Have We Hit The Top?

[SharperDingaan]

The Social (S of ESG) is stakeholder management; essentially change management and corporate social responsibility. The Governance portion is essentially strategic management, policy setting, and transparent reporting. ESG implementation is evolving, components are not weighted equally, and like all things - it is possible to game.

 

As it stands, the reporting impact is disproportionate. While there is a minimum global reporting standard, results feed into largely binary loan issuance, and loan rollover decisions. Non negotiable if you already score poorly on the ESG front.

 

Those bitching often aren't too environmentally conscious at the operations level, are not big on CSR, and see governance as largely just an exchange compliance thing. Companies are simply pressured to retire the 'obstructionists', on behalf of all stakeholders. And as some stakeholders have more 'power', there are very few 'obstructionists' in financial services ...... they were 'retired' a long time ago.

 

In some circles, ESG reporting is seen as the precursor to implementation of the coming fintech revolution. You don't get to implement until you have both very robust ESG reporting, and very good ESG scores. Hence if you insist on being a dinosaur, your remaining time is very limited.

 

Not a bad thing.

 

SD   

Edited May 27, 2022 by SharperDingaan

[Spekulatius]

On 5/24/2022 at 4:00 PM, crs223 said:

 

thank you.   Is #2 also true?

 

1. those transaction do not put a single dime in anyones pocket.

 

2. unwinding those transaction do not remove a single dime from anyones pocket.

I believe both are correct.

 

On another topic - will the Fed ever undo printing? No, it won't because that literally would mean that the Fed would need to take $ out of peoples pocket. It's not going to happen, that's what inflation and taxes are for.

 

Note that the recent surplus in the treasury account just did that. Those are due to tax payments for 2021 (I think) and that took money from peoples pockets into the treasury account. I know how it feels because the treasury got a big check from Spek's household as well, thanks to $LAACZ and a few transactions sales. This is actually deflationary and may have contributed to the equity market rout.

[Libs]

19 hours ago, Viking said:

Mr Market currently thinks inflation is transitory (and will drop big time in 2023). I am not convinced. 
—————

 

This is the mirror image of what happened in 1982. Even after Volker had reduced inflation to 4%, the 10 - year yielded 10% for a while. (What a buy that would have been!). In essence, the market had little faith in Volker. Now, inflation is 8%...... and the 10- year yields 2%. The market has complete faith in Powell.

[Gregmal]

Maybe it faith in Powell, or more likely people just realize 8% ain’t sticking anymore than $35 masks were in April 2020.

 

We continue to see signs everywhere of inflation moderating, but if we want to keep telling spooky stories….

[Spekulatius]

4 hours ago, Gregmal said:

Maybe it faith in Powell, or more likely people just realize 8% ain’t sticking anymore than $35 masks were in April 2020.

 

We continue to see signs everywhere of inflation moderating, but if we want to keep telling spooky stories….

I don’t think that 8% inflation will stick around, but even if inflation only goes back to 5%, it would be pretty bad though. 5% ongoing inflation would require many interest rate rises to counter.

 

Look at it this way, valuation today is 5% equity risk premium and 3% risk free interest rate implying a 8% LT return. If inflation sticks around 5%, the no way the LT bonds stays at 3%, they will have to go to 5% at least. That means that assuming the 5% risk premium stays the same, the stock market will be valued for a 10% return, implying a 10/8= 25% reduction in valuation. Then on top of that we have some economic impact on the rising interest rates likely causing a reduction in earnings 

 

At least that’s my talk on Aswath Damodarans valuation lessons.

[beerbaron]

5 hours ago, Gregmal said:

Maybe it faith in Powell, or more likely people just realize 8% ain’t sticking anymore than $35 masks were in April 2020.

 

We continue to see signs everywhere of inflation moderating, but if we want to keep telling spooky stories….

 

Well, one could argue that Y/Y inflation will continue to drop because the high water mark is fairly recent (feb 2022). So as we advance toward Feb 2023 it should continue dropping (hopefully). AKA, the pain has already been taken.

 

But, I don't think anybody wants to see inflation at 5%, which was the base number used for this month's CPI data.

