Where Does the Global Economy Go From Here?

[changegonnacome]

8 minutes ago, Parsad said:

Interest rate hikes have a delayed effect, so we don't know how much the economy is slowing down in real time.

 

DXY strength however is slowing SPY earnings right now......I expect a chorus of strong dollar/FX headwinds talk on Q3 earnings calls to explain earnings misses/revisions.....then I expect Q4/Q1 2023 earnings call to be full of weakening consumer/OpEx inflation & recession narrative to explain YoY earnings declines.....it will be miracle if SPY is meaningfully above 3000 in early 2023 IMO

 

11 minutes ago, Parsad said:

I also expect some easing in rates later next year as the global economy feels the pain!

 

Yes I think its possible but really back half 2023....but more likely Q4 - & only if the Fed stays aggressive here in the face of the inevitable backlash which hasn't even really begun yet given unemployment hasn't really budged up yet......no uptick in unemployment = no progress = no rate cuts

[Parsad]

20 minutes ago, ERICOPOLY said:

 

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...

 

The global housing correction will be interesting to watch.  You are right...the U.S. housing market will get hit, but will probably be better off than the rest of the world.  U.S. banks and mortgage lenders were starting to get foolish, but not even close to the stupid things they were doing in 2007.  U.S. banks are also in a much better position, have excess capital to absorb losses and will be watched by regulators that they are maintaining excess capital.  Cheers!

[ERICOPOLY]

Oh well, if the US is the best positioned, then the chance of a US recession is the same as the chance of a global recession.

 

 

[changegonnacome]

6 minutes ago, ERICOPOLY said:

Oh well, if the US is the best positioned, then the chance of a US recession is the same as the chance of a global recession.

 

US economy is best positioned, yes for sure.........the US stock market not so much.......just given (1) its relative valuation starting point vs. Europe/Asia i.e. expensive (2) SPY/QQQ's & significance of global economy to revenues & more importantly earnings growth. Not a good mix.

Edited September 28, 2022 by changegonnacome

[ERICOPOLY]

46 minutes ago, Parsad said:

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!  

 

So if you are the Fed, does it make your job easier to see a stronger dollar?  Or does it necessitate ever higher rates to offset this boon to consumer purchasing power?

[ERICOPOLY]

1 minute ago, changegonnacome said:

 

US economy is best positioned, yes for sure.........the US stock market not so much.......just given (1) its relative valuation starting point vs. Europe/Asia i.e. expensive (2) SPY/QQQ's & significance of global economy to revenues & more importantly earnings growth. Not a good mix.

 

Yes, that's so true.  Exports are going to suck tremendously.

[Parsad]

11 minutes ago, changegonnacome said:

 

DXY strength however is slowing SPY earnings right now......I expect a chorus of strong dollar/FX headwinds talk on Q3 earnings calls to explain earnings misses/revisions.....then I expect Q4/Q1 2023 earnings call to be full of weakening consumer/OpEx inflation & recession narrative to explain YoY earnings declines.....it will be miracle if SPY is meaningfully above 3000 in early 2023 IMO

 

 

Markets tend to correct well ahead of the earnings turn down...so much of that is baked in already.  Will there be further pain...most likely.  To the depths of 2002 or 2009?  I don't think nearly as bad.  The reason being that much of the excess overvaluation has corrected. 

 

We also aren't facing institutional failures like in 2008/2009.  U.S. mid-cap/large-cap corporations are probably the healthiest they've been heading into a downturn in history.  So the primary adjustment to earnings and valuation is interest rate and inflationary pressure...not poorly operating or financially unsound companies.

 

I was 60% cash in November 2021...now I'm 90% invested in quality companies that I find are well undervalued.  Cheers!  

[Parsad]

9 minutes ago, changegonnacome said:

 

US economy is best positioned, yes for sure.........the US stock market not so much.......just given (1) its relative valuation starting point vs. Europe/Asia i.e. expensive (2) SPY/QQQ's & significance of global economy to revenues & more importantly earnings growth. Not a good mix.

