Have We Hit The Top?

[Gregmal]

8 minutes ago, changegonnacome said:

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.

LOL again man! Cherry picked bullshit. Inflation didn’t start in the last 12 months. It started in summer 2020. It’s the same folks who mock others with “oh I guess the stock market only goes up”…who then cherry pick short term examples of where stuff goes down…as proof of something! You can absolutely retain or even increase purchasing power if you owned housing through this stretch. So … to your post, I’d just ask…what’s your point? That if something DOESNT “only go up” there’s a problem? If there is ONE stretch over the course of time where something does poorly, it’s proof?

[Gregmal]

Essentially….housing rips for several years. Then slows down for a year. Proof inflation is sinister….like come the F on. 

[thowed]

Just to say I'm enjoying this Gregmal/Changegonnacome exchange - I can't say which of you is right, but I know that good stuff comes from a healthy & respectful exchange of different views.

[Spekulatius]

I am just surprised people think inflation is slayed. I don't think we can be sure. It takes more than a year of low or below 2% inflation to be sure it's slayed.

I still see inflation in my daily job. It's not the high single digit any more but more like ~5%. Used to be 0-2% per unit for decades, except short periods like 1999/2000.

[Luke]

58 minutes ago, thowed said:

Just to say I'm enjoying this Gregmal/Changegonnacome exchange - I can't say which of you is right, but I know that good stuff comes from a healthy & respectful exchange of different views.

+1!!!

[Gregmal]

Maybe you guys are being too literal. Inflation will be just like COVID. Technically sure, it’s still hangin around. The first big shock happened. Here and there you’ll get stupid little flare ups that certain people will shit their pants over but the market will largely just shrug at. Fade the inflation story. Been preaching that since H2 last year. In 2021 we laughed at the transitory folks who were convinced it was going away any day(this was the majority of people, even here)…then in ‘22 the script flipped and all those people rushed over into the “it’s here forever” camp much like contrarian indicators do. The threads don’t lie. Story follows the same arch as COVID did almost to a T. To his credit @changegonnacomewas always in the higher for longer camp. We parted ways being on the same side of that trade summer of last year. 

[brobro777]

Boy I'm really tempted to short MSFT at $334. $2.5Tril at 36X, that's rich baby way too rich

[mattee2264]

I think an interesting question is what happens to market valuations once market participants get used to the idea that interest rates may have to stay higher for longer to keep inflation in check over the next decade. 

 

Agree that a lot of the COVID inflation was transitory. But there are operative factors such as trillion dollar deficits, de-globalisation, natural resource shortages etc that mean we probably aren't going back to ZIRP which has been massively supportive of valuations. 

 

 

Edited June 28, 2023 by mattee2264

[Gregmal]

There’s that recession they all predicted. Funny reading some of the excuses. 

[TwoCitiesCapital]

22 hours ago, mattee2264 said:

I think an interesting question is what happens to market valuations once market participants get used to the idea that interest rates may have to stay higher for longer to keep inflation in check over the next decade. 

 

Agree that a lot of the COVID inflation was transitory. But there are operative factors such as trillion dollar deficits, de-globalisation, natural resource shortages etc that mean we probably aren't going back to ZIRP which has been massively supportive of valuations. 

 

 

 

Historically, you've gotten single digit P/Es. Probably won't be that severe again, but I could see them coming back below the 16x average from the current 20+ which would be another 25+% decline assuming earnings remained stable - 

 

But as 2022 demonstrated, earnings will likely lag inflation and thus contract corporate margins and profits until it slows and their prior price hikes can flow through to the bottom line. 

Edited June 29, 2023 by TwoCitiesCapital

[changegonnacome]

On 6/28/2023 at 11:57 AM, Gregmal said:

Real inflation ex housing has currently been in freefall since last June. Is it 2%? 3%? 4%? The average American wouldnt know the difference

 

The average American or the below average one for sure is noticing inflation......check out Dollar Generals result & commentary their customers are trading down............trading down to FOOD BANKS! 

 

On 6/28/2023 at 12:57 PM, gfp said:

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

 

For sure everybody's setups is different.......levered / unlevered.....fixed/adjusting.........37% of homes in the US have no mortgage at all.

