Where Does the Global Economy Go From Here?

[Gregmal]

3 minutes ago, Viking said:

Good discussion of the news from the past week (there was lots). I like listening to The Macro Trading Floor; they are European so provide a perspective from across the pond. 
 

Bottom line, all eyes will be watching the Fed this week:

1.) will they move by 50 basis points? My guess is yes.

2.) will they signal 75 is back on the table for the next meeting? No idea.

3.) will their overall commentary be more or less hawkish… or more of the same? No idea.

 

What i do know is what the Fed does will have a big impact on financial markets (bond and stocks). Get the popcorn out…
—————

Europe really is a complete mess right now. inflation is running hot at about 8% and the ECB is NEGATIVE. The problem for Europe is they have zombie COUNTRIES like Italy. Higher rates will be catastrophic. Oh, and they have a war raging in Ukraine. And nat gas/energy prices are through the roof. Sounds like Legard is losing all credibility (much worse than Powell). What a shit show. 
—————

Pivoting to the US, Felder suggests some of the drivers of inflation are more structural than is currently appreciated (like lack of labour; deglobalization etc). The Fed is still fighting the old paradigm (deflation) and therefore is underestimating inflation still today.
 

In the near term Felder feels the stock market (even at current levels) is asleep at the wheel - much too optimistic on corporate earnings and profit margins looking 6 months to 1 year out. Why?

1.) he quotes Druckenmiller: high oil prices, rising interest rates, rising US$ is terrible for corporate earnings 6-12 months out.

2.) CNBC recently surveyed COO’s and 100% were forecasting a recession in the next 12 months

3.) recently released Michigan survey shows lowest consumer sentiment on record (going back 75 years).

4.) PMI indicators are forecasting lower top line growth AND higher costs (the latter being driven by inflation pressures)

 

As a result, Felder expects the Fed to pivot and lower rates much too soon. So inflation will remain higher for longer. His trade idea? Precious metals (Sprott Physical Gold and Silver Fund). 
 

i enjoyed the discussion. I am not ready to buy precious metals.
 

 

Case in point. Felder
 

Everyone is bearish as hell and claiming 100% chance of recession, stocks further to fall, investors asleep/complacent….but can we actually find “anyone” let alone “everyone” who is saying this? Like LOL

[Viking]

I am not sure anyone i have read or watched has ever said any outcome is 100%. I posted a link to Druckenmiller yesterday and as of June 10 he has no high conviction ideas as of today; so he is being open minded and watching and waiting to see what happens. 
 

If i have to summarize the current perspective of people i follow it is:

- no idea how the current set up plays out.

- unprecedented times (pandemic, war, super high inflation, oil price spike, historically strong labour market, smoking housing market in US, Fed funds rate comically low given inflation dynamics etc). 
- stock valuations remain high (S&P500 is still 15% HIGHER than it was right before the pandemic 2 short years ago)

- expectations are inflation will be back down to 2% later in 2023 (look at forward bond yields)

 

Just because people do not understand the current set up does not mean they are building bunkers in their back yard and buying SPAM. 
 

Investing is supposed to be a rational process. Caution IS WARRANTED when your analysis says that is the right course of action. 
 

Caution DOES NOT = doom and gloom. 
 

Bottom line, Buffett’s view is correct: do not bet against the US. His first rule of investing is also spot on: ‘Don’t lose what you got’ (capital preservation is key). Investors who are able to square those two concepts will do very well in the coming years.

—————

The problem is LOTS of investors have done well the past 10 years because the Fed has been blowing asset bubbles (low interest rates and QE). They think their returns are the result of skill. Now that the Fed is doing the opposite (trying to slowly take the air out of the assets bubbles that exist) and lots of investors are about to find out just how skillful they really are. High inflation is a bitch. 

Edited June 12, 2022 by Viking

[Gregmal]

31 minutes ago, Viking said:

2.) CNBC recently surveyed COO’s and 100% were forecasting a recession in the next 12 months

 

[Viking]

1 minute ago, Gregmal said:

 

CFO’s are not ‘everyone’. (I put COO and should have put CFO)

————

“According to the majority (68%) of CFOs responding to the survey, a recession will occur during the first half of 2023. No CFO forecast a recession any later than the second half of next year, and no CFO thinks the economy will avoid a recession.”

