Have We Hit The Top?

[mattee2264]

I think the bear case is simply peak earnings and peak multiples means there is some distance to travel. 

 

2021 earnings were inflated by the temporary boon e-commerce, cloud companies, consumer goods companies etc got from the pandemic and an economy pumped above its productive capacity by excessive levels of stimulus. 

 

2021 P/E multiples were inflated by zero interest rate policies, QE and a lot of optimism about technology, the recovery and the moral hazard of knowing the Fed has the market's back.

 

We've already seen a slowdown/decline in earnings in a lot of technology and e-commerce companies and future quarters may see further declines especially if the global economy goes into recession. And even if you think the US can achieve a soft landing the rest of the world might not be so lucky and therefore foreign earnings of US companies may decline significantly. A lot of tech/e-commerce companies doubled their earning power compared to pre-pandemic levels and a good portion of that increase is unlikely to be sustainable. The fiscal and monetary stimulus is wearing off. There are margin pressures from rising input costs and wages. Capacity constraints due to supply shortages. 

 

Obviously rates are going up and the Fed is going to suck some of the liquidity out of the system. The S&P 500 has a high concentration (by market cap) in growth stocks and they are very vulnerable to multiple compression following rising rates and earnings disappointments. Confidence in the Fed put is declining. And generally confidence is declining and this has a big impact on the willingness of investors to pay high multiples for stocks. 

 

There are also some technical factors. For example as the bond bubble continues to burst and bond prices decline that requires rebalancing. And deleveraging also has a big impact on buying power and there is contagion as losses on the more speculative stuff require hedge funds etc to sell their more liquid holdings. 

 

And a lot of people are still bullish or at least relatively sanguine  believing the economy is strong enough to handle rate increases and QT and inflation is close to peaking and will come down pretty quickly and any recession will be relatively mild and the Fed is all bark and no bite and will rescue markets if they go much lower or if there are signs of economic weakness. Of course this may turn out to be true in which case buying the dip continues to be good advice. 

 

But if this optimism is misplaced then more people will convert from bulls to bears and markets could go a lot lower via lower earnings and lower multiples. 

 

 

[wabuffo]

Any tea leaves your seeing.

 

The average stock (based on the Wilshire 5000 Equal Weight Index) is already down ~30% since the top last summer.  How much lower can things go?  The worst drawdowns in the past were 40-50% - so we're getting closer to the bottom, I think.  I know I am getting very bullish on stocks to buy at the moment.

 

As for the US economy, I think inflation is already receding.  The Fed's QT program is going to be a nothingburger since the US Treasury has already superseded it with its huge recent surplus.  US household balance sheets entered this period in much better shape than either 2000 or 2008 - so I would guess, the falling US budget deficit turns inflation into disinflation into slight deflation.

 

In addition, rising rates are helpful because the US household sector is helped more by rising interest income (time deposits, MMFs) than hurt by rising interest expense (95%+ of residential mortages are 30-year fixed and consumer debt is also fixed in the short term - credit cards, car loans, etc).   While the residential market will slow down due to rising mortgage rates, it actually needs more inventory for sale so a prolonged period of rising rates will help create a better supply situation for buyers.  In addition, US demographics are wildly bullish for the residential market.

 

So overall, my advice is:

- ignore the Fed narratives (QT is irrelevant and rising rates are helpful)

- focus on the shrinking US budget deficit which is falling very fast

- US economy will weather the blows just fine so don't let the bear porn affect what is in front of you as value returns to the stock market.

 

Bill

Edited May 15, 2022 by wabuffo

[Gregmal]

Anecdotally, have been to 4 different Home Depot’s this weekend. The parking lots look like tailgate parties.

[Spekulatius]

One thing to consider,  since we are talking about the 70’s is that back in the early 70’s, didn’t really expect high inflation and first, the higher inflation was considered to be transitory, just like it is now. External factors were blamed like the newly formed OPEC as a one off factor, not without reason. 
Except the issue was that even once the first oil price shock was over, the inflation never backed down to the level expected.

