Have We Hit The Top?

[UK]

"careful you must be when sensing the future Anakin, the fear of loss is a path to the dark side"

[Gregmal]

Humor often adds context but it’s true. Like the best compliment most of these guys can receive is some variation of “oh you’re so smart” or “wow that’s a really insightful bit of analysis”….stuff that gets other people talking about them. Much is marketing because they are analysts; they don’t actually lift weight.

 

Ask for performance numbers or even just a lame, raw, aggregate of hit rate of their predictions…eh we don’t go there. 
 

Example right now? See all those people who were super bearish sub SPY 4000 claiming “called it’s” and “told you sos” about the yield curve correcting and resulting in a market decline? They werent right. They missed the money making opp. But that’s not what they were ever after.

[UK]

https://www.morningstar.com/news/marketwatch/20231005223/one-percenter-depression-and-giant-sector-rotation-how-a-hedge-fund-manager-sees-bond-crisis-playing-out

 

As for the bond market, he says it's "not panicky at all."

 

He said the bottom can't be in while 10-year Treasury bonds are still inverted relative to shorter-term bonds, and said there's no reason why the yield can't go to 6%, a median area for the last 50 years, and then probably overshoot that.

 

"I wouldn't be surprised if it got back to the teens," which he sees happening over time "unless our government has some fiscal sanity," said Kuppy.

 

"Think how ridiculous it is that we're running an effectively 8% nominal GDP, 8% deficits in the boom, probably like teens in the next recession...payroll tax was up 9% year over year for Q3, so the economy is really strong. So how is the 10 [year Treasury yield] at 4% and change? It makes no sense. It should have a 6% handle."

 

But a 6% yield is a problem for the Wall Street guys it will make "insolvent," due to the leverage they use -- borrowing money to trade elsewhere. "And so you have these Wall Street guys crying and crying and crying, but my friends in the real economy, I mean it hasn't been better for them. It really is a one percenter depression, that's all it is," he said.

 

Kupperman sees high yields causing pain at some point because many businesses have to fund themselves. "They did 5-year bonds in 2021 and 2022 and you know they've got three or four years left on it and are putting it back to work in money markets and actually earning a positive carry. That's not sustainable long term." (Positive carry refers to when benefits of holding an asset exceed its costs.)

 

Kupperman says he'd keep close eye on the banks for signs of trouble, noting that Goldman Sachs (GS) "is in freefall" -- the stock has been dropping since September.

 

"You have lots of sectors in the economy that are going to do just fine and you have lots of sectors that are going to be terrible and I think you're not really going to see a stock market crash as much as a giant sector rotation," he said.

[Dinar]

https://aswathdamodaran.blogspot.com

 

Take from Damodaran

[Gregmal]

What puzzles me is why people and outlets keep getting away with making all these “economy is in free fall” claims? Like that’s clearly not the case. Most of the economy is showing it’s both sound and resilient. And despite this, for the past two years we ve had people unaccountable for repeated claims to the contrary. 
 

I guess this is why I just prefer the stock market vs listening to every asshole looking for attention, or subscribers, or just ego stroking. In the market you can typically see the value of your opinions. Everywhere else it seems people just become broken records figuring hey or I hold on long enough eventually I’ll get to take my victory lap. It’s pathetic.

Edited October 5, 2023 by Gregmal

[TwoCitiesCapital]

33 minutes ago, UK said:

"Think how ridiculous it is that we're running an effectively 8% nominal GDP, 8% deficits in the boom, probably like teens in the next recession...payroll tax was up 9% year over year for Q3, so the economy is really strong. So how is the 10 [year Treasury yield] at 4% and change? It makes no sense. It should have a 6% handle."

 

I mean, I don't disagree with him, but this is EXACTLY what was done from 2008-2021 where we ran massive deficita and interest rates were below 3.5% at the longer-end for much of that time. I'd need to hear why he believes this is different? 

