Is The Bottom Almost Here?

[Gregmal]

1 minute ago, changegonnacome said:

VIX is kind of the best proxy.....

Yea that’s generally one of my go to hedge plays. But it’s been different the last 4 months or so. Under 30 it’s still whippy. But over 30 it just seems to die. Definitely synching up with more of a non panic, systematic sell. Vs traditionally, even with the last of the COVID variants, a 2-3% down day would be +15-20% VIX spikes. But that can all change in an instant and the calls over 40 ain’t too expensive and that’s where you hit the 10-20 baggers so I’ve been rolling some of those.

[UK]

12 minutes ago, changegonnacome said:

 

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.....

 

I agree that this time fed does not care for the stock market at all and even tries to talk it down. It is perhaps much preferable for them to tighted financial conditions that way, instead of more rate hikes, which hurts real economy more. However the risk for this thesis is that thay probably cares much much more about bond market, and as with GB case, if this market "goes banana" (i am trying not to use "something brakes" there:)), pivot could happen very quickly, without waiting for the next meeting:). They have very good skills for saving the system. That is why I am not sure thera are high odds we will see these extreme/really cheap levels in the market. 

[changegonnacome]

I think the Fed is happy to push things with rates really until VIX hits 50.....then they think about backing off........I see what academics mean about the transmission mechanism being slow especially in an economy where most mortgages are fixed rate.....rate increases are only hitting the incremental buyer of property whereas in Europe variable mortgages means transmission mechanism is quicker as more of the population is effected immediately via monthly mortgage payments.......basic checking accounts in the US are still comfortably sitting at 0%.....First Republic are still handing out personal lines of credit at 2.95% fixed for 7 years........folks think the world has changed in terms of rates but they havent really fully.....yet.....money supply has been hit for sure, credit is in the process of being hit but not done.....but the final piece the one that matters the most is hitting spending/incomes....and we just arent there yet as todays jobs report shows

[Spekulatius]

On 10/5/2022 at 2:44 PM, Parsad said:

 

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!

As long as the labor market doesn't crack, we won't see defaults or bankruptcies. We are far away from any issues on this end. Even 5% unemployment is basically full employment and unemployment is at 3.5%.

 

Latest labor market report confirms this:

https://finance.yahoo.com/news/september-jobs-report-october-7-2022-203836987.html

 

Then we have the incrementally bad news from Opec. If they jack up oil prices again, it will keep inflation high. Now, it's a big question if they are adhere to the plan and outrun the demand destruction that is mostly happening in emerging markets etc, but it's still quite bad news on the inflation side.

Edited October 7, 2022 by Spekulatius

[Ross812]

10 minutes ago, changegonnacome said:

I think the Fed is happy to push things with rates really until VIX hits 50.....then they think about backing off........I see what academics mean about the transmission mechanism being slow especially in an economy where most mortgages are fixed rate.....rate increases are only hitting the incremental buyer of property whereas in Europe variable mortgages means transmission mechanism is quicker as more of the population is effected immediately via monthly mortgage payments.......basic checking accounts in the US are still comfortably sitting at 0%.....First Republic are still handing out personal lines of credit at 2.95% fixed for 7 years........folks think the world has changed in terms of rates but they havent really fully.....yet.....money supply has been hit for sure, credit is in the process of being hit but not done.....but the final piece the one that matters the most is hitting spending/incomes....and we just arent there yet as todays jobs report shows

I think short term rates and the increases we have seen so far in mortgages are trickling down more than you think. Homeowners cashed out $275B worth of home equity last year. That's about the same as the $1200/adult and $500/child covid stimulus checks. That's an indirect stimulus that has completely dried up. Look no further than lumber prices and new home starts to see the impacts of raising interest rates. 

 

 

[changegonnacome]

11 minutes ago, Spekulatius said:

Even 5% unemployment is basically full employment and unemployment is at 3.5%.

