Have We Hit The Top?

[Gregmal]

3 minutes ago, gfp said:

 

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.

I think it’s these asshat macro people. Every data point is “the start” of what they’ve been wrongly predicting for (insert time period). Except they’ll tell you they haven’t been wrong, it’s just seemed that way because of (abc or xyz excuse).

[gfp]

Sure, wrong-way macro guys are complaining as well.  But if I'm on year 4 or 5 of a 5 year commercial loan at 4.5% and it's about to reset at 8+% with banks willing to do 55% loan to value - I'm watching that short term rate and interested in the timing and magnitude.  And the banker is too.

[Hektor]

7 hours ago, changegonnacome said:

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.

If inflation is good for the borrower, and since US is a borrower, why would the Fed want to tame inflation? Why not keep it simmering and inflate away the debt?

[RedLion]

1 minute ago, Hektor said:

If inflation is good for the borrower, and since US is a borrower, why would the Fed want to tame inflation? Why not keep it simmering and inflate away the debt?

They can’t let the people know this is the plan. Otherwise they risk the reserve currency status. But I agree, how is it even possible to grow out of 120% debt to gdp without? 

[gfp]

2 minutes ago, Hektor said:

If inflation is good for the borrower, and since US is a borrower, why would the Fed want to tame inflation? Why not keep it simmering and inflate away the debt?

 

It doesn't matter what the Fed "wants."  They have a mandate for "price stability" and maximum employment and they have recently followed other global central banks into spelling out an arbitrary 2% target.  They were not the first to put out a target rate of inflation - 2% is a common target.  2% is their buffer to avoid deflation when inflation fluctuates above and below the target.  2% inflation over long periods of time is as sound of money as we can hope for with our elastic money.  As you said, a debt-based system needs some positive inflation to avoid risking the collateral death spiral of deflation.

[Dinar]

1 hour ago, RedLion said:

They can’t let the people know this is the plan. Otherwise they risk the reserve currency status. But I agree, how is it even possible to grow out of 120% debt to gdp without? 

You can easily have a zero budget deficit in this country and real GDP 20-40% higher with reforms.  The trouble is how are we going to get reforms?  

1) School vouchers could probably cut the cost of public education in half, and 75% in NYC while improving quality.

2) Ending government guarantee of student loans which cost tens if not hundreds of billions per annum, and also are a drastic misallocation of resources.

3) Gut welfare/food stamps/section 8/public housing/medicaid, etc that cost federal government hundreds of billions per annum and destroy any incentive to work.  This will also send millions of people into the labor force to do something productive.  

4) Reform FEMA and similar agencies.  There is no reason why people should get hundreds of thousands of dollars to live in paradise.

5) End foreign aid - why are we spending $100bn+ per annum on foreign aid?  

6) Reform HB-1 visa programs - this program should exist only for truly outstanding people, so charge companies $50K per annum per employee.  That way really valuable people will still get in, while people who are just cheaper than Americans and depress wages cannot come in.

7) Reform tax code - my proposal:

   a) No deductions, period

   b) First 50K of income is not taxable for individuals, first $100K not taxable for individuals with kids, first $100K not taxable for married filing jointly, first 200K not taxable for married filing jointly

   c) 30% federal tax rate on earned income

   d) 20% LTCG & dividends

   e) End non-taxability of muni bonds

   

[RedLion]

3 hours ago, Dinar said:

You can easily have a zero budget deficit in this country and real GDP 20-40% higher with reforms.  The trouble is how are we going to get reforms?  

1) School vouchers could probably cut the cost of public education in half, and 75% in NYC while improving quality.

2) Ending government guarantee of student loans which cost tens if not hundreds of billions per annum, and also are a drastic misallocation of resources.

3) Gut welfare/food stamps/section 8/public housing/medicaid, etc that cost federal government hundreds of billions per annum and destroy any incentive to work.  This will also send millions of people into the labor force to do something productive.  

4) Reform FEMA and similar agencies.  There is no reason why people should get hundreds of thousands of dollars to live in paradise.

5) End foreign aid - why are we spending $100bn+ per annum on foreign aid?  

6) Reform HB-1 visa programs - this program should exist only for truly outstanding people, so charge companies $50K per annum per employee.  That way really valuable people will still get in, while people who are just cheaper than Americans and depress wages cannot come in.

7) Reform tax code - my proposal:

   a) No deductions, period

   b) First 50K of income is not taxable for individuals, first $100K not taxable for individuals with kids, first $100K not taxable for married filing jointly, first 200K not taxable for married filing jointly

   c) 30% federal tax rate on earned income

   d) 20% LTCG & dividends

   e) End non-taxability of muni bonds

   

I almost entirely agree with your vision and I’d vote for a politician espousing these principles. 
 

