Is The Bottom Almost Here?

[changegonnacome]

1 hour ago, Ulti said:

I'm sure there is some economic bookworm formula that equates low unemployment with high inflation

Yep - it’s called NAIRU and according to it - with a 3.5% unemployment rate the US should indeed be seeing some inflationary pressures……non-inflationary unemployment level, again according to it is ~5%

 

Congressional budget office estimates the ‘natural’ unemployment rate to be 4.4%

 

Whatever way you slice it we are in an unusually tight labor market. To have inflation above the 2% range in some respects is exactly would you expect if presented with just these data points.
 

Suspect the Fed wouldn't lose a wink of sleep if unemployment went up to 4.5%…..issue with that is that you don’t move an economy from 3.5% unemployment to 4.5% without a contraction in GDP.

 

Beyond 4.5% unemployment I think their fingers are on the easing trigger.

 

https://en.m.wikipedia.org/wiki/NAIRU

Other more interesting measure I check-in on is this:

 

https://fred.stlouisfed.org/series/SAHMREALTIME

 

Sahm’s rule - meant to signal the entering of a recession in real time based on the rate of change of unemployment 

Edited January 12, 2023 by changegonnacome

[fareastwarriors]

17 hours ago, changegonnacome said:

 

Any sense in the Bay Area whether the scale of other opportunities are such that she should be able to pick up something pretty quick or a bit of dislocation happening at the moment?.......the tight clustering of lay-offs in big tech and in Bay seem pretty large...........I've a developer friend who for years worked in FinTech.......but cool FinTech..........he just took a job with an insurance giant.........still technically FinTech but not the MacBook/Bean bag/Cortado kind he's used.......it wasnt his choice and as he says this less about building the future......and more about trying to drag legacy COBOL systems into the present while not breaking anything

 

The market for software engineers still seems decently strong. Her other laid off peers got jobs at Reddit/Spotify/startups. Some did go to bigger finance/insurance/non-tech companies but many of them are visa holders. They probably needed the infrastructure to help with their visa stuff. 

 

She's going to study and prepare for interviews later this month/next month. We have a 2 month old baby. No rush though.  Our PITI is only like $2000 and we have a tenant in an ADU paying $1300. We'll be fine for a while. 

 

Edited January 12, 2023 by fareastwarriors

[Gregmal]

29 minutes ago, changegonnacome said:

Suspect the Fed wouldn't lose a wink of sleep if unemployment went up to 4.5%

Ain’t this the problem. You have these elitist academics wantonly  fucking around with the lives of about 1 million people, on little but speculative theory, and not losing a wink of sleep.

[changegonnacome]

6 minutes ago, Gregmal said:

Ain’t this the problem. You have these elitist academics wantonly  fucking around with the lives of about 1 million people, on little but speculative theory, and not losing a wink of sleep.

 

Yeah I agree - its a question of who is right or wrong here.......

 

Option 1 - if inflation is going back to 2% all by itself then the Fed is wrong to turf a million people out of jobs for absolutely no reason. Guess this is your view @Gregmal that you know the inflation thing is a bit of nonsense at this point based on the data.......and 2% is just around the corner and really the first sign of trouble in the labor market the Fed should immediately pivot and deliver some cuts so as to support employment/the economy.

 

Option 2 - The alternative view of course is that an historically unusually tight labor market is contributing to inflationary pressures that are real and not going away without meaningful intervention........those inflationary pressures if not dealt with expeditiously could result in a sustained persistent period of inflation one where inflation expectations become unanchored making them even more difficult to remove later............and so the lesser of two evils is to accept some labor market turbulence now and weaker economic growth, restore definitively & irrefutably price stability and then build out an economic recovery & jobs market from there with stable prices as its bed rock.  

 

When I think of the two options from both a risk management point of view and then from an unelected bureaucrats point of view attempting to minimize his career/reputation/legacy risk........overwhelmingly I can see why Powell is choosing the latter option.

 

To choose Option 1 and turn out to have gotten it wrong (again, remember transitory!) would be a serious egg on the face moment and would resign Powell's tenure as Chair to the funny pages of Central Banking history books......Option 2 on a pure self-interested ego legacy driven Powell basis is the 'right' option. It ensures he's the Fed Chair that slayed the inflation dragon not the next guy or gal.

