Have We Hit The Top?

[Gregmal]

Was reading through an old email chain from last year. Had a good laugh recalling all the folks who found themselves clever and edgy regurgitating various punchlines in regards to "the market" valuation because of "the E falling off"....Q3 is their last shot at that. Dont hold your breath. 

[Parsad]

1 hour ago, Gregmal said:

Was reading through an old email chain from last year. Had a good laugh recalling all the folks who found themselves clever and edgy regurgitating various punchlines in regards to "the market" valuation because of "the E falling off"....Q3 is their last shot at that. Dont hold your breath. 

 

I don't know about Q3 Greg, but there are pressures on the system.  Name me one period where interest rates moved by 5% and some sort of issue did not arise within financial institutions, the economy or consumers.  You have dramatic moves in rates and outlier events will occur.  We saw BAC lose $98B of liquidity in a couple of weeks...we saw a couple of very large regional banks go under...we've seen failures in tens of crypto brokers/institutions.  And rates have not quite peaked yet...we can expect at least one or more raises.

 

I can't time these things, but I know when to start being wary of what could happen.  Thus I remain partly invested and partly sitting in cash until an opportunity presents itself.  175% return since March 2020 to my total portfolio should keep me in good stead even if I have to wait a year or two for that next big idea.  

 

For the most part, I ignore macroeconomics, but as Sam Mitchell told me right before the GFC, "sometimes you just can't completely ignore macroeconomics."  The risk free rate in Canada and the U.S. is now close to or at 5% from less than 1%...yet markets are up and the average P/E is around 18-19.  Markets have baked in that interest rates will peak and come down over the next 12 months.  But I can't see how institutions don't have to mark down loans on their books or CRE asset values.  Consumers while still spending, are stretched and resorting to credit cards and LOC's.  Jobs are plentiful, but budgets are still being stretched.

 

I'd also like to reiterate that I'm not trying to time the market...I'm trying to preserve capital until good, cheap ideas present themselves...it could be now even as things are peaking, or it could be in the depths of a recession.  I'm just finding few ideas right now, and that usually means something has to give not far in the future.  Cheers! 

[Gregmal]

That’s all fair, but there was a certain smugness from so, so many people all through H2 last year; condescension, bravado, they knew it all….among so many of the predictions…you couldn’t trust the P/E on forward anything because “the E was going to fall off a cliff”….I just wonder what those people have to say? Do they try to claim their prediction was correct because of a modest earnings reversion coupled with a higher(much higher from some of the starting points) index? Do they kick the can down the road and just keep saying next quarter, next year? Do they nut up and just admit they didn’t know shit? It’s probably the only reason I ever go check in on Twitter anymore….most of them are still singing the same stale tunes. It’s enjoyable to see it. It’s so enjoyable KNOWING that at best they have not made any money and at worst they’ve gotten their asses handed to them. Huge earnings collapses, Homebuilder impairments. Mother of all bubbles popping. These people are court jesters. I would even turn on CNBC except they never hold anyone accountable. They just put on Tom Lee and Cramer when the market is bullish and then flip to Grantham and Grant when it’s bearish. 

[TwoCitiesCapital]

Earnings have been falling. Whether they continue to do so or not remains to be seen, and whether it accelerates or not as leading indicators suggest, remains to be seen, but directionally bears have been right on earnings and economic fundamentals. Both have continued to deteriorate and fall and have been for a few quarters now. 

 

All that we've really been wrong on so far is that stocks would reflect those deteriorating fundamentals. And while the last 6 months or so have definitely called that into question, I dunno if I'm comfortable saying "yea, fundamentals don't matter. Buy stocks whatever the valuation at whatever the fundamentals because they always go up" as my investment strategy.

 

I've been re-adding materials and energy names that I trimmed heavily in 2021/early 2022 at prices significantly below what I locked in before. I'm getting paid 6-8% in the low risk fixed income that I'm in. And 

While crypto dragged down last year despite excellent asset allocation/stock selection otherwise, this year it's carrying the portfolio back up so... I'm content to wait. 