It’s just that I don’t ever see our government and people accepting these needed changes. I think the most obvious and likely outcome is the inflation angle.  
 

So I’m trying to plan according to what I think is most likely rather than what I think would be ideal. 

[tooskinneejs]

4 hours ago, Dinar said:

 

7) Reform tax code - my proposal:

   a) No deductions, period

   b) First 50K of income is not taxable for individuals, first $100K not taxable for individuals with kids, first $100K not taxable for married filing jointly, first 200K not taxable for married filing jointly

   c) 30% federal tax rate on earned income

   d) 20% LTCG & dividends

   e) End non-taxability of muni bonds

   

I agree with most of these points too.  With regard to income taxes, I believe people in lower income brackets should pay some tax, even if it is a small percentage.  This makes them have some skin in the game and de-motivates them from voting for politicians promising 'free stuff' because they think it will cost them nothing.

[ValueArb]

4 hours ago, Dinar said:

You can easily have a zero budget deficit in this country and real GDP 20-40% higher with reforms.  The trouble is how are we going to get reforms?  

1) School vouchers could probably cut the cost of public education in half, and 75% in NYC while improving quality.

2) Ending government guarantee of student loans which cost tens if not hundreds of billions per annum, and also are a drastic misallocation of resources.

3) Gut welfare/food stamps/section 8/public housing/medicaid, etc that cost federal government hundreds of billions per annum and destroy any incentive to work.  This will also send millions of people into the labor force to do something productive.  

4) Reform FEMA and similar agencies.  There is no reason why people should get hundreds of thousands of dollars to live in paradise.

5) End foreign aid - why are we spending $100bn+ per annum on foreign aid?  

6) Reform HB-1 visa programs - this program should exist only for truly outstanding people, so charge companies $50K per annum per employee.  That way really valuable people will still get in, while people who are just cheaper than Americans and depress wages cannot come in.

7) Reform tax code - my proposal:

   a) No deductions, period

   b) First 50K of income is not taxable for individuals, first $100K not taxable for individuals with kids, first $100K not taxable for married filing jointly, first 200K not taxable for married filing jointly

   c) 30% federal tax rate on earned income

   d) 20% LTCG & dividends

   e) End non-taxability of muni bonds

   

 

One place I'd quibble is LTCG and dividend rates should be same as earned income as fairness dictates everyone should pay the same rates. To put corporate earnings and capital gains on a level playing field with earned income we'd also have to index capital gains for inflation so only real gains are taxed and allow C Corps to pay dividends pre-tax to eliminate its double taxation. 

 

The second quibble is HB-1 charges. You'd be sending a lot of talented people to foreign competitors. In the early 90s I paid over $20,000 in one time legal fees to get a work visa for a foreign software engineer, and his work ended up creating about 40 jobs at our company and made us millions in value at the companies eventual sale. At the time had I had been forced to pay even $20K annually in fees to keep him I doubt I could have gotten authorization from my CEO/CFO, and the super valuable graphics software he wrote for us would have been written for a competitor in Asia. Second example, who would have paid $50k/year to get Elon Musk a visa when he was a Stanford drop out?

 

I can see maybe $10K a year to separate out the low value hires, or a 10% tax on wages so it scales up but even then I think it's a negative incentive. Better to just freely give out work visas to those who pass a reasonable background check. Anyone who is willing to pack up and leave all their friends and family behind to go try to better themselves in the U.S. is already scoring high on ability and willingness to work hard. Let them keep the visa as long as they keep a job and don't require support, its far better they can work and live in the open and help clear out all the crime associated with our current black market system of not letting anyone but illegals in. 

[james22]

4 hours ago, Dinar said:

You can easily have a zero budget deficit in this country and real GDP 20-40% higher with reforms.  The trouble is how are we going to get reforms?  

1) School vouchers could probably cut the cost of public education in half, and 75% in NYC while improving quality.

2) Ending government guarantee of student loans which cost tens if not hundreds of billions per annum, and also are a drastic misallocation of resources.

3) Gut welfare/food stamps/section 8/public housing/medicaid, etc that cost federal government hundreds of billions per annum and destroy any incentive to work.  This will also send millions of people into the labor force to do something productive.  

4) Reform FEMA and similar agencies.  There is no reason why people should get hundreds of thousands of dollars to live in paradise.

5) End foreign aid - why are we spending $100bn+ per annum on foreign aid?  

