Is The Bottom Almost Here?

[Viking]

2 minutes ago, stahleyp said:

 

https://www.pionline.com/investing/druckenmiller-says-risk-reward-stocks-worst-hes-seen

 

He's not dumb...but he's not right a lot of the time either. In fact, I'd guess he's been more wrong then right the past 10 years (maybe even 15). 

 

That was from May of 2020! 

The important point is what is being discussed on another thread: position sizing. What matters is not if Druckenmiller is ‘right’ or ‘wrong’ at any point in time (like what he thinks the day he is interviewed). What matters is how much you make when you are right and how much you lose when you are wrong. All Druckenmiller is saying is right now he does not have the conviction to make a big bet. Given the set up i outlined above that sounds pretty rational to me. 
—————

Now if the data quickly turns then a rational investor would also pivot. Perhaps on Friday we learn the US job market has stalled out and unemployment is rising. Or global economic data gets much worse. Or something breaks in global financial plumbing - causing the Fed to pivot back to QE. That ‘be open minded’ thing…

[crs223]

15 minutes ago, Viking said:

Drukenmiller is not a dummy. 

 

Full disclosure: Drukenmiller specifically added a caveat: his confidence in his prediction is very low in this uncharted environment.

[changegonnacome]

29 minutes ago, stahleyp said:

what "herd" is Greg in?

 

Inflation is BS.....its just oil/supply chain dummies.....its gonna go away soon by itself.....the Fed has got it wrong and its gonna have to pivot soon they've just been doing these hikes cause Bill Ackman told them too cause their morons........the herd that has SPY @ 19 multiple when earnings are about to get crushed and the major global economies are spiraling into a recession (50% SPY earnings), DXY is thru the roof.....that herd.....the same ones holding boring slow growth mega cap stocks at 3% FCF yields when the 10yr is printing 4%.....those dudes   But know @Gregmal only meets some of those labels.

 

But the difference is I have mucho respecto for @Gregmal  and as he mentioned we own the same stuff.....although I will admit i cut CLPR loose  as it didnt meet my FCF Yield underwriting exercise where the FCF yield had to exceed inflation rate (preferably by alot) and it had to grow that FCF in excess of the expected inflation rate next year such that my purchasing power (inflation adjusted) was preserved.

Edited October 5, 2022 by changegonnacome

[CorpRaider]

<Horn Blares>  Did someone come at the CAPE?  

Edited October 5, 2022 by CorpRaider

[Parsad]

1 hour ago, stahleyp said:

I guess my one concern is a lack of bankruptcies and general hopelessness. I would be even more bullish if that was around. 

 

You start to get an uptick before the recession and then the bulk of it occurs during and after the recession.  We are seeing an uptick in people living paycheck to paycheck or now moving to credit cards.  Many businesses impacted by the pandemic, that piled on debt, have little movement left with stretched balance sheets.  But the bankruptcies and hopelessness come after the market indicates a recession is coming. 

 

The question is how bad that recession will be.  I think it will be bad, but certainly nothing like 2008/2009.  And that doesn't mean the markets aren't starting to throw up opportunities.  This disconnect for the pundits is usually what ends up being the lag between when opportunities arrive, and when they freely can say "Oh yeah, we think you can buy stocks now again!" 

 

Is there room for downside...sure.  Is there room for upside...sure.  Should I wait until I see the bottom?  No one can tell me when that will arrive!  Cheers!

[mattee2264]

For me the pennies that still have to drop are:

 

Consumer staples...OK they are defensive but they are still trading as bond proxies and have 20+ PE multiples and sub 3% dividend yields and margins are vulnerable and with a reliance on overseas markets for growth there is vulnerability there

 

FAANGs.....OK the quality ones have lost 1/3 of their value and the tarnished ones have lost 2/3 of their value but after eating the world and gaining a lot of market share during the pandemic it is hard to imagine that their earnings won't fall if the global economy goes into recession because they are such a huge part of the global economy and if that happens they will get severely punished. 

 

Financials....these generally are not something you want going into a recession and while a recession has been partly priced in if it does turn out to be a bad one and there are threats to financial stability from bond bubbles bursting etc like there were in the UK then things could get messy. 

