Have We Hit The Top?

[mattee2264]

The Fed will cut as it always does when a rate hiking cycle pushes the economy into recession. Historically though the negative impact on EPS dominates the benefit from lower interest rates. And the market usually bottoms about a year after the first rate cut. 

 

But this is the era of fiscal dominance. The irony of course is that the stock market places far too much importance on everything the Fed says and does. When aside from causing a few localised fires which they can put out via bailouts 500 bps of rate increases has had very little impact on the economy because it has been swamped by the stimulus that trillion dollar fiscal deficits are giving the US economy.

 

And why would the US government get responsible during a recession? Especially when an election is coming up. And if there is a recession it is much easier for them to overcome the flimsy checks and balances to increase spending. 

 

And without a recession, unless something else breaks in a major way, you aren't going to get a major decline in stock markets. 

 

It is true that the Fed has less influence over the long end of the curve especially when bond vigilantes are doing their upmost best to impose fiscal discipline. But they always have the option of yield curve control and can print unlimited amounts of money to achieve that. 

 

Whether there are long term consequences from seemingly reckless fiscal policy is anyone's guess. But everyone was convinced that QE would lead to disaster. And while it certainly distorted the economy and encouraged a lot of speculation it didn't cause hyperinflation and has juiced stock market returns. I suspect much the same will be true of fiscal policy. 

[Gregmal]

Tops in on rates, yup.

[TwoCitiesCapital]

3 hours ago, mattee2264 said:

The Fed will cut as it always does when a rate hiking cycle pushes the economy into recession. Historically though the negative impact on EPS dominates the benefit from lower interest rates. And the market usually bottoms about a year after the first rate cut. 

 

But this is the era of fiscal dominance. The irony of course is that the stock market places far too much importance on everything the Fed says and does. When aside from causing a few localised fires which they can put out via bailouts 500 bps of rate increases has had very little impact on the economy because it has been swamped by the stimulus that trillion dollar fiscal deficits are giving the US economy.

 

And why would the US government get responsible during a recession? Especially when an election is coming up. And if there is a recession it is much easier for them to overcome the flimsy checks and balances to increase spending. 

 

And without a recession, unless something else breaks in a major way, you aren't going to get a major decline in stock markets. 

 

It is true that the Fed has less influence over the long end of the curve especially when bond vigilantes are doing their upmost best to impose fiscal discipline. But they always have the option of yield curve control and can print unlimited amounts of money to achieve that. 

 

Whether there are long term consequences from seemingly reckless fiscal policy is anyone's guess. But everyone was convinced that QE would lead to disaster. And while it certainly distorted the economy and encouraged a lot of speculation it didn't cause hyperinflation and has juiced stock market returns. I suspect much the same will be true of fiscal policy. 

 

I mean, it didn't cause hyperinflation, but it did cause trillions of very real losses in fixed income markets ( and probably commercial real estate). Remains to be seen if anything else gets added to the tally.

 

More has been lost in US bonds in 2021-2023 than was lost globally from 2008/2009 debacle....

[thepupil]

5 minutes ago, TwoCitiesCapital said:

 

I mean, it didn't cause hyperinflation, but it did cause trillions of very real losses in fixed income markets ( and probably commercial real estate). Remains to be seen if anything else gets added to the tally.

 

More has been lost in US bonds in 2021-2023 than was lost globally from 2008/2009 debacle....

how many people in your life are you aware of that have been directly and  negatively affected by the bond sell-off?

[Gregmal]

39 minutes ago, TwoCitiesCapital said:

 

More has been lost in US bonds in 2021-2023 than was lost globally from 2008/2009 debacle....

So the debate is settled then? They probably shoulda just bought stocks 

[ValueArb]

12 hours ago, Cigarbutt said:

Yes since the early 80s, we (the global we) have gradually learned, in a Pavlonian way, to expect the fiscal-monetary playbook to play out, as expected.

But is this sustainable? Is there a risk of a non-linear change in trend? Won't the US retain relative refuge value?

 

What is this measuring? Because its not correct for the US, as federal debt alone was 130% of GDP in 2022, and I don't believe that is counting state and local debt.

[Sweet]

Interesting method for whale watchers in biotech:

https://whalewisdomalpha.com/baker-brothers-holdings-13f-replication-strategy/index.html

[TwoCitiesCapital]

1 hour ago, thepupil said:

how many people in your life are you aware of that have been directly and  negatively affected by the bond sell-off?

 

Just about everyone. 

 

You have a pension or a 401k or an IRA? The losses in stocks in bonds over the last 2-years - especially if the need to inflation adjust those returns is evident from anyone nearing, or in, retirement. 

 

You are in the market for a loan? You definitely feel the higher interest rates. Maybe the tighter credit standards as well as banks are balance sheet constrained because of their losses on bonds and lower liquidity. 

 

You buy insurance? You're feeling it as insurers wiped out a huge portion of good portion of their equity capital by owning low yielding securities so have to write fewer policies, with less coverage, for more premium. Inflation plays a roll here too.

