Is The Bottom Almost Here?

[Cigarbutt]

2 hours ago, TwoCitiesCapital said:

I believe you're right.

He'd announced in September that they would start selling. 

Still went from a buyer who absorbed ~$1.5 trillion worth during pandemic to run-off with sales upcoming. It was a lot of demand removed at the exact same time rising rates made fixed income unattractive. The decades-wide spreads make sense and is an opportunity since these are still essentially federally backed bonds. 

The Fed actually stopped buying in mid-September.

The following shows graphically the evolution of MBS held on central bank balance sheet with upward movements resulting from buying and downward movement resulting from principal passthroughs (which have come down because of tightening).

The point of this post is that the Fed has been a marginal player in this business (impact on credit spread as well as on 'risk-free' rate) but an important one (both ways). What is the 'right' level of home ownership in the US?
 

[Cigarbutt]

23 hours ago, thepupil said:

I will assume our private sector is FAR FAR FAR more levered than 1980's germany also. 

...

Submitted for informational purposes (private debt (corporate and household) to GDP):

[thepupil]

16 hours ago, Cigarbutt said:

Submitted for informational purposes (private debt (corporate and household) to GDP):

Far less different than I’d assumed, guess thats why it’s good to use data rather than gut/stereotype

[crs223]

19 hours ago, Cigarbutt said:

The point of this post is that the Fed has been a marginal player

 

Here are the fed holdings of MBS going back 10 years.  2022 roll off barely registers.

 

 

 

Edited November 6, 2022 by crs223

[changegonnacome]

Too much focus on Fed balance sheet this is kind of financial instrument game which has some but very little effect in the real economy sure it can blow out mortgage rates for a time, cause liquidity issues in this particular market etc……but the main show is inflation and inflation is a real economy phenomenon..….…….see the Fed doesn’t buy or sell cars or order dinner in the real economy……..folks need to remember that……….it buys/sells or allows to roll off financial instruments like MBS’s it holds which go into or out of other financial instruments…….….sure, OK, when it buys Treasurys from the government and the government sends it to people as per 2020 I’m really interested (debt monetization) and it matters cause folks take those cheques and buy REAL things in the REAL economy……….this MBS stuff is a side show now & a rounding error in the context of the wider broader American economy in its totality……..2021 there $23 trillion of spending….…..of which about $16 trillion was private sector consumption.

 

As I’ve explained….….the issue is nominal spending & income increases in the economy relative to aggregate productive capacity in any one year + productivity growth….….the delta of which is…..inflation

 

So where is the too much money coming from?

 

Well its coming from pay increases workers are receiving 6-8%……problem here is you can only eat what you PRODUCE (productivity)….go back and look at my widget world example a few pages back……….in widget world you can give workers nominal pay increases but NOBODY gets to consume more widgets without more widgets getting made…..NOBODY!…..the nominal numbers change around but so what…….well not so what…..it hurts those on lower incomes as they’ve less shock absorbers built into their monthly income.

 

The second source of inflation is credit or more precisely the private sector banks/non-bank lenders creating money, giving it to people…who then go and spend it in the real economy. This is real….way more real than the Fed & financial instrument chicanery…..a consumer applies for a loan, a bank creates a loan……that loan is used to demand products and services in the real economy……it increases nominal spending today/right now…….but again money is just paper……productivity is what matters……too much paper (via credit creation & wages increases) is chasing too few goods.

 

Again, same as nominal pay increases, you can’t eat credit……you can only eat/consume what you produce and no more. End of.

 

Here we are months after we’ve talked about this ad nauseam……with folks claiming that we are near the end and the pivot is near and the Fed needs to stop……..yet credit remains a bargain!!!!…….. even mortgages at 7%……when you adjust for CPI/C-CPE the real interest rate is low, very low. Lots of personal line of credit offers I get bombarded with are great deals……as they sit below CPI for sure…..a lot below CPE……..its free money…….but money is never free……you can’t eat money…..only productivity…….and until the abundant credit creation & wage increases moderate significantly……inflation is going to persist. You moderate credit creation by raising its cost…..the Fed has a ways to go…..as Jay-P said himself.

[Ross812]

@changegonnacome I agree the fed is going to keep at it. What is the right course of action then? You can invest in toll type companies - online market places, payment processors, maybe, financials, but you are going to get killed if the coming recession results in a lot of unemployment.

