Is The Bottom Almost Here?

[Intelligent_Investor]

Is it really putting people out of work if its just restoring equilibrium in the labor market though? I find it very hard to say that people making $300k in a non-earnings generating shitco losing their jobs is bad for the economy in the long run. People acting like the job losses is all in low-income stuff when its the exact opposite, its the high-income people working in jobs that create little to no value that are losing their jobs as the tide turns from wretched excess to a more normal state of being.

[Gregmal]

9 minutes ago, Intelligent_Investor said:

Is it really putting people out of work if it’s just restoring equilibrium in the labor market though? I find it very hard to say that people making $300k in a non-earnings generating shitco losing their jobs is bad for the economy in the long run. People acting like the job losses is all in low-income stuff when its the exact opposite, its the high-income people working in jobs that create little to no value that are losing their jobs as the tide turns from wretched excess to a more normal state of being.

So far, yes, but not if you overdo it. The economy is still fairly strong. If they kill the stuff that’s still chugging along, IE travel, entertainment, restaurants…all bets are off. And sadly, it seems that’s where hypnotized Jerry is now looking, instead of at actual inflation.

[Sweet]

13 minutes ago, Intelligent_Investor said:

Is it really putting people out of work if it’s just restoring equilibrium in the labor market though? I find it very hard to say that people making $300k in a non-earnings generating shitco losing their jobs is bad for the economy in the long run. People acting like the job losses is all in low-income stuff when its the exact opposite, its the high-income people working in jobs that create little to no value that are losing their jobs as the tide turns from wretched excess to a more normal state of being.

 

Good point.  I think higher rates is a good thing for everyone.  Good for savers, better long term for the economy.  Interest rates at near zero for so long was a mistake.

[tede02]

1 hour ago, TwoCitiesCapital said:

Weird how a regional banking crisis would occur AFTER the bottom for equity markets, right?

 

We all know the Fed basically just follows the 2-year rate and that it's the reversion of the curve from rate cuts AFTER an inversion that typically signals equity weakness.

 

With the 2-year ~0.80% off its highs from just days ago, will this be the end of the rate hiking cycle and the admission that the economy is weakening at a dramatic pace? 

 

Duration starting to look reallllll attractive. 

 

I'll be very curious to see what happens with short-rates in the weeks ahead. Is this a temporary blip as the market piles into treasurys? Or will employment numbers and monthly inflation data continue to come in strong forcing the Fed's hand? I don't know the answer, but before these bank failures, I thought short-term Treasurys were starting to look better than the S&P500 on a risk-reward basis in the short-run. That still might be the case even after this big decline in rates. The equity market has seemed sanguine to me this entire year. 

[StevieV]

1 hour ago, Gregmal said:

Idk I think there were actually quite a few people who said raise em to 4% or so and then take a breather.

 

I feel like the role of time at a particular rate is under-rated.  Taking your example, even if there was a pause at 4%, rates would still be at 4% rather than 2% or 1% or lower.  The rates take a while to work through the system.

[CorpRaider]

CPI will be interesting.  Maybe they need to chill with the hikes and lay the wood to QT + jawbone to try and get the curve not so inverted?

Edited March 13, 2023 by CorpRaider

[TwoCitiesCapital]

1 hour ago, Intelligent_Investor said:

The true answer is that no one knows what will happen with inflation, interest rates, and the economy, and over the last 2 years anyone that has tried to predict it has ended up being wrong. Most of the people criticizing the Fed for raising rates were the exact same people that, just 18 months earlier, were criticizing the Fed for not raising rates fast enough and saying we needed to get rates higher than inflation to bring it down.

 

It's true that it's hard to predict the exact path of all these things. What's easier is to use those predictions to chart out where you want to be positioned. 

 

I was wrong on how long inflation would stick around and the ultimate end point on rates. But my caution on equity multiples, rate hikes despite the weakening economy, and recognizing the potential to be wrong on inflation where equities and bonds could get wrecked guided my positioning. 

 

I sold a large portion of my non resource/non EM/non-Fairfax exposure. I used proceeds to buy gold, short duration fixed income, and iBonds to avoid price risk. Later, I started adding intermediate allocations and mortgages. 

 

All of those have turned out to be basically the right positioning barring outright shorts over that time period. And I'll continue to do well if equity/economic weakness continues. 

