Is The Bottom Almost Here?

[Spekulatius]

I think you have to look at what the Fed and the economy is doing, not what they are saying.

What they are saying is said with an intent to control the narrative, but a narrative is not necessarily an fact.

Also, the Fed does not control the economy.

Edited February 3, 2023 by Spekulatius

[Simba]

Feel like sayin' it 

 

 “There's always a bull market somewhere."

[thepupil]

8 hours ago, TwoCitiesCapital said:

 

If you held long duration, zero-coupon bonds and reinvested the proceeds over that same 50-years, you probably did better. Which one is the inflation hedge again? 

 

Can you show the data to support this?
 

I love my bones and duration more than most but this doesn’t strike me as true (though I couldn’t find a good index for this type of thing that went that far back…and the 30 year tsy didn’t exist for the entirety)

 

Edited February 3, 2023 by thepupil

[Jaygo]

The Amazon call was quite cautious. There are very few companies around that would have the instant economic data feedback that they have access to.  I’d say the tone was not positive on the broader economy. It’s worth a listen imo. 
 

The fed ex call last quarter was similarly negative and provided a really good lens’s to view the broader economy. (Not bad but slowing) Im looking forward to this coming call to see if things have perked up. 
 

as far as I can tell the only things doing really well are the CoVid backlash stuff like travel and restaurants, fast fashion and the payment processors. 
 

ggg.  Graco a company I know very well talked a very confident game yesterday but actually saw lower sales if the inflation was stripped out. Another note on that call was some serious hubris about squeezing margins up 3% in the North American contractor market. Unit sales are down and these clowns are taking record quarters. 
 

my bellweathers say this fall is going to be slow as molasses, time will tell. Invest as you wish. 

[changegonnacome]

Everybody has been poo, poo-ing, the earnings getting whacked shoe to drop thesis...took a little longer than I thought ...but you check out what just got filed after the close today?......E getting whacked story has clearly begun............just went through all the big tech earnings........different calls, same messages.......kind of eerily scarily similar.....and from the best companies & business models the world has ever known....wait till the average no moat ZombieCo starts feeling it/reporting it .....weakening consumer, margins and earnings softening......corporate response to sales/margins/earnings slipping.....pretty much the same........EFFICIENCY programs.......we all know what that means.

 

Lots of enterprises are going to take big techs lead (already have FedEx etc.) and try to save margins & earnings by getting more "efficient" by doing layoffs.....works for a little while........but thinking they can all get to 'earnings heaven' together at the same time, doing the same thing in unison is the great MBA delusion.

 

Henry Ford had a revolutionary idea.......your employee is also your customer........when you fire employees, your also firing customers.

[IceCreamMan]

On 1/9/2023 at 9:14 AM, Gregmal said:

If you ever wanna venture down the rabbit hole of “short term trading”, at least in any manner that would be successful, most of it is simply about capturing those sort of feelings, realizing that they are what “everyone is feeling/acting off of/doing”, and then find the most appropriate way to bet against that consensus. 
 

 

@Gregmal What is the consensus feeling right now?

 

The bear market is over?

[Gregmal]

9 hours ago, IceCreamMan said:

 

@Gregmal What is the consensus feeling right now?

 

The bear market is over?

Just my guess and I’ve been tuned out for a couple weeks now but basically rate hikes are done, and economy will avoid any sort of hard landing. Don’t think we are pricing in much optimism but the recent rally also now makes those pay for certainty that all the doom and gloom is over. IE now pretty much everyone and their mom knows we won’t have 7% treasuries and widespread business+ CRE blowups.

 

My 2c was that the real bottom was June, then the pump and dumpers took another shot at it in October because “ZOMG, did you hear him? HE SAID THERE WILL BE PAIN”, but that wasn’t as pure a capitulation as the tech bottom. All the ponzi and SoftBank stuff signaled a real bottom in June. That stuff was the first to crack, so by the textbook that would have been the first to bottom.

