Is The Bottom Almost Here?

[thepupil]

12 minutes ago, changegonnacome said:

 

Interesting seems like the high profile Big tech job losses were enough to soften the cough of lots of employees this year - and thats exactly how inflation gets fixed.............a round of wage setting negotiations across an economy are informed by restraint because the macro backdrop has weakened.

 

Maybe the Fed has engineered a soft landing..........my thesis was that although they moved quickly last year.......it wasn't quick enough to inform 2023 wage negotiations enough to see the transmission of 2022 CPI into 2023.......perhaps they've broken the chain......BLS data coming up will be key then.

 

I mean I only have my small circle of data points which are similar to @Dinar. We gave our nanny 4% raise and $1,500 cash bonus. she was happy. I got a 5-6% base raise (company was 4%). My wife's in medical field...medicare/insurance payors not reimbursing at any higher rate. lots of goods inflation coming down rapidly. housing/rents cooling, energy prices falling. shortage at like restaurants and stuff will abate as the layoffs pick up / and eventually things like restaurant prices will moderate. friends in tech w/ concentrated portfolios from SBC's have seen lots of wealth destruction (but seem to still be doing okay)

 

I don't really see any crazy runaway inflation in real life (though own some things that would certainly benefit therefrom). 

 

I worry more about deflation/hard landing than inflation. I can handle moderate inflation. Just means a little derate and / bad returns. Deflation impairs capital and causes destruction (obviously at a point inflation does too).

 

 

but generally my macro stance is "should i be 85% long or 105% long". so I'm a permabull. 

Edited January 11, 2023 by thepupil

[changegonnacome]

1 minute ago, Gregmal said:

So pay bumps in January will result in the purchase of more medical services and textbooks/college courses? Childcare doesnt happen overnight. 

 

Ah well you know what I mean - thats a yoke i found online to illustrate a point...........lets just call them domestically produced services, consumed domestically.......

 

4 minutes ago, Gregmal said:

In fact, I'd say the hysteria of the past 12-18 months largely emerged because all the housing and below line items went bananas. Not the top red. 

 

Yep agree - but lots of intermingled things going on too.........so hard to fully untangle monetary & supply chain driven inflation.......and its they trillion dollar puzzle.......if it was all just red, all the time.........no problemo were getting out of the woods..........if some blue got mixed in there then its more problematic as I laid in the earlier post.

 

Its gonna be so interesting to see how it plays out this year. Beyond fascinating.

[changegonnacome]

2 minutes ago, thepupil said:

but generally my macro stance is "should i be 85% long or 105% long". so I'm a permabull. 

 

Cheers for data points - my circle it seems is a little skewed.

 

Your macro stance lines up pretty close with mine.......as we've talked about here given the market goes up 70% of the time.....being long is the only rational thing..........I guess I add, like you, a little bit of Howard Mark'ism to my posture which is where are we in the cycle......I'm 85% long if I see lots of greed, bullishness & risk taking........and I'm 105% long when I see fear.

[Spekulatius]

I wish there were 9-10% wage increases. Not in my or my wife's circles that's for sure. They are just not happening.

[changegonnacome]

16 minutes ago, Spekulatius said:

I wish there were 9-10% wage increases. Not in my or my wife's circles that's for sure. They are just not happening.

 

What kind of level you seeing anecdotally?

[fareastwarriors]

There's massive deflation in my household! My wife's 200k/year salary is becoming $1,800/month unemployment payment... 

Edited January 11, 2023 by fareastwarriors

[changegonnacome]

Of course the other thing I’ll say is that  the math says in a full employment economy unable to get productivity above 2%…….any aggregate average pay increases across the economy that exceed 4%….see you breach your 2% inflation target….~5% nominal wage growth in 2023 would result in some

measures of inflation reflecting that ~3% delta……

 

Which indicates what we’ve talked about - that last bit of inflation above 2%…..let’s call it the canyon between 2% and 3.5%…….closing that gap requires more than background noise of tech layoffs taking comp discussion from CPI down to 5-6%…..but rather down to 3%.

[changegonnacome]

7 minutes ago, fareastwarriors said:

There's massive deflation in my household! My wife's 200k/year salary is becoming $1,800/month unemployment payment... 

 

sorry to hear that @fareastwarriors what industry does she work in?

[fareastwarriors]

23 minutes ago, changegonnacome said:

 

sorry to hear that @fareastwarriors what industry does she work in?

