Is The Bottom Almost Here?

[Parsad]

19 hours ago, dealraker said:

Greg I swear to God this is true and when the guy dies I'll tell you his name and you can see his estate figures.  We have a near 90 year old guy in my club I have known since childhood who inherited nicely, his family owned shares of the local furniture business that sold to Masco for half a billion.  But his part was less than 2 mil.

 

Anyway he had this pathetic looking little shirt mfg business named Manhatten in a crappy old building.  Sold the damn business three times and financed it.  Got it back thru failure of new owners all three times.  Closed it down.  He contracted at one time making Polo shirts I recall.

 

20 years ago he gave 1 mil to the YMCA here.  He's in my investment club.  His largest stock holding was GE!!!!  He has not sold!  I know, he tells me regularly.

 

He got a new computer...too old to figure it out!   Had me and my brother-in-law come over to help him.  My bro-in-law says "You know he's rich don't you...like really rich."  I said, ""No damn way."

 

We got his computer up and going, got his passwords set up.  Got him back on his broker websites.  Dude has $50 damn mil in those accounts.  My bro in law says. "There's more."

 

His daughter is 5 years younger than me but we lived close growing up and have stayed in touch...she lives in Blowing Rock NC and has no children.  I could not help it...I called her and asked her if she knew his finances, she says:  "Oh yea Charlie... I know all about it"  Not a penny passed to her yet...she said laughing almost uncontrollably.

 

Yea, these things are true.  How they happen I don't have a clue.  He owns a lot of stocks!

 

 

 

 

This happens more than you think.  Especially if you visit Omaha or Bentonville for AGM's!

 

I'll tell you a story about my first BRK AGM in 2001.  I didn't really know anyone then, so I sat by myself and there was this old lady next to me.  Very nice...she was knitting!  I asked if anyone was sitting in the chair next to her?  She said "No, no, no."  And I sat down and chatted.

 

During the meeting, she would pull out one of those 99 cent ring notebooks that would fit in your shirt pocket, an HB pencil...she would lick the tip and then start writing every time she heard something interesting from Warren or Charlie.  Then she would go back to knitting.

 

At the lunch break, I got myself a box lunch, and she pulled out her little brown bag lunch...sandwich, apple, juice box.  We talked about Berkshire and Buffett.  Some ways into lunch, I finally asked her some questions about herself:

 

Me:  "So do you come to the meeting every year?"

 

Lady:  "Yes, yes...every year."

 

Me:  "Have you owned Berkshire shares a long time?"

 

Lady:  "Oh, yes!  My husband bought them many years ago, and then when he passed away, I started coming to the meetings."

 

After 20 minutes or so of back and forth banter, I finally found out she had like 500 A shares or about $30M in 2001.  Today, if they are still in the family, they would be $215M.  She told me they had never sold a share...and then she went back to knitting! 

 

Cheers!

[Cigarbutt]

4 hours ago, CorpRaider said:

Agree more debt is riskier than less but that's not what I read the above to say.

Your conclusion assumes that nominal deficits to gross GDP will not change or increase over time.

That's why the CBO comes up with pictures such as those (it's been interesting to follow those projections over the years):

and then, the projections in 2013:

No worries, in the long run we'll all be dead. 

 

[UK]

https://www.afr.com/wealth/investing/what-howard-marks-says-really-matters-to-investors-20221104-p5bvie

 

Like medicine, there are side effects. So the condition today is excessive inflation and the medicine is monetary tightening, quantitative tightening and … when you slow the economy, some people get hurt.” That will create opportunities for Oaktree, which specialises in distressed debt investing. “Clearly we are excited about the future because the bargain hunter, the value investor, does not have many opportunities to find bargains when everybody has money and they’re too eager to put it to work. We want some difficulty, we want some risk aversion,” he told AFR Weekend in an exclusive interview. He was in Sydney to meet clients in a broader funding effort.

 

“In the real world, things fluctuate between pretty good and not so hot. In the market, they fluctuate between flawless and hopeless. We’re not at hopeless. Hopeless is October 2009 or March 2020. But at least we’re not flawless anymore.”