[changegonnacome]

1 hour ago, Parsad said:

Should I wait until I see the bottom?  No one can tell me when that will arrive!  Cheers!

 

Yep monkeys pick bottoms!.........when you see a company hit a price where's it yielding 15% FCF on a conversative estimation of that FCF and it has a shot at growing that FCF per share sustainably by 10% next year......you dont ask where the bottom is.....you dive right in and ignore/enjoy the ride

[Gregmal]

19 minutes ago, changegonnacome said:

 

Yep monkeys pick bottoms!.........when you see a company hit a price where's it yielding 15% FCF on a conversative estimation of that FCF and it has a shot at growing that FCF per share sustainably by 10% next year......you dont ask where the bottom is.....you dive right in and ignore/enjoy the ride

This, or a variation of such, is why it’s so crazy seeing how worked up people get over “the market”…whatever that means. Is the proposition acceptable, on a case by case basis? Yes or no? 15% FCF yield? Yes sir, I’ll have another. 

[Xerxes]

On 10/5/2022 at 9:09 AM, Cigarbutt said:

Interesting question.

This post is formulated with the following perspective: What would you do if you are calling the shots at the Fed and want to apply constraints on demand?

Warning: i'm not saying the following is relevant or useful; it's only interesting.

Tool #1

The above is a theoretical construct (from Keynes) but if you put short term interest rates on the y-axis and monetary base (currency + reserves deposited at the Fed) over GDP on the x-axis, you get a very strong (historically backed) relationship. The Fed has been intermittently (and to various degrees) using this correlation in order to 'control' short term rates (transformed the correlation into causation).

 

Tool #2

The blip in the early 80s is Paul Volcker's contribution to the constraints put on the economy. Now, this seems like no big deal but then monetary base to GDP was very low (steep part of the liquidity preference curve) and only a small change in monetary base had a potentially large impact on short term interest rates. 

Since the GFC, monetary base per GDP has been growing irregularly but is situated so far on the x-axis of the liquidity preference curve (flat part of the curve, even practically horizontal) that changes in balance sheet holdings would result (at this rate) in an effect on short term interest rates in only a few years (perhaps not a good public relations move if there is a perception that you've fallen behind the 8 ball). To raise short term interest rates the way they recently did would have required (using only balance sheet open market operations) an incredibly massive and accelerated pseudo-liquidation of the Fed balance sheet, a potentially destabilizing move? So, to technically 'succeed' in raising rates the way they did, they had to manage rates by increasing the interest rates they pay on excess reserves and in the reverse repo window.

Of course, the end result is the same if your aim is to put constraints on demand. At least that's what the housing markets (and a few other areas) are saying.

-----

Can i ask then, if the Fed has become so tight, why are financial conditions not really reflecting that?

 

 

 To raise short term interest rates the way they recently did would have required (using only balance sheet open market operations) an incredibly massive and accelerated pseudo-liquidation of the Fed balance sheet, a potentially destabilizing move? 

 

 

What you are descirbing is actually contrary to my understanding:

 

My view has been that the short term interest rate can largely be influence by Fed fund rate.

 

Whereas QE influence in the cost of money really shows up in the long term yeilds (i.e. 10-year treasuries), because the money created is used to buy 10-year bonds, pushing up prices (and inversely pushing down long-term yield), and thereby influence mortgage rate etc. etc. while at the sametime injecting new money into the overall system

 

Running that in reverse as QT, therefore would mean, Central Bank selling 10-year bonds (or not re-investing when they come due). Selling means bond prices sholuld go down (pushing up yields). Money that is taken from the bond market goes back to the Central Bank (i.e. un-printed or otherwise removed).

 

Yet, the interest rate curve is falling in the back end, which would mean, based on the logic described, that the Fed is more aggressive with its short term Fed rate increase than it is with QT. 

 

 

 

 

 

 

[Parsad]

Inflation is going to fall just as fast as it rose.  Terrific article:

 

https://www.marketwatch.com/story/inflation-is-going-to-fall-just-as-fast-as-it-rose-and-thats-investors-cue-to-enter-the-stock-market-11665072070?siteid=yhoof2

 

Cheers!

