Have We Hit The Top?

[SharperDingaan]

You folks might want to re-calibrate, as the Petrodollar recycling has now ceased.

 

When you don't have to buy USD to pay for things, the US has to try harder to make the USD attractive. If the Fed cannot raise rates (and thereby lower inflation), it will have to devalue the USD instead, and raise employment as trade moves on-shore. Higher discount rates lowering valuations.

 

SD 

[Red Lion]

3 hours ago, SharperDingaan said:

You folks might want to re-calibrate, as the Petrodollar recycling has now ceased.

 

When you don't have to buy USD to pay for things, the US has to try harder to make the USD attractive. If the Fed cannot raise rates (and thereby lower inflation), it will have to devalue the USD instead, and raise employment as trade moves on-shore. Higher discount rates lowering valuations.

 

SD 

 

So lower rates and lower valuations on the horizon you think? Or did I misread this? 

[SharperDingaan]

18 hours ago, RedLion said:

 

So lower rates and lower valuations on the horizon you think? Or did I misread this? 

 

Higher US rates near term, devaluing USD long term.

 

When the world doesn't need USD anymore to pay for its purchases (oil); all else equal, if the US is to maintain the same level of USD demand, one approach is to raise interest rates so as to be competitive. Higher interest rates, cooler economy, lower inflation rate; great for the economy ... not so much for the market.

 

Another approach is long-term USD devaluation relative to competitors. Manufacturing moves on-shore, higher USD demand as more US manufactured goods are bought. Same interest rate, higher employment, hotter economy, higher inflation rate; not so hot for the economy ... but great for the market. 

 

If you believe that reserve currency (USD) is in the process of being replaced with a 'supra-national' sovereign digital currency .... weakening reserve currency status is very smart. If you think otherwise .... it's dumb as a rock. 

 

Lot of opportunity, but you need to be nimble.

 

SD 

Edited June 12 by SharperDingaan

[changegonnacome]

2 hours ago, SharperDingaan said:

When the world doesn't need USD anymore to pay for its purchases (oil)

 

Re: USD and US asset dynamics.......pretty clear that China's hardcore mercantilist days are behind it.....part of which was inevitable as the domestic economy developed and they finally stopped holding down domestic consumption.....part of which we in the West accelerated by kicking off Cold War 2.0...which is to say the venerable Chinese saver who's excess savings invariably flowed into our pockets (as low cost debt) and put a solid bid under US assets (treasuries, equities & RE) likely peaked in the late 2010's.

 

So on your same theme - China demand for USD and US assets for excess savings is shifting as it shifts to more of consumption led economy.......the caveat is that another 1.4bn people in industrious India might be about to start sending us their wave of excess savings & bids for US assets as they implement the China playbook.......after them probably an aggregate of some African nations with young populations and progressive leadership.

 

BIG big picture however and counter to your thesis......is the US remains the shining city on the hill for the RoW....living here of course and watching US 'news' folks like to think its a dumpster fire headed for a cliff.....the reality and percpetion is different of course most especially for the 7.7bn people who don't live in the USA......quality, security & durability always catches a flow and a bid....one of the great secular trends of our time is premiumization......what's more 'premium' in the hierarchy of global assets/currencies than USD and US domiciled assets?

 

Edited June 12 by changegonnacome

[Sweet]

4 minutes ago, changegonnacome said:

BIG big picture however and counter to your thesis......is the US remains the shining city on the hill for the RoW....living here of course and watching US 'news' folks like to think its a dumpster fire headed for cliff.....the reality and percpetion is different of course most especially for the 7.7bn people who don't live in the USA......quality, security & durability always catches a flow and a bid....one of the great secular trends of our time is premiumization......what's more 'premium' in the hierarchy of global assets/currencies than USD and US domiciled assets?

Completely agree.

