Is The Bottom Almost Here?

[TwoCitiesCapital]

32 minutes ago, thowed said:

 

I attended a presentation by a Macro fund last week, and they were talking about 'Inflation Volatility' i.e. they said it'll go away, and then come back, and that will catch people out.  I find this a more believable narrative.

 

That's my base case. Inflation has been higher for longer than I expected, largely because housing has been more resilient than I expected (prices only started to fall 3 months ago). 

 

But, my longer term view is that inflation will average higher this decade than the last one while being incredibly volatile - bouncing between 0% and high inflation to get there. Maybe a ~4% inflation rate when all is said and done. 

 

The cats out of the bag. The direct stimulus and payments are in the economy to stay for the foreseeable future. The money supply has exploded. All at the time where there are commodity shortages from underinvestment, war, green investments, and supply chain disruptions. The end result is the same as always - too much money chasing too few goods. 

 

The only thing different this time is that the Fed seems determined to force the economy into a recession to fight it and will probably do so again in a few years. 

 

Edited December 1, 2022 by TwoCitiesCapital

[changegonnacome]

5 minutes ago, TwoCitiesCapital said:

The only thing different this time is that the Fed seems determined to force the economy into a recession to fight it and will probably do so again in a few years. 

 

I think they are determined and have learned the history lesson that you cant back off at the first sign of inflation coming down.........that you need to preserve longer than you would like to and see it through beyond any reasonable doubt.....because if you don't you'll have to go back again and do a tightening cycle all over.....causing more aggregate pain to get to the same end point......J-P talks a good game on this.....hope he backs it up.

Edited December 1, 2022 by changegonnacome

[Dinar]

I would agree that inflation (official = recorded) will be higher in the next decade than in the past decade.  I think due to de-globalization, demographics, dumbing down of American population, disdain for manual labor (even very highly skilled manual labor), belief that everyone should go to college to get a degree in film studies/gender studies/Shakespeare/art history/et all, lack of investment in commodities & housing.  I think it will average 3-4% per annum on a going forward basis on a recorded/official basis, and probably 4-5% on a real basis.  

 

[Gregmal]

I think the larger lesson or takeaway is simple. Find something that works within the parameter or framework of where we are going. I get the urge to short and all that shit. I am a natural born trader. I’m good at it too which is doubly addicting in regards to the urge to sit there and try to predict the next big short term move. That’s how I made my money. But in hindsite I also left so much money on the table longer term, not to mention coulda saved myself so much focus and brainwork, by simply focusing on good businesses rather than every stupid macro headline. So if you’re shorting to scalp 5-10% outperformance then that’s fine. But if you’re doing it to outright make money, longer term that’s damn near suicidal. 
 

When valuations are fair you have, or should have your watchlists. Mines like 300 names. When the whole world is down 25%+ you should being teeing off and your best ideas with almost no concern for tomorrow WSJ stories. 

[mattee2264]

Interest rates get a lot of attention. But earnings are usually the major driver of cyclical movements.

 

S&P 500 was at 2000 several years ago and S&P 500 earnings were 100. 

Not S&P 500 is at 4000 and S&P 500 earnings are around 200. 

 

The fact that interest rates have gone from basically zero to 3% over this period does not seem to be reflected in valuations even though interest rate movements have had a disproportionate impact on fluctuations over the last several years. 

 

If you look at previous severe bear markets they were accompanied by earnings falling off a cliff and Fed cutting rates did little to prevent the collapse in stock prices. Rather markets recovered soon before earnings started to recover. 

 

No idea if earnings will fall off a cliff this cycle. But I suspect 200 represents a cyclical peak and is artificially high due to peak margins, peak stimulus and peak animal spirits (to some extent earnings were shifted from 2020 to 2021 due to pent-up demand/excess savings etc). And even a mild recession could bring earnings down significantly.

 

Already this year we haven't seen much in the way of a recession but already Q2 earnings are 20% below the Q4 2021 peak (which not surprisingly coincided with the peak for the S&P 500 and what is most likely the bottom for this year).

 

And we have not even really felt the impact of interest rate hikes on earnings and firms may find it harder going forward to pass on price increases to consumers especially as consumers show signs of being tapped out and job market data always looks best just before a recession. 

