Is The Bottom Almost Here?

[SHDL]

57 minutes ago, TwoCitiesCapital said:

I agree in principal. Now find me any time, any country, where inflation was "stable" once exceeding 4-5%. I don't believe it has EVER happened. Certainly not in the U.S. 

 

Realistically speaking, the historic precedent once inflation exceeds 4-5% IS these whipsaws higher and lower. 

 

My vague recollection is that inflation was around 5% in post war Japan until it spiked in 73-4 due to the oil thing. But anyhow this was just meant as an example to illustrate my current thinking. 

[mattee2264]

 

 

So much for the recession being widely anticipated. I think this ties up with the idea that a soft landing is now the consensus expectation. 

 

 

[Intelligent_Investor]

On one hand, the markets are frequently irrational, but on the other hand markets have generally been much more accurate at predicting recessions/rebounds than most analysts and market strategists. Perhaps there is merit to the view the fed might actually pull off a soft landing

[TwoCitiesCapital]

21 minutes ago, dealraker said:

TwoCities, once again I 100% disagree with you.  "We" have a market!

 

I've held many stocks now close to 50 years.  Clearest proof of anything ever as to inflation and business.

 

 

 

If you held long duration, zero-coupon bonds and reinvested the proceeds over that same 50-years, you probably did better. Which one is the inflation hedge again? 

Edited February 2, 2023 by TwoCitiesCapital

[changegonnacome]

As I've said before ad nauseam in terms of inflation moving forward - the two numbers that matter most in terms of the trajectory of rates and by extension the health of the US economy/company earnings are:

 

(1) BLS - Non-farm payrolls data & Employment Cost Index (ECI)

 

(2) BLS - US Productivity growth

 

Some good news today from productivity report (https://www.bls.gov/news.release/prod2.nr0.htm) was in Q4 2022 productivity rebounded to a 3% annualized clip.

 

HOWEVER and I'll just lift from an article as it summarizes it well and I've added highlights in red:

 

"In all of 2022, U.S. productivity declined at a 1.3% rate. That’s the lowest annual rate since 1974. Some economists point to the post-pandemic return of workers in sectors like leisure and hospitality and health care.

Key details: Output in the fourth quarter rose 2.3%. Hours worked rose 0.5%.  Outside of the pandemic, that is the lowest level of hours worked since the fourth quarter of 2019.

Unit-labor costs, a key measure of wages, rose 1.1% in the fourth quarter. That’s down from a 2% rate in the third quarter. Economists has expected a 1.5% gain.  

For all of 2022, unit labor costs rose 5.7%. That’s the fastest pace since 1982."

 

https://www.marketwatch.com/story/u-s-productivity-rebounds-in-fourth-quarter-11675347610

 

If you dont see an issue there - I havent explained it very well in my previous posts in this thread!

 

The divergence between those two lines highlighted in red is a serious serious problem re: domestic in-grained monetary inflation which manifests in the "non-housing services" data series the Fed uses....we can talk all day about oil or Made in China supply chain crap........9% to 4% inflation is a zinch via base effects etc..........but if you think 4% to 2% is gonna be I think its becoming increasingly clear that this is less and less likely .....I want to believe in soft landings so I can go 112.5% LONG like I usually am....but historically this type of inflation is the gooey sticky kind that just wont budge without PAIN to the corporate & household sector via earnings erosion / layoffs & labor market weakness.

 

Alternatively you need to believe there is going to be a productivity miracle in 2023 output.......while H1 2023 payrolls/ECI growth captures unprecedented wage restraint all while 23 states jack up minimum wage....https://www.usatoday.com/story/money/2022/12/22/minimum-wage-raise-23-states/10940440002/

 

* caveat is these numbers are always subject to revisions, maybe something changes in them later that paints a better picture

 

 

 

 

Edited February 2, 2023 by changegonnacome

[Spekulatius]

Sort of funny that energy equities are crashing today.