[james22]

On 6/7/2024 at 8:16 PM, Blugolds11 said:

I guess it comes down to personal goals, and what the purpose of money is, is it the means? Because if you have "enough" or close, if your goal is to get as rich as possible and you're willing to sacrifice every other aspect of your life to further that, then do what you think you gotta do, but if you get to a point where even less than satisfactory, impressive or "sexy" returns still amount to more than your yearly liberal spending can burn through doing everything you want to do...spending all your time trying to increase that just for the sake of a better score at the end, seems like you're missing out on other joys/experiences of life because for me personally it couldnt be both, it was either one or the other. 

 

Yep.

 

Probably best to consider life as governed by constraint theory: your life only as good as your limiting factor (romantic, social, intellectual, spiritual, financial, health, etc.).

 

Came across this guy:  https://www.youtube.com/@BenMallah/videos

 

Perfect (bad) example - wealthy and spends all his time/energy on creating more wealth (waay past diminishing returns) at the cost of his health (his doc has told him he's not long to live if doesn't make changes).

 

Hard to set aside what you're good at and enjoy as your measure though.

[SharperDingaan]

It used to be that one kept most of ones surplus wealth denominated in the reserve currency of the day; usually that of the country with the greatest global military and economic power, and preferably in assets inside that country's borders. Typically diversified across real estate, treasuries, blue-chip stocks, bullion. etc. - and one assumed a 100% loss of all other assets.

 

One also maintained 'affiliations' with the trading pipes of the day; moving/transporting commodities priced in reserve currency, from source through to industrial user; both as a means of making a profit, and as a means of evading capital controls. 

 

Bitcoin protocol fundamentally changed this. The app (BTC), and CME options/futures, allows one to both bypass reserve currency entirely, as well as the purchase of assets in that country. The protocol, replacing reserve currency itself, via a supra-national DC. Not what many would prefer to hear.

 

Assets can now be diversified across real estate, treasuries, blue-chip stocks, bullion, BTC, etc. - and BTC is a better portable fit for purpose, that many of the other choices. If you see wealth as a zero-sum game, the resultant lower weighting to the 'traditional' assets must result in a price decline. 

 

Of course most people aren't wealthy, they need to work, they aren't represented here, and they see much of this as abuse. There is a reason why Brexit, Trump 1.0, and the European shift to the right occurred. Trump 2.0 is a continuation.

 

Opportunities everywhere, but it's a dangerous game ... and getting worse.

 

SD

 

 

 

     

 

 

Edited June 12 by SharperDingaan

[Gregmal]

All week I was reading this sensationalism from all the usual outlets about how Wednesday was quite possibly "one of the most important trading days of the year". How everything hinged on CPI and Fed. Not seeing any relevance to either I decided to spend the trading day....taking my daughter to the zoo. I just got back, and whew, it doesnt look like my life changed despite missing these super duper important events. 

[changegonnacome]

1 hour ago, SharperDingaan said:

BTC

 

Had a feeling BTC was somewhere inside your short USD & USD assets thesis......non-zero chance your right....but for BTC to do well it doesn't require USD & USD assets to falter.....the digital gold thesis works quite well from here......but I guess 100x from here isnt enough for some people to dream about......so it requires a total upending of worlds ordering of asset and currency allocations.

 

Listen I'm with you on some of stuff.....we are moving from the unipolar moment to a multi-polar world....the freezing & seizing of Russian assets inside the Euro-Dollar system.....and the various weaponizations of SWIFT that have occured...and all the BRICS guys banding together in some aspirational dream to ditch the dollar.....are exactly the entries you'd expect in the timeline of a reserve currencies demise......but its still the US's to lose IMO......there is a long and illustrious history with a very high body count of those that have called the end of the greenback.

 

Somebody, someday will be right....the failure rate of reserve currencies is 100% after all.

[SharperDingaan]

8 hours ago, changegonnacome said:

......but its still the US's to lose IMO

 

Quite agree, but technology waits for no man. Ultimately there will be NO reserve currency and we'll all be using supra-national DC for trade settlements. Only question is how long it takes to get there, and the path taken. In the meantime, lots of drama.

 

SD

 

 

 

 

Edited June 13 by SharperDingaan

[mattee2264]

CPI/interest rate focus is ridiculous.

 

Europe and Japan had outright deflation and ZIRP for long stretches of time and massive amounts of QE and their stock markets went absolutely nowhere. 

