Is The Bottom Almost Here?

[Gregmal]

I have too much time on my hands now with my kids at school during the day now. But call a few headhunters. Very different market of late as far as white collar jobs in the NY/NJ area go. Got the idea to do so because my wife told me her company was mandating a return to office of 3 days a week and eventually 5. Told anyone not willing to pack their bags. There aren’t jobs everywhere like there were in the spring. Got the same sort of thing from a few contractor friends. Housing has slowed. All that’s left is probably restaurant stuff which should go strong into the holidays. 

[Parsad]

1 hour ago, Dalal.Holdings said:

i’m not comparing to ‘08. The whole point was re: Aswath’s contention that index earnings cannot decline more than 30%…they have in 2001, 2008, and 2020. I found 3 counterexamples to his statement in the past 20 years. I think it shows how academics are often wrong in this field.

 

We are not in 2008, but it might be 1973-74…

 

Yes, that is possible.  I actually think the rest of the world might be in 73-74...the U.S., less so.  

 

I would recommend that those that are overly concerned, watch old episodes of "All in the Family".  You'll see some of the day to day concerns that people were tackling back then, how they coped with it, including inflation, income inequity, employment, war, politics, etc.  Yet, a few years later, the U.S. entered one of the great bull markets in history from 1982 to 1990. 

 

Good times, bad times, they all come and go!  Cheers! 

[UK]

https://www.wsj.com/articles/venture-firms-are-betting-on-public-tech-stocks-as-startup-market-stalls-11665653404?mod=hp_lista_pos3

 

Other firms—including Sequoia Capital and Andreessen Horowitz, two of Silicon Valley’s most high-profile investors—are going further, buying shares in public tech firms they hadn’t previously backed as startups. Venture capitalists say they are taking advantage of a stock selloff that has allowed them to buy shares in high-profile tech companies at a good price for the first time in years. At the same time, they say they have struggled to find good investments in the startup market, where prices for new financings have remained expensive and startup rounds have slowed despite record capital.

 

In the first quarter, Sequoia’s U.S. startup funds purchased over 2.5 million new shares in data-analytics firm Amplitude Inc. and 573,500 new shares in food-delivery service DoorDash Inc., according to public filings, two companies that counted Sequoia as one of their largest shareholders when going public. At the time Sequoia bought the shares, the stock prices of both companies were down more than 60% from last year’s all-time highs. Pat Grady, a partner at Sequoia, said the firm began making lists of public companies to invest in when the market began to dip late last year. Sequoia went through a similar exercise after the 2008 crash, when it came up with a list of 20 public companies. It ended up buying two stocks—in software firms Autodesk Inc. and Cadence Design Systems Inc. Mr. Grady said the firm eventually regretted not having made more public-market bets in the wake of the financial crisis.

 

Purchases of some public shares by venture firms from earlier this year have already tanked, illustrating the risks. Sequoia’s DoorDash investment from March has shed over 40% of its value, even though the food-delivery firm’s second-quarter revenue growth surpassed analyst estimates.

 

Vince Hankes, a partner at New York venture firm Thrive Capital, said his team had long admired the business behind Carvana Co. , a used-car retailer that Thrive hadn’t backed before it went public in 2017. As Carvana’s stock began to crater last fall, the firm took note.Thrive ended up buying 812,713 shares in Carvana in the first quarter and then almost doubled its stake in the subsequent months, according to public filings. “We think about it very similarly to how we make a private company investment,” Mr. Hankes said, adding that Thrive’s goal is to hold its public stocks for years.

 

Edited October 14, 2022 by UK

[elliott]

On 10/12/2022 at 7:40 PM, Spekulatius said:

FWIW, I am in the same age bracket than your father in law.  20% downturns occur about every 3 years on average. The last ones were in 2018, 2020 and now 2022. What we are seeing here is nothing out of the ordinary.

