Have We Hit The Top?

[ValueArb]

Looks like Burry’s latest short positions are being misreported at notational value. My guess is. He actually has about 10% of that at risk in premiums 

Edited August 14, 2023 by ValueArb

[Cigarbutt]

The title of the thread is about a top and a recent sub-topic is the growing difference between the top and bottom (inequality). Is there a link? Is this relevant for a post here? I will venture a yes to both questions. 

Inequality, like greed, is good but there gets to be a certain point when marginal returns on inequality diminish and even get negative. 

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The trigger for this post was reading some CBO material for fun (!?) quantifying that the expected federal deficit for the next fiscal year was projected to be 6-7% of GDP (incredibly unusual in ‘peace’ time, especially when economy is above its potential and when employment has reached record highs?!) and when recent budgetary details (recent but pretty much a bipartisan thing for some time) included items such as 1-the provision for $80,000 luxury sedans to qualify for $7,500 taxpayer-funded credits and 2-the notion that the Fed no longer provided large remittances from seigniorage to the US Treasury but growing a deferred asset instead.  

!?

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Growing inequality is a thing. Numbers can be twisted depending on method, inclusion of transfers etc but, overall, it’s become clear that inequality has been on the rise and significantly so. Data below shows longer term trends since the WW2 up to 1989 and the trend in the last 20-30 years is basically more of the same so that now (level of inequality now) compares to the Gilded Age period (late 20th century) and the Roaring 20s. Comparison by historical analogy is a relatively weak form of analysis and can be countered by rational arguments [take the preceding post from James22 about? the expectation of a rebound in inflation based on a historical comparison (compared to the 70s), apart from basic fact-checking and reference source, Alex Berenson, ouch!] so that key underlying conditions (key ingredients) must match when comparing periods. 

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-During the Gilded Age, tremendous value/wealth was created and inequality widened with large fortunes (and associated power) on top but, for the bottom even including unskilled workers, real wages grew very very significantly. Large-scale industrialization combined with urbanization gave way to an obvious discrepancy concerning the ‘sharing’ of the wealth created but the whole pie was growing. Productivity growth was very significant. The changes were simply happening too fast. The mass formed some kind of homogenous class and, somehow, in the following decades, a better balanced growth was achieved in part due to reasonable ‘populist’ policies and a moderately rational approach from a governance point of view. Of course, wars can ‘help’, especially if on the winning side and with limited domestic damage. Still, the US came out (transformed) of the Gilded Age with still an amazing growth potential, continued to show great productivity progress and thereby was able to integrate a huge influx of immigrants to support the growth. 

 

-Another period when inequality reached today’s level was in the Roaring 20s.  

 

This was another period when productivity growth was very strong (note: this was a secular trend and, contrary to what is often thought, productivity continued to grow significantly in the 1930s). However, most of the huge wealth created accrued to the top and the wealth divide was compounded by the huge paper wealth that was recorded as a result of rising asset values (ahead of underlying economic activity). As for the period after the Gilded Age, the potential pie continued to grow significantly and another war eventually ‘helped’. Even if the root causes of the Great Depression are still widely debated, inequality in income and wealth was a key ingredient leading to the boom/bust episode. The transition period was relatively long and painful but, after some ‘experiments’ useful mostly to let market forces achieve a more balance growth, the table was set for 30 years of glorious (and balanced) growth which revealed sustainable growth in real earnings for all groups, with an additional huge positive being that private actors started the post-1945 baby boomer era with relatively minuscule debt (the rise in private debt compounded the rise in consumption that happened in the following decades). The war-time debt that the US government accumulated to finance the war became a non-issue mostly because of the overall growth of the economy as a result of the more sustainable and productive nature of the growth with also a small component of financial repression. 

The now period is now back at a similar level of income inequality. Key differences from the two previous periods are the lagging productivity growth and the significant rise in government debt in relation to underlying fundamentals in peace time. Since 2000, government-sponsored reflation policies have been provided in larger and larger doses and more and more pre-emptively to smooth things up with the latest covid-related episode reaching new heights. Numbers reveal that the fiscal/monetary coordination of money creation ahead of underlying economic activity has greatly contributed in shoring up the balance sheet of lower income/wealth groups but how sustainable is that? 

As an example of the post-2020 fiscal/monetary coordination of reflation (becoming excess reflation) as a magnified manifestation of the growing assistance done more and more pre-emptively, most of the wealth created was not from productive measures but from paper wealth linked to ultra-easy money (‘revaluations’) and the excess private savings was essentially due to the government issuing debt with the debt securities ending up at the Fed and on commercial banks’ balance sheets and with the printed deposits ending up accounts of all income/wealth groups in a bread and circus fashion. 