 

I guess you have to sell something to buy tech and blue chips like $CVNA and $TSLA.

[Gregmal]

If you're still looking at inflation you might as well still be looking at covid case counts....story unfolds almost exactly as youd have expected. Next. 

[Parsad]

26 minutes ago, Gregmal said:

If you're still looking at inflation you might as well still be looking at covid case counts....story unfolds almost exactly as youd have expected. Next. 

 

I agree.  Although, I think the "next" one is going to be the fallout from inflation...impact of higher interest rates.  This truck ain't stopping...it's slowing, but not stopping.  There is going to be pain as it continues to hit consumers, especially indebted consumers. 

 

People are spending...to Maui, on the plane, in Maui, on the way back.  I saw people spending boatloads on gifts, hotels, restaurants, rentals, you name it.  Well heeled and those that have strong balance sheets will come out ok, but the average consumer who is indebted, and in many cases still spending, I don't see a good outcome. 

 

Indebted nations too!  Time to start paying the piper for loose monetary policy for a decade and a half!  Cheers!

[changegonnacome]

16 minutes ago, Gregmal said:

 

If you're still looking at inflation you might as well still be looking at covid case counts....story unfolds almost exactly as youd have expected. Next. 

 

 

If by inflation you mean 9% - I agree.

 

Do you consider 3.75% inflation enough to worry about….if you think it’s no problemo….I can assure you the Fed doesn’t 

I do hope your right - but the math on wage and productivity data emerging says we are cruising towards a disappointing and unexpected plateauing of the disinflationary momentum in the US (think I used the term head fake before).

 

Expected easing/pivot/rate cuts in H2 look like a fantasy to me now based on that data even more so when you layer on the Fed’s repeated reference to errors of the past around easing too early.

 

I don’t want to spoil the party my NLV is loving this too - but this is a bear market rally….trade it but don’t own it. 

[changegonnacome]

8 minutes ago, Parsad said:

This truck ain't stopping...it's slowing, but not stopping.  There is going to be pain as it continues to hit consumers, especially indebted consumers.

100% - whatever you think about inflation - pain to come got baked in the cake in H2 2022 via Fed tightening….just hasn’t fully flowed through yet 

[Parsad]

6 minutes ago, changegonnacome said:

100% - whatever you think about inflation - pain to come got baked in the cake in H2 2022 via Fed tightening….just hasn’t fully flowed through yet 

 

Change, while we share the same sentiment about pain in the economy, I'm still going to buy stuff when it's cheap and ignore macro.  It's what I've always done, and what I recommend for investors. 

 

My macro views are more to warn people about maintaining a strong balance sheet and living at/below your means, than avoiding the market.  And to always keep some dry powder ready!

 

Cheers!

[Gregmal]

Recession screamers likely create the next big opportunity but as far as 3% inflation, 1)..the goalposts keep moving in. Last year it was a certainty 5% was entrenched. People even argued with me about stuff going well south of 5 by fall 2023. 2) if we are at 3-4 next year this time there will be much more of “look how far we ve come” talk than “kill it all cuz you’re losing 50 bps over your annual raises!” talk. The big reason last year worked for the fear mongerers was bc you had these wild 5-10% prints and real world 20%+ increases and you could scream like an attention whore about Zimbabwe and needing to wipe out the world to solve it and 8% treasuries and all that shit. That’s done; put a fork it it. No one will care if Powell wants to be a tough guy to claim the last 150 bps on inflation. 

[Parsad]

10 minutes ago, Gregmal said:

Recession screamers likely create the next big opportunity but as far as 3% inflation, 1)..the goalposts keep moving in. Last year it was a certainty 5% was entrenched. People even argued with me about stuff going well south of 5 by fall 2023. 2) if we are at 3-4 next year this time there will be much more of “look how far we ve come” talk than “kill it all cuz you’re losing 50 bps over your annual raises!” talk. The big reason last year worked for the fear mongerers was bc you had these wild 5-10% prints and real world 20%+ increases and you could scream like an attention whore about Zimbabwe and needing to wipe out the world to solve it and 8% treasuries and all that shit. That’s done; put a fork it it. No one will care if Powell wants to be a tough guy to claim the last 150 bps on inflation. 