 

https://www.fool.com/investing/general/2013/08/19/what-i-plan-to-do-when-the-market-crashes.aspx

 

how much valuable are statistics like "50% drops occur 2-3 times a century"?

what I mean is how reasonable it is to expect just a few data points to have much predicting value? (unless of course we take whatever data we have going back to the Roman Empire and consider it valid and relevant, or use other markets data, in which case we would have to add complete wipe offs to the list of possible events)

 

this is something I usually ask myself also in relation to passive / index investing. you are going to get market returns minus costs, for sure, but to me the important point is whether those returns are going to be satisfactory (to me) or not, and it seems a lot of people in the passive / index community thinks that is going to be the case just so long as you invest for the long term

(I am 50% passive, and considering becoming 100% actually)

 

Edited October 14, 2022 by elliott
addendum passive investing

[UK]

Good overview of the situation: https://www.bloomberg.com/opinion/articles/2022-10-14/uk-financial-crisis-threatens-to-derail-central-banks-in-global-inflation-fight?srnd=premium-europe

 

Overall, therefore, the British soap opera has sharply increased the chances of the dreaded policy “pivot” for the rest of the world. For reasons of financial stability (a euphemism for avoiding a crisis), more central banks will come under pressure to reverse their course. If Bailey and the BOE hold the line and buy back no more gilts, it won’t end the issue, but it would provide other countries with more hope that Quantitative Destruction and a monetary policy pivot can be avoided. 

Edited October 14, 2022 by UK

[mattee2264]

Interestingly if you look at 73/74 earnings didn't fall off a cliff falling only 20% or so but you still got a severe bear market because of the combination of lower earnings and lower multiples. 

 

Data points can give a useful base case. But need careful interpretation. If you look at the grand span of stock market history 50% drops seem rare. But in the 21st century they seem to happen every 10 years or so! Because in the 21st century the Fed helps to blow up bubbles and when they deflate they tend to take the overall stock market down by quite significant amounts. 

 

Not sure what is behind the stock market moves. But seems quite typical of a stock market struggling for direction and my best guess is that people are seeing that the market is back to 2020 levels and thinking it is overdone and a good opportunity to buy. But the bears still seem to be in control so I think we have further to grind down over the coming months. 

[changegonnacome]

1 hour ago, mattee2264 said:

73/74 earnings didn't fall off a cliff falling only 20%

 

When earnings MULTIPLES are this high you dont need earnings to fall off a cliff to get dramatic moves in nominal stock prices........a few % will do the job.............it why shorter duration/low multiple stocks are going to do better (maybe still bad, but not as bad)

Edited October 14, 2022 by changegonnacome

[SharperDingaan]

5 hours ago, UK said:

Goog overview of the situation: https://www.bloomberg.com/opinion/articles/2022-10-14/uk-financial-crisis-threatens-to-derail-central-banks-in-global-inflation-fight?srnd=premium-europe

 

Overall, therefore, the British soap opera has sharply increased the chances of the dreaded policy “pivot” for the rest of the world. For reasons of financial stability (a euphemism for avoiding a crisis), more central banks will come under pressure to reverse their course. If Bailey and the BOE hold the line and buy back no more gilts, it won’t end the issue, but it would provide other countries with more hope that Quantitative Destruction and a monetary policy pivot can be avoided. 

 

Some time ago a poster pointed out that there are currently 3 global economies, and they are all out of sync; NA, Asia, and Europe. Like it or not NA is aggressively raising rates, it is the right response for NA, it is strengthening both USD and CAD, and the BoE is unable to match the rate rise. Europe is just not NA's problem, and both Euro and Asian banks are guaranteed by Europe's and Asia's various CB's (DSIB's, GSIB's, etc.).' Too big to fail ' just doesn't work anymore.

 

Anyone's guess as to what the BoE does, but most would expect a steady GBP devaluation versus higher interest rates. For now, most would expect GBP to settle at around parity with the Euro. Long term (10 yrs+), most would expect further devaluation against the Euro.  

 

02/18/2022 CAD/GBP was 1.73, CAD/EUR was 1.44. 10/09/2022 CAD/GBP was 1.52, CAD/EUR was 1.34. Over the last 8 months, the GBP has devalued 12% against CAD, and 6% against EUR. Most would also expect CAD/GBP to be a lot lower in 6 months, as CAD strengthens on higher oil prices and the UK economy declines still further through winter. 

 

Different PoV.

 

SD

Edited October 14, 2022 by SharperDingaan

[Spekulatius]

The UK may be an example where we have seen the limit of MMT. yes, you can have your cake and eat it too to a certain extend, if you are a central bank, but we have seen the rug pull in the UK.

 

The combination of weak economy more proposed spending and tax cuts was just too much resulting in a rout for gilt bonds and the GBP. That's what a failure of MMT looks like.