 

Mr Marks isn’t the only high-profiled investor to warn on the state of the economy. This week Paul Singer, founder of activist hedge fund Elliott Management, warned the world could be on the path to hyperinflation and “global societal collapse and civil or international strife” due to inaction by central bankers. But Mr Marks urged investors to ignore the endless debate about when inflation might peak or how high interest rates might go, which he said epitomised the macro-driven, trading mentality that dominated the market. He said his next addition to his famous series of memos to investors would be entitled What Really Matters. “We try to buy the stocks of companies that will become more valuable over time, and the bonds of companies that will pay interest and principal as promised. This is what matters.”

 

Mr Marks said Oaktree was in the mindset of “patient opportunism”. “When there’s nothing clever to do, our job is really to avoid mistakes. And when there’s nothing clever to do, the mistake lies in trying to be clever. I think now we’re in transition from a very challenging period to I think a period when we will have access to more bargains. The job today is to wait.”

 

“The Opportunities Fund group maintains a list of the things that are on their radar screen. In March, it was maybe 20 lines. In June, it was the whole page. And now I think it runs to five pages. So there’s a dramatic upturn in areas to look at, that conceivably can give us the returns we want. “Usually the things that give us the most opportunity are the things that were most warmly embraced in the good times.”

 

But even after this year’s tightening cycle – the Federal Reserve has taken rates from zero in March to 3.75 per cent, and the RBA has moved from 0.1 per cent to 2.85 per cent – Mr Marks said pressure around the world would be for rates to move lower as quickly as possible. “Everybody wants low interest rates. The government, because it makes it easier to service the debt. The homeowner, to service their mortgage, and the LBO [leveraged buyout] operator, because it makes it easier to finance his deals. The only people who don’t want low interest rates are savers and lenders. “I think that there’s going to be a strong bias toward low rates for a long time. And even if rates were to stop here, or end up at 4.5 per cent on the Fed funds rate, or 5 per cent, this would still be historically low.”

 

[mattee2264]

To me it seems a lazy argument that interest rates will stay low because everybody wants them to be. Of course cheap money is addictive and like any addiction there will be withdrawal symptoms and tantrums. 

 

The Fed clearly doesn't want them to be low anymore because it is now worried about inflation rather than deflation. 

There will be variations in interest rates depending on the cycle but the days of zero interest rates are probably over and people who arranged their affairs on the assumption that interest rates will stay low forever will have to adjust to the new reality and take their losses with good grace. 

[changegonnacome]

Consistent with my previous posts on what I watch but contra to my persistent inflation thesis - wage growth in October BLS moderated and annualized it indicates a deceleration on MoM increases which is positive......one month doesn't make a year but I think this is indeed positive re:wage-price spiral fears & what you would expect to see in an economy moving back to equilibrium in response to demand side moderation.

 

Danger as I've noted and I'll be watching this closely is with still strong JOLTS heading EoY.....early 2023 BLS wage data might see a re-acceleration from a large re-setting of salaries across the economy as employees get 2022 CPI incorporated into 2023 comps.

 

This is the problem with inflation.....it can in any short period have been 'fixed' in MoM data......but humans don't think in the present.....we extrapolate the past.

 

Lets see this is positive for the return of price stability but very nascent and early sign of progress.

[Gregmal]

Between now and summer you have some of the biggest components of this inflation lapping their super spike peaks. March is where oil and many commodities lap the war spike. Rents already started in august. Q2 is where you really get interesting because you’ve got the $5-6 a gallon gas and nationwide housing price peak. Then again I’m always amazed at how they come up with the actual figures so who knows. Like it’s still hard to believe cpi in July of 2021 was 5%….there are normal things that from July 2020-July 2021 increased hundreds of percent. Everything increased 20-30%. CPI 5…..then a year later, when there really wasn’t even a fraction of the increases we saw from 2020-2021…9%….so who knows.

[changegonnacome]

For sure listen 8% CPI……moving down to 5% is a mathematical certainty….it’s the journey from 5% to 2% that’s the problem & mystery for 2023/24

[UK]

3 hours ago, Gregmal said:

Then again I’m always amazed at how they come up with the actual figures so who knows. Like it’s still hard to believe cpi in July of 2021 was 5%….there are normal things that from July 2020-July 2021 increased hundreds of percent. Everything increased 20-30%. CPI 5…..then a year later, when there really wasn’t even a fraction of the increases we saw from 2020-2021…9%….so who knows.