Edited June 27, 2023 by TwoCitiesCapital

[Gregmal]

After Powell spoke for instance, it was amazing how many people felt validated missing a 10-20% rally across the board because there was a 1% intraday/overnight drop. Victory laps even. It’s just hilarious. I’m tempted to get a Twitter account just to troll these folks but I think about it and then come to my senses. But it does highlight how many pikers are out there in the finance world peddling complete crap. 

[Parsad]

29 minutes ago, Gregmal said:

But it does highlight how many pikers are out there in the finance world peddling complete crap. 

 

That has always existed and always will exist...can't get rid of scumbags no matter what.  Caveat Emptor!  

 

Cheers!

[rkbabang]

1 hour ago, Parsad said:

 

That has always existed and always will exist...can't get rid of scumbags no matter what.  Caveat Emptor!  

 

Cheers!

Can’t get rid of them, nor would you want to. For every no-brainer buy or sell any of us have ever made there needed to be someone on the other end doing something stupid. 

[changegonnacome]

4 hours ago, Parsad said:

I'd also like to reiterate that I'm not trying to time the market...I'm trying to preserve capital until good, cheap ideas present themselves

 

Indeed - basic thinking applies...stocks broadly measured aren't cheap......the Fed is determined to disimprove the economy as a means by which to tackle inflation.....which remains too high and displaying a worrying stickiness........we are about to see them undertake another round of hikes starting in a few weeks........I think you can read into the slowness by which the economy is disimproving as some kind sign of new bull market that the bears (like me) were utterly incorrect.....I think that is wrong.....the surprising slowness is a symptom of ZIRP (so much of the economy locked in low rates).........but you should in fact be a little worried by the slowness of the disimprovement we are seeing as all things being equal it might be quite surprising how high Fed rates may need to go to bring down a rate insensitive economy like the USA.

 

Likewise if the US economy fails to slow down....it effectively means that the Fed is implicitly accepting higher longer run inflation......and in that scenario the long end of the curve moves up aggressively and permanently to a higher plateau.......not a good day in the office for that other long duration asset called stocks.

 

Anyway:

 

- I'd much rather be taking BIG shots on goal with a yield curve that is steepening such that the backdrop for credit expansion exists

- When the Fed would prefer stocks to go UP.....vs. down or not maybe just not caring

- when Joe Sixpack's cashflow statement is modestly improving MoM/YoY vs. modestly disimproving

 

Short version a little like @Parsad is saying I think better opportunities lay ahead....its the future so its a guess.....and I'll keep my big swings till then......lest I be accused of being a permabear missing all the 2023 rally fun I remain ~14% up YTD & so happily matching the beta but with a portfolio that looks nothing like SPY.

 

5 hours ago, Gregmal said:

“the E was going to fall off a cliff”….I just wonder what those people have to say

 

They would say E not falling that much is part of the problem of inflation not falling by that much.....it's not really to be celebrated as a victory its really a failure of the central bank to return price stability......in an inflationary economy seeking to impose disinflationary pressure you WANT your corporate sector to get taken to the woodshed on margins, on earnings.......its part of what real sustained and on target disinflation looks like.

 

We haven't had sustained disinflation...only transitory inflationary falls......remember supercore hasnt moved down in like 15 months, its been flat.....and so the fall in E has been more modest.

 

But they would also say actually take a closer look at E**.......look at the nominal falls of mid-single digits.......now do the intellectually honest thing......and add inflation to the nominal percentage falls...your getting into double digits....it's not pretty....but I'll admit better not as bad as I expected........but I mean do people buy stocks at 20 times earnings for the EPS to fall YoY mid-single digits or low double digits in real terms?

 

That's not my game. I'm a simple man - I like EPS to go UP and to go up inflation adjusted....i.e. real purchasing power increasing.

