Where Does the Global Economy Go From Here?

[TwoCitiesCapital]

31 minutes ago, stahleyp said:

 

2008 and 2020 was not priced in because people underestimated the severity. However with 2020 markets were priced in very quickly.

 

Perhaps now people are underestimating the severity of rate hikes. I don't know.

 

You can only say they were underestimated in hindsight. I'd say right now everyone has underestimated the Fed so far which is why this sell off occurred in the first place. 

 

Whether that underestimation continues remains to be seen, but to say this is different because the severity has been correctly estimated can only be said in hindsight - seems crazy to say markets are getting it exactly right now when they got it wrong over the preceding 10 months. 

 

And I'm also gonna guess that the severity of the earnings contraction has yet to be priced in because analysts aren't yet reflecting a contraction in their estimates - just slower earnings growth

[Guest]

13 minutes ago, TwoCitiesCapital said:

 

You can only say they were underestimated in hindsight. I'd say right now everyone has underestimated the Fed so far which is why this sell off occurred in the first place. 

 

Whether that underestimation continues remains to be seen, but to say this is different because the severity has been correctly estimated can only be said in hindsight - seems crazy to say markets are getting it exactly right now when they got it wrong over the preceding 10 months. 

 

And I'm also gonna guess that the severity of the earnings contraction has yet to be priced in because analysts aren't yet reflecting a contraction in their estimates - just slower earnings growth

 

That's fair.

[bizaro86]

On 9/24/2022 at 5:38 AM, scorpioncapital said:

 

How do rental prices adjust downward in a recession or deflation? You seldom see it as prices have always galloped forward but does the landlord just one day say to the tenant your rent is now going DOWN? Or the tenant asks for a lower price cause they don't have enough money and threaten to walk and the landlord either takes it or risks to find someone else which they are not at all sure can pay the same price?  What is the protocol? Also do advertisements just start showing lower monthly rental figures over time for new rentals?

 

I own rentals in Calgary, where rents declined fairly significantly between roughly 2015-2020, mostly because of low oil prices hurting the local economy.

 

Generally tenants asked for lower rents on renewal - I'd lower it for good tenants to keep them. Turnover was higher and of course I'd advertise at a lower price as otherwise you couldn't get anyone. It's pretty organic - some people won't advertise at a lower price and their places sit empty until they get the message the market is sending them.

[Gregmal]

2 minutes ago, bizaro86 said:

 

I own rentals in Calgary, where rents declined fairly significantly between roughly 2015-2020, mostly because of low oil prices hurting the local economy.

 

Generally tenants asked for lower rents on renewal - I'd lower it for good tenants to keep them. Turnover was higher and of course I'd advertise at a lower price as otherwise you couldn't get anyone. It's pretty organic - some people won't advertise at a lower price and their places sit empty until they get the message the market is sending them.

You guys see the Fed guy recently lamenting how rents are still high lol? Well gee, you didn’t really think that whole “price normal people out of home buying” thing did you?

[TwoCitiesCapital]

6 minutes ago, Gregmal said:

You guys see the Fed guy recently lamenting how rents are still high lol? Well gee, you didn’t really think that whole “price normal people out of home buying” thing did you?

 

Crazy thing is that's it's pretty well known that rents lag prices by somewhere between 4-6 quarters. 

 

So it was pretty easy to forecast they would rise after home prices had risen 20+%.  And now that they appear to be plateauing, probably pretty easy to say that rents might be a little softer in 12-18 months as well - even if the Fed stops hiking rates during that time. 

Edited September 27, 2022 by TwoCitiesCapital

[Gregmal]

^exactly and that IMO is the real bear case driving markets right now. These guys are just not inspiring confidence and if they don’t stop hiking soon because they’re looking at the same backwards data that got them into this mess, ugly it will be.

[Viking]

1 hour ago, TwoCitiesCapital said:

 

You can only say they were underestimated in hindsight. I'd say right now everyone has underestimated the Fed so far which is why this sell off occurred in the first place. 

 

Whether that underestimation continues remains to be seen, but to say this is different because the severity has been correctly estimated can only be said in hindsight - seems crazy to say markets are getting it exactly right now when they got it wrong over the preceding 10 months. 

 

And I'm also gonna guess that the severity of the earnings contraction has yet to be priced in because analysts aren't yet reflecting a contraction in their estimates - just slower earnings growth

i don’t think the Fed knows what they are going to do. Their messaging has  completely flipped the past 18 months. And every meeting this year their messaging has changed in important ways. Just look at all the significant changes they just made in their forecasts. 
 