 

If incentives drive outcomes - his 'incentives' are clear.......you go for Option 2 all day long

[Gregmal]

Almost all of the inflation is attributed to stimulus checks going out for almost two years. As those are wearing off, there is a direct correlation to inflation declining. What’s left? End of the day will be little more than what was existing pre COVID. College costs insane, medical stuff a problem. But otherwise, if we weren’t sending missiles at normal people’s livelihoods in 2019, we shouldn’t be now, and the reason we are, is because folks are completely fabricating the idea that there is some new inflation that’s unrelated to stimulus present, that wasn’t, in say 2018 or 19.

 

Even above, in scenario two, you say “historically….” Except in this scenario historically is basically a cherry picked point in time, and void of a real application to todays situation.

[rkbabang]

20 hours ago, changegonnacome said:

20 hours ago, Gregmal said:

So pay bumps in January will result in the purchase of more medical services and textbooks/college courses? Childcare doesnt happen overnight. 

 

Ah well you know what I mean - thats a yoke i found online to illustrate a point...........lets just call them domestically produced services, consumed domestically.......

 

 

It's more accurate to call it: Highly government regulated or highly government subsidized services.  The freer market type stuff is bellow the line or at least closer to the line.

Edited January 12, 2023 by rkbabang

[Gregmal]

I mean there’s not just two options. Option 3 and what’s most appropriate is simple. Back the fuck off. No hikes, no cuts. It’s one thing to deliberately take action to prevent bad things from happening, IE cutting in March 2020, it’s another to just whimsically cause harm cuz some hedge fund guys sent a paid consultant a book report with a made up story about how it’s gonna be 1970 all over again.

[rkbabang]

All this talk about raising rates, in realityy rates still aren't that high.  You can get 5.5% 30 year fixed mortgage in the US today.  I bought my first house in 1997 when the economy was absolutely booming and took out a 30 yr fixed at 8.5%.  As long as the fed doesn't get really crazy raising rates I don't think what they've already done is going to do all that much damage.  I'm not one who thinks rates should be anwhere near 0.  Rates should be reasonable and predictable so businesses and people can make long term plans to allocate their capital wisely.

 

[Gregmal]

Totally agree. Things are back to a state of normal. Time to shut up and back off and stop listening to people who have literally just made shit up now since the day the word “inflation” became a free pass to start pushing the doomsday porn. I mean seriously, in 2023 we re gonna have these folks talking about how further hikes are needed to solve the orange juice shortage. It’s such a blatant crock of shit.

[changegonnacome]

31 minutes ago, Gregmal said:

Even above, in scenario two, you say “historically….” Except in this scenario historically is basically a cherry picked point in time, and void of a real application to todays situation.

 

I dunno @Gregmal we can chat & debate the other stuff...inflation and it sources/persistence etc.............but its been unusually and crazily and yes historically unusual labor market..........3.5% unemployment really isn't 'normal' see here https://fred.stlouisfed.org/series/UNRATE.

 

In the historical record you've got to go back to like the 1952 - 1954 period to find any persistent period of anything similar...this post-war period was when USA was the only game in town industrially with Europe in ruins.......and the Marshall plan requiring the undamaged industrial base of the USA to rebuild Europe......now did unusually low unemployment back then trigger inflation? The answer is No - but the country was still 'young', easy productivity enhancing investments could be made..............Eisenhower built the god damn inter-state highway system for gods sake! Imagine if Biden had such a no brainer productive capacity enhancing project available to him......then you had women and immigrants from Europe joining the labor pool.

 

So I dont accept cherry picked point in time as it pertains to the labor market - there is an anomaly there and one with likely consequences vis-à-vis inflation. We can debate the quantum.....but a 'hot' labor market clearly has an influence on inflation in an economy like the US which is as 'developed' as one can imagine...........and an economy which steadfastly seems to refuse to accept any immigration of scale/consequence to bolster it workforce/output capacity..............all against the backdrop of deteriorating demographics. 

