Is The Bottom Almost Here?

[Gregmal]

5 minutes ago, crs223 said:

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”

I think you are greatly misinterpreting what people are saying. Look at sports betting. If everyone thinks the Yankees will win, your odds/money line reflect that. Same thing with risk/reward when investing. 

[crs223]

Phew  — for a while I thought people were believing some nonsense.  I just misread/misunderstood.

[changegonnacome]

1 hour ago, Gregmal said:

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.

 

Was never interested in inflation, till they actually printed a shit load & sent it to people....the sheer scale caught my eye, even then I was like meh, lets see.....stay fully invested I've heard this inflation/money printing siren song before.........but then a little later inflation ACTUALLY showed up in the data......and then a little later it didn't seem to be magically going away by itself...& then I looked at the last periods of inflationary pressures and how equities did during that time & what was required from the authorities to fix it............and thats when my interest in inflation started.....I cant speak to people screaming into the abyss in the 2010's

 

It seems, to an extent, its others that cant scrap old ideas from 2010's in the face of new information. It was so right, for so long to poo poo these money printing doomsayers...... its hard to pivot. The Hussman's etc were wrong, those who ridiculed them were EXACTLY right. Being early & wrong in markets is the exact same thing. Endowment effect around ideas is real though...it's hard to let them go especially if they've delivered great returns in the past.

 

I remain ready to completely and utterly scrap my inflation/tightening cycle thesis for the US indexes at the first sign of sustained information to the contrary. Strong opinions, weakly held. Let's see.

[Castanza]

5 hours ago, thepupil said:

 

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. 

Thanks for laying that out. Have to admit you make a compelling argument with an easy to justify thesis. Beyond iSavings bonds (which I own) I haven’t done much work after seeing the real returns. Perhaps I didn’t dig enough. What can I say, I like what looks easy when it comes to investing. At the very least you’ve given me a new way to think about it. 
 

 

 

[UK]

15 hours ago, thepupil said:

 

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. 

 

That is awesome post. I have seriously invested in bonds only once in my life, that is during GFC and Euro crisis, when you were able to get like >10 per cent yield from government bods shorter than 10 years duration. And since I try to look at least for 8-10 return in stocks, the same applies to bonds in my view. Only I still prefer shares, because i.e. if bonds is at 5 and shares of a good company at 20 PE, I much prefer the later, because it also includes growth and safety of not loosing complete/majority of purchasing power, in case inflation and currency would go Turkish style. I was not investing at the time, but was old enough to experience two currencies going to the toilet paper in my country:). I ques that shapes attitudes somehow:). But that framework of yours on looking at the 6 per cent of long term bond is very informative and a thing to think about!

Edited October 19, 2022 by UK

[Spekulatius]

Fixed interest rate Bonds are insurance against deflation. Thats how I would see it. TIPS are insurance against inflation.

[mattee2264]

I also thought of TIPS as insurance against inflation but since inflation broke loose my TIP fund has lost half its value which is pretty messed up! Especially as the equivalent UK government bond fund without the inflation protection has lost only a quarter of its value. Must be something to do with the very long duration of inflation protected government bonds in the UK. Probably worth holding on to (or even rebalance) as might do well if the Fed eventually is forced to pivot but certainly aren't doing much for me as an inflation hedge!

 

Re TINA yes bonds were in a bubble because central banks were inflating their prices by being completely price-insensitive buyers. They were over-owned because central banks had disproportionate stakes they are trying to unwind. Difficult to see how far this process will go and whether private buyers will be willing to replace central banks without requiring much higher yields. But if you believe that central banks can bring inflation back towards target and we will eventually return to a low inflation low growth world then a 2% real return is pretty attractive especially as getting inflation back to that level could involve a lot of pain for stocks and if you hold to maturity it doesn't matter what bond prices do in the interim and you can reinvest that 4% coupon at lower bond prices. 

 

I think in general markets seem reasonably sanguine about the impact of rising interest rates and quantitative tightening because of the implicit assumption that a pivot is coming. But it is quite clear that lower interest rates and QE have been a massive driver in supporting stock price increases over this cycle and now this process is in reverse there could be a lot more downside to come especially as we are only getting started with QT. 

 

 

[Libs]

On 9/17/2022 at 4:30 PM, wabuffo said:

What's your take on gold's slide, given your framework ( gold as a signal of USD scarcity/surplus)?

