Is The Bottom Almost Here?

[UK]

https://www.wsj.com/articles/inflation-sudden-drop-12-5-month-cpi-pce-energy-food-new-year-price-federal-reserve-11672914903?mod=opinion_lead_pos6

 

Maybe we should start the new year with some good news: Inflation has fallen dramatically. No, that’s not a prediction; it’s a fact. With one month remaining in 2022 (in terms of available data), inflation in the second half of the year has run vastly lower than in the first half. In fact—and this is astonishing—it’s almost back down to the Federal Reserve’s 2% target. Even more astonishing, hardly anyone seems to have noticed. Yes, there’s a catch or two or three, to which I’ll come back. But first the good news: Over the past five months (June to November 2022), inflation has slowed to a crawl. Whether measured by the consumer-price index, or CPI, which most people watch, or the price index for personal consumption expenditures, or PCE, which the Federal Reserve prefers, the annualized inflation rate has been around 2.5% over these five months. Yes, you read that right. Yet hardly anyone has noticed this stunning development because of the near-universal concentration on price changes measured over 12-month periods, which are still 7.1% for CPI inflation and 5.5% for PCE inflation. Normally, focusing on 12-month inflation rates is the right thing to do, for two main reasons. First, it guards against hyperventilation over “blips” in the inflation data, whether up or down. Second, it obviates the need for seasonal adjustment, since, for example, you are comparing prices in November 2022 with those in November 2021. But when the inflation rate changes abruptly, 12-month averages can leave you watching recent history rather than current events. Today is one of those times. As mentioned, the CPI inflation rate over the past 12 months has been an alarming 7.1%. But the U.S. economy got there by averaging an appalling 10.6% annualized inflation rate over the first seven months and a mere 2.5% over the last five. The PCE price index tells a similar story, though a somewhat less dramatic one. The 5.5% inflation rate over the past 12 months came from a 7.8% rate over the first seven months followed by a 2.4% rate over the last five.

 

Edited January 6, 2023 by UK

[Gregmal]

Theres no inflation anymore and in a few months even the lagging stuff will reflect that. The economy and earnings continue to hang in there. Everyone is talking about mispricings but nobody has considered the possibility that the recession gets avoided and the Fed is soon forced to stop. Their mandate is inflation and soon they'll have no leg to stand on there. So whats the bet? That they say "no inflation but we won't stop till we kill a lot of jobs"? Thats neither their mandate nor a position an official will likely do well with for very long. Other side of the coin is that the economy then picks up, mortgage rates normalize, and off we go. 

[Gregmal]

I mean the most likely scenario I feel is staring right at us, right in front, almost every week. Jobs numbers continue to crank. Wages good but not spiraling. Savings/credit good. Inflation plummeting. Yet everyones too busy watching bear porn and reading conspiracy theories that when another good economic figure comes out they wanna sell their stocks because the macro clowns have told them good news is bad(LOL is this ever really true if you're a long term investor not buying stupid crap?) and to run from 50 bps because the punchline is....stuff might go down 20-30%. As if stocks arent known to be a volatile asset class...

 

 

[TwoCitiesCapital]

49 minutes ago, Gregmal said:

I mean the most likely scenario I feel is staring right at us, right in front, almost every week. Jobs numbers continue to crank. Wages good but not spiraling. Savings/credit good. Inflation plummeting. Yet everyones too busy watching bear porn and reading conspiracy theories that when another good economic figure comes out they wanna sell their stocks because the macro clowns have told them good news is bad(LOL is this ever really true if you're a long term investor not buying stupid crap?) and to run from 50 bps because the punchline is....stuff might go down 20-30%. As if stocks arent known to be a volatile asset class...

 

 

 

What makes you say savings and credit is good when savings are falling and revolving credit balances are rising? 

 

Also, why focus on inflation and jobs which are lagging indicators while ignoring leading indicators which are cratering for many months in a row now?

[rkbabang]

Does anyone else remember a recession/depression that was anticipated and expected by absolutely everyone like this coming one in 2023 is?  Makes me thing that gregmal may be correct and it doesn't happen.  

[Gregmal]

12 minutes ago, TwoCitiesCapital said:

 

What makes you say savings and credit is good when savings are falling and revolving credit balances are rising? 

 

Also, why focus on inflation and jobs which are lagging indicators while ignoring leading indicators which are cratering for many months in a row now?

Just follow the stuff Wabuffo looks at. It’s spot on. The “savings are drained and credit spiraling out of control” narrative is largely cherry picked lies and distortions used to create bear porn. 
 

 

 

Like seriously people are talking about consumer credit and conveniently  “forgetting” to exclude mortgage debt. Or “including” it but then ignoring equity. 

