Is The Bottom Almost Here?

[changegonnacome]

27 minutes ago, Gregmal said:

jobs = inflation.

Jobs = inflation is a dupe? Not sure you’ve read what I’ve explained @Gregmal you either don’t get it or your ultra-bullish bias won’t let you get it.

 

Too much spending chasing too few goods/services = inflation.

 

Where do people get money to spend?……jobs (&credit)…but mainly jobs

 

Jobs = Spend = Inflation (in an economy where spending growth exceeds productivity growth).

 

I can’t get it simpler than that for you.

Edited March 15, 2023 by changegonnacome

[CorpRaider]

My proposed algo:  if crypto still exists or people have used the term "fintech" since the last meeting you hike.  If not, you chill.

Edited March 15, 2023 by CorpRaider

[Gregmal]

1 hour ago, changegonnacome said:

Jobs = inflation is a dupe? Not sure you’ve read what I’ve explained @Gregmal you either don’t get it or your ultra-bullish bias won’t let you get it.

 

Too much spending chasing too few goods/services = inflation.

 

Where do people get money to spend?……jobs (&credit)…but mainly jobs

 

Jobs = Spend = Inflation (in an economy where spending growth exceeds productivity growth).

 

I can’t get it simpler than that for you.

How is this the case when everything you can spend on is not inflating anymore or even deflating? Is the last bastion of the inflation puzzle really the $18 cheeseburger with a mandatory 25% tip?

 

We’ve had decades of job growth with little to no inflation before. 

Edited March 15, 2023 by Gregmal

[Viking]

Investing for the past 10 years has been all about following the Fed. When they are easing it is risk on for assets (stocks, bonds and real estate). When they tighten it is risk off for assets. Now it's pretty useless to debate whether this is good or not - that does not put food on the table. 

 

The simple question is what do they do moving forward. And how can investors profit?  Do they continue with their tight monetary policy? Is inflation still public enemy #1? Or do financial stability concerns cause a pivot to a more accommodative policy? Super interesting times! And probably a good idea to fasten the seatbelt... the ride from here could get even more rocky.

Edited March 15, 2023 by Viking

[Gregmal]

1 hour ago, changegonnacome said:

your ultra-bullish bias won’t let you get it.

Lol where is the basis for this claim? I own like 5 real positions most of which either long term holdings or bought last year. Up until maybe a week ago I don’t think I’ve bought a stock since last week of December. Since this time last year I’ve been discussing the arc of this all, from summer peak CPI, to rents/housing lapping in the fall, into the final act which was all the Ukraine war stuff. It’s bizarre to me that as we reach the crescendo, the bears are more bearish than ever. Yet we re at like 3800 spy, and again it just kind of highlights to me why bears never make sustained, long term money. Cuz they never know when to say ok, ‘‘twas a good trade”; they’ve always gotta have this next even crazier chapter where “it just keeps getting worse” and despite the declines there’s always “a lot more to come”. I still remember hearing some guy saying SPY 675 was “maybe 20%” higher than it should be in 2009….if rate driven fears cause some banks to collapse and widespread fear as evidenced by the same VIX action you’ve numerous times said you were waiting to see occurs, what else are we hanging onto? Is it cuz VIX is 30 and not 35? Both are good enough markers for me. Are folks still hanging on 3200? There’s really no value in this market? especially given where and how the story has evolved, right as all the things everyone needs to see to call victory by the fall are here… we re still hanging on? 

[changegonnacome]

57 minutes ago, Gregmal said:

We’ve had decades of job growth with little to no inflation before. 

 

Because productivity growth outpaced spending growth (job growth)......or more correctly spending growth OUTPACED productivity growth by only 2%

[Spooky]

4 hours ago, Gregmal said:

Let’s also not forget what starts in a few months and culminates in November 2024….the setup actually seems pretty clear. Not yet, but soon. 

 

Do you still think we will get this presidential cycle effect with the GOP controlling the house and stopping the administration's agenda?

[changegonnacome]

10 minutes ago, Gregmal said:

Lol where is the basis for this claim?

 

Your right its baseless claim and imprecise use of language.......what I would say and I think its a fair comment across this thread....is that you are, lets call it, anxious declare inflation a nothing burger and over.

 

But like I've said before....I enjoy talking to you....I lean, in this instance, too far bearish....at its extreme its a poor posture for an investor (over time) I might make money in 2022 & 2023 and lose it over the next decade....your the Yin to my Yang  And I appreciate it, genuinly. My bad for throwing around lazy ultra-bullish labels on you.

Edited March 15, 2023 by changegonnacome

[Gregmal]

2 minutes ago, Spooky said:

 

Do you still think we will get this presidential cycle effect with the GOP controlling the house and stopping the administration's agenda?