 

 

[Ross812]

The trimmed mean PCE inflation rate is 4.7% right now. I think the FFR needs to go at least 100bps over this (lets call it 5.5 to 6%) to help tamp down inflation. The 10-yr should be about 1% higher at 6.5% - 7%. Throw on an equity risk premium of 1.5% and need equities to yield 8-8.5%. We have a lot more downward momentum if rates keep being pushed up and have to stay there for a while. 

 

The smartest move might be to follow @thepupil into bonds and hang out in 90 day T-bills and add duration once the yield curves start to normalize. The 20-yr should be paying around 7-8% with the FFR at 5%+. Wait for equities to over correct and sell the bonds once rates are cut.

 

I am starting to see the wisdom in what @changegonnacome is saying about only investing in EV/FCF monsters with a margin of safety to the 8-8.5% required equity yield coming.   

 

 

 

[Gregmal]

Probably the most reasonable assessment I’ve heard is from Jeff Gundlach. Can anyone explain to me how we top May/June/July/August ‘22 prices next year? It seems far more likely we get something negative than it is we see 4-5%+.

[thepupil]

2 minutes ago, Ross812 said:

The 20-yr should be paying around 7-8% with the FFR at 5%+. Wait for equities to over correct and sell the bonds once rates are cut.

 

 

Let me just say that if the 20 year goes to 7-8%, I will lose a fair bit of money. I completely disagree with the premise (that 20 year should be 7% if FFR = 5%). I'd say 3% is more likely than 7%. but that's just one hare brained dude's opinion. 

 

[Spekulatius]

Just now, thepupil said:

 

Let me just say that if the 20 year goes to 7-8%, I will lose a fair bit of money. I completely disagree with the premise (that 20 year should be 7% if FFR = 5%). I'd say 3% is more likely than 7%. but that's just one hare brained dude's opinion. 

 

I don't know the US, but Germany needed real interest rates of 3% to get rid of inflation in the early 80's. Germany never got as bad as the US in terms of inflation and I think in 1982 Germany was running ~6% inflation and you could buy 9% 10 year bunds.

 

I don't think it will get that far, but I think it's very difficult to kill inflation without having real interest rates after inflation.

[thepupil]

21 minutes ago, Spekulatius said:

I don't know the US, but Germany needed real interest rates of 3% to get rid of inflation in the early 80's. Germany never got as bad as the US in terms of inflation and I think in 1982 Germany was running ~6% inflation and you could buy 9% 10 year bunds.

 

I don't think it will get that far, but I think it's very difficult to kill inflation without having real interest rates after inflation.

what was Germany's debt/GDP then? (couldn't find on google)

 

it looks like debt to GDP was 30-50%, then. at 125% think we'd have a harder time w/ that high of rates. I will assume our private sector is FAR FAR FAR more levered than 1980's germany also. 

 

Edited November 4, 2022 by thepupil

[Ross812]

18 minutes ago, thepupil said:

 

Let me just say that if the 20 year goes to 7-8%, I will lose a fair bit of money. I completely disagree with the premise (that 20 year should be 7% if FFR = 5%). I'd say 3% is more likely than 7%. but that's just one hare brained dude's opinion. 

 

 

I mean the 20-yr is a 4.56% today with a FFR today at 3.83%.

 

 

I think you might be right and the yield curve may stay inverted if we have a short peak and relaxation of the FFR. If we get something akin to the 90's with the FFR, I think the curves will normalize and you have a 10-yr about 1% over the 2-yr and 20-yr 0.5 to 1% over the 10-yr. I don't see any way the 20-yr doesn't at least stay within 50 bps of the FFR. 

 

I think the FFR is going to have to go over the PCE inflation rate. We are a 80 bps from parity now. The amount of overshoot needed and the timing is the problem. 