 

For interest the following book is an interesting read. It was published around the time of the 2000 bu**le, showing that secular timing is not an exact science. The author lays out facts, helps analyzing the inequality issue through an historical lens and mostly stays away from reptilian arguments. 

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Anyways, this too shall pass, somehow. Typically, empires get destroyed when inequality takes over but the US has tended to, somehow, go back to a more sustainable trajectory. Obviously in this kind of cycle, when times are good, the rich get richer faster than the poor (in absolute/relative terms) and when the going gets tough, the rich get poorer faster than the poor. Let the good times roll.

The next transition phase may be quite interesting? 

[james22]

“Luxury beliefs” have to be somewhat crazy to fill their role — if they were obviously true and practical, everyone would believe them and they wouldn’t be elite signifiers. Glenn Reynolds

[changegonnacome]

12 hours ago, Cigarbutt said:

Typically, empires get destroyed when inequality takes over but the US has tended to, somehow, go back to a more sustainable trajectory.

 

Agree - its destabilizing to let it go too far.......its implicitly understood I think at the Fed....and certainly by the Fed chair......4% inflation is another form of stealth wealth transfer......its a game I benefit from, holding hard assets financed with low rate fixed term debt.......but I always think of the situation something akin to how I think about companies......are they short term greedy or long term greedy.........short term greedy is sitting with a 3% mortgage on your hard asset base and smiling at 4% inflation knowing that your 'winning'......but what is winning if you de-stablize the whole system and end up with AOC or Marjorie Taylor Greene as president in five years time.

 

Long term greedy or what I consider to be the optimal long term solution is what I think happens next.......Fed keeps pressuring financial conditions & remains resolute in the face of weakening......with true domestic disinflationary pressures in place.....corporates start to meaningfully give up margin that get translated into hopefully REAL gains in wages for median American worker. The US fiscal authorities start to get the budget under control by increasing taxes while reigning in and reforming dumb spending

 

The lunatic fringe of the American right and the American left haven't come to prominence by accident.......a whole generation maybe two of median American workers have been left behind in terms of proportional participation in growing output of the US.....the wage data is clear on this.......the fact that each party in the USA is beginning to be hijacked by its lunatic fringe is a symptom of this......Jan 6th is a symptom of this.......and IMO it needs to change.......not because I'm some bleeding heart for 'poor' people.......but because its the best LONG term for my family's wealth & happiness accumulation to live in a country/society that isn't falling apart at the seams. Dont forget the simple maths......any number times ZERO is a ZERO......best way to not end up at ZERO is to not mess with a pathway that looks like its heading there

[Gregmal]

At least the “are they really this dumb” debate is settled. Awhile ago there was talk about “no they’re not stupid and they’re aware of the impact housing has on the overall inflation figures”….well it’s all housing now and they’re still jawboning about rates lmao. 

[cubsfan]

25 minutes ago, Gregmal said:

At least the “are they really this dumb” debate is settled. Awhile ago there was talk about “no they’re not stupid and they’re aware of the impact housing has on the overall inflation figures”….well it’s all housing now and they’re still jawboning about rates lmao. 

Hahahaha- they really ARE that dumb!

[james22]

14 hours ago, Cigarbutt said:

Typically, empires get destroyed when inequality takes over . . .

 

As the sociologist E. Digby Baltzell wrote decades ago, “History is a graveyard of classes which have preferred caste privileges to leadership.”

 

https://archive.ph/DCsMq#selection-835.35-835.179

[Parsad]

Savings almost gone.  Cheers!

 

https://finance.yahoo.com/news/americans-run-pandemic-savings-next-172045987.html

[Gregmal]

3 minutes ago, Parsad said:

Savings almost gone.  Cheers!

 

https://finance.yahoo.com/news/americans-run-pandemic-savings-next-172045987.html

We ve been hearing this since q4 2021. Eventually maybe it’s true. Last year some were asserting the Xmas trees were going on credit cards. Frankly I think it’s all bullshit. Anyone who still has COVID stimulus I admire. Cuz most Americans blew it within days or weeks of getting it. Remember it only went to people in the lower brackets. So following this story at this point in time imo is stupid. 

[hasilp89]

8 hours ago, Gregmal said:

We ve been hearing this since q4 2021. Eventually maybe it’s true. Last year some were asserting the Xmas trees were going on credit cards. Frankly I think it’s all bullshit. Anyone who still has COVID stimulus I admire. Cuz most Americans blew it within days or weeks of getting it. Remember it only went to people in the lower brackets. So following this story at this point in time imo is stupid. 

 

 

Know you’re not a fan of X but Bill posts the optimistic picture of the US economy there frequently.

