Have We Hit The Top?

[TwoCitiesCapital]

46 minutes ago, blakehampton said:

So I have seen "the stock market is not the economy" a couple of times and I have to say I don't understand. Wouldn't the stock market essentially be a delayed representation of the economy?

 

Yes and no. As mentioned by others, the index essentially represents the best of the best (not always, but a close approximation) and thus isn't representative of the "average". Also, a chunk of revenues/profits are derived overseas which may be less sensitive to the ebbs/flows of U.S. specific economy.. 

 

Historically, they are related but not perfectly correlated. If only because weakness in the overall economy tend to lead to weaker consumers which will hit even the best of companies, a slowdown in the US can cause slowdowns elsewhere globally given how much we import, and because as people are laid off there are fewer $ flowing to excess savings/investments to bid up shares. 

 

But they rarely coincide perfectly - stocks often lead, and sometimes lag, the developments in the economy. 

[Gregmal]

I kinda have a theory too that with the spread of inequality and wealth concentration there’s a FUBU element that’s much more prevalent in what I’d call tier 1 assets. Real estate, stocks, private businesses. These are things for rich people, run by rich people, and increasingly becoming scarce. There is a finite number of places to put money. Debt is largely for suckers. Think pension funds and entities that need a return but aren’t practical about maximizing it. So real assets and things of value just continue to get sucked up. Think Hamptons parcels that were owned by normal folks, then sold for cash to middle class folks, who then got cashed out by developers, that then sold to families who put it in a trust and use it one month a year….

 

So my loosely held belief is that over time this adds to the bid under quality stocks. More “cash/money/currency” less “place to put it”. 

[Kupotea]

4 minutes ago, Gregmal said:

I kinda have a theory too that with the spread of inequality and wealth concentration there’s a FUBU element that’s much more prevalent in what I’d call tier 1 assets. Real estate, stocks, private businesses. These are things for rich people, run by rich people, and increasingly becoming scarce. There is a finite number of places to put money. Debt is largely for suckers. Think pension funds and entities that need a return but aren’t practical about maximizing it. So real assets and things of value just continue to get sucked up. Think Hamptons parcels that were owned by normal folks, then sold for cash to middle class folks, who then got cashed out by developers, that then sold to families who put it in a trust and use it one month a year….

 

So my loosely held belief is that over time this adds to the bid under quality stocks. More “cash/money/currency” less “place to put it”. 

I think you’ve pretty much summed up the breakneck rise in desirable real estate globally. People constantly ask who can afford to live in places like Hong Kong, Vancouver, NYC and the answer is the rich can. It’s less about living there though and more about preserving wealth. 

[ArminvanBuyout]

35 minutes ago, Gregmal said:

I kinda have a theory too that with the spread of inequality and wealth concentration there’s a FUBU element that’s much more prevalent in what I’d call tier 1 assets. Real estate, stocks, private businesses. These are things for rich people, run by rich people, and increasingly becoming scarce. There is a finite number of places to put money. Debt is largely for suckers. Think pension funds and entities that need a return but aren’t practical about maximizing it. So real assets and things of value just continue to get sucked up. Think Hamptons parcels that were owned by normal folks, then sold for cash to middle class folks, who then got cashed out by developers, that then sold to families who put it in a trust and use it one month a year….

 

So my loosely held belief is that over time this adds to the bid under quality stocks. More “cash/money/currency” less “place to put it”. 

 

Completely agree - there's less public companies vs. before, while the amount of money in the market (whether it be through 401Ks, foreign capital, etc.) has drastically increased. Think there's been a permanent shift in the floor valuation, and stocks will mostly look more expensive vs. history. 

 

I also wonder if the tenure of the average public company has lengthened (would love to see data on this), resulting in investors naturally willing to underwrite more years of NT cash flows before applying a terminal (DCF analogy)

[james22]

26 minutes ago, Kupotea said:

I think you’ve pretty much summed up the breakneck rise in desirable real estate globally. People constantly ask who can afford to live in places like Hong Kong, Vancouver, NYC and the answer is the rich can. It’s less about living there though and more about preserving wealth. 

