Have We Hit The Top?

[Spekulatius]

2 hours ago, Dinar said:

Spek, you bring back memories of my German history class.  Rosa Luxembourg and Curt von Schleicher say hello.  

 

Hyperinflation only occurs when the trust in the government is lost. This typically happens after a catastrophic event (lost war, won war) a large scale natural disaster or a complete idiot is elected. Money is basically a promise to pay and that means that if trust in the government is lost, the trust in the value of money is lost as well.

 

I am not aware of any incidence where hyperinflation occurred without a collapse in society and with it the economy. You can look at Weimar, Post WW2 Germany, Venezuela, Argentina and many others.

 

I don't see this occurring in the US or Europe, but if it does, there are a lot of things to worry about, even if you own assets that are inflation proof.

[Spekulatius]

Personally, I think the Fed guys should surprise anyone and raise by 100 bps in March and signal another unspecified raise coming after that. They are so far behind, it's not even funny any more.

 

This is economic advice from the peanut gallery.

[Gregmal]

Well at least we can hope the dum dums keep selling stocks that do well with inflation like they did all of January. 

[wabuffo]

Mr. Equity Market & Mr. Bond Market (as well as Mr. Gold Market) are all on Team Transitory, FWIW.

 

The Fed will just invert the yield curve with their hikes. 

 

Watching the Fed is like watching a 1-year old in diapers carrying an expensive Ming vase high over their head while wobbling around a room with lots of obstacles in their path.  It only ends one way.

 

Bill

Edited February 10, 2022 by wabuffo

[TwoCitiesCapital]

4 minutes ago, wabuffo said:

Mr. Equity Market & Mr. Bond Market (as well as Mr. Gold Market) are all on Team Transitory, FWIW.

 

The Fed will just invert the yield curve with their hikes. 

 

Watching the Fed is like watching a 1-year old in diapers carrying an expensive Ming vase high over their head while wobbling around a room with lots of obstacles in their path.  It only ends one way.

 

Bill

 

Markets are already pricing in cuts like 2 years out. The bond market is pretty clear that any aggressive rate hiking cycle is likely to be a policy error. 

 

Will they be right?

 

But I have a lot more faith in the market then the Fed, seeing as the market has predicted Fed action with a great deal of accuracy and a multi-month lead time historically. 

[Guest]

22 minutes ago, wabuffo said:

Mr. Equity Market & Mr. Bond Market (as well as Mr. Gold Market) are all on Team Transitory, FWIW.

 

The Fed will just invert the yield curve with their hikes. 

 

Watching the Fed is like watching a 1-year old in diapers carrying an expensive Ming vase high over their head while wobbling around a room with lots of obstacles in their path.  It only ends one way.

 

Bill

 

And which team are you on, Bill?

[wabuffo]

And which team are you on, Bill?

 

Team Transitory.   I hope.   But I'm not dogmatic about it.   Still have my TLT LEAP puts on as insurance if long rates really spike.

 

Last year I thought that BBB would pass by a hair, spending would ramp up & Fed taxes would be raised.  I also though the end of the debt ceiling meant everything was setting up for a big jump in rates & inflation.

 

But BBB didn't pass & the US has kept the 2017 tax cuts in place.  Many of the pandemic spending programs were one-timers & with the freak-out over inflation, Congress won't pass anything, perhaps until the end of Biden's 1-term presidency.

 

So guess what, the economy is booming already, Fed tax receipts are booming (+46% Dec 2021 vs Dec 2019, +28% in Jan 2022 vs Jan 20).   Once all the pandemic restrictions are completely lifted, I think the US economy roars.  

 

...and that huge deficit?   Its already turning into a short-term surplus before the likely big tax receipt months of March, June and April (the really big one).

 

The macro is setting up as a bit of a whipsaw, but its coming... and it will surprise everyone who thinks rates will rise, deficits will increase & monetary inflation will continue.   By the end of the summer this year, we could have an inverted yield curve & slight deflation (bad for gold & long rates, good for ending inflation).

 

Bill

Edited February 10, 2022 by wabuffo

[Guest]

Thanks, Bill. So are you still long gold then? Sounds like you aren't. 

[wabuffo]

Not long gold.  Once BBB looked dead, I pitched it overboard. Gold's thesis depended on profligate spending still coming out of Congress & the prospect of higher taxes.  

 

Stayed with the 2023, 2024 TLT puts.

 

Bill

[Viking]

1 hour ago, wabuffo said:

And which team are you on, Bill?

