Where Does the Global Economy Go From Here?

[Dinar]

1 minute ago, changegonnacome said:

 

As I said above........this is guiding clients or investing clients assets in Costco/Apple/Microsoft etc at 3-4% FCF yields, while the 30yr treasury is potentially going to 6%......conservative sometimes is another word for institutional ass covering, while keeping the client FULLY invested and with you and making sure you dont get sacked in the post-mortem

I did not express my self clearly.  Conservative in his words were: short-term bonds, preferred stocks, longer term munis, REITs, little in equities with a bias towards European names.  

[changegonnacome]

15 minutes ago, Dinar said:

I did not express my self clearly.  Conservative in his words were: short-term bonds, preferred stocks, longer term munis, REITs, little in equities with a bias towards European names.  

 

Got ya - fair dues to him/them. I think they are providing descent advice there.

 

But you look at the valuations...not everybody is like your buddys institution.....check out SPY.......in the context of a 30yr @ 6%, China/Europe entering recession, DXY @ 111....its bonkers IMO SPY I mean........then add in all the good reasons why we are potentially entering an era of secularly higher inflation pressures versus the goldilocks ( for low inflation) period we just came out of bookend by COVID & starting in 1980......

[Gregmal]

5 hours ago, changegonnacome said:

 

I think that too many market participants haven't seen an inflationary/rate hiking cycle and really cant see what happens next......or just institutional bias to keep dancing while going over the cliff........better to fail conventionally than succeed unconventionally.....insituational money managers will go over the cliff holding 3% FCF yielding instruments even when the 30yr is printing 6%.....in retrospect it look dumb....but inside the machine it aint dumb at all, its the exactly right thing to do if your a money managing agent collecting a fees.....nobody gets sacked in the market meltdown post-mortem holding a basket of FANGMA even if they drop 30-50%...... as a money manager you get to live another day.....and re-build your AUM's

So for 4-5 months ish, all the smart guys on the street can’t figure out how to put on the same inflation trades that worked for 18 months prior? I don’t buy that. Everything is pointing toward recession and deflation. Again, check WM today. I don’t think folks are married to 3% FCF yields, in aggregate, over 4 months, and driving the markets. If you have real inflation, you’d see inflation beneficiaries getting bid up like you did all last year. The Fed is basically blindfolded and swinging at a piñata that doesn’t exist.

[Gregmal]

1 hour ago, Gregmal said:

So for 4-5 months ish, all the smart guys on the street can’t figure out how to put on the same inflation trades that worked for 18 months prior? I don’t buy that. Everything is pointing toward recession and deflation. Again, check WM today. I don’t think folks are married to 3% FCF yields, in aggregate, over 4 months, and driving the markets. If you have real inflation, you’d see inflation beneficiaries getting bid up like you did all last year. The Fed is basically blindfolded and swinging at a piñata that doesn’t exist.

For instance BAC, wildly heralded as a great inflation play, beneficiary of rising rates, researched here for years as the poster boy of what you want to own in an inflationary environment, lost almost 1/3 of its value into the teeth of inflation? Doesn’t add up.

[ERICOPOLY]

1 hour ago, Gregmal said:

For instance BAC, wildly heralded as a great inflation play, beneficiary of rising rates, researched here for years as the poster boy of what you want to own in an inflationary environment, lost almost 1/3 of its value into the teeth of inflation? Doesn’t add up.

 

If market is down... MSGE down much more than market. 

Market up?...  MSGE up much more than market.

 

I know you were talking about BAC... but thinking should apply to hard assets too.  Is it "beta will be beta"?

Edited September 22, 2022 by ERICOPOLY

[Gregmal]

14 minutes ago, ERICOPOLY said:

 

If market is down... MSGE down much more than market. 

Market up?...  MSGE up much more than market.

 

I know you were talking about BAC... but thinking should apply to hard assets too.  Is it "beta will be beta"?

MSGE @changegonnacome and I agree on big time. It’s recession proof(ish), see GFC when they raised prices every season. Hard asset and big discount to NAV. 
 

So idk, literally everything under the sun minus Tesla and some utilities have cliff dived. I don’t like giving “the market” too much credit, but over time it does validate or invalidate larger ideas. And I just don’t see any indication that anyone in the market truly believes in the go forward inflation trade. It’s all recession and deflation with the assumption Fed sleeps their way to 4% FF.

[Dinar]

I think that inflation has peaked.  If as rumored, Facebook and Alphabet reduce headcount by say 10% or 20K+ employees, plus reduce contractor employment (200 janitors and bus drivers at Facebook got fired), then this will certainly have a ripple effect.  With other companies, including MSFT probably following, you could have tens of thousands of tech lay-offs and tens of thousands of janitors, cooks, masseuses, et all fired.  They will all probably easily find employment, but that should definitely cool wage pressure, and probably consumer spending.  No need to pay a Google or FB or MSFT engineer 500K per annum any more.   Also, if venture funding starts to dry up, tens of thousands of more techies and support stuff will also have to look for new employment.  The wealth effect from no longer rising housing prices and declining equity/bonds/crypto will also dampen consumer spending and possibly force some people to rejoin the labor force. 