 

Sure, but works both ways.

 

Chinese investors and their creditors are putting up “For Sale” signs on real estate holdings across the globe as the need to raise cash amid a deepening property crisis at home trumps the risks of offloading into a falling market. The prices they get will help finally put hard numbers on just how much trouble the wider industry is in.

 

The worldwide slump triggered by borrowing-cost hikes has already wiped more than $1 trillion off office property values alone, Starwood Capital Group Chairman Barry Sternlicht said last week. But the total damage is still unknown because so few assets have been sold, leaving appraisers with little recent data to go on. Completed commercial property deals globally sank to the lowest level in a decade last year, with owners unwilling to sell buildings at steep discounts.

 

Regulators and the market are nervous that this logjam could be concealing large, unrealized losses, spelling trouble both for banks, who pushed further into bricks and mortar lending during the cheap money era, and asset owners.

 

https://www.bnnbloomberg.ca/the-global-tremors-from-china-s-real-estate-crisis-are-only-just-starting-1.2032831

[brobro777]

2 hours ago, Gregmal said:

I kinda have a theory too that with the spread of inequality and wealth concentration there’s a FUBU element that’s much more prevalent in what I’d call tier 1 assets. Real estate, stocks, private businesses. These are things for rich people, run by rich people, and increasingly becoming scarce. There is a finite number of places to put money. Debt is largely for suckers. Think pension funds and entities that need a return but aren’t practical about maximizing it. So real assets and things of value just continue to get sucked up. Think Hamptons parcels that were owned by normal folks, then sold for cash to middle class folks, who then got cashed out by developers, that then sold to families who put it in a trust and use it one month a year….

 

So my loosely held belief is that over time this adds to the bid under quality stocks. More “cash/money/currency” less “place to put it”. 

 

Well I did have a neon yellow FUBU jacket back in the 90s

 

I did

 

[LC]

2 hours ago, Gregmal said:

I kinda have a theory too that with the spread of inequality and wealth concentration there’s a FUBU element that’s much more prevalent in what I’d call tier 1 assets. Real estate, stocks, private businesses. These are things for rich people, run by rich people, and increasingly becoming scarce. There is a finite number of places to put money. Debt is largely for suckers. Think pension funds and entities that need a return but aren’t practical about maximizing it. So real assets and things of value just continue to get sucked up. Think Hamptons parcels that were owned by normal folks, then sold for cash to middle class folks, who then got cashed out by developers, that then sold to families who put it in a trust and use it one month a year….

 

So my loosely held belief is that over time this adds to the bid under quality stocks. More “cash/money/currency” less “place to put it”. 

 

Jpow is gonna give us 10% rates for 3-5 years. Crush the FUBU element you describe and reallocate some wealth to the "suckers". 

[blakehampton]

The Buffett indicator looks pretty scary relative to the past. The ratio of total market cap / GDP is currently 181%, what do you guys think about it?

 

Buffett has said in the past that this is “probably the best single measure of where valuations stand at any given moment.” In an interview, I heard Alice Schroeder say that he would like to buy when total market capitalization is at 70-80% of GDP.

 

 

Edited February 11 by blakehampton

[TwoCitiesCapital]

2 hours ago, blakehampton said:

The Buffett indicator looks pretty scary relative to the past. The ratio of total market cap / GDP is currently 181%, what do you guys think about it?

 

Buffett has said in the past that this is “probably the best single measure of where valuations stand at any given moment.” In an interview, I heard Alice Schroeder say that he would like to buy when total market capitalization is at 70-80% of GDP.

 

 

 

This indicator is less relevant with multi-national companies that exist today. At one time, it made sense that the capitalization of companies in the US would be tied to the incomes/economy of the U.S. and could not meaningfully grow beyond that. This was the case for much of Buffett's early career. 

