Have We Hit The Top?

[mattee2264]

5 minutes ago, Spooky said:

Feels like everyone is jumping the gun assuming the Fed will just pivot and start cutting rates early next year. We would need to see some real deterioration in the labor market to justify lowering rates in my opinion. My gut feeling is they hold rates here longer than people would like.

 

Fed has just confirmed with their dot plot that they expect three rate cuts in 2024. And Powell also said that a recession is not necessary to start cutting rates. 

 

Market got it exactly right that Powell was just posturing to try and restore what little credibility the Fed has. Now it is election year he will give markets and the US government what they want. 

[Gregmal]

48 minutes ago, Spooky said:

Feels like everyone is jumping the gun assuming the Fed will just pivot and start cutting rates early next year. We would need to see some real deterioration in the labor market to justify lowering rates in my opinion. My gut feeling is they hold rates here longer than people would like.

Who cares? It was a total mistake last year to sit around wondering "whats the fed gonna do" and its a mistake today. Thats just a dumb way to invest as theres far more important variables out there. 

[Kupotea]

35 minutes ago, mattee2264 said:

 

Fed has just confirmed with their dot plot that they expect three rate cuts in 2024. And Powell also said that a recession is not necessary to start cutting rates. 

 

Market got it exactly right that Powell was just posturing to try and restore what little credibility the Fed has. Now it is election year he will give markets and the US government what they want. 

Strongly agree with this. I’ve been cautious all year as global (ex US) growth has decelerated and the FED put up a good show of higher for longer interest rates. It made other central bankers reluctant to cut because of the fx implications. I thought there was a real chance that powell would go through with it but clearly today they’ve signaled otherwise. Now we can get a big round of global easing and all those beaten down value and industrial stocks can rip higher. Merry Christmas 

[Viking]

2 hours ago, Spooky said:

Feels like everyone is jumping the gun assuming the Fed will just pivot and start cutting rates early next year. We would need to see some real deterioration in the labor market to justify lowering rates in my opinion. My gut feeling is they hold rates here longer than people would like.

Investing 101: rule #1 - don’t fight the Fed.

I think the key to using macro as an input to your investing strategy is to not get too cute. Focus on the big things. Back in late 2021 and early 2022, when inflation was spiking and the Fed started to telegraph rate hikes, the obvious macro trade was to sell long dated fixed income and stocks (risk assets). Shift to cash. And look at all the wonderful buying opportunities that materialized over 2022. No one knew what opportunities were going to show up and when. All you had to do was get to cash and be patient.
 

Today? The Fed just told the world that they are done hiking. And the next move in Fed funds will be down. When? No idea. But you don’t need to know when. You just need to get invested. 
 

Look at the move in rates across the curve over the past 7 weeks. It has been stunning. The Fed today just poured gasoline on that fire.  The easing cycle has started and in a big, big way. 
 

Oil and gas prices are super low. That is stimulative, if it lasts.
 

The big risk for investors today is to be underweight stocks, especially the stocks that have lagged badly this year (pretty much everything other than the magnificent 7). I am not saying they will go straight up from here. But they might. Bottom line, the odds are stacked big time in your favour if your holding period is 3 or 4 years - you pretty much know most stocks will be much higher in 3 or 4 years time. You just don’t know when the big move is going to happen. And if you miss the big moves, well good luck earning a good return on your portfolio. 
 

What if we get a recession in 2024? We got our answer today. The Fed will ease aggressively. And governments are still spending like drunken sailors (fiscal easing). So expect some volatility - it will not be a straight ride up.

 

But the Fed will likely be easing regardless. The Fed will cut rates because inflation is coming down aggressively. Guess what Fed rate cuts will do in an ok economy? 
 

What about inflation? I think there is a good chance it comes back. Not super high. I think governments would love 3% inflation/year for the next 5 years… that’s how you solve a too-much-debt problem. 

 

Bottom line, the Fed, once again, has your back.
 

 

Edited December 13, 2023 by Viking

[Xerxes]

It is the “pivot party” and everyone is welcome. 
 

that is what I heard on radio 

[John Hjorth]

2 hours ago, Gregmal said:

Man idk. A lot of ridiculous forecasts and predictions were made. We were told all these kinda dumb little 1 and 2 percents and insignificant monthly rounding errors forecast absurd price targets for “the markets”. Recessions have been “called” for more than 2 years now; they’ve always been “just around the corner”…now the saga is over and we re at ATHs basically but I’m sure we ll still hear how we shoulda been in bonds or that the next big scary drop is due any minute now. 
 

