Is The Bottom Almost Here?

[dealraker]

4 hours ago, thepupil said:

a lot of this is repetitive from what I’ve already said, but I have a salt/alcohol induced hangover after a lovely Valentine’s Day dinner and am dehydrated and can’t sleep.
 

I think we’re way too early in all this to declare any kind of “winner” and who was “right”. It’s been a very short time period.
 

I think “bears” would be proven right if we see a “lost decade” type environment where stocks fail to provide  much compensation above that of alternatives, specifically bonds, so that’s a 6+ year type of thing and even then will be sensitive as to which point one measures from. “bulls” would be proven right in the opposite case. We’re trying to declare a winner in 6 months vs 6 years. Like if stocks are up 10%/yr for next 7 years and bonds make 4.5%, bulls win. If stocks up 5% yr and bonds make 4.5%
 

but that’s kind of artificial because we don’t have to be bulls or bears and I think the most bearish people on are are 60-80% long stocks and acknowledge that stocks generally provide better LONG term returns. 

 

I’d frame it all as an opportunity to not be a one dimensional bear/bull and use the far more competitive yields offered by fixed income to take incrementally less risk and make similar overall portfolio returns.  For my whole investment career carrying cash/bonds/etc has been a hugely losing proposition and one was kind of consciously forced to take all equity risk.   
 

I’m not hugely bearish or bullish, but do think the game has changed and FI is not so awfully assymetric/betting on breaking the zero bound like it was the last 10 years. 

 

we have positive real yields, and nominal FI yields are similar if not greater than (in some cases) the earnings yield on the stock market. Rising rates are scary if you own rate sensitive things (like say highly levered real estate), but ultimately  this is a wonderful thing for those with capital who don’t want to be entirely in equities.

 

I’ve never felt more wealthy and secure because I no longer have the Fed competing with me for safe assets/yield. Inflation may be 3% 5% or 10%, but the interest income on my (and my retired parents)  slugof safe assets is up 100-300%. A greater balance between the levered equity/asset holders (real estate / PE /etc) and lenders is being achieved.
 

What a time to be a well capitalized rentier!*

 

I think it’s “too good” and want to own some duration because I don’t think it will last. I don’t think I should be able to make 1.6% real in a government guaranteed instrument for 30 years, that’s just a risk free handout to capital. Like why the hell is the US government paying me 7.5% effective interest? It will come down, but it’s still stupid.
 

 

*now I think if you’re gregmal or dealraker, you’d counter that the rise in yields is a trap and that one will compound at a higher rate just saying in stocks/business for the long run. My response is “yea probably” so but I’m only 70-80% sure if that rather than 100%, and I don’t think owning a little FI is gonna kill me. 
 

maybe this is veering on the “bearish” but it does feel to me that outside of the very speculative stuff we are at a point where we’re kind of having our cake and eating it too. Real estate and stocks haven’t really come down too much (in some cases not at all) despite the increase in cost of capital. Sort of a strange, but also a nice opportunity to reevaluate one’s asset allocation without the emotional baggage of a huge drawdown. 
 

I realize this thread is about predicting a short term bottom and I keep trying to make it really boring and proselytizing a 20% bond allocation and I shoukd go over to bogleheads and go buy a Buick or something. 

Wined up and such when I read this so the response goes "of course" and such.   I may be in the HIW yield view rather than bonds as much although I did to 100k into PFF a few months back, but its the same thing.

 

Remember I'm the guy who inherited $3500 of Berkshire; watched it all the other stocks in the trust get feed to death by the banks trust dept giving me less money (excluding Berkshire) almost 15 years after inheritance so I do know the stall word.  

 

Yet then...

 

Maybe we got to a point of several hundred times the inheritance?  Yea.

 

So again, my view is simple: "Pick your starting point...and live with it."  Is now a great starting point?  No.  No!  Maybe NO!

 

But in the end we are slammed endlessly with those promoting Bitcoin; those saying Brookfield is selling at 50% of intrinsic; Elon/Tesla is God...any price anytime is good; "I can buy, then sell, and do far better"; people investing in mutual funds, which don't do well...yet these investors do 30% as well as the fund buying and selling it; somebody screaming at me here that I'd have done better in a zero cupon for the last almost 50 years; and whatnot other scrambled eggs.

