Is The Bottom Almost Here?

[Parsad]

1 hour ago, beaufort said:

I am observing the vast majority of commentators saying significant recession or potentially mild/moderate recession moving forward, or here now and lower equity prices.  Seems very one sided with everyone in agreement.  That's usually a positive for the market.  I know the worse I feel when buying, the more money I usually make with those purchases.      

 

Isn't that the truth!  I remember in February 2009, I was fully invested wishing I had more cash, selling 7-8 PE stocks to buy 3-4 PE stocks...winding up the spring for the rebound.  Low and behold, the rebound came!  It always does at some point. 

 

This time I've been more disciplined, so I've still got a modest amount of cash left, when I normally would be completely out.  From my intrinsic value calculations, the stuff I own is discounted anywhere from 40% to 200%...so I'm looking forward to the rebound when it eventually does come again.  And if it takes longer to show up and prices keep falling, well we'll wind the spring once more!

 

Cheers!

[beaufort]

20 minutes ago, Parsad said:

 

Isn't that the truth!  I remember in February 2009, I was fully invested wishing I had more cash, selling 7-8 PE stocks to buy 3-4 PE stocks...winding up the spring for the rebound.  Low and behold, the rebound came!  It always does at some point. 

 

This time I've been more disciplined, so I've still got a modest amount of cash left, when I normally would be completely out.  From my intrinsic value calculations, the stuff I own is discounted anywhere from 40% to 200%...so I'm looking forward to the rebound when it eventually does come again.  And if it takes longer to show up and prices keep falling, well we'll wind the spring once more!

 

Cheers!

I wish I had been more disciplined in keeping more cash around.  I am fully invested.  I suffer from Berkowitz's affliction of premature accumulation.    

 

Edit:  And I don't learn!  I was fully invested by fall 2008 after that horrific week when financials were going down 5% a day.  

Edited July 3, 2022 by beaufort

[Viking]

7 hours ago, Parsad said:

 

You are comparing apples to oranges.  Lynch ran a fund.  Now if you compare apples to apples:

 

The original Buffett Partnership over 12 years compounded at 31.6% annualized with no down year...the S&P500 did only 9.1% annualized during the same period.  Buffett handily beat the S&P500 in each of those 12 years.

 

http://warrenbuffettoninvestment.com/buffett-partnership-performance/

 

Not to discount Lynch's performance, as it was nearly as extraordinary.  But he compounded at a lower rate and was outperformed by the S&P500 in 2 of the 13 years he ran the Magellan Fund.  Lynch was also extremely stressed out when he left the fund...Buffett is as fresh as a baby 60 years later! 

 

Cheers!

Both Buffett and Lynch were two people who got me started on my ‘successful investing’ journey… so i will be forever grateful to both men. I still read One Up On Wall Street pretty much every year (different chapters). And i am a Buffett junkie. Might as well ask a parent who their favourite kid is… not going there  

Edited July 3, 2022 by Viking

[Parsad]

1 hour ago, Viking said:

Both Buffett and Lynch were two people who got me started on my ‘successful investing’ journey… so i will be forever grateful to both men. I still read One Up On Wall Street pretty much every year (different chapters). And i am a Buffett junkie. Might as well ask a parent who their favourite kid is… not going there  

 

Beating the Street by Peter Lynch was the first investing book I read...around late 1994.  I went on to lose all of the money I put in the markets between 1995 and 1997!

 

Then in 1998, I read the Annual Letter on Berkshire's site that had just gone live.  I went on to meet Buffett, start the original COBF, meet Prem and Francis, start my own fund, take over PDH and become financially independent.

 

Thus I'm extremely partial to one.  Neither Beating the Street, nor One Up on Wall Street, sit on my bookshelf!  Cheers! 

[meiroy]

In 2009 and 2020 investors were saved by QE and the market has been pumped ever since. I've went all in in both occasions.  Now, I can't see how we get QE in the near future. The Fed is backwards looking, so either they see inflation resolved a bit with a lag or something else goes horrible bad -- then QE. Other than that, could be some bear rally, probably in tech. Or, if Putin feels like it, crude goes to the moon.