I think the data skews for some very easy victories for sitting President whether it’s energy prices or just plain CPI bragging which is inevitably going to decline for at least another 12 months consecutively(whether this fits @changegonnacome or Jerry Powell s framework IDK but the decline is inevitable), and I also think they’re going to protect the unemployment rate the best they can. Republicans really don’t have control over that and easy headlines like “falling cpi” and “lowest unemployment rate ever” tend to move needles, the same way largely we have seen CPI work the other way against the market over the trailing 12 months. 
 

@changegonnacome all good. It’s both fun and productive, even if sometimes redundant 

[Spooky]

20 minutes ago, Viking said:

The simple question is what do they do moving forward. And how can investors profit?  Do they continue with their tight monetary policy? Is inflation still public enemy #1? Or do financial stability concerns cause a pivot to a more accommodative policy? Super interesting times! And probably a good idea to fasten the seatbelt... the ride from here could get even more rocky.

 

Too hard to predict but my hunch is they stop increasing rates from here or at least become much more cautious with rate increases. Seems like they were already fairly close to getting to the upper end of their range anyway. They need to let sentiment settle, and confidence in the banking system return. Fear and greed is at extreme pessimism.

 

In the UK financial stability won out over inflation (although that seemed like a much more serious issue with gov bond yields spiking dramatically).

 

[changegonnacome]

 

28 minutes ago, changegonnacome said:

1 hour ago, Gregmal said:

We’ve had decades of job growth with little to no inflation before. 

 

Because productivity growth outpaced spending growth (job growth)......or more correctly spending growth OUTPACED productivity growth by only 2%

 

Final thought on this so folks get to understand it.......the natural rate of unemployment is like ~4.5 - 5%........when you go from 5% unemployment to 3.7% unemployment.......you are pulling a pool of workers off the sidelines that are deeply deeply unproductive....yet you are paying them the same as productive workers previously hired.

 

These unproductive workers...getting paid the same as the productive ones......add incremental spending growth into your economy but they offer diminishing and I would argue vastly diminishing output growth (productivity).........and so spending growth begins to outpace productivity growth by more than 2%......the delta widens and you get 3%......4% inflation.

 

Jobs do = Inflation

 

But its only the deeply unproductive workers added to the labor pool that cause it (inflation).....the last couple of million people added are the inflationary jobs! Not every job.....so that I'm being clear.

 

 

Edited March 15, 2023 by changegonnacome

[Castanza]

33 minutes ago, changegonnacome said:

 

Because productivity growth outpaced spending growth (job growth)......or more correctly spending growth OUTPACED productivity growth by only 2%

 

But isn't it counter intuitive to approach the issue of fewer good, more money by killing jobs? Why not let those prices inflate till consumers no longer want to pay? At that point you either innovate to bring prices down or go out of business because nobody wants your product. <---losing jobs due to lack of market demand vs intentional destruction. Or are we past that because we don't have a free market to begin with?

 

It just seems so asinine to hear "We need to kill jobs so people have less to spend on products that are too expensive." 

 

@changegonnacome Unproductive means what exactly in your post above? 

Edited March 15, 2023 by Castanza

[LC]

49 minutes ago, Viking said:

Investing for the past 10 years has been all about following the Fed. When they are easing it is risk on for assets (stocks, bonds and real estate). When they tighten it is risk off for assets. Now it's pretty useless to debate whether this is good or not - that does not put food on the table. 

 

The simple question is what do they do moving forward. And how can investors profit?  Do they continue with their tight monetary policy? Is inflation still public enemy #1? Or do financial stability concerns cause a pivot to a more accommodative policy? Super interesting times! And probably a good idea to fasten the seatbelt... the ride from here could get even more rocky.

 

I do not think the FRB will be easing much from here. My guess is a few (1-3?) more hikes (to really fvck with us), then they hold steady for a while. 

 

I'd say we're going to have to make money based on earnings, not multiple expansion.

(doesn't Jpow know I can't do that???    ) 

Edited March 15, 2023 by LC

[changegonnacome]

5 minutes ago, Castanza said:

But isn't it counter intuitive to approach the issue of fewer good, more money by killing jobs? Why not let those prices inflate till consumers no longer want to pay? At that point you either innovate to bring prices down or go out of business because nobody wants your product. <---losing jobs due to lack of market demand vs intentional destruction. Or are we past that because we don't have a free market to begin with?

 

It just seems so asinine to hear "We need to kill jobs so people have less to spend on products that are too expensive." 

 

Short version is answered in my post above this one - the jobs that are lets call themTO BE LOST - add very little to the total output of goods and services being produced.......and so in reverse their loss will indeed lead to some fall in total output but just not as much as you would think......yet these workers are paid the same and therefore spend the same as deeply productive workers.......

