Where Does the Global Economy Go From Here?

[fareastwarriors]

2 minutes ago, changegonnacome said:

 

HHC aren't dummies.......I'm sure they've tried it.....considered it......clearly something in the model 'breaks' if they do as you say.....perhaps they are foolish and from pure pig headedness have invested a couple of hundred million dollars that they dont care about......& are just happy to utilize this asset at 20% (32hrs) of its theoretically max capacity (24hr x 7 days = 168hrs).......I dont think so......i think the economy is overheating........the inflation figures agree with me.

 

I hear ya. I was just ranting to rant. HHC was just in my crossfire.  LOL .

 

 

.

One last point to share through my past few years of Fun-FIRE-ing. I did my share of low level work like restaurants, deliveries, markets, etc. I noticed pay is often times not the main factor in good people quitting. It's often just being mismanaged or being treated like idiots or like a number on an Excel. Don't get me wrong, I've seen plenty of slackers, shitheads, and flakes too but there are many, many good people just trying to do their job, well. But I believe oftentimes companies/managers make it too hard.  Just my personal observations.

 

Ok, I'm done. Back to football.
 

 

 

[changegonnacome]

8 minutes ago, fareastwarriors said:

Ok, I'm done. Back to football.

 Good call  

[Spekulatius]

If you think in broad terms - 4% interest rates with 8% inflation is still very accommodative. Even a 6% mortgage at 8% inflation is -2% in terms of real rates.

I think in order to really crack inflation - the risk fee interest rates will have to be positive in real terms (subtracting inflation) for a while. Now if this occurs with 6% interest rates and 5% inflation or 4% interest rates and 2% inflation I am unsure, but that we do get real interest rates in this tightening cycle and that interest rates need to stay positive (to help squash a reemergence of inflation) seems likely.

 

Brought to you from Spek's macro soapbox and worth exactly what you paid for,

[Gregmal]

3 minutes ago, Spekulatius said:

If you think in broad terms - 4% interest rates with 8% inflation is still very accommodative. Even a 6% mortgage at 8% inflation is -2% in terms of real rates.

I think in order to really crack inflation - the risk fee interest rates will have to be positive in real terms (subtracting inflation) for a while. Now if this occurs with 6% interest rates and 5% inflation or 4% interest rates and 2% inflation I am unsure, but that we do get real interest rates in this tightening cycle and that interest rates need to stay positive (to help squash a reemergence of inflation) seems likely.

 

Brought to you from Spek's macro soapbox and worth exactly what you paid for,

If this were true, and there was real genuine inflation like in the 70s, how do we explain the wide scale collapse in demand for mortgages, or even more broadly plenty of other things that should be beneficiaries of such accommodation? This all again just points me to the fact that the academics and folks talking up inflation are really just betting on the opposite. Otherwise, wouldn’t all these things be behaving the way they did in the 70s. Over the last 6-9 months we ve run fully through just about everything, from 2x4s to used cars, then to mortgages, then to wheat and gas, only to have the same thing occur. Now we re on the last leg and trying to kill jobs. Seems 100% like a let’s manufacture a recession playbook than a let’s stop inflation one. I got a pretty remarkable email from an old investor asking about buying tons of US based bonds at 4-5%. This guy missed the entire decade rally owning cds and crap like that. Right now it’s a full blown case of the revenge of the savers dominating the narrative lobbying for more interest. 

[Spooky]

The problem is that 8% figure is backwards looking, what happens when we get to the start of 2023 and the comparable figure changes? People will be talking about deflation soon lol.

[Gregmal]

1 minute ago, Spooky said:

The problem is that 8% figure is backwards looking, what happens when we get to the start of 2023 and the comparable figure changes? People will be talking about deflation soon lol.

Exactly and if you look at the positioning that’s exactly what everyone lobbying the inflation narrative is really betting on. It’s remarkable how rigged this stuff can be once you step back. They’ve got Powell thinking he s saving the poor people who are both too dumb to ask for raises but simultaneously getting massive raises and driving a non existent wage price spiral lol. 

[Gregmal]

You see it all over. Folks who says they believe in inflation sitting on cash and buying bonds lol. My guy I just shared the email from…”in the 80s they had to raise to double digit so they have to do that again. Inflation is 8%. Buy me 5% bonds!” LOL obviously you either don’t understand inflation or don’t believe you’re really losing 3% purchasing power.

[Spekulatius]

31 minutes ago, Spooky said:

The problem is that 8% figure is backwards looking, what happens when we get to the start of 2023 and the comparable figure changes? People will be talking about deflation soon lol.

Yes, this is correct - the 8%+ inflation is backwards looking, but even the core inflation is 6%+ right now. The core inflation has inputs that change much more slowly so it will take a while to take it back. Based on core inflation data - at 4% risk free bond yield, the real interest rate is -2%.

