Where Does the Global Economy Go From Here?

[Viking]

15 minutes ago, maplevalue said:

 

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.

Negative interest rates are simply a wealth transfer from savers to borrowers. So my 90 year old mother in law on fixed income has been getting screwed for years (on her savings). Free market capitalism? 

Edited June 12, 2022 by Viking

[Gregmal]

39 minutes ago, Viking said:

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? 
 

Whoa, whoa, whoa…rent/housing, is not supply chain? It’s almost entirely supply chain unless I missed something. Wasn’t the bear argument last year from the bear camp they’re gonna build to much? Then they get steamrolled and the thesis was wrong so they change it to “rates!”. Lumber and windows is purely supply chain as are nails and Sheetrock.
 

Energy is stupid politicians. And it’s tough cuz if you gotta drive you gotta drive. But not Fed fixable.

 

Grain and food? Been to the grocery store lately? It’s annoying, sure. Shortages bounce from one category to the next. But pretending like there is some food crisis is silly. There is tons of readily available, cheap food. Still can get a loaf of store brand bread for $2 or less. God forbid folks give up the lattes though. My DD ice coffee have gone from $2.99 to $3.89 in the past year. Bummer.

 

Wage increase are bad for corporations and good for workers. 
 

So…underneath all the noise, what’s the issue and how does the Fed have any productive mechanism to handle it? 
 

But yea the answer is to raise rates so people who literally don’t want to contribute anything to society via working or investment can make more money in their savings accounts?

[Gregmal]

In just about every instance, investing in and infusing communities and economies with growth capital is beneficial to its overall prosperity. I’ve had this conversation with the savers I’m the family and even a few clients back in the day. You’ve had things that could’ve given you 5-10% yields over the past decade. So it’s not like it isn’t there. But I don’t see how it’s wholly constructive, and largely agree with the Fed on this aspect….retirees, and in general….people who have staked their claim that they already “have enough” through no longer working(“let’s spare the 90 year olds in fixed income and talk about the other 80% for now) should be be entitled to getting more? For doing nothing? In others words give the people with with than they need, more? At least the Musks and the Bezos’ invest substantially in the form of job creation and product innovation. What does a millionaire 60 year old without a job looking to live off interest do?

[Gregmal]

The savings topic actually highlights what I think will go down in history as a remarkable masterpiece of a job done by the Fed to bring the US back from the GFC. Of course the folks like my father who hate the Fed feel resentful and it’s obvious why. But the bottom line, coming out of GFC, what works better? Encouraging investment, innovation, and restoring faith in the financial markets? Or putting extra money in the pockets of people who want something for nothing and obviously got caught with their pants down assuming they’d always be entitled to enough risk free interest to live an upper middle class or better lifestyle?

[finetrader]

4 hours ago, Gregmal said:

5 hours ago, Spekulatius said:

 

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

Don’t fight the Fed, is also something people should not forget

[crs223]

Druckenmiller said something like “inflation has never been tamed with the FF rate less than CPI”.
 

Presently the FF rate is 0.75% while CPI is 8.6%.

 

[Gregmal]

14 minutes ago, finetrader said:

Don’t fight the Fed, is also something people should not forget

It’s fair. When returns are backed(Fed put) it’s pedal to the metal. Was there a greater proposition the last decade than borrowing at 1-3% to buy stocks? Some still chose to short stocks or sit on cash. Now, simply, the training wheels come off. Sink or swim. But thinking the world will end or that there’s nothing worth investing in is dumb. 

Edited June 13, 2022 by Gregmal

[maplevalue]

10 minutes ago, Gregmal said:

But thinking the world will end or that there’s nothing worth investing in is dumb. 

 

To many people's careers in the finance industry a indexed 60/40 portfolio producing negative real returns is the 'end of the world' 

[Gregmal]

6 minutes ago, maplevalue said:

 

To many people's careers in the finance industry a indexed 60/40 portfolio producing negative real returns is the 'end of the world' 

Good. They can join the techies lining up to hang drywall or work on a rig. Will solve the housing and energy problem! 

