TwoCitiesCapital

The actual signal will be when the Fed starts cutting and uninverts the curve. Notice all the gray bars occur when it's positively sloped AFTER the inversion

Nice!

This. The consumption figure continues to decelerate. Inventories continue to be a drag. The only thing really holding this up was energy exports to Europe to replace Russian supply. That's still a net benefit to the US, but only the energy sector. Everything else is struggling and it seems the market is taking note. Look at what the 10-year yield did today - the market does not view this positively and for good reason.

I'll wait for the press release, but am gonna be disappointed if that's the case. $1.5B is a decent valuation, but I viewed this as a unique long-term asset with a long runway and would've hoped for us to wait this out. Hopefully they have others in the pipeline that they need cash for if they're exiting.

Unfortunately, I still think we play the ping pong. Monetary policy is now firmly entrenched with the executive branch who under both Republicans and Democrats has been 'spend baby spend'. The Fed can hike rates all they want - but if the government keeps printing trillions in response to each crisis, we're going to keep having these accelerations/decelerations every 3-4 years.

The Fed is going to hike until they see inflation come down. Even though it seems pretty obvious it's already happening, with a lag, they're going to wait for the prints to prove it because the labor market gives them cover. But the trouble is both inflation and the labor market are lagging indicators. If the Fed hikes until they break, it means the Fed should've stopped hiking ~6 months before. This is what I fear now - a Fed desperate to rebuild credibility and prevent inflation expectations become entrenched knowingly over-tightening to "prove a point". I'm coming around to this being pretty brutal. We already two quarters of negative GDP before the Fed even really got started - now that we're beginning to see the impacts of the first set of hikes, it's only going to get worse and they're still raising them.

1) Highest yield since 2008 after 2) Two quarters of negative GDP prints in the books and a neutral to negative Q3 expected 3) Falling home prices 4) Many traditional economic staples like Target, Walmart, FedEx, etc all have already been disappointing on earnings with more likely to come 5) USD soaring to 20 year highs The only shoe that hasn't dropped yet is unemployment...which is a lagging indicator. We're closer to the end of the rate cycle than many want to believe I think. Instead of a pivot, we may get a pause. But I don't think the Fed can do too many more hikes at 0.75%...stuff is already breaking like EM budgets and the UK pension system and people are already talking about how illiquid US treasuries are becoming without the additional pain being inflicted.

Only if buying short-term ones. The problem with the TIPS is the duration risk/price fluctuation. You only get the real yield by holding something close to maturity of the bond. iBonds provide no price risk and liquidity at any point after 12 months without taking principal loss. If the market goes down 20-30% from here over the next 12 months, I'm going to want to be able to sell and buy stocks and it's not clear where I come out owning TIPS with the price risk.

People don't understand bonds. I'm doing my best to talk retail investors and financial advisors off the cliff of selling them daily. They don't appreciate that the losses they see next to each of their bonds are coming back to them in most cases as the bonds move from discounts to par. A year ago, they were happy with their bonds, the expectation of par, and earning a 2% coupon with no red next to the cusip. This year, they're entitled to the same par and the same 2% coupon but are upset because there's red next to the cusip. Zero appreciation for the fact that 2% is now being reinvested at 4-5% and portfolio income is increasing and that they're getting the same coupon/par they were happy with a year ago. Secondly, something that has me buying more and more intermediate bond funds myself, but remaining cautious on equities, is that many of these folks still want to buy stocks. God forbid their bonds go "down" 7-10%, but let's buy more equities that are down 20-30%? Equities aren't hated yet and I think they will have to be before this over. Buy-the-dip hasn't been sufficiently punished.

I've been trickling in, but I'm thinking as long as the correlation to equities is positive that we probably have lower to go (the recent strength notwithstanding). If I'm wrong on that over the next ~3 months or so, I'll probably start accelerating my buys. Building cash/short term bonds/intermediate bonds has been working well for me this year and I don't expect that to change until there's a capitulation event in the markets or in the Fed which is where the real bargains will start.

It's correlation to stocks has been falling this and the correlation to gold rising - which is a positive. But it's still fairly positively correlated to equities. I would like to see it gets back to the pre-2020 trend of zero correlation to equities before becoming super bullish on it again, but the amount of accumulation and "HODLing" is stunning. Something like 65-70% of BTC circulating supply hasn't moved in the last year despite the continued onlsaught of falling prices. The trend has been more and more leaving exchanges (typically signals an unwillingness to trade it) suggesting this is only going to get tighter. And "moving" doesn't = selling (or the intention to sell) like me moving all of my BTC deposits off of BlockFi/Ledn/Nexo/etc earlier this year to hold on a hardware wallet. So less than 30% of existing supply is currently being traded and we're approaching another halving of miner supply in the next 12-15 months further constraining future supply. Any return of retail demand whatsoev is going to result in a massive squeeze.