 

And back to my opening point on the failure of supercore to actually move down........well corporate earnings & inflation are twinned........an inflationary environment allows for price increases.....a true disinflationary environment destroys corporates ability to push price against a weakening consumer....corporates ability to push price hasn't been destroyed because we actually havent deep disinflationary pressure as evidenced by YoY AND MoM supercore numbers.....so E holding up slightly better than expected but still failing significantly is a function of not having truly solved domestic inflation...........true disinflation (which we haven't seen on supercore, remember it hasn't moved at all basically and is why the Fed is getting concerned & gonna jack rates up at least two more times) happens kind of contemporaneously with earnings and profit margins shrinking. They are part of and integral to the process of TRUE disinflation. We haven't had that yet - so why would we expect earnings and margins to have their dramatic moment either?

 

Where I was totally wrong was on the rate insensitivity of this new post-zirp US economy & timing......I really thought that 525bps done as quickly as the Fed did would have moved the needle on inflation and began the negative spending growth cycle needed (credit creation failing/spending slipping & then unemployment rising) ...........which shrinks spending & therefore compresses the delta with productivity growth and returns us to 2% inflation....I'm as shocked as they are that they've made no progress on supercore....I always said 5 to 2 would be a bitch but I meant that in the sense that it would involve pain not that it would be this slow or non-existant in the move down........but like look at the supercore it hasn't moved and correspondingly we've had limited sectoral pain & by extension limited but still significant falls in earnings.....the issue for the Fed in some ways is EXACTLY the same issue with E having 'only' fallen nominal mid-single digits......in an 8% inflation economy that characterised all of 2022 and slipping into 2023.......there remained inside that 8% then 7%, then 6% inflation economy..........a persistent & sticky underlying ~4% inflation economy (supercore) that persists right up until today that has proved immune to 525bps of hikes........transitory overseas inflation went away on its own but made in america inflation remained......and so one part of the inflationary backdrop which allows companies to push price remained in place and so too did their margins & their earnings only slipped mid-single digits.........this is part of the problem for the Fed.......they are all connected.......supercore failing will be accompanied by further leg down in earnings/margins than we've seen. So this aint over till Jay-Pow sings rate cuts. There is another leg to this......and its when supercore ACTUALLY starts to MOVE down.

 

The Fed has supercore in its sights.....its all they talk about.....and its not stopping until it begins to move down that number......betting on an EPS rebound IMO is folly....the SPY rally right now is a bet on EPS troughing basically right now and growing out from there.......but really supercore failing if/when it does & another leg of EPS failing (again) will happen together.........your effectively saying by SPY here that the Fed is going to abandon the 2% target or can't somehow engineer a recession when they control the price of money......but after reading Edward Chancellors excellent book 'The Price of Time'.....I need to stop calling it the price of money.....price of time is more appropriate......the Fed via Fed Funds really induces everybody to shorten their TIME horizons..........credit officers defer making multi-year loans to collect overnight Fed funds instead.......companies don't invest in long term P&E projects.....preferring to dividend cash to shareholders or do buybacks NOW rather than down the road.......VC firms demand FCF now, not later......you raise the price of time enough.....and an economy no longer invests in itself to expand and it stops growing.

 

 

 

** Factset Key Metrics:

Earnings Decline: For Q2 2023, the estimated earnings decline for the S&P 500 is -6.5%. If -6.5% is the actual decline for the quarter, it will mark the largest earnings decline reported by the index since Q2 2020 (-31.6%).

 

https://advantage.factset.com/hubfs/Website/Resources Section/Research Desk/Earnings Insight/EarningsInsight_062323A.pdf

[Gregmal]

Isn’t part of the problem with the dedicated bear thesis that there’s no scenario where the market does well? It’s simplistically 1) the economy has to tank(lie by saying it is already) and 2) if it doesn’t, that the Fed needs to keep trying to sabotage it? 
 

I mean if the thesis is that earnings will decline(previously it was fall off a cliff or plummet…now the goalposts move to “just decline mid single digits”) and the economy will slowdown(with zero context in that it was at an artificial COVID induced high) and because of that, the market needs to go down WAY MORE than the 30% it briefly did…..if that’s the thesis and it’s been “spot on” but the market is higher…that kinda means some liberal assumptions were made, probably arrogantly, with respect to what’s priced in and where the market should be trading. There’s consistently been this wanton assumption that everything should be trading at low-mid teens multiples. Not sure where it came from, but that’s been a faulty assumption. Nevertheless if we have a pullback from 4300 to 3700, I’m sure they’ll feel vindicated. 