 

As Powell said himself when you look 5 or 10 years out it is impossible to detect any impact from a 25 bps interest rate change.

 

Earnings are what matter. S&P 500 was 2000 a decade ago. Now it is over 5000. And over that same time period S&P 500 EPS has increased from $100 to around $250. So pretty much all of the increase in stock prices can be attributed to earnings. 

 

And you cannot evaluate the impact of interest rate changes in isolation.

 

If interest rates are rising because the economy is growing strongly then the earnings benefit offsets any negative impact from interest rates and stock prices will go up. 

 

And if the Fed is cutting interest rates because earnings are falling off a cliff then as we've seen in prior cutting cycles stock markets will go down. 

 

And inflation is also intimately connected with the strength of the economy. The transitory supply side influences have mostly gone. So any further declines in inflation are likely to be cyclical and reflect a slowing economy. And if inflation increases it will probably because the economy is growing strongly. 

 

But there seems to be a lot of confidence that corporate earnings (especially for favoured Big Tech companies) will grow strongly and therefore investors are praying for bad economic data and rate cuts in the hope that rate cuts add fuel to the fire and result in even higher multiples that get multiplied by higher earnings and continued rapid stock price appreciation.

 

In a way I understand their point. Big Tech did benefit from a period of economic stagnation that resulted in low interest rates and Fed policies to flood markets with liquidity that coincided with a long period of secular growth powered by monetisation of the internet, adoption of e-commerce and digital advertising, shift to the cloud and now AI. 

But at the size they are now their fortunes are probably a lot more closely aligned with GDP growth because they now dominate their markets and adjacent markets and while AI represents virgin territory everyone is competing for their slice and the only one making serious money from AI is Nvidia. 

 

 

 

[Sweet]

Market just moves to CPI print these days and Nvidia earnings.  Just dumb but that’s the way it is.

[Blake Hampton]

I feel like focus should be more-so on long term interest rates. Long bonds yielding 4.5% is crazy to me when you can get 5.25% on cash. This is before you consider a FED that is currently in the process of shrinking its balance sheet, effectively adding more pressure. 
 

I’ve heard talks about the possibility of a future debt crisis concerning lack of demand in treasury auctions. Looking at TreasuryDirect, auctions seem to be relatively strong right now, but I still can’t come to understand why people are buying at current yields.

 

I’ll agree with Buffett though. I’m thinking our current situation is more of a fiscal problem than a monetary one.

Edited June 13 by blakehampton

[thepupil]

21 minutes ago, blakehampton said:

I feel like focus should be more-so on long term interest rates. Long bonds yielding 4.5% is crazy to me when you can get 5.25% on cash. This is before you consider a FED that is currently in the process of shrinking its balance sheet, effectively adding more pressure. 
 

I’ve heard talks about the possibility of a future debt crisis concerning lack of demand in treasury auctions. Looking at TreasuryDirect, auctions seem to be relatively strong right now, but I still can’t come to understand why people are buying at current yields.

 

I’ll agree with Buffett though. I’m thinking our current situation is more of a fiscal problem than a monetary one.

 

Let's say for whatever reason, you need $100 in 30 years. you have a choice between 2 instrument to get that $100.

 

You can buy a 30 year zero coupon bond for $28.75 / 4.3% yield. At maturity, it will be worth $100. 

or you can buy $28.75 t-bills @ >5%

 

Let's say you buy t-bills and make an extra 1% / yr for the next 10 years. rates don't change at all. In 10 years you will have about $48 dollars. If you bought the 30 year zero, you'd have ~$43. 

 

Now let's say there's a global depression and short term rates drop to 0 for the next decade. (years 11-20) and long term rates go to 2%. Your t-bill option is now making nothing and risks not making it to the $100. Your 30 year zero would rocket to $67.5 (it's a 20 year now) and you'd make up far more than the carry you lost in the first 10 years by not going in the higher yielding t-bills. And you know you can just hold and it will be $100 in 20 years. there's no reinvestment risk. you are promised your $100 nominal in 2054. 