 

 https://x.com/wabuffo/status/1692001921987387735?s=46&t=dzMMCHoSPQ2GLoa1fBdN_Q

 

 Savings seem fine vs 2019? Doom and gloom make for better headlines though.

[changegonnacome]

11 hours ago, Parsad said:

Savings almost gone.  Cheers!

 

https://finance.yahoo.com/news/americans-run-pandemic-savings-next-172045987.html

Yep - the basic hard landing thesis didn’t go away it just got delayed this movie ends one way it’s only the running time that’s TBC….the US is running a deficit as if the GFC just happened yet unemployment is at a 60yr low….the bond market it seems is starting to think through the implications of that relative to issuance to come, structurally higher inflation and as a consequence is pushing up rates at the long end.

 

Folks wanted the yield curve to on un-invert….it is….but not in the way that is positive for asset prices.

[Gregmal]

So SPY 3000?

[Cigarbutt]

@james22, your references are interesting but it's unclear what you're getting at. If applicable, can you add a sentence or two like if you'd try to explain to a five-year old which is basically my potential level of reasoning?

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The following is not (necessarily) about doom and gloom and it's impossible (opinion) to forecast the economy but if one uses the 'healthy' balance sheet of main street consumers as an underlying assumption, there are factual aspects that suggest an unsustainable trajectory.

 

Short version: For some time and accelerating peri-covid, money/deposit growth has uncoupled from underlying fundamentals. Real loan growth (as a source of money/deposit growth) has been coming down since the GFC (negative for some months now) and has been supplanted by 1-QE and 2-commercial banks expanding their balance sheets with government debt securities with a pattern, since 2020, that is quite comparable to what happened to finance WW2 (think about that for a minute).

The deposit levels have grown (especially the uninsured kind) mostly as a result of the Fed-Treasury coordination, ie they effectively put (printed) the deposits in the 'savings' accounts.

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Longer version

The above is simply what our great wabuffo pictured but with a longer term perspective and dissected into income/wealth groups. There is out there (opinion) some kind of misunderstanding concerning 'savings' even from the stuff coming out of highly educated Fed 'studies'. Because of the way savings is measured, it is felt and often implied that people spending less will then save more, which is obviously true at the individual level, but at the aggregate level, this does not happen. If people spend more, the money does not disappear, it just appears elsewhere as someone else's savings. Anyways. The graph above does not imply that people have been saving more (in the sense of spending less now in order to spend more later; quite the contrary in fact), the graph (once dissected) just shows that money was printed as deposits as a result of non-bank QE and as a result of the effective financing of government debt by commercial banks (asset=government debt, liability created deposit for the private crowd).

So, basically, the US government went into debt ++ or 'dis-saved' (in a disproportionate way (opinion)) in order for the mass to 'save' more than needed (opinion) and make them richer. Now if this not a real-life representation of Friedman's helicopter money experiment, i don't know what is.

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So where did the money/deposit growth come from? QE to non-banks helped garnish higher worth (money-wise) people's 'checking' balances. And commercial banks' financing of government debt filled lower worth (money-wise) (lower 40-60% especially).

The excess savings concept has been circulating and the following picture (updated since then) shows the evolution of the excess savings which has started to reverse (not because people have been 'spending' their excess savings but because QE has been reversed and commercial banks' balance sheet expansion has reversed (process only starting).

Now, to link with the inequality aspect (and the potentially relevant unsustainable growth aspect):

And remember that the 'wealth' created is not from productive loans but from centrally planned measures used in an almost unprecedented way (except for world wars) and the private mass is richer because of borrowed money (not distributed evenly, higher worth holding (directly and indirectly) more government debt as an asset and more money as a deposit asset).

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People may get tribal with the stimulus check debate so here's an example that may reach some kind of bipartisan nod? The PPP program was used to 'stimulate' the economy and to trickle down to the average worker and common (wo)man. The 800B program was deemed a success. More than 90% of loans were forgiven (remember that those loans were financed with government debt just like stymmie checks etc etc). It's been estimated that 75% of the funds went to the top quintile..

https://www.nber.org/papers/w29669

Personal note: In 2020, for the looking-for-profit private projects that i have going, i was able to qualify for various Canadian 'grants' (different than the PPP stuff in some ways but essentially the same underlying money-creation principles involved). These grants went pretty much to my bottom line (and my pockets!) so perhaps i shouldn't waste my time complaining here but the underlying sustainability is nagging. Especially nagging for the productive part when i think of the time spent recently on the phone (20-30 min) with a tax agency 'director' who audited an aspect of the eligibility, finally concluding (in a separate letter) that i had correctly kept the parental leave absence deduction for a specific month and for a specific employee (total amount: 3.54 $ CDN)!