 

 You want to move? Too bad. It'll cost you 50% more for 2/3 the house you're currently in. 

 

The effects of rates/inflation of the last 2-years is everywhere. 

[thepupil]

agree on rates, but on the direct negative wealth effect from bonds, I don't really think anyone has been particularly negatively affected and generally feels better off given a better return on savings. 

 

I think most losses have been borne by Fed, banks, duration matchers etc and that people don't really give a shit if their 0-30% in bonds are down 10% in nominal terms and that higher rates feel like stimmy to folks of means. 

 

i agree with you regarding higher rates, but the "more money has been lost on bonds than on stocks in GFC" implies that the bond losses have actually mattered to anyone other than banks with flighty deposit bases. I just don't see that. whereas RE and stock losses in the GFC were devastating to many 

Edited November 14, 2023 by thepupil

[Spekulatius]

Insurers tend to benefit from higher interest rates, as do pension funds. The market to market losses don't matter in 95% of the cases, but he availability to invest the float into higher yielding securities is beneficial to pension funds and insurance cos.

 

I have yet to see a single person who is affected by the bond selloff. The higher interest rates for home purchases is a factor but if you own one and refinanced in 2020/21 you stay put and don't give a damn.

 

I think the lower interest rate from 2009-2021 were real poison. 

Edited November 14, 2023 by Spekulatius

[ValueArb]

1 hour ago, TwoCitiesCapital said:

 

You have a pension or a 401k or an IRA? The losses in stocks in bonds over the last 2-years - especially if the need to inflation adjust those returns is evident from anyone nearing, or in, retirement. 

 

Unless you are in retirement this has been a huge net benefit. No longer do savers have to overpay for stocks or bonds. Every new dollar going into their retirement funds is getting a much higher yield and over time that will make them significantly better off.

[james22]

 

58 minutes ago, Spekulatius said:

I have yet to see a single person who is affected by the bond selloff.

 

You don't know anyone retired?

 

1. They usually have a high allocation to bonds (40%+).

 

2. They count on withdrawing from bonds when the market is down for their expenses.

 

 

[Spekulatius]

12 minutes ago, james22 said:

 

 

You don't know anyone retired?

 

1. They usually have a high allocation to bonds (40%+).

 

2. They count on withdrawing from bonds when the market is down for their expenses.

 

 

I know people who retired and own zero bonds. Most people were just holding cash or sometimes short term CD's, since bonds were yielding almost nothing. What was the point of holding bonds in 2021?

[ValueArb]

2 hours ago, Sweet said:

Interesting method for whale watchers in biotech:

https://whalewisdomalpha.com/baker-brothers-holdings-13f-replication-strategy/index.html

 

This is very interesting, thanks. They clearly have a great skill at stock picking in biotech, but we know outperformance tends to degrade over time, typically because of portfolio size increasing limiting a SuperInvestor's highest return opportunities.

 

The writer recommends a strategy of only focusing on Baker Brother's small cap picks to theoretically get their highest return ideas, which might work. The problems are,

1) its not always small caps that are their best ideas

2) With their far larger portfolio they may not have as much time to spend on their small caps, reducing their edge in picking the best. For example if they have fourteen $1B positions in mid/large caps and ten $100M positions in small caps, how much focus are they really going to give small caps? 

3) What if their previous highest return stocks were clustered in the small end of small caps, and they can't even play in that pool anymore?

 

Looking backwards can give you confidence that someone has great skills, but it can't give you confidence that they will be as successful going forward, especially when burdened with a larger portfolio forcing them into more efficiently priced parts of the market.

[ValueArb]

4 minutes ago, Spekulatius said:

I know people who retired and own zero bonds. Most people were just holding cash or sometimes short term CD's, since bonds were yielding almost nothing. What was the point of holding bonds in 2021?

 

Also any retiree who kept their bond durations short is a huge beneficiary. They are rolling over into far higher yielding bonds and will continue to for the next few years and their interest earned will skyrocket.

[Gregmal]

If you’re retired you probably also have huge home equity. Despite that whole crock of shit from people claiming we have a housing crash on our hands…

[james22]

12 minutes ago, Spekulatius said:

I know people who retired and own zero bonds. Most people were just holding cash or sometimes short term CD's, since bonds were yielding almost nothing. What was the point of holding bonds in 2021?

 

I was one of them (only shifted my MMF to ITT several weeks ago).

 

But most retirees aren't timing. They hold a fixed allocation (60/40) or follow something like Age in Bonds. 

 

And anyone holding a Target Retirement fund has a significant bond allocation.

[ValueArb]

2 hours ago, Gregmal said:

If you’re retired you probably also have huge home equity. Despite that whole crock of shit from people claiming we have a housing crash on our hands…

 

 

Quote

It is time to look more favorably on your mortgage. The leap in interest rates of the past two years means that an old fixed-rate loan should be thought of as one of your most valuable assets, rather than a deadweight loss you have to pay the bank every month.