 

BeerBaron

Edited May 28, 2022 by beerbaron

[Dinar]

1 hour ago, Spekulatius said:

I don’t think that 8% inflation will stick around, but even if inflation only goes back to 5%, it would be pretty bad though. 5% ongoing inflation would require many interest rate rises to counter.

 

Look at it this way, valuation today is 5% equity risk premium and 3% risk free interest rate implying a 8% LT return. If inflation sticks around 5%, the no way the LT bonds stays at 3%, they will have to go to 5% at least. That means that assuming the 5% risk premium stays the same, the stock market will be valued for a 10% return, implying a 10/8= 25% reduction in valuation. Then on top of that we have some economic impact on the rising interest rates likely causing a reduction in earnings 

 

At least that’s my talk on Aswath Damodarans valuation lessons.

Spek, there is a flaw in your argument.  Ceteris Paribus, if inflation is 5% rather than 2%, then yes, nominal discount rate should be higher, but so should in theory be nominal growth in rates in cash flow.  So in theory it should be a wash.   The specifics get more complicated due to decline in value of tax shields attributed to depreciation, working capital impacts, benefit from debts being repaid in debased currency, and impact on consumers who may be hurt by higher inflation (inflation + tax rates can confiscate wealth.)

[Gregmal]

34 minutes ago, Dinar said:

Spek, there is a flaw in your argument.  Ceteris Paribus, if inflation is 5% rather than 2%, then yes, nominal discount rate should be higher, but so should in theory be nominal growth in rates in cash flow.  So in theory it should be a wash.   The specifics get more complicated due to decline in value of tax shields attributed to depreciation, working capital impacts, benefit from debts being repaid in debased currency, and impact on consumers who may be hurt by higher inflation (inflation + tax rates can confiscate wealth.)

Yup. It’s the same mistake people make all the time. Like the “if rates go up real estate is screwed” arguments. And it’s just like nah. Not if rents double in 4-5 years. If an NBA team gives up 100 points a game, they’ll lose. Well not if your style is uptempo and you score 115 a game.
 

In a vacuum anything, especially something like inflation, can sound scary. But one variable moves others and there’s places to exploit. For instance without inflation, there’s likely no wage growth. But that doesn’t stop people from wantonly claiming inflation is stealing peoples wages. It’s not. Not even close.

[mattee2264]

I think it is a bit of an Emperor's clothes type situation. The fiscal stimulus is wearing off and the Fed has stopped adding fuel to the fire (for now) and temporarily spending can exceed incomes because of the savings amassed during the pandemic and the addiction to cheap debt. But a lot of those savings are leaking out of the economy (huge trade deficit in Q1) and elevated energy and food prices and rising credit card and mortgage rates will make a dent in the rest. 

 

The Fed and markets believe in a soft landing and inflation moderating. I think for the most part the share price declines so far are pricing in a) reallocation of spending to the detriment of a lot of pandemic winners b) somewhat higher rates and therefore discount rates punishing growth stocks c) somewhat lower earnings as a result of a mild slowdown in the economy and cost pressures related to supply chain disruptions/fuel price inflation etc. 

 

We may have flirted with the 20% bear market cut off on the S&P 500 but really we are still in correction territory. And bull markets do not end with corrections. They just pause and when the clouds clear and confidence returns the bull market resumes. And in this long run we have already had quite a few near bear markets. 

 

I'm not saying we are heading for a 50% decline because those do coincide with something exceptional. But a 30-40% bear market especially from a speculative peak doesn't seem unthinkable if we do not have the soft landing markets anticipate or the Fed is forced to be more aggressive than it is currently guiding. 

 

And it does kinda feel like end of an era. The bull market was fuelled by cheap money and with the inflation genie out of the bottle the Fed will probably be forced to at least keep things at neutral and turn off the QE taps even if it doesn't end up having to aggressively tighten. And the FANGAM stocks have been responsible for a large portion of the gains in the latter half of the last decade and it is difficult to see them growing at the same kind of rate and multiple compression could continue to be a tailwind. Nor does it seem likely that the economy will do the heavy lifting. In the post GFC era even with all the explosion of debt growth has only very rarely topped 3%. 