Edited July 3, 2022 by meiroy

[Viking]

10 hours ago, Parsad said:

 

Beating the Street by Peter Lynch was the first investing book I read...around late 1994.  I went on to lose all of the money I put in the markets between 1995 and 1997!

 

Then in 1998, I read the Annual Letter on Berkshire's site that had just gone live.  I went on to meet Buffett, start the original COBF, meet Prem and Francis, start my own fund, take over PDH and become financially independent.

 

Thus I'm extremely partial to one.  Neither Beating the Street, nor One Up on Wall Street, sit on my bookshelf!  Cheers! 

i discovered Buffett first and then i overlayed Lynch… The other person who was really influential way, way back was Burton Malkiel and A Rondom Walk Down Wall Street. I did not agree with Malkiel’s perscriptions but i absolutely ate up his academic vs real world discussions. 

[james22]

On 6/24/2022 at 11:15 AM, Thrifty3000 said:

We're about six months into this decline.

 

2000 Tech Bubble:

 

- It took TWO abysmal YEARS to slowly griiiiind down to a bottom. Then took about FIVE MORE years to revisit the tech bubble peak for about a split second.

 

2007 Housing Bubble:

 

- It also took nearly TWO abysmal YEARS to slowly griiiind down to a bottom. Then took about FOUR MORE years to revisit and sustain the housing bubble peak.

 

(During those bubbles the Fed had loads of fire power and readily jumped in to help.)

 

2021 Everything Bubble:

 

(This time around the Fed has already accepted defeat on staving off recession. The Fed's out of ammo and believes its only option is to pick the economy's poison; either high inflation or high rates.)

 

- After only six months, has the market fully baked in the implications? Or will it take TWO YEARS of declining purchasing power, bankruptcies and a sidelined Fed for Mr. Market to root his way to a bottom? It sure feels like we're still a bit ahead of our skis.

 

 

I keep coming back to this.

 

Hard to believe we'll get off so easily.

[Spekulatius]

Fed has 3 main priorities:

1) reduce inflation

2) Keep financial markets operating well

3) Employment

 

3) is not an issue right now. We have full employment. I don't see any issues regarding 2) in the US, but I think the massacre in EM and other currencies could be an issue in some countries with respect to their financial systems. I am not sure how much that matters to the Fed.

 

So focus is going to be on inflation until unemployment starts to creep up substantially. I think the Fed can lift interest rates quite a bit more before something breaks with 2) or 3). A mild recession (we are likely in one already) does not seem to affect labor markets much. I don't think some techie layoffs in cryptos really count, those people can easily get a job at a Fortune 500 company. Where things may get ugly is Emerging markets where credit could become very tight - that's where liquidity gets sucked out first, but that's not the Fed's problem until it affects the US economy.

[plato1976]

8 hours ago, Spekulatius said:

Fed has 3 main priorities:

1) reduce inflation

2) Keep financial markets operating well

3) Employment

 

3) is not an issue right now. We have full employment. I don't see any issues regarding 2) in the US, but I think the massacre in EM and other currencies could be an issue in some countries with respect to their financial systems. I am not sure how much that matters to the Fed.

 

So focus is going to be on inflation until unemployment starts to creep up substantially. I think the Fed can lift interest rates quite a bit more before something breaks with 2) or 3). A mild recession (we are likely in one already) does not seem to affect labor markets much. I don't think some techie layoffs in cryptos really count, those people can easily get a job at a Fortune 500 company. Where things may get ugly is Emerging markets where credit could become very tight - that's where liquidity gets sucked out first, but that's not the Fed's problem until it affects the US economy.

How about Europe? I don't treat it as EM and I do think it concerns the U.S. Gov geopolitically, if not the Fed itself

[Gregmal]

https://www.reuters.com/article/usa-fed-bullard-idUSS0N2UR07L
 

So weird! Maybe this is why the dumb dumbs thinking we need to price in perpetual 8% inflation don’t understand why the market may be forward looking? Well, first, the worst of the inflation is behind us and forward looking, rates will be a lot lower than one thinks. Remember in January all the predictions for 7-8% rates? Not happening. 

