Is The Bottom Almost Here?

[Gregmal]

The idea that wage increases are bad is farcical and derived by the elitists who control resources. Look at how long it took to get ANY real wage growth coming out of GFC. It keeps people subservient and reliant on the system. 
 

Companies like Costco and Publix are exceptions but generally speaking corporations treat people like shit and pay them the absolute bare bone minimums. And now they’re being forced to cough up more cash and the establishment comes rushing in to bail them out again. Go figure.

[SharperDingaan]

I hear you, but compare theory to actuals ...

 

Imagine you have a $1,250 budget to cover your food and your portion of utilities/rent (bunk mates). It used to cost you just $1,100/month, you had $150/month to spend on other things, and life was good. In year 1 there is 10% inflation, it now costs $1,210 (1100x1.1), and you only have an extra $40/month to spend. As pointed out, that inflation essentially 'taxed' you $110/month.

 

In year 2 there is 8% inflation, but you got a 2% raise. You have 2% more budget at $1,275/month (1250x1.02), but your cost is now $1,306 (1210x1.08). With the 2% raise you are in the hole $31/month (1275-1306). Without the raise your are in the hole $56/month (1250-1306). Given that the monthly shortfalls are not major, you cut back your standard of living to accommodate.

 

Inflation > wage increases continue, and the monthly shortfalls get bigger. If you rent and your building is sold, there is a good probability that your new utilities/rent will be at market rate and a lot higher than you currently pay. To pay the higher rent you cut back on food, and visit the foodbank. Once a quarter, then once/month, then twice/month.

 

You're either going to demand a raise > inflation, or vote with your feet (if you can). Employers will rant that unions are screwing them! and that they cant get labor (at the price they can pay). Rather than close now unviable businesses, they import illegals and abuse them. Slaving.

 

To get out of the inflation trap the population needs to either do something else, work somewhere else, or become capitalist (helicopter money, guaranteed minimum income, etc.). Wage increase > inflation is straight forward if you're young and able, or a good thief ... but a very different story if you have mortgage, kids, are old and infirm.

 

Yet none of this is in the theory .....

Hence, hardly surprising that so many are dismissive, and rightly so!

 

SD 

 

 

 

 

 

[SharperDingaan]

To add to the actuals ...

 

The higher your food and utilities/rent budget, the worse this is. A $1,250/month starting budget is very low - were it a more realistic $2,500/month (single person in a bigger city) the year 2 shortfall without a raise would be $112/month. $3,750 for a family of 4 and it is $168/month. Widespread and rotating labor strikes; demanding wage increases well above inflation, are entirely rational.

 

In 'theory', wage growth > inflation cures the problem. But that inflation cannot be negative! ... 'cause it will deflate the value of 'real' assets (make rich people poor)!!! 

 

To keep wage growth > inflation you need to change jobs every 2nd/3rd year, and always move to a higher paying job; if there aren't any higher paying jobs, retrain and move to another industry. But what if you can't change industries?, are too old to go back to school?, or just don't have the ability? (money, family responsibilities, attitude/motivation, etc.) - the vast majority of ordinary people ???

 

New Ontario nurses stay in the profession maybe 3 years; same thing in much of Europe. Why? it's a sh1t job and promotional wage growth is < than inflation. Result? very long delays getting to see a doc, if at all (you've died). Long distance trucking can't get enough drivers. Why? It's a family killer, and growth in take-home is < inflation. Result? keep the trucking distances local, or go without. 

 

But what if my food and utilities/rent budget is small? I own my house, I have no mortgage, I don't buy/eat much, I'm rich! I have investment income (inflation adjusted), I have pension (mostly inflation adjusted), I work (casually, part-time, etc.), I'm even more rich! . My reality looks very, very different to that of everyone else ...  so hardly surprising if my investment outlook is not similarly distorted?

 

Theory is just a guideline.

 

SD

Edited December 20, 2022 by SharperDingaan

[ValueArb]

I have no idea where the bottom is, but my experience is in years where the stock market has done very poorly there is a lot of people taking tax losses at year end so the market doesn't really have a chance to rebound until the new year.

[Ulti]

https://www.advisorperspectives.com/articles/2022/12/19/jeremy-siegel-the-excessive-bearishness-is-great-for-equity-investors

[stockman500]

I think this thing keeps on going down. This will be like 2008 and 2000. The bubble has mostly burst but valuations will keep going down to below fair market value in the end. 

[Jaygo]

That’s my hunch as well. H ah a been wrong once or twice though

[ValueArb]

Schiller PE says we still have a ways to fall.

 

https://www.multpl.com/shiller-pe

[Dinar]

2 hours ago, ValueArb said:

Schiller PE says we still have a ways to fall.