[Gregmal]

34 minutes ago, Parsad said:

Inflation is going to fall just as fast as it rose.  Terrific article:

 

https://www.marketwatch.com/story/inflation-is-going-to-fall-just-as-fast-as-it-rose-and-thats-investors-cue-to-enter-the-stock-market-11665072070?siteid=yhoof2

 

Cheers!

Nah. I heard that it’s actually going to be the ONLY thing produced by COVID that doesn’t follow the plummet, mega spike, then normalize trend. Cuz 70s.

[Guest]

Buffett officially became bullish in Oct of 2008. At the time the market was down about 40% from its all time high. The market then proceeded to drop another 27% until March of 2009. 

 

Hopefully we'll get an even worse drawdown this time (and yes, I'm almost fully invested but that could change anytime). 

[changegonnacome]

3 hours ago, Gregmal said:

15% FCF yield? Yes sir, I’ll have another. 

 

For shizzle, doggie fizzle.....I know I come off like a perma bear sometimes but my core position is 'stocks for the long term' mindset....I think the macro is so obviously horrible that running with some smart US market hedges feels 'right' to me.....owning and selling vol right now feels about as right as selling puts on gold plated assets in 2020/21 did....remember that golden age when the Fed had your back, your side, your middle & your front ......these are little games I play around the edges of my portfolio and hope to make some "alpha" as they say......but I REALLY make money when BOI, MSGE, HSW, LBTYK et al go up......I'm willing to let the BETA torture me on some of these names cause I aint signing a confession document that says MSGE $3bn enterprise value is the truth! No f-ing way.

[Gregmal]

https://seekingalpha.com/news/3889503-scott-minerd-warns-fed-rate-hikes-will-likely-break-something-in-the-economy-this-year

 

I actually found what this guy had to say quite balanced and well stated. 

[Value_Added]

4 hours ago, changegonnacome said:

 

Yep monkeys pick bottoms!.........when you see a company hit a price where's it yielding 15% FCF on a conversative estimation of that FCF and it has a shot at growing that FCF per share sustainably by 10% next year......you dont ask where the bottom is.....you dive right in and ignore/enjoy the ride

 

A lot of the conversation here is about dealing with the macro such as inflation, jobs, QE, QT, etc… and how that will affect the market.  Then theres statements like this from @changegonnacome which hit exactly my investment style and completely bypasses all macro outlook and forecasting.  From my perspective, that’s exactly how it should be if one believes the market is a weighing machine over the long term…it should boil down to understanding a business well enough to know what the normalized FCF or earnings are, placing a value on it, and buying it up when it reaches an appropriate margin of safety.  15％ FCF yield is insanely cheap for a good business!

 

I firmly believe you can’t time the market but there are some pretty good indicators that exist which we can at the very least use as a rough guide to help us gauge the market and classify it as cheap or expensive.  To name a few, some of which have been discussed already, are the Shiller PE, Buffet Indiciator, Buffett himself, and the individual valuations based on normalized earnings or FCF (see below). 

 

Going back to the comment from @changegonnacome, have you found opportunities that have these numbers (7x FCF multiple and growing 10% next year)?  If so, are they a covid beneficiary in any way whatsoever?  Also, what’s your best reasonable estimation of their FCF in 3 or 5 years?

 

Not to be long winded but, I ask because those numbers (without having any further context) represent a 6” bar and while the market is down substantially from its highs, I don't see a lot of 6” bars.  I see a whole lot of optically cheap companies that were a covid beneficiary to some degree (value traps), I see some really good companies that are trading at a reasonable price to justify at least a starter position, I see a few asset plays that make some sense right now, and I see some merger arbs which you could view as a cash equivalent.  But as a whole and based on my intermediate level of investing knowledge, this market hasn’t thrown up any 6” bars based on the measures mentioned.

 

There seems to be several folks with a-lot of experience here who have found ample opportunities in this market and I think that’s great but I also think it’s very important for people like myself with less experience in markets like this (and others who fall into this category) to realize what you don’t know and are likely incapable of learning to the extent of getting comfortable enough to make them 10% plus positions.  It’s easy as a human-being to get antsy in a market like this, especially reading post after post about this opportunity and that opportunity.  This is when mistakes happen if you truly don’t understand the business you’re buying.  You force yourself into having a false understanding of a business just because its down and you feel like you need to be doing something because others are, so you buy.  This could easily lead to buying a value trap and it really feels like that’s what the market is mostly offering up unless you have the skill and experience to find hidden or undervalued assets (but these aren’t 6” bars in most cases) with some certainty behind your findings.

