Where Does the Global Economy Go From Here?

[Gregmal]

10 minutes ago, RedLion said:

so I'm hoping that means we see some inventory stack up, and I can get some higher cap rates on cash purchases even if prices don't fall very much. 

Well that’s another unappreciated element to the market. You, me, even Viking if I read his post about Vancouver housing correctly…everyone is waiting to pounce on a little opportunity. Which usually makes it harder to get them. Remember all the distressed RE funds that popped up Q2/3 of 2020? How much distressed stuff actually came to market? Hardly any.

[Gregmal]

From what I followed, the only distressed selling I saw was people unloading high quality stuff at 4-5 cap rates and those became sub 4. And before we say “but rates were low”, remember that for a good while, even until the vaccine news, some markets were assumed dead and lending standards were ultra rigid. So it was hardly the opportunity it looks like in hindsite. But nonetheless turned out well.

[Red Lion]

5 minutes ago, Gregmal said:

Well that’s another unappreciated element to the market. You, me, even Viking if I read his post about Vancouver housing correctly…everyone is waiting to pounce on a little opportunity. Which usually makes it harder to get them. Remember all the distressed RE funds that popped up Q2/3 of 2020? How much distressed stuff actually came to market? Hardly any.

 

You're probably right about this too. I don't see any big reason for distress in the housing market specifically, but lots of reasons for sales volume and new construction starts to decline and rents to continue to rise. Most regular young families can't afford homes in lots of the country, but those who already own them should be in no rush to sell with equity and a substantially below market rate mortgage. Where I live in California median homes are 11 or 12X median family income, and this is a historically affordable part of the state, at 6% mortgages this doesn't really make sense to the marginal buyer, and I don't think I would find it very attractive even at 20% lower prices.  I know a lot of the west coast is like this right now and many parts of the country and the world. Meanwhile I can buy new houses in some growing mid size cities in the South for under 4X median family income which seems much less sensitive to 6% (or 8%) mortgages, and probably make a 4-4.5% CAP rate, I'm sure the locals are still complaining but housing looks very affordable from my position.

 

 I think there's still a lot of population migration to more affordable communities likely to happen over the next decades, which I know is a theme you've had a ton of success with. It seems like a lot of the long term destinations are now hot markets, and no longer super affordable based on local fundamentals (e.g. Austin, Miami, Nashville, raleigh/durham, Atlanta), but there are a lot of other cities that seem to be up and coming at better valuations. 

[Ross812]

Look around bodies of water. 30x70 pole barn with 6 doors is around 35k with concrete and electricity and land is 20-30k and acre for something in a good area with good access. Lock up 65k. Taxes are 650 and electric is 1k and figure another 2k in wear and tear. You can generate $6k/yr from boat storage. Plant hardwoods on the left over 2/3rd of an acre and harvest in 30 years. That is a minimum of 3.6% on a 65k asset which should keep pace with inflation and has a kicker of about 60k worth of hardwood in 2022 dollars when it is done growing.  

[Gregmal]

14 minutes ago, RedLion said:

 

You're probably right about this too. I don't see any big reason for distress in the housing market specifically, but lots of reasons for sales volume and new construction starts to decline and rents to continue to rise. Most regular young families can't afford homes in lots of the country, but those who already own them should be in no rush to sell with equity and a substantially below market rate mortgage. Where I live in California median homes are 11 or 12X median family income, and this is a historically affordable part of the state, at 6% mortgages this doesn't really make sense to the marginal buyer, and I don't think I would find it very attractive even at 20% lower prices.  I know a lot of the west coast is like this right now and many parts of the country and the world. Meanwhile I can buy new houses in some growing mid size cities in the South for under 4X median family income which seems much less sensitive to 6% (or 8%) mortgages, and probably make a 4-4.5% CAP rate, I'm sure the locals are still complaining but housing looks very affordable from my position.

 

 I think there's still a lot of population migration to more affordable communities likely to happen over the next decades, which I know is a theme you've had a ton of success with. It seems like a lot of the long term destinations are now hot markets, and no longer super affordable based on local fundamentals (e.g. Austin, Miami, Nashville, raleigh/durham, Atlanta), but there are a lot of other cities that seem to be up and coming at better valuations. 

The biggest wiggle or kink with residential is that the majority of buyers are not doing so for financial reasons or with the expectation of a return. They want a house, they get a mortgage pre approval, and look to buy something. If you can get a real return out of it, that’s great, but it’s also why the market is so historically robust. 

