Have We Hit The Top?

[Thrifty3000]

Here is an excerpt from Jamie Dimon’s 2018 Annual Letter addressing the volatility experienced during the 2018 flash crash…

 

“The fourth quarter of 2018 might be a harbinger of things to come.

 

Going into the final months of last year, optimism about the global economy prevailed, and this was reflected in the stock and bond markets. But in the fourth quarter, growth slowed in Germany; Italy repudiated European Union rules; Brexit uncertainty remained; and fear spiked around America’s trade issues with China. Among other geopolitical tensions, the U.S. government shutdown began. In addition, more questions arose about interest rate increases in the United States and the effect of the reversal of unprecedented quantitative easing, particularly in this country. These issues, which reduced growth forecasts and increased uncertainty, should legitimately cause stock prices to drop and bond spreads to increase. However, stock markets fell 20%, investment grade bond spreads gapped out by 36% and certain markets (like initial public offerings and high yield) virtually closed down. Even at the time, these large swings seemed to be an overreaction, but they highlight two critical issues. One, which we never forget, is that investor sentiment can veer widely from optimism to pessimism based on little fundamental change. And second, for the fourth or fifth time in this recovery, there were excessive moves in the market with rapidly increasing volatility accompanied by steep drops in liquidity.”

[Viking]

5 hours ago, Simba said:

 

 

This is my thought process - but I'm not really expecting a V shape recovery as we've been so fortunate to have in the past. 

 

IMO there's probably a ton of value in TECH land, if you can really spot out the compounders / winners, and not 1-trick COVID ponies (basically avoid whatever Cathie Wood owns)

The fly in the ointment is inflation. As long as inflation stays elevated, to maintains its credibility, the Fed will need to stay the course (higher rates + QT). My guess is the economy (employment) will actually be able to handle higher rates for a while. This suggests to me that rates could move higher than people expect (they already have). And this likely means financial markets will correct more than people currently expect. My guess is we get at least a 30% correction in the S&P500. Tesla continues to trade at nose-bleed levels. I think Cathy Wood funds are still seeing inflows from investors. The beatings will continue until…

 

Cost of living (Inflation) is a massive problem for a large swath of Americans today. And these people are employed. So the Fed has its marching orders. AS LONG AS THE ECONOMY CONTINUES TO ROLL ALONG (and employment remains strong) THE FED WILL BE UNABLE TO SAVE THE STOCK MARKET (the Fed wants tighter ‘financial conditions’ so a lower stock market is what the Fed actually wants).

 

The problem is there really are few historical precedents that mirror the current situation - record high debt levels, very high inflation levels, roaring economy, extreme labour shortage, pandemic, war in Europe, de-globalization, possible beginning of commodity super cycle, global warming, ESG, electric vehicles, green energy transition etc. So the range of possible outcomes is very wide… and so where we go (inflation, economy, financial markets) will likely be in directions few are currently expecting. 
 

Ignore the title; the video below has some good discussion regarding the current set up. I am becoming a fan of the host (Jack). He has some interesting people on and the discussion tends to be quite good.
 

 

Edited May 10, 2022 by Viking

[nwoodman]

@Viking Great video.  My favourite moment,  when George looks into the camera and referring to Cathy Wood says, "This market will not bottom until she loses all her assets"

 

cheers

 

nwoodman

[mattee2264]

I think the dynamics are very similar to the 2018 flash crash but I agree that what happens next will probably be different. I think this will be a leg down in a bear market rather than a correction that was overdone. The Fed isn't in a position to flood the market with liquidity and while things could turn out a lot better than the market is expecting (soft landing, inflation eases, not much further for rates to go, Fed rescues the market before things get really bad) they could also turn out a lot worse (hard landing, inflation still rages, Fed presses ahead with rate increases refuses to rescue the market). So I think once the selling pressure eases the market will probably go sideways for a while until we get a better handle on what comes next and markets will monitor closer Q2 company releases and economic data. 

 

Oh and final snippet of the Dimon quote is interesting re excessive moves in the market....fundamentals do matter but technical factors and sentiment might mean we bottom below fair value (which I peg at around the 3200 pre-COVID market level) 

Edited May 10, 2022 by mattee2264

[scorpioncapital]

What are higher rates? The ability of capital to earn income doing absolutely nothing, taking no risks.

I wonder what are the implications of that.

I suppose it would also mean innovation suffers since who would want to innovate? 

 

[Spekulatius]

The difference between late 2018, when the Fed started to tighten and now we have 2% vs 9% inflation. At 2% inflation, the Fed put for equities was in place, at 9% inflation, I am not so sure. I think there still is a Fed put, but the strike price is much lower.

Edited May 10, 2022 by Spekulatius

[mattee2264]

Other difference with late 2018 is that the bottom of 2500 was cheap representing around 15x earnings compared to a 10 year of 2-3%. Also at the bottom split adjusted you could have scooped up Apple at $40, Microsoft at $100, Facebook at $130, Google at $1000 and obviously their performance from that date drove a lot of the appreciation to date. 