 

I'm sitting on a ton fixed income yielding 3-7% while equities/economy look worse with each passing day suggesting it might work again in 2023. 

 

1 hour ago, Gregmal said:

Idk I think there were actually quite a few people who said raise em to 4% or so and then take a breather. Not get near 5 and start being a tough guy when even dumb dumb Elizabeth Warren can see you are off your rocker.
 

 

 

For someone who has consistently made the case that "small" moves of 0.5%-0.75%  in rates don't matter, it's a little shocking to me that you think all of this is the result of us being at 5% instead of 4%. 

[Gregmal]

11 minutes ago, TwoCitiesCapital said:

 

For someone who has consistently made the case that "small" moves of 0.5%-0.75%  in rates don't matter, it's a little shocking to me that you think all of this is the result of us being at 5% instead of 4%. 

They don’t generally. 3/4/5 on the terminal is fine(imo obviously). But in tandem with being at the upper end and then putting on the show he has the last few weeks, that’ll certainly cause some movement in the markets, even if the end rate doesn’t get there. This is stuff a junior in business school sees, meanwhile the Fed employs $6b worth of economists, who I guess didn’t count on it. It’s not being at 4 or 5; it’s being at the top end of that and then giving inconsistent guidance and then getting in front of congress acting like now you need to go even higher when nothing has changed for the worse. 6 might as well be 10 because no one in their right mind believes this jabroni would ever do something so catastrophically stupid. Nevertheless he introduced the idea that he may be that stupid which is largely what sparked all this.

Edited March 13, 2023 by Gregmal

[Spooky]

47 minutes ago, Gregmal said:

then giving inconsistent guidance

 

To be fair to the Fed their messaging has been very consistent since they started on this rate hike path. It is people's interpretation / expectations that have continued to be in opposition to what the Fed has been saying.

[Gregmal]

4 minutes ago, Spooky said:

 

To be fair to the Fed their messaging has been very consistent since they started on this rate hike path. It is people's interpretation / expectations that have continued to be in opposition to what the Fed has been saying.

The message in January was wildly different from last few week. Which was different than in October. Or July. This though was the first time where they basically ignored inflation data and just focused on jobs and used jobs as an excuse to raise rates. If this is truly what this guy believes, there’s zero shot at a soft landing. They’ve basically always been at 4-5 on terminal rate. There’s no issue with that. Shifting from a focus on inflation to jobs, while inflation is slowing, and going not only above 5 but now north of 5.5-6 is insanity. There’s a reason only attention seekers have been calling for 6%+ rates…and that’s because it’s so preposterous they know it’ll be good click bait.

[Gregmal]

https://www.cnbc.com/2023/03/13/stress-like-1987-evercore-warns-svb-fallout-will-force-new-market-low.html
 

Another wizard with his super scary prognostications yet a year end target over 4000….

 

So, are these low 3000 price forecasts just 1) blip on the intraday target? 2) Fair values? 3) buy points?
 

Because if they’re 1 or 3 then 3500 is probably more reasonable and that’s like 10% from here so who cares? If it’s 2) then there’s probably still a whole lotta stuff thats gotta happen that folks ain’t telling us.

 

Nevertheless I find the prognostications entertaining. 

[TwoCitiesCapital]

6 hours ago, Spooky said:

 

To be fair to the Fed their messaging has been very consistent since they started on this rate hike path. It is people's interpretation / expectations that have continued to be in opposition to what the Fed has been saying.

 

 

For the last several months they have been consistent. And if you've listened, Powell has all but said he's intentionally driving us into a recession to fight inflation and inflation expectations. 

 

I think 3,000 on the SPY is base case. 2,500 is likely on the table as earnings and margins fall if inflation/rates prove to be even stickier than now expected. 

Edited March 14, 2023 by TwoCitiesCapital

[Simba]

The market current trades at ~17.5x (5.7% earnings yield). Not bad.

 

In a world where 10YT yields 3.5%, is a 5.7% earnings yield a decent purchase ? 

 

[TwoCitiesCapital]

5 minutes ago, Simba said:

The market current trades at ~17.5x (5.7% earnings yield). Not bad.

 

In a world where 10YT yields 3.5%, is a 5.7% earnings yield a decent purchase ? 

