Is The Bottom Almost Here?

[changegonnacome]

1 hour ago, RedLion said:

Could the all powerful fed just avoid the valley of death and manage this problem with QE? 

There is simply no way to solve a too much money problem chasing too few goods/services problem…..by creating more money.

 

Nominal spending growth needs to drop significantly……..there is no benign ( & realistic*) way to do that without raising unemployment & creating something akin to a recession.

 

No pain, no gain I’m afraid…..but like busting your gut at the gym….future you will thank you……..the same way future COBF will thank JP for just getting the US back to price stability & a slow moving predictable interest rate environment…

 

* Unrealistic ways are opening immigration flood gates, a productivity miracle driven by I dunno free government sponsored childcare….or sweetheart tax credits for boomers to come back to the workforce. My personal & unrealistic favorite is some type of glitzy national savings scheme…that makes saving deeply attractive versus spending.  

[mattee2264]

I think the current strategy of letting stuff break and let that contribute towards the tightening of financial conditions while patching up the cracks with the various methods learned during the GFC is the most palatable solution right now. 

 

Clearly interest rates do not really have much room to go higher and the sooner the economy goes into recession and brings inflation way down with it the better as that will allow a moderate pivot which buys more time for institutions to clean house and adapt to a higher interest rate environment. 

 

Real estate will be the next shoe to drop. The banks aren't headed for a financial crisis but they won't be able to lend in the same way they used to and will exercise a lot more caution. And if real estate takes a tumble that will help push the economy into recession and have far more far reaching negative wealth effects than a modest correction in stock markets. 

 

And I still maintain this is a multi year process. When you've had such a long long long bull market then you need a bear market for a few years to wring out some of the excesses and the optimism and get the market down to a healthy starting point for another multi-year expansion. People are very much geared to historical comparisons e.g. average major bear market lasts about 2 years this one started beginning of 22 so we are most of the way through. But I think it will continue well into 2024 because this is something very new: a policy-induced recession which has followed a policy-induced boom and monetary policy operates with long and variable lags and aside from bursting the tech bubble it had relatively minor effects in 2022. 2023 we are seeing a harder hitting impact with the bank troubles and the jobs market and the housing market will surely follow and start a negative downward spiral which will only start to reverse as inflation plummets allowing the Fed to pivot. 

[Spekulatius]

Yes, the current banking crisis adds to monetary tightening - perhaps 25-50 bps. It will probably more so for a commercial real estate borrower than the average consumer.

[Gregmal]

I wake up in the morning and the sun is up, dogs need to go out, and the same fellas always see dark storm clouds on the horizon....never change. 

[tede02]

Bond market seems convinced of significant downturn. Equity market doesn't know what the hell to do. 

[TwoCitiesCapital]

43 minutes ago, tede02 said:

Bond market seems convinced of significant downturn. Equity market doesn't know what the hell to do. 

 

Historically when that divergence appears, it's typically been bonds that were right. 

[mattee2264]

Oil definitely pricing in a recession. 

[Parsad]

Investor's yanked more money from banks and put it elsewhere including a significant amount into money market funds.  Remember when no one thought money market unit values could drop below par...well 2008 changed that! 

 

Investor's have a lack of knowledge when it comes to how underlying securities work and what outlier events could cause to happen to security classes.  Cheers!

 

https://finance.yahoo.com/news/depositors-yank-another-126-billion-from-us-banks-210851940.html

[crs223]

1 hour ago, Parsad said:

Investor's have a lack of knowledge when it comes to how underlying securities work and what outlier events could cause to happen to security classes.  Cheers!

 

Sorry but I don’t think I understand your point. Are you saying:

 

“People are foolish to move money out of 0.1% bank accounts and into 4% money market funds because risk/reward is bad”?

[Viking]

Well i am so happy that that inflation thing is just going to be transitory. For sure it is going to be coming way down over the next year to the Bank of Canada’s 2% target. 5 year bond yields are back down to UNDER 3% - the 5 year Canada bond closed today at 2.87%. WOW!
—————

What else did we learn? 
1.) BC minimum wage is increasing 6.9% to $16.75/hour.

2.) property taxes increased 10.7% this year

3.) Federal, Provincial and Municipal governments are all spending record amounts in new budgets.

4.) OPEC just cut supply to keep oil prices higher.

5.) BC has a significant housing shortage… and Canada’s population increased 1 million in 2022 and we are going to have record high immigration the next few years. This suggests to me housing costs/rent prices will continue higher.

6.) Many Canadians are sitting on record amounts of wealth driven by real estate boom of past 10 years. Consumer spending will likely hold up well despite higher interest rates.