Biggest takeaway isn’t really the importance of spiking the football, but rather to ignore the hysteria and think with one’s head, in the real world, and that stocks tend to do quite well over time. It’s not much more complicated than that. 

 

 

Greg [ @Gregmal],

 

At this time, I'm plowing through - I think - eight, or so, books simultainiously, page by page.  I seldom really in this excercise meet something  really new, or in any other dimension thought provoking, related to investing, but then again - it actually happens.

 

One of those eigth books in progress readingwise is :

 

"What never changes in a changing world

Same as ever

Timeless lessons on risk, opportunity, and living a good life"

 

by Morgan Housel.

 

His definition of risk, ref. chapter 3, p. 15 is :

 

"Risk Is What You Don't See" [  ] [How does that tie with such a discussion of risk here in this topic on CoBF?]

[TwoCitiesCapital]

3 hours ago, Viking said:

It appears we have seen the peak in interest rates for this cycle. Wow! The Fed meeting today was shockingly dovish. Materially lower interest rates will be stimulative for the economy. How do stocks, especially small caps which are cheap, not rip higher? Look at all the high dividend stocks - 6 to 7% yields? Nuts. 
 

Soft landing is looking more and more likely…

 

 

I dunno about a soft landing, but agree the top is probably in for rates. Lower rates ARE stimulative - but we're only seeing lower rates on portion of the curve, it's only a big move from the the recent highs but is pretty in line with where they've been all year, AND it takes time for the stimulative effects to work through. 

 

I don't want to get ahead of ourselves here - the picture today isn't dramatically different from the picture in Q1 except the slow and continued deterioration of fundamentals. 

 

2 hours ago, mattee2264 said:

Something fishy about the Fed signalling rate cuts during an election year when core PCE is still twice the target rate. 

 

Wasn't it just two weeks ago that Powell told the market not to speculate about rate cuts. Then lo and behold the Fed confirm that rate cuts are now on the table.

 

The Fed has no clue what they're talking about. You're just as likely to find someone here who has a better idea of the future for rates than the Fed. Remember, despite being ones largely in control of the business cycle and literally paid to take the pulse of the economy, the Fed has not yet correctly called a single recession. 

 

25 minutes ago, Viking said:

Investing 101: rule #1 - don’t fight the Fed.

I think the key to using macro as an input to your investing strategy is to not get too cute. Focus on the big things. Back in late 2021 and early 2022, when inflation was spiking and the Fed started to telegraph rate hikes, the obvious macro trade was to sell long dated fixed income and stocks (risk assets). Shift to cash. And look at all the wonderful buying opportunities that materialized over 2022. No one knew what opportunities were going to show up and when. All you had to do was get to cash and be patient.
 

 

+1 

25 minutes ago, Viking said:

 

Today? The Fed just told the world that they are done hiking. And the next move in Fed funds will be down. When? No idea. But you don’t need to know when. You just need to get invested. 

 

This is where we disagree. Fed halting hikes was NOT particularly bullish in 2001/2002. It was not bullish in 2006/2007. And it was NOT bullish in 2018/2019. I don't think it's going to be bullish this time around either. 

 

The real recession risk starts when the yield curve uninverts and that occurs when the Fed cuts the front end. Sometimes you get a pop in risk markets leading  into that uninversion, but then it's quickly unwound.

 

Sure - maintain your exposure so you can sell into that possible rally. But I don't think it makes sense to count on that rally and INCREASE your risk at this time knowing that in most other instances it's been a very bad sign for 1-3 year forward returns. 

 

25 minutes ago, Viking said:

 

Oil and gas prices are super low. That is stimulative, if it lasts.

 

Stimulative? Or reflective of a weaker consumer that is supposedly very strong?

 

25 minutes ago, Viking said:

 

The big risk for investors today is to be underweight stocks...bottom line, the odds are stacked big time in your favour if your holding period is 3 or 4 years - you pretty much know most stocks will be much higher in 3 or 4 years time. 

 

 

I think you'll be right, in about 6-12 months time. Again, cuts typically precede large drawdowns. Only then do you get the stimulative recovery. Will stocks be higher in 3-4 years? Perhaps. But I think the historical precedent is for them to go significantly lower first which is why I'm wary of going 100% long here. 

 

25 minutes ago, Viking said:

What if we get a recession in 2024? We got our answer today. The Fed will ease aggressively. And governments are still spending like drunken sailors (fiscal easing). So expect some volatility - it will not be a straight ride up.

 

Cuts didn't stop the prior drawdowns in 2000, 2007, or even 2018-2020. I don't think we're going to escape the recessionary drawdown this time either. 