 

Team Transitory.   I hope.   But I'm not dogmatic about it.   Still have my TLT LEAP puts on as insurance if long rates really spike.

 

Last year I thought that BBB would pass by a hair, spending would ramp up & Fed taxes would be raised.  I also though the end of the debt ceiling meant everything was setting up for a big jump in rates & inflation.

 

But BBB didn't pass & the US has kept the 2017 tax cuts in place.  Many of the pandemic spending programs were one-timers & with the freak-out over inflation, Congress won't pass anything, perhaps until the end of Biden's 1-term presidency.

 

So guess what, the economy is booming already, Fed tax receipts are booming (+46% Dec 2021 vs Dec 2019, +28% in Jan 2022 vs Jan 20).   Once all the pandemic restrictions are completely lifted, I think the US economy roars.  

 

...and that huge deficit?   Its already turning into a short-term surplus before the likely big tax receipt months of March, June and April (the really big one).

 

The macro is setting up as a bit of a whipsaw, but its coming... and it will surprise everyone who thinks rates will rise, deficits will increase & monetary inflation will continue.   By the end of the summer this year, we could have an inverted yield curve & slight deflation (bad for gold & long rates, good for ending inflation).

 

Bill

The future path of inflation is key. If inflation remains elevated into 2H then bond yields will be moving much higher than people expect. Who called the 10 years to be over 2% today? No one i know. 
 

Bridgewater is calling for inflation to be at 5% at YE. Why? It is in the process of broadening out (everything in the economy is now going up). Not consensus. Every year there is one or two important things the market gets very wrong. I am starting to wonder if the 10 year yield does not surprise to the upside later this year (closer to 3%). I remain open minded

 

PS: my local Mc Donalds was closed today (drive in only). Reason? No labour. I have never seen that before. Wait until the economy opens up post Omicron AND THE DEMAND FOR LABOUR INCREASES. When you are already at full employment…

Edited February 10, 2022 by Viking

[Spekulatius]

Yeah, gold bugs today:

 

 

When we talk about transitory inflation, what does this mean? How long is transitory? If we get 7% inflation this year and let's say 5% next year, we have 12.4% chained inflation in two years. If we then get back to 2% in year 3, is this OK?

 

Transitory in my book would be we get 7% this year and -3% next year, which would be ~2% annualized but I am fairly sure that's not the expectation here, or it is?

 

Just an observation and I posted this before but at my work, the inflation mentality is already there. Everything we sell gets price increases across the bank. All input costs are rising too, some ridiculously so. This in sector that has seen very little price increases since I started to work in 1997. Not even during the boom in 2000 I have not seen inflationary increases like we have today. I am sure my experience is not an isolated one.

 

Once the inflation cat is out of the bag, it's not easy to get it under control as these things develop their own momentum.

 

[CorpRaider]

Yeah, I mean shutting everything down and dumping cash on the people logically seems likely to cause some inflation spikes.  But then again it seems not totally dissimilar to an oil shock or something and then maybe you get that FOMO going.  Seems like all financial anomalies are about fear or greed in the end.

 

Seems like there's a lot of psychology and complex adaptive systems to try and factor in when venturing guesses as to whether it takes hold.  Stay frosty my accounts.

Edited February 10, 2022 by CorpRaider

[Gregmal]

Much of the supply and demand imbalances and thus insane pricing is easy fixable and will be resolved shortly. 
 

On the other hand, it’s gotten so amusing now every 1% market pullback we all seem to be “ready and waiting” for the bear to emerge. WTF

 

plenty of ways to make money right now, if you’re having trouble perhaps just change the focus

 

 

[Gregmal]

And FYI, the treasury is now back to where it was….in like 2016….oh the horrors. What happens at 3%!!!! Where it was in ‘14!
 

What a giant waste of time worrying about such shit. 

[Gregmal]

Actually scratch that, 2% 10 year was 2019. We re scared of returning to 2019. Maybe I can get more Disney under 150 soon please? 

[LearningMachine]

5 hours ago, Gregmal said:

What happens at 3%!!!! Where it was in ‘14!

 

Indeed, in January 2014

• 10 year treasury was ~2.86%
• S&P 500 P/E was ~25
• S&P Earnings were ~120
• S&P was at 1822

 

Since 2014, S&P 500 earnings have gone up less than 50%, but S&P 500 has more than doubled, because of increase in P/E multiple which is influenced heavily by interest rates. 