 

33 minutes ago, UK said:

I mean it hasn't been better for them. It really is a one percenter depression, that's all it is," he said.

 

That's an interesting way of characterizing negative real income growth for the 3rd year running. 

 

2020 was a boon to the common man given all of the transfer payments. It's kind of been shitty since with real wage growth trailing inflation basically every year since. 

 

33 minutes ago, UK said:

 

"You have lots of sectors in the economy that are going to do just fine and you have lots of sectors that are going to be terrible and I think you're not really going to see a stock market crash as much as a giant sector rotation," he said.

 

It's strange to me he acknowledges "lots of sectors are going to be terrible " but characterizes that as a "one percenter depression". Because typically it's not the 1%ers being laid off when the sector does terribly.....it's them doing the laying off. 

Edited October 5, 2023 by TwoCitiesCapital

[Spekulatius]

GS in free fall? If anything they have been outperforming the other banks, imo. I am much more concerned about other commercial banks and even BAC. Also I think if the interest rates and 7%+ mortgages are here to stay, real estate will crack (both residential as well as commercial).

[TwoCitiesCapital]

11 minutes ago, Spekulatius said:

GS in free fall? If anything they have been outperforming the other banks, imo. I am much more concerned about other commercial banks and even BAC. Also I think if the interest rates and 7%+ mortgages are here to stay, real estate will crack (both residential as well as commercial).

 

I am also concerned about the banks in this scenario, but probably not BofA. 

 

As proven time and time again, too-big-to-fail is a competitive advantage. Each bank that fails has deposits that flee to other banks buying the survivors more liquidity/time without threatening their own solvency.

 

I imagine the large banks will capture a disproportionate amount of those deposits. I own a small bit of USB speculating that it'll make it through alive. If things get really bad, I'll add JPM and/or BofA at the right prices to benefit from the further consolidation of the industry. 

 

Everyone seems to be believing higher for longer, but this is the same Fed that totally missed the inflation of 2021 to begin with. Any of their expectations beyond 6-months should basically be ignored. Lower rates will be an immediate salve to the financial sector, even if accompanied by increases on defaults, and I imagine there will be some decent opportunities in financials before then. 

Edited October 5, 2023 by TwoCitiesCapital

[Gmthebeau]

44 minutes ago, TwoCitiesCapital said:

 

I am also concerned about the banks in this scenario, but probably not BofA. 

 

As proven time and time again, too-big-to-fail is a competitive advantage. Each bank that fails has deposits that flee to other banks buying the survivors more liquidity/time without threatening their own solvency.

 

I imagine the large banks will capture a disproportionate amount of those deposits. I own a small bit of USB speculating that it'll make it through alive. If things get really bad, I'll add JPM and/or BofA at the right prices to benefit from the further consolidation of the industry. 

 

Everyone seems to be believing higher for longer, but this is the same Fed that totally missed the inflation of 2021 to begin with. Any of their expectations beyond 6-months should basically be ignored. Lower rates will be an immediate salve to the financial sector, even if accompanied by increases on defaults, and I imagine there will be some decent opportunities in financials before then. 

I think the banks will go lower there is nothing but bad news coming for them.  The FED will stay higher for longer until the job market cracks. The higher rates will eventually bite it just takes awhile when people have termed out debt at low rates, but all the zombies will eventually be forced to pay higher rates, bankruptcies will increase, unemployment will go up, people won’t put as much money into 401ks when they don’t have jobs, people will have to start repaying their student loans, housing is leveling off and may eventually crack but probably just go sideways for years, stocks will eventually reprice lower as the PE is way to high at these interest rates.

[UK]

1 hour ago, TwoCitiesCapital said:

Everyone seems to be believing higher for longer, but this is the same Fed that totally missed the inflation of 2021 to begin with. Any of their expectations beyond 6-months should basically be ignored. Lower rates will be an immediate salve to the financial sector, even if accompanied by increases on defaults, and I imagine there will be some decent opportunities in financials before then. 

