Is The Bottom Almost Here?

[changegonnacome]

1 hour ago, Gregmal said:

With the energy and shelter elements starting to cross outrageously high comps, where exactly does the above then come from? Housing and energy have almost no shot at being anywhere near Q1–Q2 2022. Same for most commodity inputs. We d need like 100% increases in the smaller inputs to move the needle with the aforementioned stuff coming down.

 

As always what I speak about is monetary inflation driven by nominal spending increases against an economy operating at full tilt..........so it will show up in domestic goods and services.......and it will fight against the fall in what you outlined above such that this wont be linear fall from 8% to 2.x% like people seem to think......if I'm right inflations fall will have these little stubborn plateaus driven by 'flare-ups' in certain goods categories (domestic ones) which will make it so that inflation's fall gets stuck for a time. We wont have a lovely sloping line going from right to left and down. That's my hunch.

 

Importantly these plateaus will break the hearts of market participants waiting for the pivot resulting in negative beta.

 

 

Edited November 18, 2022 by changegonnacome

[Viking]

I continue to think a number of secular changes are happening to global economies that will lead to higher average inflation over the next 5 years (as far as my crystal ball looks out). Inflation will ebb and flow. We are moving from a world of abundance to a world of constraints. That will be inflationary. 

1.) globalization is dead. Replaced by onshoring/friendshoring.

- CCP China is now a pariah. Most CEO’s are figuring out how to do less business in China. The Ukraine invasion cemented the fact we live in a new geopolitical reality: West vs authoritarian regimes lead by China/Russia.
2.) the world, especially Western countries, will see a historically large capex cycle over the next 5 years

- see 1.)

- at the same time, investments to deal with climate change will be enormous. Transition to EV. Industry reducing carbon emissions. Catch-up investment in production of most commodities to deal with expected shortages.

3.) Western countries already have a shortage of labour. Who is going to do all the work? More investment in automation (even more capex) will be needed as not enough people exist to do the work. 
 

I was listening to the Cenovus Q3 conference call and something like $24 billion needs to be invested in Alberta for big oil to hit their long term greenhouse gas emission targets. All sorts of things will need to be built. The question was asked: “where are all the skilled workers going to come from when everyone is trying to do this at the same time”. Houston, we have a problem. Well, we already have a labour problem. It is only going to get worse. 
 

i continue to love the set up for commodities. I see robust demand. And with ESG, increasing supply will be a challenge. Cha ching. With lots of volatility of course.

[changegonnacome]

28 minutes ago, Viking said:

I continue to think a number of secular changes are happening to global economies

 

Agree with this too......but I think this secular change is ultimately why a return to anything close to ZIRP is unlikely....and will inform the risk free rate for the next decade and beyond. Which is important to consider if you touch low FCF/low cap rate investments.

 

However what we have right here, right now is predominately being driven by classic monetary inflation....which is excess income/spending chasing too few DOMESTIC goods and services......this is a very clear domestically created inflation problem......once this is solved.....there is as you say secular inflationary pressures waiting afterwards such that ZIRP wont be an option for the politicians/central bankers.

[Red Lion]

@Viking would you mind sharing some of your commodities investment ideas? 

[Gregmal]

I hope it plateaus here. Keep FF around 4%. Mortgage rates will move back to mid 5s. Life is fine.

 

I love having an OK ish 4-5% rate in the market. Makes it almost too easy to just sit on your ass, play volatility, and short OTM puts on stuff you want to own. 

[dealraker]

I completely agree with what Viking is writing and that it should be considered as to some investing decisions.

Edited November 19, 2022 by dealraker

[crs223]

9 hours ago, changegonnacome said:

large swath of wage increases that will flow through into incremental nominal spending increases

 

I make no prediction about rates, fed, economy, etc.

 

But: I don’t know anyone (and I cannot relate to anyone) that is going to spend their COLA raise on a new patio set, extra haircuts, a Tesla, etc.  It’s scary out there!

[UK]

https://www.wsj.com/articles/u-s-vows-to-tackle-visa-delays-as-frustrations-mount-11668718834

 

WASHINGTON—A top State Department official pledged Thursday that wait times for tourist, student and work visas would shorten significantly in the next year as the department ramps up processing to meet crushing demand for entry to the U.S. The State Department has been struggling to keep up with visas since 2020 when the Covid-19 pandemic forced the closing of U.S. consulates around the world, bringing the application process for entry into the country temporarily to a halt. Two and a half years later, some consulates are still offering only emergency appointments. Though visa issuance has mostly rebounded to prepandemic levels, demand for visas is so high that appointments for anyone looking to apply are often booked months or even years out, and the Biden administration has faced mounting anger from business groups, Silicon Valley companies, universities, hospitals and the travel industry over the delays. The wait times are worse than anything the State Department has seen before, said Deputy Assistant Secretary Julie Stufft, who briefed reporters Thursday.