 

Under the hood lots of winners and losers...........big picture US housing dropped about ~7% real in the last year.......I bring it up as an illustration of small nominal falls being worse when inflation adjusted.

 

its also important as per my source of fund framework for Joe Sixpack........you can't do ANOTHER cash out refi against an asset thats currently depreciating......hence one of Joe Sixpack's avenues by which he can expand is purchasing power has been shut down.

 

On 6/28/2023 at 12:58 PM, thepupil said:

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

 

True 3% mortgage holder are just #winnning whatever way you slice it..........but I know dudes who paid cash money would you believe in 2021/2022.......the Cash-Shiller Housing Index is very meaningful to them (in a sad way  )

 

However you forget the 66 year old I dunno Phoenix home owner with no mortgage....intent on reitring soon in Flrodau.......who's purchasing power contained in that house peaked out it seems in Q4 2021......and has been failing in nominal and inflation terms ever since. Like I said 37% of homes in the US have no mortgage......and home prices rightly or wrongly play a part in the oft mentioned 'wealth effect'........modest nominal falls in house prices can have outsized effects on the marginal propensity to consume for lots of folks.

 

It'll be interesting to watch housing......part of the affordability conundrum for those without a mortgage/home yet and embarking on household formation......is a few more years of the Case-Shiller inflation adjusted falls playing out as per above..........and affordability could get restored quite quickly (minus mortgage rate falls).....you know 5-7% YoY wage increases, 5% inflation & flat to 1-2% nominal reduction in house prices.....it wouldn't feel like a housing correction to anyone given the tiny changes on quoted prices on Zillow........but it would take a whole cohort of people who currently fail to hit DTI ratios.......and bring them into approval territory.

 

Notwithstanding the structural shortages in housing etc.

[changegonnacome]

On 6/28/2023 at 1:42 PM, thowed said:

Just to say I'm enjoying this Gregmal/Changegonnacome exchange - I can't say which of you is right, but I know that good stuff comes from a healthy & respectful exchange of different views.

 

Yep all in good fun & its a great puzzle - @Gregmal is my permabear therapist.....without him I would be up in the mountain somewhere with beans and rice......Greg I should be sending you cheques in the mail........your 100% right in the sense that spending too much on macro is crazy..........but I think as @Parsad pointed out.....sometimes and very rarely is the macro kind of screaming in your face to pay attention........I obviously believe that now is one of those times when you need to pay attention.......and i think Howard Mark's with his "Sea Change" comments and Druckenmiller comments if I needed any confirmation bias (& I dont!) are kind of echoing that idea.........make no mistake about it exiting COVID with all the fiscal and monetary largese has catapulted into a kind post-WWI era......there's a kind of re-ordering and re=pricing occurring in the economy now that doesn't feel done yet to me.

[Gregmal]

Yea totally. I used macro for nothing other than to potentially plan to seize opportunities. Never much else. Being prepared is 90% of the battle. Its probably the only reason I held APTS to deal close(outside of taxes) which is something I never do. Or was as aggressively using PSTH as a placeholder. Its how I established buy points and shopping lists for stuff I liked in some cases, 12-15 months before they reached those prices. Just gotta have a plan. And a backup. And a backup backup. If you need more than that, everyone is usually fucked and it  doesnt matter LOL.

[changegonnacome]

On 6/28/2023 at 3:08 PM, Gregmal said:

Fade the inflation story. Been preaching that since H2 last year. In 2021 we laughed at the transitory folks who were convinced it was going away any day(this was the majority of people, even here)…then in ‘22 the script flipped and all those people rushed over into the “it’s here forever” camp much like contrarian indicators do. The threads don’t lie. Story follows the same arch as COVID did almost to a T. To his credit @changegonnacomewas always in the higher for longer camp. We parted ways being on the same side of that trade summer of last year. 

 

Yeah its really higher for longer........until the labor market cracks.........but I'm firm on the concept that something has to crack to get us back to 2% inflation.......there is no such thing as immaculate disinflation...its an equation with variables I've laid out many times.........so the status quo (3.5% unemployment/SPY earnings this ballpark/ 1-2% GDP growth) dont get us back to 2%.