 

Even after a 15% decline we are trading at around 20x earnings and I think 2021 earnings are probably peak earnings for this cycle. The best quality mega tech stocks such as Apple and Microsoft aren't close to being cheap. And while Facebook and Netflix have sold off considerably they are facing challenges to their business models with data privacy and competition respectively. 

 

Also there was a soft landing end of 2018 with only a very mild slowdown driven by trade wars etc. Whereas we are probably heading into recession later this year. And of course inflation is going to pressure margins and make it a lot harder for the Fed to rescue markets.

 

I think the main parallel with 2018 is the speed of the decline and most likely this is a leg down with a near term bottom but it is difficult to imagine a V shaped recovery and a swift move to much much higher levels. Most likely 4800 was the peak for this bull market and depending on how things turn out for the global economy and depending on Fed policy we will either go sideways with a lot of volatility or head a lot lower 

[Ulti]

https://ritholtz.com/2022/05/transcript-alex-guervich/

This guy is a top notch global macro trader…. About an hour into the interview//  down always in the transcript… he gives his assessment on what’s going on ….. interview was done in March this year

[Guest]

42 minutes ago, Ulti said:

https://ritholtz.com/2022/05/transcript-alex-guervich/

This guy is a top notch global macro trader…. 

 

Is there such a thing?

[Minseok]

37 minutes ago, Ulti said:

https://ritholtz.com/2022/05/transcript-alex-guervich/

This guy is a top notch global macro trader…. About an hour into the interview//  down always in the transcript… he gives his assessment on what’s going on ….. interview was done in March this year

I just finished listening to it as well. I am a novice when it comes to macros so some of what he said was very interesting to me. The fact that he sees that the fed doing interest hikes prioritized over QT is indicative of ulterior political motives for example. Why benefit banks who are already well capitalized if you can achieve the same effects through a more intense QT? You are only losing your chances of reducing the balance sheet by hiking the interest rate first.

 

Also he mentioned that inflation reflects the economic state of the past year, so he is just as sure of deflation in the next few years just as he called 2022 inflation since 2020-2021. Perhaps its a call on inflation fixing itself, and fed is again at risk of over reacting.

 

lastly “Fed rate reduction is always unexpected but hikes are never unexpected”. If this is true, risk reward is always skewed towards betting on dovish fed outcomes.

[Spekulatius]

Anyone think a bear market can be over with $TSLA around $800 and $GME ~$100 ? I don't think so. it seems to me that there is are a lot more balloons to pop.

[Minseok]

34 minutes ago, Spekulatius said:

Anyone think a bear market can be over with $TSLA around $800 and $GME ~$100 ? I don't think so. it seems to me that there is are a lot more balloons to pop.

 

Not that I am a tesla bull, I sold tesla in 2012 for $32 pre split because it was bubbly.  It went through a few tightening cycle already but it defied all odds and appreciated 100+times. If you play out the most optimistic scenario there are people who can play with the numbers to justify it even on a fundamental basis.

 

i suppose I am looking at it from a “MSFT took 10 years to reach dot com-highs” kind of bubble. Tesla may not follow the same path.

[Paarslaars]

1 hour ago, Ulti said:

https://ritholtz.com/2022/05/transcript-alex-guervich/

This guy is a top notch global macro trader…. About an hour into the interview//  down always in the transcript… he gives his assessment on what’s going on ….. interview was done in March this year

Interesting. I've been talking to a few friends who are now all looking into real estate cause they think it's a good time. The reasoning is the interest rates on loans are still relatively low (2.5% @ 25y) and their salary will increase a lot due to inflation (Belgium has something called indexation, where salaries are increased with the inflation number on a yearly basis). People are taking pretty big loans based on the assumption that upcoming years of inflation will minimize their mortgage payments in a few years...

 

If he's right about deflation, this could drop the housing market here.

Only wondering what the FED will do during deflation, drop interest rates or just resort back to QE?

[Ulti]

1 hour ago, stahleyp said:

 

Is there such a thing?

I guess you would have to check out his record... looks like he did very well

march 2020 and  has a book out that points out each trade he did.

[Guest]

19 minutes ago, Ulti said:

I guess you would have to check out his record... looks like he did very well

march 2020 and  has a book out that points out each trade he did.

 

 

There are sooooo many guys who do really well for a few years and then burn out. Can you tell me a few people who've been a successful macro investor for more than a few years? Maybe Drunkenmiller but even he sucks now. 

 

[Ulti]

Maybe Soros in his hey day ? or how about

Chase Coleman now ...haha

Guervich has been doing macro for awhile and has an interesting contrarian viewpoint.  Only time will tell  his call is correct.

 

https://jackschwager.com/  

There are probably several successful macro traders mentioned in his books.