 

- https://www.cnbc.com/2022/06/09/recession-will-hit-in-first-half-2023-the-dow-is-headed-lower-cfos.html

[Gregmal]

In a dumbed down way, something the average investor can apply, I’ve actually found the opposite to be true, almost 100% of time I can recall. The key is genuinely gauging what the “consensus” is and how widespread. But you almost always want to do the exact opposite of what it is, often times aggressively. Remember, a short 18 months ago Peloton was thought to be the Netflix of fitness and on course to earn 5x returns over the next 5 years from a $120 share price. And oh yea, you just “couldn’t short” the market. 

[Gregmal]

2 minutes ago, Viking said:

CFO’s are not ‘everyone’. (I put COO and should have put CFO)

————

“According to the majority (68%) of CFOs responding to the survey, a recession will occur during the first half of 2023. No CFO forecast a recession any later than the second half of next year, and no CFO thinks the economy will avoid a recession.”

 

- https://www.cnbc.com/2022/06/09/recession-will-hit-in-first-half-2023-the-dow-is-headed-lower-cfos.html

100% of a sample survey is pretty indicative of a consensus 

Edited June 12, 2022 by Gregmal

[Viking]

14 minutes ago, Gregmal said:

In a dumbed down way, something the average investor can apply, I’ve actually found the opposite to be true, almost 100% of time I can recall. The key is genuinely gauging what the “consensus” is and how widespread. But you almost always want to do the exact opposite of what it is, often times aggressively. Remember, a short 18 months ago Peloton was thought to be the Netflix of fitness and on course to earn 5x returns over the next 5 years from a $120 share price. And oh yea, you just “couldn’t short” the market. 

The problem with looking in the rear view mirror is EVERYTHING is obvious and easy. The reality is successful investing (especially over multiple decades) is difficult and perhaps wickedly difficult. How many people were pounding the table on energy in December? No one. Yet it is an ‘obvious’ trade today. This stuff is a little more difficult than what it appears looking in the rear view mirror.

 

Edited June 12, 2022 by Viking

[Ulti]

8 minutes ago, Viking said:

The problem with looking in the rear view mirror is EVERYTHING is obvious and easy. The reality is successful investing (especially over multiple decades) is difficult and perhaps wickedly difficult. How many people were pounding the table on energy in December? No one. Yet it is an ‘obvious’ trade today. This stuff is a little more difficult than what it appears looking in the rear view mirror.

 

https://podcasts.apple.com/us/podcast/alex-gurevich-on-global-macro-investing-strategies/id730188152?i=1000559873335

Seems like the global macro boys\ both Druck and Alex above ( who thinks ahead 12-24 months)agree with you.

[Gregmal]

21 minutes ago, Viking said:

How many people were pounding the table on energy in December? No one. Yet it is an ‘obvious’ trade today.

Not December, even earlier than that. Was obvious to anyone looking ahead. Plenty of people saw it. Key was looking out, rather than being caught up in the next COVID variant hysteria like everyone was at the time. Thats how the market works. Same as it always has, throughout the course of history. 

 

 

Edited June 12, 2022 by Gregmal

[Paarslaars]

21 minutes ago, Viking said:

The problem with looking in the rear view mirror is EVERYTHING is obvious and easy. The reality is successful investing (especially over multiple decades) is difficult and perhaps wickedly difficult. How many people were pounding the table on energy in December? No one. Yet it is an ‘obvious’ trade today. This stuff is a little more difficult than what it appears looking in the rear view mirror.

 

I trippled my oil positions throughout Dec/Jan. Mainly based on discussions here..

[Gregmal]

5 minutes ago, Paarslaars said:

I trippled my oil positions throughout Dec/Jan. Mainly based on discussions here..

Yup, plenty of people saw it. Even in July of 2021. Same with rates rising. Writing was on the wall. It just wasn’t in the headlines and therefor the average investor paid attention to the COVID news and thought that was the thing to predicate your investing on. You almost never make any sort of meaningful money long term thinking and acting like everyone else. And that especially applies to getting caught up in the current flavor on the month/quarter storylines.

