Where Does the Global Economy Go From Here?

[changegonnacome]

27 minutes ago, Gregmal said:

If we have to go to 5% FF for a bit to “solve” this there isn’t a single thing im holding that I’d sell.

 

Right me neither, we hold some of the same stuff.....characterized by either high FCF yields, low multiples on that FCF and/or equities underpinned by irreplaceable inflation protected trophy hard assets. I'm looking at you CLPR/MSGE.......kudos to us, its the right strategy for what I'm talking about - but I guess what I'm saying and I'm actually doing this.....is you sure can make a lot of money on short side selling OTM calls on the indexes at their inflation adjusted ATH's, buying puts on things with Price/FCF yields with a 2.x% handle that became 10/30yr bond proxies in ZIRP world and where those same companies have over earned for the last couple of years (ehm Apple). Then you've got the universe of companies STILL trading at like 30 times sales, economically sensitive to a recession that require on-going infusions from the capital markets to deliver on their growth plans all while their cost of capital (debt & equity) is sky rocketing. Thats been my strategy since early Q2 and will remain so until CPE is under 4%. Don't fight the FED!

Edited August 29, 2022 by changegonnacome

[Viking]

I see lots of rear view forecasting. It IS clear TODAY what happened over the last year - just to state the obvious. And just to be equally clear NO ONE was predicting anything close to what actually happened over the past year:

- tech stock beatdown - lots down 70%

- bear market in all stocks

- bear market in bonds (worst ever?)

- oil prices over $100; oil stocks on fire (best performing asset class)

- inflation at 8%

- war in Ukraine; Russia a pariah in the West

- energy crisis in Europe

- Federal reserve are now hawks (aggressively raising rates and QT)

- Fed funds forecasted to go to 4%

- bond yields across the curve much higher than anyone predicted

- housing slowing dramatically

- Chinese economic growth slowing (zero covid policy; crackdown on real estate)

 

So my guess is no one really has a clue how things will look in another 12 months (economic growth, inflation, unemployment, bond yields etc).
 

Most investors have seen big declines in their investment portfolio so far in 2022. 2023? No one has a clue how it will play out. And that is one of the things i love about investing…

Edited August 29, 2022 by Viking

[changegonnacome]

10 minutes ago, Viking said:

Most investors have seen big declines in their investment portfolio so far in 2022. 2023? No one has a clue how it will play out. And that is one of the things i love about investing…

 

Nice summary above very momentous indeed, what an interesting time to be alive & investing - yep the future is unknowable......but you can look at the odds being offered in the market that X will happen and decide wether its handicapped correctly.....I take the view that the market is engaged in wishful thinking about a return to ZIRP world in 2023........when all the historical evidence suggests that periods of monetary inflation take longer than one would think to get back to price stability............so you've got two mis-pricing now in the market that one can take advantage off IMO

 

(1) Higher Rates, for longer than anyone is forecasting - see inflation expectations, TNX etc.

(2) Earnings recession and/or recession recession based on the Fed's need to quell aggregate demand

 

Take that lense and apply it across industries and companies and I think the view above is going to give you the correct posture moving into 2023

[james22]

19 minutes ago, Viking said:

NO ONE was predicting anything close to what actually happened over the past year:

 

- oil prices over $100; oil stocks on fire (best performing asset class)

- energy crisis in Europe

 

Some few did see O&G outperformance (though most too early).

[Gregmal]

34 minutes ago, james22 said:

 

Some few did see O&G outperformance (though most too early).

I don’t even know what to make of “nothing is predictable” because such a stance is so absolutely opposed to basically every merit of investing. There’s literally no point investing if you believe nothing is predictable.
 