 

Larger lesson? WTF are people

doing playing this game? Last year, doesn’t matter what you fancied, there was homerun type buying opportunities. Imagine sitting that out because you disagreed with what the index was trading for?
 

 

[Parsad]

Just a few samples of what is happening in Vancouver, and probably the same in Toronto, Edmonton, Calgary, Winnipeg, etc.  Things are still chugging along, but the economic pinch is more like a harpoon going through the side:

 

https://biv.com/article/2023/06/bc-homebuyers-facing-down-payment-pressure-royal-lepage?utm_source=BIV&utm_campaign=3592374380-EMAIL_CAMPAIGN_2023_06_27_07_10&utm_medium=email&utm_term=0_-3592374380-[LIST_EMAIL_ID]

 

https://biv.com/article/2023/06/government-benefits-helped-lower-income-households-afford-rising-cost-living-pbo?utm_source=BIV&utm_campaign=faed4f974f-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_ba3660ab09-f74cc7858e-[LIST_EMAIL_ID]

 

https://biv.com/article/2023/06/increased-financial-pressures-threatening-choke-life-out-metro-vancouver-businesses?utm_source=BIV&utm_campaign=faed4f974f-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_ba3660ab09-f74cc7858e-[LIST_EMAIL_ID]

 

Cheers!

[thowed]

12 hours ago, Gregmal said:

I’m tempted to get a Twitter account just to troll these folks but I think about it and then come to my senses. But it does highlight how many pikers are out there in the finance world peddling complete crap. 

 

I have been doing Twitter for a bit, and have to stop, because it is so full of idiots.  Of course some honourable exceptions like Pupil, BG2008, Bill Wabuffo etc.

 

Particularly excruciating is the 'Macro Trader gang' who have become mini-personalities, and a load of yes-people following their every word.  The self-satisfaction is extraordinary.

 

I have found some good stuff on small cos - it's great to expand the field beyond here on e.g. small Oil Royalty cos etc.  But like all social media you end up spending too much time on it, being wound up by the idiots, but unable to stop seeing more.

[mattee2264]

I'd say the bears got the following elements of their thesis wrong. 

 

Big Tech: people were expecting a re-run of the 2000 tech bubble bursting. But Big Tech have recovered all the 2022 losses because earnings have held up better than expected and there is future optimism about the course of interest rates/inflation and of course the hype about AI means investors can now project a lot more future growth. Another factor is that Big Tech is seen as defensive by a lot of investors especially given their outperformance during the COVID recession so rotating out of cyclicals and into Big Tech as recession fears start to build has also been supportive of stock prices. 

 

US Gov: deficit spending of over $1TR a year at full employment is very supportive of the economy. And it goes a long way towards offsetting the impact of tightening monetary policy. 

 

Rate sensitivity: while we have seen stuff breaking e.g. pensions in the UK, regional banks in the USA etc. the damage has been contained and the Fed has been able to mop up by injecting liquidity into the system and liquidity is very supportive of stock markets. 

 

Unemployment: we are still at close to full employment. That is supportive of consumption which is the lifeblood of the economy. 

 

Excess savings: this has helped cushion the blow of a higher cost of living and higher interest payments 

 

Sentiment: there is still a buy the dip mentality especially in the younger generation of investors for whom the GFC and dot com bubble are distant memories and in this long long bull market any losses were recovered very quickly (e.g. 2015, 2018, 2020, 2022) and there is still a belief that if things get bad the Fed will bail them out. 

 

But really it comes down to earnings and multiples. 

 

Bulls are foreseeing a mild earnings recession and their 2024/2025 estimates are well above $200. So with a 20x multiple (on the assumption interest rates have peaked and will moderate to around 2-3%) you get close to  5000 SPY.