I expect it to be closer to -5% by that point which is also not good for equity indices @ 20x earnings. I imagine we're going to be whipsawed for a decade. Fed has to raise rates to fight inflation now that 5-10 trillion in additional liquidity is sloshing around - but deflation is the real risk/danger so they'll ease again to prevent a deflationary spiral. It's the same playbook from the last 22 years, but is accelerated 1) because we're reaching the end of its effectiveness and 2) let the cat out of the bag with direct to consumer stimulus which is a much faster transmission than the slow extension of credit from banks. Inflation will probably average 3-5% over the next decade, but will do so through booms and busts and not anything resembling a steady figure.

Maybe we'll see some nice buybacks executed after a hopeful dip following Q3 results

Disclaimer - I'm slowly trickling in buys to foreign stock funds and real estate related names, but it's hard to get super excited even with single digit P/E multiples. Valuations are cheap, but they've been cheap for years. I expect Europe heading towards an energy crisis that is NOT reflected in global energy market prices which is going to continue to have a negative impact on forward looking economic activity. So while 8-10x earnings looks fair on some of these international stock funds, I expect those earnings may contract fairly significantly in the face of higher energy prices and lower economic activity. Still buying because multiples are attractive on both relative and absolute basis, but I think it still gets worse before it gets better and am not dividing head first just yet.

The big tech companies have more cash. And maybe commodity companies after a bumper year. But I don't think elevated cash balances is true in general. Companies have been 'optimizing' balance sheets for a long time and I don't think that meant holding tons of idle cash. Consumers ability to handle increased inflation is already tapped out. Yes, cost of debt is lower than it was from 10-years ago. But any benefit of that went to servicing inflation which outpaced their wages for most of that same decade. And now the cost of service that debt is rising. The massive increase in cash balances and savings from Covid stimulus has already evaporated and credit card balances are increasing. We're less than 12 months into this inflationary pressure and any buffer consumers had is already gone. As far as equity in homes is concerned? Largely on paper - much of it'll disappear if mortgage rates stay anywhere near 6%. Prices have sustained right now because sales activity has halted. You have no new comparables to 'mark to market'. Sellers can't sell at these prices and buyers don't want to buy at these prices so the market stalled. The advertised price has become a lagging indicator of the conditions of the market weeks/months back Prices appear to be giving before rates so I expect that'll be the trend that dominates. Once they've fallen enough, you'll get a reasonable amount of sales volume and we'll know where the comparables price to get properties 'marked to market'. Much of the equity gain in the last 12-18 months will disappear.

Fixed vs floating doesn't matter if you can't pay off the balance when it comes due. In that case, ALL debt is floating and just varies in duration and reset frequency. Even without resets, there are knock-on effects to higher rates. Best example of that is 30-year mortgages. Sure, your mortgage doesn't reset - but real estate transactions have ground to a halt because nobody can afford to sell their home and move into anything of comparable quality. Maybe there isn't a loss realized on behalf of the homeowner (other than the loss of optionality), but there are massive economic implications to there being few home sales (prices don't rise, less equity to pull out = contraction in credit availability, commissions don't get paid to brokers, fewer home improvements done, etc etc etc). Not too mention the pain on capital owners who lent long term capital at too low of rates. The pain on lenders is pretty acute too as evidenced by UK pensions going to near insolvency and the massive mark-to-marker losses on insurers' bond portfolios.

You're correct. Went back and updated to reflect nominal figures for better comparison. Still a dramatic underperformance relative to debt growth.

See, the issue is that it IS a big deal. The near bankrupting of the UK pension system in the course of 2 days should demonstrate that this is problematic. You look at this in a vacuum and say "3% is nothing! We used to have 7% rates!" But you also had way less leverage/debt when rates were at 7%. We had incomes that were more reasonable to debt loads. We didn't have 9+% inflation breathing down our neck which meant there was flexibility in lowering rates if needed to. And you didn't have people/businesses/governments making long term decisions that were only reasonable if interest rates remained at 2-3%. 15 years of low rates and regular bailouts have coaxed people to continue to lever up because that's way less painful than delevering. Federal debt in 2007 - 9 trillion Federal debt today - 31 trillion Business debt 2007 - 10 trillion Business debt 2022 - 19.5 trillion Household debt 2007 - 14.4 trillion Household debt 2022- 18.6 trillion Total 2007 - 33.4 trillion Total 2022 - 69.1 trillion Aggregate income/GDP 2007 - 14.7 trillion Aggregate income/GDP 2022 - 25 trillion (and falling) Debt has more than doubled while aggregate incomes to service it have only gone up a fraction of that. That is in no way sustainable and the delay in that reckoning is the only reason equities ever got to where they were to begin with. The debt/income ratio didn't matter while the debt was being socialized by the US govt and floated at lower and lower rates as the cost of carry was dropping like a rock. But now rates are rising and are the highest they've been in a decade. Suddenly people can't afford to roll balances forward at higher rates since incomes didn't keep pace...but the only way to put a dent in the balance is to sell assets in an environment everyone else is selling them too which begets lower prices. This is what 0% rates for 15 years does and what raising them after that does.