That, and well everything is predictable you just need to locate the proper pieces and then watch it come together. If you can’t find the pieces with a degree of confidence then just move on to stuff where you better can. If you don’t bother to put in the work, then sure, you’ll never see anything come together and you’re just guessing. Oodles of money have been made in the past year. Energy has been detailed on this site for over a year. Rates were too. Apartment REITs went apeshit. The vaccine needle popped the peloton and zoom bubbles. But yea, idk. To each their own. Like literally look at the energy topics. Every month it’s like “energy is a no brainer” and then it’s like “it’s easy in hindsite but not going forward”…then the next boatload of money is made, and it’s “energy is a no brainer”/“nothing is knowable”…rinse and repeat all over again. 

[Gregmal]

NO ONE could have predicted this

 

https://adventuresincapitalism.com/2021/09/29/will-esg-create-the-next-lehman-moment/

[scorpioncapital]

so if you can earn more on cash there is less incentive to invest or do business - therefore just sit on cash. If you have none, I presume they want to coax more people into the labour force.

 

When spending is reduced I presume this is for non-essentials? I mean, I do understand all the arguments why recessions are bad - after all - how precise can they be?  Do you want to reduce the wealth to the point that people can't pay rent or eat, or run out of money? Or do you want to reduce inflation temporarily, hopefully most? people can get by during this period on the essentials. I have always been relatively price conscious, perhaps thrifty but is the idea that most people are not. Most people just spend too much and the Fed is now going to try to take that punchbowl away?

[changegonnacome]

9 hours ago, scorpioncapital said:

Do you want to reduce the wealth to the point that people can't pay rent or eat, or run out of money? Or do you want to reduce inflation temporarily, hopefully most?

 

They want to reduce aggregate spending/demand for goods and services such that, for a period, it dips below the aggregate productive capacity of the economy to produce those goods and services THIS is what re-introduces what they term 'SLACK' (i.e. that demand for goods & services at least equals but more likely falls below the productive capacity of the economy for a period). In doing so supply will outstrip demand....and like any supply/demand curve it will shift to bring things back into equilibrium.....this moderation will REDUCE inflation.

 

This reduction in aggregate demand (via tightening financial conditions) is what they are trying to engineer by manipulating the three sources of funds in the economy (1) Money (2) Credit (3) Incomes. The way these things work is slowly and in sequence beginning at (1) then moving to (2) then ultimately feeding into (3).

 

They have done a descent job on (1). But as I've stated before credit remains abundantly available and its price too cheap (relative to the inflation rate) for the credit lever to have moderated aggregate spending/demand in a way that might have suggested they could back off. Thats why todays news on the healthy consumer in some ways is technically BAD news if you look at it through the lens of the FED attempting to moderate demand & restore price stability.

Edited August 30, 2022 by changegonnacome

[Viking]

One key question, likely to be answered over the next year, is will the Fed be able to achieve its goals primarily via communication or will it take much higher interest rates.

 

So Powell gets very hawkish with his communication. Financial markets react and tighten financial conditions sufficiently for the Fed to achieve its goals (lower inflation). This is what we saw happen earlier this year - financial markets did lots of the initial work for the Fed (before the Fed even started tightening).

 

Or, do financial markets not tighten financial conditions enough. Like what was happening up until a week or so ago (bond yields falling and stock market rallying). 
 

Moving forward, the Fed might have largely exhausted the communication tool. And will now need to rely primarily on rate increases to accomplish its goals. The Fed might have to raise interest rates higher than financial markets expect or want. The employment report on Friday will be important. Continued strong job growth suggests the Fed has more wood to chop.

Edited August 30, 2022 by Viking

[SharperDingaan]

15 hours ago, Gregmal said:

https://adventuresincapitalism.com/2021/09/29/will-esg-create-the-next-lehman-moment/

 

This just isn't going to happen.

Governments simply cover the cost of energy above X (cheque to households, guarantee to energy providers. etc.); financing it with long term sovereign debt and calls/futures at a strike of X. A process that has long existed all across Europe. No panic, no super-spike, etc.

 

The process has also long existed in the US/Canada. Were the liability of nuclear power points not self-insured by you and I, the electricity they create would otherwise be unaffordable. Something nuclear advocates never mention in their lobbying!

