't going to problems and some hardship......but European countries (aided by the ECB bond buying program) have the wealth, capability and fiscal/monetary tools to support their at risk citizens through subvention of households energy budgets......that same wealth/purchasing power will see to it that Europe can/will and is 'paying up' to secure alternative energy sources. If at the end of Nord Stream was I dunno a country like an artic El Salvador then the doom porn would be warranted….but it’s like Germany ffs…not easy they could live without the extra strain on fiscal budgets but it’s manageable.

Crash to me is 50% peak to trough......I agree the data doesn't support this......I think the data potentially supports round tripping to January 2020 prices (but inflation adjusted upward revised Jan 2020 prices)...........how big your fall depends on how high you flew.......and again property is riddled with micro-markets so I'm not saying any particular area

Yep the Fed has had your back.......question is do they have your back right now with inflation where it is/going.....cutting rates and printing isn't the no brainer policy choice it was for the last 40 years.....I'm not saying they wont do it per se but highlighting with inflation prints above ~4% it isn't the no brainer solution Greenspan/Bernanke/Yellen had arms reach away at all time behind a glass door marked 'break in case of emergencies'. Agree and I think any nominal fall in system wide house prices are going to 'trigger' this group again such that they fail to act....and these folks, in the main, have the cash to act and they wont I think based on this PTSD phenomenon. Yes will be interesting to see how this cohorts reacts to potential nominal house price falls......isnt this 'generation rent' though?....dont buy a car...uber.....no holiday home... just airbnb.....no credit cards...BNPL........the narrative is they have an aversion to debt.....I've never looked at the data so could be BS.....I wonder do they demand mortgages in lower number than previous generations?

Got you - don't have the numbers so cant be precise...... but lets say your dream home dropped in value in the future (or your income rose and that future dream house price stayed flat) such that the equity required to secure it by you came down too...would something like that work?.......additionally your current home turned into a rental and rented out for a full tax year and producing cash flow/income and showing up in your in tax returns as such....creates an incremental income stream that would allow a bank underwriter to extend credit against this too........so without any employment pay increase.......your current home turned into a rental bumps up your income and by extension your borrowing capacity.......another year or two also should see some incremental equity being built up in your current home as you pay down the mortgage and it too could potentially be used via HELOC to port some equity to the your dream house (this of course is counter to what we've talked about earlier which is the possibility that nominal house prices fall but this would work in a world where nominal house prices stay flat, which I think is very likely, and inflation does the work of reducing their real cost over a number of years).

One addition to the above …..is the question of the RoE your going to get on this rental and if it’s attractive relative to other opportunities to deploy capital….this depends on the LTV etc.

IMO giving up a 2.85% mortgage on any financed cash flowing asset one owns would be an act of insanity……everybody’s situation is different….but given what you described and depending on your appetite for friction……I’d seriously consider renting out the home you don’t need now but has the 2.85% mortgage on it….create a cash flow stream there……which you then use to subsidize rent on an appropriately sized ‘bridge’ home, this income stream can be lent against in the future by a bank...…..this rental can be your ‘waiting in the long grass’ home which has a say 3-month break notice period built into the lease…….when the time is right and appropriate affordability has been restored to the market then you swoop in to buy.

Yeah it’ll be wash…..the folks who bought last year paid a high price for the property but a very low price for the mortgage……folks in a year or two will pay a lower price for the home but a higher price for the mortgage……both those households monthly mortgage payments for housing in the short to medium will probably converge at the same monthly outlay…...…it’s just the variables (rates / prices / incomes) that shifted around….but the most important variable in the long pull in housing is always income or more correctly net income after tax, food & energy….this number assuming system wide prudent lending drives aggregate house price levels over time….……with some oscillations around that trend line as lower or higher rates are in effect..….undoubtedly in my mind we’re in a period of falling or flat (but falling in inflation adjusted terms) aggregate house price levels such that ‘affordability’ is returned to the market reflecting higher overall rates & reduced net income after tax/food/energy. (The above describes aggregate prices…..the caveat to the above of course are micro or hot markets…..where migration flows from HNW locations to MNW locations distort the equation above for a while acting like an exogenous shock….case in point Manhattanites migrating to Florida. )

True until the alternative home gets cheaper.......no movement right now as you said cause the alternative is unattractive but you wait till house prices fall in nominal or real terms.........then the move makes sense again and you rent out your 2.85% mortgaged home and cash flows support that move.