Have We Hit The Top?

[changegonnacome]

 

As a bank CEO up to his tonsils in treasures with MTM losses......that could really benefit has balance sheet by getting some rate cuts and therefore has a huge incentive to declare inflation DEAD such that his balance sheet would instantly be repaired.....the fact Moynihan isn't singing from the rafters that inflation is toast means that (a) he actually really believes it isn't & (b) he's honorable enough not to go out there and talk his & BOA's book and say something isnt so.

Edited June 12, 2023 by changegonnacome

[changegonnacome]

also @Parsad can we open up the "bottom" thread again once we go through the Oct 2021 lows, lets call it SPY 3500? Asking for a friend 

[Parsad]

58 minutes ago, changegonnacome said:

also @Parsad can we open up the "bottom" thread again once we go through the Oct 2021 lows, lets call it SPY 3500? Asking for a friend 

 

Sure.  That may be a ways out...or it may never happen!    Cheers!

[Gregmal]

It’s literally never ends.

[changegonnacome]

8 minutes ago, Gregmal said:

It’s literally never ends.

 

[Ulti]

An interesting take .. depending on what sector.. not bearish

[Gregmal]

Uh oh! Core cpi, the one with housing weighted 1/3 and cheeseburgers from restaurants part of the equation weighed in at a sticky icky icky 5.3! 
 

Anyway, next month we start seeing headline 3 prints. Even if these assholes wanted to display incompetence with more hikes, their hands are gonna be tied.  

[mattee2264]

Kuppy has a good point. Most of the damage will be in interest rate sensitive areas.

 

For the rest of the economy the Debt Deal has basically normalized emergency level over $1TR deficits which is highly stimulative to the economy and to inflation.

 

And the question is how far will the Fed go to try and offset expansionary fiscal policy and what will break in the process. 

 

But I think we have seen that even with falling private demand since COVID government spending has formed a huge portion of GDP and will continue to do so and that makes it a lot harder for GDP to decline significantly irrespective of any weakness in private demand brought about by rising interest rates. 

 

And then of course you have Big Tech that for the most part are highly cash generative so relatively unaffected by interest rate rises and even earn more interest income (and of course markets being markets then give that extra interest income a high multiple!) and the AI buzz which allows investors to dream about fertile future growth avenues even as their core businesses are pretty much ex growth. 

 

How all this all balances out for the market index is anyone's guess. But I imagine winners and losers and probably a sideways market until there is a bit more synchronisation once the economy starts to recover and interest rates are able to normalize 

Edited June 13, 2023 by mattee2264

[Ulti]

30 minutes ago, mattee2264 said:

For the rest of the economy the Debt Deal has basically normalized emergency level over $1TR deficits which is highly stimulative to the economy and to inflation.

And , according to Kaplan, you have to throw in all the government programs who's spending on projects haven't even started.. inflationary

[Gregmal]

Bears looking for 3000 SPY

 

[changegonnacome]

 call me when inflation is dead & buried & cold in the ground 

 

What we got today from the inflation print is:

 

-  a guaranteed July Fed funds raise

 

- another v likely raise in September

 

- we are headed into a period of time now where headline is converging with core......moving forward we are likely to see (if unemployment doesn't budge) some surprising spike ups in MoM supercore inflation. I suspect/predict starting in late summer/early fall due to a monster summer services demand - another round of -  price taking & wage gouging doing just that to supercore MoM.....something like July to August or August to September a disappointing spike up. The US economy is overheated heading into summer 2023.

 

- Fed funds is headed to ~6%.....5.75% for sure......it could be v surprisinging how high this gets....to Kuppy's point lots of folks live in an interest rate protective cocoon (I completely under appreciated this rate insensitivity).....which means, all things being equal, you have to go higher on rates than an ordinary cycle.......what you need to happen doesn't change from a Fed perspective, you need nominal spending growth to fall......how you get there in this new rate insensitive world has to change....you have to HIGHER ....to hit those not in the cocoon harder than you would ordinarily, that you end up with the same level of rising unemployment & nominal spending falls......CRE watch out, new home buyers watch out, homebuilders watch out, autos watch out......and banks up to gills with HTM treasuries.....expect another round of deathsquads hunting for the next First Republic.

 

- SuperCore or Made in America monetary inflation......which lets be clear is a proxy for the delta between nominal spending growth & productivity growth is effectively FLAT for 15 months....in the same 15 month period when the Fed has been "fighting" inflation aggressively....the failure to budge this is concerning....but also enlightening & positive....America is an economy that cant be brought down easily.....the consumer loves to consume....it bodes well for the resuscitation efforts that characterize the period after a Fed induced recession.