 

What you absolutely don’t want to do is leave yourself zero opportunity when these 6” bars are offered by the market.  I have a goal to make 15% CAGR over my investing life and I understand it is no easy task but if you buy right and have some patience, it is possible.  Discipline is key and while I’ve never invested in an environment like we have now, it really feels like danger is everywhere and the utmost care should be take to ensure you buy right.

 

 I don’t believe in using indicators as decision makers, but used collectively I think they can serve as a useful gauge when buying.  

• Shiller PE - Maybe its coincidence - maybe its not, but when the Shiller PE is high, it’s shown time and time again market underperformance in the years ahead.  This is a reflection of the entire market and its obvious that many great opportunities still exist with a high Shiller PE (especially asset plays and merger arb) but generally the opportunities need to be created by some sort of company or industry specific turmoil that you are able to look past with a long term mindset, understand it effects on the business, and know it will pass with the company still intact.   It could also be some sort of catalyst that is assumed to be mostly unknown by the market as a whole but care should be taken assuming the catalyst isn’t priced in.  Again, maybe theres underlying factors at play each time the market mean reverts with a high Shiller PE but i think it is wise to assume when its elevated, more care should be taken to ensure you understand what you are buying, especially with the amount of optimism built into the market.
• Buffett Indicator - Again, just an indicator and a seemingly flawed one at that.  I mean c’mon, it doesn’t even factor in private companies not trading in the Wilshire.  But like the CAPE, it mean reverts from high levels and paired with the CAPE, can act as a tool to make you aware of when more care should be used because again, at elevated levels, optimism exists.
• Following Buffett - I know Buffett is in a different league and has very limited opportunities due to Berkshire’s size, but history shows that when Buffett is building cash, the market isn’t throwing out many 6” bars.  I know he has been spending heavily recently on oil, and for those who understand oil to a level to make it a position like Buffett has, more power to you.  Even while spending billions of his cash pile, it still has a significant amount remaining and as a whole, he isn’t buying the market as he has in previous periods.  Blood doesn’t seem to be in the streets yet from an overall market perspective and again, while deals can be found - they generally aren’t 6” bars right now.
• Break it down to individual business valuation without regard to anything else - This is what should be happening anyways, but if you want to know generally if the market is cheap, you’ll find it with 6” bars everywhere based on sound valuation.  Sound valuation meaning the earnings and FCF used for the valuation are normalized.  Even in a bad market environment, the business and FCF will continue to grow and create shareholder value because the business is good and their capital allocation toolkit is utilized properly.  When you find these, they should be very obvious!  Again, these opportunities are everywhere when blood is in the streets and darts can be thrown at anything that fits the aforementioned criteria with a high likelihood of appreciating greatly into the future.  But in markets like what we have now, care must be taken to ensure you aren’t buying some sort of value trap.  I think it is prudent to demand some sort of company or industry specific turmoil that you can understand and know with a high probability the outcome on the other side.  The short-termed market sells these things off like crazy but with a long term mindset, turmoil creates opportunity.  I don’t think missing earnings due to the falloff of covid earnings counts as turmoil, and if you think it does, just exercise care and ensure you understand business and its earnings well and most importantly, ensure you have a margin of safety.

I’m done rambling…back to the 15% FCF yield and 10% growth.

[Gregmal]

34 minutes ago, Value_Added said:

 

A lot of the conversation here is about dealing with the macro such as inflation, jobs, QE, QT, etc… and how that will affect the market.  Then theres statements like this from @changegonnacome which hit exactly my investment style and completely bypasses all macro outlook and forecasting.  From my perspective, that’s exactly how it should be if one believes the market is a weighing machine over the long term…it should boil down to understanding a business well enough to know what the normalized FCF or earnings are, placing a value on it, and buying it up when it reaches an appropriate margin of safety.  15％ FCF yield is insanely cheap for a good business!