[Ulti]

http://econbrowser.com/archives/2022/06/about-40-years-of-inflation-expectations-errors

[Ulti]

Senate Banking Committee hearing Wednesday, Democratic Senator Elizabeth Warren urged Powell to proceed with rate hikes cautiously and avoid setting off a recession that costs millions of jobs.

Warren asked Powell if Fed rate increases will lower gas prices, which have hit record highs this 

Warren asked if grocery prices will go down because of the Fed's war on inflation.

"I wouldn't say so, no," Powell said.

https://amp.cnn.com/cnn/2022/06/22/economy/jerome-powell-inflation-senate-hearing/index.html

[Spekulatius]

Housing prices are affordability driven. If people can’t afford to buy, they won’t. Same if they lose their job or are afraid of job losses.

[hasilp89]

Good back and forth and thoughts @Gregmal and @RedLion.

a lot of “if, then, buts” to consider. Varies across RE asset classes as well. 

[Ulti]

https://oilprice.com/Energy/Energy-General/New-ESG-Rules-Are-Hurting-American-Farmers.html

[tede02]

Wow, the yield curve is moving towards total inversion. The 1-year Treasury is at 3.17% and the 30-year is at 3.16% today. The 3 month is still down at 2.5%. Also interesting to see how far commodities have fallen back. What's weird is it looks like we could experience a recession with moderate or even little impact on employment. 

[Gregmal]

1 hour ago, tede02 said:

Wow, the yield curve is moving towards total inversion. The 1-year Treasury is at 3.17% and the 30-year is at 3.16% today. The 3 month is still down at 2.5%. Also interesting to see how far commodities have fallen back. What's weird is it looks like we could experience a recession with moderate or even little impact on employment. 

In other words the Fed may have done what they set out to do? Imagine that? When will people learn lol 

[Parsad]

5 hours ago, Gregmal said:

In other words the Fed may have done what they set out to do? Imagine that? When will people learn lol 

 

No way to prove for sure...only time will tell...but:

 

https://finance.yahoo.com/news/bofa-survey-shows-full-investor-084216443.html

 

https://finance.yahoo.com/news/feasting-shorts-last-stock-faction-202053790.html

 

Cheers!

[Gregmal]

This entire episode has been a self inflicted panic attack orchestrated by folks who let the daily stock price influence their behavior and it’s been a Christmas in June and July for anyone who actually invests with a fundamental focus. That’s why above all else, the “cash is king” crowd once again proved to me why cash is trash unless you are 1) unable to bear temporary mark to market losses, or 2) simply unable to find investment ideas or lack confidence in your ability to do fundamental research.
 

There’s been tons of opportunities all year. All last year. I think I’ve had like a half dozen holdings get bought out just since November, most even during 2022. I have had zero instances where I wanted to buy something and couldnt(the only argument really for holding cash) and what’s been demonstrated above all else is that institutions and real investors are as hungry as ever to take private good public assets. Some just never learn.

[Parsad]

7 hours ago, Gregmal said:

This entire episode has been a self inflicted panic attack orchestrated by folks who let the daily stock price influence their behavior and it’s been a Christmas in June and July for anyone who actually invests with a fundamental focus. That’s why above all else, the “cash is king” crowd once again proved to me why cash is trash unless you are 1) unable to bear temporary mark to market losses, or 2) simply unable to find investment ideas or lack confidence in your ability to do fundamental research.
 

There’s been tons of opportunities all year. All last year. I think I’ve had like a half dozen holdings get bought out just since November, most even during 2022. I have had zero instances where I wanted to buy something and couldnt(the only argument really for holding cash) and what’s been demonstrated above all else is that institutions and real investors are as hungry as ever to take private good public assets. Some just never learn.

 

I agree with you for the most part.  At the same time, we are somewhat lucky that things like crypto didn't get wildly comingled with non-crypto assets.  Otherwise, this would have been another GFC.  And things were headed that way...you have some very smart people doing stupid things because to channel Munger, "they are overly confident in their confidence!"  

 

Like all resets, this one was necessary.  You needed people to lose money...the smart ones, the stupid ones, the "smart" money, the professionals, the amateurs, the speculators, the greedy, the confused and the lemmings!  God knows value investors paid for their confidence over the previous 5 years.  Every single category got whacked except the shorts and cash...and probably those two will get crushed in the surprise rebound those investors are certain was years away.  

 

First time in 70 years both bonds and equities had double digit losses in the 1st half of the year...and I thought I had seen it all and read it all.  Stupidity never ceases to surprise me...from others and myself!    Yet, here we are...deja vu!  