 

25 minutes ago, Viking said:

 

 

 

25 minutes ago, Viking said:

 

 

 

[Gregmal]

42 minutes ago, John Hjorth said:

"Risk Is What You Don't See"

I "don't think most saw" the risk that at the ending of the hike cycle and inflation hoax that markets would be at ATHs...Never even sniffed those low targets and sans a few hour test of SPY 3500s, nothing materially bad really happened anywhere except some bonds and shitco banks LOL

[Gregmal]

Also think another obvious lesson here is the whole livin in the real world thing. Wayyy tooo much of this "we had inflation in the 70s and this happened then so thats whats gonna happen now", "every time the curve has inverted we get a recession", etc stuff....markets are dynamic and evolving. History repeats and rhymes and sometimes doesnt do jack. Relying on things other than the textbook are crucial to successful navigation of the markets. 

 

I mean no better example of living in the real world than seeing the market correlation to CPI...understanding how CPI is constructed(cough flawed/rigged), and then trading that wind and unwind...was easy if you saw it. If not you went around thinking things were what the talking heads told you.

Edited December 14, 2023 by Gregmal

[james22]

6 minutes ago, Gregmal said:

I "don't think most saw" the risk that at the ending of the hike cycle and inflation hoax that markets would be at ATHs...

 

The "risk" few ever see are those that result from compounding (Housel's chapters Overnight Tragedies and Long-Term Miracles, Tiny and Magnificent, and The Wonders of the Future).

[Spooky]

3 hours ago, Gregmal said:

Who cares? It was a total mistake last year to sit around wondering "whats the fed gonna do" and its a mistake today. Thats just a dumb way to invest as theres far more important variables out there. 

 

Agree with this. I'm not basing investment decisions on speculation about the Fed and am fully invested. Just have a feeling there will be some more volatility ahead.

[james22]

... there’s a school of thought where the central bank and fiscal policymakers ought to err on the side of doing less - in both directions - so that we can allow the economy to heal itself against minor scrapes and bruises.

 

We forget sometimes that there are 325 million Americans who mostly wake up each day seeking to better their situation, ease their troubles, fill their bellies, support their family members, enjoy experiences and acquire higher status. This is hardwired into the culture, into our DNA.

 

So when an economic shock occurs, it will temporarily impact these pursuits, but not for long. Eventually, we want the things that we want again. Someone is going to make money selling them to us. This is how the economy can stumble and then heal.

 

https://www.downtownjoshbrown.com/p/economy-like-human-body-let-heal

[Santayana]

You'll never win being overly defensive, but I have no problem hedging a bit with puts.  The primary reason being that it protects me from myself hitting the panic button when some volatility inevitably shows up. 

[WayWardCloud]

It's been a while since this board has felt so optimistic, me included.

Curious to see what cataclysm is right around the corner

[Paarslaars]

4 hours ago, Santayana said:

You'll never win being overly defensive, but I have no problem hedging a bit with puts.  The primary reason being that it protects me from myself hitting the panic button when some volatility inevitably shows up. 

 

I don't hedge, I just suffer through it... when things get bad I use some margin and don't look at my portfolio for a while. 

[mattee2264]

Funny that the Fed Put has morphed into the Fed Call. Markets close to ATHs and Powell comes out and congratulates himself on beating inflation and says rate cuts are now on the table and don't worry guys inflation will be back on target in 2026. 

 

 

[mattee2264]

I think the risk for markets is that the S&P 500 is already trading at 20x forward earnings. The long bond is already below 4%. The S&P 500 is already at levels last achieved when the Fed Funds rate was close to zero, the Fed was printing money like crazy, the US government was doling out handouts to all and sundry, and the US economy was enjoying one of the strongest economic recoveries in the post WW2 period. 

 

And to the extent interest rates go lower it will be because growth is slowing down considerably and most Wall Street forecasts are pencilling in 10%+ EPS growth for the S&P 500 in 2024 and a lot faster growth for Mag7 and the like. 

 

Also the Fed seem to make it up as they go along. While I wouldn't discount a political motivation for promising rate cuts in an election year especially with a lot of government debt requiring refinancing, they will look very stupid if inflation increases in 2024 and they try to go ahead with rate cuts. 

[Jaygo]

Inflation was not caused by a hot economy it was caused my money printing and policies restricting production. (Government policies and not animal spirits) Rates were brought in to help cool inflation but rather than fix the issue of production it likely slowed down those repairs as well as took some purchasing power away from consumers. 
 

if they drop rates I think we can say goodby to the recession and we will get back to the 
Decent but not crazy economy of 2019. 
 

this will really help China and Germany too by putting the consumer back in charge. Toss in a bit of near-shoring and we may just get those earnings growth numbers. 
 

