Dinar

Ashtead PLC - owner of Sunbelt rentals.

Bought MSFT yesterday into the close at $239-$240.

Thank you for posting this.

I think that inflation has peaked. If as rumored, Facebook and Alphabet reduce headcount by say 10% or 20K+ employees, plus reduce contractor employment (200 janitors and bus drivers at Facebook got fired), then this will certainly have a ripple effect. With other companies, including MSFT probably following, you could have tens of thousands of tech lay-offs and tens of thousands of janitors, cooks, masseuses, et all fired. They will all probably easily find employment, but that should definitely cool wage pressure, and probably consumer spending. No need to pay a Google or FB or MSFT engineer 500K per annum any more. Also, if venture funding starts to dry up, tens of thousands of more techies and support stuff will also have to look for new employment. The wealth effect from no longer rising housing prices and declining equity/bonds/crypto will also dampen consumer spending and possibly force some people to rejoin the labor force.

https://www.wsj.com/articles/high-natural-gas-prices-push-european-manufacturers-to-shift-to-the-u-s-11663707594?mod=hp_lead_pos3

I did not express my self clearly. Conservative in his words were: short-term bonds, preferred stocks, longer term munis, REITs, little in equities with a bias towards European names.

I think that most people are positioned very conservatively/defensively. Here are two datapoints for you: a) I spoke with guy in high net worth at a large bank (minimum account - $10MM in investable assets.) He said that in general they are guiding clients to be very conservative. Also, the biggest client inflows/purchases are going into B-REIT (Blackstone's REIT.) I asked why, he said there is effectively no mark to market on it, so clients are not worried. This is NOT the bank steering them supposedly, this is clients choosing from a menu of options. b) I spoke with a former coworker today. He is in the high yield/distressed/special situations group at a large family office. (Family office is over $30bn in assets, his group manages several billion.) He said that 1) they are only buying first lien paper, which he thinks is pretty safe at 10-11% yields. 2) pretty much everyone he talks to is very defensively positioned. He has been in this seat for twenty two years.

Sure, but at what point are things priced in? S&P is down 20% (excluding dividends) in nominal terms and probably 30% in real terms. At what point would you say things are priced in? I am not trying to be argumentative, I am trying to understand how you think. Thank you.

I agree with you that house prices rose very sharply in 2020 and 2021. However, the change in mortgage rates from 3% to 6%, is not tiny. Holding house price constant, the change in interest rates sent mortgage payment higher by 40%. That's not tiny.

https://www.bloomberg.com/news/articles/2022-09-20/tight-labor-market-eases-for-chipotle-cmg-del-taco-jack-others?srnd=premium#xj4y7vzkg

Not necessarily. It depends whether nominal interest rates are up because of inflation or real interest rates are up. If TIPS yield 5%, yes, the real discount rate for stocks should probably be 7-8%. So a company whose revenues grow in line with inflation should sell at a 12-14x free cash flow. However if TIPS yield 2%, and nominal rates = 7.5% because everyone expects 5.5% annual inflation as fas the eye can see, then using the same 2-3% risk premium, will result in a real discount rate = 5%, and the same company should trade closer to 20x free cash flow. Can good businesses sell at 10x free cash flow when inflation is 5% per annum, and TIPS yield 2%? Sure, why not, but that would be a phenomenal return on a going forward basis.

Spek, I know that Heineken said that they will push prices through to recapture the absolute amount of cost inflation, but that will still result in margins declines (revenues go up while EBIT stays unchanged) and also the company is in the midst of a major cost cutting drive. So that agrees with your datapoint, at least for Heineken, price hikes will not be as high as inflation.

