Where Does the Global Economy Go From Here?

[mcliu]

https://www.wsj.com/articles/europe-manufacturers-factories-russia-gas-11662938614?mod=mhp

Europe entering a vicious inflation spiral unless they can solve their energy problem quickly.

[Gregmal]

Man that was a hot inflation report. 0.1 vs -0.1 expectation! Need to adjust my long term investment outlook to account for such hotness.

[Spekulatius]

Not a great inflation report. Core inflation is accelerating while Food and Energy got cheaper. (Gas prices have begun to rise again recently):

 

 

https://www.bls.gov/news.release/cpi.nr0.htm

 

All items less food and energy

The index for all items less food and energy rose 0.6 percent in August after increasing
0.3 percent in July.

 

The index for all items less food and energy rose 6.3 percent over the past 12 months, a
larger increase than the 5.9-percent increase for the 12 months ending in July.

 

Edited September 13, 2022 by Spekulatius

[scorpioncapital]

22 minutes ago, Gregmal said:

Man that was a hot inflation report. 0.1 vs -0.1 expectation! Need to adjust my long term investment outlook to account for such hotness.

 

my base case is a decade+ of stock multiples compressing and best case flat by 2030, base case a little lower than today.

 

[Gregmal]

Yea I have like 10-15 important case scenarios and maybe another couple dozen less important ones in the portfolio. However I can see the surface level attractiveness to some of just rolling with. "the market"...much less work to do. However theres a dearth of cheap stocks right now that will both grow earnings massively and see multiple improvement/expansion over the next 10 years. 

[Gregmal]

No one is forced to buy the FANGs lol. 
 

And it’s really not a good idea if you’re gonna hang on every little weekly or monthly report like it’s life or death. 
 

The market and its participants continue to be of great entertainment value.

Edited September 13, 2022 by Gregmal

[nafregnum]

1 hour ago, Gregmal said:

Man that was a hot inflation report. 0.1 vs -0.1 expectation! Need to adjust my long term investment outlook to account for such hotness.

 

I really laughed when I read this.  Then I said to myself "I wonder if Gregmal made other funny jokes this morning, so I clicked on the profile pic, and noticed it said "10,004 posts" ... so I want to just say "Happy 10,000th yesterday!"  I appreciate all the thoughts and ideas, the serious and the silly.  Your contributions and contrarian takes are valuable and keep the conversation rolling along and lively.  

 

Here's to your health, Gregmal, and to many more investing successes and funny hot takes.

 

 

[mcliu]

Core CPI as per BLS. There is a clear shift in the last 2 years.

The question is if this continues or reverses back to 2012-2019 levels. 

 

[Gregmal]

19 minutes ago, nafregnum said:

 

I really laughed when I read this.  Then I said to myself "I wonder if Gregmal made other funny jokes this morning, so I clicked on the profile pic, and noticed it said "10,004 posts" ... so I want to just say "Happy 10,000th yesterday!"  I appreciate all the thoughts and ideas, the serious and the silly.  Your contributions and contrarian takes are valuable and keep the conversation rolling along and lively.  

 

Here's to your health, Gregmal, and to many more investing successes and funny hot takes.

 

 

Appreciated. Cheers lol

[Gregmal]

Remember maybe a decade ago, think it was August 2011 or so there was a GDP print or something that sent the market plummeting. I was in the office back then and just remember everyone freaking out. Then it was the European debt crisis. All around that we had these government shutdown fears. And it was all just so bizarre to me because certainly this wasn’t the last GDP reading in the history of the world and one or two readings really isn’t that relevant at all to anything longer term. Government was obviously not going to be shut down forever. And GFC just showed us the roadmap for any sort of financial system issue, even if there was one, which there wasn’t really even one there….nevertheless…hysteria. 
 

I think 2013 is the only year of my investing life where there was literally nothing on the horizon. Otherwise…there is ALWAYS something being peddled and thrown in everyone’s face and when you step back and realize it’s the do nothing gossip girls and financial people who literally just sit at the computers all day waiting to press buttons, it kind of makes sense. 
 