 

- stocks aren't concerned.......but the bond market is........the 10yr & the 30yr over the last three months on each reading of stubborn supercore are slowly & relentesley climbing higher......the Fed does not control these....these are market participants......and they are saying that this is beginning to look like a monetary authority that is struggling to fulfill its price stability mandate.....we need to incorporate higher inflation expectations moving forward before we will transact in 10yr & 30yr instruments.

 

Repeat after me -

 

2% inflation & 3.4% unemployment (as a proxy for the delta between nominal spending growth & productivity growth) is like fire & ice. They cannot co-exist contemporaneously.

 

The Fed wont cut & cant cut until unemployment is driven up to at least 4.5% wherein it will likely go on to hit 5.5%....which will indeed fix inflation.

 

In terms of 'market' gazing..........I think the pavlovian dog will misread the pause tomorrow......& buy the pause......no matter what JPow says about the pause, no matter how hawkish he is....this is a market of 1981 babies.....successive cycles have seen rates failing for them for 40 years straight...their whole life, their whole career.....they are salivating, they are good dogs...they have been trained well 

[gfp]

Are you willing to entertain the notion that increased government interest payments to the private sector is net stimulative by increasing government deficit spending, increasing the transfer of new money from the government to the private sector.  So that with government debt held by the public three times what it was last tightening cycle, we may be past the point where fed rate increases are "tightening" and the fed funds rate is no longer an effective tool for managing the economy (unless they bankrupt enough banks to kill demand - a rather blunt tool).  Sizing the fiscal deficits according to economic goals / desires is a much more effective tool to manage inflation and employment.

[Gregmal]

I dont think change is ever gonna come around! When something stops working in terms of an investment variable, you move on. Focusing on this micro granular crap has had zero payoff. This whole rally and inflation deceleration was visible from 100 miles away. If they do another 25 bps here or there, again, who cares? whats your payoff? Another stupid 5-10% blip that instead of taking advantage of, folks sit there and just like last time claim is "just the beginning?". Its ridiculous. 

 

Add in, as talked about to death already, that so much of the inflation is still housing and that raising rates just makes that component even worse...they have zero leg to stand on anymore. They've made the inflation problem worse, not better...but it wasn't terribly bad to begin with because so much of it was one off. 

 

As Kuppy mentioned, you dont even need to bother with most of this nonsensical noise. Just stay in your lane and focus on what you do know and pick your spots. 

 

 

 

[mattee2264]

Agree that there is something conditioned about 

 

a) The flight to safety into Big Tech (given how well it weathered the pandemic)

b) Excitement over the potential for a pause with inflation moderating (another Fed bailout) 

 

But of course conditions are a little different now. This isn't the pandemic so Big Tech won't get that same temporary earnings boost and while AI is exciting aside from perhaps Microsoft/Nvidia it won't have a material impact on profits which for most Big Tech companies have been treading water over the last few years. While if we do head into recession Big Tech are such a large part of the economy their earnings are sure to suffer.

 

And any pause will be because the Fed can see clear evidence that the economy is weakening (which is probably driving some of the fall in inflation that markets are cheering about) and in most bear markets the bottom tends to be about a year after the first interest rate cut so careful what you wish for 

 

 

[changegonnacome]

1 hour ago, gfp said:

Are you willing to entertain the notion that increased government interest payments to the private sector is net stimulative by increasing government deficit spending, increasing the transfer of new money from the government to the private sector.

 

Yep I am for sure - I think that's one answer to the puzzle of ineffective tightening.....in aggregate however if you hurt housing enough, you hurt autos enough (both a function of growing credit fueled spending) & you delay/pause enough capital investment out there.....it crowds out the interest payment uplift.

 

I'm in total agreement with you.....make me King for day.......and the solution to the blunt tool which is monetary policy....is to actually have a Federal Reserve that is given a FISCAL override.

 

Which is to say that in times of inflation or indeed deflation....let's call it a scenario where inflation is a full 100bps over or under the target range...the Fed gets to instruct/command/expand or constrict Congress & the White House spending based on inflation.

 

The 2010's showed how ineffective monetary policy & even QE was......fiscal was asleep during this period........given monetary policies inability to find its way into the real economy........it completely failed.....monetary policy is hugely effective in affecting financial instruments but wholly useless, except at the margins, to affect day to day economy.

 

The next generation/evolution of the price stability/inflation targeting.....I believe....is some type of "fiscal override".....do i think it will ever happen even though its the right thing to do....no I don't, not a chance....I think it's a miracle, in a democracy, if we manage to hold onto independent monetary authorities, never mind giving them a fiscal override ability - for example a fiscal overside in the early 2010's...forcing cash into congresses hands to deficit spend...would have brought us out of the GFC coma way way quicker than we did.