Been years since I've read any.

 

[Guest]

7 hours ago, Ulti said:

Maybe Soros in his hey day ? or how about

Chase Coleman now ...haha

Guervich has been doing macro for awhile and has an interesting contrarian viewpoint.  Only time will tell  his call is correct.

 

https://jackschwager.com/  

There are probably several successful macro traders mentioned in his books.

Been years since I've read any.

 

 

 

Haha yeah, I was actually thinking of Schwager's books in the other post.

 

I looked a few of those guys up after the fact and it seemed like all of them sucked. 

[aws]

One of the highest traded stocks today is Redbox (RDBX) on news that it is being acquired for approximately 65 cents per share in an all stock deal. The share stock was halted on upside volatility multiple times, hitting over $6 per share, or roughly 10x the merger price. Toppy behavior still abounds.

[tede02]

Will be interesting to see how far things go on the downside. It does seem a lot of the extreme excess has been wrung out. There are tons of stocks down > 50%. Crypto is getting crushed, etc. That said, I personally expect a recession. The magnitude is anyone's guess. Perhaps corporate earnings are weak for several quarters and stocks keep sliding. Hard to know. 

[muscleman]

I am seeing signs that Bonds are bottoming here, though I am not fully convinced yet. 

Historically when QE stops, yields go down and stocks go down. I am not sure this time though. 90 bn per month QT is the largest scale QT ever. Last time they did this was in 2008 from Jan to June. 300 Bn QT from 2008 Jan to June was sufficient to crash the market.

Right now we are just seeing the tip of the iceberg because QT hasn't  even started at the warm up level of 47 bn per month.

Edited May 12, 2022 by muscleman

[Xerxes]

32 minutes ago, muscleman said:

I am seeing signs that Bonds are bottoming here, though I am not fully convinced yet. 

Historically when QE stops, yields go down and stocks go down. I am not sure this time though. 90 bn per month QT is the largest scale QT ever. Last time they did this was in 2008 from Jan to June. 300 Bn QT from 2008 Jan to June was sufficient to crash the market.

Right now we are just seeing the tip of the iceberg because QT hasn't  even started at the warm up level of 47 bn per month.

 

i had no idea there was QT in 2008. Did you mean 2018 ?

[KCLarkin]

On 5/9/2022 at 3:57 PM, KCLarkin said:

SPY wants to go lower. Bears anchor on the big 50% drops, but they are extremely rare. Probably looking at either a 2018 style "barely bear". Or a more typical -30s drop. So a range of -20 to -35. But the actual bottom will be very brief and most people will miss it. So the buyable bottom is probably -18 to -25.

 

A few more days like this and it will be buy time. But most likely we rally tomorrow to fake everyone out.

---

TLDR: Plenty of good values right now. But not many spectacular ones.

 

We've got our "barely bear" with a buyable bottom at -18%. Getting a nice relief rally now. Not sure if we'll get another big drop. 

[Dinar]

19 minutes ago, KCLarkin said:

 

We've got our "barely bear" with a buyable bottom at -18%. Getting a nice relief rally now. Not sure if we'll get another big drop. 

Actually, if my math is correct, more like a 20% decline.  Even year to date total return at the bottom was negative 18.5%, and that's including dividends.  Without dividends S&P was down 19%+ at the bottom yesterday year to date and 20% from its high.

[changegonnacome]

2 minutes ago, KCLarkin said:

We've got our "barely bear" with a buyable bottom at -18%. Getting a nice relief rally now. Not sure if we'll get another big drop. 

I’m coming around to the idea of secular Western inflationary thesis (de-globalization, bifurcated geopolitical East/west reducing available global labor pools, on-shoring, costs of green transition, falling fertility in the West leading to poor demographics)…..which all point to structurally higher price inflation = higher rates = lower asset prices.

 

The next decades successful strategy, might be characterized not by buy the dip, but rather sell the rip….as asset prices Re-price to something more akin to multiples seen in the 70’s.

 

Above is all hardcore macro….& one for the too hard pile.

 

What’s not too hard, IMO, is in the short term the Fed put is gone….and equites are floating on only fundamentals & sentiment for the first time in over a decade. Inflation needs to be killed in the crib before it gets to crawl & walk as it did in 70’s…...Powell wants to be Volcker…….nobody remembers the Fed Chair before Volcker right? So don’t be that guy, be the guy that did the right thing in the face overwhelming pressure & purged inflation from your society and restored price stability. Given the pernicious effects of inflation on the poorest in society, it’s the moral thing to do. Let’s see if he has the stomach. I sense he does.

[Gregmal]

Yea but Powell doesn’t have control over most of the stuff influencing inflation. Energy is a result of stupid politicians and tension with Russia. Consumer products are COVID supply chains. Labor you could argue is influenced by high asset prices but also could be solved with incentives and immigration. The whole inflation thing IMO is easily solvable.