Edited February 3, 2023 by Gregmal

[changegonnacome]

 

BLS Jobs Report and Non-Farm Payrolls:

 

As I've said before - in any economy you can give yourself all the nominal pay increases you want.....money is just pieces of paper......what you get to consume is what you produce......that is constrained by output & productivity growth.......changing the amount of paper money in circulation does not change the amount of goods and services......only the quoted price.........running wage growth way in excess of productivity growth like this gets you inflation excess of 2%.

 

Rate cuts in 2022 are now a fantasy......in fact, I think, that Powell/Fed are more likely now to raise expectations about the ultimate terminal rate at the next meeting & extend the horizon beyond 2023 into 2024 for how long they may have to hold it there.

 

Why does this matter about the bottom? It matters because if you look at market expectations or whats "in the price" right now its for rate cuts in H2 2023 & a soft landing......soft landing is TBC......but rate cuts are completely and utterly out the window IMO........ thats the future, not in market prices right now......higher for much much longer than is expected in light of what I expect to be US inflation persistently & stubbornly stuck above the Fed's target........driven by wage growth which is simply way too high for an economy with such poor productivity growth and completely and utterly inconsistent with 2% inflation.

 

 

 

Edited February 3, 2023 by changegonnacome

[Gregmal]

CNBC: Dow falls as jobs reports suggests Fed will keep hiking

 

Much like with Omicron over Thanksgiving 2021, theyre going to milk this til every last sucker gets fleeced. First, Dow is down 150 points...a rounding error and normal daily fluctuation. Second, blowout jobs show a healthy economy...that is good. Third, so what if the Fed does another 25-50 bps? Weren't folks just clamoring about the market expectation being 5-5.5 FF and how we are gonna go way beyond that? Or did that change already? Fourth, Feds job is dealing with inflation, not killing jobs for no reason....theres been zero link shown between inflation and jobs so far, and the academic wage price spiral theory is still just that.

[changegonnacome]

13 minutes ago, Gregmal said:

Third, so what if the Fed does another 25-50 bps?

 

So your saying the most important price in the economy - the price of money, interest rates....their level and duration of their stay at particular level....now IMO higher, for longer........what Buffet calls gravity..... doesn't really matter......

 

14 minutes ago, Gregmal said:

theres been zero link shown between inflation and jobs so far, and the academic wage price spiral theory is still just that.

 

Jobs/Wages/Income/Spending.........are ALL fundamentally the same thing as it pertains to the quantity of money in any economy......where do most people get their money from pray tell? the money tree or is it their wages? Answer is wages are the largest source of funds in the economy.............saying the wage-price spiral concept is an unproven academic theory..........is functionally the same as saying there is no link between the quantity of money and the price of goods. It's a bonkers to say it out loud and actually believe it.

[Gregmal]

7 minutes ago, changegonnacome said:

So your saying the most important price in the economy - the price of money, interest rates....their level and duration of their stay at particular level....now IMO higher, for longer........what Buffet calls gravity..... doesn't really matter......

Vs what’s priced in? Nope. Doesn’t matter at all.

 

Its why so many continue to sit here and scratch their heads as valuations rebound. Because last years declines priced in a whole lot worse. We are seeing the bid/ask in terms of most probably outcomes narrow big time.

Edited February 3, 2023 by Gregmal

[Gregmal]

8 minutes ago, changegonnacome said:

Jobs/Wages/Income/Spending.........are ALL fundamentally the same thing as it pertains to the quantity of money in any economy......where do most people get their money from pray tell? the money tree or is it their wages? Answer is wages are the largest source of funds in the economy.............saying the wage-price spiral concept is an unproven academic theory..........is functionally the same as saying there is no link between the quantity of money and the price of goods. It's a bonkers to say it out loud and actually believe it.

And then Japan or pre COVID USA pops up and says Hi, welcome to the real world. 