 

But of course a major factor in stock prices is sentiment and what markets are focusing on. If they keep focusing on inflation and interest rates then bad news is good news and earnings will not matter. But eventually I expect the focus to shift especially if the Fed stubbornly refuses to pivot.

 

The low will probably be when markets start worrying the Fed will never pivot rather than interpreting every half-dovish comment as bullish. But the Fed won't establish credibility overnight and any signs of slowing for now will be interpreted as a sign that the Fed is wimping out and will continue to get more dovish until an eventual pivot 

[changegonnacome]

https://www.reuters.com/markets/us/us-job-growth-beats-expectations-unemployment-rate-steady-37-2022-12-02/

 

That god damn labor market just wont crack.........and without it cracking in some meaningful way you're just not IMO going to get reductions in the level of aggregate spending growth needed to bring prices back into alignment with current maximum aggregate output + expected 2023 productivity growth of sub-2%. The delta between those number (2% productivity growth against maybe ~6-8% nominal spending growth in 2023) is just too big not to have an inflation number with easily a 4-handle, maybe 5-handle in front of it for much of 2023. We've got some easy YoY mathematically certain falls in inflation coming (goods/energy).....the journey from 8% down to 5% is a cake walk for the Fed and markets just die-ing to proclaim inflation 'fixed'.......the journey as I've said for many months now from 5% to 2.5% is gonna be a bitch.

 

I mean the counter argument to why the labor market and by extension the economy doesn't need to crack this time to fix inflation is that somehow a reduction in the level of job openings alone, noticed by current or prospective employees would be enough to instill recession like spending behavior i.e. cutting spending, increasing savings....for that famous rainy day. Of course I've spoke about the paradox of thrift here before which is really how people by saving for that rainy day, actually make it rain but thats another story.

 

But back to my point above.........how many times have you heard your significant other come home and say "hey honey, I noticed the jobs available section in the newspaper is looking a little thin lately, I think this year we'll stay at your cousins house on the Jersey Shore instead of that cool W Hotel, best to just pull in the spending a bit so were in good shape & lets hang on to F150 another year, its a great car I love it we dont need a new one"........basically........never.....

 

What I just described above by the way is the soft landing scenario that J-P & others seem to be dreaming off, funny uh?........but this type of 'pulling the horns in' conversation is the one the Fed is currently trying to engineer to moderate spending/income growth & stabilize prices.......we all know the real conversation that actually triggers the required mindset/behavior......& its this one........"hey honey, my friend Jeanie's husband just got let go, they were doing great, better than us, now theyre not so sure they can keep their second car Jeanie is wondering if we'd like to buy it?......honey I was thinking that maybe we'll tighten things up for a while, cancel that vacay & do a staycay and if there's any extra shifts going you should take them and eh we should have your boss Tom over for dinner in the next couple of weeks, OK?"  Thats the conversation that shrinks nominal spending growth and boosts productivity and kills inflation.......not job openings getting a little light on indeed.com or whatever.

 

Anyway enough ramblings - I remain firmly & deeply skeptical of both this rally and that the bottoms reached in 2022 represent the lows that signal we have moved back into a new expansionary period for the economy/markets. I say this not to say sell everything & go hide under a mattress......I say this to say that this is not a time IMO to be aggressive, I say this to say that one might hold little more cash than normal in anticipation of higher return options in the future that it would justify the opportunity cost of holding said cash, I say this to say that one should demand a little higher expected FCF returns with higher confidence intervals on the FCF showing up than one might normally demand from a security. I say this to say that one might choose a security where only a few things need only go right for the investment to succeed rather than one that requires a lot to go right. This is what I'm saying.

 

 

 

Edited December 3, 2022 by changegonnacome

[Guest]

Burry just said on Twitter that he isn't short. He's been doom and gloom for a while now.

