Have We Hit The Top?

[muscleman]

4 hours ago, Gregmal said:

Its like people rather lose money via the inflation monster because "the number in my checking account is still the same" and it makes them feel better than seeing a temporary red down arrow....I think its all but a certainty that the top is/was in(IMO it was Feb 2021, not now or whenever) for most of tech and high growth, high multiple stuff. But a new horizon is emerging and there's a good bit to eat there IMO.

 

I disagree that just because inflation is gonna run wild, anything we overpay would be justified right now. If you haven't tracked Zillow, look at how the Zillow Offer debacle played out. I think the same applies for extremely overvalued stocks.

Back in 2011, we used to justify an expensive stock by saying, it is only trading at 50x PE. Now we justify an expensive stock for saying, it is only trading at 100x P/S. But S is going fast so that's ok. No that's not ok when liquidity starts to dry up, which is exactly what is going to happen now.

[Gregmal]

21 minutes ago, muscleman said:

 

I disagree that just because inflation is gonna run wild, anything we overpay would be justified right now. If you haven't tracked Zillow, look at how the Zillow Offer debacle played out. I think the same applies for extremely overvalued stocks.

Back in 2011, we used to justify an expensive stock by saying, it is only trading at 50x PE. Now we justify an expensive stock for saying, it is only trading at 100x P/S. But S is going fast so that's ok. No that's not ok when liquidity starts to dry up, which is exactly what is going to happen now.

 

But thats not whats being said, and additionally thats a bad comparison. I think tech is toast and have been rotating between heavy and moderate short exposure since this time last year. However I just see being in "cash" as both lazy and unintuitive and shooting yourself in the foot for false security. I mean if you expect inflation, theres literally tons of different investment options out there, and not much is 50-100x sales crazy. If you expect deflation, theres ways to play that too. If you expect stagflation, even better. In between theres a plethora of ways to play all the in between that over time will do well too. Holding cash is basically saying "I dont know what to do" and "I have conviction in nothing", in which case, just stick to indexing. JMHO. 

 

Also, in 2011-12, much of the smart money who was bearish said shit like "14x is the norm and we're at 17x and due for a 20% correction"...LOL, yes, that was the smart money. Academic and all. There was also the European Debt Crisis crash in 2H 2011 which was basically a spitting imagine of whats happening now. GFC fresh in everyones minds and of course the situation in EU led everyone to go down this wild 2008 inspired rabbit hole which led to shit like BAC going from $12 to $5 but it was really the PTSD that fucked those people and it wasn't GFC 2.0 just a massive fat pitch BTFD opp. Same here today. Its not March 2020 2.0. A bigger pullback in select stuff, ironically some of the best inflation protected stuff, is another fat pitch. 

Edited November 30, 2021 by Gregmal

[Gregmal]

https://www.cnbc.com/2021/11/30/ray-dalio-says-cash-is-not-a-safe-place-right-now-despite-heightened-market-volatility-.html

 

A good summary just today from Dalio. There is this grand illusion that money in your checking account is not losing value just because the number doesnt change. Even outside that, theres literally millions of different near riskless things one can do to generate mid single digit returns in a non correlated way. 

 

Separately, but relatedly, about this time last year I facetiously responded to a "cash" and "market top coming" topic by saying an idiot could just cover their eyes and go 80% long BRK, 30% long MSFT, and be 10% short ZM and make money while gasp! being on margin. Wouldnt you know, the idiot woulda done just fine. Same thing applies today. People just perpetually over estimate risk and probability and give too much anchor faith to "their" assessments which on a general basis, are typically off quite significantly. 

[Buckeye]

3 hours ago, wabuffo said:

Can you elaborate? Because we just had 10+ years of massive and unprecedented deficits...and still didn't get massive inflation outside of asset markets. 

 

We did not.  We had a big deficit splurge in 2008-2009 and then quickly got back to deficits that were 3-4% of GDP.  The numbers are large but as a % of GDP they aren't big.    Now 2020-2021 was much larger and it was more in the form of direct payments to individuals (stimmie round 1, 2 & 3) and businesses (PPP forgiveable loans).  

 

I think the key question is:  Are these big deficits behind us and one-time in nature or is this the beginning of more deficit spending under this administration that will average much larger percentages of GDP?