 

This brings  second and perhaps most important factor in play , there is a difference between expected and inflation (which is priced in) and unexpected inflation (which isn’t and undermines confidence). If inflation constantly runs higher then expect, it undermines the confidence  in the Fed and bad things start to happen is this keep occurring. In this scenario, Gold tends to work best.

 

Again, listen to Damodarans most recent talks about inflation, they are very very good:

 

[Gregmal]

If you just go out into the world what’s going on is just incredible. Granted I am younger, but I’ve never seen such widespread evidence of people doing well. I live in an area that’s more middle class than high end. Nothing wild. But it’s eye popping. I’ve been all over the eastern third of the US the past 3-4 months….it’s everywhere. Some areas much hotter than others but things are good. And people continue to miss it because they’re busy looking for boogeymen that don’t exist, or relying on spreadsheets in their home office that tell them this minor change totally fucks up that, and that once that’s fucked, everything goes to hell, but that’s just not the way the world works. 
 

We ve had people begging for the consumer to collapse, making up narratives, etc, and just the opposite has been occurring. In late 2021 everyone said OMG they’re tapped out but it seemed obvious it was like “no, you guys just started doing the stupid COVID bull shit again”, and sure enough, once that nonsense stopped, things accelerated. Then it was oh the stimulus checks are done, consumer is tapped out starting in January….nope. Now it’s what? Rates went up 2 points? Who cares? Let’s look at that.

 

First, anyone with a 30 year fixed is golden. Second, how are most companies effected? If the debt you already have was well structured, it’s not a big deal. If it wasn’t, well, that’s bad management. But can anyone point to any good companies that NEED to pile on expensive debt going forward to be relevant? If 1-3%  increase hurts the company it was probably crap to begin with. The best example of this is with REITs because they all use the debt markets. Spreadsheets extrapolate these massive changes based on increased borrow costs…but what’s the reality?, rents have been growing teens and higher. Property values have exploded. Fundamentals are insane….but we re worried about paying a few million more per year in interest on slivers of the capital stack that needs refinancing? Dumb dumb dumb. As long as the entirety of the company’s debt isn’t coming due all at once and isn’t covered by a combo of cash flows and asset value…what is the big deal? And if it’s not? Why buy a price of shit like that in the first place?
 

How is the average person effected by rates? Mortgages, not if you have one and if you need one it’s overblown as has been detailed a million times. Credit cards? Does it matter? Most consumer account rates were already 25%. Now it’s 28-30? So what, if you were using that to begin with you were already in trouble. 
 

People have tons of equity in their homes and job openings galore. The more you really dive into it you start seeing how stupid it is to magnify a few point increase in interest rates. And then there’s the whole thing too that if recession occurs then rates come back down….if most of the inflation related stuff has peaked, we re off to the races. I mean the government lies we know that. This 9% figure was really probably double that. Things will start comping those elevated figures and level off on the headlines. Supply chain driven by capitalism will moderate. Used car prices already peaked. I think it’s starting to become clear that the economic activity this summer is going to be like nothing we ve ever seen before. Party like the roaring 20s knocked up South Florida in 2005 and the kid came out and they named is summer 2022.

[Sweet]

Over the long term those who were optimistic about stocks and the economy, who bought and held, have probably made much more money than those who were pessimistic.

 

At the same time, I do think we are large correction, or a decade or more of underperformance.  The former might best best for everyone.

 

I posted periods of the Dow Jones from inception.  It shows decades, multiple at times, of boom, and times when the market has done nothing.

 

In 1940 the DJ was at the same price as in 1920.

In 1983 the DJ was the same price as in 1964.

Two 20 years period with little action.

 

A huge amount of this is obviously just being born in the right era.  But if you are born in an era where the market hits a generational top, how do you outperform?

 

 

 

 

 

 

Edited May 15, 2022 by Sweet

[crs223]

1 hour ago, Gregmal said:

Mortgages, not if you have one and if you need one it’s overblown as has been detailed a million times.

Here is what I took from your post:

 

1,000 words explaining “those with fixed rate debt and assets are golden”.  Sounds good to me.