 

Europe's valuation is lower because their pain is going to be significant.  I would not be surprised to see 2-3 more troubled countries in Europe like the PIGS we saw in the past that could jeopardize the Euro.  I would imagine China has finally seen its day of reckoning in the real estate sector...Japan will see an exodus of capital or rising rates that could jeopardize its future...and Russia still creating issues.  Might see a couple of failures in South America as well.  The other side of this is that global economic crisis leads to extreme political views...either right or left!  As if things weren't shitty enough!    Cheers!

[ERICOPOLY]

4 minutes ago, Parsad said:

 

Markets tend to correct well ahead of the earnings turn down...so much of that is baked in already.  Will there be further pain...most likely.  To the depths of 2002 or 2009?  I don't think nearly as bad.  The reason being that much of the excess overvaluation has corrected. 

 

We also aren't facing institutional failures like in 2008/2009.  U.S. mid-cap/large-cap corporations are probably the healthiest they've been heading into a downturn in history.  So the primary adjustment to earnings and valuation is interest rate and inflationary pressure...not poorly operating or financially unsound companies.

 

I was 60% cash in November 2021...now I'm 90% invested in quality companies that I find are well undervalued.  Cheers!  

 

In 2002, the consumer had losses in equities, but I think bonds were offsetting some of those losses and real estate was soaring throughout the country. 

 

Today, the entire sky is falling with nothing doing well to offset it.

[Parsad]

14 minutes ago, ERICOPOLY said:

 

So if you are the Fed, does it make your job easier to see a stronger dollar?  Or does it necessitate ever higher rates to offset this boon to consumer purchasing power?

 

Theoretically the higher rates have forced a reduction in employment demand in some sectors.  It also should have reduced consumption to a certain level.  But we've rarely seen governments get it just right and they've often overshot...that's the risk.  That they push employers too fast in cutting staff or consumer consumption completely falls off.  A strong U.S. dollar has generally bode well for the U.S. economy.  Cheers!

[ERICOPOLY]

I did have some success on the purchasing front:  I got a box of New Zealand lamb from Costco priced at $9.63 per pound

https://www.costco.com/new-zealand-spring-lamb-grass-fed-lamb-premium-selection-box%2c-9.63-lbs.product.100784602.html

 

I like lamb better than steak anyway.  So go stick it up your chaps ranch boys!

 

It's interesting that Australian lamb is going for $40 a pound:

https://www.costco.com/rastelli-grass-fed-frenched-lamb-racks%2c-24-oz%2c-6-pack%2c-9-lbs.product.100652542.html

 

If you take that price of $40 a pound and apply it to the 3 pounds of lamb rack that's included in the box that I bought, then I got the leg and the chops for free.

 

But I get it... that Australian rack is meatier rack and that's where the premium went presumably.  However, I wasn't sold.

Edited September 28, 2022 by ERICOPOLY

[Parsad]

6 minutes ago, ERICOPOLY said:

 

In 2002, the consumer had losses in equities, but I think bonds were offsetting some of those losses and real estate was soaring throughout the country. 

 

Today, the entire sky is falling with nothing doing well to offset it.

 

Yes, in the short term bonds have collapsed, but that's now made for a great investment opportunity, not only for small investors, but institutions that were craving more interest income.  Someone like Fairfax or a senior citizen was getting 1% if they were lucky in January...now you can easily get 3-4%...even 5% interest income.  Corporate and junk bond yields also have to rise, so investors will be getting even more interest income going forward.  Long-term yield from the stock market has improved with lower valuations...dividend payouts are higher.  Better opportunities than just holding cash.  Cheers!

[Parsad]

10 minutes ago, ERICOPOLY said:

I did have some success on the purchasing front:  I got a box of New Zealand lamb from Costco priced at $9.63 per pound

https://www.costco.com/new-zealand-spring-lamb-grass-fed-lamb-premium-selection-box%2c-9.63-lbs.product.100784602.html

 

I like lamb better than steak anyway.  So go stick it up your chaps ranch boys!