 

I actually like utilities if inflation doesn't bounce around too much (ie the Fed remains committed and we dont have a 70s scenario). Utilities have a lot of tail winds with the green initiatives coming out. I think long term the utilities are going to replace a lot of the o&g. 

 

Staples? Healthcare? Wait it out in t-t-bills?

 

What worries me is we start to see a wage spiral in 2023. The FFR will need to stay elevated and the yield curve starts to normalize (1% spread on the 10yr, 2% on the 20 yr over the FFR). Risk assets are going to get smoked.

[Dinar]

1 hour ago, Ross812 said:

@changegonnacome I agree the fed is going to keep at it. What is the right course of action then? You can invest in toll type companies - online market places, payment processors, maybe, financials, but you are going to get killed if the coming recession results in a lot of unemployment.

 

I actually like utilities if inflation doesn't bounce around too much (ie the Fed remains committed and we dont have a 70s scenario). Utilities have a lot of tail winds with the green initiatives coming out. I think long term the utilities are going to replace a lot of the o&g. 

 

Staples? Healthcare? Wait it out in t-t-bills?

 

What worries me is we start to see a wage spiral in 2023. The FFR will need to stay elevated and the yield curve starts to normalize (1% spread on the 10yr, 2% on the 20 yr over the FFR). Risk assets are going to get smoked.

I think that you are missing political risk in utilities.  Unless I have made a mistake, utility rates in NY for instance have doubled in the last decade or so.  There is a limit to how much pricing utilities can get before consumers=voters say no more, and then ROE gets cut.  

[Parsad]

You look at revenue and earnings numbers across almost all of Berkshire's business segments in the 3rd Quarter and they certainly don't like they are in or entering any sort of recession.  They were up across the board and impressively for the most part. 

 

If there is a recession coming, I certainly don't see it happening in the 4th Quarter or probably 1st Quarter 2023.  We'll see after that, but business still looks pretty solid outside of tech.  Cheers!

[changegonnacome]

16 hours ago, changegonnacome said:

Too much focus on Fed balance sheet this is kind of financial instrument game which has some but very little effect in the real economy sure it can blow out mortgage rates for a time, cause liquidity issues in this particular market etc……but the main show is inflation and inflation is a real economy phenomenon..….…….see the Fed doesn’t buy or sell cars or order dinner in the real economy……..folks need to remember that……….it buys/sells or allows to roll off financial instruments like MBS’s it holds which go into or out of other financial instruments…….….sure, OK, when it buys Treasurys from the government and the government sends it to people as per 2020 I’m really interested (debt monetization) and it matters cause folks take those cheques and buy REAL things in the REAL economy……….this MBS stuff is a side show now & a rounding error in the context of the wider broader American economy in its totality……..2021 there $23 trillion of spending….…..of which about $16 trillion was private sector consumption.

 

As I’ve explained….….the issue is nominal spending & income increases in the economy relative to aggregate productive capacity in any one year + productivity growth….….the delta of which is…..inflation

 

So where is the too much money coming from?

 

Well its coming from pay increases workers are receiving 6-8%……problem here is you can only eat what you PRODUCE (productivity)….go back and look at my widget world example a few pages back……….in widget world you can give workers nominal pay increases but NOBODY gets to consume more widgets without more widgets getting made…..NOBODY!…..the nominal numbers change around but so what…….well not so what…..it hurts those on lower incomes as they’ve less shock absorbers built into their monthly income.

 

The second source of inflation is credit or more precisely the private sector banks/non-bank lenders creating money, giving it to people…who then go and spend it in the real economy. This is real….way more real than the Fed & financial instrument chicanery…..a consumer applies for a loan, a bank creates a loan……that loan is used to demand products and services in the real economy……it increases nominal spending today/right now…….but again money is just paper……productivity is what matters……too much paper (via credit creation & wages increases) is chasing too few goods.

 

Again, same as nominal pay increases, you can’t eat credit……you can only eat/consume what you produce and no more. End of.

 

Here we are months after we’ve talked about this ad nauseam……with folks claiming that we are near the end and the pivot is near and the Fed needs to stop……..yet credit remains a bargain!!!!…….. even mortgages at 7%……when you adjust for CPI/C-CPE the real interest rate is low, very low. Lots of personal line of credit offers I get bombarded with are great deals……as they sit below CPI for sure…..a lot below CPE……..its free money…….but money is never free……you can’t eat money…..only productivity…….and until the abundant credit creation & wage increases moderate significantly……inflation is going to persist. You moderate credit creation by raising its cost…..the Fed has a ways to go…..as Jay-P said himself.