 

8 words saying “those without assets are in good shape too”.  I didn’t follow that part.  I hope this is true.  If not, the people with assets might find there are no buyers when it’s time to sell.

[Gregmal]

Just now, crs223 said:

Here is what I took from your post:

 

1,000 words explaining “those with fixed rate debt and assets are golden”.  Sounds good to me.

 

8 words saying “those without assets are in good shape too”.  I didn’t follow that part.  I hope this is true.  If not, the people with assets might find there are no buyers when it’s time to sell.

In a way we are regaining the American dream. If people want to work, they can and will get paid very well to do so. There is so much demand for blue collar labor there is no excuse for not being able

to make a better living. We re talking putting in fences, painting, landscaping, tree removal, waiters, service/hospitality, etc. All stuff that’s accessible to everyone.
 

In a sense, much of the recent hiccups are just elitists whining about not being able to buy things they don’t need, having to compete for stuff they already have, and being bothered about not being able to buy assets cheaper. 

[Gregmal]

I mean really think about who and what is driving this “rates” discussion? Then ask yourself how raising rates fixes anything? The majority of the “inflation” is absolutely fixable and the result of stupidity. Energy, already discussed…stop being hostile and pushing this climate bullshit. Consumer products…thanks for finally ending the mask and vaccine mandates. That’s correcting now. Housing, again, fix the supply chain. Cars? For real? We re having trouble producing cars! GTFO. Rates have nothing to do with fixing these things. So why are people pushing for them? Again, who’s pushing for them? Look around. The “inflation” started COVID crap + like 6-12 months after. It’ll probably end 6-12 months after the shit stops which IMO started around February or March. And just like COVID itself, the answer is to just suck it up and deal with it, not start letting the bureaucrats interfere with things.

[Gregmal]

Start looking at who’s saying what by sampling interviews. Media outlets. Politicians. Folks on Twitter or whatever. Hedge fund guys. More often than not, they 1) have way more than they need 2) many multiples of what the average person has 3) a belief that raising rates will hurt the market and economy 4) they’re positioned to benefit or acquire more assets in the event things unfold the way they are lobbying.
 

Little fucked up no? In a nutshell it’s “hey inflation is a big deal you need to kill the economy(didn’t we just hear this in February and March of 2020 as well from these weasels) and yea I’m short or predominantly in cash and hope to buy everything when it’s lower….

Edited May 15, 2022 by Gregmal

[Viking]

There are 2 ways to fix inflation: deal with demand dynamics and/or deal with supply dynamics. 
 

Governments WAY overspent with transfers and this drove insatiable amount of demand for goods. Central banks cut borrowing costs to zero and this drove demand for housing, cars and durable goods into the stratosphere. Financial conditions were way, way too lose: credit spreads hit historic lows. SPACS are one poster child of the excesses. Covid also did its part: supply chains were not able to handle the surge in goods demand and this caused the patient (supply chain) to have a stoke; it MIGHT NOT come back to be his former self FOR YEARS. We also had 8 years of massive underinvestment in commodities and post covid demand just tipped the scales (demand > supply) with prices spiking. The Ukraine war will result in a massive  food shortage in the coming months (spiking prices). And a large swath of workers have permanently left the workforce (at the same time the US has decided immigration is a terrible thing).
 

The end result? Inflation running at +8%. AND UNLIKELY TO COME DOWN QUICKLY. TIGHTEST EVER LABOUR MARKET. And largest number of job openings ever. Bottom line, the US and global economy is completely out of kilter. 
 

There is only one solution for the Fed (control the controllable): REDUCE DEMAND. This is done in a couple of ways: reverse the wealth effect and tighten financial conditions. For consumers: Slow housing. Slow auto. Slow any purchases that are interest rate sensitive (durable goods). When demand from consumers slows businesses will then adjust to the slowing economy (slow investment and hiring). Slower demand will also allow supply chains, commodities markets to adjust.

 

The Fed has no other option. They let the inflation Genie out of the bottle. And it takes years of pain to deal with inflation ONCE IT BECOMES ENTRENCHED (like it is today). The ‘transitory’ ship sailed late last year. We are just re-learning something we already knew (but obviously forgot). 

