Is The Bottom Almost Here?

[Guest]

2 hours ago, randomep said:

 

huh? why such venom directed at the nameless average folks?

 

I was just playing along with Greg.

[crs223]

1 hour ago, randomep said:

so many people are saying the market will drop another 10-20%

 

Most people also believe the market is going to be higher 25 years from now.

 

I don't think it’s true that “when most people agree, it probably won’t happen”.

[changegonnacome]

Its beyond obvious at this point.....that SPY earnings are going down the toilet into 23.....I dunno call me crazy to be so certain on something so macro but I find it hard to build a bull case AT ALL.....everybody kind of has a bullish bias and its right 99% of the time for big picture market stuff.....but its clear that inflation is sticky and stickier than people expected requiring higher for longer rates, requiring a restructuring of discount rates in the market and equity risk premia applied across asset classes.....I take this almost as a given in my mind.......we are grinding are way down to SPY ~3000.....with some unstructured market panic likely thrown in that could take us down lower for a time.

 

But more importantly.......we are in the process of a kind of 'mega mean reversion' in US markets that is looking through this elevated period of COVID induced money printing inflation to the other side that will become clearer over time and will change long run expectations of fed funds, equity risk premia etc etc......what awaits us post this period of elevated inflation.....is not a trip back to the period 1980 - 2020........deja vu, all over again it isnt.......this was a period of peak globalization, falling interest rates/low inflation, ZIRP, abundant capital, cheap global labor pools coming 'online' (China/India/E.Europe), made in china everything........whats to come is the mirror opposite once this inflation bout is fixed we'll be in the post-COVID world...........de-globalization, higher structural inflation, higher interest rates, limited labor pools/demographics in the West, high demands for capital leading to a scarcity/higher prices for capital (near-shoring/greening of economy and all that capital intensity that entails)........its a very interesting environment to think about and what stocks/industries will do well inside of that.

[johnpane]

6 hours ago, crs223 said:

I don't think it’s true that “when most people agree, it probably won’t happen”.

 

What did investors in the Japan stock market think in 1990?

[Cigarbutt]

1 hour ago, johnpane said:

 

What did investors in the Japan stock market think in 1990?

That's an interesting question and perhaps a relevant one? It's also much easier to answer since it's a retrospective one.

From data at the time versus the 'market' and what happened after, 'investors' were expecting higher growth in 'market' earnings, were using lower discount rates based on expected low interest rates and lower risk premia.

Japan is only an analysis based on analogy and not on first principles so the applicability may be limited.

Still, to the extent that monetary policy is relevant to this "when most people agree" idea and this "almost bottom" thread, Mr. Bernanke, in an address made in 1999 (not the recent Nobel address but the Japan "self-induced paralysis" one):

"—I tend to agree with the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years (see Bernanke and Gertler, 1999, for a formal econometric analysis). Among the more important monetary-policy mistakes were 1) the failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”; 2) the apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash; and 3) the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously. Bernanke and Gertler (1999) argue that if the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better."

Edited October 18, 2022 by Cigarbutt

[Dinar]

Japan in 1990 was very different from the US today in a number of respects.  One very important one - the market for corporate control and lack of discipline of the takeover market.  You have a number of companies - SK Kaken a good example where the returns have been terrible for a decade or two because the company has just sat on cash and stockpiled it rather than return it to shareholders.

[Spekulatius]

15 minutes ago, Dinar said:

Japan in 1990 was very different from the US today in a number of respects.  One very important one - the market for corporate control and lack of discipline of the takeover market.  You have a number of companies - SK Kaken a good example where the returns have been terrible for a decade or two because the company has just sat on cash and stockpiled it rather than return it to shareholders.

A lot of mediocre companies were going around 100x earnings in 1990, I guess this was based on their presumed real estate values as well as the inflated value of their cross share holdings.

Ironically most now are in way better shape than they were in 1990 operationally and from a balance sheet POV, but trade at a fraction of their former valuations.

Edited October 18, 2022 by Spekulatius

[Gregmal]

It is kind of funny how we’ve seen clear cut cases of bubbles and yes, PE ratios pushing triple digits like in Japan or here in 1999….and yet here all dat money printing supposedly created a massive bubble where the index PE topped out at like what? High 20s? Lol. Largely weighted by what? Oh the same FANG stocks that are now cheap? Or is any market, period, that simply declines 20% at any given point in time a “bubble”?