 

[brobro777]

Maybe SPX will hit 4000. I should probably buy a lot at that point

 

 

 

[Gregmal]

The hysteria never stops, the price targets just slowly get revised…generally upwards. 

[brobro777]

16 minutes ago, Gregmal said:

The hysteria never stops, the price targets just slowly get revised…generally upwards. 

 

Well of course, I don't wanna lose $$$ for 10+ years like that that Hussman guy or something

 

Anyway, 4000 SPX!!!

 

[james22]

1 hour ago, Cigarbutt said:

@james22, your references are interesting but it's unclear what you're getting at. If applicable, can you add a sentence or two like if you'd try to explain to a five-year old which is basically my potential level of reasoning?

 

One danger of inequality today: it needs expression.

 

Given mass affluence, elites can no longer demonstrate status with luxury goods. 

 

They now do so with luxury beliefs which, by definition, need be silly.

 

Silly beliefs lead to bad public policy.

 

https://en.wikipedia.org/wiki/Luxury_beliefs

 

https://www.robkhenderson.com/p/status-symbols-and-the-struggle-for

[Cigarbutt]

3 hours ago, james22 said:

 

One danger of inequality today: it needs expression.

Given mass affluence, elites can no longer demonstrate status with luxury goods. 

They now do so with luxury beliefs which, by definition, need be silly.

Silly beliefs lead to bad public policy.

https://en.wikipedia.org/wiki/Luxury_beliefs

https://www.robkhenderson.com/p/status-symbols-and-the-struggle-for

Thank you, some kind of thirst for conspicuous status i guess. Interesting. Frankly, i don't have a clue how a more sustainable course will happen and this forum (or most online forums) may not be the ideal place for such discussions. Also, i did my fair share (mostly elsewhere on the net) of patient/polite opposition to people calling names without substance when dealing with referred 'facts' such as Alex Berenson's pieces about covid. Anyways.

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The main idea of recent posts in this thread (which may be relevant to you?) is a framework i have to set up within the next 5 to 10 years whereby, after some kind of amount is left aside (for others; no conspicuous virtue signaling here  ), i wonder what number to use as a quasi-automatic safe withdrawal rate as i believe this should be a dynamic number, not the typical 4% used. i'm trying to find out a way to make it easy to adjust the rate up or down depending on market conditions.

[james22]

50 minutes ago, Cigarbutt said:

The main idea of recent posts in this thread (which may be relevant to you?) is a framework i have to set up within the next 5 to 10 years whereby, after some kind of amount is left aside (for others; no conspicuous virtue signaling here  ), i wonder what number to use as a quasi-automatic safe withdrawal rate as i believe this should be a dynamic number, not the typical 4% used. i'm trying to find out a way to make it easy to adjust the rate up or down depending on market conditions.

 

Without being political, I expect the next 5 to 10 years will be interesting times (Fourth Turning?).

 

Retired, it makes planning a withdrawal rate difficult.

 

Just have to plan to be flexible, I guess.

[Spooky]

On 8/18/2023 at 8:06 AM, Gregmal said:

The hysteria never stops, the price targets just slowly get revised…generally upwards. 

Stocks for the long run baby. Observing everything that has happened over the last few years just reinforces the view that no one can predict what will happen in the short term. The key is asset allocation and being invested in good businesses / assets over the long run. Always be buying the best thing in your opportunity set.

[Gregmal]

This creep just can’t let go of his 15 minutes in the spotlight. Fauci 2.0….inflation still too high? Jerry it’s all housing and you did that!

[Luke]

11 minutes ago, Gregmal said:

This creep just can’t let go of his 15 minutes in the spotlight. Fauci 2.0….inflation still too high? Jerry it’s all housing and you did that!

Since Fairfax is a big position for me, i am looking forward to further rates raising  

[Paarslaars]

Same, I have a substantial FFH position as well plus I expect to sell my UBS calls after earnings so I don't mind my favorite stocks to get a bit cheaper.

Edited August 25, 2023 by Paarslaars

[Gregmal]

He said there will be pain and a year later I’m painfully 60% wealthier give or take. It’s been utterly brutal I’ll tell ya. It’s just that…..the stupidity and arrogance is breathtaking. He’s the worst breed of them all. A finance guy politician. 
 

It’s fun for us, sure. But like in March when this jackass almost blew up the banks he regulated and would’ve wiped out Americans savings accounts, you just have to wonder how deranged and clueless, exactly, they are? 
 

It’s just like Fauci with the COVID restrictions and guidance. How long is this asshat gonna keep jawboning for attention rather than just realize times up and move on?

[brobro777]

Here's some thoughts about interest rates:

 

https://divestor.com/?p=11817