Edited January 12, 2023 by changegonnacome

[Gregmal]

It’s all so simple and obvious. Shit even do the math on the average monthly wage of a typical stimulus recipient. Then weigh that versus the average monthly stimulus check. Then shut down some supply chains. It’s a total no duh. Oh rents went up 40% over two years? Oh! Really? Weird coincidence! Same with monthly car payments! Double weird. 
 

All this other random shit that wasn’t there prior to stimulus didn’t just magically show up. To move forward on the inflation/rate hike thesis, you need to believe it did. Not that run of the mill single digit pay raises that white collar folks aren’t even seeing will cause the 1970s.
 

There’s some asshole on Twitter lecturing about the Taylor rule. Like that’s the nonsense you need to start incorporating into all of this to keep it going. My guess is the Fed eventually gets the message that the real world is fine and once they have a few more months(basically by April or so) on plummeting inflation it’s over. Which is why the markets are easing up a bit. 

[changegonnacome]

33 minutes ago, rkbabang said:

I'm not one who thinks rates should be anwhere near 0.  Rates should be reasonable and predictable so businesses and people can make long term plans to allocate their capital wisely.

 

Yep me too - personally I think Central Bank's should be given a floor on rates to stop them playing these silly monetary games......all investment should have a hurdle rate..........lets call the floor 2%.......crazy ZIRP world undoubtedly led to a lot of misallocation of resources......and why.......well because the god damn politicians didn't have the balls to step up and do what they are elected to do.........so they left the 2010's to a bunch of unelected technocrats in Central Bank's to figure out how to 'fix' the economy and we got ZIRP........it was IMO a real failure of the political class that didn't have the imagination/fortitude to tidy up after the GFC

[TwoCitiesCapital]

2 hours ago, changegonnacome said:

 

Yep me too - personally I think Central Bank's should be given a floor on rates to stop them playing these silly monetary games......all investment should have a hurdle rate..........lets call the floor 2%.......crazy ZIRP world undoubtedly led to a lot of misallocation of resources......and why.......well because the god damn politicians didn't have the balls to step up and do what they are elected to do.........so they left the 2010's to a bunch of unelected technocrats in Central Bank's to figure out how to 'fix' the economy and we got ZIRP........it was IMO a real failure of the political class that didn't have the imagination/fortitude to tidy up after the GFC

 

I think they should just go back to being a lender of last resort and give up on money supply control, interest rates rejiggering, or employment targeting as if they have the ability to manage any of those effectively across the cycle. 

[mattee2264]

Agree that monetary policy should be a lot more boring going forward which will hopefully get the market less focused on "open mouth operations" and CPI prints and more focused on fundamentals such as earnings. Although difficult to see that happening anytime soon. Even with a slower pace of rate increases going forward market optimists will still dream about a pivot later this year and that seems to have got us back to 4000 on the SPY. 

[Gregmal]

Why is it, that even after a decent sized decline, the ONLY reason that its believed the market can stabilize or go up are these things like "hopium", "optimists", and "dreams about rate cuts"? Couldn't the market have simply reset, and thats what it is now? Is there just a quintessential underpinning belief that the market should always be going down?

 

Its a weird phenomena Ive seen with lots of assets. "Bitcoin keeps ripping"...eh it went from $65k to $16k and now is at $19k...ripping? Not what I'd describe that as. "Meme stocks are back"...oh we mean overvalued stocks that have cratered and been shorted by every two bit hedge fund out there now have some short covering? BBBY $40 to $1, but rally to $4 and "we're back to euphoria?

 

Its just a weird portrayal of things. 

[mattee2264]

Interest rates have reset and I cannot imagine them going much higher or lower from here. But I think earnings have a bit lower to go to reset as the peak earnings achieved in 2021 were fuelled by cheap debt, fiscal largesse, pent-up demand and a surge in growth for Big Tech thanks to the pandemic. 

 

The coming recession doesn't seem to bother the markets because they figure they can look through it and perhaps even look forward to a resultant pivot from the Fed. Clearly that was the right attitude during the pandemic. 

 

But what if what lies ahead is a reset of earnings to pre-pandemic levels with no implication they will swiftly recover to new highs? Couple that with moderate but higher interest rates than pre-pandemic and I think that unless the Fed panics and reverts back to money printing and zero interest rates we have lower to go. 