 

What would be S&P 500 today at P/E multiple of 25 that it was in 2014?

 

In 1974, 10 year treasury hit above 8%, and P/E multiple hit below 9. 

 

What would be S&P 500 at P/E multiple below 9 that it was in 1974 if we hit higher interest rates by any chance this time? 

 

I'm not saying any of this is going to happen with certainty and not do anything. As always, I'm just saying we should look to do reasonably ok both ways whether it happens or not. 

Edited February 11, 2022 by LearningMachine

[Gregmal]

A lot of these things exist but in tandem with many other variables. However over and over investors say “rates” or “fed” and then look at it in a vacuum and then draw ridiculous conclusions. That’s all I’m highlighting. In January all we heard was that “this”! was happening because of the Fed. What was “this”? A 5-10% pullback LOL. Of course “this” didn’t happen because of the Fed when everything rebounded….nah…when things came back there was no commentary. Now -1% and again we re fabricating reasons for it.
 

I’ve heard for ages that rising rates are bad for reits and I’ve repeatedly said get lost, no they aren’t. Well, last two years we’ve had probably 25% rent growth on average and companies are guiding for 8-12% on 2022. Perhaps the 10 year hits 3% up from .5 and the Fed hikes 4x. So what? If we have more rate hikes in 2023 it’s gonna be because rents will go up another 10%. If we exclude content all the time everything is scary. 
 

So, as always, a lot of much ado about nothing. 

[TwoCitiesCapital]

PPI outpacing CPI over the last 12 months. Producer prices are up ~9.7% YoY while CPI is at 7.5% YoY. This likely means margin compression even if revenues are growing. Could be painful for bottom lines - especially when considering rising labor costs. 

 

Secondly, Druckenmiller was fond of using oil prices, interest rates, and the USD to forecast earnings recessions. All 3 are currently significantly up over the last 6-months signaling tighter financial conditions (higher rates), higher input costs (energy), and less competitiveness with overseas revenues (USD). 

 

Seems to me that it's becoming increasingly likely we'll see an earnings contraction in the next 12 months. Maybe nothing happens in response like 2015, but 2015 didn't have as high of a multiple on the market nor a Fed tightening into the face of high inflation. 

 

With TLT plumbing the low end of its 1+ year range, I'm tempted to start inching into long-dated bonds here. I dropped my position in PFIX (hedge against rising long rates) today for a modest profit. 

 

Forward yield curve is already inverted for 2s-30s in 1-year out. Market is currently pricing in significant fragility by early 2023. I'm thinking that bonds might actually be the play for the next 12 - 18 months.... exactly at the time nobody wants to own them. 

 

[Viking]

3 hours ago, Gregmal said:

A lot of these things exist but in tandem with many other variables. However over and over investors say “rates” or “fed” and then look at it in a vacuum and then draw ridiculous conclusions. That’s all I’m highlighting. In January all we heard was that “this”! was happening because of the Fed. What was “this”? A 5-10% pullback LOL. Of course “this” didn’t happen because of the Fed when everything rebounded….nah…when things came back there was no commentary. Now -1% and again we re fabricating reasons for it.
 

I’ve heard for ages that rising rates are bad for reits and I’ve repeatedly said get lost, no they aren’t. Well, last two years we’ve had probably 25% rent growth on average and companies are guiding for 8-12% on 2022. Perhaps the 10 year hits 3% up from .5 and the Fed hikes 4x. So what? If we have more rate hikes in 2023 it’s gonna be because rents will go up another 10%. If we exclude content all the time everything is scary. 
 

So, as always, a lot of much ado about nothing. 

My top conviction idea for 2022 was volatility. The simple way to get rich the past 10 years is to simply follow the Fed. When they were adding liquidity - invest (buy and hold). A monkey throwing darts and getting rich kind of thing.
 

When the Fed is removing liquidity (like now) - trade (play the volatility). Not with your whole portfolio. But with a chunk of it. I am back to 45% cash. Between now and mid-March (when the Fed announces its first rate increase) my guess is we will get another big sell off. Stock pickers will be the ones making good money in 2022. The dart throwing buy and hold monkey is going to have a tougher time this year.
 

My guess is this year we are going to get so many big swings in markets that investors are going to want to get on a roller coaster so they can get their bearings back. 

Edited February 11, 2022 by Viking

[Viking]

1 hour ago, TwoCitiesCapital said:

PPI outpacing CPI over the last 12 months. Producer prices are up ~9.7% YoY while CPI is at 7.5% YoY. This likely means margin compression even if revenues are growing. Could be painful for bottom lines - especially when considering rising labor costs. 