 

I don't know. 

 

But what I do know is that the Fed is a minor player in all of this action.  The big gorilla is the US Treasury.

 

 

Bill

Weird that there’s an Ohio flag on Yellen’s spacesuit

[Viking]

The ramifications of Powell’s Q&A today will be something to watch moving forward. I think we can all agree that Fed policy impacts financial markets. In a big way. Especially the past decade. Some would argue following the Fed was the most important input to generating outsized investment returns. 

 

Today Powell officially recognized that inflation is a big problem. ‘Transitory’ has been banned as a word. He also opened the door to accelerating the taper process. This would then allow the Fed to move rate increases forward into 2022. Why move so fast? That inflation thing…
 

Monetary policy is transitioning from easy to tight. We are at the inflection point. Next Fed meeting is mid Dec. Let the speculation begin on when rate increases happen in 2022. Do financial markets pull a tantrum heading into the Dec meeting? That is usually what happens… and the Fed usually backs down. But maybe not this time. 
 

For the past 10 years financial markets KNEW the Fed had their back. At the first sign of trouble the Fed came to the rescue with easy money policies. EVERY TIME. The Fed was able to do so because deflation was their primary concern. So policy COULD be super accommodative. All the time. No one wanted the US to become Japan.
 

Inflation is now transitioning to public enemy #1 at the Fed. What are financial markets going to do when trouble comes (as it always does) and the Fed looks the other way? Wow. Brave new world. A generation of investors are about to grow up. At the school of hard knocks (the Disney movie is coming to an end). What worked the past 10 years JUST MIGHT NOT KEEP WORKING.
—————

We are slowly coming to grips with life with covid. Massive changes in consumer behaviour. Massive ongoing supply chain disruption. Massive reduction in labour force participation. Massive inflation. Massive wage gains. None of the economic models work. Virus mutates and we start on the NEXT ITERATION of life with covid. Exhausting. For families/consumers. And for business owners. 

 

 

Edited December 1, 2021 by Viking

[muscleman]

5 hours ago, Gregmal said:

https://www.cnbc.com/2021/11/30/ray-dalio-says-cash-is-not-a-safe-place-right-now-despite-heightened-market-volatility-.html

 

A good summary just today from Dalio. There is this grand illusion that money in your checking account is not losing value just because the number doesnt change. Even outside that, theres literally millions of different near riskless things one can do to generate mid single digit returns in a non correlated way. 

 

Separately, but relatedly, about this time last year I facetiously responded to a "cash" and "market top coming" topic by saying an idiot could just cover their eyes and go 80% long BRK, 30% long MSFT, and be 10% short ZM and make money while gasp! being on margin. Wouldnt you know, the idiot woulda done just fine. Same thing applies today. People just perpetually over estimate risk and probability and give too much anchor faith to "their" assessments which on a general basis, are typically off quite significantly. 

 

I've been working extremely hard to get more real estates. I am not sitting idle on cash. I don't want to buy REITs because the managers of REITs overpay to acquire assets at crazy prices to boost AUM so they can get higher bonus.

Meanwhile, I still have cash sitting on the sideline as I acquire real estates.

With that said, I do think the stock market is due for a bounce to provide false security to everyone, and then fall sharply lower. Dalio is the guy who said in Feb 2020 that cash is trash. It is funny that he is bashing cash again right at another historic top here.

 

https://www.bloomberg.com/news/articles/2021-09-15/ray-dalio-says-cash-is-trash-and-makes-the-case-for-crypto#:~:text=“First%2C know cash is trash,Bridgewater Associates%2C told CNBC Wednesday.&text=“At the end of the,'t have a place.”

[muscleman]

some fun comparison. No idea if it is going to repeat.

 

[scorpioncapital]

20 hours ago, Gregmal said:

Yea everyone has a different strategy but holding large amounts of cash is both bizarre and inefficient. I know plenty of people and even active managers who sold because they were scared of COVID in February, March and April 2020. No one that I am aware of became fully invested again until the market had already surpassed previous highs and even a year later most of them still weren't back to being invested. Over time Ive learned to hedge whenever some sort of short term uncertainty arises. Selling long term holdings to avoid 3-6 month paper losses is dumb. 

