Where Does the Global Economy Go From Here?

[Gamecock-YT]

4 hours ago, Viking said:

I am trying to understand the lower end consumer in the US (bottom 40%). Rent is increasing dramatically. Food is increasing dramatically. Gas/energy is increasing dramatically. This group spends pretty much everything it earns on essentials. Inflation is running 8%… wage increases are running maybe 5%? Now i keep reading about ‘excess savings’…  But every month is this large group not falling further and further behind (in real purchasing power)? Will it not result in lower consumer spending at some point?

 

When i weave it all together: is a large swath of the US economy not in the middle of an economic shit storm? That is getting worse each month? And will continue to get worse the longer inflation continue to rips at 7-8%?

 

Or is the simple answer this group essentially does not matter from an economic perspective - its overall impact on the economy is too small? The other 60% is what really matters?

 

 

their votes matter

[Spekulatius]

12 hours ago, Viking said:

I am trying to understand the lower end consumer in the US (bottom 40%). Rent is increasing dramatically. Food is increasing dramatically. Gas/energy is increasing dramatically. This group spends pretty much everything it earns on essentials. Inflation is running 8%… wage increases are running maybe 5%? Now i keep reading about ‘excess savings’…  But every month is this large group not falling further and further behind (in real purchasing power)? Will it not result in lower consumer spending at some point?

 

When i weave it all together: is a large swath of the US economy not in the middle of an economic shit storm? That is getting worse each month? And will continue to get worse the longer inflation continue to rips at 7-8%?

 

Or is the simple answer this group essentially does not matter from an economic perspective - its overall impact on the economy is too small? The other 60% is what really matters?

Don't forget the huge minimum wage raises. A lot of minimum wages have doubled. It's not the lower end that gets screwed here, it's the lower middle class, in my opinion, especially when renting.

 

Canada could be way worse off than the US because of completely outrageous housing prices and interest rates will reset for new buyers after a while, while in the US most people chose fixed.

Edited March 24, 2022 by Spekulatius

[maplevalue]

8 hours ago, Gamecock-YT said:

their votes matter

 

It's true, the proportion of the population that doesn't like inflation represent a huge percentage of the electorate (particularly older people on fixed incomes).

 

This is why today there is a heightened risk that central bank inflation targets get lowered (I think there is a non-negligible chance they get changed to ~0% CPI/PCE inflation). Just think about how popular a "no more inflation" policy would be from one of the candidates in the 2024 election.

Edited March 24, 2022 by maplevalue

[Ulti]

Howard Marks latest
 

https://www.oaktreecapital.com/insights/memo/the-pendulum-in-international-affairs
 

[cubsfan]

1 hour ago, Spekulatius said:

Don't forget the huge minimum wage raises. A lot of minimum wages have doubled. It's not the lower end that gets screwed here, it's the lower middle class, in my opinion, especially when renting.

 

Canada could be way worse off than the US because of completely outrageous housing prices and interest rates will reset for new buyers after a while, while in the US most people chose fixed.

 

Fortunately for us in the US - we're about to see a great reset with the November election.

The middle & lower classes are sick of outrageous inflation, ridiculous taxes, green policies that

apply only to them & not the yacht/private jet crowd,  and more bureaucrats telling them what

to do - like wearing masks all day long. We ought to get back to a place where we're energy

independent again and people actually want to work, instead of being paid to stay home.

 

As you say, the middle class is being pummeled here, as they are being told to be happy

with sacrificing for energy sustainability, apartment living and taking the bus/train - whilst 

the assholes in the tech, media, elites & politicians - have 3 or 4 mansions and fly first class.

Not to mention the jerkoffs that love open borders that are now wrecking the Southwest

and fueling crime in the rest of the country. No skin off Zuckerberg, Pelosi or Bill Gates's 

back when you have police escort everywhere & walls/gates higher than any border wall.

Out-of-control crime has no impact on you..

 

At least in the US - the toxic Davos crowd is about to get the boot - and we'll be able to

get back to a life that worked very well for the middle class for the last 100 years instead 

of this disaster.  

 

More hard work, accountability, meritocracy and far less virtue signaling bullshit from 

the Hollywood/Silicon Valley wine & cheese crowd & incompetent elites.