6) Reform HB-1 visa programs - this program should exist only for truly outstanding people, so charge companies $50K per annum per employee.  That way really valuable people will still get in, while people who are just cheaper than Americans and depress wages cannot come in.

7) Reform tax code - my proposal:

   a) No deductions, period

   b) First 50K of income is not taxable for individuals, first $100K not taxable for individuals with kids, first $100K not taxable for married filing jointly, first 200K not taxable for married filing jointly

   c) 30% federal tax rate on earned income

   d) 20% LTCG & dividends

   e) End non-taxability of muni bonds

   

 

Yes, please.

[mattee2264]

I'm  British. The welfare state is very hard to roll back. The USA is trying to have its cake and eat it by expanding the welfare state while keeping taxes low. The numbers do not add up so you are getting these huge budgets at full employment. And now you are having millions of illegal migrants who will probably end up on the benefit system. And if AI fulfils its promise you are going to get a lot of structural unemployment. 

[changegonnacome]

29 minutes ago, mattee2264 said:

illegal migrants who will probably end up on the benefit system

 

illegal immigrants almost by definition in the US (no social security number, no papers) are those most perfect of kind of Milton Friedman libertarian workers..........they sit outside the state, they incremental to the economy.....they suck-in no government resources......the true illegal migrant........are dependent on no one but themselves and cash payments they can generate for their labor.....they dont show up for work  - they dont get paid........they get sick - they dont get paid.......they become disabled - tough luck, you dont get paid.

 

Now some states in their infinite stupidity seem to be willing to provide social services to undocumented illegal migrants that's their mistake as it creates an adverse selection problem inside the pool of illegal migrants available......in much of the country however........an illegal migrant is the definition of a solo libertarian entrepreneur - not PTO, no disability, no unemployment assistance.......a lone ranger who eats what he or she generates

[james22]

 

[Dinar]

57 minutes ago, changegonnacome said:

 

illegal immigrants almost by definition in the US (no social security number, no papers) are those most perfect of kind of Milton Friedman libertarian workers..........they sit outside the state, they incremental to the economy.....they suck-in no government resources......the true illegal migrant........are dependent on no one but themselves and cash payments they can generate for their labor.....they dont show up for work  - they dont get paid........they get sick - they dont get paid.......they become disabled - tough luck, you dont get paid.

 

Now some states in their infinite stupidity seem to be willing to provide social services to undocumented illegal migrants that's their mistake as it creates an adverse selection problem inside the pool of illegal migrants available......in much of the country however........an illegal migrant is the definition of a solo libertarian entrepreneur - not PTO, no disability, no unemployment assistance.......a lone ranger who eats what he or she generates

Actually this is blatantly false.  Any illegal immigrant in any state has the right to send his kids to public school and go to the hospital even if he has no ability to pay.  This is mandated by federal law.  

[ValueArb]

12 minutes ago, Dinar said:

Actually this is blatantly false.  Any illegal immigrant in any state has the right to send his kids to public school and go to the hospital even if he has no ability to pay.  This is mandated by federal law.  

 

I think you are both right. For sure they will use emergency rooms, and likely send their kids to public schools. But @changegonnacome is also right that a large number just work and pay for most everything else themselves.

 

This was a long time ago, but I remember when we used to have "migrant" workers. I picked strawberries with them and was always amazed at how freakin fast they could fill their flats. They were almost always no nonsense, no chit chat, just racing down the rows cause we got paid per flat. I was just trying to earn spending money as a 13 year old, and frequently got distracted BSing with my buddies, and probably picked at 1/4 their rate.

 

Historically the migrants would work their butts off for half the year and then spend rest of the year back home in their Mexican villages. This was how they could earn enough to lift their families out of poverty and live well in Mexico. Academics called it "circular migration" as they never wanted to move here But over the last 50 years as a never-ending series of border crackdowns made it harder and harder to cross they started bringing their families and staying, worried they wouldn't be able to make it across again. 

[Gmthebeau]

9 hours ago, RedLion said:

They can’t let the people know this is the plan. Otherwise they risk the reserve currency status. But I agree, how is it even possible to grow out of 120% debt to gdp without? 

Exactly I have never believed the FED is serious about bringing inflation back to 2 percent.  Of course they are going to say that are but unless the bond market eventually forces them too they have no intention of it.

[dipod]

Really tempted to hedge some of my equity exposure with TSLA puts 

[gfp]

13 minutes ago, dipod said:

Really tempted to hedge some of my equity exposure with TSLA puts 

 

That's not a great hedge unless your equity exposure is TSLA stock.  Keep it simple, no need to get cute.