 

As for manufacturing a recession, you could always say this is what a tightening cycle is trying to do. Inflation means demand exceeds supply, so demand needs to be reduced to match supply, unless supply starts to increase (which would work as well but it does not appear to be happening).

 

Luckily (or unluckily for the stock market investor), the Fed has ways to go until it really impairs the second mandate which is full employment. We have more than full employment, so until labor market shows some significant increases in unemployment, the first mandate (price stability) is what drives the policy for the time being.

 

The absolute nightmare scenario, which is think the Fed is trying to avoid, is that Fed starts to ease again (too early) and then all of a sudden inflation starts to rise again with a vengeance. Now the Fed has a real problem with credibility and to squash an inflation flareup, they have to rise interest rates way higher than in the first tightening cycle, because they have lost all the credibility. That would be a true repeat of the 70's sh$tshow and no one wants that.

Edited September 20, 2022 by Spekulatius

[Gregmal]

The GFC 2.0 narrative was and is very popular and I guess I took it at face value and saw how preposterous that was fundamentally. But maybe I missed it. What was one of the underlying mechanism the propelled GFC….banks, hedge funds, academics telling the Fed and treasury… “bubbles are regional, defaults are rare. Housing only goes up. Derivatives don’t need to be regulated, they only stabilize the economy”. Just as they bet on the exact opposite. Same stuff seems to be going on here and while I don’t think it’s occurred yet in the real world, we are seemingly getting close to seeing some real destruction. What a shame it would be if we killed one of the greatest economies we ve had, because the jobs market was so good folks were telling Howard Hughes to fuck off at their $25 an hour waitstaff positions…

[thepupil]

35 minutes ago, Gregmal said:

You see it all over. Folks who says they believe in inflation sitting on cash and buying bonds lol. My guy I just shared the email from…”in the 80s they had to raise to double digit so they have to do that again. Inflation is 8%. Buy me 5% bonds!” LOL obviously you either don’t understand inflation or don’t believe you’re really losing 3% purchasing power.

bonds and cash have far lower duration than stocks and outperformed stocks during the last inflationary period. it's not entirely irrational. also TIPS offer positive real yield. I think MANY market participants are looking at bonds and seeing them as a viable alternative (for at least some portion of capital)

[Gregmal]

1 minute ago, thepupil said:

bonds and cash have far lower duration than stocks and outperformed stocks during the last inflationary period. it's not entirely irrational. also TIPS offer positive real yield. I think MANY market participants are looking at bonds and seeing them as a viable alternative (for at least some portion of capital)

You’d have to be on the very short duration side then though. Longer duration will get blasted if there’s real inflation. Rate increases or not. 

[Gregmal]

Haven’t checked cuz I’ve had friends and family up the past month and have don’t a lot of work but on the to do list is evaluating whether it makes sense to short some OTM tlt puts. Given the noise I’d have to imagine there’s some premium to be had 

[Gregmal]

Look at it like this. After a decade of being pissy, underperforming and living on the sidelines whining, we ve basically reinforced with the savers(which include a lot of the financial world folks), over the last 9 months, that all they need to do to get more interest is to scream inflation as loud as they can. And if they keep it up, they’ll possibly get some cheap real estate too, which is the second favorite asset class for many of them, outside cash. And we wonder why the noise is deafening?

[thepupil]

1 hour ago, Gregmal said:

You’d have to be on the very short duration side then though. Longer duration will get blasted if there’s real inflation. Rate increases or not. 

 

 

I don't really agree with this. The bond market in total has duration of ~6.7 and yields 4.4%. if rates go up by say 3%, it'd lose about 20% (slightly less, but we'll use 20), less the yield along the way, so if it happened over a year you lose 16% (probably a little less). If rates went to 7.5% I'd expect stocks to be down far more than 16% unless risk premiums went negative.  for corporates, you're starting to get pretty fat coupons/reinvestment such that you can recoup losses quickly through reinvestment. 

 

stocks are perpetual instruments. they're far more vulnerable to increase in the cost of capital than bonds, generally. of course if you're talking a 30 year zero coupon that's a different story. 

 

 

 

 

[Investor20]

I am not clear why many here feel job market is strong.  Just because people are asking for a raise in high inflationary situation doesn't mean the job market is strong. It could as well mean they cannot have ends meet with present income.

 

Looking at real weekly earnings (inflation adjusted) there is a steady drop of median from Q2 2020 at 393 to present 358$.  That is a whopping 8.9% real earnings drop in last two years.

https://fred.stlouisfed.org/series/LES1252881600Q#

 

If you were to look at civilian labor force participation, it was at 63.4% in Feb 2020 to present 62.4%.  That is a loss of 1%, or over 3 milion employees lost.