Edited October 18, 2022 by Gregmal

[dealraker]

15 hours ago, Gregmal said:

Is it just me or is the day to day sentiment hilarious. Every time the market is down, even on a random, no news Tuesday, folks are like “money printing”, “bubble bursting” as if its deserved for the market to go down every day even though often there’s no real reason. One day of gains and it’s like “wtf, why, this is bullshit!” all angrily. 

Talked to my nephew last night at the kids soccer game.  Sales at the builders supply are up 45% year-over-year and holding steady, this includes significant lowering of lumber prices which have now processed through their pricing.  The millwork business year-over-year is also up about the same and holding steady.

 

While talking the mayor stops by and says that all the former furniture factories that once employed 14,000 here are now used to some degree and some are fully occupied.  Egger Wood Products is now built and of course literally a huge operation for a 170,000 community.  

 

I have 3 young people in my family in process of marriage and home buying.  House prices and rates, we will see. 

 

Lots of people putting 4 or 5 extra dead bolts on the door, writing with the most certainty and absolutes,not probability, I've seen in a while- that it is all over but the tears and misery sure to come for years and years.  

Edited October 18, 2022 by dealraker
wording

[CorpRaider]

6 hours ago, johnpane said:

 

What did investors in the Japan stock market think in 1990?

They thought we're turning Japanese, they thought we're turning Japanese, they really thought so.  Must have been hard to be really stupid without SPACs and magic internet money.  Had to hammer the real estate, hello kitty, and beanie babies.

Edited October 18, 2022 by CorpRaider

[rkbabang]

11 hours ago, crs223 said:

 

Most people also believe the market is going to be higher 25 years from now.

 

I don't think it’s true that “when most people agree, it probably won’t happen”.

 

 

There is a large difference between short term and long term predictions.  Some (most?) things are much easier to predict long term than short.  I'd bet a lot that markets will be higher than now in 25 years and even higher than that in 50 years. I have no clue if they will be higher than now next week, next month, or next year.  For very short term predictions I think it is very close to true that "when most people agree, it probably won't happen."

 

[mattee2264]

There were some mini-bubbles in "stay at home" plays and "save the world" plays. And the pandemic was favourable to technology companies so even the quality companies became overvalued (although nowhere near to the same extent as in 1999). But the real bubble which is finally bursting is in bonds.

 

Also it is problematic that we are heading into a global recession and central banks are tightening and governments are tapped out after spending so much during the pandemic. That is not a very good macro set up and a corporate earnings recession will combine with further PE compression so I also find it difficult not to imagine markets going a lot lower. 

 

If anything the decline has been quite orderly after the initial shock when markets realized that the Fed meant business and inflation wasn't as transitory as everyone thought.

 

I guess there is a bit of a tug of war. A large segment of the market figures the Fed will eventually pivot the way it always does as soon as inflation starts to moderate and jobs/GDP data gets worse and is happy to look through any resulting recession. Others are more bearish and think inflation is sticky and interest rates will have to go higher and stay higher for longer than most believe is possible and even if you look through the recession sustainable earnings are probably lower than those that were achieved during the heydays of cheap money, an earnings boon from the pandemic and inflation nowhere to be seen. 

Edited October 18, 2022 by mattee2264

[crs223]

1 hour ago, rkbabang said:

For very short term predictions I think it is very close to true that "when most people agree, it probably won't happen."

 

Even for short term it’s useless:

 

Most people believe the SPY will not drop 50% tomorrow.

 

My point: “when most people agree, it probably won't happen” is simply not true — nor is it false.  It’s “fake evidence” used to “fake support” the speaker’s hypothesis.

 

The hypothesis and speaker may still be correct despite use of “fake evidence”.

Edited October 18, 2022 by crs223

[changegonnacome]

29 minutes ago, mattee2264 said:

But the real bubble which is finally bursting is in bonds.

 

But what this mean, for stocks, is that bonds are beginning to compete with stocks again for 'flows'......equites we're the only game in town for a long time, remember TINA (there is no alternative).........well alternatives are starting to emerge which will involve a not inconsequential amount of 'switching' of financial assets as TINA turns to TIA. 