[UK]

https://www.bloomberg.com/news/articles/2022-12-03/stock-strategist-is-bracing-for-5-inflation-for-the-next-decade?srnd=premium-europe

 

Q: So they’ll get rid of that 2% target for now?
A: Yes. And that wouldn’t be the worst thing in the world. And that’s my point. If you look back at the history of the 2% target, it’s a made-up number. It came from a press conference in New Zealand in the late eighties. There’s no scientific backing behind the 2%. If you look at the distribution of inflation and growth in the US, you’ll actually notice that growth has been actually faster -- real economic growth -- when inflation has been in the 4%-5% range. You can very well make the case that what really hurts is when you have inflation above 10%, or really unpredictable inflation, because this is when agents can’t plan for the future, investments don’t get made, people hoard stuff. But as long as you have stable, somewhat moderate inflation, whether it’s 2% or 4% or 5% doesn’t really change things. And I think that’s the way most Americans also feel -- most Americans don’t even know what the Fed does, they don’t know about the 2% inflation. They just think of inflation as whatever happened in the past. So that’s where the inflation expectation channel comes in. 

 

So the three factors that made it so easy for us to achieve that 2% inflation are gone -- cheap labor, cheap goods, cheap capital. So it would be a lot harder to get down to 2%. I mean, I’m sure we could, like, if Powell wanted to be Volcker and he gets the fed funds right to 10%, we get to 2%. But what’s the point? Why would you want to destroy the labor market? 

 

[Guest]

5 hours ago, UK said:

https://www.bloomberg.com/news/articles/2022-12-03/stock-strategist-is-bracing-for-5-inflation-for-the-next-decade?srnd=premium-europe

 

 

So the three factors that made it so easy for us to achieve that 2% inflation are gone -- cheap labor, cheap goods, cheap capital. So it would be a lot harder to get down to 2%. I mean, I’m sure we could, like, if Powell wanted to be Volcker and he gets the fed funds right to 10%, we get to 2%. But what’s the point? Why would you want to destroy the labor market? 

 

 

It would do far, far more damage to the stock market, I suspect than the labor market.

[RedLion]

1 hour ago, dealraker said:

My view of it all is quite simple: Time to reward young labor and not relatively old investors.  Ain't it awful?

I should have called this current environment as it arrives just as I finished stepping from the young labor boat into the relatively old investor/employer boat. 

[james22]

1 hour ago, dealraker said:

My view of it all is quite simple: Time to reward young labor and not relatively old investors.  Ain't it awful?

 

Thank God the young don't vote.

[Gregmal]

8 hours ago, UK said:

https://www.bloomberg.com/news/articles/2022-12-03/stock-strategist-is-bracing-for-5-inflation-for-the-next-decade?srnd=premium-europe

 

Q: So they’ll get rid of that 2% target for now?
A: Yes. And that wouldn’t be the worst thing in the world. And that’s my point. If you look back at the history of the 2% target, it’s a made-up number. It came from a press conference in New Zealand in the late eighties. There’s no scientific backing behind the 2%. If you look at the distribution of inflation and growth in the US, you’ll actually notice that growth has been actually faster -- real economic growth -- when inflation has been in the 4%-5% range. You can very well make the case that what really hurts is when you have inflation above 10%, or really unpredictable inflation, because this is when agents can’t plan for the future, investments don’t get made, people hoard stuff. But as long as you have stable, somewhat moderate inflation, whether it’s 2% or 4% or 5% doesn’t really change things. And I think that’s the way most Americans also feel -- most Americans don’t even know what the Fed does, they don’t know about the 2% inflation. They just think of inflation as whatever happened in the past. So that’s where the inflation expectation channel comes in. 

 

So the three factors that made it so easy for us to achieve that 2% inflation are gone -- cheap labor, cheap goods, cheap capital. So it would be a lot harder to get down to 2%. I mean, I’m sure we could, like, if Powell wanted to be Volcker and he gets the fed funds right to 10%, we get to 2%. But what’s the point? Why would you want to destroy the labor market? 

 

Yea this is actually eerily in line with my thoughts. 2% is a ridiculous totally made up target that is irrelevant to the extent they let it be. Sub 5% inflation is fine as long as it’s stable and predictable. Plenty of stuff will thrive. Much ado about nothing.

[changegonnacome]

1 hour ago, Gregmal said:

Yea this is actually eerily in line with my thoughts. 2% is a ridiculous totally made up target that is irrelevant to the extent they let it be. Sub 5% inflation is fine as long as it’s stable and predictable. Plenty of stuff will thrive. Much ado about nothing.