[Viking]

I have been trying to understand the big and sustained move in equities the past week. The more hawkish the Fed news (and the higher interest rates go) the more stocks rally. Which is counter intuitive to what one would normally expect to see.
 

Could the answer be the bond market? Is the bond market cracking? Are people FINALLY recognizing that a -6% real yield is not worth the risk of owning a bond? Is the bond market the market that is in a bear market?
 

Is the strength we are seeing in the stock market the past week the result of a rapid shift from large investment funds in their allocation to a lower weighting in bonds to a higher weighting of stocks? 

Edited March 24, 2022 by Viking

[mattee2264]

I think that markets are worried about inflation and realize it is not transitory so see it as a positive that the Fed is taking a more aggressive stance to nip it in the bud before it becomes endemic and therefore requiring much more aggressive action to tame. 

[Gregmal]

bonds, garbage

cash, garbage

hard assets, good

stocks, probably good enough

 

seems simple enough. 

[TwoCitiesCapital]

1 hour ago, Viking said:

I have been trying to understand the big and sustained move in equities the past week. The more hawkish the Fed news (and the higher interest rates go) the more stocks rally. Which is counter intuitive to what one would normally expect to see.
 

Could the answer be the bond market? Is the bond market cracking? Are people FINALLY recognizing that a -6% real yield is not worth the risk of owning a bond? Is the bond market the market that is in a bear market?
 

Is the strength we are seeing in the stock market the past week the result of a rapid shift from large investment funds in their allocation to a lower weighting in bonds to a higher weighting of stocks? 

 

Stocks typically rally during hiking cycles. There is an initial sell-off and a recovery and they continue to rise until the Fed breaks something. 

 

This doesn't seem that abnormal to me if we're just looking at this like a typical hiking cycle. 

 

The standouts that make this somewhat atypical are 1) inflation is 7% and it seems I'm in the minority in believing that rate is not sustainable and 2) the yield curve is already pricing in rate cuts within the next 18 months and we're only 1 hike in. 

 

I think the second two are probably worth ignoring for now with the recognition that this whole cycle will be abbreviated suggesting the Fed will break something sooner rather than later. I still like bonds here - particularly 2-3 year bonds that I intend to swap to intermediates the moment it looks like the Fed is going to pause. 

[tede02]

It sure seems like we're on a track toward demand destruction. If energy stays up, and inflation stays elevated more broadly AND the Fed ratchets rates up all year, this is going to start eating into consumers. 

[Viking]

Europe’s economic situation certainly looks completely messed up today. War in Ukraine. Inflation is ripping at generational highs. Energy crisis bordering on a catastrophe. Economic confidence levels are plummeting (back to levels seen at the start of covid). ECB is even further behind the Fed (in terms of normalizing interest rates) so financial repression (very high negative real interest rates) will continue (and is becoming defacto ECB policy). Putin wants payments for energy in Rubles. 
 

Europe is united today driven by Russia’s invasion of Ukraine. As economic stagnation sets in (a serious recession for some geographies and industries) the unity will likely get severely stressed later in 2022. 
 

Hard to see how the economic situation in Europe does not get much worse as the year progresses and Putin’s energy leverage increases. It really is crazy how many super important things are being juggled by the global economy right now… 

 

But hey, investors don’t have a thing to worry about… because its all ‘priced in’. (Just like it was all ‘priced in back in Feb of 2020?)

Edited April 2, 2022 by Viking

[Gregmal]

Viking I don’t think you’ve ever seen a shadow that didn’t prompt you to conclude a higher cash allocation is warranted. As has been mentioned before, you could have gone to sleep in February of 2020, fully invested, and woke up a few months later barely noticing and been higher 12 months later. Running around full of fear all the time is no way to invest.

51 minutes ago, Viking said:

But hey, investors don’t have a thing to worry about… because its all ‘priced in’. (Just like it was all ‘priced in back in Feb of 2020?)

 

[no_free_lunch]

It's a tough environment. Yes the market is overpriced and risk everywhere but also inflation is hopping.  I am still mostly invested.  I am trying to avoid financial types and focusing on business with pricing power.  At this point it's a question of holding on to capital inflation adjusted. 