[changegonnacome]

6 hours ago, Gregmal said:

For instance BAC, wildly heralded as a great inflation play, beneficiary of rising rates, researched here for years as the poster boy of what you want to own in an inflationary environment, lost almost 1/3 of its value into the teeth of inflation? Doesn’t add up.

Problem here is I think BAC would have been a beneficiary of a gradual return to more ‘normal’ inflation/rates….which would have been a sign of strong economy with stable prices. A good mix for a credit institution.

 

Issue we have now is an economy that doesn’t have stable prices…..a Fed so far behind the curve with negative real rates everywhere….that they are literally racing to raise rates….and that speed and aggressiveness has increased the likelihood of a very HARD landing for the US economy……a recession at best, some kind of unforeseen financial crisis at worst…as the Fed desperately tries to put the inflation genie back in the bottle. This is not a good mix for a credit institution like BAC.

 

BAC hasn’t ‘worked out’ even with Fed Funds heading to 4%…..because fundamentally it’s a levered bet on the US economy but the trajectory of what happens next to that economy (employment/credit quality and/or demand) is highly uncertain given the unprecedented speed at which the monetary authorities are now having to slam on the brakes.
 

BAC stock smells trouble out there in 2023….I tend to agree. The math on lots of things doesn’t work anymore and lots levered X/Y/Z plays from 2010’s are out there in the shadows waiting to blow up… things that simply don’t work anymore in (a) quite a severe recession & (b) more importantly even once inflation is ‘fixed’ it continues to remain in the conversation for the 2020’s (demographics/cold war 2.0/reshoring/greening) such that rates aren’t ever really going back to what 2010’s folks might think of as ‘normal’. Marking a levered illiquid portfolio of 2.5% cap rate CRE junk at your next refinancing conversation where subprime rates are 7-8% & 30yr yields 5% is not gonna be a fun experience for the ‘fund’ holding this junk and the investor who seeded that fund. What little equity was in these things could get taken out the back and shot very quickly. 

 

Personally I think BAC/WFC are gonna do fine and I might own both at some point again….the banks won’t be the problem this time around….it will be the shadow banks/asset managers where all the denigrate behavior that used to be inside of the money Centre banks was shipped off too where the blow ups will be this time.

[mattee2264]

If interest rates head up to 4-5% and SPY earnings come in a lot lower than the estimates of $230 then you'd think the SPY would end up closer to 3000 than 4000. 

 

Inflation probably will moderate as the stimulus wears off and interest rate hikes start to feed through to the real economy and supply chain issues continue to ease. I also think there will be some eventual resistance to price and wage increases as companies and workers have been quite opportunistic since the pandemic. But inflation moderating increases the attractiveness of bonds as an alternative to stocks. 

 

Also inflation moderating means more of the burden adjustment will fall on the nominal price of the SPY. In nominal terms we have seen around a 15% decline. In real terms that has been more like 20-30%. With double digit inflation markets can go sideways while still correcting to a reasonable level in real terms. That is a lot harder to achieve with lower inflation. Especially if the source of lower inflation is lower demand and therefore earnings. 

 

I am also more convinced that the end game will be a bust with the Fed's hands tied because it is determined to keep a lid on inflation expectations and will only be happy to ease once inflation is well under control and there is clear evidence we are in a recession and no longer at full employment providing the justification it needs to pivot. 

[changegonnacome]

2 hours ago, mattee2264 said:

think the SPY would end up closer to 3000

Suspect we’ll touch something in the late 2000’s on SPY….settling somewhere in low 3000’s where the next, hopefully decade long expansion, can build out from.

 

Some type of ‘financial event’ is very likely between now and when price stability is returned. I won’t even guess it’s exact source but changing the most important price in the economy (the price of money) so rapidly and so aggressively after such a prolonged period of ultra low rates has 1st and 2nd order effects way beyond the capacity of anyone to predict.

[Spekulatius]

10 hours ago, Dinar said:

I think that inflation has peaked.  If as rumored, Facebook and Alphabet reduce headcount by say 10% or 20K+ employees, plus reduce contractor employment (200 janitors and bus drivers at Facebook got fired), then this will certainly have a ripple effect.  With other companies, including MSFT probably following, you could have tens of thousands of tech lay-offs and tens of thousands of janitors, cooks, masseuses, et all fired.  They will all probably easily find employment, but that should definitely cool wage pressure, and probably consumer spending.  No need to pay a Google or FB or MSFT engineer 500K per annum any more.   Also, if venture funding starts to dry up, tens of thousands of more techies and support stuff will also have to look for new employment.  The wealth effect from no longer rising housing prices and declining equity/bonds/crypto will also dampen consumer spending and possibly force some people to rejoin the labor force. 

This is very bullish for GOOGL , MSFT and the likes. There is a lot of froth in salary and staff in these companies and when these excess costs are taken out, even smaller increases in topline will lead to higher margins and turbocharge earnings.

[ERICOPOLY]

10 hours ago, Dinar said:

No need to pay a Google or FB or MSFT engineer 500K per annum any more. 