 

Thanks. She's in software engineering. We are in the Bay Area. 

 

 

 

[changegonnacome]

4 minutes ago, fareastwarriors said:

Thanks. She's in software engineering. We are in the Bay Area. 

 

Any sense in the Bay Area whether the scale of other opportunities are such that she should be able to pick up something pretty quick or a bit of dislocation happening at the moment?.......the tight clustering of lay-offs in big tech and in Bay seem pretty large...........I've a developer friend who for years worked in FinTech.......but cool FinTech..........he just took a job with an insurance giant.........still technically FinTech but not the MacBook/Bean bag/Cortado kind he's used.......it wasnt his choice and as he says this less about building the future......and more about trying to drag legacy COBOL systems into the present while not breaking anything

[Buckeye]

There was an interesting article in this past weekend’s WSJ, where the writer pointed out that workers in the 70’s apparently expected the inflation to continue to increase and therefore they continued to ask for pay raises, thus exacerbating the inflation.  He contrasted that with now, where apparently workers expect the current inflation to subside and therefore have not been asking/demanding pay raises. 

Edited January 11, 2023 by Buckeye

[changegonnacome]

4 minutes ago, Buckeye said:

He contrasted that with now, where apparently workers expect the current inflation to subside and therefore have not been asking/demanding pay raises. 

 

Yep all through this period inflation expectations when consumers have been asked have indeed remain anchored ...........which is a very important part of not having a multi-year entrenched inflation issue via inflation psychology. 

 

 

Came across this little nugget - notwithstanding the click-bait inflation title.........what the CEO of Kroger actually seems to be saying once you listen to him is that the prices of some of these food stuffs are not expected to go up at ALL this year & to stay where they are.............which isn't inflation but rather stable prices! What the host is looking for is actually called deflation!

[UK]

https://www.bloomberg.com/news/articles/2023-01-11/fed-s-no-rate-cut-mantra-rejected-by-markets-seeing-recession

 

Federal Reserve officials are making a full-court-press effort to convince investors they won’t be slashing their benchmark interest rate before year’s end. It’s not working. Money markets are pricing a rate peak around 4.9%, followed by nearly half a percentage point of rate cuts by the end of 2023. That’s despite multiple officials in recent days delivering a sharply contrasting message: Rates are heading above 5% and will stay there all year. Just last month, Chair Jerome Powell highlighted that history warns against “prematurely loosening policy.” With traders effectively rejecting his narrative, the risk is that exuberance over monetary easing causes Fed officials to tighten even more — if falling market rates undercut their efforts to cool the economy. “The market thinks the Fed is playing without a playbook, since their forecasts have been wrong before and they’ve downplayed them in the past,”’ said Marc Chandler, chief market strategist at Bannockburn Global, who’s been working in financial markets since 1986. Investors judge that the US is “headed for a recession, and that the Fed doesn’t quite yet get it.”

 

“Fed officials have turned more hawkish because investors aren’t listening to their warnings,” Ed Yardeni, the veteran watcher of the bond market who heads his namesake research firm, wrote in a note to clients. “Perhaps, Fed officials should listen to the bond market.”

 

“The Fed is often wrong at turning points, said Tengler, who’s worked in markets for several decades and helps manage $1 billion. “One thing I keep in mind is that the dot plot in September of 2021 didn’t even show the Fed getting to 2% until 2024,” she said, referring to the policy-rate forecast. Economic data such as Friday’s surprise contraction in the Institute for Supply Management’s services gauge back the view that a recession in the offing and inflation has peaked, she says. “The Fed’s ultimately going to have to catch up.”

 

https://www.bloomberg.com/news/articles/2023-01-10/gundlach-says-listen-to-the-bond-market-rather-than-fed-on-rates

 

“My 40 plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says,” the DoubleLine Capital LP Chief Investment Officer told listeners on a webcast Tuesday. A number of Fed officials have indicated that they expect to lift their policy target — currently a range of 4.25% to  4.5% — to more than 5% and keep it there for some time. But markets appear much more skeptical. Swaps are currently pricing in a peak of less than 5% and suggest that policy makers will in fact begin cutting again before the year is out as US recessionary pressures bite.

 

Gundlach’s comments on the Fed echo remarks he made late last week on Twitter in which he said “There is no way the Fed is going to 5%. The Fed is not in control. The Bond Market is in control.”

