Have We Hit The Top?

[mattee2264]

Kuppy @ adventures in capitalism has an interesting take on how things will play out. Not sure if I am allowed to link the article on here but will summarize it briefly:

 

Inflation is primarily a supply side problem which the government are making worse 

Fed is under political pressure to do something 

But they don't want to crash markets 

So they are hoping that once things start to break Congress will start to worry about falling asset prices allowing them to pause and take a wait and see approach 

Inflation won't go away and therefore commodities are the place to be

 

Thoughts?

 

 

 

 

 

[Gregmal]

2 hours ago, mattee2264 said:

Kuppy @ adventures in capitalism has an interesting take on how things will play out. Not sure if I am allowed to link the article on here but will summarize it briefly:

 

Inflation is primarily a supply side problem which the government are making worse 

Fed is under political pressure to do something 

But they don't want to crash markets 

So they are hoping that once things start to break Congress will start to worry about falling asset prices allowing them to pause and take a wait and see approach 

Inflation won't go away and therefore commodities are the place to be

 

Thoughts?

 

 

 

 

 

100% spot on.

[changegonnacome]

Inflation is both a supply side problem but also a monetary driven demand problem....we did do helicopter money & surprise surprise we got inflation. One can argue around which is the biggest influence.....but its very hard to untangle IMO.

 

Supply side issues are unlikely to abate unless China changes course on its zero COVID strategy. I think that is going to be very very unlikely especially as tens of thousands of people, if not HUNDREDS of thousands of people in North Korea are about to die from COVID in the next few weeks......demonstrating what happens when the virus meets a population with little to no natural immunity & a poor healthcare system......this will give Xi the case study he requires to continue with his extreme policy....one can argue the Chinese economy slowing down is a deflationary force......but China is the factory of the world & the factory output flow will continue to be disrupted in 2022 with inflationary pressure, bulk ordering etc. while companies also chose to 'disrupt' their own supply chains by re-shoring / near shoring & diversifying away from China....selecting resiliency over efficiency & cost.....which is both disruptive AND inflationary.

 

 

[LC]

If the crux of the supply-side inflation argument is that government doesn't want to make changes to increase supply (more immigrants, more o&g drilling, more building, etc.), I have faith congress will do what it always does when their ass is on the line: turn a blind eye, cause a distraction somewhere else, and when nobody is looking, pass laws on (or refuse to legislate other laws) some activities to increase drilling, building, immigration, etc. etc.

 

It's in every congressperson's best interest to have low prices. Fat, happy constituents don't want change. 

 

 

Edited May 17, 2022 by LC

[SharperDingaan]

All else equal, with Covid receding and China starting up again, supply issues should start to untwist in a big way. The supply chain problem, largely changing to distribution limitations (labor shortage), and easier to do deal with. More supply, but subject to short-term disruptions, and companies holding inventory as a buffer.  Demand systematically being drawn down in a big way by the Fed.

 

In theory, a material rise in supply, and a material fall in demand should materially reduce prices - and the go-forward inflation rate. Thing is; it  does nothing for the current inflation rate - current inflated prices are not going to go down, they just rise at a slower rate.

 

Wage driven inflation is a catch-up to recover inflation increases to date. The longer it takes to get to lower go forward inflation rates - the more 'embedded' wage inflation becomes. Hence the aggressive fed movement.

 

SD

 

 

.

 

Edited May 18, 2022 by SharperDingaan

[Gregmal]

The counter to that, not disagreeing though, is that wages went nowhere for almost the entire period following the GFC. Same largely with a lot of goods and services. So on top of there being a bit of catching up to do, you also had all these big companies pledge to $20+ minimum wages by....22/23. Voila! Just came in heavy on the back end.

[Ulti]

https://mishtalk.com/economics/the-fed-lied-it-could-never-meet-its-qt-targets-as-announced

[Ross812]

27 minutes ago, Ulti said:

https://mishtalk.com/economics/the-fed-lied-it-could-never-meet-its-qt-targets-as-announced

If you assume the average mortgage is 4% - you hit 13B/month in P&I. The average length of home ownership is 7 years so there is around 194B in turnover a year - 16.2B/month. The natural run-off rate is 4.5B/month this year - That is 33.7B/month. I suspect the average mortgage is over 4% considering average credit and a 10% down payment adds around half a point to the prime rate; add in people who could not take advantage of lower rates - those with mortgages under 100k, and many manufactured homes and those with higher interest rates on rentals and second homes.  

[SharperDingaan]

1 hour ago, Gregmal said:

The counter to that, not disagreeing though, is that wages went nowhere for almost the entire period following the GFC. Same largely with a lot of goods and services. So on top of there being a bit of catching up to do, you also had all these big companies pledge to $20+ minimum wages by....22/23. Voila! Just came in heavy on the back end.