[Gregmal]

3 minutes ago, rkbabang said:

Does anyone else remember a recession/depression that was anticipated and expected by absolutely everyone like this coming one in 2023 is?  Makes me thing that gregmal may be correct and it doesn't happen.  

Yea. First they said it was supposed to happen in 2022 LOLz

[Gregmal]

I’ll also clarify that I’m certainly not saying ignore anything. In fact, I’m questioning why no one else is taking that advice. Pretty much everything I’ve seen and read for months now completely ignores anything that doesn’t fit a scary narrative. 

[Dinar]

Just a data point.  My daughter's private nursery school in NYC said that there will be no tuition increase for 2023-2024 academic year.  Too late for us, but interesting.

[Spooky]

1 hour ago, Gregmal said:

I mean the most likely scenario I feel is staring right at us, right in front, almost every week. Jobs numbers continue to crank. Wages good but not spiraling. Savings/credit good. Inflation plummeting. Yet everyones too busy watching bear porn and reading conspiracy theories that when another good economic figure comes out they wanna sell their stocks because the macro clowns have told them good news is bad(LOL is this ever really true if you're a long term investor not buying stupid crap?) and to run from 50 bps because the punchline is....stuff might go down 20-30%. As if stocks arent known to be a volatile asset class...

 

 

 

Totally agree. The US continues to post very robust job growth numbers each month so it seems that outside of the tech sphere the overall economy is still humming along. Once people start to realize that inflation is moderating (and could even flip negative) stocks are going to rip.....

[TwoCitiesCapital]

34 minutes ago, Gregmal said:

Just follow the stuff Wabuffo looks at. It’s spot on. The “savings are drained and credit spiraling out of control” narrative is largely cherry picked lies and distortions used to create bear porn. 
 

 

 

Like seriously people are talking about consumer credit and conveniently  “forgetting” to exclude mortgage debt. Or “including” it but then ignoring equity. 

 

This is interesting because both M2 and M1 money supply have been in contraction since March/April and both have "checkable deposits" as an input (along with travelers checks, CDs, currency, money market, etc).

 

Which would suggest that revolving credit would have to be contracting even faster for the spreads in your post to have blown out like it has, but that's not true either. Revolving credit has been rising consistently over that time.

 

So the difference must be in checkable deposits vs checkable deposits + money market + CDs + currency + etc. 

 

Doesn't the latter sound like a better measure of "cash" savings? And it's the latter that has been contracting for the last 9 months. 

Edited January 6, 2023 by TwoCitiesCapital

[Gregmal]

I think the thing I try to focus on is if the aggregate data is saying stuff that collectively gives cause for concern and where that stands relative to market expectations. For the past few months all we ve heard is that this margin call like moment of truth was about to happen; the consumer, on their knees financially, was supposedly putting their Christmas trees on the high interest credit cards and the recession was about to collapse every earnings component in the index so we get to our universal consensus of S&P 3000. And idk, but that just seemed like story telling void of real evidence and what we keep seeing is confirmation of that.

[Spooky]

From the WSJ today… goldilocks has entered the room!

 

[maplevalue]

Is the Bottom Almost Here?

 

Yes.

[changegonnacome]

5 hours ago, Gregmal said:

I mean the most likely scenario I feel is staring right at us, right in front, almost every week. Jobs numbers continue to crank. Wages good but not spiraling. Savings/credit good. Inflation plummeting.

 

I'm somewhat thinking that actually a soft landing of sorts maybe (big maybe) possible.......but a soft landing for labor, not capital and by capital i mean not a great out turn for broad SPY/QQQ.......let me explain........I think in the last few decades capital has beat the hell out of labor.....just go look at the relative returns to each, stagnant middle class etc...........this recession may actually be an earnings recession where the brunt of the pain/contraction is seen in the corporate sector vs. household sector......and given the labor shortage, job losses in some parts of the economy will see labor re-allocated much more quickly than in the past meaning unemployment will not rise so high.

 

So I remain open to idea of a soft landing.....however on the balance of probabilities and based on 2023 wage increases I expect to see flood the economy in Q1/2 2023.....I think domestic led goods& services inflation will remain stubbornly above 4% & flaring back up in H1 2023.....as I mentioned before I believe a single round of wage setting negotiations across the economy needs to be informed by strongly & demonstrably weakening inflation data peppered with macro/recessionary weakness such that FY2024 pay increases of 4% get to be in line with productivity growth (2% real/2% nominal) bringing us back into equilibrium.........fall/winter 2023 is the 'right' timing to get this done and so I suspect the Fed to keep their resolve in the face of cries to pivot....think David Tepper said something to the same effect recently.......the market loves to believe the Fed when it speaks about loosening financial conditions.....every word is gospel then....... but sticks its fingers in its hears when it talks about its resolve to tighten/weakening the economy. You can see why its human nature.