 

I'm just the oddball old dude who says:  If you buy and hold you won't go old and poor...and it actually is an option in real life, not just in those old books on the shelf you read that nobody pays any attention to.

 

But if you do this at some point at some time somewhere somehow you do have to choose a starting point.  To be honest no starting point to me has "felt good" for the last near 50 years.  

Edited February 15, 2023 by dealraker

[TwoCitiesCapital]

9 hours ago, Gregmal said:

Except they said falling earning would warrant SPY 3000 or whatever…that’s the problem with this little “let’s be cute” game. Unless you’re playing the pump and dump or smash and grab, short term, trade meaningless fluctuations game, you’re losing big time.  
 

 

You're taking a local bottom from 4 months ago, assuming it was the actual bottom, and then using that to make the argument that the earnings contraction that came afterwards doesn't matter because the bottom was already in before the real contraction. I don't know the name of the logical fallacy there, but us not hitting 3,200 yet isn't evidence that we won't.   

 

As far as real estate - it has been more resilient than expected. But it IS still falling in value. Public REITS didn't save you from the disaster in 2022 returns and private REITs are currently taking bailouts from pensions to meet redemption requests to avoid selling and remarking their books. And they've both underperformed inflation as asset classes for the last ~18 months or so. Hardly sounds like a platform to declare victory on just because there hasn't been an outright price collapse yet. 

Edited February 15, 2023 by TwoCitiesCapital

[thepupil]

24 minutes ago, dealraker said:

Wined up and such when I read this so the response goes "of course" and such.   I may be in the HIW yield view rather than bonds as much although I did to 100k into PFF a few months back, but its the same thing.

 

Remember I'm the guy who inherited $3500 of Berkshire; watched it all the other stocks in the trust get feed to death by the banks trust dept giving me less money (excluding Berkshire) almost 15 years after inheritance so I do know the stall word.  

 

Yet then...

 

Maybe we got to a point of several hundred times the inheritance?  Yea.

 

So again, my view is simple: "Pick your starting point...and live with it."  Is now a great starting point?  No.  No!  Maybe NO!

 

But in the end we are slammed endlessly with those promoting Bitcoin; those saying Brookfield is selling at 50% of intrinsic; Elon/Tesla is God...any price anytime is good; "I can buy, then sell, and do far better"; people investing in mutual funds, which don't do well...yet these investors do 30% as well as the fund buying and selling it; somebody screaming at me here that I'd have done better in a zero cupon for the last almost 50 years; and whatnot other scrambled eggs.

 

I'm just the oddball old dude who says:  If you buy and hold you won't go old and poor...and it actually is an option in real life, not just in those old books on the shelf you read that nobody pays any attention to.

 

But if you do this at some point at some time somewhere somehow you do have to choose a starting point.  To be honest no starting point to me has "felt good" for the last near 50 years.  

 

I've had 80-100%+ equity exposure since 2013 or so. Gave up shorting or market timing back then and have been better off for it. I'm not a buy an hold investor. My late grandpa was and it worked out wonderfully for him. 

 

In practice, I simply do not own many stocks for that long. Looking at current portfolio I've held Berkshire from the beginning (so about 12 years) and Tetragon for 9-10 years now, everything else is from 2019 or later. the venn diagram of "discount to NAV" and "buy and hold for 10+ years" doesn't include too many stocks. 

Edited February 15, 2023 by thepupil

[Gregmal]

2 minutes ago, TwoCitiesCapital said:

 

You're taking a local bottom from 4 months ago, assuming it was the actual bottom, and then using that to make the argument that the earnings contraction that came afterwards doesn't matter because the bottom is already in. I don't know the name of the logical fallacy there, but us not hitting 3,200 yet isn't evidence that we won't.   

 

As far as real estate - it has been more resilient than expected. But it IS still falling in value. Public REITS didn't save you from the disaster in 2022 returns and private REITs are currently taking bailouts from pensions to meet redemption requests to avoid selling and remarking their books. And they've both underperformed inflated for the last ~18 months or. Hardly sounds like a platform to declare victory in just because there hasn't been an outright collapse yet. 

These two paragraphs contradict each other. The first says, "cant declare victory over short term moves", the second says "short term moves prove something". The second paragraph is especially dangerous, because you can use whatever 12-18 month period one wants to draw whatever conclusion one wants. I do not care one iota about what 12 months says because anything can happen if you invest in stuff with second by second public quotes. It would be like trying to sell your house to only the dudes who put up those signs saying "we buy homes for cash" on street corner signs. 

