Is The Bottom Almost Here?

[Spooky]

1 minute ago, changegonnacome said:

You not read what the Fed says? - they've been excluding real estate from their inflation concerns for months and months now.....the only absurd thing is that folks seem to think that the Fed is so moronic that its missing the OER/real estate influence and roll off. Go read the press releases & minutes the Fed agrees with you......they are excluding real estate as the consider the inflation picture.

 

My comment is on overall inflation / core inflation. I just don't see inflation going materially higher from here going forward and all the data is backwards looking. The tightness in the labor market is easing, layoffs have been occurring and immigration in the US has actually been surprisingly robust. Companies are not going to be giving 5+ percent salary increases this year. It is just a matter of time until the data catches up.

 

I also agree with Greg that a 25-50 bps change in interest rates from here doesn't make any difference if you are taking a long term view. Doesn't really matter what the Fed does now and it looks like a Volker style double digit interest rate scenario is out of the window. Most likely scenario is that there is maybe one more raise and the Fed will hold rates steady for longer than required just to be safe.

 

[Gregmal]

Yup. That’s basically it. All those big scary stories we were told ain’t happening. The sinisterness didn’t exist. The rampant wage price spirals stayed in the textbooks. Oh and they nearly blew up the banks they’re tasked with regulating in a feeble attempt to generate “credibility”…whatever that means. So yea, their 15 minutes is up. They can fuck off. They’re not fooling anyone with this super granular focus on minute stuff fluctuating point one percent here and there. And I’ll happily stand by our politicians coming for their heads if they dare try to fuck with peoples jobs. It’s over. The market has moved on. 

[Spooky]

4 minutes ago, Gregmal said:

The market has moved on. 

 

Exactly, it's hard to ignore the collective judgment / wisdom of all investors in the market. Sentiment has been tilting away from fear to greed for a while now.

 

[Santayana]

17 hours ago, Gregmal said:

But I suppose their thesis is now “people with 3% 30 year fixed rate mortgages have an imaginary rent burden”…i

I've got a 3% mortgage.   Taxes and insurance make up about a 1/3 of my total payment, and those are definitely going up faster than my income.

[Sweet]

1 hour ago, changegonnacome said:

 

 

THIS ^ is the problem and what the Fed is looking at.

 

The United States is a SERVICE based economy.

 

Believing your on a path back to 2% inflation......when the largest component of your economy (services) is printing 4.5% Month over Month inflation figures......is the absurd part.

 

Back of the envelope math and accounting for services being 77% of the economy......and rolling off all the stuff that people know is going to roll off....your looking at an economy 'stuck' with headline inflation running at about 3.5 - 3.75%.......meaning the Fed is missing its inflation target not by a little but by alot......its like saying your going to land the plane in New York but you actually end up landing in Chicago. That sound like a Central Bank thats meeting its goals.....and as I've said.....you dont want a world where the 10yr or 30yr.....starts assuming 3.75% inflation as the norm on a go forward basis.

That’s a year on year chart, and 4.5% yoy is not that scary.

[changegonnacome]

33 minutes ago, Sweet said:

That’s a year on year chart, and 4.5% yoy is not that scary.

 

MoM progression annualized is about mid-4's too for SuperCore inflation....like I said there is no progress or disinflation occuring on SuperCore....its why your hearing the noise rise around hiking again.

 

As I've said a few times.....when folks turn around and say 2% inflation vs. 4%...is no big deal, its not scary......they are forgetting the 8th wonder of the world - compounding......and that inflation compounds on itself....and so small differences lead to outsized results. Moving the goalpost on inflation seems harmless.....but it's a primose path to dumb outcomes over time.

 

Basic inflation math:

 

2% inflation means the value of the dollar halfs or put another way nominal prices DOUBLE every 36 years.......nobody notices, nobody cares

 

4% means the value of the dollar halfs or prices double every 18 years!!!!! 

 

 

[Gregmal]

3 hours ago, Santayana said:

I've got a 3% mortgage.   Taxes and insurance make up about a 1/3 of my total payment, and those are definitely going up faster than my income.

Housing should be 30% of income if done responsibly. For simplicity sake if you make $100k, $30k a year is housing expense. 1/3 is taxes and insurance. So even if those go up 10%, you’re more than covered as long as your annual raise is at least 1%. 

[changegonnacome]

3 hours ago, changegonnacome said:

MoM progression annualized is about mid-4's too for SuperCore inflation

 

Most recent MoM annualized March to April is actually 5.2% (see below)........3 month average is mid-4's.....whatever way you slice it......this is an inflation data series for the largest sub-component of US GDP.....which stepped into the 4% plus inflation range in Q1 2021!!!!...over two years ago.....and has consistently and persistently bounced around in the 4-6% range ever since.