 

Bears are seeing a modest/severe earnings recession and see 2021 earnings of $220 as peak earnings and typically bear markets bottom out at around 14x peak earnings which gets you to 3000 SPY

 

 

 

 

 

Edited June 28, 2023 by mattee2264

[Intelligent_Investor]

We're in a weird state right now where the fed is trying to fight against the fiscal policy excesses from Washington during the 2020-2021 period as well as the impacts of the Ukraine war while simultaneously trying to avoid killing the middle class. But so much of the stuff that is going on in regards to inflation is out of control of monetary policy - you can't get out of a war or housing supply issues by raising rates, but that's what they are up against now. When rents/home prices have basically gone up and to the right at a double digit % annually clip for 3 straight years with no end in sight due to massive supply shortages, its not surprising that core inflation is still holding up despite heavy rate increases. I just don't see a way the fed can hike its way out of the housing issue without it naturally resolving itself.

[changegonnacome]

7 hours ago, Gregmal said:

Isn’t part of the problem with the dedicated bear thesis that there’s no scenario where the market does well? It’s simplistically 1) the economy has to tank(lie by saying it is already) and 2) if it doesn’t, that the Fed needs to keep trying to sabotage it? 

 

And the problem with the bull thesis is that it believes in a kind fairytale.....that a bout of monetary domestic inflation goes away minus economic pain.....possible but HIGHLY unlikely.

 

The problem with the bull thesis....that October 2022 marks the beginning of a new bull market expansion.......is that you have to believe that Joe Sixpack's purchasing power is increasing in the next 12 months..........yet his sources of spending/funds (credit & wages) are under pressure......inverted yield curve feeding into a credit contraction.......cash out refi ATM closed due to rates & stagnant home prices.......wage increases high enough to unfortunately sustain & perpetuate inflation but actually not high enough to expand his purchasing power in REAL terms.....the foundation for a new multi-year bull market such that I want to get constructive aggressive just isn't in place.

 

Those conditions are simple:

 

-Inflation printing mid-2's

- Fed cutting rates

-Yield curve un-inverted

-BLS non-farm payrolls exceeding MoM inflation such REAL purchasing power is expanding

 

7 hours ago, Gregmal said:

I mean if the thesis is that earnings will decline(previously it was fall off a cliff or plummet…now the goalposts move to “just decline mid single digits”)

 

Well i already explained that its much worse than mid-single digits......you're still living in a simplistic nominal world & pretending we weren't also printing high inflation while SPY EPS was falling. Its like my pal in Phoenix who was telling me the price of his house hasnt gone since he bought in 2021.....that its stayd flat....the problem out there for many right now.......is if X whatever you have hasnt gone up since 2021 that its flat......well it's actually gone down......and if its gone down a little in nominal terms.....well its gone down quite alot in real terms.

 

As I explained the Fed put the first downpayment on an earnings decline...and it was low single digits nominal....double digits real.......and STILL underlying supercore inflation hasn't gone away or moved.......and the scary thing is its not clear to me that the Fed can take any credit for taking us from 8% to 5%....or the big one time headline CPI drop we are about to see in the next few weeks........its all external stuff rolling off.......transitory inflation just 18 months late rolling off.

 

Disinflation Part Two: SuperCore........the sequel........where the Fed actually makes progress on underlying supercore will be accompanied by part two of the earnings decline.......as I said in the Bottom thread......margin compression and earnings declines require a disinflationary backdrop....you can't push price on weakening consumer.....a consumer who's source of funds are contracting credit & wages (unemployment/reduced hours)......and what you @Gregmal perceive as some kind of invalidation of the end of cycle template.....is really just the same problem that J-P has talked about & resolved to address.....which is to say 18 months into this hiking cycle......525bps of rate rises has been insufficient to make any progress on made in america inflation.....& correspondingly and one shouldn't be surprised by this as you think about it....the expected margin/profit decline has been more modest than expected (but still DOUBLE digits real).

