TwoCitiesCapital

I think that's the point. Even with oil down 30-40% YoY, we still have inflation of ~5%. What happens when energy rises into the summer is his whole point if I'm understanding it correctly. I think it's likely to occur, but whether or not its offsets the eventual bleed in of housing price declines from the peak last summer in YoY comparisons is hard to say. I think it might remain sticky above the Feds 2% target, but may still decline into the summer even with rising energy costs.

+1 I think the only place where Im largely taking a different approach is i'd say for the next 5-years or so, you might do better on 40/60 than 60/40. Bonds are providing lowish equity like returns. Equities are coming off high multiples, on record earnings boosted by trillions in stimulus while heading into a recession IMO. Also, doing this while inflation is changing regimes from low and stable to, at the very least, unstable. It takes time for these resets to occur. There will absolutely be opportunities to buy equities on dips in the next few years, but I wouldn't be shocked if it's 7-10 years or so before we exceed 2021 highs like it has been in prior secular bear markets. Thus, I want less exposure to equities than normal - particularly in an environment where alternatives are attractive, have historically out performed in similar environments, and require little duration or spread risk to work.

Hardly "redefining". As demonstrated in my post following the one quoted above, there have been a number of historical recessions that didn't fit the two quarters rule ever or at the time they were announced. And as for the two we just saw? NBER still hasn't declared one to have started suggesting we might have e another exception (though it's possible they still do and maybe even probable that they still do). Was just curious if the recession was still "over" despite the continued deterioration in economic indicators, corporate performance, and now employment softening, despite GDP turning positive on the inventory cycle and the boost from energy exports post-Russian sanctions.

Q1 corporate earnings will start rolling in soon. Expected to be down 6-7% YoY from Q4s ~4-5%. In other words, the declines in earnings are accelerating (even while it was an easier comparison as Q1 2022 was a decline from Q4 2021). What is it when you get 2 straight quarters of corporate earnings in different quarters following 2 quarterly declines in GDP? Current consensus for Q1 GDP is +1ish%, but Atlanta Fed GDP Now has it at 2.2%. But it has been declining for weeks with new data and may continue to come down. Is the recession still over if Q1 or Q2 GDP comes in negative even though there were positive quarters in between? Is the recession over if corporations are only just now feeling the pain and the labor markets is only just now beginning to soften?

I disagree on your 2) or at the very least would add "instability" in inflation as a separate option. The 70s had high inflation. They also had low inflation. It depends on the year in discussion. It's the instability in inflation I'm predicting. It also helps that we're currently at war (have been for my entire life basically - but the one in Ukraine is to much larger scale than most of those "conflicts") AND that many banks will be having liquidity/profitability and potentially solvency issues as long as rates remain where they are given the relative yields on their portfolio of assets and the duration of such. So all 3?

Corporate margins have been rising for the last 15 years. They've spent most of that time at 9-12% which is elevated relative to history and has never persisted before. So the 13.3% was the end of what has otherwise been a consistent trend in corporate profits that has been exceptionally elevated and doesn't seem terribly out of place compared to the ~12.5% that was accomplished ~2019 without the assistance of trillions of stimulus and 0% rates. What did inflation average over that period? Something in the ballpark of like 1.5%. So yes, I believe elevated corporate margins were, in part, in response to stable and low inflation. Why is it hard to see how these might be related? Maybe corporations can spend excess profits consolidating industries, eliminating overlapping jobs, and keeping the supply of labor high to keep inflation/labor pay low? Maybe they can spend excess profits lobbying for lower taxes and less burdensome regulation? Maybe they can spend excess profits doing things that support further excess profits instead of not having those profits by being behind the ball on inflation? And what else did we see over that period? Multiples applied to profits that have previously only been seen at the top of cycles to persisted for years! They're still persisting! Everyone talks about how this is the most predicted recession in history and yet we trade at 19-20x earnings that are already shrinking going into it! Those aren't recessionary prices! So yes, I think it's clear that the recent history inflation is very related to profit margins and multiples - just as it has been historically.