 

This is NOT what progress on inflation looks like:

 

Edited May 26, 2023 by changegonnacome

[Santayana]

58 minutes ago, Gregmal said:

Housing should be 30% of income if done responsibly.

Unfortunately what "should be" isn't the reality of many people.  Where I live, the cheapest single family home currently on market is $419,000 for a 780 sq/ft 2BR/1BA.  The median household income is $54,000.

[Gregmal]

15 minutes ago, Santayana said:

Unfortunately what "should be" isn't the reality of many people.  Where I live, the cheapest single family home currently on market is $419,000 for a 780 sq/ft 2BR/1BA.  The median household income is $54,000.

Yea well there’s a tried and true way to solve the housing issue…which is bizarre when you think about how big of a component housing is and the supposed “commitment” to beating inflation…and yet they’re doing the EXACT OPPOSITE! The builders were planning on building us into oblivion and investment firms were gung ho to fund it, and then confused Jerry and friends started freaking out about CPI, then switched to focusing on the stock market price action, then changed tune to focusing on the jobs market, and now are concerned that restaurants are too expensive and whatever. What a circus it’s been. 
 

Tangentially, if you look at what the market has really reacted to, it’s was clearly CPI and CPI being north of 7%. Not all this minutiae about .2s and .3s.

[Spekulatius]

Interesting disconnect and nothing new. If you invest in small caps, you certainly know:

https://www.wsj.com/articles/tech-stock-rally-leaves-small-caps-in-the-dust-2ffaa0ad?mod=hp_lead_pos5

[Jaygo]

On 5/26/2023 at 4:50 PM, Gregmal said:

Yea well there’s a tried and true way to solve the housing issue…which is bizarre when you think about how big of a component housing is and the supposed “commitment” to beating inflation…and yet they’re doing the EXACT OPPOSITE! The builders were planning on building us into oblivion and investment firms were gung ho to fund it, and then confused Jerry and friends started freaking out about CPI, then switched to focusing on the stock market price action, then changed tune to focusing on the jobs market, and now are concerned that restaurants are too expensive and whatever. What a circus it’s been. 
 

Tangentially, if you look at what the market has really reacted to, it’s was clearly CPI and CPI being north of 7%. Not all this minutiae about .2s and .3s.

By my understanding low interest rates should actually lower end prices to consumers overall as a proportion of their earning power. Cheap rates should equate to more production which should equate to a higher standard of living for everyone. 

 

the problem with ultra low rates is that is gooses asset prices and inequality so people look at it in a negative way. 

 

I personally think a 3% rate is perfect for North American demographics. I say lower taxes and lower rates will solve the inflation issue. 
 

also nimbys, the lazy, bureaucrats and generally whiny c.nts also need step aside so the real producers can do their work. 

[mattee2264]

The market is definitely being distorted by the Big Tech leaders which have rebounded a lot from last year's lows due to a) belief that we are close to a pause/pivot b) excitement about AI 

 

Old economy stocks do seem to be discounting a recession of some sorts. 

 

But still feels as though a lot of Big Tech is overvalued. The pandemic showed that as they've matured they have become utility like (i.e. essential to daily life/business and recession resistant) and also still have some growth options (e.g. cloud/AI). And increasingly investors look at Big Tech as a safe haven so it has become a risk off trade as well as a risk on trade. But multiples still look very high relative to the 4% or so you can get on bonds and growth has stalled and I think it has less to do with the economic slowdown and more to do with the fact they've saturated their markets and the pandemic has pulled forward a lot of future growth. 

 

 

 

[changegonnacome]

22 minutes ago, mattee2264 said:

matured they have become utility

I would say more Monopoly like….in some instances…..and there seems a growing willingness on a bipartisan basis to tackle some of this….first via blocking mergers….later perhaps via breakups or forced divestures…many of these companies especially the platform guys…..are beginning to look like deathstars for every other US company/industry they might choose to enter. 
 

It’s an amazing achievement by some of them…..in some respects….getting ‘done’ for antitrust is like winning gold at the capitalism Olympics…..you played the game so skillfully that you designed the perfect mousetrap….but it now needs to be taken away…..as capitalist you should be proud that your creation comes under anti-trust scrutiny. 

Edited May 29, 2023 by changegonnacome

[mattee2264]

Most utilities are natural monopolies. That gives their cash flows a predictability and stability which means that even with low growth investors are prepared to pay high multiples. I think with Big Tech a similar dynamic applies although obviously they aren't encumbered by regulation and can absorb the occasional anti-trust fine which is as far as competition authorities seem willing to go and have some growth options and much lower capital requirements etc. So I do understand why multiples are high and everyone owns them.  But the nature of markets is that there is always some sound reasoning that can get taken too far and the high multiples do create some vulnerability given that several years ago when they had way more growth ahead of them and their earning power was far more understated by GAAP and interest rates were much lower they were valued at only 20x earnings. 