[Gregmal]

Yea I would avoid financials like the plague. The Citi thread is both funny and on point. There’s never been a market hiccup where the banks don’t take it up the butt. Even the ones doing well get whacked with multiple contraction. 
 

a good area I’ve found recently as rates go up and spreads blow out is merger arbs. Seems to be 10% irr growing on trees there. Also just doing nothing and shorting OTM puts on high quality stuff is a way to be monetizing volatility. 

Edited April 2, 2022 by Gregmal

[maxthetrade]

1 hour ago, Viking said:

Hard to see how the economic situation in Europe does not get much worse as the year progresses and Putin’s energy leverage increases. It really is crazy how many super important things are being juggled by the global economy right now… 

 

I agree, hard to see how Europe can avoid a recession. My heating gas bill went from 1.6k to 6.8k/year. I was able to drop it to 4.9k by switching my gas provider which most people here don't do. Electricity bill doubled to 1.6k. Filling the tank costs 25% more.  Cost of groceries is up by 10-20%, e.g. I used to pay €15 for 1kg of red shrimp, now 20€. Only japanese Wagyu and french artisane cheese aren't more expensive, probably because they were ridiculously expensive already

 

P.S. if things get crazy later this year, e.g. rationing of gas etc. I may move for some time to a nice place in the south or the US. Most people can't of course.

Edited April 2, 2022 by maxthetrade

[Viking]

5 hours ago, Gregmal said:

Viking I don’t think you’ve ever seen a shadow that didn’t prompt you to conclude a higher cash allocation is warranted. As has been mentioned before, you could have gone to sleep in February of 2020, fully invested, and woke up a few months later barely noticing and been higher 12 months later. Running around full of fear all the time is no way to invest.

 

 

@Gregmal We all need to find strategies that fit how we are wired and that also hit our return objectives. Paying attention to macro has worked very well for me for 20 years. “Running around full of fear all the time is no way to invest.” Ouch! Thanks for that solid advice. But i think i’ll stick to what actually works for me  

[Gregmal]

It’s not really meant to be an “ouch” comment but just a question of…you really don’t think there is ANY businesses out there, in the entire universe, that are worth investing in, on a basis of anything more than just guessing week to week or month to month fluctuations? Commenting about how “oh another February 2020” when even that example proved to be a silly excuse to sell everything(resetting the holding period shot clock) unless you bought back the same exposure inside of what, 3-4 months? That doesn’t really sound like investing at all to me. Is “investing” really just confined to avoiding short term dips(also described as buying opportunity)? In the process accumulating only short term capital gains tax rates? It seems woefully inefficient even ignoring the whole inflation thing. Did following Stelco for long periods of time prove to be of any benefit if the objective was then to toss it to the curb when the ceo was tricking everyone into giving up their shares into his buyback? 
 

Generally speaking I’m all for playing the short term movements but underneath it there needs to be some underpinning of a core investment strategy. Or so one would think.

[Viking]

2 hours ago, Gregmal said:

It’s not really meant to be an “ouch” comment but just a question of…you really don’t think there is ANY businesses out there, in the entire universe, that are worth investing in, on a basis of anything more than just guessing week to week or month to month fluctuations? Commenting about how “oh another February 2020” when even that example proved to be a silly excuse to sell everything(resetting the holding period shot clock) unless you bought back the same exposure inside of what, 3-4 months? That doesn’t really sound like investing at all to me. Is “investing” really just confined to avoiding short term dips(also described as buying opportunity)? In the process accumulating only short term capital gains tax rates? It seems woefully inefficient even ignoring the whole inflation thing. Did following Stelco for long periods of time prove to be of any benefit if the objective was then to toss it to the curb when the ceo was tricking everyone into giving up their shares into his buyback? 
 

Generally speaking I’m all for playing the short term movements but underneath it there needs to be some underpinning of a core investment strategy. Or so one would think.

@Gregmal here are some answers to your questions:

1.) why do i invest? To make money.
2.) what is my holding period? It depends. See 1.)
3.) what are some core strategies used? Here are a few:
- Buy low (usually when they are on sale/out of favour). Sell high.

- Concentrate, especially when the risk/reward is very favourable. I rarely own more than 10 stocks at any time. I have had > 50% of my portfolio in one stock for short periods of time.

- Stick to stocks/industries that i think i understand well.

- am i ok holding cash? Yes. Sometimes i will be 100% cash (short term). Why? Because it allows me to take advantage of fat pitches when they are offered up by Mr Market.

