changegonnacome

@SharperDingaan we’ve chatted over in the “TOP” thread….and coming around to O&G exposure as logical place to look to deploy capital in this inflationary bear market. Can I ask what areas/names your invested in, seems to me you’ve thought a great deal about this? Thanks.

Yep slowly slowly - but I haven't seen a get me out at any price just yet moment......but feel like its coming & the Fed isn't riding to the rescue this time everyone needs to put on their own big boy pants

+1 2021 - S&P peak earnings, peak margins I'm on this train..........exactly what you would expect at the beginning of an inflationary boom bust cycle......it feels good for a while pushing price & getting away with it.........but then your customers start to feel the pinch & quit on you........and then your employees start showing up in your office looking for a raise or else they'll quit so you give em one....or they do actually quit on you and their replacement costs +25% on the fella that came before...............soon your earnings & margins start to roll over.....you can't push price without tanking volumes....you try to tighten your belt on costs, but so is everybody else at the same time......the paradox of thrift writ large and boom now your in a recession.....earnings recession possibly an economic wide recession. I dunno possibly too bearish........2019 S&P earnings feels to me like a descent place to conservatively underwrite broad market direction valuations......IF directionality is needed in your "where we are" I assess businesses and don't really care what the market does per se........but certainly discounting any companies earnings back a couple of years seems prudent now, you don't want to be underwriting large P/E's with significant multiples AND earnings..........multiples & earnings contractions happening together at the same time can lead to OUTRAGEOUS stock moves you just can't believe can happen but as @SharperDingaan showed the "math" is irrefutable.....its just you underwrote a wrong earnings figure AND a wrong market multiple at the same time and got your ass handed to you.

Inflation is both a supply side problem but also a monetary driven demand problem....we did do helicopter money & surprise surprise we got inflation. One can argue around which is the biggest influence.....but its very hard to untangle IMO. Supply side issues are unlikely to abate unless China changes course on its zero COVID strategy. I think that is going to be very very unlikely especially as tens of thousands of people, if not HUNDREDS of thousands of people in North Korea are about to die from COVID in the next few weeks......demonstrating what happens when the virus meets a population with little to no natural immunity & a poor healthcare system......this will give Xi the case study he requires to continue with his extreme policy....one can argue the Chinese economy slowing down is a deflationary force......but China is the factory of the world & the factory output flow will continue to be disrupted in 2022 with inflationary pressure, bulk ordering etc. while companies also chose to 'disrupt' their own supply chains by re-shoring / near shoring & diversifying away from China....selecting resiliency over efficiency & cost.....which is both disruptive AND inflationary.

With you on the indestructible assets part for sure On the Fed, I guess my view is a simple but differing one from you, which is alot of people are going to be blindsided by how much carnage the FED will be willing to impose on financial assets first, then the real economy next in an effort to re-anchor inflation............I hope they get tailwinds with Ukraine, Oil, China all chipping in on the supply side of the equation....it could all work out swimmingly heading into 2023.....but I guess what I'm saying is if they dont get those tailwinds and in fact those headwinds remain or increase.....I think their resolve & determination to bring inflation back to a ~2-3 handle, using the tools they CONTROL to do so, is grossly grossly underestimated and by extension under-priced in the market. We'll find out, thats the beauty of this game.

Greg enjoy chatting with you & were in some of the same names.....but a little bit like when you conflate the economy with the markets as if they are the same thing, you also often conflate the way it should be, with the way it is. To be clear: (1) I'm looking to compound wealth (2) I try to asses how the political economy intersects with the equity markets to position my assets in a sensible manner for long run success (3) dont confuse my 'concerned citizen' overtones with the reality that what I'm trying to asses is how the Fed/political class sees this issue & what drives their incentives & decision making to address it. Wether my views and views of those holding the steering wheel of power align (as they do in this case) is basically immaterial to me. The question is do I have the assessment right around their thinking & what they'll do. THIS is what I've been trying to communicate over the last few posts. You can argue all day if 'they' the Fed/politicians are right or wrong in their views.....but your opinion of their view, doesn't change it.....and they run the Fed and you don't.....what I've outlined in previous posts, I believe, is pretty standard orthodoxy in monetary economist circles re: the effects of inflation on different socio-economic groups..........and that the Fed's mistake in the 70's was to act too slowly to tackle inflation, which allowed inflation expectations to embed in the economy such that they became unanchored, the Fed lost all credibility until Volker stepped in & jacked up overnight rates up to 20% and sent unemployment up to 11% re-anchoring inflation back at ~2-3%.....at a huge cost (I'm aware of the Volcker did jack shit and he was just lucky with timing theories, one for another thread) So your Jay Powell.....you're surrounded on a daily basis with orthodox monetary economists, Volcker is lauded in the halls of power and just recently passed away. You ask your staff what they think and they tell you what I've been telling you. You look at Volcker's portrait on the wall & you ask him what to do.........and he says "dont let inflation expectations embed in the economy, like my Fed Chair predecessor did, kill inflation now with a mild recession if you have too, keep hiking lest you end up with a major recession later like the one I had to impose".......Jay says "but maybe supply chains, maybe oil, maybe Russia".......Volcker laughs & says "thats what my Fed Chair predecessor said too and I'm hanging up here on this wall and I bet you couldn't even tell me the other bozos name" My point - Uncle Jay knows what to do, orthodoxy has trained a generation of monetary economists at the Fed what to do and what not do.........and once on the pathway to re-anchoring inflation to 2% they will be on autopilot with Volcker's voice ringing in their ears to take a little pain now, to safe a-lot of pain later. I, personally, think they will be doing the right thing with this strategy but the Fed doesn't care what I think either.

