Have We Hit The Top?

[Gregmal]

Common sense should always be the mandate. School teachers and government employees are the only ones who need formal guidelines because they never have skin in the game and dont generally care about the outcome and are more concerned with their own security than taking risks, even if such perceived “risks” aren’t risks but actually sensible actions. 

[mattee2264]

And if higher interest rates eventually result in a decline in house prices of 20% or so that would be a good thing.

 

House prices would be more affordable which is good for first time buyers especially as because they are priced out of the housing market they are at the mercy of greedy landlords.

If people have to downsize because they bought too much house when interest rates were near zero it is not the end of the world. 

Given the run up in house prices and the acceleration post-pandemic most homeowners would still have positive equity 

 

 

 

[Gregmal]

19 minutes ago, mattee2264 said:

And if higher interest rates eventually result in a decline in house prices of 20% or so that would be a good thing.

 

House prices would be more affordable which is good for first time buyers especially as because they are priced out of the housing market they are at the mercy of greedy landlords.

If people have to downsize because they bought too much house when interest rates were near zero it is not the end of the world. 

Given the run up in house prices and the acceleration post-pandemic most homeowners would still have positive equity 

 

 

 

Yes but with the existing Chinese finger trap type situation you have, created by lack of supply and high rates, that just isn’t going to happen in any sort of decent MSA anytime soon.

[Castanza]

27 minutes ago, mattee2264 said:

It is not completely made up. 2% is seen as low enough to deliver the benefits of price stability but also providing a margin of safety against deflation (which worries central banks a lot more) and allowing for the fact that a little inflation improves the flexibility of an economy preventing downward wage rigidity etc. 

 

Even within the confines of a 2% inflation target central banks move the goalposts by changing the measures of inflation and many central banks also adopt a range approach with Powell's average inflation targeting the latest example of that. But at least having a 2% number that is pretty much orthodox in the developed world provides some kind of anchoring to inflation. That anchor will be undermined if central banks can just change the inflation target whenever it suits them. 

 

For example if we decide it is too painful to return to 2% inflation and adopt a target of 4% inflation then what happens when that target becomes difficult to achieve? How on earth are you supposed to anchor long term inflation expectations on that basis? 

 

In fact a lot of the problems we are facing is because the Fed extended its mandate too far. And as a result kept interest rates too low for too long and allowed imbalances in the economy to build up to an extend that normalising interest rates to a reasonable level is causing issues. 

 

And also because the US government is irresponsible and is still running trillion dollar deficits when the economy is at full employment which is adding fuel to the inflationary fire which is requiring the Fed to be more aggressive than it would ideally like to be. 

Yeah I’m sure the academics have reasons for their 2%. I’m just a believer that economies are way too complex to think a simple interest rate number or target inflation numbers can account for all the variables and effectively produce results. Sure they have a place, but the tool is beyond blunt. I’d argue it’s a magnifying glass vs electron microscope. It’s really absurd when you think about it and just start listing off variables of inputs outputs, geopolitics, local politics, birth rates, wild fires, bankruptcies, new businesses, college grads, job market (regional, local, national), innovations, technological changes, etc.
 

[mattee2264]

 

It is not the number that is magic and of course 2% is somewhat arbitrary although as explained there is some reasoning behind it.

The magic is that if you have a target that central banks are accountable for achieving and it cannot just be changed anytime it suits then that anchors long term inflation expectations which has economic benefits both from an efficiency but also an equity (fairness) standpoint. 

[Gregmal]

In order to get 20% price corrections in let’s call it a B level or better MSA, you’d need GFC level job losses. Having a government related entity purposely be the direct cause of that would be unconscionable and warrant things that probably shouldn’t be said. We re really at a point where it’s like ok what are they doing? They can’t possibly be this dumb. And if they aren’t, they can’t possibly be this corrupt. Anyone care to quantify the life cost of 6-8m job losses? That’s really what is needed cuz we’re at 3 instead of 2 lol?

Edited October 13, 2023 by Gregmal

[mattee2264]

I don't think that is true at all. We've already seen ~10% price declines from the peak with very little change in unemployment. And somewhat higher price declines in more overvalued housing markets like Australia and Canada.

 

In a market with not much liquidity it doesn't take that many people to decide they need to downsize or move to a cheaper area to bring prices down. And even fairly modest job losses (and remember we are at full employment so I am hardly advocating for mass unemployment) would probably do the trick. Another driver of house price declines would be buy-to-let investors selling out because they reach the limits of passing on higher costs to tenants and facing negative cashflow decide to sell. 

