Where Does the Global Economy Go From Here?

[SharperDingaan]

15 hours ago, crs223 said:

what percentage of residential mkt cap is on an adjustable rate mortgage?  I doubt it’s that much.

 

Also: to be fair, need to also include how much is saved by not paying rent.

 

Just to throw out some current rates, from one of the Canadian Sched-A banks.

https://www.td.com/ca/en/personal-banking/products/mortgages/mortgage-rates/

 

The current 5-yr closed fixed rate is 4.19%, the 5-yr closed variable rate is 2.70%. The difference is 149bp, and almost exactly the expected increase in interest rates over the next 2-3 months. If you chose to 'hedge' tomorrow, by switching from a variable to fixed rate mortgage, that 150bp difference on a 720K mortgage (10% DP) is $10,800/yr, or $900/month  This $900-1000 number keeps coming up, and as most people couldn't make their offer without variable rate financing ....    there is a lot more of this than you think.

 

Assume 3% commission/legal/land transfer costs to buy/sell a house. You are panicking, and immediately want out, 'cause if the proceeds are < the mortgage - you're still on the hook for the difference (recourse lending in Canada). You bought at 800K, and sold at 720K, which wiped out your 80K DP. However ..... you're still in the hole that 3% exit cost, or 21.6K (0.03x720K). 

 

This is the incremental housing supply that rapidly cools the market, and improves the economy. The bulk of these sales being the airBnB/mostly empty houses, going to families who will actually live in them full time as principal residences. That mostly empty house ?? What do you think your cottage in the country is - when you're only there maybe 2-3 months/yr.

 

SD

 

Edited April 24, 2022 by SharperDingaan

[crs223]

29 minutes ago, SharperDingaan said:

people couldn't make their offer without variable rate financing       

…

sales being the airBnB/mostly empty houses

My “FOMO coworkers” just bought — they will only buy with a fixed rate and they bought specifically due to FRM interest rate fears.  Although I see your point… stretchers who went to ARMs will be in trouble.  I’ve just never met one.  (In 2005 my coworkers were buying with ARMs).

 

I see empty homes too.  Across the street is a vacant recent purchase with a stalled-for-six-months rental being added above the garage.  Two coworkers who bought 6 weeks ago each have an empty house.

[Guest]

On 4/8/2022 at 1:08 PM, wabuffo said:

Also, when you say it (the treasury) first creates reserves I'm assuming this is the act of manifesting money, right? Is converting reserves to currency or treasury securities part of ensuring the Treasury's account doesn't have a negative balance?

 

The best way to visualize all of this is with an accounting ledger approach to all of these transactions.  The blue side is the consolidated Fed govt (Treasury + Federal Reserve).  The green side represents the private sector. 

 

The first payment flow is the US Treasury making a payment (i.e., issuing stimmie checks).  The US Tsy gives the Fed a payment order and the Fed moves reserves (settlement balances) from the Tsy's Fed acct to JPM's Fed acct.  This creates both a reserve asset and a deposit liability for JPM.  The non-bank private sector gets a new financial asset in its deposit account (with no offsetting liability).   That's why only US Treasury deficit spending creates new financial assets for the private sector.

 

In the second payment flow, the US Treasury issues a bond.  This removes the reserves and deposit from JPM and moves reserves at the Fed from JPM to the Treasury.   Notice that this transaction does not change the net asset position of the private sector.  It just substitutes one form of govt liability (reserve) for another (T-Bond).

 

The last payment flow is the Fed buying a Treasury security.  Of course it can also work the other way.  But the key point is that the Fed buying (or selling) Treasuries does not add (or subtract) net financial assets from the private sector.  It just changes the form of the asset.

 

 

Hope this helps.

 

Bill

 

 

Bill,

 

This is a little off topic but why do you think Japan has struggled so much with deflation over the past couple decades? How likely is it, in your opinion of course, do you think the US could experience something like that?

 

Just curious to know your thoughts on why things like this happen:

 

 

[Viking]

The Feds well communicated goal to slow inflation is is to tighten financial conditions. One component of financial conditions is the stock market via the wealth effect. Your stock portfolio goes up 50% you ARE MORE WEALTHY. And you spend more than you otherwise would have. Stock averages (S&P500) were up +100% from their pandemic lows  and up 40% from BEFORE THE PANDEMIC - TO THE START OF THIS YEAR. That was an absolute shitload of wealth creation. 
 

So the Fed wants stocks to fall. Guess what? It looks like the Fed is getting its wish. The S&P500 is down 12% from its highs. Not terrible… but getting there. 
 