[WayWardCloud]

24 minutes ago, dipod said:

Really tempted to hedge some of my equity exposure with TSLA puts 

 

I did just that last year and got my ass handed to me

[Hektor]

On 2/13/2024 at 5:10 PM, Hektor said:

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? 

 

US Producer Prices Increased by More Than Forecast in January.
Prices paid to US producers rose in January by more than forecast, fueled by a sizable jump in costs of services and highlighting the sticky nature of inflation.

 

https://www.bloomberg.com/news/articles/2024-02-16/us-producer-prices-increased-by-more-than-forecast-in-january?srnd=premium

[Gregmal]

Yes thats the narrative theyre trying to push to keep everyone on the edge of their chair the next month or so. Still ZERO bearing on what will happen in March, or June. 

[mattee2264]

I don't think market cares that much about the timing of rate-cuts so long as economy stays resilient and inflation doesn't take off to the point that rate hikes are back on the table. 

 

Fed will look through any inflationary increases due to the Red Sea situation. They will also ignore any month to month fluctuations. And when it becomes apparent that inflation won't go much lower than 4% without a weakening of the economy (which won't happen so long as deficit spending is $2TR a year) then Fed will probably find a way to change its target or wait patiently for hoped for AI productivity improvements.

 

Still it is a little bizarre to see UK, Germany and Japan surprising markets with negative GDP growth and seeing their stock markets shoot higher. Either market is prophetic and looking through to a robust recovery in 2024. Or more likely the market figures bad news = quicker rate cuts and the rate cuts will produce the desired economic improvements.

 

 

[TwoCitiesCapital]

1 hour ago, mattee2264 said:

Still it is a little bizarre to see UK, Germany and Japan surprising markets with negative GDP growth and seeing their stock markets shoot higher. Either market is prophetic and looking through to a robust recovery in 2024. Or more likely the market figures bad news = quicker rate cuts and the rate cuts will produce the desired economic improvements.

 

 

 

This is concerning me as well. Was already on edge with the U.S. markets ignoring leading indicators, tax receipts, PMIs, composition of jobs, etc. 

 

But now we actually have corroboration from other countries that this slowdown is global and still nothing. Lines go up. 

 

Seems like this is going to be one of those things that appeared obvious in hindsight, but that markets were able to ignore in the moment. In the meantime, content to be heavy in bonds. 

[mattee2264]

Markets aren't stupid. They are seeing evidence of a soft landing and expect that will deliver interest rate cuts and an eventual return to growth (it is better to have a landing so long as it is soft than keep having the landing postponed with the associated lingering uncertainty)

 

The first leg of the bear market was multiples reacting to higher inflation and rate cuts and at the time things looked pretty grim with double digit inflation and uncertainty as to how high interest rates would go and for how long. That leg seems to be over now (barring an unexpected second wave of inflation) and therefore markets are pricing in lower interest rates with a major benefit to P/E multiples. And note that if earnings are $1 then even PE multiples going from 15 to 20 is enough to increase stock prices by over 30%. So it is a pretty powerful impact even if outside of AI there still isn't much evidence of improving earnings.

 

The second leg of the bear market was supposed to be earnings falling as a result of higher interest rates and falling consumption in response to cost of living crisis etc. Not a huge amount of evidence of this. Earnings have been pretty resilient and held up better than most would have expected. And while Big Tech earnings growth has been a lot weaker over the past few years and increasingly relied on cost-cutting/restructuring with the AI hype investors are looking forwards to a return to fast earnings growth.

 

The few bears left standing continue to argue that every landing looks soft until it turns into a hard landing and cite various factors that are delaying the recession (US fiscal deficit spending, pandemic era excess savings, benefits to corporations from locking in cheap long term debt during ZIRP, loosening of financial conditions due to much higher stock prices etc). 

But even if there does end up being a mild cyclical recession the negative impact on earnings will be offset by lower inflation and interest rates and as we saw during COVID the market are comfortable buying the dip and looking through mild recessions. 

[TwoCitiesCapital]

1 hour ago, mattee2264 said:

Markets aren't stupid. They are seeing evidence of a soft landing and expect that will deliver interest rate cuts and an eventual return to growth (it is better to have a landing so long as it is soft than keep having the landing postponed with the associated lingering uncertainty)

 

Markets are plenty stupid from time to time. Pricing the 2021 stock market at 30x+ earnings while knowing inflation was accelerating was idiotic. Seemed like everyone was saying equities were an inflation hedge. Meanwhile, myself and a few others were suggesting real returns on equities were going to be poor, that margins were likely to contract (and profits fall), and that picking your spots in bonds and gold would likely outperform. 