 

Of course you are right that in major cities foreign cash buyers would swoop in and that would moderate the decline and be a negative. But it is the society wide myth that house prices can only go up that encourages so many investors to buy real estate to the detriment of potential owner occupiers. 

 

 

Edited October 13, 2023 by mattee2264

[longlake95]

bloom finally coming off the rose.

 

https://www.thestar.com/business/mortgage-defaults-and-forced-home-sales-are-now-starting-to-climb-in-toronto/article_47169ce1-5cac-5355-bdad-a41b4f61b970.html

[Viking]

Well, it appears what is going on in the middle east is a big nothing-burger for financial markets. The S&P started the week around 4,300 and appears set to finish the week higher at 4,330. Bonds have had a minor sell off, but only further out on the curve. Good to know! Phew, what a relief!

 

Of course, I jest with my post above. I continue to think financial markets are not respecting the tail risks of what is likely to come in the middle east in the coming weeks and months. My read is the real war has not started yet. How will it play out? No idea. And that is my point. It looks to me like financial markets are whistling past the graveyard. Of course, I could be completely wrong. And that is what i love about financial markets. 

Edited October 13, 2023 by Viking

[Castanza]

19 hours ago, Viking said:

Well, it appears what is going on in the middle east is a big nothing-burger for financial markets. The S&P started the week around 4,300 and appears set to finish the week higher at 4,330. Bonds have had a minor sell off, but only further out on the curve. Good to know! Phew, what a relief!

 

Of course, I jest with my post above. I continue to think financial markets are not respecting the tail risks of what is likely to come in the middle east in the coming weeks and months. My read is the real war has not started yet. How will it play out? No idea. And that is my point. It looks to me like financial markets are whistling past the graveyard. Of course, I could be completely wrong. And that is what i love about financial markets. 

This is going to drag a lot longer than people thing. Seems everyone thinkIsrael is going to take Gaza in a week. This is a very similar situation to Mosul. Population density, underground networks, entrenched enemy, etc. urban warfare is a major pita. Israel very well may be one of the best in the world at it, but that Guerilla warfare has proven a major thorn in the heal of modern armies with advanced tactics and equipment. 3rd time in the last decade a terrorist group has seized a major city. Mosul, Kabul and now Gaza. Pretty big deal
 

 

Edited October 14, 2023 by Castanza

[sleepydragon]

1 hour ago, Castanza said:

This is going to drag a lot longer than people thing. Seems everyone thinkIsrael is going to take Gaza in a week. This is a very similar situation to Mosul. Population density, underground networks, entrenched enemy, etc. urban warfare is a major pita. Israel very well may be one of the best in the world at it, but that Guerilla warfare has proven a major thorn in the heal of modern armies with advanced tactics and equipment. 3rd time in the last decade a terrorist group has seized a major city. Mosul, Kabul and now Gaza. Pretty big deal
 

 

i don’t think the dumb ass Hama had the brain to stock up water and other necessities. Israel shall just cut the water and surround it for 6-12 months until everyone Will eventually come out theirselves due to hunger. 

 

[Spekulatius]

Arn't housing starts around 1.4M annually. Thats actually pretty healthy. The problem was low building rate past the GFC for many years.

 

Also, it is pretty clear that low interest rates don’t make housing more affordable - if anything, the opposite is the case in the long run. So, I think higher interest rates over time will increase the cap rate for homes, apartments, which inevitable makes housing cheaper. It just takes a long time, much longer than 12month which is the current duration of the rate rising cycle.

[Gregmal]

49 minutes ago, Spekulatius said:

Arn't housing starts around 1.4M annually. Thats actually pretty healthy. The problem was low building rate past the GFC for many years.

 

Also, it is pretty clear that low interest rates don’t make housing more affordable - if anything, the opposite is the case in the long run. So, I think higher interest rates over time will increase the cap rate for homes, apartments, which inevitable makes housing cheaper. It just takes a long time, much longer than 12month which is the current duration of the rate rising cycle.

Except, everyone puts on the brakes with building with financing so expensive. Only exception is the national builders. Which crushes local and regional builders. Which further dampens competitive dynamics. These cycles take 5-10 years normally. Which I think is wayyyy too long for academics pushing textbook theories and justifying economy crushing policies.
 

The easier answer is the let these guys do what they do and lower rates so they overbuild. 