 

Secondly, Druckenmiller was fond of using oil prices, interest rates, and the USD to forecast earnings recessions. All 3 are currently significantly up over the last 6-months signaling tighter financial conditions (higher rates), higher input costs (energy), and less competitiveness with overseas revenues (USD). 

 

Seems to me that it's becoming increasingly likely we'll see an earnings contraction in the next 12 months. Maybe nothing happens in response like 2015, but 2015 didn't have as high of a multiple on the market nor a Fed tightening into the face of high inflation. 

 

With TLT plumbing the low end of its 1+ year range, I'm tempted to start inching into long-dated bonds here. I dropped my position in PFIX (hedge against rising long rates) today for a modest profit. 

 

Forward yield curve is already inverted for 2s-30s in 1-year out. Market is currently pricing in significant fragility by early 2023. I'm thinking that bonds might actually be the play for the next 12 - 18 months.... exactly at the time nobody wants to own them. 

 

@TwoCitiesCapital What if companies have pricing power? What if they are able to increase prices to cover all cost increases AND a little extra? I love Druckenmiller. I also think companies today have pricing power. And that is one of a couple reasons why the inflation genie is out of the bottle. Pandemics, in short, are a bitch.
—————

Now i know that is NOT what history says SHOULD happen. Or what the text books say. But it looks like that is what is actually HAPPENING. And earnings continue to beat expectations (in aggregate). 
—————

Looking out into 2023 you might be right. I just think you are way early. The inflation dragon is just getting started with the mayhem. Lake Town is burning. But we are way too early in the story… the hero is still bumbling around and has only just started looking for his sword… And there are no guarantees he actually has what it takes to slay the dragon (this is, after all, not a Disney movie). 

Edited February 11, 2022 by Viking

[TwoCitiesCapital]

3 hours ago, Viking said:

@TwoCitiesCapital What if companies have pricing power? What if they are able to increase prices to cover all cost increases AND a little extra? I love Druckenmiller. I also think companies today have pricing power. And that is one of a couple reasons why the inflation genie is out of the bottle. Pandemics, in short, are a bitch.
—————

Now i know that is NOT what history says SHOULD happen. Or what the text books say. But it looks like that is what is actually HAPPENING. And earnings continue to beat expectations (in aggregate). 
—————

Looking out into 2023 you might be right. I just think you are way early. The inflation dragon is just getting started with the mayhem. Lake Town is burning. But we are way too early in the story… the hero is still bumbling around and has only just started looking for his sword… And there are no guarantees he actually has what it takes to slay the dragon (this is, after all, not a Disney movie). 

 

Maybe they do. But then you'd expect CPI to be outpacing PPI. That isn't happening yet. I'm just observing the data. 

[Gregmal]

7 hours ago, Viking said:

My top conviction idea for 2022 was volatility. The simple way to get rich the past 10 years is to simply follow the Fed. When they were adding liquidity - invest (buy and hold). A monkey throwing darts and getting rich kind of thing.
 

When the Fed is removing liquidity (like now) - trade (play the volatility). Not with your whole portfolio. But with a chunk of it. I am back to 45% cash. Between now and mid-March (when the Fed announces its first rate increase) my guess is we will get another big sell off. Stock pickers will be the ones making good money in 2022. The dart throwing buy and hold monkey is going to have a tougher time this year.
 

My guess is this year we are going to get so many big swings in markets that investors are going to want to get on a roller coaster so they can get their bearings back. 

I agree. I think we spent most of the year over 20 VIX. Between that, commodity environment, and rate swing, an investor would be wise to take an interest in an education focusing on how the navigate the futures markets. 

[Gregmal]

Got oil/gold futures and call options? Thanks to all who voted for this! What a dumb ass. Now he's gonna tax opec! LOL

[SharperDingaan]

It really doesn't get much better than this. 

Should the rumors hold up, we close out the next 2 weeks at WTI > USD 100

https://www.pbs.org/newshour/world/putin-to-invade-ukraine-next-week-according-to-u-s-officials

 

SD

 

 

[Gregmal]

Yup and $100 CL calls going out up to 3 years from now cost $2 not long ago. But people believed the lies that the politicians, bankers and doctors told them. Too easy. Enjoy your $5 a gallon gas.

Edited February 11, 2022 by Gregmal