 

I remain into 2023 somewhat they way I was in 2022.......I'm a fully invested bear.......core portfolio positions around which negative market & individual company hedges should provide downside protection, even upside as it did for me 2022.......I'll do better much on balance if we enter a bull market but i see no real signs of that yet....and I wont be fighting the Fed like Tepper says.

[D33pV4lue]

6 hours ago, Gregmal said:

Theres no inflation anymore and in a few months even the lagging stuff will reflect that. The economy and earnings continue to hang in there. Everyone is talking about mispricings but nobody has considered the possibility that the recession gets avoided and the Fed is soon forced to stop. Their mandate is inflation and soon they'll have no leg to stand on there. So whats the bet? That they say "no inflation but we won't stop till we kill a lot of jobs"? Thats neither their mandate nor a position an official will likely do well with for very long. Other side of the coin is that the economy then picks up, mortgage rates normalize, and off we go. 

 

I am with you in this line of thinking. I think the probability of a recession being avoided or the recession being very mild is being underestimated. The contrarian in me has been brainstorming possible paths. One idea I keep coming back to is the fed keeping interest rates where they are once they think they have "defeated" inflation for an extended period of time. Everyone seems to think they will start to cut immedietly. 

[TwoCitiesCapital]

19 minutes ago, D33pV4lue said:

 

I am with you in this line of thinking. I think the probability of a recession being avoided or the recession being very mild is being underestimated. The contrarian in me has been brainstorming possible paths. One idea I keep coming back to is the fed keeping interest rates where they are once they think they have "defeated" inflation for an extended period of time. Everyone seems to think they will start to cut immedietly. 

 

I think there's good argument to be made for labor holding up better than expected given the current shortage. Especially on the low-end. 

 

But I dont think that saves the stock market. Earnings are already falling. Margins contracting. PMIs negative. All before the labor market has even turned, which it likely will because the Fed has said they're ok with it being higher than what it is so they'll hike until they get there. 

 

All that stickier jobs really means is higher wages for those on the low end. But those aren't the people buying stocks and real estate. They're the people buying food and used cars. There will be a floor to those physical goods. A much lower floor for capital goods. 

 

And honestly - I think that's the best outcome we could hope for. The most vulnerable of society somewhat insulated from the recession, equities coming out of clear bubble valuations for reasonable forward returns, the ability to actually earn a rate of return without taking equity risk, and the wealthiest of society who have benefitted most the last 20-30 years bearing the cost of the fight of that inflation. 

 

My gut tells me it won't be this neat and clean, but I can hope. 

 

Really concerned that a spike in energy and commodities again, with China reopening and lessening the credit spigot, upends the calculations with inflation re-accelerating and then even low income people get the shaft of higher expenses while the Fed continues to tighten into a clearly contracting US economy. 

Edited January 6, 2023 by TwoCitiesCapital

[Gregmal]

I don’t think the Fed cuts anytime soon. Nor should they. But mortgage rates have a ways to go down to normalize. That’s the key rate. Otherwise, there’s enough real assets and business that are gonna crush it from these levels, in most likely outcomes, while also still enough bloated darlings still out there that one can still do quite well. 

[frommi]

Maybe i am completly of the marks, but most equities here are not cheap. When you look at big businesses in the S&P 500 they still trade at fat multiples. That doesnt look like a bottom. And while a lot of people after the latest moves think the bottom is in, i really doubt it. We didnt have a real panic move yet. Can imagine it happens soon. Biggest downmoves in the markets happened always after the FED has cut rates not before.

I have a simple system based on yield curve, inflation rates and unemployment rates that has 12 month recession probabilities at 60% right now, which is a new high. An uptick in unemployment rates next report and it has a 3/3 risk off signal, meaning you are better off hedging or going out of the market. This has not happened since 2008. So be careful, a drawdown like in 2002 is possible. The current situation is very comparable to the end of 2001, you had the tech bust, retouch of 200 day average line and still high valuations. In the current market i wouldnt touch anything that is not recession resistant. But thats just my opinion, will also probably add hedges to my portfolio soon, since i am already up so much for the year that i can easily afford it.

[dealraker]

Those of us with some years in us do find it stimulating to witness the cut-n-run nature of those with panic level fear of 5% interest rates.  Hell, we bought a business with borrowed money in the late 1970's that expereienced the 20% prime rate of early 80's and such.  5% would have made us piss in our pants and throw an absolute bizerk party with all night drunk celebrations.

 

My view is the same, things like banks are destined to do better than expected.  Big cap tech?  Not so much.  Most I guess think Amazon is a steal and near 20% growth is endless, Tesla, Microsoft, and such are right back to the races with SAAS and ARK stocks right behind.  And Google/Meta days will be ok, but not great, already mentioned these are the dominant ad'ers, their path will be cyclical growth.  The chant is going to still be "the cloud" all while "the cloud" in old dealraker's view is wisping into the N/A category...sorry, still priced in years ago.