 

I really dont sit around looking for bottoms or tops, but rather adequate places to put money to work, with a reasonable expectation and time horizon. Last year, throughout the year, you had ample opportunity to do that. Opportunity that no longer exists but who knows, may again, soon or not so soon. Sitting around predicating it all on "did such and such index really bottom"....I think is totally missing the forest for the trees. The same way we had folks in late 2021 asking for clear proof that "THE TOP IS HERE", when anyone who's been around the markets for a minute could see that the top was February 2021. The index was still near or at highs, but the drivers were off 50%+ already. The key drivers of the next cycle, IMO real businesses, like the ones listed a few responses ago, have already told you what you needed to know and made moves well ahead of the trendy indexes. 

[Spekulatius]

I think the value of this thread could be to create a framework what to invest in rather than buy or sell everything.

 

I mentioned banks here before, because I believe they would benefit from the higher rate for longer framework 9after getting dinged in a pot. recession). maybe European banks become investible as Europe goes from a negative interest regime (which is toxic to banks)  to a couple percent risk free rates

 

Energy could be one of the drivers of inflation for some time, so it may make some sense to put some money in energy related securities.

 

Maybe a higher bond / or MM allocation makes sense for some people.

 

Those are much more interest questions than where the SP500 might go and when or buy or sell everything right now because  XXX may happen.

[Gregmal]

14 minutes ago, Spekulatius said:

Those are much more interest questions than where the SP500 might go and when or buy or sell everything right now because  XXX may happen.

Totally. It’s one of the dumbest hang ups I regularly see for folks and it’s a totally avoidable mistake. 

[TwoCitiesCapital]

37 minutes ago, Spekulatius said:

Those are much more interest questions than where the SP500 might go and when or buy or sell everything right now because  XXX may happen.

 

Nobody is suggesting to sell everything. Nobody is fear mongering here. I don't even think that many of us are caught up on the regular CPI reports and whether it comes in at 5.6 or 6.6 (ironically - Greg is the one commenting on every release lambasting people who watch every release). I literally provided a list of names that I'd been buying over the last year. But I'm also selling them because my framework suggests this is NOT an environment to be taking a ton of risk in. 

 

I'll take that risk when Baba is @ $60. Less excited about that exact same risk when it's at $120. If this were a bull market, I'd be more content to hold it but it's not. 

 

Historically bonds have outperformed stocks when PMIs are contracting. They are. Bonds outperformed last year. I think they're likely to again this year. 

 

Historically stocks have performed terribly when inflation exceeded 4-5%. We've exceeded that and are still above it. Why should we expect stocks that failed to hedge it last year to magically do it this year - particularly now that the earnings contraction is occurring and real business values are being impaired? 

 

Historically the yield curve does a great job of predicting recessions. It is screaming. Stocks haven't traditionally done well in recessions. For those who want to argue the recession is already over, you have to answer why this would be the first recession that ended without the yield curve agreeing. 

 

Historically, stocks haven't done great in periods of earnings contraction. We've just started one and it's deeper than most expected even just 6 months ago. 

 

It'd be one thing if all of this was happening and stocks in aggregate were cheap. But they're not. Historically still very expensive as judged by trailing 12 month earnings which are now shrinking. 

 

So the environment is bad, prices don't reflect the badness, so you're not being paid to take risk in most names. And the names you are being paid to take risk in? Well, you first have to identify what stocks are likely to do well in an environment where the average stock is suffering (hard to do) and then you have to trust that they won't trade down in sympathy in that environment as often happens (also hard to do). It so much easier to buy a short term bond funds and make your 4-6% and wait for the better pitches. When things drop 20-30%, buy some. Take that risk. When they pop 20-30%. Sell some and remove the risk. 

 

The S&P only matters because it is the tide which brings the boats in and out. It doesn't guarantee Fairfax, or Netflix, or Bank of America goes down or up - but it does dramatically alter the probabilities of it happening. 

