Have We Hit The Top?

[adesigar]

Powells confirmation went through so maybe he will take the kid gloves off and increase rates by 1% at the next meeting. Probably wont happen but that would be great. 

[changegonnacome]

1 hour ago, Gregmal said:

Yea but Powell doesn’t have control over most of the stuff influencing inflation

 

Agree he can't solve supply side issues but he has to deliver on what is actually in his control to restore price stability.....and I don't think anyone can argue that the man who controls the price of money, can control aggregate demand in an economy & what he certainly won't do in the short term is anything which might make inflation worse (cutting rates/QE). Hence the fed put being gone under the market with any CPI prints above a 4-handle remaining....which I think pretty much covers the rest of this year.

 

It's been a long time since investors toes couldn't touch the bottom & the vol is going to be wild.

Edited May 13, 2022 by changegonnacome

[Broeb22]

Increasing immigration right now would be a good response to the current set of circumstances. It's way better to increase supply where there are labor shortages than to kill demand. It won't fix some of the supply chain issues arising from supply chains originating in Asia, but additional labor availability would fix many, many issues. 

[Gregmal]

Yea I think it’s a no brainer and you can spin it by taking in tons of useful Eastern Europeans. At least compared to the other option which some are suggesting….basically maim the lower-upper middle class so rich people can buy cheap assets…

Edited May 13, 2022 by Gregmal

[backtothebeach]

I just updated my graph of historical S&P500 index drawdowns up to the latest

prices and thought I'd share. (May 12 is the thin line on the right, down ~19% from ATH).

 

 

 

[changegonnacome]

41 minutes ago, backtothebeach said:

I just updated my graph of historical S&P500 index drawdowns up to the latest

prices and thought I'd share. (May 12 is the thin line on the right, down ~19% from ATH).

 

 

 

 

Interesting graph....from a quick eyeball, tell me if my eyeballs are seeing things.....would it be fair to say that drawdowns in the past having reached this -19% point .....materially ALL went on to smash the bear (20% line) by at least another 5% for a total peak to trough of 25%.......with the majority actually exhausting out in the high negative twenties level......but not an insignificant amount of this -19 sample set went on to pass the 30% drawdown mark modestly.....and only three biggies went & smashed 40%.

 

That about right?

Edited May 13, 2022 by changegonnacome

[Gregmal]

I have a hard time seeing the market as a whole get back to highs any time soon. Energy would have to play a part in that and I think energy pushing significantly higher would be bad for everything else. Same time tech is probably fairly valued now, by and large. A lot of consumer stuff is dirt cheap based on the recession fears so my guess is that does ok cuz the real world economy is still strong. 
 

So compared to other declines I don’t think this is done per say, but I don’t see how it’s warranted to go materially deeper. Most of those other things had some sort of crisis or chaos. Here, literally nothing has happened and the underlying economy is strong. People are lazy and blame the Fed, but why? They did exactly what they’ve been telling everyone they’d do. That’s a false narrative IMO. This unwind I think really started/topped on the November 2020 vax announcement. It’s when the “world will be different” stocks, most tech stuff like ZM, PTON but even Z, NFLX, ROKU type stuff too, gapped down hard and then just whimpered and eventually got brought back to reality. Eventually the other non fundamental drivers discussed in other threads, details by muscleman among others, kicked in. Anyone see how brutally funds like Tiger have been annihilated? Nope they just focus on ARK. The confidence termites came. But there are few of those left who haven’t been punished severely. Even the crypto bros got it. Wednesday and Thursday I found myself genuinely looking at some stuff and saying wow these are unconditionally great values which I have had a hard time doing for the past year outside of select special situation stuff.
 