This could be the key week. Apple, Microsoft, Alphabet, Amazon and Tesla are the key stocks. Looks like Tesla may have cracked today (despite reporting earnings that beat expectations). The other 4 companies report tonight and Thursday… if we get any negative surprises look out below. But even good might not matter. I am starting to wonder if FAANG is going to experience the same fate that the Nifty 50 did back in the early 1970’s… crazy times. 

[Gregmal]

Waste Management is the new FANG LOL

[fareastwarriors]

20 minutes ago, Gregmal said:

Waste Management is the new FANG LOL

 

Trash is cash.

 

[Castanza]

1 hour ago, Viking said:

The Feds well communicated goal to slow inflation is is to tighten financial conditions. One component of financial conditions is the stock market via the wealth effect. Your stock portfolio goes up 50% you ARE MORE WEALTHY. And you spend more than you otherwise would have. Stock averages (S&P500) were up +100% from their pandemic lows  and up 40% from BEFORE THE PANDEMIC - TO THE START OF THIS YEAR. That was an absolute shitload of wealth creation. 
 

So the Fed wants stocks to fall. Guess what? It looks like the Fed is getting its wish. The S&P500 is down 12% from its highs. Not terrible… but getting there. 
 

This could be the key week. Apple, Microsoft, Alphabet, Amazon and Tesla are the key stocks. Looks like Tesla may have cracked today (despite reporting earnings that beat expectations). The other 4 companies report tonight and Thursday… if we get any negative surprises look out below. But even good might not matter. I am starting to wonder if FAANG is going to experience the same fate that the Nifty 50 did back in the early 1970’s… crazy times. 

Bring it, I finally have a reasonable cash amount and no margin so I’m ready to lever up on Brk.b at 162 again 

[Spekulatius]

1 hour ago, Gregmal said:

Waste Management is the new FANG LOL

There is a serious bubble going on in stocks that are perceived to be safe in the current environment. Examples: COST, KO, WM etc.

[Viking]

9 minutes ago, Spekulatius said:

There is a serious bubble going on in stocks that are perceived to be safe in the current environment. Examples: COST, KO, WM etc.

i would add Apple, Microsoft, Alphabet and Amazon. Just like the Nifty 50. Best companies. Super bright prospects. Were insanely valued. Still super high valuation. Works for many years… until it doesn’t. 

[Gregmal]

Just posing a theoretical question in regard to the FANGs or stuff like WM/KO/COST. 

 

If you dont own them, and have missed the majority of their runs, what credibility does the analysis have? Is there a reason to believe this time is different than the conclusion derived from the past however longs data points that led to the decision to not be invested in those names?

[Dinar]

26 minutes ago, Viking said:

i would add Apple, Microsoft, Alphabet and Amazon. Just like the Nifty 50. Best companies. Super bright prospects. Were insanely valued. Still super high valuation. Works for many years… until it doesn’t. 

Why do you think that Microsoft and Alphabet are insanely valued?  What in your opinion is fair?  Thank you in advance.

[thepupil]

17 minutes ago, Gregmal said:

Just posing a theoretical question in regard to the FANGs or stuff like WM/KO/COST. 

 

If you dont own them, and have missed the majority of their runs, what credibility does the analysis have? Is there a reason to believe this time is different than the conclusion derived from the past however longs data points that led to the decision to not be invested in those names?

this is a bizarre sentiment. if one doesn't own something, one cannot opine on something. 

 

that said, I think bubble is a strong word

 

COST

Over the last decade COST has gone from 20x to 40x. one would therefore expect fwd returns, ceteris paribus to be lower the next 10 than the prior 10. But earnings a 2.5% earnings yield that grows at well above inflation probably preserves and grows one's purchasing power...though at this price you certainly have risk of a big drawdown in a de-rating (20 yr average PE of 27x and low of 14x). 

 

KO

KO has rerated to ~27x average PE of 22x...doesn't seem crazy to me. am i a buyer, no? might it derate, yes. is it a "bubble"? not unless there's something amiss w/ the earnings such that they're drastically overearnings or something

 

WM

32x, average of 20x. again same shit. a little heated, yes? vulnerable to de-rating. sure, but it's a TIP w/ greater real yield than one...

 

Would i expect the three to outperform the SPX over next 5,10 years. Probably not. But 30% higher multiple than expected because of flight to actual quality /safety is not a bubble IMO

 

 

[Gregmal]

No what I meant was that if past analysis, which almost always was basically some iteration of “too expensive” has been repeatedly wrong, what makes one confident that this time their take, the same take that has been wrong, is now right. 

[thepupil]

3 minutes ago, Gregmal said:

No what I meant was that if past analysis, which almost always was basically some iteration of “too expensive” has been repeatedly wrong, what makes one confident that this time their take, the same take that has been wrong, is now right. 