Edited February 15, 2023 by TwoCitiesCapital

[Gregmal]

I also think the index/macro obsession is one that gets super fueled by the prominence of social media and that whole attention seeking element. What made something like The Big Short iconic is that you had guys with an exact thesis and exact framing of events and subsequent consequences and it played out exactly like they said. The ultimate “I called it”. Today folks just pick up or down and then make shit up and regardless of what happens, as long as directionally things “kinda” ever start moving in the direction of the thesis, even if only for a split second, you get all the retweeting and backslapping and I called it’s. If in 2022, rate hike fueled recession was gonna cause an earnings collapse and drive the market to 2800-3000 was the thesis, and for like 5 seconds, intraday we touched 3500 or whatever and then bounced off that base and now sit at 4,000….sorry, that’s not nailing it, and the thesis was a bust. It’s certainly possible we see earnings dive to 180 for full year 2023, and if that thesis is the S&P “needs” to go to 3200, and we get a temporary dip to 3500 again, are we still gonna have to hear about every prophet who “nailed it”?

Edited February 15, 2023 by Gregmal

[thepupil]

3 minutes ago, Gregmal said:

I also think the index/macro obsession is one that gets super fueled by the prominence of social media and that whole attention seeking element. What made something like The Big Short iconic is that you had guys with an exact thesis and exact framing of events and subsequent consequences and it played out exactly like they said. The ultimate “I called it”. Today folks just pick up or down and then make shit up and regardless of what happens, as long as directionally things “kinda” ever start moving in the direction of the thesis, even if only for a split second, you get all the retweeting and backslapping and I called it’s. If in 2022, rate hike fueled recession was gonna cause an earnings collapse and drive the market to 2800-3000 was the thesis, and for like 5 seconds, intraday we touched 3500 or whatever and then bounced off that base and now sit at 4,000….sorry, that’s not nailing it, and the thesis was a bust. It’s certainly possible we see earnings dive to 180 for full year 2023, and if that thesis is the S&P “needs” to go to 3200, and we get a temporary dip to 3500 again, are we still gonna have to hear about every prophet who “nailed it”?

 

I think many people care about indices because it's their only option. My wife and I save  $67K/year through tax advantaged vehicles. we save more on top of that, but it's a material amount of money for us and our 401k providers only allow various indices/mutual funds. Unless we quit our jobs we have to buy something with that, so having some opinion on the relative merits of the performance of various asset classes is of some use to me. 

 

for me right now I wonder whther I should keep buying bond index, switch to long term bonds, or use it to add international / non USD exposure. my portfolio's always gonna be US stock/RE heavy. for now I think bonds are a better diversifier than non US stocks. 

[TwoCitiesCapital]

I'd rather be directionally right then precisely wrong

 

It's way too soon to say if the contraction that started in 2022 is over. 

 

If we go to 3,300 or 2,900 instead of 3,200? Yes, I'll still take credit because I was still a hell of a lot more right than the guys buying at 4,800 or 4,200 or 3,700 or the guys calling the bottom at 3,500 all whole telling me I was wrong. 

 

If bonds do better than stocks, regardless of their bottom, I'll still declare I was right because I've been advocating for buying bonds over stocks since the 10-year first passed 3%. 

 

I don't have to nail the bottom and go all in on that bottom tick to be right. What I have to do is protect my capital and only take risk when price or environment compensates me for it. Neither is true of the average stock at the moment. 

Edited February 15, 2023 by TwoCitiesCapital

[Gregmal]

15 minutes ago, thepupil said:

 

I think many people care about indices because it's their only option. My wife and I save  $67K/year through tax advantaged vehicles. we save more on top of that, but it's a material amount of money for us and our 401k providers only allow various indices/mutual funds. Unless we quit our jobs we have to buy something with that, so having some opinion on the relative merits of the performance of various asset classes is of some use to me. 

 

for me right now I wonder whther I should keep buying bond index, switch to long term bonds, or use it to add international / non USD exposure. my portfolio's always gonna be US stock/RE heavy. for now I think bonds are a better diversifier than non US stocks. 