Edited June 13, 2023 by changegonnacome

[Intelligent_Investor]

Imo inflation, at least the parts the Fed can control is pretty much done and dusted, what remains is shit like energy and housing (supply issue) which the Fed doesn't really have any control over. Food/grocery prices have round tripped back to approximately where they were pre-pandemic in many items (still high in many items, but prices are starting to fall as well, or have peaked already), job market has done a 180 and cooled, while in many places as layoffs have begun, banks are pulling back on credit issuance, and cracks are beginning to show in the RE markets. The biggest risk right now is stimulative fiscal policy and a congress/Biden administration that seems to be open to running an unlimited deficit to subsidize the American people. If congress pumps out trillions in stimulus as soon as the economy slows, that's going to generate more inflation than any QE the fed does, just like we saw with the post pandemic stimulus.

[changegonnacome]

44 minutes ago, Gregmal said:

I dont think change is ever gonna come around! When something stops working in terms of an investment variable,

 

I'll change, when the data I look at changes....zero has changed to my fact based thesis....the only thing shifting is the narrative above it....my data set is simple.....nominal spending growth against productivity growth...where BLS payrolls is a good proxy for that spending growth in real time given the US consumer, on average, spend every penny of every paycheck & productivity growth continues to fail to exceed 1 or 2% The output of that data set is what we now all call 'supercore' . I called it 'made in american' inflation back in the day, ya know like wayback in 2022   That's it.

 

I've been super consistent on this since H2 2022.......and if I were to give myself the world's smallest pat on the back.....this supercore, domestic made in america inflation problem we have now.....i was flagging in late 2022 when nobody was talking about it. Go back and have a look at my posts.

 

In regards to how I'm positioned. I stand ready to go 112.5% long as soon as I'm comfortable to do so....I'm only 75-80% long today.....I've always said that I'm always net long....history demands it....how long I am is kind of cycle thing....but a cycle thing driven by bottoms up with some top down overlay....stuff just isn't screaming outrageously cheap to me when you take the median companies FCF from 2019 & inflation adjust it up & certainly not screaming cheap such that I'm excited about it. @Parsad is right some retail stuff looks or did until recently look cheap.....but I just hate retailers...I've no real insight there...i hate shopping.

 

I pick my spots as Kuppy says for sure. I dont sit on my hands. There are always places to play just not in places where the wind is at your front - As regards my portfolio performance - YTD I'm up 13%...last year I sidestepped the carnage being up 15%.....so this year so far I'm kinda in SPY territory so ya know I'm participating with a beta of 1 if I take SPY as my benchmark (which I should).....of course I'd like to be in QQQ territory, I'd prefer a portfolio beta of 2 right now who wouldn't its been a wonderful rally.

 

I stand ready & anxious to pivot to bullish/aggressive....the only reason you'd subject yourself to the IBKR interface, as I do, is cause you stand ready to ask Grandpa Peterffy for a loan - I just think the opportunity set is gonna be better,later in the US which is my preferred hunting ground. I know I can be wrong but needless to say I've a hunch I'll be right. I'm super concentrated in individual LSE value names (HSW, GLV) since Jan 1 both absolutely cheap with effective US dollar shorts built-in......in some respects when they start working (and they have been already) will be the time to get more US focused. Why? The thesis is simple the EU/UK is more rate sensitive than the USA....the EU in recession territory now is evidence of that....the EU is going to resolve its inflation issues relatively quickly vs. rate insentive US......the EU will be easing & stimulating sooner......I suspect the EU will be coming out of a recession when the US is heading into one.........dollar weakens against the Euro.......and I re-deploy & re-focus into the US.

 

I guess you could say my portfolio is on holiday in the UK/EU but anxious to return to the USA asap. That's my playbook. Let's see how it works out.

[Parsad]

 

Was reading some old Globe & Mail October 2019 newspapers I had.  Always fun to see what people were panicking about and what has transpired since.  

 

Most of the articles were fretting about China/US relations, WeWork, Cannabis companies, etc.  The world was yet to go through the Pandemic a few months away, then massive inflation/interest rate hikes, a war in Europe and finally a mini banking crisis.

 

Yet the S&P more than doubled between March 2020 and December 2022, then dropped through 2022 and rebounded into 2023. 

 

With all that volatility and global calamity, if you had just bought the S&P500 and held on in October of 2019, you would still be up 60% in less than four years!

 

Shows how stupid and unnecessary all of our fretting and posting really is!  Cheers!

 

[changegonnacome]

2 hours ago, Parsad said:

Shows how stupid and unnecessary all of our fretting and posting really is!  Cheers!

 

Yep for a great many it is....the trading I mean in terms of being stupid......fretting and posting are FREE and I don't mind so much  Maybe I channel all my bearishness here so I dont touch my portfolio - I do think you need to sanity check yourself sometimes........if over rolling say 5,7 or even 10yr periods your involvement in YOUR portfolio isn't adding Alpha....be honest with yourself.......and step away from the keyboard....or certainly give yourself another rolling 3yr period to do better with an ultimatum that if it fails to measure up again....that 90% of your investable assets are going into SPY ETF or whatever.....and the 10% remaining is fun money cause you enjoy thinking about business problems and all that.