One addition to the above that I failed to make clear - as one could misinterpret….. the Fed’s balance sheet matters ALOT in regards to other financial instruments…like I told you they buy a financial instrument, give cash to institutional counterparty who invariably buys another financial instrument ….like stocks….or puts the cash back on deposit with Fed until they buy another financial instrument.

 

This liquidity sucking sound means things without strong cash flows underneath are equities with no foundation…..

[Ross812]

10 hours ago, Dinar said:

I think that you are missing political risk in utilities.  Unless I have made a mistake, utility rates in NY for instance have doubled in the last decade or so.  There is a limit to how much pricing utilities can get before consumers=voters say no more, and then ROE gets cut.  

 

I wouldn't view the political risk as any more extreme than the risk to O&G, technology (privacy), or healthcare. Utility political risk is local on the state or even city level as well so diversification is important. The adoption of EVs is going to drive increased electricity demand similar to the widespread adoption of the AC and the IRA solidified 10-yr tax credits for green infrastructure spending by utilities. At least in my home state, increased input costs and initiatives to improve safety and reliability are an easy lift for a rate increase.

 

In my view, the primary concern with utilities is the debt load. ROE gets cut as debt payments go up and debt is rolled.    

[Dinar]

29 minutes ago, Ross812 said:

 

I wouldn't view the political risk as any more extreme than the risk to O&G, technology (privacy), or healthcare. Utility political risk is local on the state or even city level as well so diversification is important. The adoption of EVs is going to drive increased electricity demand similar to the widespread adoption of the AC and the IRA solidified 10-yr tax credits for green infrastructure spending by utilities. At least in my home state, increased input costs and initiatives to improve safety and reliability are an easy lift for a rate increase.

 

In my view, the primary concern with utilities is the debt load. ROE gets cut as debt payments go up and debt is rolled.    

We will have to agree to disagree.   I do not see consumers protesting about Google or Microsoft to politicians - consumers get the service either for free or do not see/feel the hidden costs.  When annual cost of electric and gas reaches $3-$4k per annum per household, not counting heating, in NYC, there will be consequences.   Healthcare I would agree with you, oil & gas unclear at least to me.  

[mattee2264]

Earnings are the second leg down. So if earnings can hold up pretty well over the next few quarters then markets will probably go sideways as rates continue to climb. 

[Ross812]

34 minutes ago, mattee2264 said:

Earnings are the second leg down. So if earnings can hold up pretty well over the next few quarters then markets will probably go sideways as rates continue to climb. 

 

Agreed. We won't have a full break down if companies are able to pass inflated costs onto the strong consumer.

 

An increase in the risk free rate should drive down risk assets as a whole though. Banks are forecasting a FFR of 5-5.25% in May 2023 and continuing through the end of '23. If the December meeting results in another 75bps hike, I think we are going to blow through the 5-5.25 prediction and we can expect a rerating of risk assets. 

 

I am worried the Q1'23 wage increase print. What is the FED going to do if they start to see signs of a wage spiral? Talking to friends who are recruiters, they are seeing 10%+ wage increases across multiple industries. 

[changegonnacome]

21 hours ago, Ross812 said:

Talking to friends who are recruiters, they are seeing 10%+ wage increases across multiple industries. 

 

Ditto getting the same feedback.......another reason the Fed messed up.......outside ad-tech.....fear around job security hasn't circulated fully because they started hiking too late..............if they started hiking earlier and put some very public strain on the economy…..employers could have gone into 2023 comp negotiations holding a line that wasn't something like CPI++....that window has passed.....2023 comp is going to be LOADED with 2022 CPI..........and this folks is exactly why inflation doesn't go away so easily.........its backward looking.....it feeds on itself....

 

Its why inflation expectations matter but don’t matter…..nobody is negotiating comp on inflation expectations…they are negotiating comp on PAST inflation and we’ve had quite a lot of inflation recently if you haven’t noticed. 

 

Edited November 8, 2022 by changegonnacome

[RedLion]

On 11/7/2022 at 6:34 AM, Ross812 said:

 

I wouldn't view the political risk as any more extreme than the risk to O&G, technology (privacy), or healthcare. Utility political risk is local on the state or even city level as well so diversification is important. The adoption of EVs is going to drive increased electricity demand similar to the widespread adoption of the AC and the IRA solidified 10-yr tax credits for green infrastructure spending by utilities. At least in my home state, increased input costs and initiatives to improve safety and reliability are an easy lift for a rate increase.