[Gregmal]

1 hour ago, mattee2264 said:

Interest rates have reset and I cannot imagine them going much higher or lower from here. But I think earnings have a bit lower to go to reset as the peak earnings achieved in 2021 were fuelled by cheap debt, fiscal largesse, pent-up demand and a surge in growth for Big Tech thanks to the pandemic. 

 

The coming recession doesn't seem to bother the markets because they figure they can look through it and perhaps even look forward to a resultant pivot from the Fed. Clearly that was the right attitude during the pandemic. 

 

But what if what lies ahead is a reset of earnings to pre-pandemic levels with no implication they will swiftly recover to new highs? Couple that with moderate but higher interest rates than pre-pandemic and I think that unless the Fed panics and reverts back to money printing and zero interest rates we have lower to go. 

When I think of hope, and dream, and all that, largely it refers to looking at something and having to connect a lot of bridges via assumptions to make something then vastly different. 

 

The market is largely what it is today. The market is where it is...much of it off significantly. So what resembles optimism and hope for a thesis? That, or envisions of a scenario in which things go much lower because of all the bold? How do we determine that "the market" is just "figuring" all these kind of loose assumptions into everything instead of discounting them? 

 

I'd hate to miss that was without question some utterly tremendous investment opportunity because of a hunch and a lot of assumptions that might make the market go down 10-20% more. Theres been A LOT, in many areas of the market. One of the things I dont get is that in general, people treat this in and out thing as a mitigation strategy for volatility. But volatility is one of the dominant aspects of investing in stocks. Like why would someone looking to invest in stocks, not being OK with volatility? Or worry about 10-20% fluctuations? THAT is what stocks do, by nature. It would be like wanting Chinese food but trying to avoid the carbs or msg. Or desiring pizza but saying hold the bread and the cheese. So I just dont get the point to holding a perspective that seeks to do the same. 

[vinod1]

S&P 500 Earnings are $160 in 2019. Nominal GDP is up 20% over the last 3 years - about 14% inflation and around 4%ish real GDP growth. So earnings are about $190 per share in 2022 if earnings kept up just with GDP and inflation in 2022. Now add around 4% in net buybacks and you are close to $200 per share. Does not seem to be too far out of line.

 

Or take a look at the top 50 companies by market cap and identify which ones are "peak earnings" or overstated earnings or high PE. Except Tesla, hard to find anything obvious.

 

I actually went through the exercise of looking at the top 50 companies, then looking at each industry as a profit share of the S&P 500, adjusting them up and down to come up with a rough estimate. My arguable conservative estimate comes to $180 in 2022. 

 

Now, this is the only recession that I know of where everyone and their pet is predicting. Whereas in the past, recessions have been more of a surprise. Companies started making adjustments long before the actual recession even starts.

 

Maybe, just maybe, we have a recession and it may produce only a small earnings dip or might not actually produce any earnings dip. Heck, earnings might even increase slightly in the midst of a recession. Consumers are still pretty flush with cash, companies have locked in low rates, banks in strong financial position. Unless we get some really spectacular corporate failures, or a major geopolitical blowup somewhere I just do not see any issues.

 

In 2001/2 we had 9/11 and Worldcom/Enron/Adelphia scandals. 2008/9 we had GFC. Unless we have something similar I do not see any impending doom.

 

 

 

 

[vinod1]

2020 taught us the power of Fiscal and Monetary policy. When faced with a potential for another Great Depression like scenario a $3 trillion fiscal dose + $5 trillion monetary dose produced a robust economy all for a 20% inflation hit. 

 

Come another major risk to economy, all the players now have a playbook.

 

Tail risks are now much lower than in the past. This has got to be extremely bullish for stocks over the next several decades.

 

Now that I said it, the markets are going to tank. To all the bears: you are welcome.

 

Vinod

 

 

[Blugolds]

7 hours ago, Gregmal said:

When I think of hope, and dream, and all that, largely it refers to looking at something and having to connect a lot of bridges via assumptions to make something then vastly different. 

 

The market is largely what it is today. The market is where it is...much of it off significantly. So what resembles optimism and hope for a thesis? That, or envisions of a scenario in which things go much lower because of all the bold? How do we determine that "the market" is just "figuring" all these kind of loose assumptions into everything instead of discounting them? 