 

an extreme example using the longest treasury and the shortest for affect, but the people buying treasuries are doing so to fill some need and the next 12 month's yield is certainly not the only need. think if you're a pension seeking to mathc LT liabilities, an individual seeking deflation / depression hedge, an individual defeasing one's mortgage, an insurance company looking to lock in a known yield over 5,7,10,20 years. 

 

the t-bill provides more yield and has no duration risk, but it has FAR more reinvestment risk than other bonds. rates go down and you make nothing. no compensation for your yield going away. 

 

I'm happy to underperform bills by owning bonds in exchange for a little punch if rates decline. 

 

 

 

 

 

Edited June 13 by thepupil

[Blake Hampton]

5 minutes ago, thepupil said:

 

Let's say for whatever reason, you need $100 in 30 years. you have a choice between 2 instrument to get that $100.

 

You can buy a 30 year zero coupon bond for $28.75 / 4.3% yield. At maturity, it will be worth $100. 

or you can buy $28.75 t-bills @ >5%

 

Let's say you buy t-bills and make an extra 1% / yr for the next 10 years. rates don't change at all. In 10 years you will have about $48 dollars. If you bought the 30 year zero, you'd have ~$43. 

 

Now let's say there's a global depression and short term rates drop to 0 for the next decade. (years 11-20) and long term rates go to 2%. Your t-bill option is now making nothing and risks not making it to the $100. Your 30 year zero would rocket to $67.5 (it's a 20 year now) and you'd make up far more than the carry you lost in the first 10 years by not going in the higher yielding t-bills. 

 

an extreme example using the longest treasury and the shortest for affect, but the people buying treasuries are doing so to fill some need and the next year's yield is certainly not the only need. think if you're a pension seeking to mathc LT liabilities, an individual seeking deflation / depression hedge, an individual defeasing one's mortgage, an insurance company looking to lock in a known yield over 5,7,10,20 years. 

 

the t-bill provides more yield and has no duration risk, but it has FAR more reinvestment risk than other bonds. rates go down and you make nothing. no compensation for your yield going away. 

 

 

 

 

 

No those are good examples. I just feel like the way that I see things, these current yields on long term bonds are not sufficient enough to account for the risk I would take buying them.

Edited June 13 by blakehampton

[thepupil]

10 minutes ago, blakehampton said:

No those are good examples. I just feel like the way that I see things, these current yields on long term bonds are not sufficient enough to account for the risk I would take buying them.

 

that's what makes a market. from my standpoint, long term real rates at >2% are the highest they've been since 2010 and is a very reasonable rate to lend to the sovereign. long term nominal rates offer one the ability to defease legacy debt at a discount  and a disaster deflation hedge w/ punch. 

 

i worry more about reinvestment risk / rates going away and not making money on that, then about rates going up more. but hey, I'm the guy who startged the "Bonds!" thread in April 2022 and has seen bonds underperform bills so far. 

[Blake Hampton]

1 minute ago, thepupil said:

 

that's what makes a market. from my standpoint, long term real rates at >2% are the highest they've been since 2010 and is a very reasonable rate to lend to the sovereign. long term nominal rates offer one the ability to defease legacy debt at a discount  and a disaster deflation hedge w/ punch. 

 

i worry more about reinvestment risk / rates going away and not making money on that, then about rates going up more. but hey, I'm the guy who startged the "Bonds!" thread in April 2022 and has seen bonds underperform bills so far. 

You know it’s funny because I’m young, my point being that I’ve only been investing for a couple of years now. I think that if I were to have started say 10-15 years ago, I might view the current situation completely different. I’m sure that is some form of bias and I don’t know how to feel about it to be honest.

[mattee2264]

TIPS at a 2% real yield do look pretty attractive. And might not be around for much longer. 

 

I don't think nominal long bonds at 4% are that attractive from an income POV. To get 2% real returns holding to maturity you need to assume over the next decade inflation averages 2%. The Fed may well achieve its target during slowdowns and recessions but with all the debt in the system I do not think it is willing to be aggressive enough to do so over the cycle and some of the disinflationary trends are reversing with a move towards protectionism, more geopolitical tensions and conflicts, increased demand for finite resources for green energy and AI etc. 