[tede02]

All the bond guys say the Fed isn't going to make it to 5%. Will be interesting to see if they exceed that level and market response. I feel like we're in for one more run up in long-rates before this hiking cycle is over. But this is total conjecture on my part. 

[Gregmal]

Think equations. We had what? 4-5 or whatever 75 bps hikes and a 50. We re at 25 now. 1,2,3,4 more 25 IMO aren’t a big deal because either way we are like 90-95% through the hike cycle. People can already start seeing the other side of things, so they’ll pay up more than they would have last year when most people were at best just guessing and many could still say we are gonna see hikes to 7-8%. Now those people are outed as the scumbag manipulators or total loonies that they are. Simply put, we have a sane bid/ask in terms of outcomes.

[Spooky]

19 hours ago, Parsad said:

Funny thing is that when I was sitting on the beach sucking back a mai tai watching the whales pop up once in a while, what Powell did was completely irrelevant to me...emotionally, financially and physically.  We pay WAY to much attention to the noise!  Just do what you do and keep doing it.  In the meantime, suck back on a delicious mai tai!  Cheers!

 

Wise words! Agree, need to cut out the noise and think long term.

[Gregmal]

Everyone knows the scoundrels I’m referring to. Mainly hedge fund guys and macro traders. The formula was so obvious.

1)Scream to anyone who would listen about the necessity of rate hikes (while shorting the market and buying 4-5% bonds lol). No conflict or agenda there!
 

2)Claim the Fed MUST do this. It’s an issue of ethics and national stability…LOL

 

3)Deliberately and dishonestly point to current CPI as the metric to determine inflation and where rates need to be raised to.
 

4)Quote the 70s stuff and unproven academic theory that doesn’t exist today but sounds scary

 

This game is dead and those folks deserve to get buried.

[Spekulatius]

What is the assumed trajectory of the Fed interest rates here. another 0.25% raise in March and then keep them for the remainder of 2023 there , would be my guess.

 

I do think the futures imply that rates are going to be lowered later this year? I don’t think that’s going to happen.

[mattee2264]

Unemployment apparently now at a 53 year low at 3.4%. 

 

I know that unemployment is usually a lagging indicator but if companies are pessimistic about economic prospects surely you'd have seen some layoffs outside of big tech? 

 

 

 

 

[changegonnacome]

5 hours ago, Gregmal said:

And then Japan or pre COVID USA pops up and says Hi, welcome to the real world. 

 

You seem to be saying that because we had ultra low interest rates in the 2010's and no excess goods and services inflation showed up that the whole wage/spending <-> price inflation theory is debunked???? And what I've explained above re:BLS report is academic baloney and nothing to worry about. I couldn't disagree more and I'll explain why.

 

I'll also expand more than usual if only so that I get my thinking down on paper and consider positioning against this. So forgive the length I'm writing this out for me......as the fella said the post is long, because I didnt have time to make it shorter!

 

If I'm right there is a serious amount of money to made taking the other side of the H2 2022 Fed cutting bet/soft landing bet that dominates positioning and market consensus- so it warrants some expansion as the 'wisdom' of the bond market can't be ignored.

 

Anyway back @Gregmal to your point with USA/Japan/real world ZIR reality killing the wage/spending<>price theory of inflation.......and how the very lack of inflation in 2010's during ZIRP in the USA and Japan puts the very idea in the garbage can.............respectively I don't think you understand where inflation comes from if thats your view point.......it comes from too much money/spending chasing too few goods and services.......it DOES not come from low interest rates or quantitive easing for that matter.

 

So again remember its too much money/spending chasing too few goods and services. It just so happens that wages are the MAIN component of spending/money in any economy.......like I said you poo poo wage-price theory....your effectively saying there is no link between the quantity of money and prices vis-à-vis inflation. Its akin to saying the flat earth guys have a point. It's bonkers.