 

Well one could compare relative and absolute valuations of say 5 and 10 years ago and take the view that the big premium now is potentially not deserved. 

 

but in the end arguing over valuation is one giant exercise in the below....

 

Quote

On his sixteenth birthday the boy gets a horse as a present. All of the people in the village say, “Oh, how wonderful!”

The Zen master says, “We’ll see.”

One day, the boy is riding and gets thrown off the horse and hurts his leg. He’s no longer able to walk, so all of the villagers say, “How terrible!”

The Zen master says, “We’ll see.”

Some time passes and the village goes to war. All of the other young men get sent off to fight, but this boy can’t fight because his leg is messed up. All of the villagers say, “How wonderful!”

The Zen master says, “We’ll see.”

 

[Viking]

1 hour ago, Dinar said:

Why do you think that Microsoft and Alphabet are insanely valued?  What in your opinion is fair?  Thank you in advance.

My comment was they were insanely valued. Now ‘just’ super high. I was talking about the 4 collectively (and forgot to included Tesla). Looking at Google finance, Microsoft currently has a PE of 29. Stock was up 500% in past 5 years (at its peak). Stock is still up 400% after the recent sell off. Yes, earnings is up significantly.
 

But the biggest driver of the stock prices of all the FAANG (+ Tesla) stocks the past 5 years was multiple expansion. Especially Apple. This is sentiment. And in bear markets, sentiment can quickly turn the other way. And that is what we are seeing. 
 

FYI, if Alphabet opens lower tomorrow (it is down 6% after hours) i will be buying. Facebook as well (although i will be holding my nose with that stock). Apple and Microsoft i am going to sit tight a little longer. And Tesla i would not touch with a 10 foot pole

Edited April 26, 2022 by Viking

[Dinar]

32 minutes ago, Viking said:

My comment was they were insanely valued. Now ‘just’ super high. I was talking about the 4 collectively (and forgot to included Tesla). Looking at Google finance, Microsoft currently has a PE of 29. Stock was up 500% in past 5 years (at its peak). Stock is still up 400% after the recent sell off. Yes, earnings is up significantly.
 

But the biggest driver of the stock prices of all the FAANG (+ Tesla) stocks the past 5 years was multiple expansion. Especially Apple. This is sentiment. And in bear markets, sentiment can quickly turn the other way. And that is what we are seeing. 
 

FYI, if Alphabet opens lower tomorrow (it is down 6% after hours) i will be buying. Facebook as well (although i will be holding my nose with that stock). Apple and Microsoft i am going to sit tight a little longer. And Tesla i would not touch with a 10 foot pole

Thank you very much.  By the way, I think MSFT is at 24.5x P/E.  ($270 - $8 net cash & investment)/ 10.7 (FY 2023, starts July 1st consensus estimate.)

[Gregmal]

If funny to think that everything the Fed is doing is basically to spite the poor and middle class. Whelp, can't have EVERYONE living so well. Hmmm, lets try to price the marginal homebuyer out of the market. Hmm, lets give banks an excuse to raise their rates. 25% on credit cards wasn't enough. Overpaying for cars isnt bad enough, lets boost the car loan rate.

 

The real problem is still the politicians. Focus on fixing the supply chain. Instead, Murphy in NJ just banned using bags at retail and grocery stores! Nice complement to the straw ban. Why not every state and fed agency taking their pound of flesh via energy taxes drop those? Nope. 10% of my cell phone bill is taxes and surcharges. But at the federal level theyre more concerned with Ukraine posturing and keeping Elon from letting Trump have a Twitter account than solving problems for American citizens. Its not hard to see why the lower and middle classes think the system is rigged. 

Edited April 27, 2022 by Gregmal

[Spekulatius]

5 hours ago, Gregmal said:

Just posing a theoretical question in regard to the FANGs or stuff like WM/KO/COST. 

 

If you dont own them, and have missed the majority of their runs, what credibility does the analysis have? Is there a reason to believe this time is different than the conclusion derived from the past however longs data points that led to the decision to not be invested in those names?

FWIW, i was a buyer of  COST around $315. There is no difference between tech stocks having rich multiples and consumer goods stocks having rich multiples - eventually the multiples likely will mean revert. For tech stocks, this has happened, but I think there were monkey flows into safe heaven consumer food stocks inflating their multiples, Stocks with inflated multiples are never save, eve. I’d fundamentals are good.