 

Exactly......~5% can be argued to be the 'natural' rate.....or NAIRU -  Non-accelerating inflation rate of unemployment https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/nairu-data-set

 

3.5% is ultimately not 'normal' or natural and indicates an economy overheating......it also explains the horrible productivity numbers coming out recently....you are dipping into a pool of labour with super high diminishing returns to productivity......

[Dalal.Holdings]

Looks more and more like the ‘70s to me

 

And sorry, FAANMG more and more

like Nifty 50

[changegonnacome]

28 minutes ago, Dalal.Holdings said:

Looks more and more like the ‘70s to me

 

Yup -  just the music isn't as good  

[Spekulatius]

12 minutes ago, changegonnacome said:

 

Yup -  just the music isn't as good  

I also lost my hair.

[Guest]

Like the 70s? Oh, did dollar standard just change? If not...then it ain't the 70s. 

[Gregmal]

It’s funny cuz if the wage increase, expected to come in at 5.2% came in at 5.3%, we’d be hearing a never ending string about needing more massive hikes. Instead, it comes in below and we still need more hikes. I guess people just like the current narrative. 

[widenthemoat]

No idea where the bottom is, but this is starting to become a hell of a lot of fun if you’re an investor and not a speculator. I see no problem at all with what the Fed is doing. 2% inflation has always been the target. The rules of the game haven’t changed, people just don’t like how the dice are landing now. I would also argue the “savings” that potential retirees are losing were never real in the first place, just artificially created by the fed. The 15% - 20% annual returns since 2008 were a joke and obviously not going to continue. Massive inflation was always the inevitable outcome, it was just a matter of when. Nobody is entitled to 15% returns when the real economy grows at 2% and that’s what people started to think. It was banana land. 

[changegonnacome]

8 minutes ago, widenthemoat said:

I would also argue the “savings” that potential retirees are losing were never real in the first place, just artificially created by the fed. The 15% - 20% annual returns since 2008 were a joke and obviously not going to continue.

 

There's two types of wealth - perceived wealth and real wealth.....real wealth you can eat........commonly called distributable FCF......perceived wealth has a horrible tendency to vanish when reached for!

[Guest]

33 minutes ago, widenthemoat said:

No idea where the bottom is, but this is starting to become a hell of a lot of fun if you’re an investor and not a speculator. I see no problem at all with what the Fed is doing. 2% inflation has always been the target. The rules of the game haven’t changed, people just don’t like how the dice are landing now. I would also argue the “savings” that potential retirees are losing were never real in the first place, just artificially created by the fed. The 15% - 20% annual returns since 2008 were a joke and obviously not going to continue. Massive inflation was always the inevitable outcome, it was just a matter of when. Nobody is entitled to 15% returns when the real economy grows at 2% and that’s what people started to think. It was banana land. 

 

I agree that it's becoming more fun. I hope the market keeps dying. Slow and painful is ideal. You want people to hate the market and swear it off forever. As I said the other day, in my opinion, we're not there yet. The thing is, that point may or may not happen this time around. 

 

The 15% or so returns since 2008 were partly based on a (relatively) low starting base. I mean, the market was negative from 2000-2009. 

[Dalal.Holdings]

1 hour ago, stahleyp said:

Like the 70s? Oh, did dollar standard just change? If not...then it ain't the 70s. 

 

Nixon Shock and Covid Printer going 'Brrrr are similar IMO.

 

Millenials are the new Boomers and they are forming households, demanding higher wages and spending that paper on home/kids.

 

Arab Oil Embargo recurring in Russian embargo of gas to EU/West and ESG causing chronic underinvestment in fossil fuels past decade...

 

If you invested in the Go-Go stocks of Polaroid or Xerox (FAANMG) like Gerald Tsai (Cathie Wood), then they might be good businesses but not nec good returns...

 

Edited October 7, 2022 by Dalal.Holdings

[Gregmal]

1 hour ago, stahleyp said:

The 15% or so returns since 2008 were partly based on a (relatively) low starting base. I mean, the market was negative from 2000-2009. 

I always wonder how people choose to arrive at their start points? Why 2008 or not 2007 or 2015 or 2000?