 

Edited January 12, 2023 by UK

[changegonnacome]

21 minutes ago, UK said:

Marc Chandler, chief market strategist at Bannockburn Global, who’s been working in financial markets since 1986. Investors judge that the US is “headed for a recession, and that the Fed doesn’t quite yet get it.”

 

I think they, the Fed,  'get' it quite well...a recession of sorts is the point of all this tightening..........they are happy to induce one to ensure the inflation target is met absolutely & definitively........you can question whether a recession is needed or not to get back to two.........I think folks here have a built a case that inflation might indeed be "done" as of right now...........but in some ways thats another debate............the Fed, it seems to me, isn't interested in running the experiment the bond market is asking it too or puzzling/musing as we are here to whether inflation is gliding back to 2% on its own.....this might be a a type of "show me" 2% inflation Fed where it really wants to see the eyes of 2% inflation again before backing off.......and to some extent the Fed has been clear in the last year on what it perceives to be the greater of two potential sins it could commit - doing too much or doing too little.........on this quandary they are crystal clear......when in doubt on inflation do TOO much and it seems that they might just go ahead and do exactly that.

Edited January 12, 2023 by changegonnacome

[Gregmal]

So they deliberately push a recession? Big whoop. We ve had plenty before and will have plenty in the future. I’m still not even sure they’d have the gall to do such a thing to normal people, but that’s the system. Anyone notice that most of the layoffs aren’t companies effected by anything the Fed is doing but simply companies that completely misread the COVID disruptions and hired wayyyy too many people or got too aggressive expanding? Like clockwork, that gets unwound. Same as the inflation. The Fed isn’t/wasn’t needed in any of this. You’ve got at most 2-3 more CPI reads where folks can play games but then every last datapoint has rolled and it’s totally done and we probably go negative in the summer.
 

Meanwhile grown men cower with fear of what the computer boys will do to the index in the short term. The same folks who call the Fed incompetent claim that all we need to do is follow the Fed but nevertheless always seem positioned the same way. Why would we follow incompetents? Are the “smart guys” really this simple or is it just a scheme? Egg on destruction while profiting from it with the intention of picking up the pieces to profit from that too? The most telling aspect is for instance folks like that shitbreak from Morgan Stanley. Big bad crash coming but year end target of 3900….in other words, transact, transact, transact! Even though you don’t need to. Because you too, can be a macro market wizard!

 

Including tomorrow, it’s February and then March are the last CPI where folks can try to dishonestly scream

about meaningless “unacceptability” of face value inflation reads. You’ve got two Fed meetings. All these things should they result in scare tactic sell offs seem like gifts to an investor. Inflation is done and we either have a still robust economy, or one of the most orchestrated and manipulated run of the mill recessions, ever. THATs! What all the fuss the last 12 months has been about? Seems pretty dumb now that we re nearing the end of the story.

[UK]

I think that this difference between starting to change market view and FED seems too hawkish talk is because higher markets just makes financial conditions less tight, which is still against interest of FED at this point. And perhaps it is better for them to have markets lower, than to increase rates more (with much more impact to real economy). But I would still bet, the real longer term (more than 6 month) driver for FED decisions will be real time economy inflation etc and they will be very flexible to change their minds if conditions change. After last 20 or more years I just cannot imagine FED holding rates at some arbitrary number, say 5 per cent, just because they said so 6 month ago, especially if economy/inflation or jobs by then slows down. Now, inflation could stay above 2 per cent for longer term and rates are not going back to 0 or even below 3 per cent soon, but maybe this would only be for the better. At least for me, that zero to negative rates era was very bizzare and unconfortable and I was constantly in a more defensive position because of that (and to early defensive and wrong because of this for most of the period:)).

 

And to fix this inflation and tight labour market (because of reshoring, green investments etc) problem, instead of trying to kill economy, probably it would be much better to focus on getting imigration in order. I think there are good odds that sooner or later (probably later) it will be done, because at least it could be done in US. Not every other country even has such an option.

 

Edited January 12, 2023 by UK

[changegonnacome]

2 hours ago, Gregmal said:

ou’ve got at most 2-3 more CPI reads where folks can play games but then every last datapoint has rolled and it’s totally done and we probably go negative in the summer.