[Viking]

8 hours ago, RedLion said:

@Viking would you mind sharing some of your commodities investment ideas? 

@RedLion i really like the set up over the next 5 years for a bunch of different commodities. The problem is, despite the concerns over a slowing economy, resource stocks don’t look particularly cheap today. As we get into the new year, if the US enters a recession, then we might get another big sell off. My problem is i often get way too cute in trying to time my entry point. 
 

In terms of what sectors and what companies, i have a Canadian focus (easier for me, being Canadian). US has lots of good options too. ETF’s are also a good way to get exposure. I trade in and out of most positions (most of my investments are in tax free accounts so there are no tax consequences when i sell positions). 
 

I would love to hear others ideas (sectors and stocks).
 

1.) energy: this is my favourite sector today. Demand continues to grow and supply is constrained (years of underinvestment, now ESG and governments treating sector like it is the devil). 

 

My 3 core holdings are usually CNQ, CVE and SU. MEG was my pick to play volatility. I only hold CVE and SU today. I am hoping for a pull back so i can re-load again.

- CNQ: the best managed Canadian energy company; decent nat gas exposure. 
- CVE: new kid on the block. Not sure how good management is. Will hit their net debt target around year end. Starting Jan, 100% of excess free cash flow will be returned to investors.

- SU: cheapest of the three. Management issues in past. Very good at refining/retail which seems to be a sweet spot (with high crack spreads). They will be deciding in next 2 weeks if they will selling their Petro-Canada gas stations. If yes, the stock will pop. 
- MEG: smaller, well managed oil sands producer. Very volatile. I bought a couple of times under C$16 and sold over C$18. Rinse and repeat.

 

2.) Forestry (lumber/OSB): i also love the supply/demand imbalance here. Once we get to the other side of the slowdown the Fed is trying to engineer (late 2023?), i think housing in the US is going to pop again. Demand will grow for years and supply will likely struggle to keep pace (lumber supply is falling in BC). My favourite stock is West Fraser. Interfor has been the most aggressive consolidator.
- WFG: best managed, superior long term track record, shareholder friendly, Norbord acquisition (OSB) was brilliantly timed (founded in my home town of Quesnel, BC… i put myself through university pulling lumber on the green chain in their plywood plant for 4 summers). 

3.) Steel: it seems like a bunch of secular trends are in play right now that will drive a massive capex cycle moving forward: deglobalization, decarbonization, EV transition, resource build out, etc. North America has cheap energy so i can see more industrial business coming here. All of will need lots of steel.
- STLC.TO: has been my usual go to.

- NUE: would probably be my ‘set and forget’ US pick

- CLF: volatility play

 

4.) Copper: it looks like lots of metals will be needed for the EV transition to become a reality. I need to do more work here but copper looks like a good place to start. I have traded Teck a couple of times this year. An ETF might be a better way to play this (not just copper). Not sure right now.
- TECK: they have a very large copper mine coming on stream soon. 
 

5.) Uranium: nuclear really is the only viable solution for the world to deal with climate change. China is aggressively expanding. Looks like Japan is coming to its senses. The rest of the world will likely come around… they will have no choice. Not sure the best way to get exposure. Cameco? ETF like URNM? Or something else?

- https://sprott.com/insights/sprott-uranium-report-uraniums-october-optimism/

 

6.) Agriculture: the outlook for potash looks interesting. Russia and Belarus are big producers. Natural gas is an important input; high nat gas prices in Europe are affecting supply coming from Germany (I think). I need to do more work. Mosaic (MOS) and Nutrien (NTR) are on my watch list.

- https://www.nrcan.gc.ca/our-natural-resources/minerals-mining/minerals-metals-facts/potash-facts/20521

Edited November 19, 2022 by Viking

[UK]

https://www.bloomberg.com/news/articles/2022-11-17/oaktree-s-marks-sees-great-bargains-coming-as-recession-looms

 

Marks predicts US inflation has likely peaked, and expects rates to stay near the 5% mark in the next 5 to 10 years. An accompanying shift in consumer appetite alongside higher borrowing costs will lead to “significant distress” at many companies, he said. “A year ago the outlook was considered flawless and I think we’re going to reach a point where they consider it hopeless,” he said of investors. “And that’s when you get the big buys. That’s when you get to be a buyer of assets cheap and a maker of loans at high yields with safety.” Credit markets have seized up as the Federal Reserve hikes rates at the fastest pace since the early 1980s. Banks that agreed to backstop loans at one price months ago are finding that appetite has changed and funds are demanding higher yields. That’s prompting firms specializing in distressed debt to prepare for a potential boom.