The Fed is at the Disney part of tightening financial conditions. It is VERY easy to be a hawk on the Fed right now. Wait until the economic pain gets turned up from the current mild - to medium - to hot. If inflation is still high… the Fed will be screwed. Do we get Burns or Volker? No idea. Because the Fed doesn’t even know right now. But based on past actions, i do not have a lot of confidence they will get it ‘just right’. 

Edited September 27, 2022 by Viking

[crs223]

“the fed will attempt to reduce CPI by raising rates”.  This is priced in, omniscient raccoon not needed for that one.

[patience_and_focus]

I am not sure if markets are predicting correctly by how much the rates will rise and for how long exactly. If we look at US treasury bond yields as of today, the 10 year yields (3.97) are lower than 2 year yields (4.30) suggesting that the prediction is for a ball park in early to mid 4 percent. Timewise looking at 3, 5 & 7 year yields, between 3-5 year mark from today the rates will either stabilize or start trending downward.

 

So yeah, "its priced in" by some aggregate (and incomprehensible) "formula" in the stock market. But that does not mean that the prediction and consequently the "price" of s&p 500 is right today. At any rate, unless we are buying s&p 500 index for example, this exercise of predicting an aggregate stock market bottom is of limited value for finding individual stock bargains (which of-course will be affected by interest rate, but is one of the many factors including hodling time).

 

The doldrums of the 1970s with high inflation lasted roughly 9 years (from peak to trough). Yield curve (10 year - 2 year) was inverted for many of those years, even though technically we were not in recession this whole decade. Just saying that it could continue for a while.

 

 

 

 

Edited September 27, 2022 by patience_and_focus

[crs223]

I don’t disagree with your numbers and the opportunity for a bad scenario to play out.  I thought we were screwed when I learned about the federal debt 20 years ago, and I’ve been waiting for the collapse ever since.

 

But: if we are going to profit from the market mispricing an event, I just cannot believe “rates will go higher” is the event.  Every macro person in the entire field is thinking about inflation/fed/rates 60+ hours per week for 6+ months.

 

Now if you had some intel on some obscure CDO, or imminent nuclear launch, or some novel asian virus…

[Guest]

I'm not overly concerned with inflation. I'm a simple guy but it certainly seems like it's slowing down.

 

As area that I am more concerned with is deflation. I do not think the market is pricing that in. 

[Gregmal]

Absolutely agree with both @stahleyp and @crs223. 

 

First, I'd discount "some" of the market action possibly. These sort of group trades and computer driven moves have become every other year events. Fundamentals be damned. Dont think even a smaller cohort can do stuff like this? A couple weeks ago I was reading an SEC investigation into manipulative short selling. Was expecting to see stuff like Kerrisdale posts about. These small caps with funky trading dynamics...nope. JPM, AMZN, META where securities involved. Short term, anything is possible. 

 

But larger picture, "rates going higher"(to 4/5/6) for like a few years doesnt change the long term business value much more than when everyone thought they were so clever abandoning stocks because COVID was going to bring earnings to 0 for a year. In that situation most of the detailed work showed that "maybe" a 10% correction should have occurred. So here, IDK, its been a cute trade, but acting like earnings are going to fall off a cliff and stay down forever, while the fed keeps raising rates forever, IDK, seems highly improbably. If we get 1 or 2 years of an earnings decline? OK, does that really warrant -50% top to bottom? In which case rates go back to 1-2% and I'm sure instead of the bear camp saying theres 200% upside they'll still be saying we've got much further to fall. 

 

One of the things I dont think many really address is just how far in advance the Fed told everyone they'd raise and IDK but 3-4% shouldn't shock anyone. If you're off and theyre at 6%, everyone still had plenty of time to prepare. So most of these companies(Im talking about quality, not bullshit companies) had world's of time to prepare for this. And most have. They've raised on attractive terms over the past 12 months. Hedged their rate exposure. Whether its Berkshire, Apple, Fairfax, or Stelco, Aimco, or FRP Holdings, everything I follow for the most part has seen management take actions to weather the storm. Same with the housing universe/REIT universe. Balance sheets are in better shape than they've ever been. Is there just going to be a unanimous behind the scene collusion by everyone to just abandon owning assets? Folks just need to get off the ledge and think. I'd own BRK shares on a non transferrable basis at todays close for 5 years, at least and be happy to do so. Same with pretty much everything else I own. At some point the obsession over whats coming next week while ignoring whats beyond that is crazy. 