The entire world is in recession bar the USA and a few other outliers. It’s all rates of the big dog 

 

[gfp]

3 hours ago, mattee2264 said:

Funny that the Fed Put has morphed into the Fed Call. Markets close to ATHs and Powell comes out and congratulates himself on beating inflation and says rate cuts are now on the table and don't worry guys inflation will be back on target in 2026. 

 

 

 

I'm sure the short sellers don't feel like they have a "Fed Call" in their pockets to bail them out

[mattee2264]

Interesting that the Bank of England have gone in a different direction and admitted that inflation isn't under control and they will have to keep rates higher for longer even as the economy plunges into recession. I suspect a lot of other central banks that are less politically motivated will take the same approach. 

 

Ironically monetary and fiscal easing is going to weaken the dollar and add to inflationary pressures in the US economy. 

 

 

[Spooky]

8 hours ago, WayWardCloud said:

It's been a while since this board has felt so optimistic, me included.

Curious to see what cataclysm is right around the corner

 

I know right, it just seems too easy...

[Jaygo]

17 minutes ago, mattee2264 said:

Ironically monetary and fiscal easing is going to weaken the dollar and add to inflationary pressures in the US economy. 

not if everyone is doing it. 

[vinod1]

It is okay to enjoy the rally guys  

 

As value investors we might want to invest to this song

 

 

 

But we would enjoy life more if we lived by

 

 

[TwoCitiesCapital]

12 hours ago, james22 said:

... there’s a school of thought where the central bank and fiscal policymakers ought to err on the side of doing less - in both directions - so that we can allow the economy to heal itself against minor scrapes and bruises.

 

We forget sometimes that there are 325 million Americans who mostly wake up each day seeking to better their situation, ease their troubles, fill their bellies, support their family members, enjoy experiences and acquire higher status. This is hardwired into the culture, into our DNA.

 

So when an economic shock occurs, it will temporarily impact these pursuits, but not for long. Eventually, we want the things that we want again. Someone is going to make money selling them to us. This is how the economy can stumble and then heal.

 

https://www.downtownjoshbrown.com/p/economy-like-human-body-let-heal

 

+1 

 

I've long been an advocate for the Fed to stop fucking with money supply and rates and just go back to being a bank regulator and a lender of last resort. Give us a decade of not dicking around with the business cycle and see where we land. 

All the Fed really does really does in hindsight is follow the 2-year treasury anyways - we don't need a roundtable of highly paid experts to do what the market does for free. 

 

4 hours ago, mattee2264 said:

I think the risk for markets is that the S&P 500 is already trading at 20x forward earnings. The long bond is already below 4%. The S&P 500 is already at levels last achieved when the Fed Funds rate was close to zero, the Fed was printing money like crazy, the US government was doling out handouts to all and sundry, and the US economy was enjoying one of the strongest economic recoveries in the post WW2 period. 

 

And to the extent interest rates go lower it will be because growth is slowing down considerably and most Wall Street forecasts are pencilling in 10%+ EPS growth for the S&P 500 in 2024 and a lot faster growth for Mag7 and the like. 

 

+1 

 

2 hours ago, mattee2264 said:

Interesting that the Bank of England have gone in a different direction and admitted that inflation isn't under control and they will have to keep rates higher for longer even as the economy plunges into recession. I suspect a lot of other central banks that are less politically motivated will take the same approach. 

 

Other central banks aren't as privileged to to have a guaranteed bid on their currency for global trade. The US is somewhat lucky in the regard that we can run massive twin deficits and still gets plenty of demand for the old greenback. 

[mattee2264]

What I do find very suspect is that 2 weeks ago Powell said it was premature to speculate about rate cuts and yesterday rate cuts are now on the table for discussion. 

 

Powell is supposedly data dependent. Well over the last 2 weeks ISM Services report was a clear beat, November payrolls report was a clear beat with unemployment coming in lower than expected and average hourly earnings hotter than expected. U Michigan Consumer Sentiment report smashed expectations, CPI Inflation came in hotter than expected, and today retail sales beat expectations as well. Financial conditions have loosened massively making a mockery of Fed comments that the steepening of the yield curve meant the market could do some of the tightening for them. 

 

So data is hotter. Inflation is still double target. No evidence of recession either in the unemployment data or the retail sales data. All that has really changed for the worse is Biden's approval rating.