So again, idk. Real world is strong. Outside of the rich schmucks like Ackman lobbying for economic destruction so they can profit personally, I don’t see anything really hurting people. They bitch about car prices but still buy new cars. Grocery bills up 30% but that’s a few hundred bucks a month for most, so what? Gas higher, maybe $20 a tank more, manageable. Housing? Well that took a generational GFC crisis and a decade of underbuilding to create and there’s no way to reverse that freight train. It’s hard to claim though that the majority of the market is massively overvalued anymore.

[KCLarkin]

2 hours ago, changegonnacome said:

 

Interesting graph....from a quick eyeball, tell me if my eyeballs are seeing things.....would it be fair to say that drawdowns in the past having reached this -19% point .....materially ALL went on to smash the bear (20% line) by at least another 5% for a total peak to trough of 25%.......with the majority actually exhausting out in the high negative twenties level......but not an insignificant amount of this -19 sample set went on to pass the 30% drawdown mark modestly.....and only three biggies went & smashed 40%.

 

That about right?

I think your eyes are deceiving you. The barely Bears are smaller and shorter so not as visible on this chart. But very visible in table format. 2018 is a notable example.

[Viking]

One of the keys moving forward will be earnings. If earnings revisions start to come down then this will likely lead to another leg down in stocks.

 

What would cause earnings to come down? A strong dollar will hit earnings of US multinationals. Europe’s economy is in trouble (war/insane energy prices). China’s economy is slowing (covid lock downs; popping of real estate bubble). These are happening. 
 

As spending shifts to services, do we see slow down in goods purchases? What will be the impact of much higher interest rates? Borrowing costs are now much higher. Do we see a slowing of durable goods orders? Will we eventually see an impact on housing? 
 

At what point does inflation start to impact earnings in a more negative way? We are seeing some examples in Q1. Up to now consumers have largely accepted rapidly rising prices (simply happy to be able to spend money during covid). Does this continue, or do consumers start to get pissed off and pull back on spending in response to ever rising prices?

Fed tightening/QT could result in an economic hard landing. This will take time to play out.

—————

At the same time there are significant tailwinds in US/Canada. Unemployment at a historic low. Job openings at historic high. Travel/services is booming. Resources/oil are booming. De-globalization is happening. Etc…

—————

My guess is it will take 3-6 months for all the different puts and takes to play out more fully. I continue to believe as long as the Fed continues to remove liquidity (raising rates and QT) financial markets will struggle. Bottom line, expect lots more volatility. And lower lows as long as the Fed continues down its current path.

Edited May 14, 2022 by Viking

[mattee2264]

I think it remains to be seen how strong the economy is now the Fed is no longer being so accommodating and the fiscal stimulus is wearing off and inflation continues to rage. 

 

Now it is clear inflation is not transitory and the economy is heading south companies are more likely to consider cost cutting measures such as laying off staff etc or cutting back on growth capex. As for the consumer after using stimulus checks to pay down credit card debt credit card debt is now back towards record highs and APRs are heading higher which doesn't feel like an indicator of health. And it is not just food and energy that is a lot more expensive housing costs are going up and travel is a lot more expensive and that is going to mean cuts in other areas of spending and we've already seen e-commerce companies take a hit in anticipation of this. And then of course there is precautionary saving as recession fears build and the negative wealth effect as asset prices fall.

 

Agree with Viking that all of this will take some time to play out. At this point in time markets are mostly pricing in probabilities and these probabilities will change as we get more information from future Fed guidance, company guidance, economic and company data releases etc. 

 

In simple terms if we are going to get the soft landing we are probably close to the bottom. If we are going to get a hard landing we are probably only halfway there. And of course if the Fed pivots and turns on the printing presses again then we will probably quickly recover to all time highs (in nominal if not real terms). 

 

[thepupil]

I think assets have cheapened quite nicely  (exception: private RE). 
 

Your classic 60/40 allocation (Vanguard Wellington) now features high quality ~8-10 yr corporate bonds at 4% and high quality stocks have de rated from mid 20’s to 18-20x (5-6% earnings yield) 

 

those 2 numbers were 2.5-3% and 3.5-4% recently. A no effort blended retirement portfolio’s earnings+interest yield has increased by like 30-50%. For the rentiers of the world, an increase of this magnitude feels wonderful (if one can survive the decrease in asset prices that accompanies it). I’m loving it.