 

 

[changegonnacome]

17 minutes ago, Gregmal said:

At some point the obsession over whats coming next week while ignoring whats beyond that is crazy. 

 

Totally agree - own now what you would own in 5/10/15 years time......this is an episode inside of a much bigger narrative called long term investing.....the prices you see today are offers to buy/sell.....not verdicts on underlying business value

[ERICOPOLY]

Well, a hurricane is indeed coming.  Aside from that joke, my own consumer behavior is projecting doom for the us economy.  The things that are souring my mood are the same things everyone is facing.  Higher prices everywhere and for nearly everything.

 

So I have actually added to my SPY puts because we're still at that point where pundits are saying "50% recession risk" or whatnot.  I'm thinking it's 100% but that's just me.  

 

Home equity is dropping.  Bond portfolios dropping.  Equity portfolios dropping.  Rents up.  Food up.  Energy up.  Fuck all every other cost is up.

 

And that won't bring on a recession?  Then nothing will.

 

 

 

 

 

[Viking]

Just now, changegonnacome said:

 

Totally agree - own now what you would own in 5/10/15 years time......this is an episode inside of a much bigger narrative called long term investing.....the prices you see today are offers to buy/sell.....not verdicts on underlying business value

Stocks (S&P500) is down about 25%. The 10 year US Treasury now yields about 4% = 20% about bear markets in bonds? The time to be really worried about stock and bond markets was back in January. Now if the global economy goes into recession in 2023 then financial market averages will likely continue to struggle. Lots of good values out there today (especially for investors with a longer term holding period).

[Guest]

9 minutes ago, ERICOPOLY said:

Well, a hurricane is indeed coming.  Aside from that joke, my own consumer behavior is projecting doom for the us economy.  The things that are souring my mood are the same things everyone is facing.  Higher prices everywhere and for nearly everything.

 

So I have actually added to my SPY puts because we're still at that point where pundits are saying "50% recession risk" or whatnot.  I'm thinking it's 100% but that's just me.  

 

Home equity is dropping.  Bond portfolios dropping.  Equity portfolios dropping.  Rents up.  Food up.  Energy up.  Fuck all every other cost is up.

 

And that won't bring on a recession?  Then nothing 

 

Eric, what percentage are you hedged?

[ERICOPOLY]

1 minute ago, stahleyp said:

 

Eric, what percentage are you hedged?

 

I'm not hedged in my Roth IRA.  

 

The puts are all in my margined taxable account. 

[changegonnacome]

11 minutes ago, Viking said:

The time to be really worried about stock and bond markets was back in January.

 

Dont confuse my comment on long term investing...about what I believe to be more short term pain to go here..........SPY earnings are going to get screwed....the BETA is gonna suck balls........i think we've had the 1s leg down which is discount rate driven......second leg is earnings deterioration.....if Fed holds its water and holds firm as inflation dips lower such thats its on a predictable path way to ~2%..... then all told we might be near the bottom in stocks by Q2-ish 2023.........I still expect a 'moment' between now and then that will feel for all intensive purposes like a traditional stock market panic

[Gregmal]

21 minutes ago, ERICOPOLY said:

Well, a hurricane is indeed coming.  Aside from that joke, my own consumer behavior is projecting doom for the us economy.  The things that are souring my mood are the same things everyone is facing.  Higher prices everywhere and for nearly everything.

 

So I have actually added to my SPY puts because we're still at that point where pundits are saying "50% recession risk" or whatnot.  I'm thinking it's 100% but that's just me.  

 

Home equity is dropping.  Bond portfolios dropping.  Equity portfolios dropping.  Rents up.  Food up.  Energy up.  Fuck all every other cost is up.

 

And that won't bring on a recession?  Then nothing will.

 

 

 

 

 

See this is one of the things. Perhaps we are already in a recession? I mean it’s amazed me whether COVID or several other things how folks look at what their eyes are telling them but succumb to what they’re being told and go with it. We’ve definitely hit a recession in terms of the standard definition nevertheless the current media and administration tell us otherwise. Look at stock prices of many different companies. From Berkshire to FedEx to REITs and even something like MSGE….it’s not like we are 10-20% off highs; individual stuff in many cases is -30-50% already. Might that be more indicative of what’s already occurred?

[Parsad]

32 minutes ago, ERICOPOLY said:

Well, a hurricane is indeed coming.  Aside from that joke, my own consumer behavior is projecting doom for the us economy.  The things that are souring my mood are the same things everyone is facing.  Higher prices everywhere and for nearly everything.