Don’t care to check but there’s been a lot of GDP prints since 2h 2011 and plenty of other noise but in any event you’d be hard pressed to find anything to buy at those quotes. 

[changegonnacome]

As I've been saying for a while - you've got underwrite your portfolio against a FCF yield from 2018/19 company earnings, the FCF has got to be unusually high right now IMO 10%+ and certainly higher than Core CPI & higher than where the 30yr is likely to go, its also ideally got to have prospects of growing FCF greater than CPI in 2023 against a weakening consumer backdrop....the company should have no requirement for access to capital markets (debt or equity) to remain a going concern or grow for the next 36 months at least...........you own something that meets these criteria and you'll do fine.........you own something that doesn't.....your gonna get your ass handed to you (potentially).

 

Nobody knows if we exit this period of rising rates into a new one of (1) secularly higher real rates/inflation for the next decade or (2) revert back to 2010's discount levels......I dont know, I dont care......holding high FCF yielding companies you get to play in both future worlds of  (1) & (2)......take one side of the bet holding a basket of 3-5% FCF yielding company......... well if your wrong and (1) happens your toast. Permanent impairment of capital. No bueno.

[Benderok]

7 hours ago, Gregmal said:

Appreciated. Cheers lol

Yeah cheers indeed! I saw you at 9,999 today in the morning, thank you for such a contribution!

[Gregmal]

Shit so good they’re partying at the White House!

 

https://nypost.com/2022/09/13/gop-slams-biden-for-out-of-touch-inflation-celebration/
 

November will be fun for sure.

[scorpioncapital]

14 hours ago, changegonnacome said:

As I've been saying for a while - you've got underwrite your portfolio against a FCF yield from 2018/19 company earnings, the FCF has got to be unusually high right now IMO 10%+ and certainly higher than Core CPI & higher than where the 30yr is likely to go, its also ideally got to have prospects of growing FCF greater than CPI in 2023 against a weakening consumer backdrop....the company should have no requirement for access to capital markets (debt or equity) to remain a going concern or grow for the next 36 months at least...........you own something that meets these criteria and you'll do fine.........you own something that doesn't.....your gonna get your ass handed to you (potentially).

 

Nobody knows if we exit this period of rising rates into a new one of (1) secularly higher real rates/inflation for the next decade or (2) revert back to 2010's discount levels......I dont know, I dont care......holding high FCF yielding companies you get to play in both future worlds of  (1) & (2)......take one side of the bet holding a basket of 3-5% FCF yielding company......... well if your wrong and (1) happens your toast. Permanent impairment of capital. No bueno.

 

Could you also find stocks where the growth rate of revenues & earnings >= cpi core rate and with high gross margin, even if the fcf yield begins below the core cpi yield?

 

[changegonnacome]

1 hour ago, scorpioncapital said:

Could you also find stocks where the growth rate of revenues & earnings >= cpi core rate and with high gross margin, even if the fcf yield begins below the core cpi yield?

 

Sure but forget revenues, fools grow revenues....its earnings that matter & EPS more importantly (SBC is going to kill people now).......but what you've described is a situation where the math gets harder........how far into the future does the FCF yield based on the price you pay today start to exceed 5% CPI so your 'money good'....how many years out do you have to wait for that happen and then you've got to use a higher discount rate on that future. Over time a great businesses bail most people out regardless of the price they pay.....but there just isnt that many truly great businesses.

 

There's reason say Bill Ackman dumped Dominos.....which is completely consistent with his swaptions position.....Dominos grows, is a high margin franchise model and has characteristics like you describe but the FCF yield was too low (~3%) & the growth ultimately too modest, too slow for a world where the 30yr is likely going to 5%. Bill still holds low-ish FCF yield quality/growth-ish companies but my guess is Dominos was just way too over the line in terms of what would be required to make the math work.