Edited June 12, 2022 by Gregmal

[Gregmal]

In December some people were buying energy and oil and others were worried about Omnicron….

[maplevalue]

47 minutes ago, Gregmal said:

In a dumbed down way, something the average investor can apply, I’ve actually found the opposite to be true, almost 100% of time I can recall. The key is genuinely gauging what the “consensus” is and how widespread. But you almost always want to do the exact opposite of what it is, often times aggressively.

 

Forget about recession or no recession. The most important consensus in the market right now is that rates can't go up that much. Market thinks Fed can get to neutral at ~2.5%-3% (which at current inflation rates is still one of the most stimulative monetary policies the US has had), real 10y yield at 40bps well below historical norms.

 

All retail investors and real estate investors conditioned on BTFD of the past decade because you get rewarded by ever lower discount rates. Very big pain will occur if consensus shifts to higher rates than what is currently discounted. Not saying it will happen, but macroeconomic uncertainty is super high right now so its a very real possibility.

 

 

[Gregmal]

11 minutes ago, maplevalue said:

 

Forget about recession or no recession. The most important consensus in the market right now is that rates can't go up that much. Market thinks Fed can get to neutral at ~2.5%-3% (which at current inflation rates is still one of the most stimulative monetary policies the US has had), real 10y yield at 40bps well below historical norms.

 

All retail investors and real estate investors conditioned on BTFD of the past decade because you get rewarded by ever lower discount rates. Very big pain will occur if consensus shifts to higher rates than what is currently discounted. Not saying it will happen, but macroeconomic uncertainty is super high right now so its a very real possibility.

 

 

Off of this the million dollar question, and really the only thing I think worth focusing on, is how high and how long? Rates being above 5% IMO are certainly possible short term, but there s no way it’s supported for an extended period of time. Which then leads back to the same question many people bungled with COVID, which is, what is the relevance of 1 or 2 years in the course of a valuation? Answer…not terribly much.

Edited June 12, 2022 by Gregmal

[Gregmal]

I’d also add that the thing with residential real estate assets, is that as long as inflation eventually comes down, and in the meantime, rates remain below inflation, you make out like a bandit. Add in the insane supply and demand imbalance, prohibitive costs of building, and amount of capital looking for a home and I’m not sure what kind of declines I’d expect in real assets(other than public market doing the short term volatility thing). Would I own an office in a business hostile environment or a strip mall in rural America? Not a chance in hell. Rental homes in a good MSA? All day. 
 

Someone pointed me to this today…very good take on things. 

https://www.privateeyecapital.com/apartment-reits-are-cheap-again/

 

[maplevalue]

3 minutes ago, Gregmal said:

Off of this the million dollar question, and really the only thing I think worth focusing on, is how high and how long? Rates being above 5% IMO are certainly possible short term, but there s no way it’s supported for an extended period of time. Which then leads back to the same question many people bungled with COVID, which is, what is the relevance of 1 or 2 years in the course of a valuation? Answer…not terribly much.

 

Since long rates are what most influences asset prices, and since asset prices are essentially what the Fed is using to affect inflation, if inflation is persistent this will force the all-powerful Fed to make long rates go higher too (faster QT + more hikes).

 

Today's bond market reminds me of what it was like in the mid 2010s. Market kept saying "yields are so ridiculously low, they cannot possibly go any lower". Rates kept grinding lower (including the epic 2014 treasury market flash crash). Believe similar situation at play today where market convinced yields cannot go that much higher, and we will continue to grind higher in yield.

[Gregmal]

13 minutes ago, maplevalue said:

 

Since long rates are what most influences asset prices, and since asset prices are essentially what the Fed is using to affect inflation, if inflation is persistent this will force the all-powerful Fed to make long rates go higher too (faster QT + more hikes).

 

Today's bond market reminds me of what it was like in the mid 2010s. Market kept saying "yields are so ridiculously low, they cannot possibly go any lower". Rates kept grinding lower (including the epic 2014 treasury market flash crash). Believe similar situation at play today where market convinced yields cannot go that much higher, and we will continue to grind higher in yield.