Precisely (great clip btw).....now take the 10% with IQ's below 83....now add to that cohort, those who are only moderately above 83 & for whom industriousness & consciousness is not in their NATURE (forget nurture). You've got I dunno 20% of the US population who dont have the toolkit to adapt to prices rising at 4/5/10% annually. Sure in the early part of the cycle these folks just get GIVEN raises they probably didn't even ask for, see everybody feels good about things in the early part of an inflationary cycle.....but do they get given CPI? do they know what CPI is & have the wherewithal to ask their employer for it?.....and, most importantly again, this is in the early phase of the inflationary cycle, wait till profit margins at corporates start getting killed....how do wage negotiations go then when lets say the service oriented corporate sector 'hive mind' (Dunkin, Wendys, Walmart), say these salary rises cant continue, our margins are getting whacked!!......"here's CPI minus 5%, now get back to stacking that shelf". Now add to that the squeezed middle as @Spekulatius points out. Inflation is pernicious & insidious......its like letting the fox into hen coop.

Yep - & nobody really talks about it openly.....but every monetary economist knows it - a recession is the circuit breaker in an inflationary wage-price spiral.....it ultimately brings aggregate demand in under aggregate supply for a time, prices as result stabilize/moderate & then this becomes the foundational basis under which you move forward (with price stability) & an appropriate neutral interest rate posture.

Owned this for a while - then the convoluted ownership & fee structure began to annoy me.....and then I was reminded about the old Charlie Munger quote about walking away from an investment opportunity with 200-page prospectus attached. Fairfax India has always felt like that. Seems to be alot of internal rejigging of assets to create portfolio marks such that FFH gets paid or the investment managers locally get paid.....everybody seems to be getting paid except the minority shareholder? I mean I get the attraction owning an infrastructure assets like BIAL in the "next China" ,its a shiny object that feels irresistible but all that glitters isnt gold and all that malarkey. So just curious if this has materially changed or is it still convoluted with a number of hands in the cash register?

Yep all three, sure its tiny numbers......way out in the left tail, very small numbers here obviously.......to struggle in an 10% inflationary economy doesn't require all three scores to be in the pits......just an aggregate bad one.

Your only continuing to confirm my theory around your blind spot re: this size-able cohort of the population...................& maybe you missed my point about industriousness, intelligence & conscientiousness too.....I dont think so....but to put it more crudely for you, seen as your line about these folks just needing to get a better job if they need more money, suggests you havent quite 'walked a mile in the cohort I've described shoes' and in doing so got over your inherent blind spot which is YOUR intelligence, industriousness & conscientiousness .....see this cohort of the population measured against those three genetic traits i've listed....lets not get into the nuture piece here........means having any basic job is an achievement in and of itself.......their capability & ability to switch jobs, industries, learn new activities/skills & maximize their earning inside a complex ever evolving economy is limited by the result they got in the ovarian lottery. Again ignore nurture here....I'm talking raw computer processing power here married to important inherited personality traits. Again I wont labor this further...........you've pieced the world together in all its complexity and interlocking puts and takes.......havent you come across people in your life for whom comprehension of this complexity is just beyond them and always will be? High inflation, and the puzzle it presents to those same people to individually restore their living standards, is similarly beyond them..............& I'm not talking about 1% of the population here Greg, right. This is many multiples of that and its a sliding scale across to the fat centre of that bell curve. The Fed, i think, understands this and the moral imperative to act.

I disagree with that point of view fundamentally on so many levels, we wont even bother going 'there'........but your other blind spot, connected to the first.......is those same people can & do vote....and that has consequences your Darwinian framework misses.