 

 

 

 

 

 

 

 

 

 

 

[Spekulatius]

10 hours ago, Dinar said:

Spek, there is a flaw in your argument.  Ceteris Paribus, if inflation is 5% rather than 2%, then yes, nominal discount rate should be higher, but so should in theory be nominal growth in rates in cash flow.  So in theory it should be a wash.   The specifics get more complicated due to decline in value of tax shields attributed to depreciation, working capital impacts, benefit from debts being repaid in debased currency, and impact on consumers who may be hurt by higher inflation (inflation + tax rates can confiscate wealth.)

It’s not the inflation that is impacting equity valautions, it’s the interest rate to fight it. Letting inflation run to 8% at zero interest rates is very bullish for stocks, reducing inflation to 3% with 5% interest rates not so much.

 

But I agree there are many secondary effects like that inflation boost growth rates for certain business, (but not for others) and tightening interest rates slows down the economy which causes the growth rates to fall or even reverse.

 

I do think that if you look at all countries with high inflation rates that eventually interest rates go up too Turkey is an exception and they ruined their currency. Alternatively, look at periods where interest rates were higher in Europe or the US you will find that equity valuations were lower. So, empirically this rule holds up.

 

FWIW, in the end inflation means that demand is out of whack with supply. The Fed cannot increase supply but it can reduce demand via  higher interest rates, which are going to slow down the economy.

 

The Fed basically signaled to us that it is willing to accept a light recession (soft landing) in exchange for lower inflation. That may not be such a big deal, because we had already 1.5% GDP growth adjusted for inflation in the first quarter, so with another quarter at the same level, we would technically have a recession already.

Edited May 28, 2022 by Spekulatius

[SharperDingaan]

The US Fed Reserve meets again in 3 weeks to set rates; the BoC meets in a week to do the same thing - both entities are expected to raise by another 50bp. Do you really think the 1,000 point+ run-up since the last rate reset is going to stick?, or is it much more likely there's a healthy 'correction'? With a lot of the press (paid?) selling a negative story - whining about the impact on RE and the cost of living .....

 

Negative stories sell, positive ones not so much.

Smells like an opportunity to me 

 

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

 

SD

[Spekulatius]

This podcast is pretty good on the Fed /interest rates and the impact on the economy:

https://podcasts.apple.com/us/podcast/odd-lots/id1056200096?i=1000563964446
 

 

In addition, Aswath Damodaran’s recent presentations on YouTube regarding inflation and impact on equity valuations (discount rates ) are also very good.

 

 

FWIW, when you listen to the odd lots podcast , the guests opinion is that the Fed has implicitly removed the Fed put, meaning that the Fed may ignore stocks going down for the time being, and just limit themselves to looking out for orderly credit markets.

Edited May 28, 2022 by Spekulatius

[Gregmal]

The media and hedge fund guys, not to mention analysts and pundits, have spent the last 1-1.5 months really drumming up and laying on thick the inflation story. The “1970s again” narrative.
 

During this time the market began precipitously dropping. 
 

So, one, I think the claim that the market expects nothing but a transitory and soft landing situation to be clearly absurd. Otherwise, why the sell off?

 

But overall, the talking and narrative control, fear mongering, by itself I think plays a role in how things and people react. The stock market the past month or two didn’t react to inflation getting worse, because inflation didn’t get worse. The stock market didn’t, or at least shouldn’t be punishing companies too much, on a go forward basis, for predictable difficulties faced last quarter. The Fed hiking to a whopping .75% doesn’t even create a hiccup on the valuation side so that shouldn’t be it either. Bond yields were basically where they were a couple years ago. Not it either.

 

So if nothing else, I think what’s clear is that there’s always some kind of data or narrative floating around that will justify anyones conviction in just about anything, at any given time. The aggregate of data and circumstance combined with future expectation is really what can and does matter. May 2022 can likely be summer up as a storytellers circus. Inflation didn’t get any worse, Fed did what it said it would do quarters ago. Bonds were at 2017 levels. But the stock market had a correction and that’s because nobodies expectations changed? LOL…we serious here? 