 

SD

[changegonnacome]

1 hour ago, Viking said:

Or, do financial markets not tighten financial conditions enough. Like what was happening up until a week or so ago (bond yields falling and stock market rallying). 

 

If your question is whether stocks and the negative wealth effects a fall in their quoted value would have on overall aggregate demand & wether that would be sufficient enough all by itself to reduce demand and restore price stability.....the answer is no.......not enough people in the broader economy own financial assets.......but it does have an effect.....I mentioned it a few pages ago I know one couple in response to fall in value of their major holding ( a tech darling) decided to give up their NYC rental that they had been holding, in addition to a Florida rental.

 

The above example is a perfect illustration of negative wealth effects.......the quoted value of their equity portfolio declined by 30%....they 'felt' less wealthy.....and reduced their demand for housing in the United States by 50%.........take this and expand it across lots of transactions in the economy.....and yes wealth effects both positive and negative effect aggregate demand but I don' think its significant enough to get the Fed where they want to go.

 

Effecting aggregate demand sufficiently will require the Fed to completely change the math in the credit markets.....this will have a much larger effect on aggregate demand than a 40% fall in the SPY.

 

 

Edited August 30, 2022 by changegonnacome

[ERICOPOLY]

The Fed cannot control the labor shortage unless it pulls out an iron bar to hit the economy with.

[changegonnacome]

14 minutes ago, ERICOPOLY said:

The Fed cannot control the labor shortage unless it pulls out an iron bar to hit the economy with.

 

Yeah it can @ERICOPOLY, the only reason there is a labor shortage.....is because there's an EXCESS of demand. The Fed is in the demand destruction business now, which in turn solves the labor shortage, right?

Edited August 30, 2022 by changegonnacome

[Gregmal]

And killing companies and costing people their jobs is the answer to "fixing" a good jobs market for everyday folks.....sometimes this stuff is just too hard to believe. The doctor also suggested killing the patient to solve the issue of indigestion.....

 

There's been zero linkage or evidence that a strong jobs market and rising wages equates to todays inflation. Theres been plenty suggesting that supply chain bottlenecks does. So as literally everything continues to come down, why do we, without any real evidence, just keep insisting on destroying jobs? This isnt the 70s. People just dont seem to want to accept that. 

[Gregmal]

As I said earlier, when bankers get massive raises its cuz theyre deserving. When blue collar folks start getting them, we need to stomp that shit out....all because prices went up temporarily as a result of governments fucking up their covid responses....seems logical. 

 

I guess my only other wandering is...is there anything thats allowed to be good for folks or the economy? So far we've spent the last 9 month whack a moling from one thing to the next talking about how it needs to be killed. As a result, almost all have either regressed significantly, or stabilized. It would almost seem as if we are on some wild treasure hunt, looking for a treasure that doesnt exist but sticking TNT in anything and everything around us to find it. 

Edited August 30, 2022 by Gregmal

[LC]

36 minutes ago, Gregmal said:

And killing companies and costing people their jobs is the answer to "fixing" a good jobs market for everyday folks.....sometimes this stuff is just too hard to believe. The doctor also suggested killing the patient to solve the issue of indigestion.....

 

 

Yeah, I agree. It's a little ridiculous. "We won't stop raising rates until some of you bastards are unemployed!"

 

"Just stop eating and you won't get heartburn!"

[Gregmal]

Yea I really hope and am rooting for the average folks here. That the consumers hold tight and common sense prevails. This entire thing is unbelievable. 

 

There was no wallowing about the affordability or supply of Ferraris. Regular folks want trucks? Theyre willing to pay up for them? It must be stopped!

 

That said Im aware of how the system works and the games are rigged and the scum running the game always seems to win so you wanna be ready for that. In a lot of ways similar to how a short seller trashes a company's reputation, gets their buddies to pile on shorting, then covers for a quick turn around profit and 6-12 months later it doesnt matter that it was all wrong and scammy but the company still got hurt.