Yea I think I generally under appreciate that aspect of most peoples financial picture cuz Ive always been a 1099. Ive also generally never been scrupulous about using the tax advantaged stuff because I just hate the idea of having a 30 year lockup or whatever. But wouldnt conventional wisdom, or maybe its not conventional, IDK, lead one to give a shit a lot less about the short term stuff with that slug of assets? This stuff is probably a totally different subject than obsessing over tops and bottoms, but I guess could play a part. I just try to figure like OK if Ive got $500k in an account I cant touch for decades....does 10/20/30% fluctuations really matter? Especially if Im pumping contributions into it for those next couple decades. The origins of the "doom porn" is some massive GFC or Japan collapse where shit goes down and never recovers. Thats one thing....a big thing. But also rare and totally different than trying to speculate on fluctuations or draw conclusions from regular old stock market volatility. "Calling" a collapse where stuff declines 15% and immediately recovers 8-10% is the same as "calling" a big up move because a fake buyout rumor hits and the stock briefly rises...its a conjob. IMO one of there more underrated long term impacts of ZIRP is that it conditioned people to think stocks shouldn't be volatile. They should. And if you are day tradings I guess thats a big thing. But if you are investing fundamentally its really just part of the game and nothing to fret. 

Edited February 15, 2023 by Gregmal

[thepupil]

I view it as part of my overall portfolio rather than separate. I don't view it as money that I won't touch until I'm 59.5. The roth conversion ladder if i stop w-2 work prior to then is an option. I doubt I'll w-2 until I'm 59.5. Also you get to roll into your own IRA when you switch jobs. I've done so 4 times in 12 years, so in practice it hasn't been 30 year money but 2-4 year money that one then switch to have full control. One can also monetize in other ways (ROBS, loans, SEPP) etc. 

 

It can obviously be very very long term money, but it's not necessarily so. 

 

I'm shocked you haven't set up a SEP IRA or something to build a tax advantaged account, particularly given I imagine your style leads to lots of short term gains. c'mon man! 

 

[Gregmal]

LOL yea that is my dirty little secret. I’m am downright negligent with that stuff. I kind of view my private real estate stuff as a sub/tax efficient asset pool, but yea. Not an accountant by trade and after running into contribution limits a couple times early on was just like fuck this shit.

[thepupil]

Oh man...I'm not that great an investor and it's more from lots of contributions than anything, but here on this semi-anonymous message board, I will brag that I've accumulated about $730K individually and $780K as a couple (grad school's a bitch right!) in various tax advantaged vehicles over 11 years starting from $0.

 

Let that be a little inspiration to the youngsters...I'm inviting the far better investors here to one-up me and inspire further. 

 

I can't imagine having 100% of my investment assets be taxable. gross! 

 

of course, I've yet to access that, so in no way has that money affected my life other than my ability to brag about it on a semi-anonymous message board. 

 

Edited February 15, 2023 by thepupil

[John Hjorth]

3 minutes ago, Gregmal said:

... Not an accountant by trade and after running into contribution limits a couple times early on was just like fuck this shit.

 

@Gregmal,

 

I'm not trying here to be mean or anything else, but I have to say the above actually reads funny to an accountant!

[Spekulatius]

Yes, when you have a 401k, then your option are limited. Often the only options aren't even index funds, they have higher cost funds. over time this has improved, but even large companies have surprisingly crappy options.

 

I have talked with several benefit managers about this - they could easily do better, but they don't care - all they care is compliance.

 

If you think about it in this way, less options mean compliance becomes easier for them. brokerage window - oh now - possible compliance leak - don't want this. Even with index vs higher cost funds - as long as it's not grossly negligent - they don't care.

 

I also think there is some sort of kickback scheme at work where higher cost funds are pushed in exchange for reducing the administrative cost for the sponsor company.

Edited February 15, 2023 by Spekulatius

[mattee2264]

I think the bull vs bear debate centres around whether autumn 2022 was the low (at around 3500 on the SPY) or whether there is a new low within this market cycle within the next year or so. 

 

Markets were correct in calling the March 2020 low. But you had a huge amount of stimulus that continued far longer than most would expect and also the rapid discovery of a vaccine and a pandemic environment which was very favourable to tech companies pulling forward years of future earnings and it was a man-made recession to the extent that the economy was put on pause and re-opening was a clear catalyst for recovery.

 

This time it feels a bit different. There isn't as much room or appetite for stimulus. The Fed still has inflation to worry about and while the government will want to spend it won't be able to hand out widespread transfer payments which did a lot to ease the damage of the pandemic. And if consumers and businesses fall behind on their payments there won't be forbearance and the government is no longer backstopping bank loans and credit is becoming a lot tighter. And we have yet to feel the full effect of the interest rate rises (monetary policy operates with long and variable lags) and there are various vicious cycles that operate in a recession and prolong the pain until the economy recovers naturally. 