Edited May 28, 2022 by Gregmal

[TwoCitiesCapital]

On 5/27/2022 at 8:15 PM, Spekulatius said:

I don’t think that 8% inflation will stick around, but even if inflation only goes back to 5%, it would be pretty bad though. 5% ongoing inflation would require many interest rate rises to counter.

 

Look at it this way, valuation today is 5% equity risk premium and 3% risk free interest rate implying a 8% LT return. If inflation sticks around 5%, the no way the LT bonds stays at 3%, they will have to go to 5% at least. That means that assuming the 5% risk premium stays the same, the stock market will be valued for a 10% return, implying a 10/8= 25% reduction in valuation. Then on top of that we have some economic impact on the rising interest rates likely causing a reduction in earnings 

 

At least that’s my talk on Aswath Damodarans valuation lessons.

 

 

Interest rates have historically trailed inflation. There just is no mechanism that forces interest rates to trade above it - it doesn't HAVE to happen. 

 

I'd actually expect average 10-year yields to trail average inflation over the next decade by 1-2% per annum. We're going to have a decade of repression, real interest rates will be negative, and stocks and bonds are going to go through crazy volatility IMO. 

[mattee2264]

Seems to be some confidence that core inflation has peaked and is heading lower and the Fed isn't going to be that aggressive frontloading with a few hikes and then when it is clear core inflation is starting to decline they can press pause and take a wait and see approach. So I think assuming earnings hold up it could be another near bear market and the bull market will resume and continue its long run. And even if earnings do fall a Fed pivot will help markets to look through a mild recession. 

 

I think at this point the only downside risk is that there are a lot more earnings disappointments in subsequent quarters and a recession coincides with inflation still sufficiently high that the Fed's hands are tied and it is unable to pivot and slash rates and print money. 

Edited May 30, 2022 by mattee2264

[Spekulatius]

SPGI withdrawing guidance, due to "extraordinary weak macro" - which for them means weak debt issues:

https://finance.yahoo.com/news/p-global-suspends-2022-financial-104500674.html

 

 

This likely affects MCO as well and to some extend investment banks.

Edited June 1, 2022 by Spekulatius

[Gregmal]

Look at what the Fed did. One day of QT and we're already plummeting!

[gfp]

I thought it was worthwhile to listen to Jamie Dimon's actual complete audio from the "hurricane" headlines.  He's always interesting to listen to anyway -

 

https://seekingalpha.com/article/4515787-jpmorgan-chase-and-co-jpm-ceo-jamie-dimon-presents-bernstein-38th-annual-strategic-decisions

[changegonnacome]

Watched Powell testify to congress......i standby my earlier comments in this thread.....which is we might disagree on inflation & its sources, its future trajectory, the Fed's ability to moderate it with their toolkit. We can & have disagreed on its effects on lower income folks & whether they 'deserve' it or not.

 

But watch Powell's testimony and two things come through loud and clear in his characterization of what happens next:

(1) Powell & the Fed believe inflation regardless of its source is insidious & pernicious and waiting for it to moderate might allow it to ingrain in inflation expectations making it even harder to solve later

(2) Powell indicated a moral imperative to act to help the poor...stating clearly his "Why?" This is because he/they believe inflation hurts the poor disproportionally and if the cost to help them is the re-pricing of financial assets & in the case of housing real estate assets then this is the price that must be paid for the greater good and he/the Fed are willing to watch that happen and ignore the squeals from market particpants. 

 

We've argued over many pages here whether these views are right or wrong...what I'm saying here is that the view above, right or wrong, is the only 'view' that matters as this is the view of the people driving the bus here with rate hikes. I happen to agree with him but it doesnt matter what I think...its what he/FOMC think that matters.

Edited June 23, 2022 by changegonnacome

[Gregmal]

I found the Elizabeth Warren squabble ironic. I rarely, although more than I like to admit, agree with her. How does raising rates help the middle class and lower? Pricing people out of homes and into expensive rentals? Or just in general making their cost of borrowing greater? How about pushing the economy into recession so that they have to worry about their jobs? It’s all very amusing watching this play out. 

 

 

 

[changegonnacome]

26 minutes ago, Gregmal said:

I found the Elizabeth Warren squabble ironic. I rarely, although more than I like to admit, agree with her. How does raising rates help the middle class and lower? Pricing people out of homes and into expensive rentals? Or just in general making their cost of borrowing greater? How about pushing the economy into recession so that they have to worry about their jobs? It’s all very amusing watching this play out. 

