Where Does the Global Economy Go From Here?

[Gregmal]

2 minutes ago, Viking said:

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). Owning a house for the past 5 years was probably enough. Many people own multiple properties. Gains are tax free. 
 

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

That’s what I mean. Owning a home kills like 4-5 birds with one stone. Ok it doesn’t go up, well you’re still putting a big % of your would be rent into a de facto savings account. The Canadian mortgage stuff is foreign to me. But I have no clue how every American doesn’t own as much house with a 30 year fixed mortgage as possible. Even at 5-6%. Stuff goes up, you’re good. Rates go down refi. I probably wouldn’t be deterred until we hit low teens in terms of taking out a fixed rate mortgage. 

[Viking]

12 minutes ago, Gregmal said:

That’s what I mean. Owning a home kills like 4-5 birds with one stone. Ok it doesn’t go up, well you’re still putting a big % of your would be rent into a de facto savings account. The Canadian mortgage stuff is foreign to me. But I have no clue how every American doesn’t own as much house with a 30 year fixed mortgage as possible. Even at 5-6%. Stuff goes up, you’re good. Rates go down refi. I probably wouldn’t be deterred until we hit low teens in terms of taking out a fixed rate mortgage. 

Peter Lynch in one of my favourite investment books (One Up On Wall Street) says the first thing a person/couple should do is buy a house - not stocks. Great advice.
—————

One of my buddies bought a house when we were both still young (a few years out of university). i asked why a house? He said he and his wife were terrible with money. But they would pay their mortgage. So he knew his financial future would be secure. Smart like a fox. 

Edited April 27, 2022 by Viking

[Gregmal]

39 minutes ago, Viking said:

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

My father has been yelping about how the Fed is taxing savers since like 2012. It’s true. But.

 

 

In regard to unstoppable brand and businesses…doesnt it kind of make sense? Look at Berkshire or more aptly I think is Simon Property. Let alone Costco and WM. These guys are best in class assets/businesses…sure. But they can borrow, globally, like anywhere, at rates significantly below inflation or whatever. Berkshire has been tapping Japanese debt markets if I’m remembering correctly. So think about it. You have businesses that are inflation+. And on top of that carry investment grade credit rating. And on top of that can borrow wherever in the world savers are most desperate. When you look into it, 30x for certain companies is not what it seems. There’s flexibility and dynamic/opportunity embedded in that valuation. 

[thepupil]

20 hours ago, Gregmal said:

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.

my only point is that even for those of us with "long time horizon", possible change in multiple matters. 

 

If you assume COST reverts to historical multiple over hold period and grows EPS by 10% / yr (this is how much operating income per share has grown over previous decade, NI grew 12%/yr but tax reform impact)

 

5 year time horizon   8% cost of capital:   $411 (25% lower than stock price) 

20 year time horizon 8% cost of capital:   $756 (36% higher than stock price)

 

EDIT: to clarify, this is what stock worth today under above assumptions

 

so this is why i push back on both you and speculatios. I hardly see COST in Bubble territory. If you think it can grow EPS by 10%/yr for 10 or 20 years and be worth 25x (a "reasonable" multiple  for a world class business) it is not expensive; this is why munger badgers buffett for selling and is mr #neversell.

 

But to completely ignore the asymmetry of an elevated multiple (as you do with your "what's wrong with costco's price" omits a big risk of derating over 1,3,5,10 years (the latter 2 of which i'd consider somewhat "long" time horizons. Making no money for that long a time particularly if withdrawing a portion of capital can hurt a fair bit. We actually have a very real example of this. The broader stock market made 0% / year from 2000 - 2010 and Costco only made 5% / year in that time frame. EPS grew by 2.5x. The stock de-rated from 40x (about where it is today) to 23x.

 

I assume you're trying to make more than 5% / year holding COST

 

 

a high multiple, medium growth security has extreme sensitivty to changes in multiple (duration) over short to medium time horizons...COST has more duration than bonds (but should make a much higher return over long time horizon)

 

Edited April 27, 2022 by thepupil

[Gregmal]

40 minutes ago, thepupil said:

my only point is that even for those of us with "long time horizon", possible change in multiple matters. 

 

If you assume COST reverts to historical multiple over hold period and grows EPS by 10% / yr (this is how much operating income per share has grown over previous decade, NI grew 12%/yr but tax reform impact)

 

5 year time horizon   8% cost of capital:   $411 (25% lower than stock price) 

20 year time horizon 8% cost of capital:   $756 (36% higher than stock price)

 

so this is why i push back on both you and speculatios. I hardly see COST in Bubble territory. If you think it can grow EPS by 10%/yr for 10 or 20 years and be worth 25x (a "reasonable" multiple  for a world class business) it is not expensive; this is why munger badgers buffett for selling and is mr #neversell.