 

 

https://www.wsj.com/finance/investing/the-trillion-dollar-win-hiding-in-your-mortgage-ae1cd21e?mod=hp_lead_pos3

 

Quote

If you borrowed $500,000 to buy a house at 3% interest for 30 years, and then mortgage rates went up to 8%, that mortgage is now arguably worth just $287,000.4 Your debt went from $500,000 to $287,000, so your net worth increased by $223,000.

...

Why isn’t someone building a product? We talked a while back about assumable mortgages, which are one way to unlock this value, but which are not broadly available. But really the tempting product is:

• You have a $500,000 mortgage that is now worth $287,000.

• You go to your bank and say “I’ll give you $300,000 for it.”

• The bank is like “fine okay that works.”

 

https://www.bloomberg.com/opinion/articles/2023-11-14/goldman-keeps-getting-more-boring?srnd=opinion

Edited November 14, 2023 by ValueArb

[Gregmal]

20 minutes ago, ValueArb said:

 

 

 

https://www.wsj.com/finance/investing/the-trillion-dollar-win-hiding-in-your-mortgage-ae1cd21e?mod=hp_lead_pos3

 

 

https://www.bloomberg.com/opinion/articles/2023-11-14/goldman-keeps-getting-more-boring?srnd=opinion

Is there actually a legitimate way to do this? Would imagine getting a payoff quote aint getting you a discount to amount outstanding. 

[dealraker]

OK, so as far as predictions as to inflation and whatnot...

 

Greg's test result: 100

Everybody else: 0

 

(And that's being generous to everybody else, I'm in this group too.)

 

I'm trying to be a tad funny of course, but it ain't far off.  Lordy Greg, CNBC guest economist on your radar?  

Edited November 14, 2023 by dealraker

[Gregmal]

16 minutes ago, dealraker said:

OK, so as far as predictions as to inflation and whatnot...

 

Greg's test result: 100

Everybody else: 0

 

(And that's being generous to everybody else, I'm in this group too.)

 

I'm trying to be a tad funny of course, but it ain't far off.  Lordy Greg, CNBC guest economist on your radar?  

Kind words appreciated but I like being away from the crowds. Figuratively and literally. 

[ValueArb]

47 minutes ago, Gregmal said:

Is there actually a legitimate way to do this? Would imagine getting a payoff quote aint getting you a discount to amount outstanding. 

 

Thats a great question. If I was a bank and someone requested a modification like this, I'd know they needed to sell their house and would just sit on my hands until they closed and paid the entire mortgage off at par.

 

But it can be argued that there is a group of home owners who don't have to sell their homes, and probably won't sell their homes any time soon but would if they were given a modification like this. So if the banks could create a product that targeted them it might improve their balance sheets, especially if they only give back some of the value to the customers. But I don't really understand the accounting of bank mortgages so maybe it doesn't make sense.

[Gregmal]

1 minute ago, ValueArb said:

 

Thats a great question. If I was a bank and someone requested a modification like this, I'd know they needed to sell their house and would just sit on my hands until they closed and paid the entire mortgage off at par.

 

But it can be argued that there is a group of home owners who don't have to sell their homes, and probably won't sell their homes any time soon but would if they were given a modification like this. So if the banks could create a product that targeted them it might improve their balance sheets, especially if they only give back some of the value to the customers. But I don't really understand the accounting of bank mortgages so maybe it doesn't make sense.

Yea I’m super fat and happy on 30 year fixed at 3/4/5 rates from primaries to investor loans. No plan to sell but if a bank said hey that $450k mortgage can be paid off for $325k I’d probably consider it, or at least do partial buybacks if available. But knowing the system if I say hey I got this one here at $450k with a 3.25% what’s the payoff they’d say $452k lol and it’s like ok enjoy your NIM

[thepupil]

1 hour ago, Gregmal said:

Is there actually a legitimate way to do this? Would imagine getting a payoff quote aint getting you a discount to amount outstanding. 

 

yes, buy bonds. 

[Spekulatius]

11 minutes ago, ValueArb said:

 

Thats a great question. If I was a bank and someone requested a modification like this, I'd know they needed to sell their house and would just sit on my hands until they closed and paid the entire mortgage off at par.

 

But it can be argued that there is a group of home owners who don't have to sell their homes, and probably won't sell their homes any time soon but would if they were given a modification like this. So if the banks could create a product that targeted them it might improve their balance sheets, especially if they only give back some of the value to the customers. But I don't really understand the accounting of bank mortgages so maybe it doesn't make sense.

the bank likely does not own your mortgage - certainly not if it is a conforming mortgage. The mortgage is owned by  by some MBS fund with thousands of other mortgages packaged together. That construct makes it probably not feasible to buy out individual mortgages.

 

Even if a bank does own your mortgage fully, i don't think they would buy it back because they would immediately realize a loss which would create a hit for their equity. Better to extend and pretend as this does not impair their capital (from a regulators perspective).

Edited November 14, 2023 by Spekulatius