 

Perhaps but I think the CPI dropping is going to accompanied by some pretty painful earnings misses....and in some respects falling CPI is the other side of the same coin which is to say CPI progress is in some respects a function of a weakening consumer & falling demand..........so you've got some positive impact coming perhaps on lower discount rates moving forward (higher multiples) as a result of clear CPI progress but ultimately what good is a slightly higher multiple when the thing your multiplying (earnings) are falling.

 

2022 - multiples get whacked

2023 - earnings get whacked

 

Thats my basic take on things......Fed drove up discount rates in 22, market got whacked.......tightened financial conditions......is beginning now to feed through into the real economy via diminished demand/spending......market gets whacked again....this time on E............how do I know? Cause the Fed told me so .

 

But lets see......there's about twenty reasons earnings have peaked out and very few reasons ive heard pointing to an earnings uplift......the balance of probabilities is to the former not the latter

Edited January 12, 2023 by changegonnacome

[StevieV]

7 hours ago, Gregmal said:

So they deliberately push a recession? Big whoop. We ve had plenty before and will have plenty in the future. I’m still not even sure they’d have the gall to do such a thing to normal people, but that’s the system.

 

If the Fed's goal was to cool things down, then they've already made a lot of progress.  We already had 2 quarters of negative GDP.  The fed is estimating an anemic 0.5% GDP growth in 2023.  Some excesses have been taken out of the stock market, not to mention the crypto market.  Housing prices have definitely cooled.

 

I'm as skeptical of the system as anyone else, but the Fed may actually be just trying to calm inflation.  Will the overshoot or undershoot?  I don't know.  I also don't know what tradeoffs they are willing to accept.  If combating inflation means some increased unemployment, I think the Fed is ok with that.  Where the line is and when they decide they've accomplished their mission, I don't know.  

[Spekulatius]

The fact that the bond and equity market doesn't believe the Fed is one of the core issues for the Fed. The Fed needs to regain credibility and that is why I think higher interest rates for longer is a likely outcome.

 

This will also prevent a whipsaw of inflation that we could see. It's very clear that CPI data is rapidly cooling for now, but it is less clear that core inflation is cooling to the extend that it allows for the 2% inflation benchmark. The labor market so far has not shown much indication of slowing (unemployment still at 3.5%) so that gives the Fed a lot of leeway. Same with the USD has been weakening, which also takes of systemic risk from USD shortage.

Also, what happens if CPI data starts to re-accelerate because energy costs start to rebound, which is what many are expecting here?

 

Just random musings of course.

Edited January 12, 2023 by Spekulatius

[Ulti]

1 hour ago, Spekulatius said:

he labor market so far has not shown much indication of slowing (unemployment still at 3.5%)

 I have  a question , which probably comes from ignorance. Why is the fed so focused on the employment rate ?  I understand that Congress has just passed a multibillion $$ infrastructure bill which will seem to keep unemployment lower for many years to come. In addition, with demographics and a poor immigration

policy, it just seems that jobs will be harder to fill in the coming years. Maybe this inflation is transitory as originally diagnosed.. I'm sure there is some economic bookworm formula that equates low unemployment with high inflation and that's why they are so focused... but haven' there been periods in history with low unemployment\low inflation ? It just looks like if employment is their focus, the  Fed has got a long road to go.

[Dinar]

The Fed has a big problem, and that is beyond 2023.  There are a number of structural factors that will push inflation above 3% per annum on a measured basis starting in 2024/2025 and beyond.  They are:

 

a) Transition to green energy is very inflationary, since you need a back up source of power for wind/solar/hydro

b) Deglobalization

c) Continued left-wing policies in the US (on the federal level + NY+California+NJ et all) that discourage work and encourage idleness (being on the dole) and reducing the size of the labor force.  Ironically, in France, Macron is going the other way.

d) Demonization by the educated, but without common sense, elites of everyone that disagrees with them which leads to distrust in institutions, drops in vaccinations for things like measles, prevents common sense reforms.

e) Rapidly declining quality of education in the US, and hence declining skills of the labor force.

f) Too many people in the labor force are employed in producing nothing - diversity consultants, etc...

g) Promoting people/hiring contractors based on skin color/sexual orientation, rather than how good they are.  I wonder how much money FAA spends per year on diversity/equity/inclusion and how much on testing software?

h) Insane government waste.  In NYC, for instance, the educational budget per pupil is for $40K per year, yet only $10K reaches the actual school.  