 

But now? Companies do a ton of business overseas and are no longer linked to just American incomes (what GDP is measuring) allowing for higher multiples to U.S. incomes to persist. I doubt we see 70-80% again outside of some economic depression. 

Edited February 11 by TwoCitiesCapital

[james22]

It's different this time.

[blakehampton]

12 minutes ago, TwoCitiesCapital said:

 

This indicator is less relevant with multi-national companies that exist today. At one time, it made sense that the capitalization of companies in the US would be tied to the incomes/economy of the U.S. and could not meaningfully grow beyond that. This was the case for much of Buffett's early career. 

 

But now? Companies do a ton of business overseas and are no longer linked to just American incomes (what GDP is measuring) allowing for higher multiples to U.S. incomes to persist. I doubt we see 70-80% again outside of some economic depression. 

This was my first thought when I finished writing the post.

 

Are there any metrics to review trends in globalization? It would be an interesting study.

Edited February 11 by blakehampton

[KCLarkin]

I've never understood why Buffett thinks (thought -- has he mentioned it in the last 20 years?) this is a good metric. There are so many obvious flaws, I don't know why anyone takes it seriously. Similar to Lynch's PEG ratio.

Edited February 11 by KCLarkin

[mattee2264]

Valuations are probably less relevant than the past because a lot of buying of stocks is price insensitive

 

e.g. corporate share buybacks. When times are good and stock prices are high companies buy back far more shares than when times are bad and stock prices are low. And with ZIRP companies have been able to use financial engineering to borrow at cheap rates to buy back shares. As interest rates come back down this practice will resume.

 

e.g. pension contributions. there is a continual inflow of money into index funds from this. 

 

e.g. switch from active to passive strategies. In the past (in theory at least) active managers used to buy undervalued stocks and sell overvalued stocks or even short them. Now the main active investors are hedge funds and retail trades both of whom favour momentum strategies and flavour of the month investments with a good story. 

 

e.g. Fed has been doing successive rounds of QE while keeping interest rates low (until recently) so if you can only earn next to nothing in cash or bonds then you tend to be a lot less discriminate when it comes to buying stocks i.e TINA. Even with higher interest rates a 4-5% long bond yield seems unappealing when investors are using to doubling their money every year in bitcoin or Big Tech and even in index funds are making double digit returns and investors are well schooled that dips are buying opportunities and the stock market always recovers quickly and without any lasting pain. Even during COVID while the market panic was scary by the end of the summer the market had already recovered made new highs. And while the 2022 bear market was more protracted than investors were used to the index only fell about 20% as confidence in a pivot and Chat GPT turned the tide and 2023 instead of being a down year saw the market recover most of its losses with the rest made up this year.

 

And now AI has given the perfect excuse for markets to send Big Tech stocks to the moon and price in much better prospects for the rest of the economy with the idea that there will be a productivity miracle that will shock that economy out of its post-GFC doldrums and increase trend growth rate in the same way as in the mid 90s before it all went sour. 

 

Also interesting is that markets have pretty much shrugged at the good economic data and Fed talk walking down rate cuts. I suppose they have realized that the economy is a lot more resilient to higher interest rates than previously thought and Big Tech's growth prospects are being revised upwards so that even using a higher discount rate they are still worth a lot more. 

 

So I think we are only getting started. And probably the only things that will ruin the party are:

a) Big Tech results disappointing and the roll-out of new AI initiatives not living up to the hype resulting in much slower adoption 

b) Inflation rearing its ugly head again and forcing the Fed into rate hikes or at least convincing markets in higher for longer. The V-shaped recovery carries with it the implicit assumption that the Fed was right along and inflation was transitory and the inflation shock is over. 

c) A hard landing with inflation not falling enough to justify a Fed rescue and earnings across the board falling.