Edited October 18, 2022 by changegonnacome

[Gregmal]

If there was a bubble in bonds, meaning obviously that they were over owned, why now would it be assumed that even more people would buy them. You didnt have a bubble in Zoom or Peloton because nobody wanted to own them. This is another part of the narrative contradiction. If you genuinely believe in this inflation, bonds are less attractive than they've ever been. Not more simply because of a face value yield. 

[Red Lion]

4 minutes ago, Gregmal said:

If there was a bubble in bonds, meaning obviously that they were over owned, why now would it be assumed that even more people would buy them. You didnt have a bubble in Zoom or Peloton because nobody wanted to own them. This is another part of the narrative contradiction. If you genuinely believe in this inflation, bonds are less attractive than they've ever been. Not more simply because of a face value yield. 

 

Not all bonds are created equal. Short term t-bills had a decent track record in the 70s compared to equities and longer term bonds, and they've certainly been one of the best places to hide so far this year. 

 

Personally, I don't have much need in my life or my portfolio for long term bonds. I have a very small position in 22 year TIPS, but that's it. Now that bonds are more attractive, stocks are also much more attractive. e.g., why not buy GOOGL with a 5-6% earnings yield, net cash balance sheet, and long term growth prospects? should still blow any long term bonds out of the water I would think. 

[Castanza]

31 minutes ago, RedLion said:

 

Not all bonds are created equal. Short term t-bills had a decent track record in the 70s compared to equities and longer term bonds, and they've certainly been one of the best places to hide so far this year. 

 

Personally, I don't have much need in my life or my portfolio for long term bonds. I have a very small position in 22 year TIPS, but that's it. Now that bonds are more attractive, stocks are also much more attractive. e.g., why not buy GOOGL with a 5-6% earnings yield, net cash balance sheet, and long term growth prospects? should still blow any long term bonds out of the water I would think. 

 

My thinking as well. I honestly don't see the attraction to bonds. I mean what are you getting in real terms with them? 1-2%? Who tf wants that? I'll either reach for better yields over the long term with fairly priced companies or I'll put my money in some other investment area (real estate). Maybe I don't understand the logic behind it? 

[Gregmal]

So what I see is… bonds were the real bubble but now are going to be even more in demand as the bubble bursts. Because…. We ignore mark to market on bonds and just look at a raw yield. But at the same time, we conclude stocks are a terrible idea because of current market to market while ignoring the real earnings yield.
 

Additionally, bonds would be great in an inflation environment…….(no idea why), but equities are obviously terrible to own in an inflation environment because hey look at what the stock market indexes did the last year and idk….money printing!

 

Very bizarre and of course all of it is so short term centric. Any sort of common sense will lead one to the conclusion that a reasonably priced business with a sound competitive position will do better during a period of inflation than most alternatives.

[thepupil]

1 hour ago, Castanza said:

 

My thinking as well. I honestly don't see the attraction to bonds. I mean what are you getting in real terms with them? 1-2%? Who tf wants that? I'll either reach for better yields over the long term with fairly priced companies or I'll put my money in some other investment area (real estate). Maybe I don't understand the logic behind it? 

 

I have been (somewhat aggressively) bonds this year and am planning on continuing to do so. some thoughts

 

- 2% real shouldn't be dismissed. 2% real would basically guarantee me and my family a wonderful life. If I work for 10-20 more years, save what i'm saving and made 2% real on my investments, I'll accomplish pretty much everything with respect to wealth generation and be able to provide inheritors a decent sum (assuming nothing wild and crazy wrt tail risks thereafter). I have to date made low teens per annum on my money over course of a decade or so ( not too far ahead of various markets) and plan on making >2% real on the totality of my capital, but 2% real is not some disaster. 