We re at 3. Folks are already talking about the “huge” move in rates. Huge referring to a whopping 1.5%. If things normalize, say 4-5% treasury and 7% mortgage you’re probably looking at things slowing considerable but being propped up by lack of supply. New build matters, but who in their right mind is selling their home so they can trade in their 3% mortgage for a 7% mortgage or current market rent?

 

If the playbook is the 1970s look at housing prices and rental rates during the 1970s. There is an incredibly beautiful mechanism with certain types of real estate that allow it to provide advantages to its owners and users in a variety of market conditions.   
 

But in general, at some point higher rates become destructive for sure, and then there will be no reason to raise them anymore. Then what? They come back down and here we go again. DugDilligence posted the Mike Burry tweet about mortgage market supposedly going no bid Friday. And it’s like “ok and…..” will it never have a bid again? Will it crash and never come back? Like what are you even getting at? Or are we just trying to panic folks about short term crap again? 
 

For all the bitching about inflation, what percentage of folks have a better quality of life today vs 2020? Or 2018? At some point the bogeymen are just exposed as frauds and stories derived from people with agendas.

Edited June 12, 2022 by Gregmal

[Spekulatius]

Speks rule: If everyone predicts one thing it wont happen.

[Viking]

19 minutes ago, maplevalue said:

 

Since long rates are what most influences asset prices, and since asset prices are essentially what the Fed is using to affect inflation, if inflation is persistent this will force the all-powerful Fed to make long rates go higher too (faster QT + more hikes).

 

Today's bond market reminds me of what it was like in the mid 2010s. Market kept saying "yields are so ridiculously low, they cannot possibly go any lower". Rates kept grinding lower (including the epic 2014 treasury market flash crash). Believe similar situation at play today where market convinced yields cannot go that much higher, and we will continue to grind higher in yield.

The million does question is: does the Fed put still exist. If it exists, what price level in the S&P will it take to get the Fed to pivot. 
—————

The fly in the ointment is inflation. How can the Fed possibly pivot with inflation at 8.6%?

 

Hence Druckenmiller’s comment about being in an economic set up we have not experienced before. And the importance of being open minded to what will come…

Edited June 12, 2022 by Viking

[Gregmal]

21 minutes ago, Spekulatius said:

Speks rule: If everyone predicts one thing it wont happen.

Yup. For all the brilliance on Wall Street, folks so easily forget about the basic principles of supply and demand. All the time. 

[Gregmal]

The main takeaway off the sentiment arguments is that folks would do themselves a great service waking up to how it works. When the markets are already off, going down the "should I be concerned" path is dumb and too late. The time to do that was when you were feeling giddy and happy about your holdings. Not guessing whats to come next week. 

 

Instead over, and over we hear the Howard Marks speak. Noncommittal, it could go this way but it could go that way...the "who could have known" crap, and its like, as an investor its your job to know, especially if you charge 2/20. IDK LOL come on. Who could have seen oil? Anyone who bothered looking ahead. Who could have seen rates? Theres an entire thread with @wabuffohandholding everyone through rates all last year...Can you imagine if we played Jeopardy like this? 

 

Host: Who you like to solve the puzzle?

 

Contestant: You know, its just not knowable. I think I"ll wait and see

 

Host: Yes but you have most of the variables and just need two vowels 

 

Contestant: Anything can happen. I dont want to risk getting it wrong...the future is uncertain! Nobody knows!

 

Macro provides the variables. Theyre there, interpretable, and easy to back into specific and favorable situations. 

[SharperDingaan]

1 hour ago, maplevalue said:

 

Since long rates are what most influences asset prices, and since asset prices are essentially what the Fed is using to affect inflation, if inflation is persistent this will force the all-powerful Fed to make long rates go higher too (faster QT + more hikes).

 

Today's bond market reminds me of what it was like in the mid 2010s. Market kept saying "yields are so ridiculously low, they cannot possibly go any lower". Rates kept grinding lower (including the epic 2014 treasury market flash crash). Believe similar situation at play today where market convinced yields cannot go that much higher, and we will continue to grind higher in yield.