 

And equally when they dominate the market indices to the extent they do it is difficult to make much of a bear case without foreseeing a large fall in their stock prices. 

Edited May 29, 2023 by mattee2264

[Sweet]

@Gregmal https://truflation.com

 

Its attempting to be the inflation equivalent of GDPNow and try to track inflation in real-time rather than the lagging CPI etc

[Gregmal]

1 hour ago, Sweet said:

@Gregmal https://truflation.com

 

Its attempting to be the inflation equivalent of GDPNow and try to track inflation in real-time rather than the lagging CPI etc

Yup. It’s over. Time to find the next thematic trade. So far just regular old run of the mill recession mongering. Think a bigger one emerges in back half of the year.

[Parsad]

30 minutes ago, Gregmal said:

Yup. It’s over. Time to find the next thematic trade. So far just regular old run of the mill recession mongering. Think a bigger one emerges in back half of the year.

 

CRE write downs.  Cheers!

[Sweet]

7 hours ago, Parsad said:

 

CRE write downs.  Cheers!

Is this mostly a West Coast phenomenon?

[Parsad]

36 minutes ago, Sweet said:

Is this mostly a West Coast phenomenon?

 

No, I think it's happening virtually in all large cities in North America.  Workers not returning to offices, failing restaurants/retailers, excess capacity...all having an impact.  Cheers!

[Sweet]

Anecdotal and with major caveats, one of which being I don’t live in the US.  However we experienced lockdown and all the same hybrid working in the UK and commercial

occupancy has significantly improved.  Nearly everyone is regularly back in work, hybrid working still in force in some places but not nearly at the level during covid.  Could the CRE not be as bad as predicted?

[CorpRaider]

3 hours ago, Sweet said:

Anecdotal and with major caveats, one of which being I don’t live in the US.  However we experienced lockdown and all the same hybrid working in the UK and commercial

occupancy has significantly improved.  Nearly everyone is regularly back in work, hybrid working still in force in some places but not nearly at the level during covid.  Could the CRE not be as bad as predicted?

That's right, most other places (who didn't do nearly the bullwhip stimmy resulting in uber tight labor markets) have already nearly reverted.  Investors there know this.  

[Parsad]

5 hours ago, Sweet said:

Anecdotal and with major caveats, one of which being I don’t live in the US.  However we experienced lockdown and all the same hybrid working in the UK and commercial

occupancy has significantly improved.  Nearly everyone is regularly back in work, hybrid working still in force in some places but not nearly at the level during covid.  Could the CRE not be as bad as predicted?

 

For the 15 years before the pandemic, Vancouver core CRE vacancy rate was below 1%...today it is over 10%!  Toronto's core CRE vacancy rate is about 18% compared to 4.2% in 2019!  Canada's overall core CRE vacancy rate was just over 10% pre-pandemic...today it is nearly 20%. 

 

Hybrid work is alive and well in Canada and most parts of the U.S...which is going to spell trouble for some CRE owners/investors.  Absorption of the excess capacity is going to take a decade, including some of it being repurposed to residential or other uses.  

 

Cheers!

[Sweet]

6 minutes ago, Parsad said:

 

For the 15 years before the pandemic, Vancouver core CRE vacancy rate was below 1%...today it is over 10%!  Toronto's core CRE vacancy rate is about 18% compared to 4.2% in 2019!  Canada's overall core CRE vacancy rate was just over 10% pre-pandemic...today it is nearly 20%. 

 

Hybrid work is alive and well in Canada and most parts of the U.S...which is going to spell trouble for some CRE owners/investors.  Absorption of the excess capacity is going to take a decade, including some of it being repurposed to residential or other uses.  

 

Cheers!

How is it trending, has it seen a recent improvement.

[Gregmal]

Yea I spent the better part of the last decade totally befuddled by peoples often misplaced disdain for retail real estate...ignorantly and often just chucked into the "death of retail" category...which ended up being a great opportunity, while many of those people simultaneously drooled over office properties at 5-6 cap rates. Office has had very poor fundamentals behind in for a long time and it was truly shocking people were willing to pay what they were for it, for such a long time. I never really wanted to even bother with it because the return profile I'd need for it to be appealing was at a minimum high teens annually and it was just never near that. 

 

Ultimately, class A/B grocery strips and office properties swapped places in the hearts of the dumb money institutions. I dont see that reverting. Retail is cyclical, but well located retail is tough to beat. Office is secular, and basically a melting ice cube.