 

So the relationship between jobs lost, spend getting hit and TOTAL output falling is not 1:1 relationship on these workers.....you lose a little on the output side.....but ALOT on the total nominal spend.......its cruel math.....but its the reality & its how inflation gets 'fixed'.

 

Edited March 15, 2023 by changegonnacome

[Castanza]

5 minutes ago, changegonnacome said:

 

Short version is answered in my post above this one - the jobs that are lets call themTO BE LOST - add very little to the total output of goods and services being produced.......and so in reverse their loss will indeed lead to some fall in total output but just not as much as you would think......yet these workers are paid the same and therefore spend the same as deeply productive workers.......

 

So the relationship between jobs lost, spend getting hit and TOTAL output falling is not 1:1 relationship on these workers.....you lose a little on the output side.....but ALOT on the total nominal spend.......its cruel math.....but its the reality & its how inflation gets 'fixed'.

 

 

Ok gotcha, that makes sense from that standpoint 

 

Thanks

[changegonnacome]

15 minutes ago, Castanza said:

@changegonnacome Unproductive means what exactly in your post above? 

 

Adding these workers, all things being equal, does not add to the total output of your enterprise relative to the last worker you hired and what they did in terms producing incremental goods/services. Diminishing output returns to marginal labor effectively.

 

Think of it like a production line & one machine.....1st worker produces 100 widgets, 2nd worker added to the line leads to 50 widget increase (& 150 total).....widget demand keeps rising and so you add a 3rd person to the line (he/she is lazy bum and your stuck for workers and so you suck it up and hire them)....this third workers adds only 20 widgets (170 total widgets).....yet he/she gets paid the same as worker 1 & 2...........worker 3 is adding very little to the economy, yet is getting paid as if they are......their spend added to the economy increases spending growth ALOT......their labor added to the economy adds very little to aggregate output.....and you get inflation.

 

The above example is how - JOBS = INFLATION

 

Edited March 15, 2023 by changegonnacome

[Viking]

1 hour ago, LC said:

 

I do not think the FRB will be easing much from here. My guess is a few (1-3?) more hikes (to really fvck with us), then they hold steady for a while. 

 

I'd say we're going to have to make money based on earnings, not multiple expansion.

(doesn't Jpow know I can't do that???    ) 

If history is any example, the stock market might try and help convince the Fed to end rate hikes. And then try and convince the Fed to actually start easing. So my base case is to expect some pretty wicked volatility. So the market averages continue to swing in big directions both down and then up… but with a flat to downward bias in the coming months.

 

What is an investor to do? Active management will likely outperform simply buy and hold in the coming months. As we get to the bear market bottom, likely later this year, then buy and hold will likely outperform from that point forward. Obviously, just a guess. But it is useful to have a plan.

Edited March 15, 2023 by Viking

[mattee2264]

Markets generally bottom quite some time after the end of a Fed tightening cycle (long and variable lags in action). So wouldn't surprise me at all if the bottom was in 2024 probably midway through the recession that is likely to begin later this year. 

 

 

[Gregmal]

Strolled over to Seeking Alpha to do some low brainwork reading. My goodness have times changed. Every retail punter is calling a crash and bragging about “locking in” their 5-6% CDs and fixed income stuff lol. 

[Cigarbutt]

11 hours ago, Spekulatius said:

With their deposits, banks either do loans (their primary purpose) or buy bonds (MBS or treasuries). With securities I mean income securities (treasuries, MBS). Intentionally or not, the banks sucked up a lot of them in 2021, basically doing what the Fed has been doing with quantitative easing. They won't buy more of those long dated debt securities now and likely just run off the ones that they own as they amortize (MBS) or come due.

Fair enough but banks have been tightening lending for quite some time now, much before this recent liquidity noise. However, the revelation of some weakness in some banks (smaller, low loan to deposit ratio, less sticky deposit base) is unlikely, on its own, to cause a bank-induced liquidity crisis as deposits from weaker institutions will only tend move to larger institutions (with some leakage to money market funds, not showing up at this point in the reverse repo window).

If you dissect the info below from the graphs, smaller banks show a slightly more pronounced recent move in liquidity but, overall, at least on the surface, liquidity appears to remain abundant.

Cash assets have grown ++ with recurrent episodes of easing and the growth of cash assets has been larger than the growth of all assets which itself has been superior than GDP growth. The level of cash assets has always corresponded to total reserves (including excess reserves) so banks do not keep excess cash on top of excess reserves and always buy securities with the excess excessive cash.

With the recent tightening, the deposit to cash ratio has gone up but remains very low from an historical perspective. This aspect is unlikely to change significantly for the whole banking system if deposits simply move around.

All that to say though that it is interesting to see that cracks are starting to appear in the 'system', much earlier in this tightening phase than during the 2019 repo crisis. This looks like an addiction pattern and i wonder if it is debt addiction?