[Gregmal]

Maybe we re getting close. Monday Jumbo Jim said the bottom was in. Today he updated his position.

 

https://www.cnbc.com/2022/10/07/cramers-week-ahead-dont-be-a-hero-while-the-fed-battles-inflation.html

 

Although also amazing is this. The second most overused finance buzz phrase this year is either “coming in hot” or “the E”. Well, apparently the economy is still way too strong. So if that’s the case, why is “the E” gonna fall off a cliff and never recover?

 

Lotsa contradictions in the market right now.

Edited October 7, 2022 by Gregmal

[changegonnacome]

35 minutes ago, Gregmal said:

why is “the E” gonna fall off a cliff

 

 Cause of a little place, you might have heard of,  called the 'rest of the world'

Edited October 7, 2022 by changegonnacome

[Gregmal]

40 minutes ago, changegonnacome said:

 

 Cause of a little place, you might have heard of,  called the 'rest of the world'

Whew. For a minute I thought the Garden was gonna be empty and no one would want Alico oranges. Hopefully the rate hikes get that whole energy thing straightened out. 

Edited October 8, 2022 by Gregmal

[changegonnacome]

13 hours ago, Gregmal said:

Whew. For a minute I thought the Garden was gonna be empty and no one would want Alico oranges. Hopefully the rate hikes get that whole energy thing straightened out. 

 

Totally.....US domestic focused businesses are going to get to be a bargain (already are in many cases, especially small cap value) as they get caught in the negative beta current.............SPY/QQQ is chock full of global champions selling into recessionary Europe/China & the DXY just blew out on them too & thats before we even get to inflationary pressures eating away at ATH profit margins.....Q3/Q4 earnings are gonna be a doozy

Edited October 8, 2022 by changegonnacome

[Cigarbutt]

19 hours ago, widenthemoat said:

No idea where the bottom is, but this is starting to become a hell of a lot of fun if you’re an investor and not a speculator. I see no problem at all with what the Fed is doing. 2% inflation has always been the target. The rules of the game haven’t changed, people just don’t like how the dice are landing now. I would also argue the “savings” that potential retirees are losing were never real in the first place, just artificially created by the fed. The 15% - 20% annual returns since 2008 were a joke and obviously not going to continue. Massive inflation was always the inevitable outcome, it was just a matter of when. Nobody is entitled to 15% returns when the real economy grows at 2% and that’s what people started to think. It was banana land. 

Hmm..Interesting.

No idea either but it may be helpful to think separately about the two types of inflation.

-Asset inflation

The recent era of cheap or easy money (opinion: to which the Fed has contributed) has likely been a tail wind to asset inflation. So, to the extent general 'easing' has been a positive contributor, it can be reasonably expected that general 'tightening' would tend to be a negative contributor. But there was no rush to act for the asset inflation aspect and that's why foundational principles of central banks tend to focus on their independence and on their short-term liquidity advantages in times of stress. For those interested, Edward Chancellor (Devil Take the Hindmost fame) recently released The Price of Money. He criticizes central banks (he assumes interest rates have been artificially suppressed) and describes potential unintended consequences, one of which is asset inflation. But the intent behind the present tightening phase which has been initiated by central banks is not aimed at asset inflation (unless it's an acte manqué). And they could 'pivot' anytime.

-Consumer inflation

Something happened (versus consumer inflation) in 2020-2. There was an unusual and unprecedented phase of both monetary and fiscal easing. This had been brewing since the GFC and had started to go away in 2019 but there was then the equivalent of an acute and huge helicopter money experiment. This works with a lag (private money accumulates and then gets depleted; the process well advanced with saving rates down and consumer debt up lately) and the consumer inflation effects of this experiment should be over (as reported in official numbers) in early 2023 (especially with supply side effects mostly disappearing; on their own and by decreased demand). 