Edited May 16, 2022 by Viking

[Viking]

4 hours ago, Gregmal said:

Start looking at who’s saying what by sampling interviews. Media outlets. Politicians. Folks on Twitter or whatever. Hedge fund guys. More often than not, they 1) have way more than they need 2) many multiples of what the average person has 3) a belief that raising rates will hurt the market and economy 4) they’re positioned to benefit or acquire more assets in the event things unfold the way they are lobbying.
 

Little fucked up no? In a nutshell it’s “hey inflation is a big deal you need to kill the economy(didn’t we just hear this in February and March of 2020 as well from these weasels) and yea I’m short or predominantly in cash and hope to buy everything when it’s lower….

The rich have made out like bandits the past couple of years - all assets went to the stratosphere. They were the big winners. The people who got screwed were the bottom 50% (don’t own assets). Who does inflation of 8% hit the hardest? The same bottom 50%. 

Edited May 16, 2022 by Viking

[changegonnacome]

10 minutes ago, Viking said:

There is only one solution for the Fed (control the controllable): REDUCE DEMAND.

 

+1……..Inflation is insidious, it must be killed by hook or by crook………..hoping that supply chains reconstitute, hoping that China’s zero COVID strategy is dropped, hoping the port of Odessa opens up, hoping global oil supplies ratchet up, hoping the chip shortage moderates…….isnt a strategy option for the Fed……….they control the price & the supply (QT/QE) of money, the hurdle rate for incremental investment in the economy…….I’m sure they would like help getting inflation back in the 2’s by political leadership/good fortune…..but my sense is they will do it all by themselves if they have too & I for one agree that they should as @Viking points out re:bottom 50%….its not only the smart thing to do longer term for the economy, its the moral thing to do. Having been behind the curve, I think people are underestimating the Fed’s resolve to “fix” this.

[Gregmal]

6 minutes ago, Viking said:

The rich have made out like bandits the past couple of years - all assets went to the stratosphere. They were the big winners. The people who got screwed were the bottom 50% (don’t own assets). Who does inflation of 8% hit the hardest? The same bottom 50%. 

Ok but the rich are always gonna be fine. Who gets hurt most when you price people out of housing? Cash buyers or people with home equity? Nope.
 

The lower 50% have an opportunity I’ve never seen in my life with the job market. Those that ARE working and ambitious are making more money than they ever have. I have tried bidding out a $5000 tree removal job. Wait time is two months and half the contractors never even quoted.
 

Who gets hurt when you hit the panic button on the credit and equity markets? Techies making 300k base, or the guy with the retirements savings who now sees a recession and has to worry about layoffs? Corporations always react the same way, they cut the bottom down and give some middle level 3 jobs. So the solution proposed fucks those we are claiming to “help”? Come on! If we push energy production that’s tons of new jobs. Even better for the little guy. Know nothings make $100k in the oil patch. Who got hurt by the tech bubble burst and crypto crash? Bill Miller or the mailman hoping to finally have some wealth? It’s the Melvin Capital philosophy that people like Ackman are proposing. How dare you take my short selling profits I was entitled to. You didn’t play by the establishment rules and robbed me of additional wealth I didn’t need in the first place. Punish them! I was entitled to those profits because my research is better and those idiots had no business doing what they did and getting to where they were in the first place.

 

The biggest element? Unless you believe the worst inflation is ahead of us, which I doubt, we ve already gotten through the worst of it. Everyone needs to suck it up.

[Gregmal]

I mean why are all the rich guys who are lobbying so hard already short or in cash? Isn’t it clear the system is rigged against the small guy?