As pointed out, margins tend to contract because prices/wages/inputs rose faster than can be passed onto consumers. This is EXACTLY what we've seen over the last 18 months as as inflation has averaged ~8% over that time. Earnings didn't just not keep up - they contracted! This is a shorter term phenomenon that stops as soon as inflation stabilizes, but is valid as long as it keeps rising - profits will contract trying to keep up. Additionally, multiples in those profits tend to contract. In the 1970s they went from ~19 to ~7. We started this current period near ~30 and now are currently sitting near ~19. Maybe we don't go to 7, but I'm highly skeptical we remain as high as 19 either considering even THAT is above historical averages despite the inflation and the incoming recession. This is why stocks lose in inflation - especially if you're invested at the front-end of the cycle change. The profits are only one input - how much you're paying for them is the second piece. Profits get hit early on, but tend to recover. You're already trailing inflation due to this mechanism, but then it's the multiple that gets totally ravaged taking you even further behind. At that point, equities become a good bargain for hedging future inflation. Real returns in equities in the from 1970-1974 was nearly -30%! How?!?! How does an inflation hedge underperform inflation by 30% points over 4-years?!?! About 1/3 of that from negative price performance and the remainder was from failing to keep up with high inflation. Even by the end of the decade, stocks had a negative real return of -0.5%/annum for the entire decade. Did NOT keep up with inflation over 10-years let alone produce real returns. But you did well if you bought the dips and sold the rallies which is primarily what I've been advocating here (or you did well simply holding shorter duration bonds and rolling them if you don't want to be active in the markets). How long must your time horizon be it to be true that equities outperform in inflation if 10-years isn't long enough?!?! Especially considering we started this current period at valuations ~60% higher and comparable to prior historic euphoric tops like 1929 and 2000 when inflation WASN'T the problem?

Agreed. Gold is more of a real rate hedge than an inflation hedge. It does well when real rates are negative (a la the post-covid environment). It gets confused as an inflation hedge because that typically DOES happen in inflationary environments, but if inflation is 10% and yields are 15%, you want to own bonds and not gold and it's those periods that wreck gold's historical track record of correlation with inflation. I take a diversified approach to this. I own gold. I own Bitcoin. I own slugs of iBonds that I bought when rates were low. Now that they're "high", I've been buying short duration bonds and more recently intermediate spread products like mortgages to lock in these 5-7% yields and have a duration hedge if rates fall. The stocks I own tend to be commodity producers or EM that benefit more directly from rising consumer prices AND have been broadly cheap relative to most equities for years. My expectation is that this diversified mix of asset classes will outperform broad large cap equity indices over the next 12-18 months in an inflationary OR recessionary environment (given the heavy tilting towards bonds). If stocks drop another 20-30%, then broad consideration should be given to adding them now that they're approaching more reasonable valuations. I'd also expect SOME of this basket will have done reasonably well during that period broadening the performance differential and the argument for swapping back to equity exposure. I'm not saying a 10-year bond will outperform stocks over the next 10-years. But I'm actively taking that bet for the next 1-2 years and will reevaluate as we make our way through that period. If you don't want the duration risk, I expect short term bonds will also outperform - especially if we don't get an immediate pivot from the Fed and you have time to reinvest and compound that 5-6% YTM.

That's just simply not been borne out by history. Even prior to 2020, for decades one could've done better than equities by rolling zero coupon treasuries. Stocks are long duration instruments. They also have a spread component (the equity risk premium). High inflation has historically hurt both. Low inflation helps both. Bonds with lower durations and lower spread components will typically do better when inflation/interest rates are rising. The primary exception to that IS hyperinflation where the floating nature of the stock's coupon (earnings/revenues) helps to more quickly reset than waiting for most bonds' maturities. But in real return calculations you'd have done better owning real assets like houses, gold, energy, etc in that type of environment - stores of wealth and things EVERYONE needs. You say it's a sample size of 1, but it isn't. The 1970s were inflationary for many. So were many war periods. So have many unrelated periods been in several countries. Notes/bills tend to outperform equities in these more moderate inflations. We've seen many hyperinflations. Real assets outperform equities - particularly the ones that can be moved out of the country or are tied to things people need like gold and/or energy. Now if governments cap yields, set rations, and/or confiscate stores of wealth, then fine! Own the the third best alternative. But while those aren't the case, there are better asset classes to own during inflationary periods as has been observed throughout history. Especially when stocks are historically expensive IN that period.