 

I firmly believe you can’t time the market but there are some pretty good indicators that exist which we can at the very least use as a rough guide to help us gauge the market and classify it as cheap or expensive.  To name a few, some of which have been discussed already, are the Shiller PE, Buffet Indiciator, Buffett himself, and the individual valuations based on normalized earnings or FCF (see below). 

 

Going back to the comment from @changegonnacome, have you found opportunities that have these numbers (7x FCF multiple and growing 10% next year)?  If so, are they a covid beneficiary in any way whatsoever?  Also, what’s your best reasonable estimation of their FCF in 3 or 5 years?

 

Not to be long winded but, I ask because those numbers (without having any further context) represent a 6” bar and while the market is down substantially from its highs, I don't see a lot of 6” bars.  I see a whole lot of optically cheap companies that were a covid beneficiary to some degree (value traps), I see some really good companies that are trading at a reasonable price to justify at least a starter position, I see a few asset plays that make some sense right now, and I see some merger arbs which you could view as a cash equivalent.  But as a whole and based on my intermediate level of investing knowledge, this market hasn’t thrown up any 6” bars based on the measures mentioned.

 

There seems to be several folks with a-lot of experience here who have found ample opportunities in this market and I think that’s great but I also think it’s very important for people like myself with less experience in markets like this (and others who fall into this category) to realize what you don’t know and are likely incapable of learning to the extent of getting comfortable enough to make them 10% plus positions.  It’s easy as a human-being to get antsy in a market like this, especially reading post after post about this opportunity and that opportunity.  This is when mistakes happen if you truly don’t understand the business you’re buying.  You force yourself into having a false understanding of a business just because its down and you feel like you need to be doing something because others are, so you buy.  This could easily lead to buying a value trap and it really feels like that’s what the market is mostly offering up unless you have the skill and experience to find hidden or undervalued assets (but these aren’t 6” bars in most cases) with some certainty behind your findings.

 

What you absolutely don’t want to do is leave yourself zero opportunity when these 6” bars are offered by the market.  I have a goal to make 15% CAGR over my investing life and I understand it is no easy task but if you buy right and have some patience, it is possible.  Discipline is key and while I’ve never invested in an environment like we have now, it really feels like danger is everywhere and the utmost care should be take to ensure you buy right.

 

 I don’t believe in using indicators as decision makers, but used collectively I think they can serve as a useful gauge when buying.  

• Shiller PE - Maybe its coincidence - maybe its not, but when the Shiller PE is high, it’s shown time and time again market underperformance in the years ahead.  This is a reflection of the entire market and its obvious that many great opportunities still exist with a high Shiller PE (especially asset plays and merger arb) but generally the opportunities need to be created by some sort of company or industry specific turmoil that you are able to look past with a long term mindset, understand it effects on the business, and know it will pass with the company still intact.   It could also be some sort of catalyst that is assumed to be mostly unknown by the market as a whole but care should be taken assuming the catalyst isn’t priced in.  Again, maybe theres underlying factors at play each time the market mean reverts with a high Shiller PE but i think it is wise to assume when its elevated, more care should be taken to ensure you understand what you are buying, especially with the amount of optimism built into the market.
• Buffett Indicator - Again, just an indicator and a seemingly flawed one at that.  I mean c’mon, it doesn’t even factor in private companies not trading in the Wilshire.  But like the CAPE, it mean reverts from high levels and paired with the CAPE, can act as a tool to make you aware of when more care should be used because again, at elevated levels, optimism exists.
• Following Buffett - I know Buffett is in a different league and has very limited opportunities due to Berkshire’s size, but history shows that when Buffett is building cash, the market isn’t throwing out many 6” bars.  I know he has been spending heavily recently on oil, and for those who understand oil to a level to make it a position like Buffett has, more power to you.  Even while spending billions of his cash pile, it still has a significant amount remaining and as a whole, he isn’t buying the market as he has in previous periods.  Blood doesn’t seem to be in the streets yet from an overall market perspective and again, while deals can be found - they generally aren’t 6” bars right now.
• Break it down to individual business valuation without regard to anything else - This is what should be happening anyways, but if you want to know generally if the market is cheap, you’ll find it with 6” bars everywhere based on sound valuation.  Sound valuation meaning the earnings and FCF used for the valuation are normalized.  Even in a bad market environment, the business and FCF will continue to grow and create shareholder value because the business is good and their capital allocation toolkit is utilized properly.  When you find these, they should be very obvious!  Again, these opportunities are everywhere when blood is in the streets and darts can be thrown at anything that fits the aforementioned criteria with a high likelihood of appreciating greatly into the future.  But in markets like what we have now, care must be taken to ensure you aren’t buying some sort of value trap.  I think it is prudent to demand some sort of company or industry specific turmoil that you can understand and know with a high probability the outcome on the other side.  The short-termed market sells these things off like crazy but with a long term mindset, turmoil creates opportunity.  I don’t think missing earnings due to the falloff of covid earnings counts as turmoil, and if you think it does, just exercise care and ensure you understand business and its earnings well and most importantly, ensure you have a margin of safety.