 

So I have actually added to my SPY puts because we're still at that point where pundits are saying "50% recession risk" or whatnot.  I'm thinking it's 100% but that's just me.  

 

Home equity is dropping.  Bond portfolios dropping.  Equity portfolios dropping.  Rents up.  Food up.  Energy up.  Fuck all every other cost is up.

 

And that won't bring on a recession?  Then nothing will.

 

 

 

 

 

 

The United States is an import country...not an export country.  You will get a recession...a global recession...but it will be much more painful for the rest of the world than the U.S.  The U.S. can now import at lower cost with a stronger dollar...inflation has an impact, but it will be less painful here...although the papers will cry bloody murder!  

 

Yes, real asset prices are dropping...that's a good thing for those that were sitting on cash.  There was also a lot of cash sitting on the sides held by institutions and investors.  That will now be put to use as asset prices become more enticing.  This is the end of a cheap credit cycle...one of the cheapest in global history.  The excesses are now being wrung out of the system to make room for a much healthier system for the long-run.  

 

The patient is now on a treadmill again...steak and lobster is off the menu!  Cheers!

[Parsad]

33 minutes ago, Viking said:

Stocks (S&P500) is down about 25%. The 10 year US Treasury now yields about 4% = 20% about bear markets in bonds? The time to be really worried about stock and bond markets was back in January. Now if the global economy goes into recession in 2023 then financial market averages will likely continue to struggle. Lots of good values out there today (especially for investors with a longer term holding period).

 

+1!  Cheers!

[ERICOPOLY]

Today I was reading that we just had our 2nd largest inflow from retail investors of 2022.  That's not capitulation.

[Parsad]

14 minutes ago, changegonnacome said:

 

Dont confuse my comment on long term investing...about what I believe to be more short term pain to go here..........SPY earnings are going to get screwed....the BETA is gonna suck balls........i think we've had the 1s leg down which is discount rate driven......second leg is earnings deterioration.....if Fed holds its water and holds firm as inflation dips lower such thats its on a predictable path way to ~2%..... then all told we might be near the bottom in stocks by Q2-ish 2023.........I still expect a 'moment' between now and then that will feel for all intensive purposes like a traditional stock market panic

 

There's probably more pain to come.  Interest rate hikes have a delayed effect, so we don't know how much the economy is slowing down in real time.  We also get food inflationary pressure every September/October.

But overall, I would say about 60-70% of the pain has been inflicted.  And the market may tread sideways for some time until inflation is tempered.  

 

I don't think we will see a panic like 2008/2009...but a more prolonged, slow downtrend like 2000-2002.  At that time, tech stocks as well as the broad market were way overpriced.  While the market was overpriced this time around, the overall P/E was inflated by hugely overpriced sectors (new tech, meme stocks, crypto, SPACs, etc).  Those stocks have already suffered a rapid 60-90% decline...the overall market is now at fair value or better.  If it goes down another 15% or so, it will be cheap with where rates are today.  I also expect some easing in rates later next year as the global economy feels the pain!

 

Cheers!

[Parsad]

3 minutes ago, ERICOPOLY said:

Today I was reading that we just had our 2nd largest inflow from retail investors of 2022.  That's not capitulation.

 

Investors see opportunity.  I don't think you'll see a hands up capitulation like we saw in February 2009.  We've seen very few days where markets have dropped 7% or more in this correction (I believe only one), unlike 2008/2009...I think we saw at least 6 days of a 7% correction or more.  This is a slow grinding correction like 2000-2002.  You'll probably have another leg down in the next quarter.  Cheers!

[ERICOPOLY]

13 minutes ago, Parsad said:

 

The United States is an import country...not an export country.  You will get a recession...a global recession...but it will be much more painful for the rest of the world than the U.S.  The U.S. can now import at lower cost with a stronger dollar...inflation has an impact, but it will be less painful here...although the papers will cry bloody murder!  

 

Yes, real asset prices are dropping...that's a good thing for those that were sitting on cash.  There was also a lot of cash sitting on the sides held by institutions and investors.  That will now be put to use as asset prices become more enticing.  This is the end of a cheap credit cycle...one of the cheapest in global history.  The excesses are now being wrung out of the system to make room for a much healthier system for the long-run.  

 

The patient is now on a treadmill again...steak and lobster is off the menu!  Cheers!

 

Costco food court is on the menu again.

 

I agree that the US is in the better position.  I was wondering this afternoon what will happen in all the other economies where the consumers will be reset into higher mortgage rates.  This won't hit the US where most people have 30 yr fixed rates.  But everywhere else...