 

I still think we are in for a up and down, somewhat volatile market for the next couple of years as interest rates and inflation find equilibrium, nation states fix their balance sheets and the overleveraged finally get their day of reckoning.  So moving from overvalued assets to cash to undervalued assets...repeat...may be the strategy for the next while.  Cheers!

 

 

[scorpioncapital]

people are like this is all over. i don't think so . can anyone say why the stock market won't be at this level in 2030, even after many up and down distractions? Traders market it seems.

 

[Gregmal]

1 hour ago, scorpioncapital said:

people are like this is all over. i don't think so . can anyone say why the stock market won't be at this level in 2030, even after many up and down distractions? Traders market it seems.

 

I don’t think anything has to be over or getting started or whatever the implication of worry is. You just have to realize that like life, the markets have ebs and flows and all you can really do is act reasonably and enjoy the ride. Don’t get too invested in the day to day noise.

 

The past 6 months or so reminded me of the good old fashioned cup check in youth hockey. If you came prepared you’re fine, if not, you learned. No one goes into a supermarket and asks “what’s everyone else buying?” And then rushes over and pays whatever the asking price is for tons of said product. You go in and get what you need, maybe see what else you want, and at the end of the day, leave with what works for you and that point in time. Why is the stock market any different? Never in my life has there been an instance where there’s nothing you can find to invest in. 

[Gregmal]

Just look at some of these Buffett filings on OXY. Several times the dude is paying substantially more, mere hours after buying substantial amounts of stock earlier in the day. You think that’s someone who has a focus on the fundamentals? Or the fluctuations?

[scorpioncapital]

Love the point about the lesson. Some are slower or faster to learn it, but when you learn it on your own skin, it is there for good. But even in a failure we have to ask what made us do it or stay with it. Usually the reason is not half bad, but there is probably a better way to fulfill that need.

 

Cheers!

 

Edited July 20, 2022 by scorpioncapital

[tede02]

12 hours ago, Parsad said:

 

I agree with you for the most part.  At the same time, we are somewhat lucky that things like crypto didn't get wildly comingled with non-crypto assets.  Otherwise, this would have been another GFC.  And things were headed that way...you have some very smart people doing stupid things because to channel Munger, "they are overly confident in their confidence!"  

 

Like all resets, this one was necessary.  You needed people to lose money...the smart ones, the stupid ones, the "smart" money, the professionals, the amateurs, the speculators, the greedy, the confused and the lemmings!  God knows value investors paid for their confidence over the previous 5 years.  Every single category got whacked except the shorts and cash...and probably those two will get crushed in the surprise rebound those investors are certain was years away.  

 

First time in 70 years both bonds and equities had double digit losses in the 1st half of the year...and I thought I had seen it all and read it all.  Stupidity never ceases to surprise me...from others and myself!    Yet, here we are...deja vu!  

 

I still think we are in for a up and down, somewhat volatile market for the next couple of years as interest rates and inflation find equilibrium, nation states fix their balance sheets and the overleveraged finally get their day of reckoning.  So moving from overvalued assets to cash to undervalued assets...repeat...may be the strategy for the next while.  Cheers!

 

 

 

I agree with your sentiment. I also found it amusing how an entirely new generation jumped into the markets 2020/2021. The overwhelming majority of these people had no clue that we were in a speculative craze. It's amazing how there's always a new generation coming of age that have never experienced a major down market first-hand and as a result, you get these periodic booms and busts. 

 

As for the economy, it sure seems like we have a ways to go before markets find equilibrium. There are so many things going on that have shaken up the global economy. 

 

Side note - I can't believe the Chinese are going to stick with their zero covid policy. It seems completely stupid given how contagious it is and the fact that the rest of world is just moving ahead and dealing with it. Maybe it's possible if you're an isolated island nation like Cuba or something. 

[Parsad]

1 hour ago, tede02 said:

 

I agree with your sentiment. I also found it amusing how an entirely new generation jumped into the markets 2020/2021. The overwhelming majority of these people had no clue that we were in a speculative craze. It's amazing how there's always a new generation coming of age that have never experienced a major down market first-hand and as a result, you get these periodic booms and busts. 

 

As for the economy, it sure seems like we have a ways to go before markets find equilibrium. There are so many things going on that have shaken up the global economy. 

 

Side note - I can't believe the Chinese are going to stick with their zero covid policy. It seems completely stupid given how contagious it is and the fact that the rest of world is just moving ahead and dealing with it. Maybe it's possible if you're an isolated island nation like Cuba or something. 