 

I do not disagree with you here (and also comments above re Kuppy) and just prefer not to believe anyone very much on this. Figuring out were we are currently, as Marks proposes, is hard enought for me (yet after minute or two, he is also predicting sea change himself:)). But I will cite another article anyway:

 

https://www.bloomberg.com/news/articles/2023-10-05/chicago-fed-s-austan-goolsbee-sees-puzzle-in-recent-ust-rate-spike

 

Even so, Goolsbee urged market participants to believe the central bank when it says it’s going to do what it takes to bring inflation back down to 2%, citing Silicon Valley Bank as a cautionary tale. “Remember the lesson of Silicon Valley Bank,” he said. “Silicon Valley Bank knew they don’t have a traditional deposit franchise — and they knew they hold a bunch of bonds and that the rates are going up — so I could not for the life of me understand, why didn’t they just hedge?” “They did hedge, but then they thought that the Fed wouldn’t stick it out and that they would make more money if they got rid of the hedges, and so they got rid of them. And that’s yet another in the long line of lessons: Don’t bet against the Fed. That’s not a good idea.”

 

And yet, before he said:

 

That move has rekindled worries over the potential for something to “break” in the financial system. Memories of Silicon Valley Bank, which experienced a run on its deposits in March after taking a big hit on its bond portfolio, are still fresh. Tighter financial conditions could also bring about a larger-than-intended slowdown in the economy. “We absolutely monitor that and are thinking about that, and that could be a blow to either the financial or the real economy,” Goolsbee said. “If there is a credit crunch — if those things materially deteriorate in a way that we haven't seen, but feared seeing, over the last six months — we will adjust, and we’ve got to think about it. By law, we have a dual mandate.”

 

Go figure:))). But maybe: a. don't bet against the Fed b. Fed can adjust and change its mind quite quickly.

[UK]

https://www.wsj.com/articles/bond-market-10-year-treasury-yields-rise-federal-reserve-8926812a?mod=hp_opin_pos_1

 

What do you know: The U.S. has a bond market again. That’s the underlying significance of the recent rise in yields for longer-term Treasurys, especially the all-important 10-year note, which is triggering a freakout in much of the financial press. This isn’t to make light of this major economic event and its risks for the economy. But 15 or so years of unprecedented low interest rates and central-bank market distortions are making it impossible for some commentators to recognize “normal” when it arrives.

...

This era is over. This means yields are rising in part because they can, since central banks finally are dialing back the monetary stimulus. This is good news. The era of low rates and quantitative easing can’t be described as a smashing success. Central bankers and their academic cheerleaders say they spared us a Great Depression-esque deflation after the 2008 financial panic and the pandemic. But their policies badly distorted investment decisions, pumped up asset prices and fueled some of the biggest peacetime fiscal blowouts on record. Then came the worst inflation in 40 years. Compared to that record, a modestly positive inflation-adjusted long-term interest rate—which is what the U.S. finally has—is no great threat to prosperity. More normal yields will discipline markets in ways that could boost growth over time. Higher real rates are forcing businesses to invest in projects that will generate real returns. People take more care when money isn’t free: fewer investments in SPACs, NFTs and other exotic assets stirred up by low rates and QE; but more investment in areas that can increase productivity and real wages.

...