 

Now, the BOE has to tread very carefully. I see now that the finance minister has already been booted after 6 weeks on the job. Now the question is, who is next?

https://www.cnbc.com/2022/10/14/uk-pm-liz-truss-fires-finance-minister-kwasi-kwarteng.html

[TwoCitiesCapital]

16 hours ago, Gregmal said:

Idk but even with a poor report you have to wonder what kind of jackass is bidding down Berkshire to $250? Someone with a 2 week time horizon? At some point this stuff is absurd and overdone. Is there anyone who really thinks next summer we re printing 5-10% CPIs? 

 

I expect it to be closer to -5% by that point which is also not good for equity indices @ 20x earnings. 

 

I imagine we're going to be whipsawed for a decade. Fed has to raise rates to fight inflation now that 5-10 trillion in additional liquidity is sloshing around - but deflation is the real risk/danger so they'll ease again to prevent a deflationary spiral. 

 

It's the same playbook from the last 22 years, but is accelerated 1) because we're reaching the end of its effectiveness and 2) let the cat out of the bag with direct to consumer stimulus which is a much faster transmission than the slow extension of credit from banks. 

 

Inflation will probably average 3-5% over the next decade, but will do so through booms and busts and not anything resembling a steady figure. 

Edited October 14, 2022 by TwoCitiesCapital

[UK]

https://www.bloomberg.com/opinion/articles/2022-10-14/fed-s-next-crisis-is-brewing-in-us-treasuries

 

Conditions are so worrisome that Treasury Secretary Janet Yellen took the unusual step Wednesday of expressing concern about a potential breakdown in trading, saying after a speech in Washington that her department is “worried about a loss of adequate liquidity” in the $23.7 trillion market for US government securities. Make no mistake, if the Treasury market seizes up, the global economy and financial system will have much bigger problems than elevated inflation. 

[Gregmal]

47 minutes ago, TwoCitiesCapital said:

Inflation will probably average 3-5% over the next decade, but will do so through booms and busts and not anything resembling a steady figure. 

Yea I’ve heard a lot of smart and rational stuff supporting the stop/start thesis. It’s kind of where I think we go as well. Which again bodes well for the Berkshires and Fairfax’s of the world.

[UK]

https://www.bloomberg.com/news/articles/2022-10-14/summers-sees-more-land-mines-after-uk-warns-on-bond-shut-out?srnd=premium-europe

 

“I doubt we’ve seen the last mine go off. Some of them might be in the private sector. I think more of them may be international,” Summers said. He said he was struck by “countries reporting difficulty in getting market access” at this week’s meetings in Washington.

 

I am not sure if that would mark possible bottom, but how can FED not stop/pivot if situation in credit market gets more seriuos despite of infliation?

[crs223]

1 hour ago, UK said:

https://www.bloomberg.com/opinion/articles/2022-10-14/fed-s-next-crisis-is-brewing-in-us-treasuries

 

Conditions are so worrisome that Treasury Secretary Janet Yellen took the unusual step Wednesday of expressing concern about a potential breakdown in trading, saying after a speech in Washington that her department is “worried about a loss of adequate liquidity” in the $23.7 trillion market for US government securities. Make no mistake, if the Treasury market seizes up, the global economy and financial system will have much bigger problems than elevated inflation. 

 

 

Here is how I explain this to my children:

 

Something (“treasuries”) is so expensive… that at its natural price nobody would ever buy it.

 

Someone (“federal reserve”) buys it using printed money.

 

If ever comes the day where the printing+buying stops… or god forbid even sells… then the world as we know it will end.

 

And the folks who came up with this scheme get nobel prizes.

[Gregmal]

3 minutes ago, crs223 said:

 

 

Here is how I explain this to my children:

 

Something (“treasuries”) is so expensive… that at its natural price nobody would ever buy it.

 

Someone (“federal reserve”) buys it using printed money.

 

If ever comes the day where the printing+buying stops… or god forbid even sells… then the world as we know it will end.

 

And the folks who came up with this scheme get nobel prizes.

Here’s mine.

 

So in the early 2000s, bankers, hedge funds, and big corporations found ways to make extraordinary amounts of money by gaming the system. This ultimately blew up the financial system and caused normal people to lose their homes, see their retirement savings wiped out, and widespread unemployment.
 

In an attempt to make this right, there was an underlying pledge by many of those same insiders, who never really lost their wealth, to make those people whole again by reinflating the system. The side benefit is that their assets would increase substantially as well.
 

Unforeseen, was that the average person was still too scarred to ever really get back into the game, or too poor to participate, until the back end of the decade and early 2020s. Just in time for the system to fuck them again. 
 