[Spekulatius]

These are the components of the CPI. The Fed wants to bring the inflation down from 8% to 2%, so the inflation for largest components (housing, food, transportation, energy) will have to come down, otherwise its mathematically  impossible to get there:

 

Edited June 13, 2022 by Spekulatius

[RedLion]

3 hours ago, Spekulatius said:

These are the components of the CPI. The Fed wants to bring the inflation down from 8% to 2%, so the inflation for largest components (housing, food, transportation, energy) will have to come down, otherwise its mathematically  impossible to get there:

 

And the fed tools would be raising the target rate plus (accelerated?) QT to get there. It seems like this would be designed to have a disproportionate impact on housing. Maybe transportation, and likely not on food and energy. 
 

I’m conflicted about where to invest now. I see some good opportunities in the stock market, but I would really like to buy cash flowing rental real estate that’s conservatively financed and producing NOI that I can offset with depreciation. 
 

2 years ago you could borrow at 3.5-4% and get a 5-6% cap rate on a newer single family home in the sunbelt or Midwest markets that I follow. Now you can borrow at 6.5% and buy with a 3.5-4% cap rate in the same markets or sub 3% in the hot markets. Sure you can make money, as long as prices and rents keep going up and you have enough reserve to stomach the negative cash flow until they catch up. But I personally would want NOI > cost of debt capital going in at a bare minimum which seems impossible now without buying shitholes. 
 

[Castanza]

16 hours ago, Spekulatius said:

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

Bingo

 

"Experts" have nothing to go off of but hindsight analysis or textbook definitions. Throw in "unprecedented times" and it's like throwing sand in their microchips. They can't process it and flounder. I find it helpful to look for the simplest approaches. 

 

What's a problem(s) that was highlighted during covid that will persist for the next 5-10 years AND could persist or create business(company side)/buying(equity side) opportunity if we get an economic slowdown? 

 

Energy, commodities, materials, shipping, microchips, housing

 

All of these categories show increasing demand over the next 10 years in any environment (if you look in the right places). 

[crs223]

What's the thing that everyone is predicting?  Interest rates are going up?

[SharperDingaan]

If all you do is hold a bond through to maturity, you need a positive real yield. However, if it is part of a ALM, held for trading, or needed for the coupon interest (seniors) - it is not a requirement; a liquid market is. Hence periodic CB intervention when markets 'freeze'.

 

It is quite obvious that high CPI will be with us for some time. Ongoing CPI calculation and target rate 'massaged' to meet the needs of the time, supply-chain inflation progressively embedding into the economy as time goes on. A great many union contracts are also entering arbitration, with rate increases in the 1%, 1%, 3-5% in yr 1, 2, 3 range. 12-18 months at most, to get inflation down?

 

Obviously, there are lots of opportunities here!

 

SD

[E. Nashton]

2 hours ago, crs223 said:

What's the thing that everyone is predicting?  Interest rates are going up?

To be fair, I think the differing views on this is with how much and how long. In the twitter universe, there's a fair bit of folks that are making the case that the "governments" won't let rates go too high or for too long because it would crash the RE market and no one wants that. So I actually don't think there is consensus on interest rates at the moment. 

 

To be clear, I am not offering my opinion on the above...just stating what I've seen. 

Edited June 13, 2022 by Dean

[SharperDingaan]

32 minutes ago, Castanza said:

Bingo

 

"Experts" have nothing to go off of but hindsight analysis or textbook definitions. Throw in "unprecedented times" and it's like throwing sand in their microchips. They can't process it and flounder. I find it helpful to look for the simplest approaches. 

 

What's a problem(s) that was highlighted during covid that will persist for the next 5-10 years AND could persist or create business(company side)/buying(equity side) opportunity if we get an economic slowdown? 