[changegonnacome]

45 minutes ago, Gregmal said:

The lower 50% have an opportunity I’ve never seen in my life with the job market. Those that ARE working and ambitious

 

I'll step into a storm here @Gregmal.....but you've made me do it & my intentions are good.......I have no doubt YOU in this economy, if you were in the bottom 50%, hell the bottom 5% would be making out like a bandit as demand outstrips supply........playing employers off each other & ratcheting up your hourly wages/getting promoted, starting side hustles galore....and that fact is I think YOUR blind spot & many others on this forum as you think about the insidious effects of inflation on the economy/society...........see the devastating thing social psychologists have known for a long time and nobody has an answer for it........ is that industriousness, intelligence & conscientiousness (the main ingredients for 'success' in the modern economy) are NOT equally distributed across the population but rather distributed in a bell curve. The left THIRD of that distribution (a not insignificant amount of people ) are getting killed by inflation. They just are.

[Gregmal]

Survival of the fittest. That’s life.

[Gregmal]

I mean I get some of it, but in the other side, why did 2021 make Wall Street soook mad? Guys were livid. Even the buffets and numbers of the world, the vitriol they speak with when talking about bitcoin and GameStop? This stuff always happens to pop up when normal people happen to be doing well in the stock market. No one trashes Tiger funds or Bill Miller for buying the same stuff? There is a real animosity on Wall Street towards Main Street and it’s kind of disgusting. I don’t agree with all the speculative stuff and don’t encourage people to be wild but it’s their money. If they make money, why hate on them?

[changegonnacome]

56 minutes ago, Gregmal said:

Survival of the fittest. That’s life.

 

I disagree with that point of view fundamentally on so many levels, we wont even bother going 'there'........but your other blind spot, connected to the first.......is those same people can & do vote....and that has consequences your Darwinian framework misses.

Edited May 16, 2022 by changegonnacome

[Gregmal]

49 minutes ago, changegonnacome said:

 

I disagree with that point of view fundamentally on so many levels, we wont even bother going 'there'........but your other blind spot, connected to the first.......is those same people can & do vote....and that has consequences your Darwinian framework misses.

I mean can we at least agree that if you need more money and don’t think to look for a better job but instead come to the conclusion the solution is to vote for a candidate who’s just gonna make your problems worse that it’s kinda your fault and you’re beyond help?

[Gregmal]

I’ll happily eat my words and admit I am wrong if in a year or two we re still seeing real world inflation of 10%, let alone the 20 or so we saw this last 12 months which we re being told is only 8%….but it’s hard to see this getting much worse than it is and the bottom line is that the majority of capable people, normal people, have eaten this like champs and are doing very well. If the bottom rung really have a problem with $4.50 gas…well, vote for that to change. It amazes me how even here, you had smart people basically saying, Biden will be a disaster but I hate Trumps personality and let that influence their votes. While stupid, they I assume at least have their money to fall back on. Those whom are really struggling and feeling the pain of $4.50 gas? Maybe don’t be so arrogant next time you get to cast your vote? You can’t afford an EV anyway.
 

Housing they’ll loosen lending standards and implement incentives for lower income and first time.
 

It’ll all take a couple years but again, the answer isn’t to destroy peoples portfolios and home equity so that rich people can get cheap assets…that is ALWAYS what happens when the economy slows down. Middle class and under get screwed and those with resources just come out better off. We keep coming back to “the bottom 50%” rhetoric, but as of today, that’s hardly true. They have the most robust job market for blue collar labor that we ve ever seen and those whom own houses have tons of equity. Many are taking advantage of that. Those who aren’t can’t become the excuse to ruin it for everyone else. All the things I heard people claim will help people, in the real world, don’t actually happen to those people when the economy stops. They lose their jobs. Can’t get credit. No shot at buying a home. No savings to buy stocks….But hey, let’s make things more affordable for them while we accumulate more assets….

Edited May 16, 2022 by Gregmal

[Paarslaars]

2 hours ago, changegonnacome said:

 

I'll step into a storm here @Gregmal.....but you've made me do it & my intentions are good.......I have no doubt YOU in this economy, if you were in the bottom 50%, hell the bottom 5% would be making out like a bandit as demand outstrips supply........playing employers off each other & ratcheting up your hourly wages/getting promoted, starting side hustles galore....and that fact is I think YOUR blind spot & many others on this forum as you think about the insidious effects of inflation on the economy/society...........see the devastating thing social psychologists have known for a long time and nobody has an answer for it........ is that industriousness, intelligence & conscientiousness (the main ingredients for 'success' in the modern economy) are NOT equally distributed across the population but rather distributed in a bell curve. The left THIRD of that distribution (a not insignificant amount of people ) are getting killed by inflation. They just are.