 

And while corporate America as a whole is not highly levered, the distress is piling up, he said. “This is going to be a buyer’s market and a lender’s market. We’re going to have much better opportunities,” he said, adding that tech buyouts over the last 13 years have led to an accumulation of debt. “We’ll be looking among the ruins for great bargains.”

 

https://www.institutionalinvestor.com/article/b20q0fnk434bpg/ackman-made-2-billion-this-year-betting-on-rising-rates

 

Today Ackman is still betting that interest rates will continue to rise, saying they are “meaningfully below where they are going to go. That is a risk for equities.” He believes that inflation is going to be structurally higher than it has been historically. “We don’t believe the Fed is going to get back to 2 percent,” Ackman said, referring to the inflation target the Fed has historically used. Various factors, including de-globalization, will keep inflation at a higher level in the U.S. “We had the benefit for many years of outsourcing of production to low-cost labor markets,” he said, but that era is over. The Covid pandemic alone has made the U.S .reconsider “distant supply chains.” “A lot more of that business is going to come closer to home,” he said. “It’s more expensive to do business here.” Ackman also thinks “the transition to alternative energy is going to be expensive.” All of that means that the cost of debt will continue to rise for companies. “Locking in a 4 percent fix rate for 30 years is going to be difficult to do,” he said.

 

Edited November 19, 2022 by UK

[mattee2264]

S+P 500 back above 4,000. Suggests renewed confidence in a soft landing. Inflation falling off allowing the Fed to pause and eventually pivot and no meaningful fall in corporate earnings. 

[changegonnacome]

On 11/23/2022 at 8:31 AM, mattee2264 said:

. Inflation falling off allowing the Fed to pause and eventually pivot and no meaningful fall in corporate earnings. 

 

Yet.........

 

American consumer has officially gone on to their credit card........possibly one last Christmas where they pretend all is well.....then pay the consequences come Jan/Feb CC bill.....this is my base case + Fed getting rate up to ~5.5%+.....but unlike consensus......they hold it there for much of 2023 as economy/employment/SPY & most importantly inflation begins to tank........this resolve in the face of poor economic data is whats gonna shock market participants I think. Lets see will be very interesting to see what happens but this is my hunch.

[dealraker]

On 11/19/2022 at 12:29 AM, Viking said:

@RedLion i really like the set up over the next 5 years for a bunch of different commodities. The problem is, despite the concerns over a slowing economy, resource stocks don’t look particularly cheap today. As we get into the new year, if the US enters a recession, then we might get another big sell off. My problem is i often get way too cute in trying to time my entry point. 
 

In terms of what sectors and what companies, i have a Canadian focus (easier for me, being Canadian). US has lots of good options too. ETF’s are also a good way to get exposure. I trade in and out of most positions (most of my investments are in tax free accounts so there are no tax consequences when i sell positions). 
 

I would love to hear others ideas (sectors and stocks).
 

1.) energy: this is my favourite sector today. Demand continues to grow and supply is constrained (years of underinvestment, now ESG and governments treating sector like it is the devil). 

 

My 3 core holdings are usually CNQ, CVE and SU. MEG was my pick to play volatility. I only hold CVE and SU today. I am hoping for a pull back so i can re-load again.

- CNQ: the best managed Canadian energy company; decent nat gas exposure. 
- CVE: new kid on the block. Not sure how good management is. Will hit their net debt target around year end. Starting Jan, 100% of excess free cash flow will be returned to investors.

- SU: cheapest of the three. Management issues in past. Very good at refining/retail which seems to be a sweet spot (with high crack spreads). They will be deciding in next 2 weeks if they will selling their Petro-Canada gas stations. If yes, the stock will pop. 
- MEG: smaller, well managed oil sands producer. Very volatile. I bought a couple of times under C$16 and sold over C$18. Rinse and repeat.

 

2.) Forestry (lumber/OSB): i also love the supply/demand imbalance here. Once we get to the other side of the slowdown the Fed is trying to engineer (late 2023?), i think housing in the US is going to pop again. Demand will grow for years and supply will likely struggle to keep pace (lumber supply is falling in BC). My favourite stock is West Fraser. Interfor has been the most aggressive consolidator.
- WFG: best managed, superior long term track record, shareholder friendly, Norbord acquisition (OSB) was brilliantly timed (founded in my home town of Quesnel, BC… i put myself through university pulling lumber on the green chain in their plywood plant for 4 summers). 