I think people underestimate the impact of high prices on demand, as well as tech companies cutting perks. a) Many people are aggressively hiking prices, and will find out too late that demand collapsed, not because people can no longer afford the service/good, but because they decide it is no longer worth it. For instance, I was at a barber shop this morning, the barber used to charge $12 per haircut in 2012, $14 in 2018, and then raised it to $18 in 2020, $20 in 2021, and $25 in 2022. Normally by this time on a Saturday, the barber would have gone through a dozen clients, today he got through six. My brother in law, who makes excellent money as a computer programmer cut his haircuts from monthly to quarterly. He can afford to go monthly, but he says it is not worth it. My wife and I stopped getting take out, instead we go a couple of times a month to a Michelin restaurant, because we decided that take out was no longer worth it given price increases. We wanted to hire a driver to take us to the airport, he used to charge $70 this time he asked for $120, I said why? He said well gas prices went up. So my father drove us. I used to get croissants & pastries every Friday. In the last four years, the price doubled. I no longer get them. I just do not want to buy a croissant for $5, it is not worth it to me. A number of my friends are very wealthy, but they are all self-made, mostly immigrants. A number of them have stopped using drivers, or getting take out and in a couple of cases fired cleaning women after demands for large wage increases. As the wife of one of them put it, I remember making $200 a week, and I am not paying someone $250 to clean my 3000 sq foot house. b) There are a lot of tech companies that pay for everything and pamper their workforces, including in crypto. I think that is going the way of the Dodo and that will significantly impact demand for services. If the Biden administration continues on the path of giving trillions of dollars in welfare, then yes, inflation will continue to increase as there will be no incentive to work. However, if the government starts behaving like Bill Clinton in the 1990s, then I think inflation on a measured basis will go to 2-4% per annum, and 3-5% in reality.

Greg, if you do not mind, can you elaborate on how you are protecting yourself against Fed engineered recession? (If I understood you correctly, you think that it is the biggest risk, right?) Are you selling JOE? Buying puts, if so on what index or sector? Thank you.

These are very good points. The short answer is that Armenia's allies are Iran and Russia, oh and Azerbaijan has a lot of oil and gas.

Spek, I remember that for at least a decade or two there were attempts to bring hydroelectric energy from Canada to NY and the attempts were stopped by politicians or activist groups.

Amen, that's why I have 17% of my portfolio in NEN (bought in 2004, sold in 2007, and bought back in fall of 2009.)

Don't forget how idiots in NY State (Democrats) would not allow transmission line of hydro generated electricity from Canada and as mentioned before no natural gas pipelines either.

Instead of making absurd assertions, why don't you do a simple search of how many properties under $2MM there are for sale within 30 mile zip code of 93101? I found over a hundred. There is no reason why a couple of doctors/lawyers/computer programmers cannot live in that area. Why do you expect that someone who works at McDonalds should be able to afford to live in a very nice area?

Seriously? Based on what do you make this assertion? Why can't a Google couple making $750K per annum each can't? Why can't a couple of lawyers buy it?

EQR seems bullish. https://investors.equityapartments.com/news-events/press-releases-news/news-details/2022/Equity-Residential-Provides-Operating-Update/default.aspx

Sure, wealth effect plays a huge role, particularly for retirees. However, how about a Medicaid effect? I saw figures that claimed 88MM Americans are on Medicaid, sure some of them are elderly and children, but why aren't the parents of those children as well as able bodied adults working? Why is nobody talking about this? Surely a much larger impact than baby boomers.

Could not agree more with SD, most managers treat their workers like garbage, and it shows!

Of course the causes matter, because then the solutions are different. If the issue is declining labor force participation rate, then the question is how to address it.

Could also be due to population being dumber and dumber, due to both genetics and educational system getting worse and worse. In my co-op, a pair of Princeton educated Koreans (Harvard Law & Yale Law) - zero kids, they are both in their 40s. Indian couple - both work for Google (two kids), white couple (he is a CEO of a large company) - 1 kid, average number of kids per family - two. Meanwhile, porter has four kids, super has four kids, and welfare recipients in Harlem six plus? Quality of public schools has gone down sharply, and by the way the quality of private schools as well. I compare what my niece and nephew learn and what learned at that age in public school, and boy the quality has deteriorated sharply.