 

As soon as all of the pharmacists in my pharmacy started to ask me about the cryptocurrencies they had all bought, I knew they were f**ked and that maybe, we had just avoided another disaster of epic proportions by more people not being stupid/greedy and doing even dumber things with their capital.  As the great Forrest Gump says...stupid is as stupid does!  Cheers!

[Viking]

Well the first half of 2022 has been pretty crazy. Simply following the Fed has been a very profitable strategy. The interesting thing is the US and Canadian economies are NOT rolling over. Most importantly, the labour market continues to be very strong - we still have a big shortage of workers in US and Canada. And Mr Market expects inflation to be transitory. 
 

The second half of the year could be equally as interesting as the first half. The Fed appears intent on hiking until inflation shows signs of coming down materially. Yes, we likely have hit peak inflation at 8% but what if it is still running at 7% in early 2023?.
1.) What if oil goes to $150 this fall? Don’t think this is possible? Might want to read up on the energy crisis unfolding in Europe (that will be getting much, much worse with each passing month).

2.) Buy anything made in Europe? Imagine the price increases COMING over the next 12-24 months just due to the spike in energy prices alone. Europe is also heavily unionized. Super inflationary.

3.) Who thinks rents are coming down any time soon with the cost of capital (interest rates) skyrocketing?
4.) Labour has to make up for lost ground the past 18 months - inflation has been ripping and wage increases have been too low.

5.) China’s continuing zero covid policy/lock downs? Inflationary.

6.) Who thinks companies are done dramatically increasing prices (that is called inflation…)?

7.) We need to build chip plants in the US… bringing manufacturing back to the US in scale will be… yes, inflationary.

8.) The globe desperately needs to transition to clean energy (wind and solar)… yes, that will also be… inflationary. (get the raw materials, manufacture the panels, build transmission lines etc).

9.) Electric vehicles? Massively inflationary. Everyone needs to spend a shitload of money to make it possible (get the raw materials, electric grid, car manufacturing etc).

10.) Russia’s war on the West (Ukraine being a small part)… wars on this scale are… yes, inflationary. And this war is just 5 months old and will NOT be ending any time soon.

 

Do i need to continue? And people think inflation will be back down to 3 or even 4% in 2023? Dream on. 
 

Bottom line, i am now seeing forecasts for Fed Funds Rate to exceed 4% with some calling for 4.5 to 5%. I know, I know… it will NEVER HAPPEN. Just like a year ago EVERYONE said higher rates (like we have now) were impossible due to high debt levels. 
 

What to do? Continue to follow the Fed. They are not done. (QT just started 5 weeks ago!) And buckle up (expect more volatility).

—————

Please note, i am not saying people should build a bunker and buy ammunition and Spam. What i am saying is i think as long as the Fed continues to aggressively raise interest rates and engage in QT then assets/financial markets will struggle. We will get big rallies (like we are seeing now… yay!). And we likely will get another big sell off (perhaps multiple). What investors do will depend on their age, financial situation, risk tolerances, financial objectives, investing style etc. Good luck and may we all prosper  

Edited July 21, 2022 by Viking

[Ulti]

https://podcasts.apple.com/us/podcast/citi-sizes-up-the-markets/id1460047965?i=1000570782953

[Viking]

Below are a few of the news headlines from today. Looks to me like the Fed is getting what it wants = slower economic growth. This is also a global phenomenon - not only happening in the US. Europe and China are also slowing. What does it mean for investors? Slower economic growth is now slowing revenue growth. Inflation is increasing expense growth. Slowing revenues + rising expenses = lower profitability. This dynamic is just getting started. Not a great set up for the stock market. 

1.) “Walmart slashes profit outlook as food inflation wallops consumers”

2.) “GM cusbs discretionary spending and hiring; earnings miss estimates”

3.) “3M cuts sales and profit forecast” 

4.) “UPS sees decline in package deliveries for second quarter”

5.) “McDonalds Q2 sales drop after Russia and Ukraine locations closed”

6.) “Shopify cutting 10% of workforce as e-commerce growth slows”

7.) “IMF cuts global economic forecasts for 2022 and 2023”

8.) “US consumer confidence drops to lowest since Feb 2021”

[Spekulatius]

@Viking - low consumer confidence has been an extremely reliable contrarian indicator (my guess is it seeps into investment decisions) and when you bought stocks when consumer confidence was at low levels, it has worked very well every single time.

Looks at the lows in 1990 (gulf war) 2002 (9/11, recession) 2008 (GFC), 2010 (Europe). 2020 (epidemic) 2022 (inflation).