Stocks are better than bonds in hyperinflation. They're still worse off than most real assets. In more moderate inflationary environments, like the 1970s, bills and notes did better than stocks (precisely because stocks are long duration assets). I'd imagine many real assets did as well but am only certain of energy. Most bills/notes/bonds outperformed most stocks last year too. Jury is still out this year, but looks increasingly in favor of bills/notes/bonds if we are headed into an recession at 18x falling earnings while bills/notes pay 4.5-6.5% pending spread and credit quality. Stocks are ONLY good in modest inflationary environments. There are better asset classes to own in just about any inflationary environment where inflation consistently exceeds 4%. If it's between 0-4%, stocks are what you want to own.

That's supposedly been the plan for months, but they haven't purchased the contracts yet. They could've bought as they were releasing into spot for a positive spread and locked in a win for tax payers. They didn't. A someone who believes recession is on the horizon, I don't want to be too critical as they MAY get a better price, but gov't officials playing oil trader isn't what I want. Lock it in!

+1 For being the "most predicted recession in history", people are still paying 18x forward earnings that are falling.... That's a negative real return in this current environment (and likely the forward looking one) AND you can get 5-6% in short term bonds? Why buy equities here? For as much as people are talking about a recession, they aren't acting like it. Equities have lower to go IMO.

Every once in a while they cover financial topics that are way more relevant than what the mainstream news covers. They were covering BTC as far back as 2011 before I can recall anyone mainstream watching it. They were the first that I saw to cover the JPMorgan whale in the CDS markets weeks before it blew a hole in their balance sheet back in 2012ish. They had some great coverage of repo and money markets breaking in 2018. Etc. There used to be more of good financial content in there, now there is less. It HAS been increasingly replaced with a hard right perspective on politics and etc. But, you can choose which articles you read and read it knowing it comes from a hard right perspective to make your own adjustments to the narrative. It's still a valuable source for financial reporting to me, but much much less so than it used to be.

The IF is the big question. The banking system lost $100+ billion in deposits in the weeks preceding the runs. That wasn't panic - that was rational behavior. If we continue to bleed a $100 billion here and $100 billion there every few weeks, you can be guaranteed there will be more bank failures/loss of confidence. The new Fed facility provides liquidity. But it doesn't provide solvency. It prevents banks from experiencing balance sheet destroying, overnight bank runs, but it does so at the expense of wrecking income statements by imposing a negative NIM. How many quarters of negative hits to earnings, deteriorating credit conditions, and deposits fleeing the system before there is another failure? Maybe this "solution" extends the problem long enough for us to skate by. I think that probably is the base case. But it is concerning to me that this whole thing is built on confidence in $100 billion insuring $17 trillion. Confidence is fragile - I dunno if it WILL be lost, or what would cause the loss, but it does seem like we're skating perilously close to that edge.

It really is Game Theory esque. It's been pointed out nation states may buy in after one or two have adopted solely to not be left out in the event it IS successful. I think we'll see that play out with individuals first. Each person that pulls deposits and puts them in BTC to escape the "system" puts further strain on the system. The last ones out bare the most economic pain while the first ones out get most of the economic profit. There will be very large FOMO here if the banking situation gets more precarious to be obvious to the average consumer. It may be all that will take is 2-3 more banks failing and the news reporting on the deficiency of the FDIC reserve fund to insure it while more deposits flee traditional banks. Gold, TBTF banks, Bitcoin, and even stocks may all prove to be beneficiaries of the flows but I expect it'll be gold/Bitcoin that shine the most in this scenario. Particularly BTC given it's capitalization relative to the expected flows and the inability of Feds to confiscate it if shit really hits the fan.