 

Anyway let me repeat - inflation of the kind were concerned with consumable goods and services inflation in the real economy is not created by low interest rates. Low interest rates DO cause price inflation in cash flowing ASSET PRICES via the discount effect in financial markets/financial economy but not in consumable goods and services transacted in the real economy.

 

OK lets get a little more granular and explain the ZIRP 2010's and why inflation stayed, surprisingly for those that don't understand inflation as many seem not too, low in spite of zero interest rates. Its not a mystery.

 

There are three sources of funds or spending in the REAL economy:

 

(1) Wages

(2) Credit

(3) Government/Treasury

 

The 2010's had ultra low interest rates & quantitive easing.......but interest rates alone are not a source of funds/spending in the economy.....all things being equal lower interest rates do tend ordinarily to lead to more credit creation/demand which eventually DOES become spending. That however is not a given.........in the 2010's credit creation that could have become spending was actually exceptionally muted. Why? Well financial institutions were trying to repair their balance sheets - they weren't interested in making new loans. They were re-building regulatory capital. Consumers, hurting post GFC even if banks were lending (they weren't), had an aversion to credit and were repairing their own balance sheets. Lending standards, via regulation & capital requirements, also became more prudent = lower opportunity to create credit/spending. Low interest rates don't cause inflation. Credit creation that becomes spending causes inflation.

 

Central Bank quantitive easing, I here you say, again quantitive easing does not CREATE spending in the real economy....it is channelled into financial instruments. The Fed buys a bond from a financial market participant, they then take that cash and buy another financial instrument (presumably one further out the risk curve). The Fed does not buy eggs in the real economy or laptops or automobile via QE. Do all the QE you want.......its great for financial instrument valuation/inflation. Which, yes, has a little efficacy via the wealth affect.......however the transmission mechanism from QE to the real economy is rather weak. 

 

Now hopefully that helped you understand that.

 

So go look at the 2010's in the USA/Japan*........its no mystery at all why inflation remained muted even with 0% interest rates & QE..............go look at exactly what I look at right here TODAY and talk about ad nauseum in the BLS data from back then.......and you'll see (1) why there was low ~2% inflation then and (2) why there is and WILL BE inflation moving forward with this BLS data feeding into nominal spending growth that we got today..............see the 2010's was dominated by moribund spending growth and sleepy wage growth....credit creation was subdued in spite of low interest rates and governments in US and Europe implemented the wrong policies of austerity.....put it all in the pot.........and we can see why even getting inflation to the 2% target was difficult!!!!!! Lots of QE, permanently zero bond Fed funds with ECB going negative. Cause the delta between spending (wage/credit/fiscal) growth and output/productivity growth remained tight...that delta was sub-2%....so we got sub ~2%. inflation for a big chunk of time

 

So where are we right now and why this BLS non-farm payrolls/EIC data today and productivity growth data yesterday matter! And why they matter alot.

 

So again three sources of funds/spending in the economy lets think about them right now in contrast to the 2010's and you'll understand the difference:

 

(1) Wages today - wages are accelerating YoY at unusually high levels well above those seen in the 2010's......this is very DIFFERENT scenario......wage growth in 2021 was 4.5%, in 2022 it was 5.1%.......by contract wage growth in the period 2010 - 2105 the numbers were sub-2%.....1.8%....1.9% was the norm...a little later in the Trump roaring years it got to 2.4%!!!

(2) Credit - financial institutions with their balance sheets repaired and over-flowing with regulatory capital & SBA loan....as well as exceptionally low REAL interest rates in 2021/22..........credit in the USA economy was.....maybe not quite now.........absolutely free flowing...back logs for cars (mainly bought with credit) etc. Credit creation is I would imagine slowing now. I need to look into data on this although credit card debt is clearly going through the roof...credit card debt = immediate spending in the economy!! Put simply its a very robust credit creation environment....how many instant approval loans do people on here get offered every day??? They weren't so common in the 2010's....financial institutions are loaded with regulatory capital today......they are single and ready to mingle with borrowers!