 

I have a fondness for cash.

cash pays my bills.

cash lets me act fast.

cash lets me BUY things I need or want.

 

while cash may lose its purchasing power in the short to medium term, it will make up for that loss when asset prices deflate , yields increase and you actually have money left (even if worth less) to put to work at higher rate of return. That higher rate later versus now differential I feel does catch up the lost ground. 

Edited December 1, 2021 by scorpioncapital

[Gregmal]

It all depends on what your objectives are. I know @Viking has a goal of staying retired young rather than seeking to acquire more money that isnt incrementally as meaningful to him as what he currently has, and have had numerous conversations on COBF over the years regarding that. If your objective is being able to pay bills, realistically you shouldn't need a ton of capital to do that. If you are looking to compound capital, in absolute terms, then holding cash and will continue to be your worst enemy. I think @musclemanpoint about Dalio in 2020 is actually supportive of the opposite. If you were fully invested in Feb 2020, even after the big drawdown, you were likely whole again within a quarter or two...is THAT, really something to be scared of? Whereas, like I said, the folks who went to cash, didnt really get back into the game until way later. 6-12 months after the covid crash, you could still make the statement that staying the course is early 2020 was the right choice. 

 

I do agree with @muscleman on RE though. Given the outlook, certain types of RE, and all that comes with them, IMO are better than gold and the risk adjust returns are insane if things roll the way I think they likely will over the next 3-5/10 years. 

[Spooky]

17 hours ago, wabuffo said:

Can you elaborate on this please?

 

Its simple - the Federal government offers to us (the private sector) three types of liabilities that exhibit "moneyness":

a) currency in circulation

b) bank reserves

c) treasury securities

 

(I compare this to a bank offering you: a) cash b) demand deposit or c) time deposit.)

 

There are three types of transactions that the consolidated Federal govt (US Treasury + Fed) does with the private sector that affects these three types of Federal government "moneyness" liabilities:

1) US Treasury deficit spending (net of taxes and fees received)

2) Federal Reserve buying/selling US Treasuries.

3) US Treasury issuing new treasury securities.

 

Of these three, the only transaction that increases money supply for the private sector is deficit spending.  

 

The other two types of transactions with the private sector are asset swaps and change one form of Federal government liability for another and thus do not added to the total amount of Fed govt liability to the private sector.

 

Some say bank lending also increases the amount of money supply - but I say that this is a private sector transaction that adds an asset but also a liability - and thus does not increase total private sector net assets.

 

So the headline is - watch US Treasury deficit spending.  Its the only thing that matters when it comes to money supply increases.

 

Bill

 

 

 

Thanks for the explanation, appreciate it!

 

[Spooky]

16 hours ago, wabuffo said:

Can you elaborate? Because we just had 10+ years of massive and unprecedented deficits...and still didn't get massive inflation outside of asset markets. 

 

We did not.  We had a big deficit splurge in 2008-2009 and then quickly got back to deficits that were 3-4% of GDP.  The numbers are large but as a % of GDP they aren't big.    Now 2020-2021 was much larger and it was more in the form of direct payments to individuals (stimmie round 1, 2 & 3) and businesses (PPP forgiveable loans).  

 

I think the key question is:  Are these big deficits behind us and one-time in nature or is this the beginning of more deficit spending under this administration that will average much larger percentages of GDP?

 

I don't know. 

 

But what I do know is that the Fed is a minor player in all of this action.  The big gorilla is the US Treasury.

 

 

Bill

 

So I'm trying to think through the implications now of the Fed raising interest rates in this environment - based on your position it won't stop the inflation experienced due to the expansion of the money supply but will lower asset prices, increase interest expense for government / firms, potentially reduce demand for goods / growth. So it seems like we are possibly headed for stagflation (assuming the government continues to run large deficits going forward). 

 

Also, can you contrast the environment now with the environment where Volcker broke inflation with significant rate increases? What is similar today and what is different? Trying to figure out why that worked then and why.

[SharperDingaan]

The issue is the growing possibility of an unexpected loss too large to recover from. Risk multiplied by continuous interest rate decline, and over-reliance on markets always recovering to higher prices (ongoing fed intervention). Were rates to appreciably normalise (rates, LP, etc), or mild 'moral suasion' applied, the market would drop like a brick.  Against which the game can go on almost indefinately - as long as nobody screws up!