Advice: only buy indestructible hard assets and things with a durable and dynamic ability to generate cash flow. 

[thepupil]

i find the direction of flows out of the bond market puzzling. TIPS yield 1-2% REAL across the curve. treasuries pay 4% across the curve (which is not out of line w/ long term inflation so are no longer negative real LT rates. Mortgage spreads very wide, can buy a fully government guaranteed 6% or so...which i find attractive whether its a 10 year or 20 year cash flow. IG spreads are decent. 

 

I recognize no one wishes to fight the fed, but am still somewhat surprised at the collective cowardice of savers.

 

Man up and buy some bonds, you little bitches.

 

but rates may go up? who cares, all the more reinvestment income on which to gorge. 

 

but inflations? if you think inflation is going to continue to  roar buy tips. not like stocks are going to do well at sustained 8% inflation...but in that scenario you could lock in 10%/yr at whatever duration you want. 

 

but regime change? yes the regime changed. unclear if it will change more. 

 

i feel like an island on this and am probably way early per usual (and was early and knew it). 

 

this is a long way of saying is i think we may be past the theorretical "natural" rate of interest already and am more concerned about not being able to earn these rates on safe stuff for a while than about rates going up more. but no one...and i mean almost no one...agrees with me on this. 

Edited October 14, 2022 by thepupil

[widenthemoat]

11 minutes ago, crs223 said:

 

 

Here is how I explain this to my children:

 

Something (“treasuries”) is so expensive… that at its natural price nobody would ever buy it.

 

Someone (“federal reserve”) buys it using printed money.

 

If ever comes the day where the printing+buying stops… or god forbid even sells… then the world as we know it will end.

 

And the folks who came up with this scheme get nobel prizes.

I am dying laughing at this. It is scary accurate. 

[rohitc99]

7 minutes ago, thepupil said:

i find the direction of flows out of the bond market puzzling. TIPS yield 1-2% REAL across the curve. treasuries pay 4% across the curve (which is not out of line w/ long term inflation so are no longer negative real LT rates. Mortgage spreads very wide, can buy a fully government guaranteed 6% or so...which i find attractive whether its a 10 year or 20 year cash flow. IG spreads are decent. 

 

I recognize no one wishes to fight the fed, but am still somewhat surprised at the collective cowardice of savers.

 

Man up and buy some bonds, you little bitches.

 

but rates may go up? who cares, all the more reinvestment income on which to gorge. 

 

but inflations? if you think inflation is going to continue to  roar buy tips. not like stocks are going to do well at sustained 8% inflation...but in that scenario you could lock in 10%/yr at whatever duration you want. 

 

but regime change? yes the regime changed. unclear if it will change more. 

 

i feel like an island on this and am probably way early per usual (and was early and knew it). 

 

this is a long way of saying is i think we may be past the theorretical "natural" rate of interest already and am more concerned about not being able to earn these rates on safe stuff for a while than about rates going up more. but no one...and i mean almost no one...agrees with me on this. 

@thepupil can you share what is the way to execute on this ? buy ETF on tips ? how does on buy mortgages ?

[thepupil]

I buy TIPS in my 401k. there are ETFs as well for both short term and the whole tips market. VTIP owns whole TIPS market so whill have some duration. about 25% of the bond index is mortgage backes so any bond index is investing in MBS which are trading at juicy spreads to tsy's of like 100-200 bps so will yield 5-6.0%, ginnies are explicitly guaranteed and fannie freddie the whole implicit thing...you could also buy VMBS or MBB ETF's to buy those...or AGNC in levered form (I am not doing this). 

 

one can buy individual TIPS and tsy's too on fidelity. I don't own TIPS in taxable because you have to pay tax on the inflation adjustment ahead of when you actually get it which for a long term TIP is really unapealling. 

[TwoCitiesCapital]

27 minutes ago, thepupil said:

i find the direction of flows out of the bond market puzzling. TIPS yield 1-2% REAL across the curve. treasuries pay 4% across the curve (which is not out of line w/ long term inflation so are no longer negative real LT rates. Mortgage spreads very wide, can buy a fully government guaranteed 6% or so...which i find attractive whether its a 10 year or 20 year cash flow. IG spreads are decent. 

 

I recognize no one wishes to fight the fed, but am still somewhat surprised at the collective cowardice of savers.

 

Man up and buy some bonds, you little bitches.

 

but rates may go up? who cares, all the more reinvestment income on which to gorge. 