I'll step into a storm here @Gregmal.....but you've made me do it & my intentions are good.......I have no doubt YOU in this economy, if you were in the bottom 50%, hell the bottom 5% would be making out like a bandit as demand outstrips supply........playing employers off each other & ratcheting up your hourly wages/getting promoted, starting side hustles galore....and that fact is I think YOUR blind spot & many others on this forum as you think about the insidious effects of inflation on the economy/society...........see the devastating thing social psychologists have known for a long time and nobody has an answer for it........ is that industriousness, intelligence & conscientiousness (the main ingredients for 'success' in the modern economy) are NOT equally distributed across the population but rather distributed in a bell curve. The left THIRD of that distribution (a not insignificant amount of people ) are getting killed by inflation. They just are.

+1……..Inflation is insidious, it must be killed by hook or by crook………..hoping that supply chains reconstitute, hoping that China’s zero COVID strategy is dropped, hoping the port of Odessa opens up, hoping global oil supplies ratchet up, hoping the chip shortage moderates…….isnt a strategy option for the Fed……….they control the price & the supply (QT/QE) of money, the hurdle rate for incremental investment in the economy…….I’m sure they would like help getting inflation back in the 2’s by political leadership/good fortune…..but my sense is they will do it all by themselves if they have too & I for one agree that they should as @Viking points out re:bottom 50%….its not only the smart thing to do longer term for the economy, its the moral thing to do. Having been behind the curve, I think people are underestimating the Fed’s resolve to “fix” this.

Agree - avg. household balance sheets ballooned during lockdown.....folks are running down that b/s now....if not already on on to the CC's as you say....need to pay more attention to aggregate/median checking/savings account balances & the other side of that coin credit card balances @wabuffo is always good on that stuff. Any tea leaves your seeing @wabuffo?

I have no idea who your talking about

Yep they are going to meet in the middle somewhere i think.....the classic growth-value gap......its just one side has a big painful journey to make and the other one not so much. You can play both IMO...long/short etc....for an outstanding result but you need to very careful.

Totally agree.........to sum up my blathering: The indexes are screwed & arent going back to their ATH until the inflation genie is back in the bottle with the lid tightly screwed on .....both the E & P contracting are going to drive this ........near term cash flow generating / low PE stocks are now king cause you cant really squeeze the P much more than they already are mathh wont let.....luckily there are alot of these around as you said...........volatility is going to be through the roof, so you gotta really know what you own, as the card deck gets reshuffled its going to painful & if you dont know what you own, you dont OWN anything. Exactly why I'm interested to see how Einhorn gets on and wether his strategy redeems itself....cause what I've described is a perfect environment for a long/short value focused hedge fund like his. His bubble basket at least must have performed well.

Yes alot of this is deeply interlinked @Dinar so we can talk ourselves into literally circular arguments such is macro....as everything in economics is a 'then what happens'. Again though, linking it back to the equity markets which is my concern, I think the Fed is trying to stop the most circular of reactions which is the wage-price spiral feeding on itself...i think they've signaled "no more" and are determined to get price inflation under control in the next 18 months I sense a do 'whatever it takes' attitude backed up by polling which inflation as citzens No.1 concern, well its the Feds no.1 concern................the music will stop for corporates to push price in that environment as the Fed shrinks demand in the economy...while the employees, if unemployment holds up secure/hold higher wages remains = structurally lower margins/earnings for corporates. This is the way i think about the circularness of it and probably the most important part & it's a timing thing thats REALLY REALLY important here. Firms initially push price > leading to higher margins/profits> this leads to > Higher Wages > leading to > higher prices ad infinitum....HOWEVER assuming a Fed determined to kill inflation which in my model they are AND because wage negotiations happen with a lag i.e. they "look back" at 12 month historical CPI......Corporates IMO ultimately get left "holding the bag" so to speak i.e. the ability to push price is the first thing to evaporate but CPI linked wage demands from employees continue. Result: profit margins & earnings getting wrecked. The Fed is the circuit breaker in the circular model of wages & price inflation....and in my opinion using the time lag theory, corporate margins flatter in the short term but ultimately compress as the Fed steps in to halt to stop the wage price spiral.

I think @Gregmal you're envisaging a world where the real economy does fine/good. I think what you've described above is not in conflict with lets call it the Grantham view / my post above envisaging what will happen to the corporate sector earnings & equity market valuations...the economy & equity markets are correlated over the long term but they are not the same thing in the intermediary term. My main mental framework is how do SPY/QQQ companies exceed their 2021 earnings/margins, in the world I described (labor rates for skilled staff like your wife ratcheing up, opex, PP&E costs increasing, while Fed is moderating demand though the price of money).......while at the same time receiving a comparable or higher market multiple (Fed put gone, rising risk free rate till inflation is under control)......the real economy can grow or hold up, while carnage ensues on the quoted prices of equity assets. You can hold both these views at the same time, I dont think they are diametrically opposed. SPY/QQQ earnings can slip modestly on rising costs/slight softening of demand, while multiples contract in response to a modestly rising risk free rate...both combined can have outsized effects on equity prices....especially when equity prices reached a point of being priced for perfection as they were you could argue the indexes were in Nov/Dec 2021.