 

[Hektor]

https://fortune.com/2024/02/13/what-is-the-current-inflation-rate-consumer-price-index-january/

 

Will this push rate cuts further down the road? 

[Gregmal]

People and outlets just make shit up cuz they need stories to sell shit. Rates cuts were always gonna be a spring/summer thing and it was always and still will be 75bps or so total for 2024. The whole “will they in March” crap was fabricated as is the current fear that they won’t happen in June. People really need to get a life instead of continually finding excuses to create knee jerk panics over immaterial events. It’s laughable but predictable how now we go “omg .2 vs .3” and “3.1 vs 3.4 vs 2.9!!!”….who cares?

[Hektor]

1 hour ago, Gregmal said:

Rates cuts were always gonna be a spring/summer thing and it was always and still will be 75bps or so total for 2024

Why do you think so? What might cause either the time line to change or the bps to be different?

 

Asking only to understand.

[Gregmal]

I just don’t think going back to anywhere close to zero is needed or the real plan. People lie and say ZIRP happened for a decade but it was only post COVID. Really we are modestly higher on everything now vs pre COVID so pre covids 2.5 is new normals 3.5 or whatever.
 

I also think being at 5 is stupid and an unnecessary overreaction/misread/look how tough I am from Fed. Equilibrium imo is like 3.5% 10 year and 5-6% mortgages so that’s ultimately where I think we end up in the next couple years. So maybe 75 bps this year and 75-100 next. Certain functions require these levels and there’s not much resistance to getting back them. I don’t see this changing with meaningless monthly fluctuations. Shelter is still the only reason we’re anywhere near 3% cpi

Edited February 14 by Gregmal

[Jaygo]

1 hour ago, Gregmal said:

also think being at 5 is stupid and an unnecessary overreaction/misread/look how tough I am from Fed. Equilibrium imo is like 3.5% 10 year and 5-6% mortgages so that’s ultimately where I think we end up in the next couple years

Agree, I think the real economy warrants around 2.5 to 3 max. Businesses and individuals should be able to borrow for productive needs without the fed worrying about asset prices inflating. Maybe if we got rid of deductibility of interest for financial assets it may limit a bubble in the markets but allow for a productive economy to borrow. 
 

I’m seeing large equipment loans at ten plus percent. If that’s the case for long the productivity of the economy will suffer imo 

[Hektor]

1 hour ago, Gregmal said:

I just don’t think going back to anywhere close to zero is needed or the real plan. People lie and say ZIRP happened for a decade but it was only post COVID. Really we are modestly higher on everything now vs pre COVID so pre covids 2.5 is new normals 3.5 or whatever.
 

I also think being at 5 is stupid and an unnecessary overreaction/misread/look how tough I am from Fed. Equilibrium imo is like 3.5% 10 year and 5-6% mortgages so that’s ultimately where I think we end up in the next couple years. So maybe 75 bps this year and 75-100 next. Certain functions require these levels and there’s not much resistance to getting back them. I don’t see this changing with meaningless monthly fluctuations. Shelter is still the only reason we’re anywhere near 3% cpi

Thank you.

[changegonnacome]

2 hours ago, Gregmal said:

I don’t see this changing with meaningless monthly fluctuations. Shelter is still the only reason we’re anywhere near 3% cpi

 

The problem with today's print has zero to do with shelter - everybody gets the lagged data in this component....the PHD's at the Fed might be dumb, but they're not so dumb that they cant figure out OER quirks & lagged data......in fact the metric that the fed follows closely and surprised today is SuperCore which specifically excludes shelter.

 

I've referred to it to many times in this thread as dometic made in america inflation....one can think of it as services inflation..no big deal I hear you say.....the only issue is services make up ~77% of the US economy- it fell along with all other inflation components from late 2022 until Q3 2023....at which time it flattened out and began to accelerate upwards again recently.