I’m done rambling…back to the 15% FCF yield and 10% growth.

I think a lot of this comes down to what you’re looking to invest in.
 

Quality operating businesses very rarely go on sale to such a massive degree that they’d be pushing 15-20% cash flow. Especially not over some run of the mill, temporary any way you cut it, rate hike fit and run of the mill recession. Like maybe META is getting there now and even outside of the market, look at all the company specific issues that have caused that.

 

But overall the best companies tend to trade better than troubled ones. Rates are still lower than where they are historically. Rich get richer and great companies take market share and get stronger over the cycle. Does anyone truly believe Costco should have a 15% earnings yield? Why would Costco trade down more than the average company? Part of where I think there’s a flaw in some of the logic many people are throwing around is that people are still, granted feeling very emboldened, basically just making the case for valuation shorts which is and never has been a great strategy. Was Amazon cheap on a FCF basis in 2009?
 

So I guess yea it’s prudent either way to wait until you find what works for you. But a Ferrari is still a Ferrari and more expensive than a Honda during a recession. Maybe it’s somewhat cheaper than in a roaring economy. But it’s still not gonna be given away.

[Cigarbutt]

6 hours ago, Xerxes said:

 

 To raise short term interest rates the way they recently did would have required (using only balance sheet open market operations) an incredibly massive and accelerated pseudo-liquidation of the Fed balance sheet, a potentially destabilizing move? 

 

 

What you are descirbing is actually contrary to my understanding:

 

My view has been that the short term interest rate can largely be influence by Fed fund rate.

 

Whereas QE influence in the cost of money really shows up in the long term yeilds (i.e. 10-year treasuries), because the money created is used to buy 10-year bonds, pushing up prices (and inversely pushing down long-term yield), and thereby influence mortgage rate etc. etc. while at the sametime injecting new money into the overall system

 

Running that in reverse as QT, therefore would mean, Central Bank selling 10-year bonds (or not re-investing when they come due). Selling means bond prices sholuld go down (pushing up yields). Money that is taken from the bond market goes back to the Central Bank (i.e. un-printed or otherwise removed).

 

Yet, the interest rate curve is falling in the back end, which would mean, based on the logic described, that the Fed is more aggressive with its short term Fed rate increase than it is with QT. 

 

 

 

 

 

 

The Fed can influence short term interest rates (either through the fed fund rate or through open market operations changing base money; the latter option not possible at this point because of the very large inventory of government debt securities).

But it appears that their influence on rates longer than 2-3 years is limited and mostly unpredictable because many other factors come into play (substantiated opinion; provide evidence to disprove). When long rates refuse to collaborate, central bankers typically refer to a "conundrum" which is simply a recognition that they have no clue.

People who are shopping for houses and cars etc now face much higher monthly installments essentially because of the impact of higher short term interest rates influenced by the Fed (opinion) and not because of their open market operations at the long end (another opinion).

Also note that QE and reverse QE operations are simply asset swaps: the net result is, essentially, a market participant swapping a government debt security for a virtual dollar (or vice versa), which are two relatively equivalent liabilities for the Fed (and the system). These operations do have an impact (asset inflation and wealth effect; one way or the other) but only have a marginal impact on basic consumer inflation (opinion).