 

inflation may continue to weigh upon valuations, but the long term compensation for participating in “the market” has increased substantially. 

Stocks weren’t that expensive before outside of some frothy demons which have been exorcised via 70-90% drawdowns. If I squint hard enough, even some of that looks more balanced r/r. 

as the resident Panglossian Permabull Pollyanna (that’s alliteration!) with a decent time horizon. I say buy everything. Megacap tech is reasonable, public RE looks good, bonds offer decent r/r more carry than they have in 10 years, energy is flowing, speculative tech is seeing some forced selling.

the top 20% of America dutifully sends their paychecks to 401k’s each month, earnings remain robust and the divvy+buyback yield is decent. 
 

buy buy buy !!!
 

 

[Spekulatius]

I think it’s interesting to note that each 1% rise in treasuries (Aswath references to the 10 year) should result in a 20-25% drop on the SP500, according to Damodaran. Seems like a very large drop to me and I don’t know on what math this is based on. I guess it’s the total return= equity risk premium+ risk free rate of return formula. Equity risk premium in the US has been around 5% and  risk free premium is round 3% now, so going from 3-4% should be more like a 11% drop. I guess I should listen to Damodaran classes in YT (which are great):

Anyways, I like the idea to just watch the bonds for signal rather than trying to guess here what inflation might or might not do. This overall doesn’t sound that great overall.

Edited May 14, 2022 by Spekulatius

[Viking]

2 hours ago, thepupil said:

I think assets have cheapened quite nicely  (exception: private RE). 
 

Your classic 60/40 allocation (Vanguard Wellington) now features high quality ~8-10 yr corporate bonds at 4% and high quality stocks have de rated from mid 20’s to 18-20x (5-6% earnings yield) 

 

those 2 numbers were 2.5-3% and 3.5-4% recently. A no effort blended retirement portfolio’s earnings+interest yield has increased by like 30-50%. For the rentiers of the world, an increase of this magnitude feels wonderful (if one can survive the decrease in asset prices that accompanies it). I’m loving it.

 

inflation may continue to weigh upon valuations, but the long term compensation for participating in “the market” has increased substantially. 

Stocks weren’t that expensive before outside of some frothy demons which have been exorcised via 70-90% drawdowns. If I squint hard enough, even some of that looks more balanced r/r. 

as the resident Panglossian Permabull Pollyanna (that’s alliteration!) with a decent time horizon. I say buy everything. Megacap tech is reasonable, public RE looks good, bonds offer decent r/r more carry than they have in 10 years, energy is flowing, speculative tech is seeing some forced selling.

the top 20% of America dutifully sends their paychecks to 401k’s each month, earnings remain robust and the divvy+buyback yield is decent. 
 

buy buy buy !!!

i agree that investors with cash should buy. Just not be in a hurry to deploy it all. Peter Lynch said buy when you find a good deal in a stock you understand well. Not complicated.

 

The challenge with investing the past 14 years is Central Banks are the key factor driving returns. With inflation printing 8% it is CRYSTAL CLEAR the Fed will be increasing interest rates in the coming months and June 1 they will begin quantitative tightening. The Fed has said they have NO IDEA how QT will impact financial markets. So buckle up. 
 

Drawdowns of 30-40% in stocks are not uncommon. The S&P500 closed Friday 16% HIGHER than where it was trading in Feb 2020 (just before covid).

Edited May 14, 2022 by Viking

[changegonnacome]

10 hours ago, Viking said:

One of the keys moving forward will be earnings. If earnings revisions start to come down then this will likely lead to another leg down in stocks.