 

In my view, the primary concern with utilities is the debt load. ROE gets cut as debt payments go up and debt is rolled.    

 

I'm not an expert on the utility industry in general, although I follow the PG&E situation very closely as my business has a big interest in the direction of the PG&E stock. 

 

My understanding is that most utilities have a regulated ROE they are allowed to earn, so if they have to roll debt at higher interest rates they could then use this in their rate case to get higher rates to achieve their allowed ROE even with rising interest rates. Do I misunderstand how this works? Or am I just extrapolating the PG&E framework to other utilities? 

[Ross812]

@RedLion - that is the case I have observed. The issue is you have rising NG costs and debt is more expensive to roll forward. Many of the utilities have rate increase caps though so the ROE can lag the regulated limit.    

[RedLion]

1 hour ago, Ross812 said:

@RedLion - that is the case I have observed. The issue is you have rising NG costs and debt is more expensive to roll forward. Many of the utilities have rate increase caps though so the ROE can lag the regulated limit.    

 

That makes sense, I can imagine that the lag can be substantial, and there's always political risk that the regulator may not approve rate cases every when they aren't hitting their regulated limit to avoid crazy electricity prices. 

 

However, I will say that living in Northern California in the PG&E territory, customers could definitely pay 400-500% more for electricity across the United States if they had to. Our electricity rates are just absurd here. 

[fareastwarriors]

31 minutes ago, RedLion said:

 

Our electricity rates are just absurd here. 

 

High five buddy. I know the pain. Alameda County here. 

[nafregnum]

 

David Katz (I don't know a lot about him) definitely believes we're near the bottom.

[nafregnum]

 

One more, both of these videos were over on dataroma.com commentaries tab at this link ... https://www.dataroma.com/m/comm.php

 

So, housing is 40% of core inflation.  There's a backward looking measurement of housing costs, and there's a forward looking measurement.  The forward looking indicators are down, but the Fed uses the backward looking indicators which are 'still' up...  If the FFR is a forward looking policy tool, Jeremy Siegel here says they ought to be using the more forward looking measurements when deciding on what to do next.

[Gregmal]

Weird. Almost like it’s following a pattern.

[Parsad]

12 minutes ago, Gregmal said:

Weird. Almost like it’s following a pattern.

 

Yes.  I was down to 3% cash last Friday.  I like patterns.  Cheers!

[UK]

[UK]

 

[changegonnacome]

6 hours ago, UK said:

 

 

Maybe Jeremy is right but its very early to be declaring victory.......in a full employment economy.......it doesn't matter what the Fed thinks inflation is or a what Jeremy Seagul's adjusted inflation rate is........its what workers believe it to be & the relative leverage they have with employers.......that cultural 'meme' inflation rate is ~8%......and its forming the foundation of every salary comp discussion I'm aware of....such that 2023 nominal income/spend is going to loaded with 2022 CPI++....anecdotally ~10%+........whats the problem with that?............you cant 'consume' nominal pay increases, you can only consume REAL increases in the aggregate level of actual goods and services produced.........outside of a measly 2% productivity gain where are those real goods and services gonna come from in an economy with 3.7% unemployment and running at what accepted to be full tilt? 

 

I hope we are on a perfect glide path now to 2.x% inflation........but without a significant increase in unemployment in H1 2023.........my guess is we are going to get what happened in the 1970's which was inflations descent hitting stubborn plateau's and/or surprising flares upwards. In fact I would expect in early 2023 BLS data, then subsequently in inflation data to see what I described above.....nominal pay/spend increases hitting measly productivity gains and generating a new cycle of inflation which will be the delta between the two.

 

On the other hand this Christmas we might see enough households leverage up their balance sheet so much that spending collapses into H1 2023.....which would result in what I described above not happening. Its why the Fed I think will continue to act and talk exceptionally tough heading into the December meeting and beyond.....they've got a window heading in 2023 to kick inflations butt.....and to ensure EoY 2023 comp discussions don't incorporate historical CPI.....the way you do that is not nice, the economy has to be put over the hot coals for a little while. I hope I'm wrong......and Jeremy is right and inflation is just gonna magically go away and the Fed can get cutting again in mid-2023.