 

Fiscal deficit has been too small for most of 2022.  Q2 had a huge surplus in April due to record tax receipts.  September has also been a surplus, though a lot smaller.  Overall its causing a shortage of USD both domestically & internationally and is reflected in USD's surge vs gold & other major currencies.  Those currencies aren't really weakening (if you compare them to gold) - its that the USD is uniquely strong.

 

Will it last into 2023.  No idea.  It will depend on whether tax receipts stay strong, IMHO as there won't be much extra on the spending side.

 

Bill

Bill- Thanks for the earlier reply.

 

July, August and September deficits are quite 'healthy.' Are we at that 6% of GDP level you're looking for?

US Deficit.pdf

[wabuffo]

September was a surplus.

 

Bill

[Red Lion]

On 10/18/2022 at 2:20 PM, changegonnacome said:

 

Was never interested in inflation, till they actually printed a shit load & sent it to people....the sheer scale caught my eye, even then I was like meh, lets see.....stay fully invested I've heard this inflation/money printing siren song before.........but then a little later inflation ACTUALLY showed up in the data......and then a little later it didn't seem to be magically going away by itself...& then I looked at the last periods of inflationary pressures and how equities did during that time & what was required from the authorities to fix it............and thats when my interest in inflation started.....I cant speak to people screaming into the abyss in the 2010's

 

It seems, to an extent, its others that cant scrap old ideas from 2010's in the face of new information. It was so right, for so long to poo poo these money printing doomsayers...... its hard to pivot. The Hussman's etc were wrong, those who ridiculed them were EXACTLY right. Being early & wrong in markets is the exact same thing. Endowment effect around ideas is real though...it's hard to let them go especially if they've delivered great returns in the past.

 

I remain ready to completely and utterly scrap my inflation/tightening cycle thesis for the US indexes at the first sign of sustained information to the contrary. Strong opinions, weakly held. Let's see.

What does your thesis practically look like? 
 

Commodity stocks? 
 

shorting stocks? 
 

shorting tlt and putting your money into short term t bills?   
 

The only thing working for me this year has been cash and a very large beneficial/derivative interest in PCG stock that I can’t control. Fortunately between the two that’s about 75% of my net worth. My investment accounts are otherwise down 24% this year and that includes about 800 basis points of hedging returns. Ouch. 

[mattee2264]

Other point about bonds is you are getting 4% on Treasuries which compares to a 2% dividend yield on Treasuries. Usually you require a risk premium of 3%-5%. So you are requiring 6-8% earnings growth. You are also requiring no further PE multiple compression. 

 

Difficult to imagine 6-8% earnings growth when there are so many headwinds and financial engineering (big driver of EPS growth over this cycle has become a lot more expensive) and Big Tech (another big driver) are mature and have saturated their markets so will find it hard to grow much faster than world GDP growth (which is unlikely to be that impressive). 

 

Also difficult not to imagine further PE multiple compression when we currently still have above average multiples (17-18x) on peak earnings (beginning of the year forward S&P 500 earnings estimate of $230). 

 

[Spekulatius]

I think earnings could look better then people think, because the inflationary costs to input costs for a lot of companies have started to abate.

Of course this differs from business to business and energy costs are still high and probably remain so,  but for a lot of others things, input costs (which have been pressuring margins) have started to revert and some may end up recovering margins that has been lost during a cost surge.

 

For tech companies, While I agree that growth may slow, there is a lot of fat in salaries. Both in terms of high salaries being paid as well as the numbers of positions and perks they may be able to cut, once competition for talent from upstarts and hot areas like crypto starts to abate.

[Libs]

12 hours ago, wabuffo said:

September was a surplus.

 

Bill

Page 5 of attached- September shows $487 B receipts, $917 B outlays; deficit = $429 B. What am I missing? 

Edited October 22, 2022 by Libs

[scorpioncapital]

I'd be more worried about a top then a bottom. bottoms are higher returns, tops are lower returns.

 

[wabuffo]

Page 5 of attached- September shows $487 B receipts, $917 B outlays; deficit = $429 B. What am I missing? 

 

Sorry - made a math error.  Still a deficit, but a very small one = $56b.