 

Agreed. Ontario goes to the polls June 02, and the winner will be whoever gives the largest inflation increases on expired union agreements (most expired during Covid, and rolled forward 'as is' until Covid is over). Lot of sizeable 'ratification' bonuses, and wage increases of 5-7% over 3 years being thrown around. Expectation of an annual bonus, plus pay raise, if you stay in place - particularly in health care & emergency services. Even Universities and Colleges getting in on the act 

 

Not much different across the rest of Canada -  just the magnitude of the numbers.

The US should not be a whole lot different overall, it will just vary a lot across the individual states. Sadly, all else equal, it will also widen the gap for the average joe (who cannot relocate) between the rich and poor states.

 

SD 

Edited May 18, 2022 by SharperDingaan

[Ulti]

[Minseok]

With the recent retail results indicating inflationary pressures, price of goods might correct itself sooner than expected. Fed might use more dovish language in the june meeting and ease on the tightening. I hope this will be the start of change in sentiment.m ( and bottoming of markets).

[Guest]

2 hours ago, Minseok said:

With the recent retail results indicating inflationary pressures, price of goods might correct itself sooner than expected. Fed might use more dovish language in the june meeting and ease on the tightening. I hope this will be the start of change in sentiment.m ( and bottoming of markets).

 

Why would you want the market to bottom?

[Minseok]

Just now, stahleyp said:

 

Why would you want the market to bottom?

Im out of bullets

[Guest]

Just now, Minseok said:

Im out of bullets

 

haha I'm assuming you're retired then?

[Minseok]

No far from it. just didnt expect this ‘correction’ to last as long or as deep. I’ll never forget now to be conservative with my cash position going forward.

[Guest]

17 minutes ago, Minseok said:

No far from it. just didnt expect this ‘correction’ to last as long or as deep. I’ll never forget now to be conservative with my cash position going forward.

 

Be happy then. This could get worse (and I hope it does). 

[LearningMachine]

6 minutes ago, stahleyp said:

 

Be happy then. This could get worse (and I hope it does). 

 

Vix has only hit 31 so far. 

 

Still many companies trading at such high prices that they won't give you your money back for decades if you owned them entirely and market was shutdown forever.

Edited May 18, 2022 by LearningMachine

[fareastwarriors]

6 hours ago, Minseok said:

No far from it. just didnt expect this ‘correction’ to last as long or as deep. I’ll never forget now to be conservative with my cash position going forward.

 

If you're younger, just keep adding with every paycheck.  This correction is barely that long or deep...but sometimes you have to pay the tuition.  It's part of the learning.

 

 

Edited May 19, 2022 by fareastwarriors

[Thrifty3000]

3 hours ago, Minseok said:

Im out of bullets

you might be out of bullets, but hopefully the companies you invested in aren’t and are able to buy more of their own stock back for you and increase your ownership.

 

PS. Having vicariously learned a very hard lesson from Ben Graham - who had no dry powder during the Great Depression - I recommend not running completely out of bullets until the market has dropped 90%.
 

Holding onto a handful of bullets that will likely never be shot is painful at times like this, but probably not as painful as bankruptcy.

 

I like to believe the modern financial system will never result in markets dropping 90%. I also like to believe I’ll be able to pick up some BRK for $30 per share and FFH for $50 if it ever does.

[Gregmal]

You really just need to focus on buying indestructible businesses or assets continuously through the cycle. Be a little more aggressive when others are scared but it’s more about staying the course and investing in things where you won’t likely have permanent impairments on meaningful invested capital. Staggering puts sales is also a very healthy strategy for those who get cold feet buying on the declines. Sell a BRK $300 put with a June expiration. Then a $280 Sept. Then a $260 October…and so on. That way rally or not, you’re accomplishing objectives. Sitting on your hands hoping to avoid corrections historically has been a suckers play. Easier to just hedge them.

Edited May 18, 2022 by Gregmal

[Thrifty3000]

2 hours ago, fareastwarriors said:

 

If you're younger, just keep adding with every paycheck.  This correction is barely that long or deep...but sometimes you have to pay the tuition.  It's part of the learning.

I remember back in 2009, 2010, I upped my 401k contribution to the max (like 90%) and my pay check was only a few dollars. 

 

Yeah, 20% pullbacks happen pretty frequently. Maybe once every 2 years. Pullbacks of 30% or more happen probably once a decade. But 20 percenters shouldn’t come as much of a shock. This is our third pullback of this magnitude or greater since 2018. Right on schedule I say.

[Sweet]

On the Economy

 

Lots of talk by Twitter commentators and market analysts that we are in for a large economic recession on parallel with 2008, driven by inflation busting rate rises.

 

Maybe they are right, however, it has been my experience that market optimists have been on the right side of history far more often than not.

 

The last time the Fed had to get tough with inflation was in the 70s and 80s, many are dreading a reoccurrence, but few seem to recall that GPD largely kept ticking higher even when rates were at their peak.