  

[Dinar]

1 hour ago, changegonnacome said:

 

Yeah it can @ERICOPOLY, the only reason there is a labor shortage.....is because there's an EXCESS of demand. The Fed is in the demand destruction business now, which in turn solves the labor shortage, right?

Not if Biden keeps giving $500bn giveaways left and right.  Trump started this idiocy (unemployment benefits in excess of wages, mailing checks to people) and Biden and Democratic Congress are happy to push this train downhill.  You want to solve the labor shortage?  Stop giving away money, cut social spending - welfare, section 8 housing, student loans, free heat/cell phone/telephone service, food stamps & medicaid, and see millions rejoin the labor force.  

[Gregmal]

2 minutes ago, Dinar said:

Not if Biden keeps giving $500bn giveaways left and right.  Trump started this idiocy (unemployment benefits in excess of wages, mailing checks to people) and Biden and Democratic Congress are happy to push this train downhill.  You want to solve the labor shortage?  Stop giving away money, cut social spending - welfare, section 8 housing, student loans, free heat/cell phone/telephone service, food stamps & medicaid, and see millions rejoin the labor force.  

Nope. You're apparently better off going after those who are currently working. Increase unemployment for the sake of "defeating inflation". 

[changegonnacome]

2 hours ago, Dinar said:

Not if Biden keeps giving $500bn giveaways left and right.

 

Higher interest rates on the 10yr/30yr......places incremental constraints on the sovereign too.....what Biden has done in reckless fiscal giveaways, Republican administration's have done in reckless corporate tax cuts......depends, I guess, on who your target voter audience is where the giveaways ultimately go.....but the lines are blurring, the parties are co-mingling economic audiences.......the next Republican House will be filled potentially with Trump-esque Republicans who now, with a nativist bent, appeal to poor white working class voters who used to be the backbone of the Democratic party.........seems fiscal conservatism on both sides of the aisle is dying on the vine.

[ERICOPOLY]

5 hours ago, changegonnacome said:

 

Yeah it can @ERICOPOLY, the only reason there is a labor shortage.....is because there's an EXCESS of demand. The Fed is in the demand destruction business now, which in turn solves the labor shortage, right?

 

Politicians discouraging immigration.  Boomers retiring.  Fed cannot control these things.

[matthew2129]

0% inflation in July and real time CPI indicators suggesting we could have moderate deflation in August. Seems like a reasonable time for a bit of a pause . But Volcker fanboys still want to make us pay for the sins of our past and show inflation who's boss.

[changegonnacome]

1 hour ago, ERICOPOLY said:

Politicians discouraging immigration.  Boomers retiring.  Fed cannot control these things.

 

Totally agree the Fed doesn't control the supply side of the economy, never has & never will - but they sure as hell control the demand side.

 

Reminds me of that alcoholics anonymous Serentiy Prayer thingy ( slightly modified for central bankers):

 

'God, grant me the serenity to accept the things I cannot change (the supply side!),
courage to change the things I can (demand side!), and the wisdom to know the difference.' 

[ERICOPOLY]

Is the shortage of labor driven by an excess of demand or an excess of retirements?

 

https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/employers-face-hiring-challenge-as-boomers-retire-in-record-numbers.aspx

 

Baby Boomers are leading the exodus, as 3.2 million more of them retired in the third quarter of 2020 than did in the same quarter of 2019.

[Gregmal]

1 minute ago, ERICOPOLY said:

Is the shortage of labor driven by an excess of demand or an excess of retirements?

 

https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/employers-face-hiring-challenge-as-boomers-retire-in-record-numbers.aspx

 

Baby Boomers are leading the exodus, as 3.2 million more of them retired in the third quarter of 2020 than did in the same quarter of 2019.

Yes sir. There was a bit of discussion here around that time period, maybe summer 2021 about just that because there was an overwhelmingly political narrative going around that no one was working because of all the free money being given out. For sure this contributes, but it’s not even close to the key variable. The key variable is what you showed. COVID was basically the last straw for a huge segment of the population that didn’t really need to be working anyway.