 

But to completely ignore the asymmetry of an elevated multiple (as you do with your "what's wrong with costco's price" omits a big risk of derating over 1,3,5,10 years (the latter 2 of which i'd consider somewhat "long" time horizons. Making no money for that long a time particularly if withdrawing a portion of capital can hurt a fair bit. We actually have a very real example of this. The broader stock market made 0% / year from 2000 - 2010 and Costco only made 5% / year in that time frame. EPS grew by 2.5x. The stock de-rated from 40x (about where it is today) to 23x.

 

I assume you're trying to make more than 5% / year holding COST

 

 

a high multiple, medium growth security has extreme sensitivty to changes in multiple (duration) over short to medium time horizons...COST has more duration than bonds (but should make a much higher return over long time horizon)

 

I generally don’t try to complicate it in a situation such as this. If I can borrow at a rate that justifies it, holding low single digit quasi forever positions in these sort of names means you benefit should they do what they do. They’re never going to 0. If you get the much bigger derating then you amplify the size of the position. I just think waiting 5-10 years with no assurances in order to justify owning businesses of this caliber makes little sense. 

[Gregmal]

The other thing as well is that over the course of my investing life, I’ve kind of become less and less enchanted with those sort of “apply a discount rate” or “project multiples going out x years” and all that sort of traditional analyst stuff. Not to say there’s never any value in it but most of the time it’s got too many underlying variables and if one’s off the majority of the conclusions are useless. Even the best analysts I’ve seen, when making projections, rarely demonstrate the ability to forecast correctly more often than not. 
 

Conversely, it’s a lot of the sentiment in what Buffett and Munger and even a guy like Ackman portray when they describe what they like to invest in. Moats. Brand power. Superb management. 
 

It’s easier IMO to simplify these things because if you check the boxes in the second paragraph, chances are you’ll do better than average. Whereas in a scenario where Costco reverts to a lower multiple, in a vacuum, it goes lower. But general guess what also happens? So do the shitty Costco knockoff companies or less established retailers. The reason for the multiple decline is generally a macro reason, applied across the board, and the better companies tend to get less punished than the “cheap” shitty ones. 

[thepupil]

13 minutes ago, Gregmal said:

The other thing as well is that over the course of my investing life, I’ve kind of become less and less enchanted with those sort of “apply a discount rate” or “project multiples going out x years” and all that sort of traditional analyst stuff. Not to say there’s never any value in it but most of the time it’s got too many underlying variables and if one’s off the majority of the conclusions are useless. Even the best analysts I’ve seen, when making projections, rarely demonstrate the ability to forecast correctly more often than not. 
 

Conversely, it’s a lot of the sentiment in what Buffett and Munger and even a guy like Ackman portray when they describe what they like to invest in. Moats. Brand power. Superb management. 
 

It’s easier IMO to simplify these things because if you check the boxes in the second paragraph, chances are you’ll do better than average. Whereas in a scenario where Costco reverts to a lower multiple, in a vacuum, it goes lower. But general guess what also happens? So do the shitty Costco knockoff companies or less established retailers. The reason for the multiple decline is generally a macro reason, applied across the board, and the better companies tend to get less punished than the “cheap” shitty ones. 

 

i don't disagree with anything you're saying. just have to be mindful at extremes and the choice isn't b/w COST and some shitty company. 

 

as of 3/31 the index of high quality US stocks traded at 24x trailing and 21x forward...the likes of COST/WM may be worth a premium....but is it worth 2x the multiple? 

 

 From what i can tell quality stocks grew EPS by about 8-9%/yr to costs low double digit (i don't have data going too far back)

 

High quality US stocks 12/2013 PE was 18x ish (now 23x)

COST 12/2013 PE was 26x (now 43x)...both figures are trailing for ease of comparison. 

 

So the COST premium has gone from 44% (26/18) to 95% (43/23) while absolute multiples have gone up. 

 

these are the types of setups where stocks can dissapoint for pretty long time frames (even if "eventually" right). you are sized to be okay with that. 

 

 

[LearningMachine]

56 minutes ago, Gregmal said:

Even the best analysts I’ve seen, when making projections, rarely demonstrate the ability to forecast correctly more often than not. 

 

I agree it is really hard to predict many years out.  This also applies to predicting what happens to Costco many years out.  Live by your own principle, @Gregmal :-).