[crs223]

13 minutes ago, Gregmal said:

dumb dumbs thinking we need to price in perpetual 8% inflation 

isn’t it glorious?  Gives all of us smart folks a chance to buy quality companies for cheap.  I wish the dumb dumbs were pricing in 20% inflation instead of 8%

[Spekulatius]

1 minute ago, crs223 said:

isn’t it glorious?  Gives all of us smart folks a chance to buy quality companies for cheap.  I wish the dumb dumbs were pricing in 20% inflation instead of 8%

The question is not what inflation is priced it, it’s what interest rates are priced in. Each percent increase in LT risk free interest rates will push down valuations by about 10-15% assuming constant equity risk premium.

[Gregmal]

6 minutes ago, crs223 said:

isn’t it glorious?  Gives all of us smart folks a chance to buy quality companies for cheap.  I wish the dumb dumbs were pricing in 20% inflation instead of 8%

It really is a systemic rouse being perpetrated on the common folks. Hook ‘em in, drum up the noise, flush em out, let the smart or wealthy folks pick up the pieces…rinse and repeat. I’m just a little peeved real world real estate hasn’t gotten cheaper. I really want a southern home. 
 

We ve had 3-5% rates before, not even terribly long ago in a historical context. Many existing companies are not only better off than they were the last time around, but have created tremendous value since. I was joking with a friend how the first time I bought a home the 10 year was at 3 and I got a 4.25 mortgage. Then a few years later we were back at 3 and it was a really big deal to some but it turned out to be a nothing burger. Here we are again and mortgage rates are near 6% and my home value is nearly double. But nevertheless there is a whole contingent of disaster callers mouthing off because 3-5% rates will be permanent and also the end of the world. Bet against those people. They’re pretty much never right.

[Gregmal]

12 minutes ago, Spekulatius said:

The question is not what inflation is priced it, it’s what interest rates are priced in. Each percent increase in LT risk free interest rates will push down valuations by about 10-15% assuming constant equity risk premium.

I don’t even think it’s what rate, but how long. Who cares if we temporarily get 5-7% treasuries if a couple years later we re back at 2-3? Maybe the Twitterers and hedge fund guys who just wanna create their own noise to trade but as we learned during COVID, a year or two of earnings is meaningless. If you say fuck the next 2 years and after that I’m buying Costco at 15x, or Microsoft at 12xc why wouldn’t you take that opportunity and run? Cuz some doomsdayer says you might incur a 20% paper loss? 

[Spekulatius]

52 minutes ago, Gregmal said:

I don’t even think it’s what rate, but how long. Who cares if we temporarily get 5-7% treasuries if a couple years later we re back at 2-3? Maybe the Twitterers and hedge fund guys who just wanna create their own noise to trade but as we learned during COVID, a year or two of earnings is meaningless. If you say fuck the next 2 years and after that I’m buying Costco at 15x, or Microsoft at 12xc why wouldn’t you take that opportunity and run? Cuz some doomsdayer says you might incur a 20% paper loss? 

It’s possible true, but first of all no one here says “fuck the next 2 years “ (neither do you) and second we do not know if interest rates come down or how much.

 

Higher internet rates get discounted  into a higher discount rate for equities after a while. It may not happen instantaneously (or it may) but it will happen just as higher spot prices for crude will get build into the valuation for E&P’s.

 

FWIW and that has not been discussed enough what did scree up the 70’s was not inflation , it was unpredictable inflation. We had 10%+ in 1973 and 1974, then a recession in 1975 lower inflation and 1976 and 77 seems relatively cal and them all the heel broke lose.

 

The problem was that nobody could predict what happened next, companies did not know what to expect next year, how to set prices and how to invest. The seesaw was impacting the economy in many ways. If inflation had been let’s say a relatively steady 7% throughout the 70’s, it would not have been such a big problem.

 

We are having the same issue now. Commodity prices seesaw like crazy. Next year, we could well see labor trying to take their share after been screwed by unexpected inflation this year etc. It’s going to make the economy way more volatile. If we don’t get this under control, I expect the next few years to be very very volatile. Maybe the 20’s will be the decade of the macro trader rate than the buy and hold investor popularized in the last decade.