- capital preservation is super important. I have enough. Buffett’s first rule: “don’t lose what you’ve got”. Buffett’s second rule: “don’t forget the first rule”

4.) do i like to use macro in my investment process? At times, yes.
5.) what about taxes? The vast majority of my investments are in tax advantaged accounts (multiple LIRA’s, RRSP’s, TFSA’s, RESP) so i do not, for the most part, have to think about taxes when investing. This is a big advantage.

So what has all the above delivered? An annual return of a little over 15% per year for the past 20 years (11.5% YTD). Retirement at 40 (mid 50’s now). Opportunity to spend some of the best years of my life with my wife and 3 kids when they were growing up - priceless.
 

So you say that what i am doing is not investing. All i know is it works.. for me and for my family.  
—————

Yes, i did sell Stelco when steel prices were falling and Kestenbaum was having his moment. And i think i mentioned i moved the proceeds into oil (which was my top pick to start the year). Regardless, i will admit i do lots of dumb things. And that is what i love about investing… just avoid the big mistakes… soon enough more fat pitches (that i understand) will be coming right down the middle of the plate again and again and again…

[Gregmal]

Thanks @Viking. The tax advantage accounts make tons of sense then. Agree on investing vs making money. Who cares about the terminology. Appreciate the detail on the process. No one’s is perfect and regardless you always have to evolve to stay ahead of the markets. 

[scorpioncapital]

I would argue the inflation has just begun and so the sugar high hasn't even reached a peak. stocks can still even double. We are still in the euphoric orgasmic phase of inflation.

The horrors of inflation occur on the downside of the roller coaster. If you think this is bad, you haven't seen a real hyperinflation yet!

 

Edited April 3, 2022 by scorpioncapital

[Viking]

4 hours ago, scorpioncapital said:

I would argue the inflation has just begun and so the sugar high hasn't even reached a peak. stocks can still even double. We are still in the euphoric orgasmic phase of inflation.

The horrors of inflation occur on the downside of the roller coaster. If you think this is bad, you haven't seen a real hyperinflation yet!

@scorpioncapital I agree that where inflation goes from here (2H 2022, 2023 and 2024) will be super interesting and super important for investors in the coming years. My base case is most investors simply follow the trend - and that IS normally the best thing to do. However, when long term trends change then ‘what works for investors’ can also change in important ways. The rub, of course, is we will not KNOW there has actually been a trend change for years. Is any of this actionable for most investors? Probably not. 
—————

i love history. The10 year US Treasury had a yield of 15.5% in 1982. In March of 2020 it had a yield of 0.5%. We had a 40 year period of continuously and methodically lower interest rates. So investors in anything bond/fixed income related have just experienced the greatest bull market in history. And what was the key driver of ever lower bond yields? Continuously and methodically falling inflation. (Over the past decade unprecedented central bank intervention has also been a factor.)
—————

And what is the most important input for an investor when assessing any investment? Well, according to Buffett it is interest rates. “The most important item over time in valuation is obviously interest rates,” Buffett said last year. “Any investment is worth all the cash you’re going to get out between now and judgment day discounted back.”

- https://www.cnbc.com/2018/10/11/warren-buffett-on-why-interest-rates-matter-so-much-for-investing.html

—————

So what about inflation? Well a year ago EVERYONE thought inflation would be transitory. A year later, that word is no longer mentioned in polite company. Today everyone now understands, yes, we have an inflation problem AND IT IS NOT TRANSITORY. And as this realization sets in bond yields are now spiking. And Q1 was the worst quarter for fixed income since 1980. 
—————

So, to weave it all together, can we say the long term trend down in bond yields (and interest rates) is broken? No, i don’t think we can say that YET. We need to see what happens the next couple of years. 
 

My read is Mr Market today is very confident that the Fed over the next year will be able to engineer a soft landing for the economy and also bring inflation back down to a more acceptable level.
 

Absent a recession (hard landing for the economy) i am not convinced inflation is going to come down over the next year as much as Mr Market currently expects (looking at bond yields). Why?
1.) labour: Is there a large structural shortage of labour in the US economy today?
2.) housing: is there a large and structural shortage of housing in the US today?

3.) ESG: how fast do we transition to electric vehicles? And to alternative energy sources?