 

Funny thing is that when I was sitting on the beach sucking back a mai tai watching the whales pop up once in a while, what Powell did was completely irrelevant to me...emotionally, financially and physically.  We pay WAY to much attention to the noise!  Just do what you do and keep doing it.  In the meantime, suck back on a delicious mai tai!  Cheers!

[Gregmal]

4 minutes ago, Parsad said:

 

Funny thing is that when I was sitting on the beach sucking back a mai tai watching the whales pop up once in a while, what Powell did was completely irrelevant to me...emotionally, financially and physically.  We pay WAY to much attention to the noise!  Just do what you do and keep doing it.  In the meantime, suck back on a delicious mai tai!  Cheers!

It’s actually really funny you mention that. Yesterday was doing the same; watching my kids on the beach and dolphins breaching the surface 30 yards out all afternoon. Never once thought about bothering with was it 25 or 50? or “what did he say at the presser”…life generally goes on sufficiently either way. If my investments are long term predicated on such nonsense I’m doing it wrong. 

[thepupil]

26 minutes ago, Gregmal said:

Recession screamers likely create the next big opportunity but as far as 3% inflation, 1)..the goalposts keep moving in. Last year it was a certainty 5% was entrenched. People even argued with me about stuff going well south of 5 by fall 2023. 2) if we are at 3-4 next year this time there will be much more of “look how far we ve come” talk than “kill it all cuz you’re losing 50 bps over your annual raises!” talk. The big reason last year worked for the fear mongerers was bc you had these wild 5-10% prints and real world 20%+ increases and you could scream like an attention whore about Zimbabwe and needing to wipe out the world to solve it and 8% treasuries and all that shit. That’s done; put a fork it it. No one will care if Powell wants to be a tough guy to claim the last 150 bps on inflation. 

 

PE backed companies w/ floating rate debt and certain RE borrowers will absolutely care. I do think an extended period of 4%+ short term rates (and 7-8% all in 1st lien rates and more for worse credits) should hurt more than a few levered borrowers. Feel like we haven't seen that stuff play out yet. 

 

Note this isn't a "stock market" view. Because anyone who has actually looked at the "stock market" knows that it is mostly comprised of extremely high credit quality companies and not a bunch of levered floating rate borrowers. 

 

I'm more just pointing out that extended periods of "high" short term rates brings about real pain for a select few. For me it brings about safe carry/yield. 

 

Edited February 2, 2023 by thepupil

[Spekulatius]

Fangman = hangman. AMZN, GOOG, AAPL and even META - all the earnings today suck.

 

 

Edited February 2, 2023 by Spekulatius

[Gregmal]

2 minutes ago, Spekulatius said:

Fangman = hangman. AMZN, GOOG, AAPL and even META - all the earnings today suck.

And thats why the whole macro shit is tough thing exists. And why most of the bear camp, IE the Chanos and Einhorn types of the world need to go on TV or Twitter to pump their holdings and attempt to manipulate or control the narrative and market.  Cuz Jimbos been short Tesla for years and Einhorn has too along with the rest of FANG, and well, gee, AAPL is still like 30-40x whatever earnings...dont know many that have actually made money, even on "valuations being crazy" or now "earnings deteriorating". Like unless you're just doing it to milk fees or sell a product, its just a million times easier with 10% of the effort to just find decent longs. 

[changegonnacome]

8 minutes ago, Spekulatius said:

Fangman = hangman. AMZN, GOOG, AAPL and even META - all the earnings today suck.

 

Yep - their timing is impeccable though - those results into a risk-off rally would have been carnage.....some are modestly down AH....others are way up.......