 

The small possibility of a soft landing exists.......but the softest version I can envisage is a situation where corporate profits and by extension the index are the things that get taken to woodshed and that is sufficient to push inflation down to 2%....without significant rise in unemployment or negative GDP.

[Gregmal]

19 minutes ago, changegonnacome said:

However you forget the 66 year old I dunno Phoenix home owner with no mortgage....intent on reitring soon in Flrodau.......who's purchasing power contained in that house peaked out it seems in Q4 2021......and has been failing in nominal and inflation terms ever since

I will go out on a limb and say this guy aint ready to retire if his retirement was predicated on absolute peak PHX homes prices and a 7% pullback puts him in peril. For all we know he didnt budget in realtor fees in his home sale forecast and maybe he was never ready to retire to begin with!

[changegonnacome]

Just now, Gregmal said:

I will go out on a limb and say this guy aint ready to retire if his retirement was predicated on absolute peak PHX homes prices and a 7% pullback puts him in peril. For all we know he didnt budget in realtor fees in his home sale forecast and maybe he was never ready to retire to begin with!

 

True! But the wealth effect of housing prices on spending is powerful.......we all know people who do nothing but keep a weekly tally of how much they think their house is worth now.......goods weeks they go get a steak on Friday......a bad week of comps and their cancelling their vacation to Jamaica and heading for Sam's Club 

[gfp]

Here's a good one, ISM services prices paid index time shifted forward 3 months overlaid with CPI.  Capitalism and time cure the type of inflation we had.  Truflation is another example.  If you think most of our inflation was caused by monetary inflation and not COVID-related supply/demand shocks, the FED isn't going to do anything to help.  Only adjusting the level of the deficit will help if you think the inflation is caused by too much "money" sloshing around.  Since so much of the deficit is structural at this point, you would have to raise taxes.  Or CUT interest rates to reduce deficit spending stimulus.  Even the Federal Reserve is losing money on their balance sheet holdings - that is additional stimulus!  Government deficit plus "net interest paid by the Fed" on their money losing balance sheet while the yield curve is inverted.

 

https://truflation.com

 

[changegonnacome]

1 hour ago, gfp said:

If you think most of our inflation was caused by monetary inflation and not COVID-related supply/demand shocks, the FED isn't going to do anything to help.  Only adjusting the level of the deficit will help if you think the inflation is caused by too much "money" sloshing around.

 

Yeah my view is that supply chain stuff in conjunction with monetary/printing kind of was the spark for the inflation fire we have now.

 

The problem with inflation is thats its kind of a perpetual motion machine once its established.............as I've laid out.....nominal wage increases feeding into nominal spending growth far in excess of REAL productivity growth.......is the functional equivalent of a company printing new shares & diluting existing shareholders.....anybody who knows anything about stocks.....goes first to the accounts to see the quantum of REAL goods and services being sold and at what margin .......then they look at shares outstanding x price........the intrinsic value of a company increases when its sells more and more REAL stuff.....not when it prints more and more stock certificates.

 

The economy (& purchasing power via fiat currency) is the same........we as a society only get to consume what we produce.....we divide up access to those goods and services via currency kinda like little stock certificates....they are claims on those goods and services..........and those claims mainly come in the form of wages (but also credit)........however you cannot grow wages far in excess of the real goods/services you produce......money/wages are just bit of papers....more money/wages does not create more good & services........more goods and services creates more goods and services.

 

No company can increase its true intrinsic value by printing more shares........and no economy or individual inside that economy can get to consume more goods and services by simply printing more wage increases.

 

The US is the process of modestly growing the amount of real stuff it makes each year....maybe by 1%.....but across the economy in tiny little bilateral wage negotiations workers are leveraging the macro backdrop with employers to give them nominal pay increases that far exceed the underlying REAL gains in national domestic productivity......now this always happens......remember we target 2% inflation......which crudely means we choose to create 2% more money in excess of the real goods and service we produce each year......but whats occurring now is really an undesirable level of monetary dilution against a very modest real increase in the intrinsic real level of goods and services being produced in the US.