 

It's interesting that Australian lamb is going for $40 a pound:

https://www.costco.com/rastelli-grass-fed-frenched-lamb-racks%2c-24-oz%2c-6-pack%2c-9-lbs.product.100652542.html

 

If you take that price of $40 a pound and apply it to the 3 pounds of lamb rack that's included in the box that I bought, then I got the leg and the chops for free.

 

But I get it... that Australian rack is meatier rack and that's where the premium went presumably.  However, I wasn't sold.

 

Those frenched racks of lamb tied together would make a beautiful crown roast at Christmas!  Especially if you are tired of turkey every year.  Cheers!

[ERICOPOLY]

49 minutes ago, Parsad said:

 

Yes, in the short term bonds have collapsed, but that's now made for a great investment opportunity, not only for small investors, but institutions that were craving more interest income.  

 

In the meantime, families are gut punched by the mark-to-market losses and cutting back.  Reverse wealth effect.  They will cut back on meals out, etc...  They are thinking less about their higher earnings yields, and thinking more about the $20k or $50k or $200k that they just 'lost'.  They feel less confident and want to eat Costco food court instead of $14.00 at Burger King for the double bacon stacker king meal large size.

 

When did Burger King become a $14 meal?  I mean, it's crazy.  

 

 

[ERICOPOLY]

57 minutes ago, Parsad said:

 

Those frenched racks of lamb tied together would make a beautiful crown roast at Christmas!  Especially if you are tired of turkey every year.  Cheers!

 

That's what we're having at Christmas this year!  Your idea has me sold.

[Gregmal]

5 minutes ago, ERICOPOLY said:

 

In the meantime, families are gut punched by the mark-to-market losses and cutting back.  Reverse wealth effect.  They will cut back on meals out, etc...  They are thinking less about their higher earnings yields, and thinking more about the $20k or $50k or $200k that they just 'lost'.  They feel less confident and want to eat Costco food court instead of $14.00 at Burger King for the double bacon stacker king meal large size.

 

When did Burger King become a $14 meal?  I mean, it's crazy.  

 

 

Considering most middle class folks rely on things like this, market products, many out of their control, such as 401k nonsense where it s "pick a managed product"....this is going to be a real thing. Even upper middle class....how many are in total junk like private yield pig CRE products, OZ funds, and other alternatives that are hugely levered and misaligned incentive wise? At some point this reverberates bigly, elsewhere. We keep talking about things going up, but many of those are still choices with alternatives. You dont need to eat Bobby Flay or even Burger King burgers....Costco sells em for like 80c per. Shop-rite its $5 a pound. But that managed product they've been forced into for 20 years now getting a 30% haircut because the $14 Burger King is deemed unacceptable? At some point there will be widespread, warranted anger because again, the system is showing how rigged it is. If $14 Burgers cause a recession, so be it. Deliberately causing one, which I won't go as far as to say thats what the Fed is doing, but theyre getting close, is abominable. 

[Gregmal]

Inflation duckers 

[ERICOPOLY]

25 minutes ago, Gregmal said:

 If $14 Burgers cause a recession, so be it. Deliberately causing one, which I won't go as far as to say thats what the Fed is doing, but theyre getting close, is abominable. 

 

I really don't know what their options are.  If they don't cause a recession then they're left with rising wages in a tight labor market, and then there is the wage price spiral to worry about.

[Gregmal]

1 minute ago, ERICOPOLY said:

 

I really don't know what their options are.  If they don't cause a recession then they're left with rising wages in a tight labor market, and then there is the wage price spiral to worry about.

Raise, chill, let the effects take place? Talk tough in between? 
 

I’m kind of in the camp of helping when it’s warranted and then acting as necessary but with caution. Actively being the aggressor will potentially lead to massive civil unrest. Let people do it to themselves.

[Gregmal]

Like give ‘em the stimulus checks when things are tough and if they blow it or chose not to work, cool. Giving away $10,000 and then taking one’s job or ability to pay rent is a little more nefarious. 

[Parsad]

23 minutes ago, ERICOPOLY said:

 

I really don't know what their options are.  If they don't cause a recession then they're left with rising wages in a tight labor market, and then there is the wage price spiral to worry about.