 

but inflations? if you think inflation is going to continue to  roar buy tips. not like stocks are going to do well at sustained 8% inflation...but in that scenario you could lock in 10%/yr at whatever duration you want. 

 

but regime change? yes the regime changed. unclear if it will change more. 

 

i feel like an island on this and am probably way early per usual (and was early and knew it). 

 

this is a long way of saying is i think we may be past the theorretical "natural" rate of interest already and am more concerned about not being able to earn these rates on safe stuff for a while than about rates going up more. but no one...and i mean almost no one...agrees with me on this. 

 

 

People don't understand bonds. I'm doing my best to talk retail investors and financial advisors off the cliff of selling them daily. 

 

They don't appreciate that the losses they see next to each of their bonds are coming back to them in most cases as the bonds move from discounts to par. 

 

A year ago, they were happy with their bonds, the expectation of par, and earning a 2% coupon with no red next to the cusip. 

 

This year, they're entitled to the same par and the same 2% coupon but are upset because there's red next to the cusip. Zero appreciation for the fact that 2% is now being reinvested at 4-5% and portfolio income is increasing and that they're getting the same coupon/par they were happy with a year ago. 

 

Secondly, something that has me buying more and more intermediate bond funds myself, but remaining cautious on equities, is that many of these folks still want to buy stocks. God forbid their bonds go "down" 7-10%, but let's buy more equities that are down 20-30%? 

 

Equities aren't hated yet and I think they will have to be before this over. Buy-the-dip hasn't been sufficiently punished. 

Edited October 14, 2022 by TwoCitiesCapital

[thepupil]

1/4 i-bonds at 0% real / (currently 6%-7% yield) 0 duration 0 mark to market risk, no credit risk

1/4 CLO AAA at ~6% yield, floating rate, 0 duratrion, mark to market risk, infinitesimal credit risk (must see 40% cumulative defaults w/ no recovery in an asset class that typically recovers like 50% of par and whose default rate went to 20% for 1 minute during GFC, ya need like a 4x GFC before the AAA gets touched)

1/4 20 yr BBB at ~6%-7% duration about 12 (0.3% historical default rate)

1/4 20 yr TIPS at ~2% real duration about 12 (duration of TIPS is complex, please accept my oversimplification)

 

this portfolio yields 6% (or more) has almost no credit risk and will go up/down by about 6% for every 1% increase in rates (but will yield more). you could swap in MBS instead of corporates and have less convexity, similar yield, and no credit risk...

 

what are prospective bond buyers waiting for? 

Edited October 14, 2022 by thepupil

[Guest]

This market is beeeautiful. 

[Dalal.Holdings]

40 minutes ago, thepupil said:

I buy TIPS in my 401k. there are ETFs as well for both short term and the whole tips market. VTIP owns whole TIPS market so whill have some duration. about 25% of the bond index is mortgage backes so any bond index is investing in MBS which are trading at juicy spreads to tsy's of like 100-200 bps so will yield 5-6.0%, ginnies are explicitly guaranteed and fannie freddie the whole implicit thing...you could also buy VMBS or MBB ETF's to buy those...or AGNC in levered form (I am not doing this). 

 

one can buy individual TIPS and tsy's too on fidelity. I don't own TIPS in taxable because you have to pay tax on the inflation adjustment ahead of when you actually get it which for a long term TIP is really unapealling. 

 

VTIP appears to be short duration TIPS (less than 5 yrs)...and it's down 8.5% in the past yr ??? Not what I would expect in inflationary times. I'm not sure I understand TIPS well

[Spekulatius]

2 minutes ago, Dalal.Holdings said:

 

VTIP appears to be short duration TIPS (less than 5 yrs)...and it's down 8.5% in the past yr ??? Not what I would expect in inflationary times. I'm not sure I understand TIPS well

TIPS compensate you for inflation, but they don’t compensate you for the Fed raising interest rates. If the Fed starts stops raising interest rates, Tips should do better.

[thepupil]

you gotta look at the total return of bond funds, not just price. real rates have increased so even realtively low duration will take some losses...iu got confused and thought VTIP was TIPS index which it's not...the Vanguard fund that's the whole tips market is down about 12% over the past year...your principal adjustment in that case is still a far out cash flow and has duration...if you truly can't have any MTM risk, then i-bonds are the only real choice. but to lock in more real return and make money if real / nominal rates decline, you need to take on some duration.  

 

Edited October 14, 2022 by thepupil