Edited June 13, 2023 by changegonnacome

[mattee2264]

We talk a lot about the economy and clearly so far we've avoided recession and inflation is now fairly modest and we are still at full employment which is all bullish (for now). 

 

But the big driver YTD has of course been the "AI" 7 (AAPL, META, MSFT, NVDA, TSLA, GOOGL, AMZN) which is up approximately 80% YTD while the rest of the S&P 500 has gone nowhere.

 

And if you look at the NYSE FANG+ index which adds to that list Netflix, AMD and Snowflake it is up approximately 70% YTD and is back at 2021 highs which were the product of ZIRP/unlimited QE and fast revenue growth during COVID as they were all major beneficiaries from people spending more time online and on their phones and businesses having to pull forward IT investment to enable remote working.

 

Obviously a lot of buzz about AI and it might reinvigorate growth that was flatlining as their core businesses matured. But can it justify multiples which are 30-40x at the low end and 60-80x at the high end compared to 5% interest rates?

 

[changegonnacome]

Yeah underneath the BIG 7....things aren't crazy expensive.........I'd prefer to buying the stuff underneath the big 7.....but only while the big 7 is ALSO getting killed too.....and I think they'll have another moment before this cycle is over.....I'll go shopping more aggressively in the US then.

 

Greenblatt's crew Gotham, certainly see value in the value/magic formula bucket as they define it....this is the cheapest 700 of a 1400 US stock universe......average forward return for this bucket is 50% over two years...not too shabby...which puts it at the 83rd percentile of the historical US opportunity set (updated daily) - https://gotham.com/

 

AQR/Cliff Asness talking about the same in terms of the growth-value trade.

 

Big tech has been great this year........but like last year.....I believe your asking for heatbreak or at least sub-optimal fwd returns in many of them.......rummaging in the value bucket is the way to go.......multiple contraction heartbreak is not fun.

[james22]

 

[changegonnacome]

Seems to be a Kuppy fan club on here - looking at you @Gregmal see below:

 

 

 

Personally i don't give two shits about energy inflation & either does the Fed....by definition it moves around alot & it is not made in america inflation.......it is made in saudi arabia inflation.....you control what you can....and the Fed can control supercore........and so it has a responsibility to do so under its mandate.

 

If he's correct however - it chimes, for different reasons with my thoughts for later this summer or H2 more broadly.......rubber is hitting the road on this sticky, made in American, underlying supercore inflation in the next few months.......maybe Kuppy is right...and we get some scary headline flare ups....headlines wake folks up I guess and change the narrative.....but like i said I've got my eyes trained on only one thing.....nominal spending growth & productivity....and not really productivity at all....you can take it to the bank thats its sub-2%

[Gregmal]

5 minutes ago, changegonnacome said:

Seems to be a Kuppy fan club on here - looking at you @Gregmal see below:

 

 

 

Personally i don't give two shits about energy inflation & either does the Fed....by definition it moves around alot & it is not made in america inflation.......it is made in saudi arabia inflation.....you control what you can....and the Fed can control supercore........and so it has a responsibility to do so under its mandate.

 

If he's correct however - it chimes, for different reasons with my thoughts for later this summer or H2 more broadly.......rubber is hitting the road on this sticky, made in American, underlying supercore inflation in the next few months.......maybe Kuppy is right...and we get some scary headline flare ups....headlines wake folks up I guess and change the narrative.....but like i said I've got my eyes trained on only one thing.....nominal spending growth & productivity....and not really productivity at all....you can take it to the bank thats its sub-2%

I don’t rule that out. I’ve said I think Q4 probably gets a little interesting on how these things break. But I’m also not as bullish as he is on energy and commodities. 

[mattee2264]

What does give some pause for thought is it would be highly unusual for the leaders in the last bull market are to be the leaders in the next one. So the fact that the Big 7 have accounted for roughly 70-80% of the YTD gains is a little worrying especially as the rest of the index has languished. 

 

On the other hand the rally in the Big 7 has gone on too long and too far to be dismissed as a bear market rally. And the operative factors that killed Big Tech last year (runaway inflation, earnings disappointments) seem to have faded away. 

 

So it seems more likely that we are still in the long secular bull market that began in 2009 with another innings thanks to the AI mania reigniting enthusiasm for Big Tech (and possibly eventually leading to a blow off top within the next year or two). 

 

Last year's bear market seemed more consistent with 1987/2020 in other words a shock driven market panic that was swiftly followed by a V shaped recovery and return to new highs and the bull market resumes its progress to new highs.