 

 

Not when that 5.7% is shrinking. And not when you can get mortgages and high yield bonds paying 6-8% YTMs. 

Edited March 14, 2023 by TwoCitiesCapital

[Spooky]

https://www.wsj.com/articles/investor-anxiety-hits-a-fever-pitch-after-silicon-valley-bank-collapse-3cbf94b7?mod=djemRTE_h

 

Seems like a good time to buy some good companies.

[Paarslaars]

Pretty sure that's what we're all doing.  

[wolverine890]

Greg, I agree with TdoubleC & Spook. In my opinion the fed has been consistent since their October meeting with the path forward. My takeaway from that meeting was threefold: 1) the fed would like to see unemployment go from the mid 3s to the mid 4s. 2) They would like to see new job openings cut in half (from Oct. numbers) 3) they would like to see housing prices fall by ~20% from their peak. 

Once the fed converted to the belief that the data no longer lead to the conclusion that inflation was transitory, they have been consistent that unemployment, new job openings and housing would be their three main factors in determining when their dual mandate was accomplished. 

The think the main way we get a "soft landing" if those three targets are correct is an increase in the labor force participation rate. IMO, that is what Mr. Powell was trying to share before congress, but those monkeys needed to dance, and he wasn't providing them with any music.

IDK, that's my opinion and it has helped me interpret them. But take it with a grain of salt because I like the fed. I think it’s a great institution.

 

Also, did anyone else follow the greekjordan on twitter? I always appreciated his commentary on the fed. But, one day he was gone. 
 

[tede02]

Big move in short-rates today to the upside. Market is trying to digest all the opposing forces (as am I!). I think the Fed goes 25 bps next week and then waits to see if there is any more wreckage between then and the next meeting. The bank failures are such a great reminder that these things always come out of no-where. I'm sure there will be more surprises this year. I'm still thinking the risk-reward for short-term Treasurys looks better than stocks (generally speaking) in the near term. 

[Gregmal]

50 minutes ago, wolverine890 said:

Greg, I agree with TdoubleC & Spook. In my opinion the fed has been consistent since their October meeting with the path forward. My takeaway from that meeting was threefold: 1) the fed would like to see unemployment go from the mid 3s to the mid 4s. 2) They would like to see new job openings cut in half (from Oct. numbers) 3) they would like to see housing prices fall by ~20% from their peak. 

Once the fed converted to the belief that the data no longer lead to the conclusion that inflation was transitory, they have been consistent that unemployment, new job openings and housing would be their three main factors in determining when their dual mandate was accomplished. 

The think the main way we get a "soft landing" if those three targets are correct is an increase in the labor force participation rate. IMO, that is what Mr. Powell was trying to share before congress, but those monkeys needed to dance, and he wasn't providing them with any music.

IDK, that's my opinion and it has helped me interpret them. But take it with a grain of salt because I like the fed. I think it’s a great institution.

 

Also, did anyone else follow the greekjordan on twitter? I always appreciated his commentary on the fed. But, one day he was gone. 
 

Thanks. Guess it’s just differentiating things open to interpretation. If the goal is to utilize a mechanism that by his own admission, takes 12-18 months to work…it’s pretty darn useless to sit here today and give a speech, and then a week later respond to the next data batch with “it’s not happening fast enough”…like was he expecting 9% to 2% in 4 months? Even if that happened, it just wouldn’t show in the data cuz that’s not how it’s tabulated. @Castanzas cake analogy is perfect…

 

The other issue is the dude is claiming he s fighting inflation, except he s not even following it. He’s been hypnotized by a certain crowd to now redefine inflation as “anything that’s doing ok” and currently focused on jobs. If you ask him where the inflation currently is, I am not sure he could even come up with a valid answer…same goes for the “persistent and sticky” inflation crowd. Where is it currently?

 

If you further eliminated everyone who sat around last year saying higher for longer because of “Ukraine, supply chain, and companies playing games with pricing” who now all of a sudden switched to “jobs and wages”….there’s virtually no case left to be made. It’s obvious, so obvious that even Elizabeth Warren can see it, that the cause of the inflation was almost entirely tied to those things. And those things don’t get solved by extreme rate hikes, or taking away people’s jobs, they get solved with TIME, and it’s happens almost exactly as it’s been happening since the summer. It’s accelerating here into fall ‘23, all you have to do is wait for it.
 