 

- no one (prudent) is investing 100% of their money in bonds. if you put 20% in bonds and have 80% in risk assets, it doesn't really cause that big of a drag on return. most historical studies actually show HIGHER returns for portfolios w/ 10-15% ish bonds vs 0% bonds because of the rebalancing/diversification effect. I don't fully ascribe to modern portfolio theory by any means, but there is SOMETHING to be said for diversification. I think that was far less true where rates were 1 year ago vs today. rates have moved substantially and may provide a source of diversification going forward. I'm still 90% long equities (and 15% ish long bonds)

 

- deflation hedge: risk assets love relative price stability / predictable environment. they do not love lots of inflation and i'd view deflation as the scariest of all macro scenarios, particularly for levered real estate (which i invest a good bit in). very high quality, long term bonds are the best deflation hedge out there. 

 

-it's not just the yield, there's lots of opportunity for price appreciation. let's take the BNSF 2097's at $120 / 6%. While i certainly am not predicting it get back there, this bond was $230 within the past 2 years. I think it's a mistake to say "why would i invest in that to make 6%?". I would say that with a long time horizon 6% is the minimum return and there's a big option on yields going down and making a bunch of money on a shorter term time horizon (competitive with the upside of stocks). I feel like everyone focuses only on price downside of bonds. Duration is both risk and opportunity. if at any point within the next 5 or 10 years these trade at 5% yield, then one will make the current yield of 6% + 20% of capital appreciation which would add 180-370 bps of return (7.8-9.7% /yr of total return). trading to a 4% yield would add 48% of capital appreciation (4-8% on a10 and 5 yr time horizon which would be total return of 10-14% / yr of total return). there are headlines talking about inflation going down to 3% in a few months. I don't know if that will happen, but it may happen within the next 5 years. could the bond go down? of course it could, but it's quite easy to hold and just clip coupons. now this isn't "i only buy 5 bagger" type of returns, but your risk profile is pretty different too. you are lending on like 20-30% LTV loan to  the country's 2nd largest railroad with a hell of an equity sponsor in Berkshire.

 

-convexity is real. Take our BNSF bond. At 2% lower yields it's +47%. At 2% higher rates its -25%. the positive asymmetry of long duration bonds is beginning to come forth. now if you think inflaiton will be 9% forever and this should yield 10%, you're still going to lose 40%, but I'd say stocks are down 30-60% in that scenario too.

 

on a 5 yr hold basis, you'll make ~30% in coupons and at +-2% on rates be down 25% to up 47%, for total cumulative return of +5% to +77%, call it 0-12% / yr before taking into account reinvestment of the coupons which wuld put that higher. rates can certainly go up or down more so it doesn't cover the whole probability tree, but i think that's decent risk/reward.

 

- mental drag/attention: I focus on high quality IG bonds with lots of diversification. I'f been buying a 1%er in this healthy co, 1% in that, etc. or tsy's/tips. the underwriting is simple "will this pay the interest and principal" "will the EV of this company decline by 60-70-80% such that I'll take a loss"...there's no work with respect to predicting earnings or worrying about really much of anything. bonds senior position has value in its low maintenance requirements. cant get too complacent of course. I would index if there was an index of 20+ year non financial corporate BBB or better bonds...but don't think there is

 

- reinvestment: bond yield to maturites assume one reinvests at the current YTM but that doesn't mean you can't reinvest  the coupons in something sexier in the future. 

 

- i still consider myself short rates. I'm short about $750K of mortgage which has a duration of about 18 and is at a fixed rate of 2 7/8%. I own < $750K of bonds and total duration of bond portfolio is <18. rates going up still benefits me if I'm going to hold my house/mortgage for its 28.5 yr duration, which i might. 

 

my biggest issue with bonds is their tax treatment sucks and i only have limited IRA/401k space.  

 

anyways that's my ode to going long bonds. of the high quality long duration variety. go get em fellas. 

Edited October 18, 2022 by thepupil

[changegonnacome]

1 hour ago, Gregmal said:

If there was a bubble in bonds, meaning obviously that they were over owned, why now would it be assumed that even more people would buy them.