And I guess what concerns me is that this doesn't REQUIRE a panic. It could just be the results of rational individuals seeking higher yielding money markets/Treasury bonds that continue to slowly deplete deposits. As dollars are withdrawn, banks are given the option to sell treasuries for a loss and book a hit to capital OR borrow from the Fed at a higher rate then their NIM and take the hit to earnings. I'm thinking most will opt for the latter. But that means bank earnings are gonna get ugly, before considering any deterioration in loan portfolios and credit reserves, which could spark additional concern to depositors. And even if it doesn't, there is bound to be another failure or two solely from the hit to earnings depleting capital to levels that require additional equity issuance which might cascade into a failure like SVB did. Ultimately FDIC had $128 billion. $20-30 billion of that has already been spent on these recent failures. It doesn't take too many more for people to start questioning whether or not they're really insured. I know that Congress WILL step, but that IS precisely what gives his hyper inflation narrative credibility. It is all a little concerning and seemingly obvious and yet here we are still raising rates

Just getting around to listening to this and it is f*cking scary The argument seems to boil down to the below since he doesn't really lay it all out succinctly - 1) FDIC insurance typically dissuades bank runs b/c most deposits are insured 2) bank runs can be started if people feel their deposits are at risk/uninsured which is what has happened with individual banks so far 3) FDIC fund balance is $128 billion versus 17.6 trillion in total bank deposits. In reality, nobody is insured if bank runs exceed ~1% of deposits. Fear, more attractive alternatives, and the continuous hemorrhaging of bak earnings/capital can precipitate systemic deposit flight in excess of that 1%. 4) nobody is going to allow cascading bank failures to send us into Great Depression II so Congress/Treasury print trillions to backstop banks/capital flight/etc. 5) But this is money in circulation as it is accessible by consumers as deposits - not bank reserves like historical money printing so this would be hyperinflationary. So how likely is it that the average consumer realizes that FDIC insurance really ISN'T a thing if we get en masse deposit flight? And then precipitates that flight?

Historically when that divergence appears, it's typically been bonds that were right.

We'll see. I generally agree with your take on inflation, but if you get an extra 1-2 million unemployed, suddenly the raises they received previously no longer factor into the equation for non-productive flows of money into the economy. I think inflation will be higher this decade versus last, but not by much and not until later in the decade. Almost ALL of the disinflationary/deflationary trends are still in place. Productivity/demographics/debt loads/globalization/etc. Over time, some of these will fall off (like demographics and globalization). But that will take years. In the meantime, disinflationary and deflationary trends remain in place but are somewhat counteracted by underinvestment in real resources and war which play inflationary roles. I think we'll see these boom/bust headfakes with inflation. It'll appear and then disappear as inflationary/deflationary forces wage battle in timing. But ultimately, the really inflationary trends won't be ingrained until the second half of the decade so I'm still betting that the Fed follows the 2-year this time around.

The Fed hikes 0.25% and the 2-year falls 0.20%. Bond markets are being very clear. Recession incoming. I expect the Fed to follow the 2-year directionally from here on out. Might be cutting as soon as May pending how quickly the corporate sector deteriorates.

When inflation is at 7-9%, do you want to take your time with gradual hikes? Or get to get to some target rate very quickly so that In 6-12 months that rate can take it's effect as opposed to having to wait an additional 6-12?

I think there should be two separate tiers of FDIC insurance. The current 250k limit is probably good for retail/individual accounts. Then there needs to be a higher tier limit for larger accounts that is significantly larger and charges an additional surcharge fee for the additional insurance. It's crazy to think corporations and individuals are bank experts enough to do due diligence on the solvency/liquidity of banks before depositing with them. Separately, it's also crazy to think that corporations would do that due diligence on thousands of separate entities to keep below 250k at each. Allow for higher FDIC limits and CHARGE extra for it on those specific accounts.

They want them so bad that they've already borrowed $160+ billion from the Fed to make up for not having them as per Bloomberg. That's $160 billion at a negative NIM

Deposita have been exiting the banking system for months. I'm sure it's a combination of things, but it's not like we're waiting for it to happen - it's happening

Sure, would love to see them buy agency MBS too. I've been commenting favorably on that in other threads. ANYTHING other than keeping duration at sub-2 years. I just want SOME consistency in interest income for the next 2-4 years and for them to lock in the benefit of being short rates during a historic hiking cycle. If we go back near zero, and interest income is cut by more than half over the ensuing twelve months as 1/2 of the highest yielding securities in the portfolio roll off, then we're right back to where we we started. No benefit from being short rates, interest income back in the dump, no hedge to equities, and only one-off savvy/opportunistic credit investing to make money. And the shame of it all would be is that by owning treasuries and MBS they'd be enhancing option #3 because they could most likely be sold for gains in that environment.