It’s one thing to change the target rate in the context of achieving said target…….quite another to change it when you’ve failed so objectively at your stated aim…..if you think Central Bank credibility matters in a fiat currency system ( and I do) then it’s not quite as simple as it might seem to change the goalposts

Edited December 4, 2022 by changegonnacome

[Gregmal]

Many people have spent a decade claiming the Fed has no credibility. The “Fed has lost all credibility” crowd, sang at its loudest this summer….and the dollar sat at an all time high. So “credibility” IMO is overrated. Credibility, if defined by the “I hold tons of cash/short the market” crowd, doesn’t matter at all. 
 

More relevantly, I think there’s great credibility in moving and adjusting to situations. Sitting here and demanding 2% inflation is equivalent to the investor who demanded a sub 14x PE on the broader market in 2013….

 

If they demand it in a stupid way that we get back to 2% and blow things up it will be a generational opportunity for the investor who doesn’t shit in their pants at the thought of portfolio volatility. Every mistake can usually be undone. However the other scenario is that they get with the program and then everyone sitting around being a negative Nancy misses the boat on plenty of opportunities which are already pretty damn good. 
 

I just don’t see a point to sitting around scrupulously fretting every flavor of the year “crisis”. That’s just not how long term money is made, although on the internet everyone can do that and still make 20% a year so who knows. 

[Dinar]

@Gregmal, with all due respect, I disagree that 5% inflation on a consistent basis is not a problem.  It confiscates the wealth of most people in society, except for the those able & willing to be long the stock market, and long property on a leveraged basis.  

[Gregmal]

Longer term I don’t think we are anywhere near 5%. But the issue is stability. Not some stupid made up “2%” number. All systems need flexibility to evolve. Meanwhile talking heads and inflation experts have in the last two years:

 

-smugly declared transitory only to now just as snuggly declare it entrenched

 

-cried for a decade about Fed credibility when the dollar says “scoreboard”

 

-refused to give up on 2014s busted “money printing” thesis

 

-don’t seem to understand the differences between slowing inflation, price stability, and deflation. They continue to demand deflation in the name of “restoring price stability” which is just dumb. For instance how many times have we heard about how high prices are and that they “need to come down”?? Stopping inflation just means they stop rising. Nothing to do with going down.

 

-insisted we have rate hikes to solve things that have nothing to do with rates..

 

 

It’s all been one big circus. At the center of it much of the loudest COVID screamers. Enjoy them for what they are, but they don’t deserve credibility. 

 

 

[changegonnacome]

It’s not a target if you keep changing it when the going gets tough……talking about changing it upwards at some point in the future is a worthy debate…….but doing so now is just not the time IMO….show resolve, get back to 2-ish, hold it there for a year or two THEN have the debate ….anyway think about what a 2.5% target rate would do to long duration treasuries…I mean if you want to help stonks go up it just immediately wouldn’t be a good for them as 10/30yr would shift upwards incorporating higher ‘acceptable’ inflation

Edited December 4, 2022 by changegonnacome

[maplevalue]

2 hours ago, changegonnacome said:

It’s not a target if you keep changing it when the going gets tough……talking about changing it upwards at some point in the future is a worthy debate…….but doing so now is just not the time IMO….show resolve, get back to 2-ish, hold it there for a year or two THEN have the debate ….anyway think about what a 2.5% target rate would do to long duration treasuries…I mean if you want to help stonks go up it just immediately wouldn’t be a good for them as 10/30yr would shift upwards incorporating higher ‘acceptable’ inflation

 

My "markets does not have on its radar" scenario is some politician comes along and says "let's make the inflation target 0". It's a vote winner IMO. Low probability, but I think the markets assign it a 0 probability.

Edited December 4, 2022 by maplevalue

[Gregmal]

42 minutes ago, maplevalue said:

 

My "markets does not have on its radar" scenario is some politician comes along and says "let's make the inflation target 0". It's a vote winner IMO. Low probability, but I think the markets assign it a 0 probability.

The counter is that most people are oblivious to regular low single digit inflation. We ve been told inflation wasn’t 0 or whatever the entire pre COVID period. No one had a care in the world while getting 3% raises. They just started bitching when post COVID real inflation was like 20-30%. Getting back to inflation below a mid single digits numbers won’t be anything worthwhile to anyone not some financial propagandist.