 

https://www.multpl.com/shiller-pe

A couple of points, it is actually Ben Graham's P/E, he came up with the concept first.  More importantly, is this accurate?  Here is why I ask

2013 S&P 500 EPS = 128.13 or 163.7 in today's dollars given the 27.77% official inflation over the past decade

2022 S&P 500 EPS = 190. 

The average of the two is 176.86, so at 3854, it is 21.8  (I know I should use the average of the entire 10 year period but I am being lazy and this should be close enough.)  So it it is not 28.21 (May be if you include 2020)

Also, there is no adjustment being made for cash held by the likes of MSFT & GOOG (3.5% and 10% of market cap respectively) and no adjustment is made for the level of interest rates.  

 

 

[ValueArb]

26 minutes ago, Dinar said:

A couple of points, it is actually Ben Graham's P/E, he came up with the concept first.  More importantly, is this accurate?  Here is why I ask

2013 S&P 500 EPS = 128.13 or 163.7 in today's dollars given the 27.77% official inflation over the past decade

2022 S&P 500 EPS = 190. 

The average of the two is 176.86, so at 3854, it is 21.8  (I know I should use the average of the entire 10 year period but I am being lazy and this should be close enough.)  So it it is not 28.21 (May be if you include 2020)

Also, there is no adjustment being made for cash held by the likes of MSFT & GOOG (3.5% and 10% of market cap respectively) and no adjustment is made for the level of interest rates.  

 

 

 

Yea, there lots of adjustments you could make, rates, inflation, taxation. The actual average for last decade of S&P earnings is $145. 

 

Jun 30, 2022	193.36
Dec 31, 2021	211.50
Dec 31, 2020	107.70
Dec 31, 2019	161.74
Dec 31, 2018	157.04
Dec 31, 2017	132.83
Dec 31, 2016	116.71
Dec 31, 2015	109.02
Dec 31, 2014	129.85
Dec 31, 2013	128.13
Dec 31, 2012	112.29
Dec 31, 2011	114.82
Dec 31, 2010	105.17

 

The reason I like to use Shiller as a starting point is because 2020 & 2021 were both historical outliers, and early this year lots of people said (incorrectly) that S&P 500 PE was reasonable because of that outlier year. It was a record earnings year based on stimulus. 

 

Inflation is a tough adjustment, but maybe a necessary one that would make Shiller more accurate representation of market PE.

 

Another factor to consider is taxation rate. Trumps tax cuts increased S&P net earnings, but they only started in 2018 so earnings in years before it would be roughly 15% higher.

 

A main driver to market prices is interest rates. As a value investor I try to ignore present day rates and focus on long term rates when estimating intrinsic value. But clearly a lot of the market bubble was created by using DCFs with historically low rates as gospel. But I haven't really thought of how to adjust for rates or whether it should be adjusted for rates since the historical 16 PE was a product of historical rates. The question is whether Shiller try to predict Mr. Market, or should it try to estimate value?

 

Data from https://www.multpl.com/s-p-500-earnings/table/by-year

Edited December 29, 2022 by ValueArb
source data

[CorpRaider]

PE5 and Q give you roughly the same answer as of my last check.  Prof. Shiller credits Graham appropriately.

[Dinar]

29 minutes ago, CorpRaider said:

PE5 and Q give you roughly the same answer as of my last check.  Prof. Shiller credits Graham appropriately.

Q is a idiotic measure.  Q of 0.5 for a Five Seasons in the middle of Sahara is insanely overpriced, Q = 2 for an airport in the middle of Paris is insanely cheap.

[Paarslaars]

When the S&P starts to become more dominated by tech stocks that typically have higher P/E values due to growth expectations, is it still correct to compare with historical Shiller PE values? Would we not expect higher values to be the norm?

[dealraker]

Back and forth we sway like braches in a storm.  I've watched storms before, 20% prime rates in the early 1980's "whip inflation now" era - when "stuff" like stocks were worthless - right on through years and more years of interest rates falling so low that things like crypto and SAAS stocks at 80 times sales became the norm.  And of course the living genius arrived with an electric car and rich man fireworks (rockets) via inflated stock free play.   Amazingly, to top it off with gusto, Cathie came along and stood on the shoulders of this euphoric bunch shouting "GENIUS SAYS MORE!"

 

Something new; clear view.

Right on cue; too few.

It's a zoo; scary too.

What ya gunna do? I'll follow you.

 

"They say" that William the Conqueror killed most of the steadfast courageous English nobility at the Battle of Hastings.  The result was that hundreds of years of nobility 'watch-then-join the winning side' evolved topped off by the Stanley's behavior at Heny VII's improbable Bosworth Field victory.

 

But always remember the great majority of English had nothing to do with these battles, they just heard about them or watched from a distance.  

 

Anyway, as I ramble without a cause here my worthless wild ass guess is that those looking for a market plummet may be looking too close given that it seems from what I hear the chant is "recession but 2nd half is good" and whatnot.  What's "the market" looking at?  I surely don't know.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Edited December 30, 2022 by dealraker

[TwoCitiesCapital]

On 12/29/2022 at 12:00 AM, stockman500 said:

I think this thing keeps on going down. This will be like 2008 and 2000. The bubble has mostly burst but valuations will keep going down to below fair market value in the end. 

 

RIVN was down 75% from it's peak in October. It's down another 40% from then. Tesla is still dropping. 