 

I'd hate to miss that was without question some utterly tremendous investment opportunity because of a hunch and a lot of assumptions that might make the market go down 10-20% more. Theres been A LOT, in many areas of the market. One of the things I dont get is that in general, people treat this in and out thing as a mitigation strategy for volatility. But volatility is one of the dominant aspects of investing in stocks. Like why would someone looking to invest in stocks, not being OK with volatility? Or worry about 10-20% fluctuations? THAT is what stocks do, by nature. It would be like wanting Chinese food but trying to avoid the carbs or msg. Or desiring pizza but saying hold the bread and the cheese. So I just dont get the point to holding a perspective that seeks to do the same. 

 

I agree and I dont get it either. People talking out of both sides of their mouth and its a waste of time.

 

You hear about impending recessions that the market "just hasnt realized yet" and then in the next breathe complaints that there are no value opportunities because "efficient market theory" has priced everything in.  

 

Humans have bias and naturally want to look for confirmation, reading tea leaves to paint a narrative that they either want...or fear. 

 

Its much less stressful to play the ball as it lays. Take what is presented. To your point, markets are gonna market. These guys should WANT volatility! Why wouldnt you? I dont understand why someone that wasnt say, 5 years from retirement, WANT another recession, and view it as a once in a decade or more OPPURTUNITY to make some serious money. And honestly if you are close to retirement you should be positioned as such anyway, so even then it shouldnt be catastrophic.

 

The manic Mr Market analogy shouting crazy price offerings. Literally ANY other item goes on ridiculous discount...70" Sony flatscreen TV normally $1500 at the store, you walk buy and they have it on clearance for $100 or a $400 Xbox for $50 because some kid at the store made a mistake with the barcode scanner or read the pricing sheet wrong, nobody would assume the item was junk, they would just quietly fill a cart up and make their way to the checkout line, but when it comes to solid businesses that they have held or are looking to take a position in, they freak out. WHAT $400 XBOX is now worth $50?! I better go home, kick my kid off his game, and throw that thing on Craigslist while I still can!! LOL New BMW on the lot for $5000 anyone? Rolex in the display case for $300? 

 

Philosophically I sometimes think of this like Walt Whitmans writings: "Do I contradict myself? Very well then, I contradict myself, I am large, I contain multitudes". He is embracing something seen as a shortcoming (seeming unreliable), into a positive. The idea that a person has to adhere to hard principles all the time , but doesnt acknowledge that principles can change. We want consistency all the time or risk appearing weak or unreliable. Whitman says the person who never contradicts himself doesnt think deeply enough or is too simple minded. 

 

Applied to the market. If you are thinking enough, your strategies should change as opportunities present, rather than wishing for (or expecting) slow and steady increases in the market that allow cookie cutter DCF projections, accept, expect, and embrace volatility. Acknowledge that the market doesnt always stick to hard principles and you dont have to either. 

 

Continuing with your analogies, the ship is most safe in the harbor, but thats not what ships are made for. Safe space for investors does not present the best opportunity for investors. AND when you buy solid companies, for instance BRK (obviously) and COST, I think of the WB's analogy, to focus most on picking the right person to marry, and then not worry if you paid a little too much for the ring. 

 

What a horrible way to live, constantly trying to predict things that are nearly impossible, stress when things are good because something MIGHT happen, stress when those fears become REALITY, stress when things happen that you didnt see coming. Just roll with it. 

 

 

[james22]

15 hours ago, vinod1 said:

Tail risks are now much lower than in the past. This has got to be extremely bullish for stocks over the next several decades.

 

Sure. That's the Dow 36,000 argument: once stocks are recognized as less risky than now thought, they'll correct upward.

[Kupotea]

16 hours ago, vinod1 said:

S&P 500 Earnings are $160 in 2019. Nominal GDP is up 20% over the last 3 years - about 14% inflation and around 4%ish real GDP growth. So earnings are about $190 per share in 2022 if earnings kept up just with GDP and inflation in 2022. Now add around 4% in net buybacks and you are close to $200 per share. Does not seem to be too far out of line.

 

Or take a look at the top 50 companies by market cap and identify which ones are "peak earnings" or overstated earnings or high PE. Except Tesla, hard to find anything obvious.