[UK]

On 10/5/2022 at 8:15 PM, changegonnacome said:

I’m afraid this one isn’t - I was right there with you @Gregmal in 2020/21 betting COVID was getting to be a nothing burger….made lots of $$….not everything you read in the paper is nonsense…..and ironically while you think your a contrarian on this, your right smack bang in the middle of the consensus when you look at US index valuations….they display an expectation around BS inflation, a pivot and a return to ZIRP world very soon….but they are Im afraid very wrong.

 

Be careful I get the sense you think your not part of the herd this time but you really are.

 

https://www.bloomberg.com/news/articles/2022-10-06/bill-gross-sides-with-pimco-bond-bulls-in-seeing-yields-peaking?srnd=premium-europe

https://www.wsj.com/articles/when-interest-rates-rise-fast-markets-tend-to-break-how-to-spot-the-cracks-11664974804

 

I would still guess they will not pivot soon, at least not until something really brakes. Just SnP itself at -20 probably is not enought this time. It would be easier to try to call a bottom if SnP was at least -30, after some heavy selling with VIX above 40:)

 

Edited October 7, 2022 by UK

[Gregmal]

I’d love to ban the term “something breaks”. Force folks to actually make sense of their communications because it’s by far the cliche buzz word of 2022. Just saying “until something breaks” is like the lowest IQ sound-byte putforthable. Not at all directed at you UK. 
 

Waiting for -40% would be what? Wiping out 20 years of savings for the 50-65 crowd? Because last year they did nothing and this year inflation is like 5%, but yea 1970! Come the fuck on. 

Edited October 7, 2022 by Gregmal

[UK]

53 minutes ago, Gregmal said:

I’d love to ban the term “something breaks”. Force folks to actually make sense of their communications because it’s by far the cliche buzz word of 2022. Just saying “until something breaks” is like the lowest IQ sound-byte putforthable. Not at all directed at you UK. 
 

Waiting for -40% would be what? Wiping out 20 years of savings for the 50-65 crowd? Because last year they did nothing and this year inflation is like 5%, but yea 1970! Come the fuck on. 

 

Take it easy:). It is a thread about market bottom. I think of it more as for entertainment purposes:). Btw not -40%, but something more like -30% and 40+ VIX. If I was constrained to investing in the total market (I do not do that), after that I would be fully invested, be it bottom or not:)

 

As for possible somethings: " By one measure—how much debt can be traded at a given price—market functioning today is as bad as it was in April 2020, in the depth of pandemic lockdowns, according to JPMorgan. By another measure, this year has seen the worst conditions since 2010, according to Piper Sandler & Co. The morning after the Sept. 21 Fed meeting, Treasury yields shot up. The 10-year yield jumped to more than 3.7% from around 3.55% in less than two hours. Roberto Perli, a central bank expert at Piper Sandler noted a growing gap between the yields on the easily traded Treasurys and others, a sign of more difficult trading conditions. “The capacity of dealers to make orderly markets has diminished,” he said. Treasury officials said they don’t see a reason for alarm, but trading conditions are a problem they are watching. “Reduced market liquidity has served as a daily reminder that we need to be vigilant in monitoring market risks,” Nellie Liang, Treasury undersecretary for domestic finance, said last month. Two once-reliable sources of demand for Treasurys, banks and foreign investors, are pulling back. U.S. commercial banks increased their holdings of Treasury and agency securities other than mortgage bonds by nearly $750 billion over the course of 2020 and 2021, partly to invest a pandemic-induced surge in deposits. This year, as customers have shifted deposits to such alternatives as money-market funds, that figure has shrunk by about $70 billion since June. For years, Treasurys were among the few advanced-economy bond markets with positive yields, making them attractive to foreign investors and a haven during moments of market turmoil. Now, other government bonds’ yields are rising, giving foreign investors more options. Added to these strains, the Fed itself has stopped a bond-buying program launched during the pandemic to support markets and the economy. “We worry that in the Treasury market today, given its fragility, any type of large shock really runs the risk of un-anchoring Treasury yields,” said Mark Cabana, head of U.S. rates strategy at Bank of America.

 

 

 

 

Edited October 7, 2022 by UK

[tede02]

6 hours ago, Gregmal said:

I’d love to ban the term “something breaks”. Force folks to actually make sense of their communications because it’s by far the cliche buzz word of 2022. Just saying “until something breaks” is like the lowest IQ sound-byte putforthable. Not at all directed at you UK. 
 