 

Just examples of their still being plenty of speculative excess going around even just 4-8 weeks ago when people were convinced the bottom was in. People have been waiting for the Fed to pivot and save the day and the markets reflect that expectation. 

 

I think once people realize how bad the earnings picture is going to get, and that the Fed is intentionally engineering a recession and will not save the day, that the panic will be palpable and you'll see it spreading to blue chip names and not just the COVID plays getting hit hard. 

 

That's when you'll want to start buying. 

Edited December 30, 2022 by TwoCitiesCapital

[Gregmal]

1 hour ago, dealraker said:

Back and forth we sway like braches in a storm.  I've watched storms before, 20% prime rates in the early 1980's "whip inflation now" era - when "stuff" like stocks were worthless - right on through years and more years of interest rates falling so low that things like crypto and SAAS stocks at 80 times sales became the norm.  And of course the living genius arrived with an electric car and rich man fireworks (rockets) via inflated stock free play.   Amazingly, to top it off with gusto, Cathie came along and stood on the shoulders of this euphoric bunch shouting "GENIUS SAYS MORE!"

 

Something new; clear view.

Right on cue; too few.

It's a zoo; scary too.

What ya gunna do? I'll follow you.

 

"They say" that William the Conqueror killed most of the steadfast courageous English nobility at the Battle of Hastings.  The result was that hundreds of years of nobility 'watch-then-join the winning side' evolved topped off by the Stanley's behavior at Heny VII's improbable Bosworth Field victory.

 

But always remember the great majority of English had nothing to do with these battles, they just heard about them or watched from a distance.  

 

Anyway, as I ramble without a cause here my worthless wild ass guess is that those looking for a market plummet may be looking too close given that it seems from what I hear the chant is "recession but 2nd half is good" and whatnot.  What's "the market" looking at?  I surely don't know.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Your storytelling skills are improving. 
 

Anyway, I can’t believe people still care about this. The stuff you wanna own already bottomed. Chew on that.

Edited December 30, 2022 by Gregmal

[dealraker]

1 minute ago, Gregmal said:

Your storytelling skills are improving. 
 

Anyway, I can’t believe people still care about this. The stuff you wanna own already bottomed. Chew on that.

Greg you can tell that I missed parents telling me stories when young, thus I...

 

LOL, tell stories!

[TwoCitiesCapital]

There's also leading indicators to be considered - which are currently cratering at a rate indicative of -4 or -5% GDP growth YoY

 

PMIs are massively contractionary. Historically, bonds have dramatically outperformed stocks when PMIs were contracting. 

 

And we know that monetary policy acts with a lag, so we're not even seeing the impacts of the bulk of the rate hikes yet and the Fed is still hiking....

 

I think it gets worse before it gets better. The next 6 months will basically be a continuation, and potential acceleration, of the trends of 2022.

[Gregmal]

11 minutes ago, dealraker said:

Greg you can tell that I missed parents telling me stories when young, thus I...

 

LOL, tell stories!

I love reading. Always have. However I’ve never been able to finish books easily. Once I get through enough of the story to which things lose their mystique and become predictable my mind checks out and it’s on to the next one. Last few chapters are just there for others to stay preoccupied with while I get a head start on the next story. 

[dealraker]

9 minutes ago, Gregmal said:

I love reading. Always have. However I’ve never been able to finish books easily. Once I get through enough of the story to which things lose their mystique and become predictable my mind checks out and it’s on to the next one. Last few chapters are just there for others to stay preoccupied with while I get a head start on the next story. 

LOL.  Read Acres of Diamonds, not that you need to because you don't!  But because the book is tiny with very few pages.  But oh my is it so revealing of human nature and insight.

[Gregmal]

The previous “bottom” multiple was like 70x or something. So idk but on top of the obvious laziness of refusing to do individual securities analysis, I just find anchoring to a mid teens multiple and then just playing the addition, subtraction then division game to be ….the epitome of pointless guessing. I mean with all the Ivy League geniuses running WS, is the answer really just plain vanilla 3rd grade division and multiplication? I think not.
 

It’s far easier to just find a satisfactory price to pay for a stellar business or asset and then get on with your life. 

[james22]

49 minutes ago, Gregmal said:

...is the answer really just plain vanilla 3rd grade division and multiplication?

 

Probably.

[Gregmal]

2 hours ago, james22 said:

 

Probably.

This would work if these people weren’t horrendously wrong for basically eternity. The formulas can’t be all that successful if it’s right once a decade. Blind squirrels have better hit rates than that.

[james22]

20 minutes ago, Gregmal said:

This would work if these people weren’t horrendously wrong for basically eternity. The formulas can’t be all that successful if it’s right once a decade. Blind squirrels have better hit rates than that.

 

Maybe I misunderstood your argument.

 

I'm just thinking plain vanilla 3rd grade division and multiplication > Ivy League geniuses.

[Dinar]

I generally agree with you, except David Tepper who is a phenomenal trader went on CNBC a couple of weeks ago and said that he thinks S&P should go to 3000-3200