 

Energy, commodities, materials, shipping, microchips, housing

 

All of these categories show increasing demand over the next 10 years in any environment (if you look in the right places). 

 

It is a well known fact that 'consensus' forecasts are utter rubbish. To prove it, all one need do is simply compare any strip pricing curve against the subsequent actual prices. The reality is that 'consensus' forecasts are little more than baby food for the masses - feeding them into analysts models to spit out earnings and price targets just makes them look legitimate. 

 

However, when most are just buying ticker story and experience, and don't actually 'know' the company - magical things can happen !!. 

 

SD

[spartansaver]

1 hour ago, SharperDingaan said:

 

It is a well known fact that 'consensus' forecasts are utter rubbish. To prove it, all one need do is simply compare any strip pricing curve against the subsequent actual prices. The reality is that 'consensus' forecasts are little more than baby food for the masses - feeding them into analysts models to spit out earnings and price targets just makes them look legitimate. 

 

However, when most are just buying ticker story and experience, and don't actually 'know' the company - magical things can happen !!. 

 

SD

It's funny how it can be such a well known fact yet also a starting point for the majority of the buyside community. The blind leading the blind. 

[Ulti]

[Ulti]

[patience_and_focus]

[patience_and_focus]

2 minutes ago, patience_and_focus said:

 

Let's hope we are not in a "6 year recovery from the trough" era of 1974-80! I do have 20% cash still but looking at this gives me pause before i deploy all of it.

 

[Gregmal]

What did the Fed do today? Was at the pool for a big chunk of it and couldn’t find anything. Any idea what they’ll do tomorrow? 

Edited June 13, 2022 by Gregmal

[Viking]

People are trying to understand what is going on in the economy right now, what central banks are going to do, and what it means for financial markets moving forward. What is a framework that will help an investor and, most importantly, maximize the returns in their portfolios?

 

1.) Lots of investors on this board come at investing with a straight forward Graham/Buffett approach: buy quality companies (moat) with good management, predictable earnings when they trade at a discount to fair value. And hold them for the long term.

 

2.) Lots of investors also use technical analysis. This can be especially useful as a tool when buying and selling securities. 
 

3.) I think understanding global liquidity flows can be another important and useful input, especially at inflection points. “Understanding global money flows provides tremendous insight into where asset classes are likely to move.” 
 

Why is understanding liquidity flows so important today? Because the world has historic amounts of debt. Lots of which has to be constantly rolled over EVERY YEAR. Being able to refinance debt is FAR, FAR more important to a borrower than what the interest rate is. THIS IS EXCEPTIONALLY IMPORTANT TODAY - ESPECIALLY WITH GLOBAL LIQUIDITY CONTRACTING AT AN EXCEPTIONALLY RAPID RATE. This is just one example of how understanding global liquidity flows matters. 
 

The video below is the best 105 minute explanation of what is going on in the economy and financial markets - through the prism of global liquidity flows - that i have come across. And it is timely (recorded June 10). THIS IS JUST ANOTHER TOOL INVESTORS MAY CHOSE TO USE (or not) to help them make money. Best of luck  
 

 

Edited June 13, 2022 by Viking

[Parsad]

37 minutes ago, Gregmal said:

What did the Fed do today? Was at the pool for a big chunk of it and couldn’t find anything. Any idea what they’ll do tomorrow? 

 

They said "Greg Malchowski is at the pool today, we're going to sink the Dow nearly 1,000 points!"  Don't go to the pool tomorrow Greg!  Cheers!

[Gregmal]

Pools are fun. So is buying stonks.  My mother is law handed off the kids today midday and was like "oh today must be tough"...and I know the casual lingo and all but thought, I golfed in the morning, took my daughter to Dad/daughter day at gymnastics, bought a bunch of stocks I really like at prices I honestly didnt expect to see for a while, then picked my son up and went to the pool, bought more stock, and now am having dinner before some night fishing. Rough day indeed LOL.