—————

My read is the inflation genie is officially out of the bottle. That 1970’s Show is coming to a theatre near you…

 

Edited April 6, 2023 by Viking

[Parsad]

On 3/31/2023 at 6:56 PM, crs223 said:

 

Sorry but I don’t think I understand your point. Are you saying:

 

“People are foolish to move money out of 0.1% bank accounts and into 4% money market funds because risk/reward is bad”?

 

No...that is rational.  But they are essentially moving capital from FDIC insured accounts to money market funds that aren't insured.  If you are concerned about a bank run, that might not be rational.  You can still get 4% in bank GIC's.

 

Also, not all money market funds are the same...many invest in more riskier short-term fixed income instruments to boost yields.  Investors don't understand the difference because they don't look at the underlying securities of funds.  I just don't understand why people don't buy treasuries directly. 

 

Cheers!

[Spooky]

9 hours ago, Viking said:

Well i am so happy that that inflation thing is just going to be transitory. For sure it is going to be coming way down over the next year to the Bank of Canada’s 2% target. 5 year bond yields are back down to UNDER 3% - the 5 year Canada bond closed today at 2.87%. WOW!
—————

What else did we learn? 
1.) BC minimum wage is increasing 6.9% to $16.75/hour.

2.) property taxes increased 10.7% this year

3.) Federal, Provincial and Municipal governments are all spending record amounts in new budgets.

4.) OPEC just cut supply to keep oil prices higher.

5.) BC has a significant housing shortage… and Canada’s population increased 1 million in 2022 and we are going to have record high immigration the next few years. This suggests to me housing costs/rent prices will continue higher.

6.) Many Canadians are sitting on record amounts of wealth driven by real estate boom of past 10 years. Consumer spending will likely hold up well despite higher interest rates.

—————

My read is the inflation genie is officially out of the bottle. That 1970’s Show is coming to a theatre near you…

 

 

This environment still seems pretty bullish for hard assets like real estate in Canada. Anyone got any Canadian listed real estate companies / REITs they like? To me it seems like the Bank of Canada is stuck between a rock and a hard place, inflation could be running too hot but they can't raise rates much more without breaking the housing market which is a higher percentage of GDP than in most other places and causing severe pain to the economy. Already seems like they blinked.

 

 

 

 

 

 

[GordonGekko69]

[Viking]

2 hours ago, Spooky said:

 

This environment still seems pretty bullish for hard assets like real estate in Canada. Anyone got any Canadian listed real estate companies / REITs they like? To me it seems like the Bank of Canada is stuck between a rock and a hard place, inflation could be running too hot but they can't raise rates much more without breaking the housing market which is a higher percentage of GDP than in most other places and causing severe pain to the economy. Already seems like they blinked.

I don’t think the Bank of Canada thinks they are stuck. They have shown their hand. They are ok with elevated inflation. They need elevated inflation and low interest rates because that is how you solve a debt bubble (over a number of years). The problem the Bank of Canada has is if, over time, they lose credibility - and people start to lose confidence in the economic system. Negative real interest rates + unprecedented fiscal spending (big government is back) + rising taxes is not a recipe for success on the inflation front. It really does look like we are headed for a 1970’s type situation, at least when it comes to inflation. This could well play out over the next 5 or so years. I am not all doom and gloom… the current set up just makes no sense to me.
 

Personally, i am avoiding sectors awash in debt (unless its locked in at low rates for the medium to long term). if inflation remains elevated the Bank of Canada will be forced to increase interest rates. If the Bank of Canada loses credibility then we really are screwed. Not my base case. Just not sure how all the wage increases and spending gets inflation back down to anything around the targeted 2% level. The wild card is a recession… but i don’t see that as likely… employment is too strong. Interesting times. 

Edited April 6, 2023 by Viking

[changegonnacome]

10 hours ago, Viking said:

My read is the inflation genie is officially out of the bottle. That 1970’s Show is coming to a theatre near you…

 

Indeed…not sure exactly like the 70’s but we are in a new paradigm as Howard Mark’s et al have said.

 

SPY heading back to ~4100 post a banking crisis and weakening economic & company earnings that continue to disappoint....…………looks to me like a Pavlovian response…..one where bad news, is good news for equities…..the Greenspan, Bernanke, Yellen, Powell ‘put’ are in the rearview mirror….it was beautiful run for holders of long duration risk assets…….the ‘game’, as I’ve said over many pages, has subtlety changed…….buy great companies, at fair prices as always…..but this is market that punishes investing mistakes & missteps more cruelly than it has in the past where a rising tide lifted all equity evaluations.