 

Perhaps a good analogy is when someone catches the flu. You can treat it by pumping him up on meds so that he recovers faster and doesn't really experience much in the way of symptoms. Or you can let him recover naturally which takes longer and results in more suffering and pain but is perhaps better for long term immunity and health.

 

 

 

 

 

 

[mattee2264]

On a related point, how well do people think banks are positioned for a hard landing? Obviously net interest margins are a lot better (although eventually they will narrow as they have to pay depositors more to attract their money) and most of the major banks have been adding to their credit provisions. But it is a long long time since we saw any credit stress and there is a lot of debt in the system predicated on the idea that interest rates would stay forever low. And not to mention a potential housing market crash as mortgages reset and people struggle to make payments. 

Edited February 15, 2023 by mattee2264

[Gregmal]

Frankly I don’t think the big banks are even allowed to be stressed anymore. They’re kind of indestructible from the systemic shock angle due to regulation. They’re basically utilities with some upside. The smaller ones….yea I’d be a little more careful. 

[Spekulatius]

15 minutes ago, mattee2264 said:

On a related point, how well do people think banks are positioned for a hard landing? Obviously net interest margins are a lot better (although eventually they will narrow as they have to pay depositors more to attract their money) and most of the major banks have been adding to their credit provisions. But it is a long long time since we saw any credit stress and there is a lot of debt in the system predicated on the idea that interest rates would stay forever low. 

A hard landing - however that is defined-  is never good for banks. Results will depend on exactly how hard and what exactly comes down, but it generally means consumer stress (CC and car loans defaults) as well as commercial real estate defaults  and spreads blowing out.

 

For a real hard landing, the annual stress test results give you an idea what a 2008 GFC like scenario looks like. It's not pretty but the major banks would survive. That said, you don't want to own banks in this scenario.

 

I consider such a hard landing very unlikely however.

[TwoCitiesCapital]

1 hour ago, SHDL said:

 

This may be of interest to you:

https://www.bloomberg.com/news/articles/2023-01-04/pioneering-yield-curve-economist-sees-us-able-to-dodge-recession#xj4y7vzkg

 

Just to be clear I don't have a strong view on this matter one way or the other. 

 

Behind a paywall. Care to summarize the argument? 

[fareastwarriors]

4 minutes ago, TwoCitiesCapital said:

 

Behind a paywall. Care to summarize the argument? 

here you go:

https://archive.is/PQSFB

[Red Lion]

1 hour ago, Spekulatius said:

Yes, when you have a 401k, then your option are limited. Often the only options aren't even index funds, they have higher cost funds. over time this has improved, but even large companies have surprisingly crappy options.

 

I have talked with several benefit managers about this - they could easily do better, but they don't care - all they care is compliance.

 

If you think about it in this way, less options mean compliance becomes easier for them. brokerage window - oh now - possible compliance leak - don't want this. Even with index vs higher cost funds - as long as it's not grossly negligent - they don't care.

 

I also think there is some sort of kickback scheme at work where higher cost funds are pushed in exchange for reducing the administrative cost for the sponsor company.

I’m the plan admin for my small business and there are a bunch of 401k plans with almost no fees but nothing but garbage high fee funds. 
 

I’m paying a lot more admin fees to get a Schwab brokerage account. So far I can trade anything, but not cash secured outs which irritates me. Hopefully by next year we will have enough plan assets to justify the higher administrative fees. 

[TwoCitiesCapital]

1 hour ago, fareastwarriors said:

here you go:

https://archive.is/PQSFB

 

His primary arguments are below

Quote

One of the reasons is the fact the yield curve-growth relation has become so well known and widely covered in popular media that now it impacts behavior, he said. The awareness induces companies and consumers to take risk-mitigating actions, such as increasing savings and avoiding major investment projects — which bode well for the economy. 

 

This gets said EVERY time the yield curve inverts. Its observable, but people ignore it because its observable, which is probably, in part, why it still works as a leading indicator (otherwise would likely more be more of a coincident indicator).  

 

Just b/c its observable doesn't mean main street people pay attention to it. Just because its observable doesn't mean it doesn't stifle credit creation which is now a money losing proposition. And lastly, what IS observable is that the exact opposite of what he supposes happens - savings are being drawn down VERY quickly while revolving credit balances are going up. People aren't becoming more anti-fragile in response to the inversion - they're racing to become more leveraged. 