-----

Also, a slightly semantic precision (but a conceptual one also): banks do not do loans with deposits, they do deposits with loans. And the largest sources of deposit growth during 2020 to 2022 (about 80 to 85%) were QE to non-banks (most of QE) and banks expanding their balance sheets with government debt.

[Spekulatius]

@Cigarbutt The deposit to cash ratio is meaningless. In the past, banks have used MBS and treasuries as cash substitute, but that‘s not valid any more because the MTM on debt securities make them essentially an asset that the banks can’t touch (until they are close to par again). So in my opinion, you need to look at loans plus longer dated securities and if you do that, the liquidity is far less impressive.

 

Pretty much all the longer term security on the bank balance sheet are now immobilized :

 

Deposits made a Huge jump in 2020 but are now shrinking

https://fred.stlouisfed.org/series/DPSACBW027SBOG

 

Looks like there are $4.4T of treasuries and MBS on the banks balance sheet, which are mostly “under water”, so they are basically immobilized and can’t be sold , since it would lead to loss of regulatory capital. Those $4.4T represent basically quantitative tightening. I guess some of it is shorter dated paper, but I think most of it is longer dated.

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

 

Edited March 16, 2023 by Spekulatius

[Paarslaars]

9 hours ago, Viking said:

If history is any example, the stock market might try and help convince the Fed to end rate hikes. And then try and convince the Fed to actually start easing. So my base case is to expect some pretty wicked volatility. So the market averages continue to swing in big directions both down and then up… but with a flat to downward bias in the coming months.

 

What is an investor to do? Active management will likely outperform simply buy and hold in the coming months. As we get to the bear market bottom, likely later this year, then buy and hold will likely outperform from that point forward. Obviously, just a guess. But it is useful to have a plan.

 

I've got the same feeling, we're at least close to the end of rate hikes and we'll probably get some QE right into the U.S. elections.   

[Cigarbutt]

8 hours ago, Spekulatius said:

@Cigarbutt The deposit to cash ratio is meaningless. In the past, banks have used MBS and treasuries as cash substitute, but that‘s not valid any more because the MTM on debt securities make them essentially an asset that the banks can’t touch (until they are close to par again). So in my opinion, you need to look at loans plus longer dated securities and if you do that, the liquidity is far less impressive.

 

Pretty much all the longer term security on the bank balance sheet are now immobilized :

 

Deposits made a Huge jump in 2020 but are now shrinking

https://fred.stlouisfed.org/series/DPSACBW027SBOG

 

Looks like there are $4.4T of treasuries and MBS on the banks balance sheet, which are mostly “under water”, so they are basically immobilized and can’t be sold , since it would lead to loss of regulatory capital. Those $4.4T represent basically quantitative tightening. I guess some of it is shorter dated paper, but I think most of it is longer dated.

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

 

i guess it depends on what you mean by "tightening".

If tightening means an attempt at reversal of easy money, from the banks' balance sheet perspective, it's become harder to sell Treasuries on a net basis. Mark-to-market losses will help to go back to an easing mode as banks are less likely to continue to sell securities.

If tightening means less liquidity for 'risk-free' securities, it's unusual that a squeeze is already felt in this still ample reserves era.

Somehow (similar to the UK situation not long ago), given the apparent liquidity still present, it feels like the 'market' is refusing to react the way expected and this is similar to the 2019 repo crisis. It's not clear if recent tremors have anything to do with a "bottom" concept but i wonder if the Fed is not about to try to become unusually creative with further innovative facilities?

[TwoCitiesCapital]

Copy/pasting the below from the Fairfax thread as it's relevant here too

 

A cascading banking crisis will kill both inflation and employment AND tighten financial conditions. 

 

The measures put in place to allow banks to borrow liquidity instead of selling treasuries simply moves the pain to their income statement (due to the negative NIM) as opposed to the balance sheet. As consumers move cash deposits to productive allocations like money market, short term treasuries OR liability reduction/negative savings, banks lose deposits, accept negative NIM for the liquidity, and earnings get killed...but they remain solvent until such a time as rates more lower. 

 

Credit was already constrained and tightening - it's about to do even more of that and banks will have cratering earnings in response.  

 

The Fed has maybe one 0.25% hike in March left in it. That'll demonstrate their commitment to fighting inflation. Then, they'll hold short end rates higher for longer to further demonstrate that commitment. But rate hikes are basically done and inflation 12 months of out is already 0 to negative IMO. 

 

I'm going to go out on a limb and say the top is in for both the 2-year and the 10-year Treasury rate. 

 

[Spekulatius]

I posted this elsewhere, but deposits moving to MM is also a concern. Could be that savers are sleeping at the wheel and the whole debacle have woken them up and now they start to move funds.

https://finance.yahoo.com/news/deposits-started-moving-money-market-145355809.html