 

I kind of reject the concept of over-owned/less owned as it pertains to financial assets. The yield has to get re-priced relative to alternatives such that people are willing to continue to hold them..... as alternatives themselves are getting re-priced via Fed funds.....everybody is re-shuffling their allocation & every financial asset is held by somebody at all times....so they can never be 'over-owned' per se....there is one bond, one owner at any one time...who sits on that bond & their expected return changes relative to what people will accept to continue to hold them, relative to other things that they potentially could be holding .....the base competitor black hole sucking in all around it, right now, is the humble savings account (and beside that QT).....its about relative allocation & flows across the risk curve.........cash>checking account>savings account>CDs>US-T's>Corp Bonds>HY>Equites>Alternatives>VC>Crytpo.....the sucking sound & re-ratings is flows from one to the other......its what happens when the Fed stops printing money and that money goes into & in this case out of financial assets.....QE to QT....while also raising the Fed funds the ultimate checking account alternative!

 

Cash used to be trash.........but losing ~6% purchasing power......when everything is else losing 20% starts to get attractive on a relative basis and when risk appetite gets suppressed....its a kind of liquidity crunch driven by the uncertainty around terminal rates. Of course a stock picker can do better....but for the purposes of these types of discussions I think in indexes/

 

Q - What's the best performing broad asset class this year? 

A - Cash

 

1 hour ago, Gregmal said:

If you genuinely believe in this inflation, bonds are less attractive than they've ever been.

 

True - but also we may be entering one of those periods....where return of capital becomes more attractive than a return on capital.....bonds are certainly attractive with that filter applied.

Edited October 18, 2022 by changegonnacome

[Spekulatius]

1 hour ago, Castanza said:

 

My thinking as well. I honestly don't see the attraction to bonds. I mean what are you getting in real terms with them? 1-2%? Who tf wants that? I'll either reach for better yields over the long term with fairly priced companies or I'll put my money in some other investment area (real estate). Maybe I don't understand the logic behind it? 

Bonds can be attractive if you buy junk bonds when there is credit distress. You can get equity like returns in those situations.

I actually can see the attractiveness to buy some TIPS at ~8% yield too. 8% is close to the LT track record of the stock market and with much less risk, especially if you have a shorter timeframe.

Edited October 18, 2022 by Spekulatius

[nafregnum]

On 10/12/2022 at 11:13 AM, CorpRaider said:

Slightly below the bargains seen at the peak in 1929.  They didn't even have magic internet money ponzis back then.  Hooray!

 

(Fun fact I learned yesterday)

 

Greed springs eternal!  There was no crypto back then, but they did have the original Charles Ponzi. 

 

"Under the heading of his company, Securities Exchange Company, he promised returns of 50% in 45 days or 100% in 90 days."

 

https://www.investopedia.com/terms/p/ponzischeme.asp#:~:text=Origins of the Ponzi Scheme,Howe in the United States.

 

(Learned it from a great book called "One Summer" about all the amazing things that happened in the summer of 1927.  Ponzi was mentioned, even though his scheme happened in 1919 and 1920.   Bill Bryson is a fantastic author, for anyone who hasn't heard of him.)

[randomep]

16 hours ago, crs223 said:

 

Most people also believe the market is going to be higher 25 years from now.

 

I don't think it’s true that “when most people agree, it probably won’t happen”.

 

wait...... I said "many" and you said "most" ... the market at any time is the value of equilibrium, we can argue that there are as many bulls as bears... but the makeup is very different. The bullish side maybe people who follow cathie woods, or people who are throwing good money after bad, anchoring to the values they saw in Jan. But the bear side is more sensationalism and sentiment and macro prognostications, and it is the latter which in the past is prone to be wrong, very wrong.

 

I am not saying I know where the market is going, I am as confused as the next guy but I just have a really uneasy feeling.

[Gregmal]

36 minutes ago, randomep said:

But the bear side is more sensationalism and sentiment and macro prognostications, and it is the latter which in the past is prone to be wrong, very wrong.

That’s the biggest thing to me. I’ve never seen people cling to a thesis, so hard, so wrong, for so long, as this whole money printing thesis. Maybe Fannie/Freddie, but that at least had some merits. But they just can’t let go. Every 10% pullback we’ve had this decade is cuz of the money printing bubble bursting. Because of course, sometimes we can’t just have a correction. Stock markets aren’t known to do those sort of things. 

Edited October 18, 2022 by Gregmal

[crs223]

Bear or bull.  Long term or short term.  Investing or astrophysics.  Many or most.  Doesn’t matter.  This is nonsense:

 

“because most people agree, it probably won’t happen”