 

Quote

Another boost to the economy is coming from the job markets, where the current excess demand for labor means laid-off workers will likely find new positions more quickly than usual. In addition, he said, given the largest job cuts so far have been in the tech sector, those highly skilled recently fired workers are also not apt to be unemployed for very long.

 

I agree here. But I don't think a resilient job market means a recession is avoided. Just that it might take longer to get to one and that it will be shallower than otherwise. Employment overall is remaining strong - but the underlying trends are for losses in full time positions and gains in part time positions. Hardly as resilient as it first seems. 

 

Quote

Harvey’s model was linked to inflation-adjusted yields and he said the fact inflation expectations are inverted — meaning traders see price pressures easing through time — also eases odds for a recession ahead.

 

The level of real yields also casts doubt on the recession signal. US 10-year yields adjusted for inflation are likely well above corresponding three-month ones. While there are no three-month break-even rates, cross-referencing the latest annual CPI reading with one-year break-evens would return a negative real rate for the tenor, compared with 10-year real yields above 1.5%.

 

I like the idea of using real yield curves on the surface - but would want to take a look at the historical predictive power to know if that improves the signal or not. 

 

What I would say is I do NOT believe 1.5% real yield on the 10-year is the right number.  Right now, 10-year yields are 3.7%. This suggests that inflation will average ~2.2ish% for the next 10-years. Basically not far off from the last 10-15 years which was a deflationary/disinflationary theme. As has been discussed ad nauseum by many here, the next decade is unlikely to look like that. The energy transition, commodity shortages, inventories moving from just-in-time to just-in-case, rising political tensions and near-shoring/friend-shoring becoming dominant, and demographics all point to an elevated inflationary environment in the U.S. relative to the last decade.

 

If we assuming that 2% inflation isn't the right number, but rather something more like a modest 3-4%, you have a real yield curve that is pretty flat already and becoming close to inversion with each subsequent hike. If you think it's higher than 3-4% on average, then we're already inverted on the real yield curve too. 

 

Quote

One wildcard, he said, is if it the Fed after being late to raise rates last year proves to push them too high. 

 

“I believe the time to end the tightening is now,” Harvey said.

 

 

This I agree with. Would only add that I think the Fed probably should've stopped awhile ago if the goal was to successfully manage the business cycle. It takes months for rate hikes to filter though to the economy. Just 8 months ago, effective Fed Fund rate was 1%. Now it's 4.75%. We're probably only just now feeling the full effects of that 1-1.50% level and many economic indicators have been contracting for months.  The Fed's priority isn't to avoid a recession - it isn't to support the stock market - it has become to regain credibility in the fight against inflation even if that means fighting inflation from 9 months ago today. 

Edited February 15, 2023 by TwoCitiesCapital

[Viking]

What i find interesting is the Fed has taken short term interest rates up to 5%. At the same time, QT is like another 100 to 200 basis points of tightening. So over the past 12 months interest short term rates have effectively increased 6-7%. And they will be moving higher in the coming months… probably another 50-75 basis points. So that gets us to short term interest rates of 7 to 7.5%. 
 

And the impact on the economy? Not much. Yes, interest sensitive sectors, like housing, have taken a hit. But the economy appears to be digesting higher rates and chugging along. THAT IS AMAZING. Given the amount of tightening over the past year.

 

What the hell is going on? That is the million dollar question. Has basic economic theory been turned on its head? Fed tightening no longer matters?

 

Perhaps the economy is still experiencing the ‘benefits’ of:

1.) 10 years of zero interest rates (i.e. it takes much longer than just 12 months to get this out of the economy).

- a decade of asset inflation made lots of people multi millionaires… with asset prices rebounding as we start 2023, last years fall in assets was a minor dent for most of these people. 

2.) all the stimulus spent governments during covid

Of course, there are also the covid ‘boomerang’ effects. Travel is going to boom. China is just coming out of covid and its economic growth is going to pop higher. 
 

What does all this mean? One possibility is higher interest rates. Like Fed funds of 6%? Not on anyones radar right now. Continued QT… that would be be significant tightening. And at some point i would expect basic economic theory to start to work again - slowing economy/mild recession.

 

What is an investor to do? As yields move higher, bonds are looking more attractive. Interesting times!

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So far, the economy (the deer) has escaped the increase in interest rates (the croc)… 

 

 

Edited February 15, 2023 by Viking