 

And you are already pricing in further disinflation and rate cuts to the extent that the yield curve is inverted. If a more normal term premium of 100bps or so is re-established that could offset any benefit from further rate cuts. And if inflation remains above target then absent a recession the Fed probably doesn't have that much room to cut. 

 

But there is still a chance of a hard landing or something breaking in a serious way. And that is a good reason to have some long nominal bonds because if the Fed does aggressively cut rates (and it has over 500 bps of runway to do so) you can get some very good capital gains. 

 

Also it is pretty clear that those worried about a return to 70s stagflation were wrong. You don't have the conditions for a wage-price spiral. Illegal immigration and the threat of AI will make workers wary of asking for wage increases and we aren't as unionized as we were in the 70s and with remote working you can outsource and draw from a wider labour pool.

 

 

 

 

 

 

 

Edited June 13 by mattee2264

[Castanza]

https://scottgrannis.blogspot.com/?_sm_au_=iVVJLSNRJMN6NWWr

 

Some interesting charts from Scott Grannis

[gfp]

10 minutes ago, Castanza said:

https://scottgrannis.blogspot.com/?_sm_au_=iVVJLSNRJMN6NWWr

 

Some interesting charts from Scott Grannis

 

Good stuff, thanks for sharing that.

 

[Blake Hampton]

After adjusting for corporate taxes, Shiller PE is currently sitting around where it was at the peak of the tech bubble.

Edited June 15 by blakehampton

[changegonnacome]

I dunno - maybe they're dummies....but two prominent asset managers (Bill Ackman & now Ken Fisher) choosing right now as a pretty good time to sell a piece of their carry.......

 

Fisher Investments Sells Stake of Up to $3 Billion -

https://www.bloomberg.com/news/articles/2024-06-16/advent-nears-deal-for-minority-stake-in-fisher-investments-wsj?sref=7zqHEcxJ

 

Bill Ackman’s Pershing Square Sells 10% Stake for $1.05 Billion

https://www.bloomberg.com/news/articles/2024-06-03/pershing-square-sells-10-stake-for-1-05-billion-ahead-of-ipo?sref=7zqHEcxJ

 

 

Edited June 17 by changegonnacome

[cubsfan]

On 6/15/2024 at 10:09 AM, blakehampton said:

After adjusting for corporate taxes, Shiller PE is currently sitting around where it was at the peak of the tech bubble.

 

If you strike the Mag 7, what does it look like then?

[Red Lion]

2 hours ago, changegonnacome said:

I dunno - maybe they're dummies....but two prominent asset managers (Bill Ackman & now Ken Fisher) choosing right now as a pretty good time to sell a piece of their carry.......

 

Fisher Investments Sells Stake of Up to $3 Billion -

https://www.bloomberg.com/news/articles/2024-06-16/advent-nears-deal-for-minority-stake-in-fisher-investments-wsj?sref=7zqHEcxJ

 

Bill Ackman’s Pershing Square Sells 10% Stake for $1.05 Billion

https://www.bloomberg.com/news/articles/2024-06-03/pershing-square-sells-10-stake-for-1-05-billion-ahead-of-ipo?sref=7zqHEcxJ

 

 

Its interesting blackstone ipo’d at the top of the market in 2007, but overall it seems to increase the likelihood of a broken ipo, and not sure that really benefits a money manager in the long run. 

[Sweet]

On 6/15/2024 at 4:09 PM, blakehampton said:

After adjusting for corporate taxes, Shiller PE is currently sitting around where it was at the peak of the tech bubble.

How well has the Shiller PE worked in the past 10 years?  It’s been terrible for people who followed it.

 

WSJ is reporting that the PE of the SP-500 is 23.6 and the 1-year forward PE 21.  The Nasdaq is 31 and a 1yr fwd of 28:

https://www.wsj.com/market-data/stocks/peyields
 

For comparison, during the dot.com bubble the SP-500 PE was 45 and the Nasdaq PE was 200.