I dunno. I have been shorting cruise lines and airlines off and on since 2021. The enterprise values were all well above 2019 levels while profitability was well below and debt loads massively higher, with no obvious end in sight to a y of those inputs. Made no sense to me that they'd be worth more in the capital markets than they'd been in 2019. I still feel similarly except now all of the stocks are actually down significantly now that the market has turned and everything is hated. Are they a good opportunity going forward? Hard to say. Global travel still hasn't picked back up yet and you're on the cusp of a global recession which probably delays that. In the mean time, you have fewer ships or ships that are less full which is hard on revenues/margins. My guess is the bleed continues, the losses continue, and that there will be a better time to buy in the next 6-12 months.

I was listening to someone on macro voices talk about US nat gas and the Freeport facility back in August-ish. His argument was with that facility down, you'd have expected everything that was being exported from it to result in a glut of gas in the US and a build in inventories. But even with that "glut" of gas not being exported for months, inventories in the US are still at the very low end of where they seasonally are compared to the last 5 years. His argument is US gas prices rise to the global market price once that shortage becomes apparent. Just parroting all of this - I know nothing of nat gas markets nor do I have a trade on, but it seems to make sense and I confirmed the inventory levels on the EIA website.

I agree with this sentiment. I think the Fed is going to intentionally overtighten to regain whatever credibility was lost in the 'transitory' stage where they "let" inflation get to 9.6% even while the USD rose to 20-year highs. I was originally expecting a pivot. Now I'm coming around to the idea they won't even though it's perfectly obvious the rental component of CPI lags and will be rolling over for the next 12 months. They're going to do this because we DO need to let inflation run at 3-5% for the next several years just because of the 31 trillion in federal debt - the Fed needs to let inflation run hot while keeping interests low so negative rates can work their magic. But they have to do that AND control longer term inflation expectations. So welcome to the environment of booms/bust as inflation goes from 0% to 9% back to 0% back to 6% etc. over the next decade. How can you have a "strong" economy and cratering earnings? Revenues fall modestly, while margins crater due to higher wages/higher inputs/higher financing costs/elevated inventories/elevated uncertainty on 12-24 month outlook. Now you've got a 10-20% contraction in earnings across much of the S&P while the index will need to "rebalance" to where the earnings are - i.e. energy/commodities stay flat or rise while tech/communication/consumer discretionary all falls dramatically.

Pretty certain both treasury bonds and cash/T-bills outperformed equities in the inflationary decade from 1970 - 1980 making it difficult for me to believe these guys are the "worst off". If you have a 20-30 year time horizon, sure. Maybe forget about it and let the earnings/reinvestment average out your result to something less terrible. If you're someone that's retiring soon, it's not enough that the E lines goes up if the P line is falling rapidly. You can't spend the earnings - only the dividends and sales proceeds. Even if earnings are going up, if it goes up less than inflation it's problematic - particularly if you'd capitalized large increases in expected real earnings into the multiple paid for the stock. Even in hyperinflationary environments where equity indices go parabolic, you'd have generally been better off owning real assets like real estate, gold, etc. I'll never understand why people think equities are a good inflation hedge and bonds are not. Equities are a significantly longer duration asset than most bonds. They typically do terribly in inflationary environments. And even when nominal equity prices DO rise, they tend to rise quite a bit less than other readily available alternatives. Equities do well when inflation is low. Just like every other risk asset. When inflation is medium, even bonds and cash perform better. And when it's hyperinflation, you want commodities and real assets.

The benefit will be when the Fed pivots and rates go back to zero. We had very little interest income from 2016 - 2021 because of the move to short term bonds and the missing of the last Fed pivot. 5-years we've paid the price of having very little income on tens of billions of dollars on bonds because 2-year bonds were reinvested at essentially 0% rates when they came due. All I'm asking is that they lock in a portion of it this time around. They don't have to dump the entire portfolio into long treasuries, but I don't want another 5-years of zero interest income if the Fed pivots again. They've missed most of the pain in fixed income markets this year. They should congratulate themselves and lock some of that in by extending duration to ~4-5 years at this point IMO. They could do that with a bond ladder extending our to 10-15 years and not be taking undue duration risk.

Fingers are crossed. Back in June the 10-year was @ 3.5ish. Now it's 3.65ish. not much change for the 1.50% in hikes that occurred in the interim (with obvious fluctuations both higher/lower during that time). We might be close to seeing the highs on the long-end at least if the last 3 months is any guide so hopefully they take the cue and start locking this in for the pivot that the market expects in 2023.

Spreads traditionally tighten in hiking cycles because hiking occurs in economies that can typically handle it which are low credit event periods. This helps offset the duration risk which is why IG credit is often preferred to treasuries in hiking cycles. It's not a shocker that they're tight, but you would expect them to widen once the recession becomes obvious... But then is often somewhat offset by the duration as rates come down.