 

See I know folks are always what about the little guy......he's finally getting wage increases.......but you know the little guy is running to standstill.......you cant eat money & you certainly dont get to consume more than the economy in aggregate can produce........you use money as a mechanism by which to secure REAL things.......if REAL things are only increasing by 1% a year........yet the quantity of funny money via wage increases is increasing 5%.......you've got a math/consumption problem called inflation.

 

There's nuances here....the little guy could theoretically win, if, they begin to secure pay increases in excess of inflation but to actually actually win somebody else in the economy......but lets call them "fat cats" for fun.....need to be securing wages increases or even pay cuts which FAIL to match inflation.......this would be a mechanism by which the little guys piece of the REAL goods and services are increasing....while the 'fat cats' share is decreasing. Basically for somebody to win a greater share of the goods and services somebody has to lose......of course the other way is you need to grow the pie.....but as we know the pie just isnt growing that fast.

 

The problem with the above - is that its just never the way it really plays out in inflationary cycles......those at the upper end of the income spectrum via bargaining power/scacity gets to secure adequate pay increases to maintain their purchasing power....and those at the lower end, in aggregate, fail to do so.

 

Buffett's remedy to inflation & purchasing power is 100% correct......be the the best doctor in town.....or the best lawyer...you'll always secure your fair share of the American goods and services pie regardless of what inflation is doing at any point in time...thats the ultimate inflation hedge....your skills command it & the scarcity of those skills command it........what Buffett doesn't say of course is the way to not get your fair share of the American goods and services pie in an inflationary environment is to be a worker amongst many workers available with an undifferentiated skills set.

 

Its a recipe for what we have now playing out for all those to see in THIS inflationary economy....the little guy with an undifferentiated skill set loosing his grip on his previous share of the American goods and services pie.....one day your shopping at Dollar General and the next year your in a line at a Food Bank.....and you can't quite figure out why........cause ya know you taught you were a shareholder of "USA Inc" listed on the Nasdaq and you keep hearing about how well USA Inc. is doing............but when you look into it a bit more........turns out the sons of bitches at corporate printed too many shares......& your at the Food Bank cause you got diluted bro! Its the stuff of revolutions if let get out of hand.

 

I joke buts its basically the reality of an inflationary economy in action.

Edited June 29, 2023 by changegonnacome

[gfp]

Thanks for the long detailed post.  I basically agree that inflation doesn't matter at all except to the extent that it potentially (and usually) redistributes real wealth unevenly between cohorts.  Nobody really cares if we keep score using the metric system all of a sudden, it is just a unit of account.  But when the changing of the units on the scoreboard effects different groups to different degrees we have a problem.

 

Where we differ is that I think your wage spiral is history.  Hours worked has already rolled over.  Employers are reluctant to let anybody go because it was painful and expensive to find them and train them in the first place.  But without sufficient new orders coming in, new hiring and wage-increase negotiations will be a memory.

 

We'll see how it all works out!

[changegonnacome]

3 minutes ago, gfp said:

Where we differ is that I think your wage spiral is history.  Hours worked has already rolled over.  Employers are reluctant to let anybody go because it was painful and expensive to find them and train them in the first place.  But without sufficient new orders coming in, new hiring and wage-increase negotiations will be a memory.

 

We'll see how it all works out!

 

yeah exactly maybe hours worked is enough to pull down aggregate nominal wage increases....which via that fall + maybe slightly increased recessionary behaviors leading to increased savings......is enough that nominal spending growth cools sufficiently and we get back to 2%. Thats the dream type thing and I dont rule it out.....2020 - 2022 was a very unusual period for obvious reasons.

 

I think the soft landing camp is definitely something like a credit contraction + hours worked slipping, + JOLTS falling + a profit recessions driven by margin compression.......the problem is really that wages are just the largest source of funds in the economy.....and it would be very unusual to get inflation from 4.5% down to 2%........without driving a bus right through the heart of Downtown Employment.......and the basic NAIRU math says you gotta drive unemployment up to ~4.5-5% to have no inflation.......its brutal stuff.....that would be a few million folks made unemployed. Hours worked slipping does not get you to something functionally equivalent to a few million folks not getting a paycheck.....its a big difference.