Waiting for -40% would be what? Wiping out 20 years of savings for the 50-65 crowd? Because last year they did nothing and this year inflation is like 5%, but yea 1970! Come the fuck on. 

 

LOL. I know what you mean. That said, many Fed officials this week have been doing a lot of jaw-boning that they need to see definitive evidence core inflation is coming down before they stop raising rates. There seems to be a lot of conviction to keep going. Assuming they do, that is going to keep significant downward pressure on the markets. They probably will keep going until there is a major crisis (the UK situation times 10). 

 

I heard Kashkari this week say they have seen little to no data that core inflation is declining. Yet, we are seeing deflationary signals all over the place such as housing, used cars and commodities. I think Gundlach makes a good point the Fed should slow the rate hikes down to give the effects time to work through the economy. But it doesn't look like they will. 

[Gregmal]

34 minutes ago, tede02 said:

I heard Kashkari this week say they have seen little to no data that core inflation is declining. Yet, we are seeing deflationary signals all over the place such as housing, used cars and commodities. I think Gundlach makes a good point the Fed should slow the rate hikes down to give the effects time to work through the economy. But it doesn't look like they will. 

Yup. I have no clue what they think the point of overdoing it is. They're blindfolded and swinging at a piñata that doesnt exist. If everything is coming down, and the only thing standing is a solid jobs market, its incredible to me that they'd keep being obtuse on little more than academic theory and a not really all that applicable 1970s sample size of 1. 

[SharperDingaan]

Headline inflation will come down simply because of the way it is calculated; current month additions smaller than current month roll-off. Which is essentially, confirmation of the anecdotal observations that we see all around us everyday.

 

Thing is, current month additions do not fall unless market liquidity and market confidence is reduced. This is where the CB's just do not see adequate evidence of it yet, so continue with the rate hikes and the QT; entirely different PoV.

 

Hence CB's keep reducing until we will get a market seizure, and a step-down in market confidence. While CB's have lots of practice in restoring markets, the reduction in market confidence remains for a while. Hard to argue against.

 

To quickly get to positive real rates of return again, we collectively need a big drop in the inflation rate, and less market liquidity and market confidence. If you are a sales person reliant upon market confidence to facilitate transaction occurrence and commission income ... this is terrible. 

 

Talking heads are in the marketing business.

 

SD

 

Edited October 7, 2022 by SharperDingaan

[UK]

 https://www.reuters.com/breakingviews/global-markets-breakingviews-2022-10-06/

The great “unknown unknown” is how the broad derivatives complex, which has notional positions measured in the hundreds of trillions of dollars and incorporates unfathomable leverage, with the vast majority linked to interest rates, will react as borrowing costs rise from their lowest levels in history.

 

One more ghost from GFC is beeing called:)

 

And no pivot for today: Federal Reserve Bank of New York President John Williams said on Friday that the United States central bank needs to continue hiking interest rates and, over time, bring them to around 4.5%. Williams stressed that inflation in the country is "very high" and the Fed is "far from where it needs to be." However, he remained confident that inflation will fall "significantly" in 2023 and the US economy will see positive growth.

Edited October 7, 2022 by UK

[changegonnacome]

8 hours ago, Gregmal said:

“something breaks”.

 

Yeah its an easy one to throw around. VIX solidly above 40+ touching 50 for a time is kind of my base case and in lots of ways one should think of the stock market now as just another version of interest rates, another brick in the wall of "financial conditions" that the Fed is using to cool the US economy.......cause it kind of is just that.....its the cost of equity capital for companies, the interest rate....the Fed is raising Fed funds, which feeds the cost of credit for consumer/enterprises and to the extent that Fed 'controls' stock prices it is driving the cost of equity financing up too........I think if you put a few whiskeys in Jay Powell he'd tell you SPY @ 2800 for a while would work very well for what he's trying to do with inflation.........its whether you can smoothly and in orderly fashion move SPY down to 2800 from 4800 or whatever.......the something breaking in some sense is things becoming disorderly which is just another word for market panics/blowups....VIX is kind of the best proxy.....