 

Why? Because the inflation progress or lack thereof has been way more modest than anyone expected......this US economy......locked into ZIRP rates......has shown itself to be quite immune to Fed funds at 525bps......which should as an observer be concerned on two fronts:

 

(1) How high will Fed funds need to go then in this ZIRP fixed rate US economy to achieve progress on supercore? Fed Funds at 7%? Mortgages at 9%......

(2) If the Fed fails to make progress on supercore inflation such that we are printing 3.5% inflation as far as the eye can see.....what does the 10yr/30yr do......well they sure as hell move up into 4's or 5's....which is not a good day in the office for that other long duration asset equites.

 

Your original Q was - 

 

Quote

Isn’t part of the problem with the dedicated bear thesis that there’s no scenario where the market does well?

 

And my answer is kinda yeah.......as Elvis would say........."we're caught in a trap" of 4% inflation....."we can't walk out"......without either bringing down or inflicting pain on the US economy to fix it......or if you cant bring yourself to envisage 5% unemployment & negative GDP & J-P chickens out.......I can then show you door two where that doesn't happen.........BUT and a big but.....you need to accept that the long bond (10yr/30yr) the DCF magic number is going to adjust upwards to incorporate the new inflationary reality & stock prices go down....again we had a little down payment on that in the 2022 with multiple compression........but if you whisper in Pimco's ear that the Fed is giving up on 2% and is now happy at 3.5%.....oh lord not a good day for long duration assets.

[Gregmal]

7 minutes ago, changegonnacome said:

 

And the problem with the bull thesis is that it believes in a kind fairytale.....that a bout of monetary domestic inflation goes away minus economic pain.....possible but HIGHLY unlikely.

Not mine. I’ve said 3-5% stabilized inflation is a nothing burger, if not even hugely positive for the economy. 
 

The Fed can’t tackle the inflation that isn’t going away with rate hikes. They’ll talk the big talk but eventually if they get carried away we ll see heads roll which is awesome. These dumb dumbs are still looking in the rear view mirror. You wanna drop inflation? Lower rates to 2% and build into oblivion. Instead they’re making housing more expensive and paying people 5% to be cowards and not invest in the economy. 

Edited June 28, 2023 by Gregmal

[brobro777]

I get that these big cap tech companies are wonderful and I've used iphone/Mac for years but Apple at $3Trillion at 31X scares me

 

I would understand more if interest rates were 0% and 10 year was below 2% like in 2016 but now... oof I don't know

 

But then again I own tobacco stocks so what do I know hahaha

[Gregmal]

16 minutes ago, changegonnacome said:

And my answer is kinda yeah.......as Elvis would say........."we're caught in a trap" of 4% inflation....."we can't walk out".

Isn’t that hugely problematic? Markets can always price stuff in. They can always go against you. Not being able to envision a scenario where one is wrong….is suicidal. It’s hugely arrogant. It’s how the frog slowly boils in the pot. 
 

Also hugely arrogant as we’ve talked about is this notion that we KNOW what multiple the market or stocks should trade at. Since the inflation started, no asset class has been as durable as stocks have(no I’m not buying the bs data points which cherry pick start dates in q1 ‘22 that happen well after the bulk of the inflation occurred)…Many businesses are deserving of the premiums. It makes zero sense as I’ve repeatedly stated, if you believe there is inflation to be wasting your time with 5% bonds.

[changegonnacome]

1 minute ago, Gregmal said:

I’ve said 3-5% stabilized inflation is a nothing burger, if not even hugely positive for the economy. 

 

That is beyond a crazy statement for somebody who holds a tonne of long duration assets to make...its like praying for chaos.......your inviting a one time and instantaneous 30% mark down in your portfolio wishing that out loud.

 

Inflation expectations are STILL anchored around 2%......such that the 10yr bond still has a 3-handle in front of it.

 

In Greg world of new 4% accepted & stabilized inflation......the 10yr has to violently adjust upwards to something with a 5 or even 6-handle......and stocks do a one time violent swan dive to reflect the new paradigm & reset permanently at lower multiples.