 

The good thing for investors is that other things are quite ok these days for investing.  But old habits are hard to break.

 

And oh how much I enjoyed the change-and-Greg debate here, it was a first class debate as to inflation/rates/royal disaster and such.  No matter how it turns out it is THE most predicted recession/inflation/bust in the history of my life ---- and I mean BY FAR the most.

 

Life is great...if you can stand it!  

 

My guess: Buffett lives long enough that the chants that he should invest in Amazon, Tesla, Microsoft, Google, Meta, and such are replaced by a whole new group of investor obsessions.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Edited January 7, 2023 by dealraker

[Spekulatius]

I bought my first house in 2002. The mortgage rate was 6.75 percent with BofA in spring 2002. So mortgage rate like we currently have currently certainly have are not exactly a new experience, thry were around exactly 20 years ago.

 

I do think that once the Fed stops raising, mortgage rates will come down, because the margins that banks or mortgage lenders need will come down. That’s due to the convexity nature of MBS in a rapid rate rising cycle, I think. I do think the Fed already signaled that they won’t cut in 2023, but they may be about to be done rising for now. Maybe another 0.25% rise and we could be done.

[changegonnacome]

45 minutes ago, Spekulatius said:

I do think the Fed already signaled that they won’t cut in 2023

 

I think so too - and I think they've been crystal clear now that they see the risk of easing too early to be much greater than the risk of holding rates too high for too long................given the former would potentially see inflation come back as it did in the 70's........requiring another painful round of tightening later......this Fed is focused on one and done.......this bias towards doing too much versus too little is the big disconnect between what I see priced in the bond/stock market & what might play out this year. The idea IMO that the FED will be cutting rates in H2 2023 is wishful thinking.

 

The Wily Coyote moment later this year will potentially be when the economy & stock markets are clearly weakening and the Fed does nothing and re-asserts its resolve.....lets define it as a VIX 35+ moment........cash used to be trash.........but IBKR is paying me nearly 4% to hold it and wait, UST 3-M 4.5%.......its getting to be attractive to wait around relative to whats out there and this trade from equities to cash.......will require equites to provide a greater equity risk premium to reverse the flow.

 

Its going to very interesting indeed to watch it play out.

 

 

[Gregmal]

13 minutes ago, changegonnacome said:

The Wily Coyote moment later this year will potentially be when the economy & stock markets are clearly weakening and the Fed does nothing and re-asserts its resolve.....lets define it as a VIX 35+ moment........cash used to be trash.........but IBKR is paying me nearly 4% to hold it and wait, UST 3-M 4.5%.......

The issue is that all of this is just as much wishful thinking.
 

Piece by piece, the economy has already moderated some, the stock market is off anywhere from “some” to “a lot” depending upon what you define that as. Amazon for instance is down like 50% from when it became a VIC favorite.
 

So 75% of your catalysts have already occurred or at least seem to be acknowledged by most of the market, and the Fed has been clear a while they’re holding rates for a bit. Who is this consensus that is indicating they are cutting or is this just another assumption derived from “the market is at 20x and I think it should be at 15x”? And again, 4% is a waste of time. Yes, even if the ultimate gotcha is that once in a while the market will have short term performance inferior to that.

[copelandlewis]

I don't know if this has been discussed yet or not but how did the Fed devise the 2% inflation target. When the average US inflation rate over the last fifty years has been 4%, the 2% inflation target seems low.

[changegonnacome]

1 hour ago, Gregmal said:

Who is this consensus that is indicating they are cutting or is this just another assumption derived from

SOFR forward curve has rate cuts forecast in for H2 2023….Fed holding at ~5% isn’t priced in….and I would suggest (with no data to back it up)….only opinion….that what’s most definitely not priced in is the lack of central bank easing when economic conditions emerge that would have ordinarily triggered such actions in the past (rising unemployment, bankruptcy’s, market stress/bordering on panic). I’m skeptical that the Fed will show resolve on this last point but pronouncements to date show a Fed mentally preparing itself to do just that. Let’s see.

 

1 hour ago, Gregmal said:

the market is at 20x and I think it should be at 15x”?

 

2022 - was the year of multiple compression this part of the story is mostly over I think Possibly some more to go as folks begin to think of world where 3-4% risk free rate might exist longer term on the far side of this sea change and so the longer term ERP built on top of that assumption  needs to decrease multiples a bit more but not much.

 

2023 - is the year of E compression….all those 2023 pay increases are coming out of operating margins….you can’t push price anymore on a weakening consumer….& you can’t maintain volume without cutting price. It’s a year of tough choices at an operating company level. 

Edited January 7, 2023 by changegonnacome