[TwoCitiesCapital]

1 hour ago, thepupil said:

 

Let me just say that if the 20 year goes to 7-8%, I will lose a fair bit of money. I completely disagree with the premise (that 20 year should be 7% if FFR = 5%). I'd say 3% is more likely than 7%. but that's just one hare brained dude's opinion. 

 

 

I tend to agree. Im probably wrong regarding how long short-end yields would sustain above ~3-3.5% rate as I didn't expect multiple 0.75% hikes and hawkish commentary, but that doesn't mean the long end has to move. 

 

A positively sloped yield curve is expected in a healthy economy at neutral. We had two quarters of negative GDP growth BEFORE the hiking started and Q3 reading was only good if you're an energy exporter. And the Fed is still hiking. 

 

This is not a healthy economy at neutral. It is a quickly decelerating economy with the Fed continuing to tighten. The long-end is going to continue to price in a recession and remain flat to inverted until the Fed uninverts it by cutting IMO. But you'll want to own those intermediate-to-long bonds when they do. 

[Ross812]

 

Edited to say this has since been revised from 3.1% to 3.6%.

Edited November 4, 2022 by Ross812

[TwoCitiesCapital]

5 minutes ago, Ross812 said:

 

 

 

We will see. It's an estimate informed by a single month so far and the Atlanta Fed has a history of estimates that vary wildly over the course of the quarter. For a long time they were forecasting pretty close to 0% for Q3 and only changed in the weeks leading up to the report IIRC

Edited November 4, 2022 by TwoCitiesCapital

[Ross812]

@TwoCitiesCapital, fair point on the Atlanta Fed. 

 

Below is the historic spread between the 10-yr and the 30-yr mortgage (borrowed from Wabuffo's twitter). I think it tells an interesting story about the uncertainty the banks have about the direction of long term rates.  

 

 

The longer term average spread is about 170 bps and is nearly 300 bps right now. 

 

 

To me, this implies the risk departments at the banks are projecting a future the 10-yr around 5.8% (170 bps off the prime mortgage rate). The 10-yr is at 4.16 today which is 33 bps over the FFR. I'd say the risk departments at the banks are much more informed than any of us so they are thinking a FFR of maybe 5.5% in today's messed up economy? 

 

What are the implications of a FFR of 5.5%, 5.8% 10-yr, and a 6% 20-yr? That's an implied hurdle on the SP500 of 7.3% with a risk premium of 1.5% over the 10 yr. A DCF of the SP500 at 8.9% growth with today's earnings and a that discount rate gets us to the SP500 at 3670. Does that mean we are fairly valued now?   

[Dinar]

29 minutes ago, Ross812 said:

@TwoCitiesCapital, fair point on the Atlanta Fed. 

 

Below is the historic spread between the 10-yr and the 30-yr mortgage (borrowed from Wabuffo's twitter). I think it tells an interesting story about the uncertainty the banks have about the direction of long term rates.  

 

 

The longer term average spread is about 170 bps and is nearly 300 bps right now. 

 

 

To me, this implies the risk departments at the banks are projecting a future the 10-yr around 5.8% (170 bps off the prime mortgage rate). The 10-yr is at 4.16 today which is 33 bps over the FFR. I'd say the risk departments at the banks are much more informed than any of us so they are thinking a FFR of maybe 5.5% in today's messed up economy? 

 

What are the implications of a FFR of 5.5%, 5.8% 10-yr, and a 6% 20-yr? That's an implied hurdle on the SP500 of 7.3% with a risk premium of 1.5% over the 10 yr. A DCF of the SP500 at 8.9% growth with today's earnings and a that discount rate gets us to the SP500 at 3670. Does that mean we are fairly valued now?   

No, you are not thinking about it correctly.  Think about a 30 year mortgage as two things: a regular amortizing 30 year mortgage that you cannot pre-pay and an option to refinance at any moment.  Given the recent extraordinary volatility in interest rates, the value of the option has skyrocketed.  Hence, the spread widened drastically.   

[changegonnacome]

2 hours ago, Ross812 said:

I am starting to see the wisdom in what @changegonnacome is saying about only investing in EV/FCF monsters with a margin of safety to the 8-8.5% required equity yield coming.   