 

I actually went through the exercise of looking at the top 50 companies, then looking at each industry as a profit share of the S&P 500, adjusting them up and down to come up with a rough estimate. My arguable conservative estimate comes to $180 in 2022. 

 

Now, this is the only recession that I know of where everyone and their pet is predicting. Whereas in the past, recessions have been more of a surprise. Companies started making adjustments long before the actual recession even starts.

 

Maybe, just maybe, we have a recession and it may produce only a small earnings dip or might not actually produce any earnings dip. Heck, earnings might even increase slightly in the midst of a recession. Consumers are still pretty flush with cash, companies have locked in low rates, banks in strong financial position. Unless we get some really spectacular corporate failures, or a major geopolitical blowup somewhere I just do not see any issues.

 

In 2001/2 we had 9/11 and Worldcom/Enron/Adelphia scandals. 2008/9 we had GFC. Unless we have something similar I do not see any impending doom.

 

 

 

 

I don’t think you need a recession for stocks to perform poorly again this year. Lets assume the economy keeps chugging along which by all indications it has to date, where do long term treasury yields go? What’s a fair risk premium for equities if the 10 year yields 4-5%? Look at how copper is reacting with China reopening. Do oil prices stay subdued with low inventories and a global economy moving forward at full strength? How do you convince an entire cohort of retirees to come back to the workforce?
 

There are compelling arguments that the economy remains strong. There are also indicators that we get a recession sometime in H2. I have yet to see a convincing argument that long term rates should be inverted without a corresponding hit to earnings.

[Red Lion]

1 hour ago, Kupotea said:

I don’t think you need a recession for stocks to perform poorly again this year. Lets assume the economy keeps chugging along which by all indications it has to date, where do long term treasury yields go? What’s a fair risk premium for equities if the 10 year yields 4-5%? Look at how copper is reacting with China reopening. Do oil prices stay subdued with low inventories and a global economy moving forward at full strength? How do you convince an entire cohort of retirees to come back to the workforce?
 

There are compelling arguments that the economy remains strong. There are also indicators that we get a recession sometime in H2. I have yet to see a convincing argument that long term rates should be inverted without a corresponding hit to earnings.

 

If 10 year yields go to 4-5% for a sustained period of time, it seems like stocks would still be a better place to ride the out compared to long term bonds since they should have decent earnings growth as things normalize. 

 

I don't think it's an issue of convincing a cohort of retirees to come back to work (short term solution). I think it's not farfetched at all to say that AI and robotics are going to have to play a roll in what comes. The demographic situation is very different going forward with a larger retired population and fewer productive workers, and I think this is showing itself in real estate prices, certain service costs, etc. 

 

If services inflation persists, the ROI for implementing AI and robotics to improve employee efficiency also goes up. I don't invest in AI or robotics short of some stock in GOOGL and AAPL, but I sure would like to if I could understand it. 

 

In California they're talking about raising minimum fast food wages up to $22/hr. I think the economics are really going to start making sense in some of these situations, which is good, maybe those fast food employees can go to work in home health care or construction, which is where society needs the labor right now I would say. 

Edited January 14, 2023 by RedLion

[Gregmal]

16 minutes ago, RedLion said:

10 year yields go to 4-5% for a sustained period of time, it seems like stocks would still be a better place to ride the out compared to long term bonds since they should have decent earnings growth as things normalize. 

Exactly, I am blown away by the idea of anything else. If rates stay higher than they are today it’s because of inflation. Why in the F would anyone want to own a paper asset in that situation? The reason, it seems to me, is that most people who buy stocks don’t actually understand that they are buying ownership of anything. They are simply invested in the day to day quote.

[vinod1]

4 hours ago, james22 said:

 

Sure. That's the Dow 36,000 argument: once stocks are recognized as less risky than now thought, they'll correct upward.

 

Very different.

 

Their argument is that stocks and bonds have the same level of risk. Hence stocks do not need any equity risk premium i.e. a equity risk premium of zero.

 

What I am saying is historical risk premium of 6.5% is too high and going forward it should be lower.

I will lay out my reasons - not actually mine, but these arguments are quite well documented by many for the last 20 years. Shiller, Philosophical Economics, etc.