 

One approach is to hold cash, and pray for failure  T-Bills, BTC, etc as a bar-bell strategy. Bleed a little every day but one day, and that day may never come, you will make the trades of the centrury! Of course ... should the 'rules' change on you ... you're f****d !!

 

Another approach is to simply buy blue-chip dividends. Div yields > bond yields, over the mid-long term - divs & share price rise as the economy recovers. Over the near term changing price doesn't really matter - no intent to sell, and you have a cash flow to live on.

 

For many ... 'I've no effing idea!' - this is what advisors are for. You pay them to worry for you, while you get on with your life. For those too cheap to pay - simply average in/out of index funds, look them over once every 6 months or so, and get on with your life. You're going to pay a fee no matter what - get over it!

 

No one today, knows where things will end up 5-10 years from now - best one can do is 'forecast', and periodically update as time goes by. There are no guarantees, however, some things ARE 90% certain; both WEB and Charlie will be dead < 10 years!

 

Get used to dealing with risk, or give your money to someone else to manage.

Life is too short.

 

SD

 

 

[wabuffo]

8 minutes ago, Spooky said:

Also, can you contrast the environment now with the environment where Volcker broke inflation with significant rate increases? What is similar today and what is different? Trying to figure out why that worked then and why.

The inflation of the 1970s was due to the US devaluing the dollar after Nixon severed the peg in August 1971.  The effects of currency debasement pre-dated 1971 and were bottled up through the 1960s and finally unleashed by the peg breaking.  Sudden devaluations do that - they lead to inflation.   We are in a different monetary system now - there is no peg.

 

Volcker gets a lot of misplaced credit and in my solitary view is very over-rated.  He frankly didn't know what he was doing by chasing monetary aggregates and his interest rate hikes were costly and unproductive in stopping inflation. This goes with my belief that the Fed can't stop inflation.

 

The 1970s Inflation was broken by the Reagan tax cuts (the top Federal tax rate in the US was 70% at the beginning of Reagan's presidency in 1980 - its was 28% when he left in 1988).   These marginal rate tax cuts unleashed the potential of the US economy and with that also significantly increased demand for US dollars and US dollar assets.   After all - inflation is a too many dollars chasing too few goods.   The Reagan tax cuts solved the too few goods problem as the US added the GDP-equivalent of West Germany's entire economy over those eight years.

 

Just as the 1970s were the end of one monetary era (the dollar pegged to gold), we will see if the 2020s are the end of another or just the extension of it (the 10%+ deficit to gdp ratios end or continue through the 2020s leading to more inflation and the discrediting of the MMT belief in unlimited US Federal spending as a cure-all for everything).

 

Bill

 

[Spekulatius]

I think people make the 70's worse than they were. Sure, the 70's had two major crisis - 1974 and 1979 - both oil price shocks, but there was actually pretty healthy growth in between. For example I did a quick calculation of the geometrical GDP growth in the 70's and got ~2.52%, also this was extremely volatile. I also read (but can't confirm) that real wages did fairly well in the 70's until 1979 when the economy was throttled by the oil price shock and higher interest rates (this 15% inflation caused a significant loss in purchasing power because the wages did not adjust with inflation any more).

 

I believe it is the oil price shocks and the miserable end of the 70's decade that stuck to the memories, not the fairly healthy growth in between.

 

 

Anyways, this 2.52% growth rates is higher than what we have right now over the last decade:

[muscleman]

9 hours ago, scorpioncapital said:

 

I have a fondness for cash.

cash pays my bills.

cash lets me act fast.

cash lets me BUY things I need or want.

 

while cash may lose its purchasing power in the short to medium term, it will make up for that loss when asset prices deflate , yields increase and you actually have money left (even if worth less) to put to work at higher rate of return. That higher rate later versus now differential I feel does catch up the lost ground. 

 

That's right. I think what happened with Zillow Offer is what is happening in the stock market right now, marked in real time.

Everyone knew that RE prices will be far higher 3-5 years down the road, but ZO started paying 25% over fair market value for every property it could seen, and exploded.