[UK]

https://www.bloomberg.com/news/articles/2023-10-17/us-stocks-are-ripe-for-earnings-led-rally-as-rates-angst-settles?srnd=premium-europe&leadSource=uverify wall

Edited October 17, 2023 by UK

[Luca]

23 minutes ago, UK said:

https://www.bloomberg.com/news/articles/2023-10-17/us-stocks-are-ripe-for-earnings-led-rally-as-rates-angst-settles?srnd=premium-europe&leadSource=uverify wall

Interesting, and still some huge bubbles...

[Gregmal]

Retail sales confirm the Q4 recession is imminent. 

[Jaygo]

I feel like Canada is in recession now. Less so in small retail purchases but more so in larger items and higher value goods that people are holding off from. Were looking for a living room set, every single big box furniture store is a ghost town (except Ikea with those damn meatballs! ) 

 

The real estate wealth effect is starting to bite pretty hard I think.

 

Restaurants are still pretty busy as are malls but id say smaller tickets. Retail sales can increase as GDP does not.

 

Look at the consumer companies, most are saying that volumes are down, 3M at an investor day said they are seeing disinflation in most suppliers segments.

 

As for the US im not sure. 

[UK]

 

[mattee2264]

10 year valuation is misleading when you consider that the last 10 years were in a very low interest rate environment. And an equal weight deserves a lower multiple considering that the highest quality stocks generally dominate indices and therefore your average stock probably doesn't have much of a moat. 

 

But agree that most of the overvaluation reflects the Magnificent 7 who are now about 30% of the S&P 500 by market cap. 

 

I think if we avoid recession there might be more of a rotation as a lot of people are treating Magnificent 7 as safe havens. 

But if there is a recession then you'd imagine even Magnificent 7 would see a fall in earnings and market has some distance to fall because lower earnings and a lower multiple is a double whammy. 

[Gregmal]

I’m not really sure there’s any evidence of the double whammy. Nothing gets priced at its lowest multiple at the trough. Generally peak is discounted down and trough is given higher multiple. As many have gone very far out of their way to demonstrate, peak earnings are now several years ago for most. If the argument is still “I think multiples are high” I mean that’s a game I stopped playing a long time ago. 
 

Also just stepping back today and looking at bigger picture….also blown up is the idea that the “Fed is trapped” and “has no room to soften a landing like they did previously”…we re at 5/8 on 10 year/mortgage rates. This statement actually proved to be the exact opposite. They had plenty of room to go up; and now have plenty of room to go down.

 

The risk imo is they keep going up for no reason. 

[mattee2264]

The double whammy comment was specifically in relation to the Magnificent 7. MAG 7 have an average PE multiple of over 45 times earnings. And for some context the lowest multiple was around 20x set at beginning of 2019 and in the depths of COVID which with benefit of hindsight were excellent buying opportunities. Their current price is only about 5% below the end of 2021 peak. As we all know their stock prices are up 70-80% YTD. 

So not difficult to imagine a lot of downside if earnings disappoint. 

 

 

 

[Gregmal]

Idk sometime around October or November of last I kind of had a moment where I reorganized my thoughts, because I did and still do get urges to think in a narrow “valuation inspired” way. But it dawned on me how it also is kind of crazy, when you step back and think about it, how…look at the macro…whatever it is, slowdown, inflation whatever…and what are people drawn to? Shorting the highest quality, most durable, moaty companies with insane competitive advantages, cash flush balance sheets, and generally asset lite business models….makes no sense.

[Gregmal]

I bring this up because it’s part of a theory that has been gaining more traction; that these ultra companies are basically becoming the bond subs because of their moats, inflation protection, and overall durability. Markets are always evolving. 

[thowed]

Yes, this is a very tempting argument & quite convincing.

 

On the other hand, is this not a rehash of the Nifty 50 argument, which worked... eventually, if you waited 30-40 years from the peak?  And particularly when it feels like an increasingly consensus view?

 

On the other hand again, even if they do turn out like the Nifty 50, the top might be 5-10 years away, and they'll carry on (& may grow more into their valuations with new technological additions to their arsenal).

 

I know you're flexible, so are your MGK Puts in case they turn out not to be bond subs?

 

Anyway, I fear that I have my own bias to deal with as I'm woefully underweight these ultras, apart from the tiniest amount I bought at the bottom last year, before I lost my nerve.  So I'm struggling to buy more at a much higher price.

Edited October 18, 2023 by thowed

[Gregmal]

1 minute ago, thowed said:

know you're flexible, so are your MGK Puts in case they turn out not to be bond subs?

I actually hit the structure specifically out of this fear. Rather than a straight index short I got both IWM puts and then MGK puts in the event there was divergence. Didn’t want to be banking on just SPY or QQQ and just figured both could work, or one could work, and in either event using options I’d be ok.