3.) Steel: it seems like a bunch of secular trends are in play right now that will drive a massive capex cycle moving forward: deglobalization, decarbonization, EV transition, resource build out, etc. North America has cheap energy so i can see more industrial business coming here. All of will need lots of steel.
- STLC.TO: has been my usual go to.

- NUE: would probably be my ‘set and forget’ US pick

- CLF: volatility play

 

4.) Copper: it looks like lots of metals will be needed for the EV transition to become a reality. I need to do more work here but copper looks like a good place to start. I have traded Teck a couple of times this year. An ETF might be a better way to play this (not just copper). Not sure right now.
- TECK: they have a very large copper mine coming on stream soon. 
 

5.) Uranium: nuclear really is the only viable solution for the world to deal with climate change. China is aggressively expanding. Looks like Japan is coming to its senses. The rest of the world will likely come around… they will have no choice. Not sure the best way to get exposure. Cameco? ETF like URNM? Or something else?

- https://sprott.com/insights/sprott-uranium-report-uraniums-october-optimism/

 

6.) Agriculture: the outlook for potash looks interesting. Russia and Belarus are big producers. Natural gas is an important input; high nat gas prices in Europe are affecting supply coming from Germany (I think). I need to do more work. Mosaic (MOS) and Nutrien (NTR) are on my watch list.

- https://www.nrcan.gc.ca/our-natural-resources/minerals-mining/minerals-metals-facts/potash-facts/20521

These posts Viking...something worthwhile.

[Spekulatius]

One of the sectors I like is packaging. I have a decent position in GEF-B and a bit WRK. BERY is another one.  Packaging isn’t that cyclical and cash generative in downturns. No need to bet on any commodity prices as they are pass through.

 

GEF-B and WRK both have had management issues, but seem to be getting better. They have double digit FCF yields.

Edited November 26, 2022 by Spekulatius

[Gregmal]

I’m definitely a tree freak and always go grab a giant Xmas tree almost as soon as they get delivered to the farms(F the Home Depot trees)….typically a couple days prior to thanksgiving or the week after it. This year?….yea my town has changed over the years from suburb with a rural flair to yuppy…basically the exact mix everyone fleeing cities during COVID was looking for….but shit. Absolutely zero Xmas trees available over 10ft tall within a 20 mile radius. $275-500 a pop? Usually they sit for weeks because there’s only a couple maniacs like me that wanna deal with one that big and don’t mind paying that. Every farm or small shop selling them said the same thing. We ordered the same as always. We priced them 20-30% more expensive, and inside of 24-48 hours they were all gone.
 

No, the cost of growing a tree didn’t increase 20-30% in the last year, these things take 10-15 years to grow….people are still feeling jolly in some ways I guess. Total discretionary good too and definitely not something folks go blow money on if they’re tapped out, or even close to it. Stupid anecdotal observation, but soft landing seems far, far more likely to me than total bust.

 

Pretty much everywhere I look things still seem healthy if not robust. Maybe that’s just specific to where I look and invest(north NJ and Florida lately)….even dreaded housing. My stupid blue state lake property I bought in August 2021? Just had the worst unit in the development, 4 rows back from the water and close to a main road, sell above ask and 18% above what I paid 14 months ago for waterfront with a boat slip. 
 

Maybe it’s just me but it’s hard not to get excited about what seems to be the wind coming out of the sails of this farcical inflation story. If the consumer manages to survive this Wall Street led raid on the economy, next year is gonna be a doozy.

Edited November 26, 2022 by Gregmal

[Dinar]

By the way, spoke with someone who works for a large hospital chain in NJ.  3% wage increases for staff for 2023, so certainly no wage inflation there.  

[UK]

 

[Blugolds]

11 hours ago, Dinar said:

By the way, spoke with someone who works for a large hospital chain in NJ.  3% wage increases for staff for 2023, so certainly no wage inflation there.  

 

Staff? As in CNA, Maint workers, housekeeping? That doesn’t include nurses does it? They have their own union and negotiate correct? 

 

I think it probably depends on if it includes nurses and physicians because that has to be the majority of their labor costs,  one nurse hourly avg probably counts as 3 support staff. 

[Gregmal]

Wage increases alone arent going to keep the charade going. You even started seeing the ramifications of this in October, in terms of playing that game. Folks like Powell dont want to end up on Capitol Hill having to explain why theyre targeting the average American worker and actively trying to cause them hardship. It just won't fly. And my belief all along has been that they dont even really intend to, they just have to talk a really tough game to keep things in order until the obviously necessary time passes in order to start the downward spiral with CPI. 