 

Loss of 3 million employees lost from pre-Covid (Jan 2020) and negative 8.9% median real wages hardly show a strong job market.  If people want a raise, it only means their expenses went up and need more to have their ends meet.

 

https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htm

 

 

[thepupil]

52 minutes ago, thepupil said:

 

 

I don't really agree with this. The bond market in total has duration of ~6.7 and yields 4.4%. if rates go up by say 3%, it'd lose about 20% (slightly less, but we'll use 20), less the yield along the way, so if it happened over a year you lose 16% (probably a little less). If rates went to 7.5% I'd expect stocks to be down far more than 16% unless risk premiums went negative.  for corporates, you're starting to get pretty fat coupons/reinvestment such that you can recoup losses quickly through reinvestment. 

 

stocks are perpetual instruments. they're far more vulnerable to increase in the cost of capital than bonds, generally. of course if you're talking a 30 year zero coupon that's a different story. 

 

 

 

 

 

 

also there's some safe floating rate stuff out there that's becoming reasonable alternatives to equities. CLO AAA is now at 5.6% yield. this is for AAA tranche on structured leveraged loans, so for them to lose money you'd need far far worse than GFC type stuff and has no duration. 

 

 

https://twitter.com/thepupil11/status/1570831452807516161?s=20&t=XeAdGxvFeCKZdz2eVPrvBQ

Edited September 20, 2022 by thepupil

[Dinar]

50 minutes ago, thepupil said:

 

 

I don't really agree with this. The bond market in total has duration of ~6.7 and yields 4.4%. if rates go up by say 3%, it'd lose about 20% (slightly less, but we'll use 20), less the yield along the way, so if it happened over a year you lose 16% (probably a little less). If rates went to 7.5% I'd expect stocks to be down far more than 16% unless risk premiums went negative.  for corporates, you're starting to get pretty fat coupons/reinvestment such that you can recoup losses quickly through reinvestment. 

 

stocks are perpetual instruments. they're far more vulnerable to increase in the cost of capital than bonds, generally. of course if you're talking a 30 year zero coupon that's a different story. 

 

 

 

 

Not necessarily.   It depends whether nominal interest rates are up because of inflation or real interest rates are up.  If TIPS yield 5%, yes, the real discount rate for stocks should probably be 7-8%.  So a company whose revenues grow in line with inflation should sell at a 12-14x free cash flow.  However if TIPS yield 2%, and nominal rates = 7.5% because everyone expects 5.5% annual inflation as fas the eye can see, then using the same 2-3% risk premium, will result in a real discount rate = 5%, and the same company should trade closer to 20x free cash flow.  Can good businesses sell at 10x free cash flow when inflation is 5% per annum, and TIPS yield 2%?  Sure, why not, but that would be a phenomenal return on a going forward basis.  

[Cor]

51 minutes ago, Investor20 said:

I am not clear why many here feel job market is strong.  Just because people are asking for a raise in high inflationary situation doesn't mean the job market is strong. It could as well mean they cannot have ends meet with present income.

 

Looking at real weekly earnings (inflation adjusted) there is a steady drop of median from Q2 2020 at 393 to present 358$.  That is a whopping 8.9% real earnings drop in last two years.

https://fred.stlouisfed.org/series/LES1252881600Q#

 

If you were to look at civilian labor force participation, it was at 63.4% in Feb 2020 to present 62.4%.  That is a loss of 1%, or over 3 milion employees lost.

 

Loss of 3 million employees lost from pre-Covid (Jan 2020) and negative 8.9% median real wages hardly show a strong job market.  If people want a raise, it only means their expenses went up and need more to have their ends meet.

 

https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htm

 

 

The 3M drop you’re referring to would be better viewed in context of how many new jobs were created during this time as well. What seems to be happening is a number of people left the job market in 2020 and for the remaining workers, there are now more jobs to choose from. Since employers need to put bums in those seats, their recruiters are working double time trying to poach qualified laborers by offering them better pay. Perhaps this drives more of the pay increases across the board than employees proactively asking for raises out of need.

 

 

[Dinar]

https://www.bloomberg.com/news/articles/2022-09-20/tight-labor-market-eases-for-chipotle-cmg-del-taco-jack-others?srnd=premium#xj4y7vzkg

[changegonnacome]

6 hours ago, Gregmal said:

how do we explain the wide scale collapse in demand for mortgages

 

Because nominal house prices rose so high in 2021 that a tiny in change underlying interest rates literally blew out monthly mortgage payment affordability......buyers have gone on strike as result, hence mortgage demand collapse.....sellers haven't got the memo yet and hold dear to 2021 comps......transactions & mortgage demand will restart once nominal price levels reset downwards and/or mortgage rates fall back.....or alternatively home sellers wait for a couple of years of nominal wage increases such that the price of the home has fallen in real terms & affordability is restored by that mechanism

[changegonnacome]

6 hours ago, Spekulatius said:

If you think in broad terms - 4% interest rates with 8% inflation is still very accommodative.