 

My point in previous posts is that your starting point (FCF yield) matters now more than ever in the positions you take.....the market is no longer paying up for the future .....and wont again until inflation is under control....all while the future macro economy 12/24/36 months is uncertain......which is why I wont really accept holding a company today that doesn't provide a FCF yield 'risk' premium over the 30yr in the future that may sit at 5%....because in the future the market wont accept that either and will 'bid down' assets to make the math work......I want to be invested, dont want to hold cash and I want to retain my purchasing power as it is today but in 36 months time & I obviously believe this is way to do it while remaining net long. We'll see.

Edited September 14, 2022 by changegonnacome

[scorpioncapital]

46 minutes ago, changegonnacome said:

 

There's reason say Bill Ackman dumped Dominos.....which is completely consistent with his swaptions position.....Dominos grows, is a high margin franchise model and has characteristics like you describe but the FCF yield was too low (~3%) & the growth ultimately too modest, too slow for a world where the 30yr is likely going to 5%. Bill still holds low-ish FCF yield quality/growth-ish companies but my guess is Dominos was just way too over the line in terms of what would be required to make the math work.

 

 

I guess the key is to normalize the earnings, can be noisy sometimes. I don't know what Domino's growth rate or gross margin was that compelled Ackman to sell but I figure if the FCF was 3% and growth rate was say 5% real, you've bought about 11 years too early! I also wonder if the 10-30 year goes to 5% would that cause nominal growth rate to accelerate also, or would in fact slow it down further? If so, I can definitely see the risk of a 5% long yield and a too-slow growth rate. Even if growth rate was 10% you are still buying 5-6 years too early at 3% fcf yield. But the hyper-growers who are growing at 20-30%+ a year but have no earnings, not sure what to make of it. When they do have earnings, the fcf yield on initial purchase price would still be quite high just from the revenue growth alone. But you have to believe that there is a translation to net earnings (e.g. Amazon). There is also the mystery of gross margin/qualitative business factors. It seems that these businesses trade at a lower fcf yield even if growth is in the 5-10% range. But I do not know how much 'quality' is needed to offset the rate headwinds.

Edited September 14, 2022 by scorpioncapital

[changegonnacome]

50 minutes ago, scorpioncapital said:

There is also the mystery of gross margin/qualitative business factors. It seems that these businesses trade at a lower fcf yield even if growth is in the 5-10% range. But I do not know how much 'quality' is needed to offset the rate headwinds.

 

When this interest rate hiking cycle is almost over........and inflation almost 'conquered'......the growth math will be so evident to the casual onlooker on some of these names...... it will hit you over the head, no calculator required......but market participants will be too afraid to touch it then......because of the PTSD of the prior 18-24 months holding similar instruments.....then you buy GARP......but not now I think but I could be completely wrong. We'll find out.

[nafregnum]

 

 

I'm interested in what you're saying, @changegonnacome, so for curiosity sake, I made a watchlist out of the last five or six pages of "Investment Ideas" and then sorted the list for "Best FCF Yield" and "Worst FCF Yield" in the screenshots attached.  Also attached, the csv file which can easily be imported into a Google Sheet if anyone wanted to examine the whole list or sort on a variety of different rows...

 

I'm not familiar with all of the threads, but Do the "best" and "worst" seem like the most and least likely to see price improvement in the next 36 months?

Watchlist CoBF FCF Yield List 46 rows with 1 active filter - Valuation.csv

[tede02]

One big question in my mind is whether the ultra tight labor market is going to result in the Fed having to raise rates significantly higher than concensus. Everyone is talking about 4%ish being the magic number. But what if Fed Funds has to go to 5%, 6%? Stocks could really get smashed. 

[Gregmal]

1 hour ago, nafregnum said:

 

 

I'm interested in what you're saying, @changegonnacome, so for curiosity sake, I made a watchlist out of the last five or six pages of "Investment Ideas" and then sorted the list for "Best FCF Yield" and "Worst FCF Yield" in the screenshots attached.  Also attached, the csv file which can easily be imported into a Google Sheet if anyone wanted to examine the whole list or sort on a variety of different rows...

 

I'm not familiar with all of the threads, but Do the "best" and "worst" seem like the most and least likely to see price improvement in the next 36 months?