Everyone sees leading tech stocks being the future, so they started paying a premium. At first 50x PE. Then 100x PS. It will explode too. I think that moment is now.

[spartansaver]

12 hours ago, wabuffo said:

The inflation of the 1970s was due to the US devaluing the dollar after Nixon severed the peg in August 1971.  The effects of currency debasement pre-dated 1971 and were bottled up through the 1960s and finally unleashed by the peg breaking.  Sudden devaluations do that - they lead to inflation.   We are in a different monetary system now - there is no peg.

 

Volcker gets a lot of misplaced credit and in my solitary view is very over-rated.  He frankly didn't know what he was doing by chasing monetary aggregates and his interest rate hikes were costly and unproductive in stopping inflation. This goes with my belief that the Fed can't stop inflation.

 

The 1970s Inflation was broken by the Reagan tax cuts (the top Federal tax rate in the US was 70% at the beginning of Reagan's presidency in 1980 - its was 28% when he left in 1988).   These marginal rate tax cuts unleashed the potential of the US economy and with that also significantly increased demand for US dollars and US dollar assets.   After all - inflation is a too many dollars chasing too few goods.   The Reagan tax cuts solved the too few goods problem as the US added the GDP-equivalent of West Germany's entire economy over those eight years.

 

Just as the 1970s were the end of one monetary era (the dollar pegged to gold), we will see if the 2020s are the end of another or just the extension of it (the 10%+ deficit to gdp ratios end or continue through the 2020s leading to more inflation and the discrediting of the MMT belief in unlimited US Federal spending as a cure-all for everything).

 

Bill

 

Why has Japan had little to no inflation for the past 25 years despite running a meaningful deficit during that period?

[adesigar]

2 hours ago, spartansaver said:

Why has Japan had little to no inflation for the past 25 years despite running a meaningful deficit during that period?

 

Aging/Declining Population. Current population is about the same as 1990

 

 

Edited December 2, 2021 by adesigar

[spartansaver]

1 hour ago, adesigar said:

 

Aging/Declining Population. Current population is about the same as 1990

 

 

Ve

Aging population seems like a catch all for everything Japan. It may have had an impact, but I’m not completely sold. On a separate theory, wabuffo has stated that he believes higher tax rates lead to higher inflation and the opposite holds true. In Japan’s case the income tax rate fell from over 50% to slightly over 30% over the past 25 years. I wonder what else may be at work.

[wabuffo]

Why has Japan had little to no inflation for the past 25 years despite running a meaningful deficit during that period?

 

I don't know how Japan's monetary system works and haven't studied it closely, but.... there are a couple of things I would look closer at.

 

1) The Bank of Japan has bought most of the outstanding Japanese central government Treasury securities and replaced them with reserves frozen with the Japanese banking sector.   In effect, the Japanese private sector holds very little Japanese Govt Bonds (JGBs) - in fact, very few trade every day. 

 

So the deficits go into the private sector as spending, the Japanese govt issues JGBs to replace those financial deposits with JGBs, then the BOJ buys all the JGBs and replaces them with reserves in the Japanese banking system.   Reserves are stuck at the BOJ and don't circulate and that may be having an effect.

 

2) Unlike the US, Japan runs a large trade surplus instead of deficit.  So to replace those reserves (which are frozen), it net saves in US dollars and US dollar assets by trading goods for them.  It's a weird composition for the private sector in Japan as it holds more US Treasuries instead of JGBs.  Its hard to inflate in a foreign currency you don't control, I would think.

 

Those are my thoughts and I could be very wrong.  I haven't studied Japan's monetary system.

 

Bill

[Cigarbutt]

^Potentially relevant perspective?

Using the MV=PY perspective. It's only a balancing equation; don't get angry at it.

Since their bubble burst (1990) and up to recently (covid new era?), this balancing equation has revealed one of the most constant (and remarkable) relationship in financial history. 

Long story short, the PY (nominal GDP in Yen) is essentially the same as 30 years ago(!), ie barely above and close to 0% CAGR. V (let's call it a simple mathematical residual to avoid the 'velocity' controversy) has gone down almost linearly by about 2-2.5% per year. To complete the balance, the money supply growth (using M2 as proxy) has gone up by a rate of about 2-2.5% (with the government increasing base (outside) money to compensate for private deleveraging that has happened over the last 30 years(!), a true bu**le, that was). Corporate loans being repaid over time, on a net basis, will cause money to be retired (i guess 'destroyed' would be a better term to reverse 'created') from the total money supply.