[Blugolds11]

5 hours ago, Dinar said:

@Gregmal, with all due respect, I disagree that 5% inflation on a consistent basis is not a problem.  It confiscates the wealth of most people in society, except for the those able & willing to be long the stock market, and long property on a leveraged basis.  

 

I dont necessarily think 5% is a problem, it can be, if the raising tide doesn't lift all boats...and it often doesnt. 

 

As to confiscating wealth of society by those able and willing to take advantage of opportunities, yes I agree...and thats literally how it has always been throughout history regardless of interest rates, it might temporarily (in the grand scheme of things/history/timeline) ebb and flow...but the trend is clear and established...the low/middle class have been squeezed for the last 4-5 decades, I dont think that will ever change. They're gonna get squeezed at 2% and squeezed at 5%, might be a faster or slower squeeze. Everybody knows low heat is preferred, but low heat or high heat, the lobster is still getting cooked and the end result is the same for the little guy in the pot. 

[Gregmal]

I mean you can do what nimrods do and look at data you’re fed by people who like feeding you manipulated data, or just live in the real world. Between summer 2020 and summer 2022 we pretty much had across the board 30-50% inflation in everything. The biggest drivers were COVID restrictions. Then fuel on the fire was stimulus checks going to everyone. If a worker deserving $18 an hour can get $28 to stay home and said restaurant is only allowed to operate at 20% capacity despite nearly limitless demand from folks with thousands of dollars of Monopoly money coming in monthly, in hand wanting a table….I mean come the fuck on. But all that’s over. Generating beyond 5% annual inflation will be absurdly challenging, despite what the people who called it transitory last year may now say.

[Dinar]

44 minutes ago, Blugolds11 said:

 

I dont necessarily think 5% is a problem, it can be, if the raising tide doesn't lift all boats...and it often doesnt. 

 

As to confiscating wealth of society by those able and willing to take advantage of opportunities, yes I agree...and thats literally how it has always been throughout history regardless of interest rates, it might temporarily (in the grand scheme of things/history/timeline) ebb and flow...but the trend is clear and established...the low/middle class have been squeezed for the last 4-5 decades, I dont think that will ever change. They're gonna get squeezed at 2% and squeezed at 5%, might be a faster or slower squeeze. Everybody knows low heat is preferred, but low heat or high heat, the lobster is still getting cooked and the end result is the same for the little guy in the pot. 

tax authorities confiscate wealth in a world of 5% inflation, that is what i was referring to

[UK]

This has nothing to do with US, but I think it is very interesting real time experiment with rates and inflation:)

 

https://www.bloomberg.com/news/articles/2022-12-05/erdogan-s-fastest-inflation-is-set-for-first-fall-in-over-a-year?srnd=premium-europe

[Gregmal]

2 hours ago, UK said:

This has nothing to do with US, but I think it is very interesting real time experiment with rates and inflation:)

 

https://www.bloomberg.com/news/articles/2022-12-05/erdogan-s-fastest-inflation-is-set-for-first-fall-in-over-a-year?srnd=premium-europe

They would be burning textbooks before long. 

[Spekulatius]

2 hours ago, Gregmal said:

They would be burning textbooks before long. 

We don’t  have to burn text books because inflation in Turkey comes down from the ~80% annual rate.

https://www.statista.com/statistics/895080/turkey-inflation-rate/

 

Similarly, we can’t do victory laps when inflation goes down form 9% to 6% in the US either.

 

While the 2% target was deliberately  chosen, it is a number that makes a lot of sense. It is low enough that it does not do much damage to buying power  and does not cause distortion in the economy and but is high enough that it is far away from a deflationary negative inflation. So the US central bank settles on 2%.

 

If the central bank were to settle on 5% and would indeed be able to create a stable 5%  then that would be fine. Chances are however, that with a 5% inflation target, we have a much more volatile inflation environment and have 2% one year, 8% the next, maybe 5% too once in awhile, but generally speaking we have inflation jumping all over the place and nobody would know what is temporary and what is not, until you have 3 years in a row of 8%+ and then you have a runaway inflation train wreck that is very hard to stop.