 

I always focus on cash (ie, US Treasury's reserve acct at the Fed = TGA).   Reduction of operating cash = $34b for the month.   Now some of that is due to debt redemption/issuance so we need to back that out.  Borrowing from the Public added a net $22b.   IOW, the TGA would've been lower by that $22b without the net issuance so that amount has to be added back.

 

$34b + $22b = $56b operating deficit for the month of Sept (not $429b).  

 

 

Where's the difference?  See that "By Other Means" section at $373b?   That's an "accounting charge" guesstimate by the US Treasury for the Student Loan forgiveness program.  Its "non-cash" and is instead a writedown of assets.   How do we know?  Let's go to the Appendices of the monthly Treasury report for Sept....

 

<flip, flip....flip>.   Ah - here we go.   I've highlighted it.   Federal Direct Student Loans in the month were written down by $373b.   Note that the accounting here is a "net reduction of asset accounts".    See - this cash was spent from the TGA years ago when the Student Loans were originated/purchased by the US Treasury.  That money already went to the institutions of higher learning probably under the Obama years.   It never was treated as an expense that went through the deficit accounting rules because it was a purchase of an "asset".   LOL!

 

 

Hope this helps!

 

Bill (your green eye shade deficit accountant)

Edited October 22, 2022 by wabuffo

[changegonnacome]

13 hours ago, RedLion said:

What does your thesis practically look like? 

 

Taking opportunity to 'sell' volatility when I can and where it makes sense.......then short via puts US indexes (& some names) while holding disgustingly cheap high FCF yield consumer staple type things that are buying back shares right now or have irreplaceable hard assets enhanced by inflation at their core.... with a strong tilt towards Europe/UK where you know the recession/nuclear war is is already 'priced in'  so sentiment can only kind of get better there & as a USD investor the currency at some point will be a tailwind............then short some consumer discretionary/economically sensitive to recession stocks & then companies where their FCF yield is flirting with the same yield that is going to be available from a humble high yield savings by year end. For example CIT bank is offering a 3% savings account today.....guessing this is gonna be 4% by year end. Folks will wake up soon and wonder what the hell they are doing holding equities with FCF yields in that neighborhood when FDIC alternatives exist.

 

Then I really like market neutral stuff right now, merger arb, works outs - like the Twitter deal trade I had on. Need to do more work on this type of thing actually.

Edited October 22, 2022 by changegonnacome

[Dinar]

2 hours ago, changegonnacome said:

 

Taking opportunity to 'sell' volatility when I can and where it makes sense.......then short via puts US indexes (& some names) while holding disgustingly cheap high FCF yield consumer staple type things that are buying back shares right now or have irreplaceable hard assets enhanced by inflation at their core.... with a strong tilt towards Europe/UK where you know the recession/nuclear war is is already 'priced in'  so sentiment can only kind of get better there & as a USD investor the currency at some point will be a tailwind............then short some consumer discretionary/economically sensitive to recession stocks & then companies where their FCF yield is flirting with the same yield that is going to be available from a humble high yield savings by year end. For example CIT bank is offering a 3% savings account today.....guessing this is gonna be 4% by year end. Folks will wake up soon and wonder what the hell they are doing holding equities with FCF yields in that neighborhood when FDIC alternatives exist.

 

Then I really like market neutral stuff right now, merger arb, works outs - like the Twitter deal trade I had on. Need to do more work on this type of thing actually.

What names on the long side do you like?  Thank you.

[changegonnacome]

2 hours ago, Dinar said:

What names on the long side do you like?  Thank you.

 

MSGE, LBTYK, HSW, GLV.L, BOI

 

[Cigarbutt]

21 hours ago, wabuffo said:

...It never was treated as an expense that went through the deficit accounting rules because it was a purchase of an "asset".   LOL!

Focusing on the potential investment implications only and using a purely accounting perspective as a blueprint, the 430B in costs that were written down was simply the equivalent of a loan being written down (because 'forgiven'). The 430B is the estimated future value of receipts tied to those loans that were expected in the future (real future cashflows).

Receipts and outlays are often biased by one-offs and others and trends may be more meaningful? especially longer term ones?

Of course one can focus on certain time lines when defining trends and one should use an appropriate denominator. Is GDP ok?

To add another dimension, are receipts and outlays a leading, coincident or lagging indicator? And if an indicator, an indicator of what?