4.) war in Europe: do we see spending on the military ramp significantly higher in countries around the globe? Will NATO countries spend 2% of GDP on military moving forward?

5.) commodities: are we at the beginning of a commodity super cycle?

6.) globalization: is globalization dead? How much production shifts back from Asia to NA and Europe (computer chips being just one example)?

7.) covid: the pandemic is still with us. China and its policy of zero tolerance being but one example.

 

If inflation continues to come in higher than expected then it also makes sense to me that interest rates will continue their march higher. We will see. Interesting times indeed.

Edited April 3, 2022 by Viking

[Viking]

On the inflation front, below is the link to a great podcast with Larry Summers. One hour discussion. Host asks great questions. Lots of great discussion on THE topic of today.
 

Summers thinks the Fed will need to get to 4-5% interest rate (high enough that they get close to a real interest rate) in the next couple of years to break inflation.

 

Why will inflation stay higher in 2023 and 2024 than Fed models currently expect? Here are some thoughts after listening to Summers:

- only 1/3 of government stimulus has been spent. Rest will be spent over next couple of years. Too much money chasing too few goods.

- Fed policy (higher rates) impacts economy with considerable lag. As of last month Fed policy was still ACCOMMODATIVE.

- labour market is exceptionally tight, especially when you add in extreme level of job vacancies. Might be tightest labour market in +50 years.

- negative interest rates: even with a 2% interest rate, with inflation at 6% the real interest rate is -4%. This rate is still HIGHLY ACCOMMODATIVE. 

- new news: War in Europe adding to inflation issues. How high commodity prices go and how long they stay elevated is key (to impact on future inflation)

- new news: China covid policy (lock downs) will continue to restrict supply of goods - which is inflationary - perhaps for next year

- bottom line, inflation expectations might be getting embedded at +5%. Workers now need and are increasingly demanding big wage increases to keep up with rising prices they see every day now - food, energy, goods, housing. Businesses are now planning (and needing) on getting big price increases not just this year but also IN FUTURE YEARS to offset increases in costs. 

—————

I keep hoping Larry Summers Is Wrong. What if He’s Not?

https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5zaW1wbGVjYXN0LmNvbS84MkZJMzVQeA/episode/ZjIyOGZlZmEtYzZlZC00Zjk5LTkxN2YtODQ0ZDQ2NTdjNjJh?hl=en-CA&ved=2ahUKEwi5xfW-1Pv2AhVnHzQIHdhBDHwQjrkEegQIBRAI&ep=6

For over a year now, Summers — a former U.S. Treasury secretary and current Harvard economist — has been warning about the economy that we appear to be entering. So I invited him to the show to make his case and paint a picture of what he thinks comes next. We discuss why he thinks we’re almost certainly headed toward a recession, why he believes the Fed is engaged in “wishful and delusional thinking,” whether corporations are using this inflationary period as an excuse to goose profit margins, how to avoid a 1970s-style stagflation crisis, whether interest rates are the right tool to be addressing inflation in the first place, why he thinks much more immigration is one of the best tools we have to bring down prices in the long term and much more.

 

 

Edited April 5, 2022 by Viking

[LC]

On 4/2/2022 at 3:40 PM, Gregmal said:

a good area I’ve found recently as rates go up and spreads blow out is merger arbs. Seems to be 10% irr growing on trees there. Also just doing nothing and shorting OTM puts on high quality stuff is a way to be monetizing volatility. 

 

Agreed. Find something you like, figure a reasonable valuation, and see what the puts sell for at that price. 

 

A few weeks ago someone paid me $7.50 to sell me Adobe for $260 in October. I wimped it up and didn't go in hard enough. But that was a screamer.

 

Was buying MSFT also @ ~270 with the proceeds. 

 

Merger arb is a whacky one and I trade around it because I never know if the deal is going to close or not. 

Edited April 5, 2022 by LC

[TwoCitiesCapital]

It's always a little stunning to me that people believe negative real interest rates that imply the erosion/destruction of the capital and savings of a country is a bullish metric...

[Gregmal]

I think theres a tendency to overthink it. I mean people are making a big fuss over the "inverted yield" curve, and "what does the bond market know" and I just think "who cares" and "why its anyone wasting their time with bonds to begin with"?? Only relevance of the interest rate to most people is what you need to finance and what you can generate above that.