 

Let me know if/when @Gregmal you become Fed Chair  ......cause I'll go to cash, buy some puts & chill out down the caribean for a year or two while you do your thang in D.C.  Then come back to survey the wreckage & hopefully buy a few bargains 

 

Either way - it's going to be very interesting to observe the second half of this year......the Fed has some tough choices to make......they either step tentatively into Greg world and back away from the 2% inflation target (not a good day for stocks broadly)......or they double down on their fight against supercore (also not a good day for some economically sensitive stocks & defo interest rate sensitive stocks (autos/housing etc.))

 

Let's see - its just beyond interesting how this plays out & as @Intelligent_Investor says you've got the fiscal authority that cleverly loaded its fiscal gun with bullets back in 2021/22 fighting the Fed......I mean everybody says Joe Biden has dementia or Alzheimer's........dont underestimate his bumbling folksy ramblings........he sure hasn't forgotten how to create the foundations required to WIN Presidential elections..........Build, Back, Better bill ramping up spend & projects with endless red, white and blue ribbons to cut in every state heading into 2024 (genius Joe, high five ).........the IRA bill & CHIPS act creating a manufacturing boom with even MORE red, white and blue ribbons to cut in 2024 outside massive battery factories in the heartland & brand new shiny EV plants from overseas & domestic auto manufacturers.....yep Uncle Joe doesn't move as fast as he used too.....I'd be afraid he did......we'd have 10% inflation......but the old dog, knows some really old tricks....and those tricks work pretty great in elections.....not so much if you care about price stability.

[gfp]

I still don't get all this focus on inflation and the Federal Reserve.  Inflation has been slayed, it is over for now.  We do not have an inflationary economy at the moment - despite huge deficit spending stimulus.  The Federal Reserve's overnight rate isn't what slayed inflation and the Fed doesn't have an effective tool for dealing with inflation going forward.  Further rate increases are more likely to make "inflation" worse.

[changegonnacome]

21 minutes ago, Gregmal said:

Isn’t that hugely problematic? Markets can always price stuff in. They can always go against you. Not being able to envision a scenario where one is wrong….is suicidal. It’s hugely arrogant. It’s how the frog slowly boils in the pot. 

 

Yeah I still recognise the possibility, however slim, of a soft landing....they can happen......but like I said before I'm like 80% invested which is a bearish posture vs. a usual 115% for me.....like I'm not in a bunker somewhere with beans & toilet paper with a laptop typing this......I'm not underperforming SPY by 20% this year either......ya know what mean....I'm matching SPY actually....I'm a beta pig right now

 

Arrogant would be a 0% stock allocation...I'm nowhere near that.....I'd argue 120% long is conversely also an arrogant position right now given the opportunity set & complexity.....that would scream I know EXACTLY what's gonna happen and its all good.....I don't know, it's a curious puzzle....dependent on what JP does, his courage or not, Ukraine etc......but the balance of risks & scenarios I see, to me, still point to the downside more than the upside & so my portfolio positioning/exposure is conservative.....on the expectation that some fat pitches are to come and I want liquidity to participate...but aint zero...my 80% allocation in some respects screams I'm not sure what the hell is gonna happen.

[Gregmal]

19 minutes ago, changegonnacome said:

That is beyond a crazy statement for somebody who holds a tonne of long duration assets to make...its like praying for chaos.......your inviting a one time and instantaneous 30% mark down in your portfolio wishing that out loud.

Not really. Its actually one of the few ways the US and many highly indebted nations work their way out of it...We've had it before. You have consistently arrived at many of these "if this, then that" conclusions...and part of what Im pointing out, the bulk just haven't played out(polite way of saying they were wrong). If the thesis was Fed needs to hike higher and earnings will come in modestly and there will be multiple contraction, and, well, all that happened, except there was multiple expansion....uhm, thats getting the most important variable in the equation WRONG. To which we can either learn...figure out ways to adapt, or do the Fintwit thing and just keep harping on how "I disagree with the market" in perpetuity LOL.