 

Cutting rates & doing QE in response to every financial and real economy stumble used to be an asymmetric trade for policymakers……….now it has to be balanced with an inflationary backdrop with all the negative societal issues that brings with it……equity valuations have lost a tailwind for sure, some more negative would argue they have headwind…….to be clear so you don’t have me confused as saying sell it all, go to cash panic monger …..I’m advocating for elevating your due diligence process….investing in things with more certainty attached, not less…..at prices that leave a larger margin of safety than you are used to. That is all.

[Gregmal]

While I dont think we go back there anytime soon, nor that the economy is on the brink of disaster, the major flaw you guys are making is exactly those assumptions. If theres no longer inflation, why wouldnt all those programs be back on the table? Especially now that they've, gasp, given themselves 500 bps of room to breathe, which was previous the argument for the "theyre trapped and have nowhere to go" bear crowd. 

[crs223]

35 minutes ago, changegonnacome said:

SPY heading back to ~4100

 

How’d you pick 4100?

[gfp]

1 minute ago, crs223 said:

 

How’d you pick 4100?

 

I think they were just pointing out the level that the S&P 500 had already bounced back to following the mini banking "crisis."

[Gregmal]

1 minute ago, gfp said:

 

I think they were just pointing out the level that the S&P 500 had already bounced back to following the mini banking "crisis."

The banking crisis was largely overblown by people trying to create one and Jerry trying to be a tough guy for his friends. 
 

In other news, the 2010 inflation crisis called and says it wants its oil prices back. It’s amazing the straws that continue to be grabbed at in order continue to peddle the inflation story. 

[dealraker]

For a perspective related to my lifetime (I'm 68 almost 69 and inherited less that $50k of stocks in my teens):

 

This is, by far...by leaps and bounds, the most obsessed over, most predicted rampant inflation and recession in the last 50 years.  

Edited April 6, 2023 by dealraker

[dealraker]

For comparison, Larry Kudlow was ranting buy banks in what he called every day "the Cinderella economy" well up into 2007.  

Edited April 6, 2023 by dealraker
2007 not 2008

[gfp]

One thing that stands out to me is that we had whatever that Bank scare was and the S&P 500 failed to make a lower low below the December / End of year levels.  So we have higher highs and higher lows and the index is above both the 50 day and 200 day moving average.  All the downtrends of the "bear market" have been broken to the upside and everyone is bearish.  Hmmmmm

[changegonnacome]

20 minutes ago, dealraker said:

For a perspective related to my lifetime (I'm 68 almost 69 and inherited less that $50k of stocks in my teens):

 

This is, by far...by leaps and bounds, the most obsessed over, most predicted rampant inflation and recession in the last 50 years.  

 

100% agree (as a 41yr old!  ) - when everybody and its mother has gone to one side of the boat in terms of predicting something in financial markets........generally speaking, the intelligent investor, should get on the other side.

 

What is so widely predicted, through a process of Soros-esque reflexivity, rarely comes to pass as predicted.

Edited April 6, 2023 by changegonnacome

[dealraker]

For a further perspective, I 100% disageeed with Kudlow as early as 2004 and had urged all my friends to get out of their bank stocks (of course while holding my CATY and EWBC).  I thought, of course, that I was a ****ing genius...and for a while it seemed I was!  "It is a housing and banking thing" I thought, one where MY stocks would be just fine. 

 

Then...?

 

That was my last "forecast" as I decided I knew just enough to be slightly smarter than Kudlow but still a royal ****ing dumbass --- next to dead last, just above Kudlow in the bottom of the barrel.

 

 

[John Hjorth]

10 minutes ago, dealraker said:

... This is, by far...by leaps and bounds, the most obsessed over, most predicted rampant inflation and recession in the last 50 years.  

 

@dealraker,

 

These overriding themes, dwarfing, overriding and overshawing everything [well, naturally not everything] and creating a certain negative sentiment has been going on pretty constantly also here on CoBF, as long as I've been around [, and that's now more than decade],  which I think is somewhat mentally unhealthy to adopt to.

 

To which degree do they matter? Well, naturally it matters in respect to how one is invested. So if these macro things keeps one awake at night, perhaps the solution would be to invest differently than what one already does?

 

Based on the "Pro Business" attitude I posses based on education and professional training etc., I'm a firm beiever in the on CoBF former technical platform signature by @Spekulatius :

 

Quote

To be an optimist, you have to believe in miracles.

 

[This is not nice, but] I find it striking that some CoBF members are more active in these kind of topics than in the Investment Ideas forum.

 

Keep the eyes on the ball. The ball here is your own portfolio. This not the same as as stating all "macro-talk" on CoBF has no relevance, i.e. for real estate is matters a lot.