 

If you can point to real things, and enough in aggregate, that are inflating in an unhealthy manner, they can keep playing the raise rates game. But so far, go back to this time last year...every single item held onto tightly by the inflation forever group...its imploded, one by one, as the one time stimulus drawdown inflected with supply chains or supply sources catching up. Only thing left to keep the gig going is the academic jobs/wages argument. But see above. And even just step back. That argument is as stupid in reality as it is on paper to anyone not holding a short position. Job and wage strength is a great thing for the economy. Everything else, even on the energy front which surprises me....seems to have been brought back to reality. I dont see a scenario where the kindred spirits take over ALL of those things again, at least not to the extent we start seeing wild inflation numbers again. 

 

[Spekulatius]

Just my hunch, if labor market stays reasonably strong and the wage increases continue to trail inflation, we are going to see widespread labor strikes and more unification.

 

 

That will complete the 70‘s experience. Maybe even the bellbottom jeans come back as well.

 

P. S. Perhaps the strikes are already happening in the way of quiet quitting.

Edited November 27, 2022 by Spekulatius

[Gregmal]

There’s been not an ounce of “wage price spiral”….period. It’s purely academic and there’s even been evidence to the contrary. The egg on the Fed argument at this point is basically, kill jobs. It’s as preposterous as it sounds. 
 

There’s also turnover of voting members soon. Another angle where “wait and see” makes more sense than not. 
 

It would be all too funny if not more than two years after doing it with COVID, the academics hijacked the country on little more than a theory and fucked everything up again.

Edited November 27, 2022 by Gregmal

[Viking]

3 hours ago, Gregmal said:

Wage increases alone arent going to keep the charade going. You even started seeing the ramifications of this in October, in terms of playing that game. Folks like Powell dont want to end up on Capitol Hill having to explain why theyre targeting the average American worker and actively trying to cause them hardship. It just won't fly. And my belief all along has been that they dont even really intend to, they just have to talk a really tough game to keep things in order until the obviously necessary time passes in order to start the downward spiral with CPI. 

 

If you can point to real things, and enough in aggregate, that are inflating in an unhealthy manner, they can keep playing the raise rates game. But so far, go back to this time last year...every single item held onto tightly by the inflation forever group...its imploded, one by one, as the one time stimulus drawdown inflected with supply chains or supply sources catching up. Only thing left to keep the gig going is the academic jobs/wages argument. But see above. And even just step back. That argument is as stupid in reality as it is on paper to anyone not holding a short position. Job and wage strength is a great thing for the economy. Everything else, even on the energy front which surprises me....seems to have been brought back to reality. I dont see a scenario where the kindred spirits take over ALL of those things again, at least not to the extent we start seeing wild inflation numbers again. 

 

@Gregmal you seem to be in the inflation is transitory camp. Please correct me if i am wrong. So where do you think inflation will be 6 months from now? 

[Gregmal]

15 minutes ago, Viking said:

@Gregmal you seem to be in the inflation is transitory camp. Please correct me if i am wrong. So where do you think inflation will be 6 months from now? 

Max 3%. Summer 2023 on CPI which is what everyone has used this year to promote the scheme, will possibly even be negative. What comps higher than May-August 2022 as far as the inputs go? Housing? Nope? Energy? Outside shot but probably not. Car prices? Nope. Commodity prices? Which ones? I don’t see any.
 

We ve reach a level where the comps are damn near impossible to retest. Giving people 10% raises probably wouldn’t put a dent in all the stuff they’ll be able to buy now that supply is catching up. I would almost guarantee this will be evident in Black Friday sales, which is a good precursor. All the goods and services people want. At some point they are satisfied with what they have and don’t need anymore. That’s capitalism working. Add in technology advances, which even just in the logistics and planning side are greatly deflationary, lack of gold standard catalyst, and the general reduction in relative significance of unions and it’s clear this ain’t the 70s. 2024? That’ll be interesting. But the inflation story for now you can stick a fork in.

Edited November 27, 2022 by Gregmal

[Viking]

BMO: "Wage Demands Just Warming Up"

 

[Gregmal]

Look at June here….why happened to all that “earnings are going to be awful” talk. They were gonna be awful in Q2. Then Q3. Now “next year”. For sure if we say stuff long enough it will eventually happen, but this is how folks get sucked into bear traps and miss years if not decades trying to be smarter than everyone else. There’s still plenty of stocks you could throw darts at that will do very well with inflation 5% or lower. Which is basically covering 90% of your potential outcomes over the next few years.