(3) Government/Fiscal/Treasury - well we know they went crazy in 2020/21...trillion dollar packages here, there and everywhere........but would you say right now, their coffers full from nominal spending/wage growth taxes, that federal, state & local governments budgets are constrained....they most certainly are not.....Joe Biden is running around the country this week trying to turn the spiget on spending billions on infrastructure.....social security increases of what 8.5% got pushed through late last year. The fiscal authorities are to put it mildly spending like drunken sailors.....contrast that with the 2010's....remember WW3 over TARP...$475bn in the end  

 

Now the other side of the inflation coin - output/productivity:

 

Well productivity was pretty lousy in the 2010's averaging 2%........but that was OK.........cause against that nominal wage growth was muted too as outlined above, add in spending by the household sector (made up of muted wage growth & muted credit demand) and then add in restrained fiscal authorities fighting over BILLION dollar packages.....remember TARP........$475 billion, how quaint!........now its TRILLIONS or it doesn't get on the floor for debate......so short version when you aggregate spending growth against muted productivity growth.......it worked out to muted inflation prints....in some ways disappointingly low inflation.

 

Contrast that to today - you've got WAGE growth which flows through to nominal spending growth on fire with 4.5% & 5.5% prints the last two years.....and you certainly had a credit boom in 2021/H1 2022....credit card debt being the only credit sub-category booming right now......and then you have the fiscal authorities running around with TRILLION dollar fiscal packages burning a whole in their pocket.......CHIPS Act.....ironically named Inflation reduction act............all while PRODUCTIVITY growth wasn't 2% last year like in the 2010's.............it was god damn NEGATIVE!

 

 

I rest my case your honor............if you got to the end of the above congrats, not sure I would have.........I'm writing it more for you than me to double check I'm not crazy.......the market (equities/bonds) are positioned like this BLS data were seeing today and productivity data yesterday is a nothing burger.........if I'm right and I think I am.....they're wrong and there's a very nice opportunity to make some alpha. That's my job for the weekend

 

*Japan mystery using framework above...................shrinking/aging population = decelerating aggregate nominal spending growth (old people also spend less than young people which means double trouble).....so you could, if your not careful, even get outright falls in aggregate nominal spending and hence why the BOJ plays such a big role in that economy........then you've got the flip side of aggregate nominal spending and thats aggregate output/productivity growth.....if just maintain total output, never mind grow it..........while nominal spending doesn't grow but actually falls.........well you've got a disinflation problem.......which conversely is too little spending/money chasing too many goods and services!!!!

Edited February 3, 2023 by changegonnacome

[Spekulatius]

I think the 2010‘s were very different than the situation we have right now. We had several deflationary forces back than - globalization /outsourcing to China etc, Lower energy and commodity prices from (crude went from $90 /brl in 2010 to $50) and labor market slack that lasted until 2018/19.

 

None of these factors exist today, in fact they all reverted. I think it’s unlikely that the 2010 economy repeats, the structural framework is much different now. That doesn’t meant we stay at 6-8% inflation, but the 2% is very hard to reach. I think we will have structural higher inflation now than in the 2010 decade. This requires structural higher interest rates as well.

[maplevalue]

Is it not interesting how the "high inflation is now a secular phenomena" theme emerged precisely after a bout of inflation which was quite clearly caused by shutting down most of the economy while sending out cheques to people to not work.

 

I feel like it's very easy for economists to construct a narrative around high inflation when they can point to the current YoY rate and shout "deglobalization" "demographics" "a new commodity supercycle"...much harder for them to go out and understand the tremendous, and in my opinion underappreciated, efficiency gains from technology happening (for goodness sake Moderna had designed the COVID vaccine by March 2020!). 

 

Inflation is a very very very very difficult thing to understand/forecast. Which is why I am coloured skeptical of the new consensus that has emerged around it.