If he wanted to make the argument some are making, that inflation is 4% and it should be 2%…fine, but again, you think that’s going to be something discernible from that data this week? Lol like wtf? And either way, the solution for THAT, isn’t jacking rates up to 6/7. This guy is literally drunk on attention and hypnotized by academics and hopefully it doesn’t hurt too many people. Schmuck banks failing is fine. Rich tech bros having to get real jobs is fine. Bitching about jobs and wages cuz blue collar folks are finally having some success getting paid…fuck him. Or cuz it costs to much to eat out….dine at home Jerry. Eating at a restaurant ain’t a god given right. We don’t need 6% rates so that you and your pals are the only ones who can afford to make a reservation.

[Spekulatius]

5% unemployment and 2% inflation is better than 5% inflation and 2% unemployment. There I said it.

[Gregmal]

Ok so then where are we even seeing 5% inflation currently? Oil prices? Housing? Commodities? People are still chasing 2021 and early 2022s ghosts. Grocery prices is the best shot and that by itself doesnt do it. Theres literally no sign of this going on anywhere which is why maybe folks started harping on used car prices getting a modest y/y bounce recently? 

[changegonnacome]

50 minutes ago, Spekulatius said:

5% unemployment and 2% inflation is better than 5% inflation and 2% unemployment. There I said it.

 

You've nailed it in Charlie Munger style conciseness - beautifully put - its unpopular but its 100% true.

 

The Fed has two mandates - price stability & more recently employment........they will never say it out loud but they know and their public pronouncements confirm that one mandate supersedes the other........their 'real' goal is to maximize employment inside of the 2% inflation target because they know that doing so actually minimizes aggregate misery in the short run & optimizes stability and future growth of the US economy in the long run. Its hugely desirable.

[TwoCitiesCapital]

2 hours ago, wolverine890 said:

Greg, I agree with TdoubleC & Spook. In my opinion the fed has been consistent since their October meeting with the path forward. My takeaway from that meeting was threefold: 1) the fed would like to see unemployment go from the mid 3s to the mid 4s. 2) They would like to see new job openings cut in half (from Oct. numbers) 3) they would like to see housing prices fall by ~20% from their peak. 

Once the fed converted to the belief that the data no longer lead to the conclusion that inflation was transitory, they have been consistent that unemployment, new job openings and housing would be their three main factors in determining when their dual mandate was accomplished. 

The think the main way we get a "soft landing" if those three targets are correct is an increase in the labor force participation rate. IMO, that is what Mr. Powell was trying to share before congress, but those monkeys needed to dance, and he wasn't providing them with any music.

IDK, that's my opinion and it has helped me interpret them. But take it with a grain of salt because I like the fed. I think it’s a great institution.

 

Also, did anyone else follow the greekjordan on twitter? I always appreciated his commentary on the fed. But, one day he was gone. 
 

 

Yup and 1) has never occurred without a recession and 3) is also very, very likely to cause a recession. 

 

Other indicators also confirm recessionary like conditions already exist today.

 

Lastly, unemployment typical doesn't rise until you're already in the recession. The Fed is publicly acknowledging they'll be late to the ball, intentionally, when it comes time to cut. 

[Ross812]

@Gregmal what is the correct course of action? We have had a decade of ZIRP which resulted in hard equities and RE to inflate while goods, services, and average wages stayed put. Continuing ZIRP into the future isn't healthy and doesn't allow for loose monetary policy when things crash. Part of the reason we got the helicopter money in 2020/21 was because we started with low rates. If we had entered 2020 at 5-6% I would imagine we would have seen a far different outcome. The current hiking cycle should have stared in 2016 and certainly shouldn't have been abandoned in 2018/19.

 

We have had - 

13 years of ZIRP

Interest rates hiked then cut again in 18/19

A huge tax cut effectively stimulating the economy

Further rate cuts to 0 and helicopter money

A forced year of saving

 

Tax increases and rate increases are the way out, but the former is unpalatable so we are left with rate increases and tightening the money supply. What else can be done? 

[SHDL]

2 hours ago, wolverine890 said:

3) they would like to see housing prices fall by ~20% from their peak. 

 

Has the Fed ever actually said that?