 

And what did we see? Contracting margins and falling profits. S&P 500 profits are STILL below what they were in 2021 in real terms. Even after the double-digit rally in Q4 last year, nominal returns are mediocre and real returns are roughly -2%/yr over that time.

 

The only real surprise here has been the markets willingness to bid stock prices up again, despite an environment that is clearly cautionary and even that couldn't deliver good results to the average stock.  

 

1 hour ago, mattee2264 said:

The first leg of the bear market was multiples reacting to higher inflation and rate cuts and at the time things looked pretty grim with double digit inflation and uncertainty as to how high interest rates would go and for how long. That leg seems to be over now (barring an unexpected second wave of inflation) and therefore markets are pricing in lower interest rates with a major benefit to P/E multiples. And note that if earnings are $1 then even PE multiples going from 15 to 20 is enough to increase stock prices by over 30%. So it is a pretty powerful impact even if outside of AI there still isn't much evidence of improving earnings.

 

On rates: The problem that markets get wrong about rates is that if you're lowering your discount rate, then you should be lowering the average growth rate you expect as well. The effects largely cancel one another out.

 

This was borne out in the 2010s when U.S., Europe, and Japan all had 0% rates. Broad revenue growth was abysmal. GDP was significantly below average. Real earnings to workers and etc suffered. 

 

The primary saviors of the S&P 500 came in the form of refinancing high cost debt and levering up which expanded margins, using cheap debt to buyback shares, and the eventual concentration of the index in a few hyper growth names that were ablet o buck the trend. But 2 of those 3 trends are basically guaranteed to reverse and act as headwinds in a decade of non-zero rates. 

 

1 hour ago, mattee2264 said:

The second leg of the bear market was supposed to be earnings falling as a result of higher interest rates and falling consumption in response to cost of living crisis etc. Not a huge amount of evidence of this. Earnings have been pretty resilient and held up better than most would have expected. And while Big Tech earnings growth has been a lot weaker over the past few years and increasingly relied on cost-cutting/restructuring with the AI hype investors are looking forwards to a return to fast earnings growth.

 

Earnings have NOT been resilient and have NOT been better than originally expected. The only expectations beat were the expectations that were previously cut dramatically. The expectations were earnings would be inflation resistant. We are still below 2021 earnings in real terms by a fair bit. 

 

Not a huge amount of evidence? It's only in services consumers are "splurging". Retail sales plummeted in 2022 in real terms in 2022. 2023 basically got us back to even in real terms. The best characterization of that is stagnation. And that stagnation was existing before we entered a consumer credit cycle. 

 

Now? Credit card defaults are accelerating. Major economies ARE going into recession. Commercial real estate is beginning to weigh on regional banks and we know major banks have been cutting back on lending. I have to believe that sets us up for a worse 2024 than 2023 i.e worse than stagnation. 

 

 

1 hour ago, mattee2264 said:

 

The few bears left standing continue to argue that every landing looks soft until it turns into a hard landing and cite various factors that are delaying the recession (US fiscal deficit spending, pandemic era excess savings, benefits to corporations from locking in cheap long term debt during ZIRP, loosening of financial conditions due to much higher stock prices etc). 

But even if there does end up being a mild cyclical recession the negative impact on earnings will be offset by lower inflation and interest rates and as we saw during COVID the market are comfortable buying the dip and looking through mild recessions. 

 

I don't know what is delaying the recession. The timing of these things is always difficult - especially when confounded by trillions in an unprecedented bout of stimulus.  But forward data continues to disappoint and now coincident data is starting to. 

 

The only three things that appear to be holding up are the 1) S&P 500, 2) the unemployment rate, and 3) GDP.

 

1) The S&P can make mistakes and turn fast. It has repeatedly done so in the past 

 

2) On unemployment? The numbers have been trending in the wrong direction. And while headline numbers are fine relative to historic figures, the moves under the surface are concerning. More part time jobs and fewer full time jobs. Higher wages, but fewer hours, leading to less take-home pay. More government jobs, fewer private sector jobs. Etc. etc. etc. The weakness is there and growing and we know this is a lagging indicator

 

3) On GDP? It's painting an entirely different picture from GDI which aims to measure the same thing. And it can be revised lower as it has been in prior periods leading into recessions. My expectations are historical GDP figures will be revised lower and GDI figures will be revised higher and GDP will not appears as robust in hindsight

 

And lastly, we have official recessions in Germany and Japan. France is teetering on the edge. Most of the rest of Europe is slowing. As is Canada. As is China. The majority of the global economy is pointing to a slowing. 

 

Edited February 16 by TwoCitiesCapital