 

Don't say that!  I just rented my house to an Apple engineer making 500k.

[Gregmal]

14 minutes ago, ERICOPOLY said:

 

Don't say that!  I just rented my house to an Apple engineer making 500k.

That’s the one you were looking to sell?

[ERICOPOLY]

17 minutes ago, Gregmal said:

That’s the one you were looking to sell?

 

Yes, the bottom has fallen out of the market here.

[Gregmal]

4 minutes ago, ERICOPOLY said:

 

Yes, the bottom has fallen out of the market here.

Congrats. I think you’ll be way better in the long run keeping that 30 year fixed and letting the techies pay it down. 
 

 

[changegonnacome]

42 minutes ago, Gregmal said:

way better in the long run keeping that 30 year fixed

 

30 year money at 2021 rates....is like winning the state lotto.....beg, borrow, cheat but dont let go of that paper!

[crs223]

7 hours ago, ERICOPOLY said:

 

Yes, the bottom has fallen out of the market here.

 

Probably a blessing in disguise.  i wonder why the engineer didn’t buy?  FYI the engineer is probably happy to pay extra for quality top-notch landlording (and for all other services).

[ERICOPOLY]

2 hours ago, crs223 said:

 

Probably a blessing in disguise.  i wonder why the engineer didn’t buy?  FYI the engineer is probably happy to pay extra for quality top-notch landlording (and for all other services).

 

He already owns a $3m house in San Jose that's only 1,400 sqft, with their laundry facilities on the outside of the home.  He is renting out his San Jose home for $7,000 and moving out here to be closer to family.  They have 3 little kids.

 

My house is 3x that size with a pool and they're paying me a little less than they're taking in...  so they're quite happy.  Until they get here and realize that the Bay Area is a much better place to live.  Shhhh.... 

[ERICOPOLY]

Regarding this anti-globalization political trend in the US.  How does this not drive prices for everything higher in the midst of a labor shortage?  I should think in our present situation with tight labor we should be trying to offshore things to free up labor for where it's needed elsewhere in the economy.  The anti-globalists want something that only makes it worse.

Edited September 23, 2022 by ERICOPOLY

[crs223]

5 hours ago, ERICOPOLY said:

Regarding this anti-globalization political trend in the US.  How does this not drive prices for everything higher in the midst of a labor shortage

 

I think the anti-globalists (who might also be called pro-nationalists) are looking to gain more control over the supply chain to increase security/availability.  Even if it costs more.

[Gregmal]

Yea I mean we are as a nation looking to do things that will have cost impact now…think of it as spending today for payoff down the road, this for sure is contributing to increased prices. Yet to clowns at the Fed are reading out of playbooks from the 70s and academic work that’s nonsensical and thinking raising rates until backwards looking metrics come down, will make the world a better place. Why do you think we offer EV tax subsidies? Cuz it’s more expensive up front typically. Why is bringing labor back on shore creating higher wages? It’s almost as if the Fed is sabotaging what the country is doing. Their whole “inflation” fight essentially targets deliberate agendas and for many, sacrifices they are willing to make to change the country.  

[UK]

https://www.bloomberg.com/news/articles/2022-09-23/ackman-touts-immigration-over-rate-hikes-in-inflation-fight

 

Fortunatelly for US it is fixable thing?

 

https://www.bloomberg.com/opinion/articles/2022-08-14/niall-ferguson-demographics-are-a-us-headache-but-nightmare-for-china?leadSource=uverify wall

Edited September 23, 2022 by UK

[Gregmal]

1 minute ago, UK said:

https://www.bloomberg.com/news/articles/2022-09-23/ackman-touts-immigration-over-rate-hikes-in-inflation-fight

 

Fortunatelly for US it is fixable thing?

Whoa, whoa, whoa…so now we know Bill has closed his “inflation” scheme trades and has got something else on. Bottom probably comes in late October then when the rest of the suited sheep catch wind of what the trade is. 
 

Amazing though because this was obvious back in July when he was lobbying for rate hikes. Shows you again, not that we need it, how those lobbying for rate hikes just looking to profit off the stupidity and destruction from them, rather than believing they are the answer to anything.

[Castanza]

43 minutes ago, UK said:

https://www.bloomberg.com/news/articles/2022-09-23/ackman-touts-immigration-over-rate-hikes-in-inflation-fight

 

Fortunatelly for US it is fixable thing?

 

https://www.bloomberg.com/opinion/articles/2022-08-14/niall-ferguson-demographics-are-a-us-headache-but-nightmare-for-china?leadSource=uverify wall

 

Immigration needs fixed for sure

 

Also

 

US academia ideologues also need to stop telling younger generations that having more than one child is irresponsible and reprehensible. 

[ERICOPOLY]

2 hours ago, Gregmal said:

Why is bringing labor back on shore creating higher wages?

 

There are already help wanted signs everywhere so it becomes a bidding war for labor.  Then there is a wage price spiral.  Businesses can't just keep raising their labor costs without raising prices to maintain profitability.

Edited September 23, 2022 by ERICOPOLY