Edited July 8, 2022 by Spekulatius

[mcliu]

1 hour ago, Gregmal said:

I don’t even think it’s what rate, but how long. Who cares if we temporarily get 5-7% treasuries if a couple years later we re back at 2-3? Maybe the Twitterers and hedge fund guys who just wanna create their own noise to trade but as we learned during COVID, a year or two of earnings is meaningless. If you say fuck the next 2 years and after that I’m buying Costco at 15x, or Microsoft at 12xc why wouldn’t you take that opportunity and run? Cuz some doomsdayer says you might incur a 20% paper loss? 

Why do you think that rates will be back to 2-3% in a few years? Because inflation will subside?

[Gregmal]

Just now, mcliu said:

Why do you think that rates will be back to 2-3% in a few years? Because inflation will subside?

Pretty much. It’s the last wave of the COVID cycle. 

[Gregmal]

25 minutes ago, Spekulatius said:

It’s possible true, but first of all no one here says “fuck the next 2 years “ (neither do you) and second we do not know if interest rates come down or how much.

 

Higher internet rates get discounted  into a higher discount rate for equities after a while. It may not happen instantaneously (or it may) but it will happen just as higher spot prices for crude will get build into the valuation for E&P’s.

 

FWIW and that has not been discussed enough what did scree up the 70’s was not inflation , it was unpredictable inflation. We had 10%+ in 1973 and 1974, then a recession in 1975 lower inflation and 1976 and 77 seems relatively cal and them all the heel broke lose.

 

The problem was that nobody could predict what happened next, companies did not know what to expect next year, how to set prices and how to invest. The seesaw was impacting the economy in many ways. If inflation had been let’s say a relatively steady 7% throughout the 70’s, it would not have been such a big problem.

 

We are having the same issue now. Commodity prices seesaw like crazy. Next year, we could well see labor trying to take their share after been screwed by unexpected inflation this year etc. It’s going to make the economy way more volatile. If we don’t get this under control, I expect the next few years to be very very volatile. Maybe the 20’s will be the decade of the macro trader rate than the buy and hold investor popularized in the last decade.

Those are good points on the 70s. It remains to be seen if that’s likely here but so far everything’s kinda indicated it’s not. We expecting another wave of 25% run ups in used car pricing? I don’t. Once you settle the supply demand equation for most stuff, it’s hard to recreate and demand imbalance. 
 

And sure, we all move inside of two year periods with our approach. I generally target 12-18 months for stuff…but what I meant is that everything has a price we’re you say fuck it who cares. COVID it happened quickly but a half sensible person saw that 1000 points coming off the Dow for every couple hundred new cases was bullshit. Well, not everyone. There were still plenty who even after 20/30/40% said “still got a ways to go”. But to most sensible people you see something like Berkshire at $200 or $190 and say “who cares”. 

[Gregmal]

The other thing that makes it compelling here is that if inflation persists, it’s pretty much a given it will be commodity market related. With so much of the space trading at 1-4x earnings, you can almost hedge just by owning some of them. Or options because the thing with commodity cycles is that they go batshit sometimes so LEAPs could really pay off. Similar to what I’ve been doing with oil. 

[james22]

1 hour ago, Spekulatius said:

no one here says “fuck the next 2 years“

 

Newly retired, I'd much prefer a 2 year popping of the Everything Bubble to a 10 year slow leak.

 

I've cash to ride out the short-term, SRR would really hurt if it dragged on longer.

 

1 hour ago, Spekulatius said:

Maybe the 20’s will be the decade of the macro trader rate than the buy and hold investor popularized in the last decade.

 

A million Bogleheads suddenly cried out in terror.

[Spekulatius]

57 minutes ago, Gregmal said:

The other thing that makes it compelling here is that if inflation persists, it’s pretty much a given it will be commodity market related. With so much of the space trading at 1-4x earnings, you can almost hedge just by owning some of them. Or options because the thing with commodity cycles is that they go batshit sometimes so LEAPs could really pay off. Similar to what I’ve been doing with oil. 