[changegonnacome]

1 minute ago, Gregmal said:

ts just a million times easier with 10% of the effort to just find decent longs. 

 

Word -- short selling is a terrible way to live....& very hard to do successfully as the bodies of short sellers would attest too..........

[changegonnacome]

1 hour ago, Parsad said:

My macro views are more to warn people about maintaining a strong balance sheet and living at/below your means, than avoiding the market.  And to always keep some dry powder ready!

 

This I wholeheartedly endorse - if your a W2 employee and don't have six months expenses in MM or CD account right now....as layoffs randomly get distributed across big bureaucratic orgs with likely more to come.......you need your head examined.....this is a time for prudence as the macro path forward is fundamentally uncertain

[bizaro86]

5 minutes ago, changegonnacome said:

 

This I wholeheartedly endorse - if your a W2 employee and don't have six months expenses in MM or CD account right now....as layoffs randomly get distributed across big bureaucratic orgs with likely more to come.......you need your head examined.....this is a time for prudence as the macro path forward is fundamentally uncertain

 

I think if you're not a w2 type employee you probably need a bigger cash buffer than w2 types. 

 

Contractors are often the first cuts in big organizations, and self employment is intrinsically more exposed to macro. Eg I own a travel business - March 2020 I had negative cash flow approx equal to 1 years income as things shut down. Obviously that's an extreme case, but even the "retired living off investments" types are at least as exposed to macro as the average w2. Isnt great to sell during a downturn, so makes sense to keep a cash buffer for living expenses.

[SHDL]

1 hour ago, changegonnacome said:

Do you consider 3.75% inflation enough to worry about….if you think it’s no problemo….I can assure you the Fed doesn’t 

 

 

I have a different take on this which is that once we're down to 4% or so, I think central bankers will move their goal posts and declare victory and stop tightening. As far as I know the 2% target was somewhat arbitrary to begin with (the reasoning was something like "ok so we want it to be positive and not too high and 2% seems like a good number because it looks reasonably attainable starting from zero") so I have a hard time believing they will try to wreck the economy just to get from 4 to 2. 

[changegonnacome]

4 minutes ago, bizaro86 said:

I think if you're not a w2 type employee you probably need a bigger cash buffer than w2 types. 

 

Of course - I say W2 as these are the people who ordinarily are sleepwalking and expecting the pennys from heaven (salary) to just drop into their account every two weeks....... Entrepreneurs, contractors & 1099 workers in my experience know all too well that the real world throws up surprises and they are in the main more prepared for turbulence

[bizaro86]

Just now, changegonnacome said:

 

Of course - I say W2 as these are the people who ordinarily are sleepwalking and expecting the pennys from heaven (salary) to just drop into their account every two weeks....... Entrepreneurs, contractors & 1099 workers in my experience know all too well that the real world throws up surprises and they are in the main more prepared for turbulence

Ah, gotcha, I would agree.

[Gregmal]

2 minutes ago, SHDL said:

 

 

I have a different take on this which is that once we're down to 4% or so, I think central bankers will move their goal posts and declare victory and stop tightening. As far as I know the 2% target was somewhat arbitrary to begin with (the reasoning was something like "ok so we want it to be positive and not too high and 2% seems like a good number because it looks reasonably attainable starting from zero") so I have a hard time believing they will try to wreck the economy just to get from 4 to 2. 

Ive got another theory and thats that anyone who isnt utilizing the stupid CPI measure to gauge inflation, wouldnt even be able to tell the difference between 2 and 4. Thats how irrelevant it is. In fact, you could go from 3% positive to 3% negative probably doing little else but switching from name brand to white label or keeping the heating 5 degrees cooler in the winter and AC 5 degrees warmer in the summer. These are all largely nonsensical measures that are used to fabricate policy. Is reported car price inflation simply based on enough people wanting a used car with 10,000 miles vs 14,000? Or an extra half bath in their home? You wouldnt know the difference...