 

You should check out the same math when i pointed this out about 20 pages and 5 months ago....it was like negative -7% real rates.....folks have got so addicted to low rates, they cant even conceive of a world of a 6% yielding checking account........why.......well i guess a bunch of people are kind of long duration & invested in a bunch stuff when you do math that has a cap rate/FCF yield of 3-4%.......that is already but will look absolutely bonkers in a 5-6% checking account world.......and they'll look back and ask themselves what the hell was I thinking!

[Gregmal]

18 minutes ago, changegonnacome said:

 

Because nominal house prices rose so high in 2021 that a tiny in change underlying interest rates literally blew out monthly mortgage payment affordability......buyers have gone on strike as result, hence mortgage demand collapse.....sellers haven't got the memo yet and hold dear to 2021 comps......transactions & mortgage demand will restart once nominal price levels reset downwards and/or mortgage rates fall back.....or alternatively home sellers wait for a couple of years of nominal wage increases such that the price of the home has fallen in real terms & affordability is restored by that mechanism

What memo do they need to get? Most homeowners have at least one, some two, and many of the following  three things going for them.

 

1) equity

2) strong rental options

3) super low, fixed rate financing

 

 

 The Fed isn’t solving anything with housing, they’re making it worse. Wouldn’t the obvious answer just be the same one that’s solved every other housing shortage? Building more?

[Dinar]

23 minutes ago, changegonnacome said:

 

Because nominal house prices rose so high in 2021 that a tiny in change underlying interest rates literally blew out monthly mortgage payment affordability......buyers have gone on strike as result, hence mortgage demand collapse.....sellers haven't got the memo yet and hold dear to 2021 comps......transactions & mortgage demand will restart once nominal price levels reset downwards and/or mortgage rates fall back.....or alternatively home sellers wait for a couple of years of nominal wage increases such that the price of the home has fallen in real terms & affordability is restored by that mechanism

I agree with you that house prices rose very sharply in 2020 and 2021.  However, the change in mortgage rates from 3% to 6%, is not tiny.  Holding house price constant, the change in interest rates sent mortgage payment higher by 40%.  That's not tiny.  

[changegonnacome]

25 minutes ago, Dinar said:

I agree with you that house prices rose very sharply in 2020 and 2021.  However, the change in mortgage rates from 3% to 6%, is not tiny.  Holding house price constant, the change in interest rates sent mortgage payment higher by 40%.  That's not tiny.  

 

You mis-read my message - i said a tiny change in mortgage rates was all it took to blow out affordability i.e. buyers were already at the edge of affordabilty with 2.75% mortgage rates....the move to 3% blew them out....and 4%....and 5% etc etc. We are saying the same thing.

Edited September 21, 2022 by changegonnacome

[changegonnacome]

35 minutes ago, Gregmal said:

What memo do they need to get?

 

If you want to sell your house, I dunno , this calendar year some time, you are going to have significantly reduce the price to get the deal done cause your prospective purchaser hasn't changed....its still the same socio-economic bracket person and their household cash flows haven't changed much but the mortgage rate they can secure sure has....and to get that purchaser to buy your house your going to have to significantly reduce the nominal house price level down such that they qualify under bank debt service capacity models underwritten against a 6% mortgage.

 

That memo.

 

Principal and interest payment on a $500k house mortgaged for 30-years:

@ 2.65% it'd be $2,015 (i.e. Jan. 2021)
@ 3.11% it'd be $2,138 (i.e. Dec. 2021)
@ 6.42% it'd be $3,134 (i.e. today)

 

The way you fix the math above to get you back to $2k monthly mortgage payment.....is the seller cuts the asking price, by alot.......there is no mortgage demand because people arent dumb, nobody is signing up to a Q3 2022 mortgage against 2021 house prices!!!!....buyers are on strike, sellers pretending its just a blip.....and as I've stated before a few times in regard to my housing theory......the socio-economic profile of people who live in various houses/neighborhoods rarely changes.....but interest rates & nominal house prices do......but all in all monthly mortgage payments should consume perhaps ~35% of monthly disposable household income..........if a neighborhood is traditionally populated by X type of professionals....tell me the prevailing wage in that profession, income tax rates and mortgage rates....and I'll tell you the house price. Take the same equation and you can see why house prices have to give here if transaction levels are to be restored

Edited September 21, 2022 by changegonnacome