The jolt of higher rates no doubt carries risks, especially for indebted firms or projects that must refinance. Higher rates will squeeze some corners of the economy, such as commercial real estate, where bubbles developed. Some banks are carrying losses on their balance sheet if they didn’t hedge their interest-rate risk, a la Silicon Valley Bank. More cautious borrowing may slow the economy in coming months. Higher rates are also bad news for the federal fisc, which must refinance trillions of dollars in debt at higher rates. Treasury secretaries across three administrations failed to take advantage of low rates by issuing more longer-term debt. The silver lining is that this may provide some discipline to our spendthrift political class as annual interest on the debt nearly matches the entire Pentagon budget. These worries are causing some worriers to urge the Fed to do something. That might mean slowing the pace of quantitative tightening, by which the Fed currently lets $95 billion in maturing Treasurys and mortgage-backed securities roll off its balance sheet each month. Yet to do this now would amount to a form of yield-curve control on the sly because the Fed would be signaling it thinks there’s a correct level for longer yields. This has failed in Japan, where the Bank of Japan continues to push futilely against market signals as investors keep pushing the yield on Japanese government bonds higher. It would also hurt the Fed’s anti-inflation credibility. There may be financial and corporate casualties, perhaps serious ones, as the economy unwinds the legacy of unnaturally low rates. But the market exists to price that risk too. Whatever else happens, it’s welcome news that the Fed at long last is letting the market do its vital work again.

 

[Spekulatius]

7 hours ago, UK said:

Higher rates will squeeze some corners of the economy, such as commercial real estate, where bubbles developed.

I am curious why the WSJ think that only commercial RE will be affected. We all know that the higher interest rates has removed sellers from the market because they have low cost mortgages but that's not a lasting effect.

 

At some point, residential RE will have to come down with higher mortgages because the key metric affordability is a multi decade low. There simply won't be buyers at current prices and with current mortgage rates.

[sleepydragon]

1 minute ago, Spekulatius said:

I am curious why the WSJ think that only commercial RE will be affected. We all know that the higher interest rates has removed sellers from the market because they have low cost mortgages but that's not a lasting effect.

 

At some point, residential RE will have to come down with higher mortgages because the key metric affordability is a multi decade low. There simply won't be buyers at current prices and with current mortgage rates.

 

Went to see a crapy house which was sold two years ago and now selling for 30% higher. It's a house with basement recently flooded due to heavy rain.  8 people shows up at the open house on Saturday. Got emails from broker on Monday night asking final bids from everyone. This is in CT.

Because of covid, there seems a lot of family formations, and everyone seems is moving from NYC

 

[Spekulatius]

8 minutes ago, sleepydragon said:

 

Went to see a crapy house which was sold two years ago and now selling for 30% higher. It's a house with basement recently flooded due to heavy rain.  8 people shows up at the open house on Saturday. Got emails from broker on Monday night asking final bids from everyone. This is in CT.

Because of covid, there seems a lot of family formations, and everyone seems is moving from NYC

 

Same here in my area, supply and demand determines prices, but I think those are more short term. LT, it's affordability.

 

For example, when prices start to fall, buyers immediately get more cautious and pull back. There is a lot of reflexivity in buyers and sellers behavior.

[Gmthebeau]

17 minutes ago, Spekulatius said:

I am curious why the WSJ think that only commercial RE will be affected. We all know that the higher interest rates has removed sellers from the market because they have low cost mortgages but that's not a lasting effect.

 

At some point, residential RE will have to come down with higher mortgages because the key metric affordability is a multi decade low. There simply won't be buyers at current prices and with current mortgage rates.

 

My first mortgage was 8% years ago, so I would say that the endless stream of people saying people won't buy are wrong.  This was NORMAL decades ago.  The recent 15 years was an ANOMALY.  There will be less buyers but there are also less sellers and low inventory.   I think residential at worst just goes sideways in price.  I don't prices will come down in any significant way.

[Spekulatius]

9 minutes ago, Gmthebeau said:

 

My first mortgage was 8% years ago, so I would say that the endless stream of people saying people won't buy are wrong.  This was NORMAL decades ago.  The recent 15 years was an ANOMALY.  There will be less buyers but there are also less sellers and low inventory.   I think residential at worst just goes sideways in price.  I don't prices will come down in any significant way.

My first mortgage was 6 7/8% as well but my house was way cheaper relative to my salary and affordability was better. I suspect that was the case when you puchased your house as well.

 

What I think will happen is that the existing pool of buyers get exhausted while sellers (due to life changes etc) will trickle back into the market over time because they have to. That will shift the balance towards a sellers market where prices will be more determined by affordability.