 

You know we worry too much about these things in the short-term, but they really mean little over the long-run.  I'm 53 and this is probably the 9th recession I've experienced in my lifetime.  And there have been some doozies...1973-1975; 1980-1981; 1990-1991; 2008-2009; 2020.  

 

If you are overleveraged, carrying variable rate debt, have job insecurity, no savings...yeah you are fucked!  If you are like probably most people on this message board...you tighten the belt a little, fret about the volatility of your investments and discuss it incessantly on here! 

 

But at the end of the day, you will still be in the top 5% of income earners and wealth!  So that second SUV or Porsche will have to wait.  You'll shop at Costco and Target instead of Whole Foods.  The villa in Tuscany will be a beautiful cottage in Maine.  You will have to fly premium economy instead of business.  Your children won't get to upgrade from Apple iPhone 13 to Apple iPhone 14 till next year.  Christmas will be a one week ski trip instead of two!  I mean these are the problems people on here will be facing.

 

The real problem is government services may be cut back with high deficits and debt.  Wait times for services will be longer.  More people will need the help of food banks.  More kids will be hungry when they go to school...breaks my fucking heart thinking about that!  More homeless, less help for those that need assistance.  Higher taxes including the middle class.  More class warfare.  The usual negative stories in the media and partisan politics!

 

But at the end of the day, the recession will come and go.  People will again overleverage themselves in the next cycle...live paycheck to paycheck...overindulge themselves...etc.  That's just life!  Cheers!

[Paarslaars]

1 hour ago, Parsad said:

You will have to fly premium economy instead of business. 

 

That sounds horrifying 

[Spekulatius]

The USD is quite something and is quite a deflationary force, if you live in the US (or have assets denominated in USD) going forward. look for example at the Price of VISA stock, one time quoted in Euro (German stock exchange) and one time quoted in the US (in USD - blue line). Looks like a nothingburger in Euros and a disaster in USD. Visa does ~50% of their revenues in non-US currencies for reference.

 

Same with some manufacturing. The company I work for has companies and assets in Europe (mostly Germany) and the US (where I work) and there some overlap to what we are doing. Well their cost structure just went down almost 20% by means of the exchange rate. Now it is true that energy costs went up, but this is light manufacturing , so energy is maybe a few percent of the BOM. They still are way cheaper now than they were 12 month ago.

 

I think some people that talk about near- shoring are forgetting that it does not work from cost POV with the exchange rate. maybe it works for some energy intensive goods like basic chemicals, but light manufacturing has just gotten one hell of competitive boost in Europe, if they work in export business in the dollar space. Besides that, we don’t have the labor pool anyways in the US.

 

I think the exchange rate angle is underestimated, because the average person in the US doesn’t tend to deal much with them. I think however that soon, a few EM‘s start to blow a gasket (Turkey, Pakistan etc) and that will lead to demand destruction for commodities (which are quoted in USD). I also think that there is a strong possibility that China needs to drop the USD- Yuan peg and let the Yuan slide because they might have trouble keeping their currency tied to the USD, because their economy is weak and they export anlogt into other EM‘s or Europe with weaker currencies.

 

For this reason, I don’t think interest rates in the US may not rise that much. They may have to rise more in Europe but that will only happen after the winter. GBP looks screwed, they are getting hit from multiples angles and @SharperDingaan house in London has lost and will lose a lot of value in USD (trigger alert).

 

Edited September 28, 2022 by Spekulatius

[mattee2264]

Hard to see the USD strength fading. The US is less affected by the Ukraine war, its economy is in better shape generally, it is seen as a safe haven, and it might be able to increase energy exports. But it does help to bring down inflation and I suspect that the Fed will be the first to pause/pivot and that will cause the dollar to weaken probably sometime next year. 

 

I think the Fed is concerned about credibility so it will tighten more and for longer than it would otherwise have to. Asset prices will continue to be collateral damage. But really all that has happened so far is we have given up the 2021 gains and worst case scenario we may give up some of the 2019 gains but is that such a big deal in the context of such a long and impressive bull market especially if it means that valuations are reasonable again and housing is more affordable? 

 

 

[ERICOPOLY]

Wow it must be exciting to hold DB or BCS.