[Gregmal]

I’m not disagreeing that they’re optically expensive. But personally I don’t know why any bond in the history of earth has had less than a 10-15% coupon. I couldn’t fathom buying one below that. Even government guaranteed stuff; 5%? Unless I can borrow below that and arb it risk free then why would I waste my time? I’ve thought similar about office REITs. 5 cap? Huh? For secular decliners? Not attractive at all. But people, lots of em, pay that price. So while I’ve always been uncomfortable going out there and buying stuff like COST and WM, V at times too….if you can make the case for other asset classes then why can’t you make the case for the best companies in the world? Especially one as dynamic as COST or WM? Id rather own those at 30-40x than a bond with 2+ years duration at 5%. At least with the equity you own something. Bonds are just a claim to a fixed check and the assumption that you get your principle back. If not you have to become an active business owner….yawn. 

[Gregmal]

These businesses can do whatever that want and have limited to no real competition. Every comp I’ve seen to COST is a misguided false assumption of retail hierarchy. WM is in a league of its own. 
 

So while the rich bankers and politicians itch in their skin about normal people making money in stocks, housing, crypto, ooops I mean, “speculative excess”, and look to set fire to the prosperity of those who don’t have divine right to their wealth, I think it’s become obvious that bonds and cash are not where a sensible person wants to be, so then at that point you have to ask “where?”. And I keep coming back to integral and irreplaceable assets. Convince me otherwise that dollar cost averaging through indestructible and unique assets/businesses doesn’t work over a 20-30 year horizon.

[thepupil]

37 minutes ago, Gregmal said:

Convince me otherwise that dollar cost averaging through indestructible and unique assets/businesses doesn’t work over a 20-30 year horizon.

It does, but no one actually has a 20-30 year horizon for every $1 they invest. 

[Gregmal]

Given the relatively recent development/advances in regards to brokerage firms and liquidity levers, I don’t see any reason why anyone under the age of 65 can’t invest in a sub 10% position with a 20 year horizon. If you need your last sub 10% before then…you ain’t ready to retire.

[Gregmal]

Is there a point in time when “bubble” and “speculative excess” wasn’t widely attributed to, or code word for, normal people getting wealthy? Basically a red alert for the wealthy and establishment folks that they need to knock the lesser beings down a notch?

[Viking]

1 hour ago, Gregmal said:

I’m not disagreeing that they’re optically expensive. But personally I don’t know why any bond in the history of earth has had less than a 10-15% coupon. I couldn’t fathom buying one below that. Even government guaranteed stuff; 5%? Unless I can borrow below that and arb it risk free then why would I waste my time? I’ve thought similar about office REITs. 5 cap? Huh? For secular decliners? Not attractive at all. But people, lots of em, pay that price. So while I’ve always been uncomfortable going out there and buying stuff like COST and WM, V at times too….if you can make the case for other asset classes then why can’t you make the case for the best companies in the world? Especially one as dynamic as COST or WM? Id rather own those at 30-40x than a bond with 2+ years duration at 5%. At least with the equity you own something. Bonds are just a claim to a fixed check and the assumption that you get your principle back. If not you have to become an active business owner….yawn. 

It looks to me like there has been a massive wealth transfer the past few years (with negative real interest rates) from savers AND debt holders to those who borrow. And the more leverage the better. 
 

Central banks normalizing interest rates will:

1.) start to pay savers and debt holders a better rate of return

2.) likely end the party for borrowers, especially those with/needing lots of leverage

[Viking]

2 hours ago, Gregmal said:

These businesses can do whatever that want and have limited to no real competition. Every comp I’ve seen to COST is a misguided false assumption of retail hierarchy. WM is in a league of its own. 
 

So while the rich bankers and politicians itch in their skin about normal people making money in stocks, housing, crypto, ooops I mean, “speculative excess”, and look to set fire to the prosperity of those who don’t have divine right to their wealth, I think it’s become obvious that bonds and cash are not where a sensible person wants to be, so then at that point you have to ask “where?”. And I keep coming back to integral and irreplaceable assets. Convince me otherwise that dollar cost averaging through indestructible and unique assets/businesses doesn’t work over a 20-30 year horizon.

The new class divide in Canada is ‘do you own assets or not’? It is no longer worker / owner. Do you own: House? average house is likely worth +$800,000. Stocks? Pension? All 3? You are rich.
 

Rent? Don’t own stocks? No pension? None of the 3? You have just missed out on the greatest financial windfall in Canadian history - over the past 10 years. 
 

Everyone that has owned a house for the past 8-10 years in greater Vancouver or Toronto is now a millionaire (at least). Population of greater Vancouver and Toronto is what… 12 million or so? That is a lot of wealth creation. Actually, owning a house for the past 5 years was probably enough. Many people own multiple properties. Gains are tax free (principal residence).
 

Anyone who has been renting the past 5 to 10 years has completely missed the party. That is crazy. 

Edited April 27, 2022 by Viking