 

This will only play out this way when mortgage rates remain high. If mortgage rates go down both sellers and buyers will get into the market and transaction volume will increase, but maybe not prices.

 

In any case, the buyers at current prices have a very poor risk reward. They could get stuck with 8% mortgage and if home prices go down, they might not be able to refinance, if their mortgage goes underwater, even if interest rates go down a little.

 

Edited October 6, 2023 by Spekulatius

[Gmthebeau]

3 minutes ago, Spekulatius said:

My first mortgage was 6 7/8% as well but my house was way cheaper relative to my salary and affordability was better. I suspect that was the case when you puchased your house as well.

 

What I think will happen is that the existing pool of buyers get exhausted while sellers (due to life changes etc) will trickle back into the market over time because they have to. That will shift the balance towards a sellers market where prices will be more determined by affordability.

 

This will only play out this way when mortgage rates remain high. If mortgage rates go down both sellers and buyers will get into the market and transaction volume will increase, but maybe not prices.

 

In any case, the buyers at current prices have a very poor risk reward. They could get stuck with 8% mortgage and if home prices go down, they might not be able to refinance, if their mortgage goes underwater, even if interest rates go down a little.

 

 

What you suggest may eventually happen but I think it will take many years maybe even a decade.  I don't think we are going back to low rates again, as that would set off inflation again which has still not even been reversed.   I would agree buyers today have a poor risk/reward, but most people who buy just want a house and many times people are willing to overpay just to get the house they want.    I don't know how "housing affordability" is calculated but I suspect there have been changes in the economy, peoples benefit packages etc that make those comparisons today to be irrelevant to decades ago.  For example, UPS workers with no degree are reportedly making 180k.  I find it hard to believe there is a housing affordability problem.   Auto workers asking for 30-40% pay increase.  Health care workers going on strike.   Most people today want a new home (or mostly new) compared to decades ago when people bought homes that were older.  I don't think the comparisons are accurate.

[Spekulatius]

@Gmthebeau I agree, it will take a while to play out, but not a decade. I think it will be more evident over time that the 2009-2021 time frame was a huge historical outlier in terms of interest rates.

 

The negative interest rates for sovereign debt may have been the biggest bubble ever

[changegonnacome]

Cost of living and end of stimmies/student loan seems to be tempting more labor off the sidelines - it’s an impressive number 

 

MoM nominal wage increases have moderated too….those numbers if they were stay down where they are would indeed be consistent with 2% inflation….
 

The only issue being what company have you ever worked that institutes a pay rise in August…..and given the level of worker comp friction/strikes…. it’s clear a wave of inflation catchup wage increases are coming…..likewise EoY performance & comp season is rolling around AGAIN with a super tight labor market backdrop.

 

Pluses and minuses but I think we are headed for an inflation flare up in the next number of months….which is gonna cement the higher for longer thesis

[gfp]

Anecdotally, I have noticed more than a couple of our tenants taking on second jobs in the last month or so.  I get the sense that savings are depleted for our tenants.  Slight increase in bounced rent payments from timing issues with the bank suggests there wasn't much padding in that account before the paycheck cleared.  I certainly don't feel like I can put through rent increases at the moment, despite the increases in insurance and property taxes.

 

I think inflation has settled around 2.5% and that should be fine.  There is no reason to set off an unpredictable domino effect of economic weakness just to tick off (and likely blow right through) that last 50 basis points.

[Gregmal]

1 minute ago, changegonnacome said:

Cost of living and end of stimmies/student loan seems to be tempting more labor off the sidelines - it’s an impressive number 

 

MoM nominal wage increases have moderated too….those numbers if they were stay down where they are would indeed be consistent with 2% inflation….
 

The only issue being what company have you ever worked that institutes a pay rise in August…..and given the level of worker comp friction/strikes…. it’s clear a wave of inflation catchup wage increases are coming…..likewise EoY performance & comp season is rolling around AGAIN with a super tight labor market backdrop.