[gfp]

Well according to Bill's (wabuffo) withholding chart, we are still growing wages strongly, although it is possible people adjusted their withholding percentages after a rude surprise in April -

 

[changegonnacome]

Yeah listen on one hand it’s good news…..but on the other it’s just isn’t from a taming inflation point of view …..as you put rightly above the nasty redistributive effects of inflation continue……from those without a pot to piss in……to those with 2.95% 30yr fixed rate million dollar mortgages…..

[Gregmal]

Ok sure but who exactly has made out here? It was uncanny, really like nothing I’ve seen before; last year, maybe in March and April, like a blade cut through the existing status quo. Every one of my contacts all in upper class neighborhoods said EXACTLY the same thing….home improvement projects, new car purchases, everything..stopped. And everyone said the same thing. They’re about to tank the economy. The great reset is happening.
 

You think the average blue collar worker was cutting their discretionary spend down to the bones, cashing in all their stocks, and refinancing the house? Nope. They just wondered why half the jobs they booked last month cancelled and why the phones ain’t ringing off the hook anymore. This was, outside of COVID, the most obvious wealth transfer attempt scheme I’ve ever witnessed. Even down to the coordinated lying about all the impending economic doom, the housing collapse, recession being right around the corner….this whole process has been a shameful sham and an attempted inside job.

Edited June 30, 2023 by Gregmal

[Spekulatius]

35 minutes ago, Gregmal said:

Ok sure but who exactly has made out here? It was uncanny, really like nothing I’ve seen before; last year, maybe in March and April, like a blade cut through the existing status quo. Every one of my contacts all in upper class neighborhoods said EXACTLY the same thing….home improvement projects, new car purchases, everything..stopped. And everyone said the same thing. They’re about to tank the economy. The great reset is happening.
 

You think the average blue collar worker was cutting their discretionary spend down to the bones, cashing in all their stocks, and refinancing the house? Nope. They just wondered why half the jobs they booked last month cancelled and why the phones ain’t ringing off the hook anymore. This was, outside of COVID, the most obvious wealth transfer attempt scheme I’ve ever witnessed. Even down to the coordinated lying about all the impending economic doom, the housing collapse, recession being right around the corner….this whole process has been a shameful sham and an attempted inside job.

I don’t know, in my own circle , I didn’t see a sudden shift last year in spring . Maybe it’s a NY or financial sector thing.

 

My circle is mostly in manufacturing industries and we have seen more of a slowdown in business this year than last year, with layoffs in most companies. I guess the stock market is not the economy.

[changegonnacome]

2 hours ago, Gregmal said:

This was, outside of COVID, the most obvious wealth transfer attempt scheme

The wealth transfer scheme is hiding in plain sight @Gregmal - no conspiracy theory, short sellers or men behind the current required:

 

5% Inflation

 

+

 

3% Fixed Rate Mortgages on million dollar homes

 

= negative real interest rates….financed against inflation hedged hard assets!

 

now add in the folks behind these million dollar 3% mortgages:

They’ve the skillsets, occupations & the educational backgrounds that can command inflation matching pay increases no matter what inflation does.

 

Then at the bottom of the wealth/income distribution there’s your prototypical 2022 dollar general shopper….like a frog.......getting boiled in inflation hot water.

 

There is your wealth transfer scam & its irefutable.

 

Dont get me wrong.......I say this as someone who is benefitting right now in a 5% inflation economy that’s “doing great”:

 

I own hard assets - financed with debt with a negative real interest rate's.

Just took on another mortgage at 5.15%.....preferably l'd like inflation to go back up to 6%....so this new 2023 mortgage can go negative real rate too! That would be awesome for me.

 

People who do my job and with my background successfully extract inflation or inflation adjacent pay increases annually. 

 

Five percent inflation suits me just fine......like I said 6% would work better for me actually if I think about.....….it’s a nothing burger as you would say….in fact I’d call it a double cheeseburger with bell peppers….it works kinda great my end.

 

Now go check out the Dollar General folks…..like i said earlier….they are trading down……trading down to food banks.

 

There's a scam going on alright and i just laid it out for you.

 

 

 

 

 

 

Edited June 30, 2023 by changegonnacome