 

Fed funds (blue line), GPD (red line) - 1972 to 1983

 

 

 

On Stocks

 

We have a decade of low rates driving valuations higher.    The average of the 10 yr US Treasury yield has historically been 4% - 5%.  A return to that average yield for Treasuries is healthy, although I think valuations in stocks will compress.

 

Some companies, are trading at very low multiples, but others are trading at sky-high valuations.  Walmart, even with the recent 20% drop in price, is trading at a PE of 25 whilst recent revenue growth has averaged at about 4% per year. 

 

On the whole the market doesn't look cheap.

 

When the Fed was raising rates in the 70s and 80s stocks did very little for nearly a decade.

 

Dow Jones - 1970 to 1983

 

 

 

History is not a predictor of course.  Overall I think the economy is OK, but I think we investors may be in for a period of under performance.  We don't really have any other alternative than to be in the market though.

 

 

 

 

Edited May 18, 2022 by Sweet

[Gregmal]

29 minutes ago, Sweet said:

Lots of talk by Twitter commentators and market analysts that we are in for a large economic recession on parallel with 2008, driven by inflation busting rate rises.

Well one, they’re on Twitter so they need to be discounted. And two, it’s been en vogue every year since 2009 to call for another 2008. That was a once in a lifetime series of events. It’s not happening again. I try to be open minded, but I typically just write off anyone who starts beating the 2008 drum. There are no parallels to that today. The stock market probably better resembles post tech bubble period and the inflation situation isn’t at all comparable to 1970s. 
 

I continue to be amazed by how investors and media alike get absolutely petrified by the word recession. We ve had them before. We ll have them again. Shorting or cashing up every time a shadow emerges for the last decade doesn’t work unless youre a guy who’s brand is peddling dog shit like Hussman or Grantham. But recall, those guys, their returns certainly don’t keep the lights on or cover the rent.

[Cigarbutt]

11 hours ago, Thrifty3000 said:

...

PS. Having vicariously learned a very hard lesson from Ben Graham - who had no dry powder during...

If so inclined, could you elaborate on two questions:

1-Do you think Ben Graham's experience (versus negative market action) is relevant now?

2-What makes you say that one of the main issues was having no dry powder?

i was under the impression that his message was that one should avoid a situation of forced selling in the context of leverage?

[Simba]

On 5/18/2022 at 7:45 PM, Sweet said:

On the Economy

 

Lots of talk by Twitter commentators and market analysts that we are in for a large economic recession on parallel with 2008, driven by inflation busting rate rises.

 

Maybe they are right, however, it has been my experience that market optimists have been on the right side of history far more often than not.

 

The last time the Fed had to get tough with inflation was in the 70s and 80s, many are dreading a reoccurrence, but few seem to recall that GPD largely kept ticking higher even when rates were at their peak.

 

Fed funds (blue line), GPD (red line) - 1972 to 1983

 

 

 

On Stocks

 

We have a decade of low rates driving valuations higher.    The average of the 10 yr US Treasury yield has historically been 4% - 5%.  A return to that average yield for Treasuries is healthy, although I think valuations in stocks will compress.

 

Some companies, are trading at very low multiples, but others are trading at sky-high valuations.  Walmart, even with the recent 20% drop in price, is trading at a PE of 25 whilst recent revenue growth has averaged at about 4% per year. 

 

On the whole the market doesn't look cheap.

 

When the Fed was raising rates in the 70s and 80s stocks did very little for nearly a decade.

 

Dow Jones - 1970 to 1983

 

 

 

History is not a predictor of course.  Overall I think the economy is OK, but I think we investors may be in for a period of under performance.  We don't really have any other alternative than to be in the market though.

 

 

 

 

 

I think the market doesn't look cheap if the "E" starts to cater, or the one-time COVID-gains are not sustainable and will be challenged going forward. All that being said, the market is climbing a wall of worry next 1-3 years.  

 

No one is really talking about this, but take a name like PayPal, their revenue was OK, but operating income / free cash flow got completely crushed. Huge re-rating (stock popped on earnings which made no sense). I'm assuming there are other names like this which Consensus Earnings need to be adjusted down.

 

Even if rates go up to 5%, I still think equities are a good place to be long-term (but multiple would get crushed). 

 

Historically inflation has been 2% and if you have a long-term view, I think it's safe to assume inflation will eventually mean revert back. 

 

To be honest, for anyone in the accumulation phase, they should be happy that stock prices are low. It just means they can accumulate more at a fair price. If inflation is contained in the next 5 years (which it most likely be), and FANG continues to deliver, I'm sure the market will be fine. 

 

This shall too pass. 

 

That being said, the market is 18.7x for trailing 2021 EPS  (5.3% earnings yield), and much cheaper on a forward looking basis. Meh.

 

Not bad. 

 

Edited May 20, 2022 by Simba