 

The US MBS market went 'no bid' on Friday 

https://notoriousrob.com/2022/06/finally-no-bid-on-mbs/

 

"30 year fixed mortgage rates today are about 270bps over the benchmark 10 year Treasury as of this writing (5.85% vs. 3.165%). If we need to get to real bond yields before investors want to buy bonds, that implies a 10 year Treasury somewhere north of 8.6%. That in turn implies mortgage rates north of 11%. (All of that assumes you believe the 8.6% CPI print.) "

 

Then of course .... if you can get the CPI to come down, and rapidly - you don't need 11% interest rates.

Could be a very profitable week!

 

SD

 

 

[Gregmal]

30 minutes ago, SharperDingaan said:

 

The US MBS market went 'no bid' on Friday 

https://notoriousrob.com/2022/06/finally-no-bid-on-mbs/

 

"30 year fixed mortgage rates today are about 270bps over the benchmark 10 year Treasury as of this writing (5.85% vs. 3.165%). If we need to get to real bond yields before investors want to buy bonds, that implies a 10 year Treasury somewhere north of 8.6%. That in turn implies mortgage rates north of 11%. (All of that assumes you believe the 8.6% CPI print.) "

 

Then of course .... if you can get the CPI to come down, and rapidly - you don't need 11% interest rates.

Could be a very profitable week!

 

SD

 

 

Exactly. If you have time inflation at 8% for this year why would long term assets need to be priced as if this is occurring in perpetuity? To hold this belief you need to believe that the 8.6% is never coming down. Given how much of this is supply chain related….I don’t know how anyone holds that belief. Investors don’t need and aren’t entitled to real bond yields. They have had them in ages.

[maplevalue]

27 minutes ago, Gregmal said:

Exactly. If you have time inflation at 8% for this year why would long term assets need to be priced as if this is occurring in perpetuity? To hold this belief you need to believe that the 8.6% is never coming down. Given how much of this is supply chain related….I don’t know how anyone holds that belief. Investors don’t need and aren’t entitled to real bond yields. They have had them in ages.

 

Well in fairness this is the 2nd year of 'transitory supply chain related inflation' one can forgive investors for thinking this might be persistent (especially if there is no quick solution in Ukraine).

 

You are correct investors are not entitled to real bond yields. With that said real yields serve as inputs into the save vs. spend decision, and the more deeply negative real yields are, the more economic actors are incentivized to pull forward consumption. So if the Fed wants to slow economic activity, it's not enough to just have a higher nominal yield, but real yields matter as well.

[Viking]

6 minutes ago, Gregmal said:

Exactly. If you have time inflation at 8% for this year why would long term assets need to be priced as if this is occurring in perpetuity? To hold this belief you need to believe that the 8.6% is never coming down. Given how much of this is supply chain related….I don’t know how anyone holds that belief. Investors don’t need and aren’t entitled to real bond yields. They have had them in ages.

The problem is most of the inflation we are seeing today has nothing to do with supply chain (see blow for largest components). Rent is going up because of supply chain? Grain shortages in Ukraine are supply chain? Oil spiking is supply chain? Insurance increases are due to supply chain? Big wage increases are primarily due to supple chain? 
 

inflation is morphing. Spreading. Like a virus. It is becoming embedded in all parts of the economy. That ‘entrenched’ thing. The Fed is losing control of inflation expectations… and once that cat gets out of the bag (like in the 1970’s) there is ONE solution: wicked high interest rates and a brutal recession. BECAUSE THE ALTERNATIVE IS WORSE.
 

Out of control inflation ALWAYS ends very badly. For everyone. Populism. Political unrest. Political change. Economic ruin. Lots and lots of examples of this in the past 100 years.
 

Alternative? High interest rates and a recession and then clear sailing (look at the US economy after the debacle of the 1970’s… it rocked for a long time. Despite the mistakes made recently, i think the Fed is smart enough to figure this one out. 

—————
CPI Largest Components:

Shelter = 32.4%

Food = 13.4%

Energy 8.3%

Medical care services 6.9%

Transportation services (vehicle insurance biggest part) 5.8%

 

- https://www.bls.gov/news.release/pdf/cpi.pdf