 

 

Aren’t earnings & record high profit margins the next thing to drop & with fairly high certainty………companies that can push price first in an inflationary environment display earnings & profit margin growth in the first instance..…this is the Wile E. Coyote phase of an inflationary environment, your off the cliff but everything seems fine….however, and this goes back to inflation expectations, those firms employees in the last round of wage negotiations in late 2021 had a transitory mind frame approach to inflation and so sought modest increases……the next round of wage negotiations in late 22 married to  incremental new hires that are happening now, the inflation narrative has changed….such that a wall of real incremental labor + capex costs will be hitting SPY/QQQ firms starting now (this assumes that unemployment remains low & employees retain leverage). Anecdotally I’m aware of many firms where new 2022 hires are sitting beside legacy employees in the same role where a massive wage differential has opened up, that will be addressed by legacy staff in the next performance review or else they walk. 

Edited May 14, 2022 by changegonnacome

[Gregmal]

Which to me sounds like you are implying that there’s still a huge wave of folks getting big pay bumps? So they’ll be joining the new car, boat, home improvement, and travel/vacation/entertainment  party as well.

Edited May 14, 2022 by Gregmal

[muscleman]

On 5/12/2022 at 10:29 AM, Xerxes said:

 

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

It was done secretly without announcements, from early to mid 2008, just when the market needs liquidity the most, which makes total sense LOL.

https://fred.stlouisfed.org/series/TREAST

 

This time around, the scale they plan to do is FAR bigger than in 2008.

 

[changegonnacome]

11 minutes ago, Gregmal said:

Which to me sounds like you are implying that there’s still a huge wave of folks getting big pay bumps? So they’ll be joining the new car, boat, home improvement, and travel/vacation/entertainment  party as well.

 

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.

Edited May 14, 2022 by changegonnacome

[muscleman]

11 minutes ago, Gregmal said:

Which to me sounds like you are implying that there’s still a huge wave of folks getting big pay bumps? So they’ll be joining the new car, boat, home improvement, and travel/vacation/entertainment  party as well.

One of my neighbors accepted an offer to be a staff engineer in Coinbase. The offer was 200k base salary+450k stocks per year. 

Two months later the Coinbase stock went  from 190 to 58 so his expected pay check shrunk a lot. The stocks will be given to him at 12 months on the job. By that time, I think the stock will likely be 20 a share, so his big pay bump will likely go from expected 650k a year to 240k.

[changegonnacome]

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.

Edited May 14, 2022 by changegonnacome

[Viking]

Yes wages are increasing but my understanding is for most workers they are not increasing anywhere close to actual inflation (especially in Canada). So consumers have much less money to spend (in real terms). So the number of ‘units’ consumers can now purchase are lower. And getting lower every year.
 

This reality manifests itself in the political world. A very large swath of the American public are much worse off when inflation rips at 8%. And the longer the inflation remains elevated the further behind these people fall. Inflation is a silent tax. Its evils have largely been forgotten the past 40 years. But we are now in year 2 of out of control inflation and consumers are just getting cranky. And we have US elections this year. Get out your popcorn. 
 

Where this gets really interesting is IF inflation stays elevated into 2H (say 5-6%). Which will likely force the Fed to continue with tightening. Even if the economy starts to slow a little.
—————

Wage increases in Canada are running at about 3%. The acticle below says inflation is 6% but the official number now is closer to 8% and it is likely understated. 2 or 3 years of this type of disparity and consumers will be screwed. If consumers take a 10% hit to real income it will have an impact on the economy. And then politicians will have to do something to get inflation down (probably make it worse). What the US learned in the 1970’s is high inflation destroys an economy and society - it is much worse than high unemployment because it is so hard to rein in once it gets out of control (the whole expectations thing). There is a good chance we will re-learn this lesson over the next couple of years.