 

The incremental point is those charts everybody has seen on growth vs. value spreads etc being the widest they've ever been in decades.......well mean reversion is a bitch (if you believe in it)....how is the reversion going to occur then between these assets.......well the way the spread is compressed back to normal is that growth/higher multiple/low FCF yield stocks contract.....all the re-rating travel is going to occur in these assets.......they are ultimately part of the same conversation around a normalizing of rates...talk of the 10yr/30yr......which is to say these equites were levered long plays on low inflation/low rates/zirp & there is a strong argument to say that we have exited that era given the (1) reemergence of real inflation post-GFC/C19 cumulative stimulus (2) future inflationary forces discussed ad nauseam.

 

How does value outperform growth over long cycles? Answer.......investing is a very long movie with lots of twists and turns and where 'growth' in Act Two looks like the hero of the tale.......problem is in Act 3 'growth' gets murdered......& 'value' emerges from the supporting cast bruised and battered but alive........the unlikely hero as the end credits start to roll and its outperformance crown is restored  

[TwoCitiesCapital]

2 hours ago, Dinar said:

No, you are not thinking about it correctly.  Think about a 30 year mortgage as two things: a regular amortizing 30 year mortgage that you cannot pre-pay and an option to refinance at any moment.  Given the recent extraordinary volatility in interest rates, the value of the option has skyrocketed.  Hence, the spread widened drastically.   

 

Also there's a liquidity premium to be had as the mortgage market has seized up. 

 

Mortgage bonds are way more illiquid than treasuries ANd banks that used to offload these in MBS to sell to investors are now having to warehouse more of them on balance sheet since nobody wants to own bonds...and the Fed is selling a ton of MBS too. 

 

Now would be the time to buy MBS, as opposed to treasuries, IMO. I don't think it'll be treasuries rising to meet MBS, but MBS falling to meet treasuries. 

 

 

[matthew2129]

1 hour ago, TwoCitiesCapital said:

...and the Fed is selling a ton of MBS too. 

Aren't they explicitly not selling any and just allowing current holdings to runoff? 

[UK]

8 hours ago, Gregmal said:

Probably the most reasonable assessment I’ve heard is from Jeff Gundlach. Can anyone explain to me how we top May/June/July/August ‘22 prices next year? It seems far more likely we get something negative than it is we see 4-5%+.

 

Maybe if some really substantial decouplimg from China occured? But maybe it is possible that it just to far for the market participants to look untill some time after year end.

 

Also, what I do not understant: so Japan not even tries to raise rates, UK just has ackknowleged, that its economy (or financial system) can not bear substancially higher rates. I am sure EU will soon follow them too. US is in the best position, but I do not understant how is it that different and if it will be able to have very high rates for long, when the whole world around can not afford it? And somewhat normal rates, like right now, is nothing to freak out about, it would be healthy for a long term. 

 

RE high/low FCF, value vs growth, sure some reversion and justice is due:), however, if growth is real, than it is part of the formula. Just put terminal growht rate of 10 or even 6 percent into any FCF / (i - g), and see where that gets you. Not growing FCF at a 10 per cent discount is worth 10x, IF it is growing by 7 percent for at least 10 years, then that current multiple quickly goes to more than 15x etc. The question is ofcourse if the growth is real, and before this year it was overprojected and overvzlued on steroids. This is changing very fast this year:). Another thing, not every time, but ussualy these higher FCF / jam today companies are much inferior in other ways: roe, capital intensity, leverage, structurally disrupted etc. so you also have yo be carefull with them.

[UK]

https://seekingalpha.com/article/4553507-tesla-working-on-biggest-disruption-ever-humanoid-robots?mailingid=29602811&messageid=2800&serial=29602811.6852&utm_campaign=rta-stock-article&utm_medium=email&utm_source=seeking_alpha&utm_term=29602811.6852

 

Solutions is waiting just around the corner...gee such things probably shows, that this downturn is not over yet:)

[TwoCitiesCapital]

15 hours ago, matthew2129 said:

Aren't they explicitly not selling any and just allowing current holdings to runoff? 

I believe you're right.

 

He'd announced in September that they would start selling. I had thought that was more immediate, but on a double check I don't believe they've started just yet. He just said they probably would at some point. 

 

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.