 

The most recent MoM spike to 0.7 (if annualized thats 8.4%....in reality smoothed out on current trajectory its more like mid-4%)......this is not what progress looks like....... this the largest MoM increase recorded since mid-2022 .....and as you can see below that MoM figure is effectively unheard of in the last decade only being seen in the context of COVID induced inflation spikes.

 

You can't get back to 2%........with SuperCore at mid-4%.....its too large a component of CPI......but supercore is more important in that it is a large contributor to the people's perception of inflation and therefore inflation expectations.

 

China is exporting deflation to us..........the US dollar is exporting inflation to the rest of the world....oil supply/demand dynamics post-Ukraine have been benign....lots of tailwinds have delivered disinflation and the progress has been impressive.....the problem remains however that the domestic US economy is running too hot, nominal spending growth is exceeding productivity growth by a number which is inconsistent with ~2% inflation. 

 

I expect to see more references to 'sticky' 'stuck' & 'stubborn' inflation over the coming months (if the strong economy persists). Something in the nominal spending growth - productivity growth - inflation equation has to adjust.....maybe productivity can keep surprising - its certainly surprised me.

 

The most likely candidate remains the most obvious one at the end of most hiking cycles - nominal spending growth contracts......and we get back sustainably to 2%......seems like that old fox in the White House just wont be letting nominal spending slip until after November if he has anything to do with it.......running 7% fiscal deficits when unemployment is at historical lows and inflation is still elevated...... is reckless......but maybe its cheap when you believe your are battling for the "soul of the nation".......me.........I think he's an old guy who spent his life learning this fiscal math trick in D.C.......and trying to get to the White House and now he's got there he doesn't want to leave......and he's willing to incinerate billions/trillions to stay.....the White House has officially become the world's most expensive elderly care facility with this fiscal largesse.

 

[Paarslaars]

9 hours ago, Gregmal said:

who cares?

 

Anyone with short term options I guess...

[Sweet]

I don’t think the Fed should cut too much.  Definitely not below 4%.  I don’t think we should ever go back to super low interest rates as a ‘normal’.

 

The economy is looking strong at the moment.  The biggest risk potential risk to that is reducing the deficit spending which has got to happen some time.  
 

Deficit is now 6.3% of GDP it needs to come below economic growth for debt-GDP to start dropping.

 

Edited February 14 by Sweet

[mattee2264]

If the Fed were truly politically independent it would make it clear that the US government's full-employment fiscal deficits are hindering its battle against inflation and delaying the rate cutting cycle. It is not at all surprising that with the US economy running hot disinflation is starting to stall. 

 

If the Fed were truly politically independent it would not have teased rate cuts last year when inflation was still above target sparking a massive stock market rally and looser financial conditions. 

 

But I think this year we know the US government will keep spending big in a desperate attempt to keep the economy booming in the hope it will get Biden re-elected and the Fed will do what it can to help that goal without completely destroying their credibility. 

[mattee2264]

But I do not see any real need to lower interest rates. We did just fine in the 1990s with interest rates averaging 5%. So if we are in for another decade of strong growth driven by illegal immigration (lol), AI productivity improvements, and never-ending fiscal deficits (MMT lol) then the neutral rate is going to be a lot higher than it was during the pre-GFC period when GDP growth and inflation were anaemic. 

 

The economy seems to do just fine with higher interest rates. The main people complaining are investors who need low interest rates to pump up their long duration assets such as Big Tech. 

 

And I agree it is a ridiculous situation when you have traders and investors hanging on to every word the Fed says and waiting with bated breath for every jobs report and CPI print knowing that they will determine whether the Fed cuts once, twice, three times this year and whether the cuts start in March, June, or September. It never used to be like this. 

[gfp]

2 hours ago, mattee2264 said:

The economy seems to do just fine with higher interest rates. The main people complaining are investors who need low interest rates to pump up their long duration assets such as Big Tech. 

 

You really think it's investors in Big Tech that are complaining?  I'm thinking it is commercial property owners and their lenders that are obsessing over the dot plots.