 

Pluses and minuses but I think we are headed for an inflation flare up in the next number of months….which is gonna cement the higher for longer thesis

Yea outside of now even the people calling for a housing crash seeming to have pulled a 180(lol), the report today seemed perfectly consistent with what a more or less best case scenario would be. Jobs still strong. Wages moderating. Seems perfect setup to get the Fed their pointless but desired final 25 bps hike. 
 

I wouldn’t be shocked to see a bit of a flare up, but then you turn around and apparently $10 a barrel fell off the past week. Gas prices at the pump are coming down. Rents are solid but not moving anywhere really. 
 

I haven’t really been doing a ton lately in the market other than cleaning a few things up and cashing in hedges, I have what I like and otherwise it just seems there’s a ton of people screaming for attention with their forecasts but most of it is more geared towards next week or next month and I just don’t care about that stuff at all.
 

My guess is the outlook everyone had in July is still the outlook. Solid economy, solid jobs, one more hike, then hold for a few years. Not something that should be creating brown stains in ones undies.

[Spekulatius]

I am not sure how widespread this is, but talked to tech (in manufacturing) who quit his job with the company I am working for to take a higher paying job in a food joint. He was working swings (evening shift) and likes the new hours better do. Benefits are about equivalent.

 

Hard to believe but manufacturing jobs were once considered the ones who get you in the (lower) middle class and now fast food joints pay more. LOL.

Edited October 6, 2023 by Spekulatius

[Gregmal]

4 minutes ago, Spekulatius said:

I am not sure how widespread this is, but talked to tech (in manufacturing) who quit his job with the company I am working for to take a higher paying job in a food joint. He was working swings (evening shift) and likes the new hours better do. Benefits are about equivalent.

 

Hard to believe but manufacturing jobs were once considered the ones who get you in the (lower) middle class and now fast food joints pay more. LOL.

Yea this is kinda emblematic of the decades old problem. Fortune 500 America has systematically ground employees down to where they just don’t have a real career path upward unless they move. Made them truly believe they are interchangeable and replaceable.
 

I’ve mentioned before my sister at Lockheed has a good job. But is probably paid 80% of the fair market rate for her job. If you go to management and ask for a raise they just tell you to wait til next annual review except even those never eclipse 3-5%.

 

My wife was super loyal to a similar large corporation because there was a decent work/life balance. She got offered 35% more from a headhunter with the catch being she had go in full time. So she went to HR and said she’d stay for a 15% raise as long as she could continue doing hybrid. They agreed and then 3 months later reneged and said everyone back to the office 4 days a week. See ya. She left.
 

Establishment corporate America is finally getting what it deserves. There’s reasons wages haven’t kept up with inflation now for 5 fuckin decades! It’s got nothing to do with anything occurring in the last 3 years. Hopefully the Fed isn’t fully able to stop the current momentum in favor of their lobbyist and corporate friends.

[tede02]

2 hours ago, Gmthebeau said:

 

My first mortgage was 8% years ago, so I would say that the endless stream of people saying people won't buy are wrong.  This was NORMAL decades ago.  The recent 15 years was an ANOMALY.  There will be less buyers but there are also less sellers and low inventory.   I think residential at worst just goes sideways in price.  I don't prices will come down in any significant way.

 

I agree that low inventory will put a floor on housing prices. Maybe they come down 10% but nothing like we experienced post GFC. I bought my first house in late 2008 and the situation was completely opposite, there were forclosures everywhere. Now there is nothing to pick from. 

 

I think I timed the mortgage market perfectly with a refi in Aug/Sept 2021. I noticed how low nominal rates were AND how tight spreads got. Locked in 2.375% on a 30 year with no points. In hindsight, I wish I would have paid a point and locked in at 2%! 

[gfp]

1 minute ago, tede02 said:

Locked in 2.375% on a 30 year with no points

 

It doesn't get much better than that!  Hope you like your house and want to stay for a long time