 

https://www.cbc.ca/news/business/inflation-rising-wages-1.6384530

 

Edited May 14, 2022 by Viking

[changegonnacome]

31 minutes ago, Viking said:

Yes wages are increasing but my understanding is for most workers they are not increasing anywhere close to actual inflation (especially in Canada). So consumers have much less money to spend (in real terms). So the number of ‘units’ consumers can now purchase are lower. And getting lower every year.
 

This reality manifests itself in the political world. A very large swath of the American public are much worse off when inflation rips at 8%. And the longer the inflation remains elevated the further behind these people fall. Inflation is a silent tax. Its evils have largely been forgotten the past 40 years. But we are now in year 2 of out of control inflation and consumers are just getting cranky. And we have US elections this year. Get out your popcorn. 

 

+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 .

Edited May 14, 2022 by changegonnacome

[Gregmal]

Do people really think inflation is going to continue at 8% for the next several years? Its funny to me how last year there were like 2-3 people here tops who said this would happen, everyone else was in the transitory, camp. Now, everyone thinks its 5-10% a year in perpetuity. I guess thats why markets move and sentiment is powerful. But again, most of this "inflation", is fixable. So yea, tech stock based comp will blow for a few years. But the idea that markets need to price in 5%+ inflation OFF OF the already elevated base, seems to a little ridiculous to me. 

 

Similar to the housing market, the labor market is so tight that people ARE getting meaningful raises simply due to supply/demand imbalances. We all know the government lies about inflation. But again, theyre handling it right now, exceptionally well. Dining, travel, home improvement. AT THESE PRICES. So we can talk generally about "oh inflation"...great. Plug in x% inflation in perpetuity and get a crazy bearish picture. Tell me how stupid shit like 2x4s, automobiles, desktop computers, etc....are going to go parabolic on prices for the next half decade? I'd take the other side of that bet all day. Energy and housing will take time, but Im pretty certain policies will start shifting either soon, or starting in November to be more favorable on that front too. It just seems like we have big and popular story, and people are getting carried away with applying it to the future. 

[Gregmal]

I mean even the simple concept of inflation, shouldn't really apply to first world countries due to the principles of capitalism. It happened here, because of covid, because government started screwing around with stuff. Locking people in their homes, handing out money, putting companies out of business. This isnt obvious to people? When we had black market snout protectors selling for $30 a pop...making masks was incentivized and now we have so many they are given away for free. This same thing can be applied virtually everywhere. Especially commodities which are driving the end products higher. We are basically through the covid shenanigans everywhere in the world except for China. Even there, stuff will normalize. And as it does, all this stuff comes down. Is the very picture of that chart on these inflation inputs not the overridingly dominant theme of the past two years? It doesnt just apply to Zoom stock. Down, huge spike up, then normalization. Seems simple and obvious to me. 

Edited May 14, 2022 by Gregmal

[changegonnacome]

16 minutes ago, Gregmal said:

Do people really think inflation is going to continue at 8% for the next several years?

 

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).

 

 

Edited May 14, 2022 by changegonnacome

[thepupil]

One of the reasons I look at “quality” indexes such as the MSCI Quality or GMO funds or whatever is that historically these are the types of companies which can pass on prices in an inflationary period; honestly I don’t worry too much that Visa, Microsoft are overearning. No company is infallible, things can change (like corporate tax rates) etc, but ultimately I think a lot of the market has pricing power and those companies have fallen in absolute price. 
 

everyone is worried about peak margin/peak multiple; you’ve had a nice chopping of the multiple  and I haven’t seen mean reversion in margin in the ten years folks have been calling for it and I honestly don’t expect much of it for most high quality companies. 

I’m partly just throwing some bullish vibes out there to be contrarian…you can’t be complacent, but just don’t want y’all to become too wound up on the “regime change!!! Stagflation!!! “ narrative…

 

with that said my portfolio does kind of look Like big inflation bet and is short on regular way high quality co’s so I’m starting to worry about not having enough of that (normal good companies) vs inflation protection. 

 

 

 

 

 

Edited May 14, 2022 by thepupil