It looks like their 'transitory' definition was correct (opinion, if transitory is meant to be 12 to 24 months) but central bank mindset (in addition to the relative fiscal drag felt as a result of the transfer withdrawal) presently focus on the need to lower inflation (even if their own policies (if believed to be relevant) also act with a lag) even if inflation will take care of itself shortly.

Why?

This is not the 70s inflation when wages were also pulling inflation. After the initial positive effects of various transfers, for more than a year now, real wages after transfers have been coming down (negative effects).

How Inflation Has Affected Households at Different Income Levels Since 2019 (cbo.gov)

The above likely underestimates the 'true' CPI (CPI-essentials) that lower income groups are facing and take into account the increasing taxes paid as a result of inflation (effect on income tax brackets etc; poor trend going forward). The trend for this aspect is also following a reverse trickle down pattern. i think the Fed is reacting to this cost of living crisis and (opinion) i wonder if they are shooting in their own goal. And of course they could 'pivot' any time but will it matter at some point?

[scorpioncapital]

finallly we see the reality. not even 'great' saas businesses are really worth more than 15x-20x earnings in a high rate environment. since I still see lots of over 20x stocks, much less earning nothing stocks, I can see potentially a long way to bottom. but hard value should be ok. another scenario is that earnings do grow, slowly, to grow into a currently 'frozen' valuation for a few years. trader's market if that's the case.

[flesh]

Prediction, when we lap the first 8+ inflation print, march 23'. The market will recover.... no later than that, maybe sooner. 

[changegonnacome]

59 minutes ago, Cigarbutt said:

i think the Fed is reacting to this cost of living crisis and (opinion) i wonder if they are shooting in their own goal. And of course they could 'pivot' any time but will it matter at some point?

 

Really enjoyed the above post and I think you are hitting on something but not sure it actually casts doubt on what the Fed has to to or should do....and even think that your on to something re: the acute fiscal/monetary intervention and how it itself has a half life that perhaps is transitory......I think the Fed is aware of this aspect of the puzzle.....however and this is where we step in to the realm of inflation psychology, central bank credibility & reflexivity and so its gets a little esoteric......but this bout of inflation, whatever its source, has been ongoing now for a significant period of time & forecast even in the best case scenarios to be 'above 2' for another 12-18 months ......even if the Fed believed that the monetary/fiscal inflation was just this acute spike in response to extraordinary but ultimately temporary measures, it in addition to supply chain/energy inflation have fused together together to form a multi-year inflation time series.....this length of time isn't good for both (1) inflation psychology and (2) central bank credibility.

 

This Fed therefore is racing to address both and in some ways cant afford to run the "transitory" experiment again even if it had a reasonable likelihood of actually being true THIS time.....I posit that inflation psychology would break, if they paused and made another transitory call that turned out to be an error.........which in turn would destroy whatever credibility they have left after their intial transitory call....inflation expectations, which remain anchored, would blow out & then you really aren't in Kansas anymore & all the Paul Volcker analogies might come to pass......as really what would be required then would be Jay Powell to be replaced and for whomever replaced him to basically do a Volcker impersonation.

 

Because lets be clear what Jay/Fed is actually proposing to do to fix this is NOT Volcker, not even close to it.....but everybody is screaming like little girls about it cause they've got so used to ZIRP levitating their portfolios, keeping vol low and bailing them out of every dumb investment they made......Fed funds @ ~5% & unemployment at ~5-6% .....eh go talk to your parents who around in the 70's, they would have sacrificed their first born child (maybe that was you!  )  for that macro backdrop. In the historical record those numbers are a nothing burger.....what will be actually note worthy in the historical record is the re-marking of some asset prices relative to their post-GFC/ZIRP highs.

[crs223]

22 minutes ago, changegonnacome said:

inflation psychology

 

I don’t believe people are behaving as if they expect inflation (good news for the Fed and maybe everyone else).

 

1-2 years ago people were hoarding FOMO-style, anticipating increased prices for (or shortages of) toilet paper, xboxes, cars, houses, bitcoin and stocks.

 

Im not saying that there is no inflation, just that people are not behaving like there is.