 

Indeed, though you really are just screwed if you score low on all 3 at the same time (which is not a third of the population). I score embarrassingly low on conscientiousness but I'm doing fine having the other two compensate.  

 

I know quite a few people who would score low on the intelligence curve but they are just conscientious enough to function at a well paid laboring job (shift work) and just industrious enough to buy a second property and rent it out, these people will do very well in this environment.

Edited May 16, 2022 by Paarslaars

[changegonnacome]

1 hour ago, Gregmal said:

if you need more money and don’t think to look for a better job

 

Your only continuing to confirm my theory around your blind spot re: this size-able cohort of the population...................& maybe you missed my point about industriousness, intelligence & conscientiousness too.....I dont think so....but to put it more crudely for you, seen as your line about these folks just needing to get a better job if they need more money, suggests you havent quite 'walked a mile in the cohort I've described shoes' and in doing so got over your inherent blind spot which is YOUR intelligence, industriousness & conscientiousness .....see this cohort of the population measured against those three genetic traits i've listed....lets not get into the nuture piece here........means having any basic job is an achievement in and of itself.......their capability & ability to switch jobs, industries, learn new activities/skills & maximize their earning inside a complex ever evolving economy is limited by the result they got in the ovarian lottery. Again ignore nurture here....I'm talking raw computer processing power here married to important inherited personality traits.

 

1 hour ago, Gregmal said:

but instead come to the conclusion the solution is to vote for a candidate who’s just gonna make your problems worse that it’s kinda your fault and you’re beyond help?

 

Again I wont labor this further...........you've pieced the world together in all its complexity and interlocking puts and takes.......havent you come across people in your life for whom comprehension of this complexity is just beyond them and always will be? High inflation, and the puzzle it presents to those same people to individually restore their living standards, is similarly beyond them..............& I'm not talking about 1% of the population here Greg, right. This is many multiples of that and its a sliding scale across to the fat centre of that bell curve.

 

The Fed, i think, understands this and the moral imperative to act.

[changegonnacome]

15 minutes ago, Paarslaars said:

Indeed, though you really are just screwed if you score low on all 3 at the same time (which is not a third of the population)

 

Yep all three, sure its tiny numbers......way out in the left tail, very small numbers here obviously.......to struggle in an 10% inflationary economy doesn't require all three scores to be in the pits......just an aggregate bad one.

[SharperDingaan]

There are a lot of people being seriously harmed by inflation. Seniors on fixed income, the great many on social assistance, and now the lower middle class being forced to foodbanks. Sure, some just made bad decisions, but for most - working more hours/2nd job, for higher pay, is just not practical. Those folks become homeless, and just cost society more.

 

Refuse to deal with the problem, and your government gets overthrown. We see that everyday in most other parts of the world, and we see it in the US as well. Todays toxic political discourse, senate riots, etc. did not come out of nowhere.

 

Wall St is a closed world, under assault; lobbying/bribing on a widespread basis to maintain it's position. Main street can change the politicians every few years, but that's about it - and easily corruptible. The real threat is the changing technology that eliminates intermediation - and Wall Streets reason for existence. 

 

The good news is that closed worlds suffer from in-breeding. The why supposedly very smart and independent people all end up in the same failing investment, and in size. Compare the average business smarts of those doing the day-to-day running of mid/large US companies, vs Wall St - the gap is getting wider, and not in favor of Wall St.  

 

So what?

By and large, trade against the Wall St view - as you know Wall St is compromised. Guerilla trade the discontinuities, where Wall St luminaries will have to lobby their way out - when they are successful, you will be too  Defeat the larger force by not going head-to-head with it, toss sugar/sand in its gas tank instead.

 

SD   

 

 

Edited May 16, 2022 by SharperDingaan