I think you are wrong about this, We could well be done with commodity inflation here, but what if labor want their bite after losing ~4% of their buying power in real term? The labor negotiations in Europe for example will get fairly tenuous and I think it will seep over the US.

If labor says, well inflation Is 8% right now, so I want that, plus a compensation for last years losses. What then?  We probably see labor strikes coming back too just like in the 70’s. Strikes were very rare since the 90’s, but they actually do work if labor is scarce like is the case right now.

 

Thats why inflation, especially unexpected inflation is so damaging. It affects different sectors and people at different times and sets up a flywheel eventually because everyone feels getting screwed, which is actually correct.

 

I am old enough to remember the second half of the 70’s and even the lines on gas station in 1974 (which were less of an issue in Germany than the US), the labor strikes and the whole economic mess. You just had no idea what next year would bring, some years seemed just like everything is fine again (1976) and then the inflation raised its ugly head again in 1978. Its one thing to read about this and look at old charts and another one to live though it, even though only as teenager.

 

The Fed is well advised to really get this bottled up for sure and if it causes a recession, so be it. The labor market is likely still on full employment even with a recession anyways, so that part is not that big of a concern.

[Gregmal]

9 minutes ago, Spekulatius said:

I think you are wrong about this, We could well be done with commodity inflation here, but what if labor want their bite after losing ~4% of their buying power in real term? The labor negotiations in Europe for example will get fairly tenuous and I think it will seep over the US.

If labor says, well inflation Is 8% right now, so I want that, plus a compensation for last years losses. What then?  We probably see labor strikes coming back too just like in the 70’s. Strikes were very rare since the 90’s, but they actually do work if labor is scarce like is the case right now.

 

Thats why inflation, especially unexpected inflation is so damaging. It affects different sectors and people at different times and sets up a flywheel eventually because everyone feels getting screwed, which is actually correct.

 

I am old enough to remember the second half of the 70’s and even the lines on gas station in 1974 (which were less of an issue in Germany than the US), the labor strikes and the whole economic mess. You just had no idea what next year would bring, some years seemed just like everything is fine again (1976) and then the inflation raised its ugly head again in 1978. Its one thing to read about this and look at old charts and another one to live though it, even though only as teenager.

 

The Fed is well advised to really get this bottled up for sure and if it causes a recession, so be it. The labor market is likely still on full employment even with a recession anyways, so that part is not that big of a concern.

It’s all possible but wasn’t the argument for inflation commodity price volatility? And wasn’t not too long ago the reason for justifying all the aggressive Fed action that the bulk of the labor force was too dumb to take advantage of the job market? Now they’re going to get a brain and push hard? Plus, there’s plenty of ways to play a boon to the consumer. 
 

Im not looking to do much other than pick off low hanging fruit, but both the commodity prices and labor strength are actionable. If shit picks up labor wise, rents and housing prices go nuclear.

[Ulti]

[Lazarus]

I've come to the realization that I'm a perma-bear pessimist about markets and that it is a huge flaw. I was underinvested in 2009 (I thought the world was ending) and didn't invest at all in the March 2020 lows (I thought the bubble was finally bursting and waited for blood in the streets). With that disclaimer in mind, I still can't help but think that we are still in bubble territory and we are nowhere near the bottom. Perhaps someone would be kind enough to explain the flaws in my thinking, so that I can join the optimists and make more money:

 

1) I think that the rise since 2009 has been largely due to QE, low interest rates and central bank interference (as opposed to fundamental business reasons). Hence, I am suspicious of the meteoric stock market rise since 2009.

 

2) The sharp rise in markets since March 2020 makes zero sense to me. We've been in lockdowns, had supply chain issues, etc. Does this rise reflect fundamentals in any way? What justifies the market rise? Why the hell didn't the market fall?

 

3) If the Fed is now going to focus on fighting inflation, common knowledge is that raising rates to fight inflation will make the markets fall. How much of a battle will this be? My pessimistic side thinks that it will be hard to get inflation under control, for two reasons:

(a) the amount of QE and the increase in money supply since 2009 should have caused massive inflation for years. Buffett wrote an article to this effect back in 2010 or 2011, and Buffett has indicated in years since that he doesn't understand why inflation didn't hit, that it should have. Hence, maybe the inflationary pressures are like a loaded spring - they were held back for many years, and now are being released with a vengeance. Maybe all the inflation we should have had earlier, as per Buffett's predictions, are catching up with us. 