 

Safer to own a company that is returning money to shareholders now and will give it all back in the next 5-10 years, instead of owning a company that you hope might some day start returning to you in 20-30 years. 

 

Bird in the hand is worth two in the bush. 

 

Edited April 27, 2022 by LearningMachine

[goldendad]

1 hour ago, Gregmal said:

The other thing as well is that over the course of my investing life, I’ve kind of become less and less enchanted with those sort of “apply a discount rate” or “project multiples going out x years” and all that sort of traditional analyst stuff. Not to say there’s never any value in it but most of the time it’s got too many underlying variables and if one’s off the majority of the conclusions are useless.

 

 

You familiar with Fermi problems?  I think investing -- on both the complex and simple ends -- is just a bunch of Fermi problems.

[Gregmal]

15 minutes ago, goldendad said:

 

You familiar with Fermi problems?  I think investing -- on both the complex and simple ends -- is just a bunch of Fermi problems.

Exactly. In a simple way, a stock will either go up, or it will go down. From there, you probably don’t need to worry too much about why it goes up assuming you are long. So then focus on mitigating the reasons it would go down. The majority of macro are easy to hedge. So then really you only need to focus on company specific. Even within all that there is tons of volatility in which you get small moves for no reason. The biggest thing I try to focus on is avoiding substantial impairments on large positions. Those are tough to recover from. Everything else is a relatively easy and solvable problem. A 2% position goes down 70%? Well the more it goes down the less relevant it is to you overall portfolio. And if it’s 70% down but you still like it, it’s a hell of an opportunity. If not, you need a small fluctuation on the rest of your portfolio to make up for it. 

[Blugolds]

Russia’s invasion of Ukraine has contributed to a historic shock to commodity markets that will keep global prices high through the end of 2024, according to the World Bank.

The spike in energy prices over the past two years is the biggest since the 1973 oil crisis, while the jump in food prices is the most since 2008, the World Bank said Tuesday in its commodity markets outlook report.

“Overall, this amounts to the largest commodity shock we’ve experienced since the 1970s,” said Indermit Gill, the World Bank’s vice president for equitable growth, finance and institutions. 

Russia is a leading exporter of oil, natural gas and coal, while Ukraine is a major source of wheat and corn. The situation has been exacerbated by soaring fertilizer costs and price spikes for key metals.

After nearly doubling last year, energy prices are expected to jump more than 50% this year before easing in 2023 and 2024, the World Bank said. Food prices will soar by 22.9% this year, highlighted by a 40% rise in wheat prices, according to the report. 

“These developments have started to raise the specter of stagflation,” the World Bank warned. “Policymakers should take every opportunity to increase economic growth at home and avoid actions that will bring harm to the global economy."

Prices are expected to stay at “historically high levels” through the end of 2024, the World Bank said. 

The fear is that high prices for necessities will hit low-income families the hardest.

“The resulting increase in food and energy prices is taking a significant human and economic toll – and it will likely stall progress in reducing poverty,” Ayhan Kose, director of the World Bank’s Prospects Group, said in the report. 

[TwoCitiesCapital]

People seem awfully sanguine about the contraction in GDP for Q1. Consensus estimates mostly hovered around +1-1.5% from what I'd seen.

 

Coming in at -1.4% seems kind of major - particularly since the Fed only just started hiking rates and is expected to accelerate that next month, no? 

[crs223]

11 minutes ago, TwoCitiesCapital said:

Coming in at -1.4% seems kind of major - particularly since the Fed only just started hiking rates and is expected to accelerate that next month, no? 

 

Wow.  Maybe this means the Fed won't be hiking as much...

[Gregmal]

Significant in the context of what though? I don’t see it’s significance relative to company specific earnings which are being reported for the same period. Like just in general as interpreted by the Fed or what?

[TwoCitiesCapital]

4 hours ago, Gregmal said:

Significant in the context of what though? I don’t see it’s significance relative to company specific earnings which are being reported for the same period. Like just in general as interpreted by the Fed or what?

 

Since GDP is simply a measure of aggregate incomes - isn't it bad in general? Whether those be corporate incomes, individual incomes, or a mix - they're pie is getting smaller. 

 

And sure, within that there will be some winners and some losers, but that doesn't even mean the winners' stock goes up. A receding tide lowers most boats. Google had record revenues earnings basically throughout the entire 2007-2009 period and still lost 2/3 of it's market cap. 

 

The sky isn't falling. Don't sell everything. But might be prudent to be trimming gains, selling rallies, and adding some duration here. 

[Gregmal]

7 minutes ago, TwoCitiesCapital said:

 

Since GDP is simply a measure of aggregate incomes - isn't it bad in general? Whether those be corporate incomes, individual incomes, or a mix - they're pie is getting smaller. 