 

 

Yep all very valid points.....but i guess what I'm saying is Powell doesnt give a F......he's not elected by the people has just been re-appointed to chair and history is calling him to kill inflation 'for the poor'.........its what Jesus would do  Ok I'm being over the top here for effect....but you catch my drift.

 

He has a plan & he has his 'Why' and to top it all off he has the power to execute unencumbered by political considerations & influence. He is on an inflation jihad!! and I'm not too sure when the penny is going to fully drop with US markets but thats my spicy take with religious overtones for shock value

Edited June 23, 2022 by changegonnacome

[Gregmal]

3 minutes ago, changegonnacome said:

 

Yep all very valid points.....but i guess what I'm saying is Powell doesnt give a F......he's not elected by the people has just been re-appointed to chair and history is calling him to kill inflation 'for the poor'.........its what Jesus would do  Ok I'm being over the top here for effect....but you catch my drift.

 

He has a plan & he has his 'Why' and to top it all off he has the power to execute unencumbered by political considerations & influence. He is on an inflation jihad!! and I'm not too sure when the penny is going to fully drop with US markets but thats my spicy take.

Yea I think it’s probably near the arch in terms of rhetoric. Just posted in the other thread, but look at the inputs. Lennar said yesterday demand is strong but they’re now able to lower price. Otherwise? Oil? Steel? Lumber? Stocks? Crypto? All the inflation inputs seem to be pointing the say way”. These are the ones everyone was focused on after the last round of stuff like cars and chips topped out. 

Edited June 23, 2022 by Gregmal

[changegonnacome]

6 minutes ago, Gregmal said:

Yea I think it’s probably near the arch in terms of rhetoric. Just posted in the other thread, but look at the inputs. Lennar said yesterday demand is strong but they’re now able to lower price. Otherwise? Oil? Steel? Lumber? Stocks? Crypto? All the inflation inputs seem to be pointing the say way”. These are the ones everyone was focused on after the last round of stuff like cars and chips topped out. 

 

Yeah i watch that stuff and agree.....but as you've mentioned before.....one cant rule out that Powell, through aggressive Fed action, wants to or will take credit for moderating inflation even if it would have happened anyway....becoming a mini-Volcker legend in his own mind. The beauty with macro and its inherent complexity is that murky correlation and causation will allow him to claim victory regardless......untangling what moderated inflation in the post-mortem is like staring in the looking glass you see what you want to see.

 

The tone of his testimony yesterday and responses to questions around house prices falling/borrowing costs going up, the looming recession etc etc tell you everything you need to know I think. Powell is, IMO, not for turning on this matter.

[crs223]

59 minutes ago, Gregmal said:

How does raising rates help the middle class and lower?

 

 

How do low rates help the lower class?

 

How do low rates help the upper class?

 

I imagine you could make a career out of trying to answer those questions... in a system as complex as our economy it would probably require A/B testing in parallel-but-otherwise-identical universes.

 

 

 

 

 

Edited June 23, 2022 by crs223

[Gregmal]

Yea he's talking tough. What'll he do? IDK, but I love situations where you have short term but fixable problems. We are what? 4-8 weeks removed from when everyone "transitory" flopped into the "inflation4eva" camp. And in that short period a bunch of stuff had already peaked, and the new focus points topped off and now dropped. If the Fed wants to overdue it, eventually there will be a tipping point. I have been surprised how bad the PR for democrats has been. But usually, even if theres big overreactions, common sense eventually ends up prevailing. There is a lot of stuff right now, investment wise, where people are hanging in the balance of every short term report or tick in bonds and making decisions off that. Which kind of stacks the deck in favor of those who arent behaving in such a manner. 

 

On a related note, my buddy is a contractor in very blue leaning Bergen County. He said work was off the charts until maybe 5 weeks ago. Then all of a sudden, as if an internal memo was sent out, everything stopped. Most of these folks are finance people. And the ones he cared to converse with where all like "yea theyre doing the big reset so we gotta pad our savings now"...LOL