 

[Gregmal]

The next decade certainly won't look like the last. But I also like things that are asymmetric, off the radar, and have big payoffs. Theres none of that with trying to guess, let alone spending tons of time worrying about, whether inflation is 3.35 or 3.75 or 4.15% going forward. All we need to know, is what we already know, and thats that the clowns who said it would be north of 5% are done and so is all that came with that fear mongering charade. 

Edited February 3, 2023 by Gregmal

[tede02]

4 hours ago, maplevalue said:

Is it not interesting how the "high inflation is now a secular phenomena" theme emerged precisely after a bout of inflation which was quite clearly caused by shutting down most of the economy while sending out cheques to people to not work.

 

I feel like it's very easy for economists to construct a narrative around high inflation when they can point to the current YoY rate and shout "deglobalization" "demographics" "a new commodity supercycle"...much harder for them to go out and understand the tremendous, and in my opinion underappreciated, efficiency gains from technology happening (for goodness sake Moderna had designed the COVID vaccine by March 2020!). 

 

Inflation is a very very very very difficult thing to understand/forecast. Which is why I am coloured skeptical of the new consensus that has emerged around it.

 

 

Narratives are interesting. The financial media makes them up daily to explain market moves when they typically have no idea. 

 

The inflation rate is certainly coming down. But the way everything is priced presently creates a lot of downside risk if it (inflation) sticks around  or we get some jumps in the coming months. The new narrative is the the economy is slowing, inflation is coming down, Fed is going to pause soon. Today was a good reminder that it may not be that predictable. 

[mattee2264]

The next decade probably isn't going to be that great for stock investors.

 

Inflation probably will moderate to around 4-5% but could be quite sticky around those levels requiring an interest rate of around the same level. De-globalization, resource shortages, wage inflation as inflation expectations get built into the economy especially given the Fed is losing its stomach for the inflation fight. 

 

4-5% inflation and 4-5% interest rates (with some variation higher or lower depending on the stage of the cycle) would be fine if we had a healthy growing economy and moderate amounts of debt. But growth has been tepid post GFC struggling to get much above 3%. The roaring 20s narrative people peddled on the basis of an impressive recovery from COVID juiced by massive amounts of stimulus hasn't materialized and it looks more like boom and bust and then a return to tepid growth. Debt levels in the economy are very high and servicing that debt with 4-5% interest rates is going to choke economic growth. Politicians want to cut taxes but are constrained by high levels of government debt and exploding welfare costs as people got used to handouts during the pandemic. Record low unemployment figures disguise the fact that a lot of people simply aren't out there actively seeking growth and the quality of employment is poor with a lot of part time workers struggling to get by in a gig economy. 

 

Multiples have been high in the 21st century averaging above 20. But that was a product of a low interest rate environment and a composition effect as investors favoured growth and quality (bond proxies). With a change in leadership and higher interest rates over time you'd expect more moderate PE multiples which will probably result in the stock market going sideways over the next decade. Unless of course we get a proper reset. 

 

Peak earnings of the cycle were $210. Even if you assume that these are sustainable (doubtful as they were the product of a lot of stimulus, low interest rates, record high profit margins etc) once you put a 15x multiple on that you get a fair value of around 3200. 

 

 

[Jaygo]

Guys if you want to lower inflation go produce something that your neighbor needs. We have higher inflation now because people are lazy as hell and just sit around with their phones or push paper around. The government condones this shit for some reason. The last decade we had low inflation because poor nations were working their asses off for us. That stopped during CoVid. It is starting back up and inflation will drop. 
 

there is a video of a shirtless roughneck covered in drill mud working an oil rig. That bad ass hombre is the solution to inflation not typing on a forum or trading stocks back and forth with each other. 
 

sorry guys but if you are not part of the solution your part of the problem. Myself included. Look around society. Most people do not produce shit. 
 

also low interest rates should reduce inflation in a healthy free economy by allowing for increased production of goods. I’m hungover and am really part of the problem today. Sorry for the cussing .