 

And sure, within that there will be some winners and some losers, but that doesn't even mean the winners' stock goes up. A receding tide lowers most boats. Google had record revenues earnings basically throughout the entire 2007-2009 period and still lost 2/3 of it's market cap. 

 

The sky isn't falling. Don't sell everything. But might be prudent to be trimming gains, selling rallies, and adding some duration here. 

Yea I was wondering if you saw a specific angle or trade associated with the data point. I largely think the biggest data/numbers are hard to do anything with because of the fact that they are so widely followed. 

[Gregmal]

Leaked transcripts from the Fed:

 

 

Highlights:

 

-"Average folks are doing too well, we dont want competition for goods and services, have you tried getting a reservation at a good restaurant lately?"

 

-"Everyone has too much home equity. If we jack up rates we can at least keep those annoying social climbers where they belong"

 

-"I was disgusted, being a Wharton grad with five generations of members at the country club, to see some younger guy arrive in a Porsche. Smells like speculative excess to me!"

 

-"You know, I am just not that confortable investing in the stock market with so many plebs. We dont want any more Melvin situations. Its just so much easier making money on investments when the only people participating are playing by the rules we all learned at Columbia Business School"

 

-"You know, I have this theory, that if we start scaring the market, the first to go will be the uneducated plumbers. Why theyre even in the market, I dont know. But theyre probably using leverage too. Not responsibly like Bill Hwang, but like ignorant poor folks do. If we wipe them out we can put our cash to use"

 

"Anyone finding it hard to get a vacation home? My third property in Hilton Head is overrun by new buyers. Its horrible. Some under 30 couples as well. They need to be stopped"

 

"I think the easiest way to spin this is that crushing lumber and steel price inflation helps the normal people. They are probably too dumb to realize it will also deflate the value of their homes so lets just focus on the smaller picture stuff"

 

"I'm am frankly soooo tired of constant messages from our friends. Ackman, Pelosi, and Einhorn keep sending late night rant emails about how we need to move faster on rates. Theyre cash up, holding their desired derivative allocation, and just waiting for the opportunity to buy all the stonks and real estate they want from all these annoying middle class aspirers. Please note, avoid using the term wealth transfer at all costs. Instead, use "speculative excess, tide going out, reining in inflation, irresponsible capital allocation". 

 

 

Edited May 4, 2022 by Gregmal

[Viking]

Well it appears the Fed is, after all, getting its wish. What a surprise! (Not; that was my attempt as sarcasm).

 

Inflation was running much to high and becoming embedded in expectations (not transitory). What to do? Tighten financial conditions. 
 

1.) much higher interest rates have killed the stock market. Up til now it looks to me like the decline has largely been focussed on bringing the multiple down. Makes sense. The yield on the 10 year US treasury was 1.5% in Dec. recently it was around 3%. The Nasdaq, the index with the much higher earnings multiple, has been hit the hardest - down about 30%.

 

2.) 5 months into the Fed’s campaign to tighten financial conditions we are now seeing the second shoe drop: earnings guidance from companies is now coming down. My guess is this will drive the next leg down in the stock market in the coming months.
 

Europe’s economy is screwed and will likely only get worse in the coming months (as the energy crisis worsens). China’s economy is screwed as Xi continues with his baffling zero covid policy (and a bunch of others). The Fed is successfully slowing the US economy.
 

The million dollar question is where does the US economy go in 2H and 2023?
1.) Does it defy the naysayers and keep chugging along? Goods part slowing and services part booming? Housing largely shrugging off higher mortgage rates? I.E. the Fed gets its soft landing…

2.) Does it slow more more aggressively causing an actual recession, likely in 2023?

 

It looks to me like Mr Market is just starting to increase the odds for #2.

 

What do i think? #1 = 50%; #2 =50%

- what to watch? Inflation… does it stay elevated into 2H? The Fed… when do they pivot.

—————

Bond yields, across the curve are starting to come down hard… interesting…

Edited May 24, 2022 by Viking

[Ulti]

https://podcasts.apple.com/us/podcast/bridgewaters-greg-jensen-on-why-markets-have-further/id1056200096?i=1000563249055

 

Dalio's CoCIO..... Markets are still pricing in a soft landing.

[Viking]

For those of you who like to get into the weeds of the impacts of Fed activities on the banking system and economy here is an interesting video. You might want to start at the 1 hour 8 minute mark… where they state their base case expectations of how things will play out in the coming months.
 