Watchlist CoBF FCF Yield List 46 rows with 1 active filter - Valuation.csv 11.63 kB · 1 download

This I was actually thinking about this the other day. A while back, like a year or two ago before everyone got obsessed with inflation there was some talk about prepping for higher rates and I think it was @LearningMachine who looked at Verizon as one of the ideal positioned companies where you wanna have a huge debt load but fixed rate and some pricing lower. Maybe it was someone else or a different company but the gist was that those type of high FCF generators whom regularly also happened to have lots of debt would do well. Nevertheless the current market is more or less a baby with the bath water market. Those names especially, look at Comcast, have gotten raped. If you believe in efficient market…there’s nothing that can help you. But if you don’t, you’d have to imagine the stock quote and the business value have diverged and it’s probably a decent long term opportunity.

[changegonnacome]

2 hours ago, nafregnum said:

I'm interested in what you're saying, @changegonnacome, so for curiosity sake, I made a watchlist out of the last five or six pages of "Investment Ideas" and then sorted the list for "Best FCF Yield" and "Worst FCF Yield" in the screenshots attached.  Also attached, the csv file which can easily be imported into a Google Sheet if anyone wanted to examine the whole list or sort on a variety of different rows...

 

Yeah nice piece of work only caveat I will add here.........is that a very high FCF yielding company is kind of the canary in the coal-mine for a future value trap................so you still have to answer the most important question....which is the business deteriorating or not underneath the surface......a good business will bail you out of over-paying over time, but paying too much for a BAD business is a one way ticket to hell.

 

So........I like screen's........but the highest FCF yielding companies......sorted from highest yield on down......you could argue might be a rank order filing in which BUSINESSES are the most likely melting ice-cubes available to choose from Mr.Market today.........so I talk a lot about the math of investing in rising rate environment & I stand by that basic math.........but it is not by any means an excuse not to due qualitative assessment on the durability of that businesses competitive position/industry/earnings power. Give me an equity with a FCF yield of 9% on demonstrably advantaged business.....all day long.......... versus one with a 19% yield but serious terminal risk questions to be answered by the prospective investor.

Edited September 14, 2022 by changegonnacome

[LC]

I'm with you there Greg but I haven't seen much pricing power being exercised from the cable/telcos. If anything there's still downward pressure, which I think is why VZ etc are all nuked.

[Gregmal]

I’ve had Sprint since 2006 and the same plan that was $170 then is $155 now. 
 

Overall there’s a double whammy of selling. Stuff that’s inflation resistant seems to be getting whacked on recession worries. Stuff that’s recession proof is getting hit on inflation worries. Only WM stands alone lol. Sooner or later something gives. 

[maplevalue]

1 hour ago, tede02 said:

One big question in my mind is whether the ultra tight labor market is going to result in the Fed having to raise rates significantly higher than concensus. Everyone is talking about 4%ish being the magic number. But what if Fed Funds has to go to 5%, 6%? Stocks could really get smashed. 

 

The estimates of the neutral rate are exceptionally uncertain, forecasts for inflation are exceptionally uncertain, and my feeling is that people have anchored themselves to what has transpired since 2008 as to what 'usual' interest rates are.

 

In the 2010s many people spoke about how the Fed was 'pushing on a string' in that they struggled to increase inflation via more and more extreme monetary stimulation. Which makes sense, their policies mostly juiced up financial assets which are owned by the rich so their easing did not create that much inflation since the rich will not change their consumption patterns that much if assets appreciate. It is completely reasonable that we are in the reverse situation today, where in order to generate even a modest reduction in inflation the Fed needs to move interest rates an outsized amount.

 

As of today, stocks, real estate, crypto, etc. are well above their pre-COVID highs. Therefore the vast majority of people are still feeling pretty rich. My sense is the Fed needs asset prices decently lower from here (via QT/interest rate increases) to generate a response from the real economy.

Edited September 14, 2022 by maplevalue

[Gregmal]

https://www.cnbc.com/2022/09/15/the-economy-is-braking-hard-says-billionaire-barry-sternlicht-.html
 

lotta good points in here. Remember, 2% inflation is great, 3% is not, and 4% calls for blowing everything up! Yes that’s really the approach some are taking.