(b) will raising rates really lower inflation that much? To the extent that inflation is being caused by supply side issues (China lockdowns, supply chain issues, etc.), then how do rate increases address those particular issues? Rate increases will slow down demand, but perhaps the current inflation is due to supply issues?

 

Thoughts? You guys mostly seem more optimistic than me (and you are better investors than me), and I'd like to join you on the light side.

 

 

[Gregmal]

1 hour ago, Lazarus said:

I've come to the realization that I'm a perma-bear pessimist about markets and that it is a huge flaw. I was underinvested in 2009 (I thought the world was ending) and didn't invest at all in the March 2020 lows (I thought the bubble was finally bursting and waited for blood in the streets). With that disclaimer in mind, I still can't help but think that we are still in bubble territory and we are nowhere near the bottom. Perhaps someone would be kind enough to explain the flaws in my thinking, so that I can join the optimists and make more money:

 

1) I think that the rise since 2009 has been largely due to QE, low interest rates and central bank interference (as opposed to fundamental business reasons). Hence, I am suspicious of the meteoric stock market rise since 2009.

 

2) The sharp rise in markets since March 2020 makes zero sense to me. We've been in lockdowns, had supply chain issues, etc. Does this rise reflect fundamentals in any way? What justifies the market rise? Why the hell didn't the market fall?

 

3) If the Fed is now going to focus on fighting inflation, common knowledge is that raising rates to fight inflation will make the markets fall. How much of a battle will this be? My pessimistic side thinks that it will be hard to get inflation under control, for two reasons:

(a) the amount of QE and the increase in money supply since 2009 should have caused massive inflation for years. Buffett wrote an article to this effect back in 2010 or 2011, and Buffett has indicated in years since that he doesn't understand why inflation didn't hit, that it should have. Hence, maybe the inflationary pressures are like a loaded spring - they were held back for many years, and now are being released with a vengeance. Maybe all the inflation we should have had earlier, as per Buffett's predictions, are catching up with us. 

(b) will raising rates really lower inflation that much? To the extent that inflation is being caused by supply side issues (China lockdowns, supply chain issues, etc.), then how do rate increases address those particular issues? Rate increases will slow down demand, but perhaps the current inflation is due to supply issues?

 

Thoughts? You guys mostly seem more optimistic than me (and you are better investors than me), and I'd like to join you on the light side.

 

 

Just some general thoughts to balance that which may or may not help you. 
 

1) A lot of people I know think this but then you ask for a show of hands as to who was margined out long the whole way and no one thought this was such an obvious thing that they felt compelled to take advantage of it. It’s largely only a feeling that gets emboldened when the markets go down. 
 

 Also, what is a “meteoric” rise? Why is the bottom in 2009 the starting point? Why not 1999/2001/2007/2012?
 

2) again, what is sharp rise? You mean recovery? Sure some stuff definitely got out of hand. I kind of view that whole thing differently. The markets had no business going down the way they did in February/March 2020. It was driven by a lot of charlatans screaming fire in a crowded room. Much of the market is basically back to pre COVID levels. Not a big deal from either bullish or bearish perspective IMO

 

3) Personally I think rates going up or down are irrelevant to this inflation issue. It’s not a Fed solvable issue and folks keep moving the goalposts. Cars and commodities where the problem and they come back to earth and then they just so “oh but now this”. It’s like don’t worry “now this” will follow the same path. But just generally speaking I don’t totally disagree with your thoughts on 3, but the bigger question is, who’s incentives align with shit being bad, markets falling big, economy going to hell? Virtually no one’s, so you’d not only kind of have to be fighting all the bankers and politicians and most powerful people in the world, you’d also kind of have to think normal people tolerate it at the polls. I don’t think being on either end of the extreme, positive or negative is healthy per say, but there’s definitely a preference to keep shit out of the gutter.

Edited July 8, 2022 by Gregmal