They discuss the impact of QT, which begins in 8 days. Bottom line, they expect volatility to continue in the coming months. Until something breaks. At which time, the Fed will pivot.
 

Joseph Wang is one smart dude. He is able to explain complicated things in a very understandable way. Jack Farley is a very good host. Forward Guidance is becoming one of my favourite YouTube channels.

 

 

Edited May 24, 2022 by Viking

[Viking]

7 hours ago, Ulti said:

https://podcasts.apple.com/us/podcast/bridgewaters-greg-jensen-on-why-markets-have-further/id1056200096?i=1000563249055

 

Dalio's CoCIO..... Markets are still pricing in a soft landing.

The podcast is an excellent overview of where the US and global economies are today and how things might play out over the next year. Bridgewater also expects core inflation to be @5% in May 2023. Mr Market expects core inflation to be @2.7% 12 months into the future. Big disconnect in the two views.

Edited May 24, 2022 by Viking

[wabuffo]

Fedguy12 and Maroon Macro are very knowledgeable and informative to listen to....but I find they are too Fed-centric and stuff they can't explain via a specific Fed action, they then create explanations for these market reactions that make no sense ("market front-runs the Fed", etc).

 

I think this is because they ignore the actions of the US Treasury - or don't have a model to integrate the actions of the US Treasury into the real-time data of rates and supply/demand for things like Treasury securities and how all this interacts with the Fed's balance sheet.

 

FWIW,

Bill

[Viking]

3 hours ago, wabuffo said:

Fedguy12 and Maroon Macro are very knowledgeable and informative to listen to....but I find they are too Fed-centric and stuff they can't explain via a specific Fed action, they then create explanations for these market reactions that make no sense ("market front-runs the Fed", etc).

 

I think this is because they ignore the actions of the US Treasury - or don't have a model to integrate the actions of the US Treasury into the real-time data of rates and supply/demand for things like Treasury securities and how all this interacts with the Fed's balance sheet.

 

FWIW,

Bill

@wabuffo interesting comments. Here is my read of how Fed / policy / financial markets have been going the past 5-6 months (since the Fed did their hard pivot). Fed talks more hawkish. Afterwards (over a few weeks) Financial markets then price it in. At the next meeting the Fed then executes (actual tightening) what the market has already priced in. In between meeting lots of Fed governors are floating different trial balloons - with the Fed getting a look at how financial markets respond. Rinse and repeat. So the market is front running (pricing in) the actual tightening the Fed does BEFORE each meeting.
 

Bottom line, I am looking forward to seeing what happens to long term rates (among other things) when the Fed begins QT next week. Powell said during his last press conference that he (the Fed) really has no idea how QT will play out in financial markets over time. Other Fed officials have said they expect QT to affect the economy ‘like an additional rate hike’. 
 

i continue to think that the Fed is in a VERY tough position. Inflation is wicked high and looks reasonably sticky so the Fed will need to keep going with rate increases and QE. Parts of the economy are slowing and will slow further as financial conditions tighten more. How high can rates go before something breaks? My read is something will break BEFORE the Fed is ready to slow rate increases. The ‘breakage’ will give the Fed the cover (excuse) to slow/stop rate increases/QE even with inflation quite high (+5%). 
 

Where will the breakage occur? One or more of the following:

1.) The US Dollar: emerging markets?

2.) Corporate bond spreads: blow out?

3.) Equity market levels: bear market?

4.) The level of interest rates at different maturities: slow housing? Slow durable goods purchases? Slow business investment?

 

 

Edited May 25, 2022 by Viking

[Spekulatius]

YTD tax receipts are are running way above 2021 levels. Doesn’t look like a recession to me.

 

[TwoCitiesCapital]

18 hours ago, Spekulatius said:

YTD tax receipts are are running way above 2021 levels. Doesn’t look like a recession to me.

 

 

This is a good indicator, but the YoY figures for the month are worrying, no? How many months do you have to be down 30% YoY for the YTD figured to flip? 5 more months of that and you start to get negative YTD figures as well. 

 

My general thought is this plays out like an accelerated 2018-2020. The Fed is going to hike, economic conditions tighten dramatically, inflation begins to come down, the yield curve will invert again, Fed halts, and risk assets rally straight into economic weakness.

 

My guess is the recession is early next year, not this year, but you'll start to see the economic weakness starting now as we had several months of sub-50 PMIs and a manufacturing recession in 2019 while equities popped 20% even while fixed income markets screamed about economic fragility. 

 

The unknown to the above is the willingness of the Fed to capitulate given the current inflation in the mix, but I'm still thinking they will. 

Edited May 25, 2022 by TwoCitiesCapital