 

Bigger picture, the problem with inflation is that people just continuously make up their own definitions of it and arrive at all sorts of crazy conclusions. 2% inflation is a made up "ok" figure. But wait, 3-4% is totally unacceptable LOL? How many different "measures" have we even seen the Fed use over the past year? First CPI. Then the stock market was a proxy. Then the unemployment rate. Then core. Then supercore. Its really ridiculous to even keep having these debates because its pretty much been settled. Real inflation ex housing has currently been in freefall since last June. Is it 2%? 3%? 4%? The average American wouldnt know the difference and if there is variance in that range over many years its inconsequential. Ill point out the even some of the "sinister effects" of inflation, that you've stated over the duration of this thread, have consistently changed. From the poorest 10% getting screwed(while ignoring all their stimulus money), to C-suites not being able to budget correctly with inflation, to wage price spirals that never seem to materialize, down to just "they said the target is 2% so they have to stick to it"...we are in restrictive territory, maybe they hike a few more times, but the story is over. I can go back to October and again in March were I suggested not to overstay your welcome on this inflation inspired bear trade. Its over. Dont be the last guy at the party. 

[Gregmal]

To be clear Ive been no lower than 1.2x and as high as 1.7x levered through the whole thing. Its not because I have ANY ability to be certain all the things you are saying are right or wrong, but its because the crux of my investment philosophy is that owning assets is long term beneficial and the more you own, the better you do. Just manage your risk. Find ones that are indestructible. Work it. It blows my mind when I see young people in cash. My dad is a conspiracy theory money printing bubbles guy. My 28 year old sister had some money laying around and he offered to invest it for her...bought t-bills LOL. Over the past 4 years she's made less than what Ive made this month! Like what is any person with a time horizon greater than 2 years doing not owning stocks? Bonds are for old people and the top 1% of gunslinger market wizards. Theyre throwing returns in the toilet for pretty much everyone else. Cash is even worse. 

 

I will fully admit you have a very in depth, thorough, and sophisticated thesis. I will fully admit I dont; I just dont care and am agnostic to the market. I solely let individual companies and their fundamental value propositions talk to me. So the super macro pessimism is just baffling to me. Why get hung up on all that crap? Its just a distraction. 

[changegonnacome]

Here's an example of nominal & real in action.

 

Exam question - How does the housing market correct significantly (-20%) - without anybody noticing.

 

It's the magic trick that inflation can pull on folks.

 

This is how.....the just released April 2023 S&P Housing index modestly down on a 1yr basis:

 

 

But we're a little smarter than the average bear.....how many tins of beans can your house buy you if sold it tomorrow.....quite a few less tins of beans than it could in April 2022 actually:

 

 

 

If this 2022 to 2023 period replicated in housing for another 3 or 4 years.....i.e flat to slightly down nominal national prices while we continued to have 4-5% inflation......you could have a 2021 to 2024 period where US Housing corrects by about 20%+ in real terms.......while the Zestimate on Zillow budges hardly at all.

 

Inflation is an insidious beast......cause people can mistakenly sit there as their actual purchasing power (all that matters) is getting destroyed MoM & YoY and they never even realize it. The only person laughing to the bank is Uncle Sam.

[gfp]

So in your housing example the average homeowner has a huge fixed rate multi-decade mortgage getting inflated away right?

[thepupil]

22 minutes ago, changegonnacome said:

If this 2022 to 2023 period replicated in housing for another 3 or 4 years.....i.e flat to slightly down nominal national prices while we continued to have 4-5% inflation......you could have a 2021 to 2024 period where US Housing corrects by about 20%+ in real terms.......while the Zestimate on Zillow budges hardly at all.

 

 

why would that be a problem?  if anything this would seem healthy for most people given the huge gains experienced 2019 to present, and would not represent an issue for those who bought at the top given they did so with amortizing nominal mortgages and flat prices would allow for an okay exit as long as one doesn't sell first few years due to transaction costs. 

 

I mean, my home went up 50% in 3 years. Holding on to that for next 3-10 at flat prices and just amortizing down is kind of my base case...

 

 

 

Edited June 28, 2023 by thepupil