Edited January 12, 2023 by Dinar

[Gregmal]

Man Im disappointed. Was hoping for a big selloff so some jerk off could tell us how significant some .1 or .2 figure was. 

[Gregmal]

The thing thats still weirdly trendy and lingering in the market and perhaps with the Fed is largely things that are entirely made up. For instance, if inflation isnt tempered, it will "flare up" again. Except...proof? This is purely speculation with zero proof or evidence. If wages go up, inflation will go up...proof? If we dont kill jobs, inflation will persist...proof? 

 

To continue this path, there needs to continue to be deliberate destructive activity from the Fed, with the basis for it, simply being an imagination and a theory rather anything where theres evidence. 

[changegonnacome]

3 hours ago, Spekulatius said:

It's very clear that CPI data is rapidly cooling for now, but it is less clear that core inflation is cooling to the extend that it allows for the 2% inflation benchmark. The labor market so far has not shown much indication of slowing (unemployment still at 3.5%) so that gives the Fed a lot of leeway

yep COVID supply chain/energy stuff is peeling off….no question……mathematical certainty…… this is made in China and made in Ukraine inflation….it’s disappearing and it’s disappearing fast in the data……..contemporaneously it’s already gone…..the trillion dollar question is whether underneath this exogenous inflation we have Made in America inflation….a hangover from too much fiscal and monetary largese……I suspect a modest 100-150bps of inflation of this kind exists….and the question is what happens when we hit perhaps 3-3.5% on CPI and the damn thing stops moving down as beautifully as the last few prints.

 

The Fed has already sign posted their plan go to ~5% and hold there for not just as long as needed but it sounds to me like they’ll hold it, out of an abundance of caution, a little longer than might actually be needed. That idea of doing too little versus too much as being the greater of follys to commit.
 

Not delivering a pivot at a time it would ordinarily have in the past is gonna be a scary moment for market participants raised on the VIX 30+ equals Fed put/ stimulus…..what’s going to be even scarier is if those equity folks are holding things at x17 times earnings (5.88% yield) when risk free, FDIC stuff or triple A-rated paper is yielding 4,5 even 6% YTM.

 

The equity risk premium (ERP) is something I’m becoming highly attuned to as IBKR starts to pay me ~4% to hold cash….is SPY at a 5.88% yield (17 times earnings) based on what is highly probable to be peak earnings an appropriate ERP? I really don’t think so. Cash and Bonds are competing with equites for the first time in over a decade…..and equites need to step up their returns to compete for flows in this new world. The way they do that of course is by having their nominal price fall. We’ve had some of that but not quite enough to bring us to historically normal ERP spreads.

 

P.S. - of course one requires a view of future risk free rates here too 5% Fed funds is a point in time…..you think 5% Fed funds is an anomaly and we’re going back to 0%….then yep 17 times on SPY is a descent ERP. Which gets us back to the more difficult post-COVID world question and musings as @Dinar correctly lays out……are we heading into a new paradigm where inflationary pressures will stalk the West such that interest rates aren’t going back to ZIRP. 

Edited January 12, 2023 by changegonnacome

[Spekulatius]

1 hour ago, Ulti said:

 I have  a question , which probably comes from ignorance. Why is the fed so focused on the employment rate ?  I understand that Congress has just passed a multibillion $$ infrastructure bill which will seem to keep unemployment lower for many years to come. In addition, with demographics and a poor immigration

policy, it just seems that jobs will be harder to fill in the coming years. Maybe this inflation is transitory as originally diagnosed.. I'm sure there is some economic bookworm formula that equates low unemployment with high inflation and that's why they are so focused... but haven' there been periods in history with low unemployment\low inflation ? It just looks like if employment is their focus, the  Fed has got a long road to go.

Reason 1)

The labor market is about the only thing that the Fed has an influence on, by increasing interest rates to slow the broader economy . The Fed has no impact on crude, energy, food prices and many other things. Since the tight labor market presumably means persistent wage pressure, it is a number that the Fed is closely looking at, since it impacts core inflation.

 

Reason 2).

The Fed has dual mandate of facilitating price stability and maximum employment. Typically the two are contradicting each other - full employment means wage pressure which leads to inflation and that contradicts the primary mandate of price stability. Price stability is the  most pertinent issue right now, so the fact that we do have basically full employment (which has in the past been defined as unemployment rate <5%) it means that the Fed should tighten to reduce inflation as long as the full employment mandate is not impacted.