Opinion: Financial repression can work (like post WW2 in US) but one then needs an unusual set of circumstances which are not present now. The yield curve seems to agree.

Opinion: The more i read about Paul Volcker the more respect, but that may be a problem of mine (infatuation with certain ideas)?

[wabuffo]

The 430B is the estimated future value of receipts tied to those loans that were expected in the future

 

lol.

 

Bill

[Cigarbutt]

4 minutes ago, wabuffo said:

lol.

Bill

Hi Bill,

It seems (possibly wrong perception on my part) that this a slippery slope topic (for this Board).

But this (lol thing about future receipts and outlays and growing mismatch vs underlying real economic activity) is why (opinion) central banks need to maintain a high degree of independence.

Assuming here central banks are relevant and important entities?

CF

[wabuffo]

CB - I don't care about the politics of central bank "independence". 

 

What I care about is how the US monetary plumbing works.  In order to do that, one has to view it from the angle of a consolidated sovereign fiat currency issuer.  That means that the Treasury and the central bank are part of the sovereign's money creation apparatus with each playing a role in that process.

 

Too much attention is paid to the central bank in an outsized manner relative to its limited role (mainly as inter-bank payment clearing system manager).  Unfortunately, this also applies to central bankers who actually believe that they play an outsized role in the management of the economy.  

 

The only central banker in my lifetime who understood this was Greenspan.  Volcker and Bernanke did not.

 

Bill

 

[Libs]

2 hours ago, wabuffo said:

CB - I don't care about the politics of central bank "independence". 

 

What I care about is how the US monetary plumbing works.  In order to do that, one has to view it from the angle of a consolidated sovereign fiat currency issuer.  That means that the Treasury and the central bank are part of the sovereign's money creation apparatus with each playing a role in that process.

 

Too much attention is paid to the central bank in an outsized manner relative to its limited role (mainly as inter-bank payment clearing system manager).  Unfortunately, this also applies to central bankers who actually believe that they play an outsized role in the management of the economy.  

 

The only central banker in my lifetime who understood this was Greenspan.  Volcker and Bernanke did not.

 

Bill

 

Bill:

 

Could you clarify one more thing.

 

Your central premise, I believe, is that federal budget surpluses (or insufficient deficits) lead to recessions. Is that your prediction now? It seems these conditions are in place to create that recession; yet you feel we are 'talking ourselves into one,' i.e., it doesn't need to happen. What do I have wrong?

 

Thx for all the green eyeshade work, it's very interesting.

[wabuffo]

We definitely were creating those conditions in Q2 with the huge surplus.  I think we are going to avoid those conditions now with September coming in at a small deficit (I was expecting a medium surplus).  

 

The fiscal situation is in full reflation mode now (not inflation - just removing the deflationary pressures).  Dollar should come back to earth & US economy quite likely avoids recession.   Current GDP in real terms is running close to 3% (7-8% nominal) and employment income in real-time seems to still be strong.

 

I think the Fed has really painted itself in a corner with its stupid open-mouth operations.   What happens in 2023 if CPI bumps along at 3-3.5%.   Will they accept that and allow themselves to pause as economy continues to grow?   Or will they worry about their previous comments about 2% being their target and continue to raise?

 

I blame Bernanke for all of this.  I much preferred a Fed that kept its mouth shut and only talked about general goals about sound money & full employment while running a tiny balance sheet.  

 

Bureaucrats gotta expand their scope, I guess, especially if they pay no personal price for failure.

 

Bill

Edited October 23, 2022 by wabuffo

[changegonnacome]

 

Clear articulation from a former Fed official of what I've talked about before - equity markets & their levels........are another version of interest rates (the price of equity capital vs. debt/credit)....they are all broadly 'financial conditions'.......higher market levels, all things being equal, are counter-productive to the Fed's strategic & overarching aim of slowing the economy down and returning price stability.

 

Price stability can not and will not be returned without a period of time where the US sits below its aggregate productive capacity......the Fed calls it slack, you might call it a recession/unemployment.

 

I expect Jay Powell is re-writing his Nov speech with tougher language in light of index rallies..........................market participants the last two decades have had a Pavlovian response to falling market prices conditioned into them.....he's got a hell of a job to do to train a very old dog with some new tricks.

Edited October 24, 2022 by changegonnacome