The last decade has been characterized by expanding margins/Trump tax cuts driving "E" up to a record, offshoring, globalization reducing SPY/QQQ firm wide costs & expanding addressable markets, low/zero inflation, falling interest rates/risk free rates & therefore multiple expansion.....put it in a pot, the perfect bitches brew for a rising equity market. In a real sense things are either getting better for equity prices or they are not. What i described above was great for US equities.....i dont think one can describe a bitches brew like that for the next handful of years. I guess what Im saying is dont see those same forces continuing in the next decade, the world has changed due to COVID, Cold War 2.0 & inflation.....we have corporate on-shoring (Intel), de-risking, degloblization......I see it everyday in my job SPY/QQQ firms are prioritizing resiliency over cost optimization .............& and I would be interested to hear the bull case for how earnings continue their upward march in an inflationary world ,conjoined with a rising rate environment...where the Feds stated aim is to reduce aggregate demand by increasing the cost of money....bad for demand, bad for E.......while the Fed's transmission mechanism by which they do that (cost of money) has material effect on the risk free rate & by extension the discount rate > bad for P. This at the same time that the least well off in society are, in a real sense, getting globbered by inflation.....they will need to be helped by fiscal transfers IMO if this continues......at the same time the sovereign cost to borrow is ramping up such that borrowing money has real number attached to it now, if the 10yr gets back to I dunno 4% or 5%........republican congresses at a state & federal level........full of fiscal conservatives screaming about the deficits are not going to be able reduce corporate tax rates again......they might do the unthinkable and actually raise income/real estate taxes on the wealthy & corporations to help the squeezed middle.....and lets not forget the new republican voter tent includes a new constituency that Trump helped soldify & ride to the WH & republics in Nov will need to win back congress.....the JD Vance constituency Anyway so much reflexivity in macro.....you can tie yourself in knots........I have a simpler framework, until inflation is under control (which I think we can all agree will take time lets say 12 - 18 months).....the indexes especially the QQQ's & the COVID beneficiaries will NOT regain their ATH's.....one can do alot with that insight on the short side while trying to do sensible things on the long side for an aggregate good result. Blll Miller spoke about what worked in the 70's on CNBC recently......low P/E, high dividend yielding.....I smell out-performance for the Einhorn's of the world in the short-meduim term.

I dont.....but inflation doesn't have to stay at this level for SPY/QQQ margins/earnings to get wrecked.....while at the same time the risk free rate is increasing providing competition to equites.......so in P/E terms.......E is compressing while at the same time the P/E multiple is contracting.....and like a levered equity CableCo.....small changes in the numerator & denominator happening at the SAME time result in big moves in the underlying equity price (to bring it back to market prices).

+1......its a tapeworm....that wrecks havoc on individuals purchasing power (in real terms) & IMO will begin to wreck havoc on enterprise level margins & earnings as their opex (labor) & capex (PP&E) expense lines begin to balloon while at the same time they've exhausted their ability to push price against the backdrop of a weakening consumer, hence my Wiley. E Coyote analogy......the early part of a persistent inflationary cycle feels OK, good even > Firms who can push price, do.....those price increases land without any sales volume effects, & done against that firms pre-inflationary cost base margins & profits expand.....but the piper must be paid & margin compression soon follows as those firms expenses begin to balloon......just as gravity, in my strained Wile E. Coyote analogy, always send Wile E. crashing into the canyon below with the Road Runner laughing at him for thinking he'd gotten away with actually running off a cliff .

Yes @muscleman this is also the other shoe to drop....Coinbase being an extreme example but the idea can apply if you subscribe to the 2021 peak earnings & peak asset prices theory that Grantham et al would argue......obviously financial markets are one way via negative wealth effects Powell reduces aggregate demand & controls what HE can control in terms of the demand side of the economy. In the US more than other developed economy in my mind, equity prices are big transmission mechanism for wealth effects positive & negative.....SBC has become a feature of many comp packages.....so while nominal wages might increase to maintain employee purchasing power, those same wage increases are reducing aggregate firms profitablilty/margins such that their earnings are being hurt.....& so the SBC portion of comp is slipping underneath.....net net for your friend in Coinbase & others across the economy your total purchasing power is falling. The more you think about inflation, the more you come to see what a scourge it is........the only real beneficiary, if you ignore the damage to economy & citizens lives, is that most inflation insulated institution.....the US treasury/government who's total debt in inflation adjusted dollars is falling.

Yes but this is the perniciousness of inflation, in purchasing power terms those folks with their new pay increase are only restoring their purchasing power from 2021 in real terms......they wont "feel' wealthier & they aren't.......and therefore they wont demand & cant command aggregate incremental goods & services vs. 2021......and this how S&P500 & QQQ profit margins & earnings get compressed.