A fascinating aspect is that Japan, over time, has increased the relative proportion of base money to total money supply as a result of long-lasting QEs at the expense of inside money. Note: this ratio has increased in the US since March 2020 but is still way below Japan. If crowding out is a thing, this is something to consider if long term productive growth is the goal.

Now the interesting part is what has been happening recently as the linear relationship seems to have entered non-linear territory with money supply growth growing by 8-10%, growth remaining stuck in the dust and inflation staying at zero. 

-----

Random thoughts:

-The population in Japan is about the same as in 1990 but the population aged 15 to 64 has decreased significantly (by about 10 to 15%). Older folks in Japan (contrary to other developed countries) are walking faster and have more teeth but Japan is at the forefront of something humans have never experienced before (but others are catching up real fast, including the 'developing' China).

-The private sector in Japan 'only' holds 90% of JGBs that the BOJ does not hold (about 50% of total) but, given the huge amounts of JGBs per unit of GDP, it's still a large absolute amount (people are entering a dissaving phase there, at least that's what is expected of people reaching their end, especially if they live longer, various variants permitting).

-Japan's trade surplus is often taken for granted but trends show that trade deficits could rapidly be in sight if the exchange rate continues to be associated with recurrent waves of sympathy for the Yen as a safe haven. Of note is that Japan global trade as % of GDP has gone from 20 to 35% since 1990, which implies that unfavorable trade terms would have quite a significant effect on capital movements.

Shown below is the % of trade balance per GDP for Japan over time including their 1980s China moment.

 

 

Edited December 2, 2021 by Cigarbutt
Edited for minor textual adjustments.

[muscleman]

It looks more and more like the repeat of 2000 top. Last Friday, SPY made a new high, while many stocks in it were making new lows.

[Kupotea]

I've been in mostly cash for the last two weeks. I think the narrative about the FED put is about to be broken. Stocks are by and large overvalued unless you assume perpetually low rates. All the self reinforcing narratives about the FED being unable to raise rates and the government still being able to service its debts had a kernel of truth but was largely overplayed. Rotation out of tech has been clear for a while now and only the FAAMG stocks are holding the market up. Earnings will disappoint next year as stimulus comes off and China implements a controlled real estate crash. Long term I do think inflation is the clear preferred option to dealing with the global gov debt problem so I'll be adding to select names as the pullback plays out.

[muscleman]

1 minute ago, Kupotea said:

Rotation out of tech has been clear for a while now and only the FAAMG stocks are holding the market up. 

 

That is exactly what happened in 2000. A lot of dot com stocks were already nose diving while the stock index was making new highs as Cisco, MSFT and a few others were holding the market up. The funny thing is that this time MSFT is also one of them.

The difference is that this time is an everything bubble, but in 2000, value stocks went up when dot com stocks collapsed.

 

[ValueArb]

On 12/1/2021 at 2:21 PM, muscleman said:

 

That's right. I think what happened with Zillow Offer is what is happening in the stock market right now, marked in real time.

Everyone knew that RE prices will be far higher 3-5 years down the road, but ZO started paying 25% over fair market value for every property it could seen, and exploded.

Everyone sees leading tech stocks being the future, so they started paying a premium. At first 50x PE. Then 100x PS. It will explode too. I think that moment is now.

 

Why do you think RE prices will be far higher in 3-5 years? If mortgage rates go up to 5% or so, won't that lead to flat or lower RE prices?

[Dave86ch]

1 hour ago, muscleman said:

 

That is exactly what happened in 2000. A lot of dot com stocks were already nose diving while the stock index was making new highs as Cisco, MSFT and a few others were holding the market up. The funny thing is that this time MSFT is also one of them.

The difference is that this time is an everything bubble, but in 2000, value stocks went up when dot com stocks collapsed.

 

Tbh I doubt it's a everything bubble, BRK is an emblematic case where Warren throught increasing share repurchases is communicating the under-fair value of its shares.

Only my humble opinion.

Edited December 13, 2021 by Dave86ch