Future Cuts to U.S. Social Security

[Parsad]

1 hour ago, TwoCitiesCapital said:

 

I didn't cherry pick a start date, Greg. I picked the last 5 years since the inflation  shock started in 2021. You're hard pressed to find any date in the last 5-years on those charts that was higher than 2021. That's not cherry picking, Greg. That's a secular theme of stocks underperforming true inflation hedges. I'm sorry your ego prevents you from seeing that. 

 

 

Yes. I do expect multiple contraction at some point. It hasn't happened yet. Sue me. I own that the timing has been hard. I've made returns elsewhere. 

 

People used 0% interest rates to justify elevated multiples for a decade. We no longer have them and multiples are even higher.l and people are now justifying it by saying stocks hedge inflation - which clearly they havent. Not in the 1970s and not today.

 

While contraction hasn't happened yet, I find it an even thinner argument that it'll never happen or multiples will continue to expand into infinity which is largely what YOU need to happen to be right at this point since real earnings growth is non-existent, multiples are stretched, and bonds have a significant advantage on starting yields. 

 

 

 

Because we're picking an asset that has widely been recognized as an inflation hedge for decades and comparing its performance to the so called "inflation hedging" abilities of stock generally. Why is this so hard to understand? 

 

 

DCA'ing gold probably still did better

 

The crux of your entire argument here is "why are we limiting the observation period to an inflation shock and comparing to other inflation hedges when discussing relative inflation hedging performance" 

 

There's been inflation since the beginning of the United States and the printing of the U.S. dollar.  Whether you look at 10 years, 20 years, or 100 years...stocks are a better hedge for inflation than anything else.  

 

No, they aren't going to counter a market panic spike in inflation like gold or other commodities, but in terms of protecting against inflation, nothing has been better.

 

When it comes to contraction of valuations, you have to remember that you could see a spike in earnings growth for several years, that justifies current valuations and reduces the market's overall valuation 5 years out.  Based on what Trump is doing, the market is justifying the higher valuations because it believes earnings will grow faster than normal for the foreseeable future (his term and maybe a couple of years after). 

 

I look for distressed investments, but I cannot discount this possibility.  Why, look at the earnings of the Mag7!  They have high historical valuations, but their earnings are real, their growth is real, their balance sheets are solid, their margins are unreal, they have cash up the ying-yang.  These companies are not the internet stocks of 1999...they are GE, IBM, KO, etc in the 1950's!  As long as they keep growing and sustain their margins, there is room to run, regardless of how crazy $2T, $3T or $4T in market cap sounds.

 

At some point, things will slow and those valuations will contract, but I just don't see it happening any time soon.  The economy is strong...well before Trump showed up this term...job opportunities are there (even more with all the illegals kicked out)...growth is there...train cargo is doing well...consumers in the top 40% are showing unusual resiliency. 

 

I think the best historic period to "rhyme with" might be 1982-1991...sudden inflation, it eases, we have room to run, but there may be a shock type of correction and then a resumption of the bull.  Maybe the shock hit during the tariff announcement was exactly that...Nasdaq down 20% in very short order and the S&P down 11% in short order.

 

I just don't see markets collapsing to half their valuations unless some outlier event happens...big war, another pandemic, some large country failing, etc. It will happen, but no way of predicting when.  Cheers!  

[changegonnacome]

11 minutes ago, Gregmal said:

They were largely worked through the system by summer 2022 which is why the lagging “inflation” so many refer to has done nothing but go down since then. The same period you describe as “inflation”. News flash…despite Jpow crying wolf, 2023/4/5 certainly havent been described as periods of “high inflation” by anyone but you.

 

This is an interesting period to look at......and I was most certainly one who called 2022 correctly as the classical correction to overvaluation and raising rates damage to the underlying economy as means by which to tackle inflation.......however what I would say is I remained too bearish into 2023 as my monetary inflation theory mixed with supply chain thesis started to break down in the face of stronger than expected dis-inflation (relative to the economic strength or should I say only slight economic weakness).

 

Like anyone I can get too wedded to a thesis........but one variable nobody was working with at the time in that 2022 period was the unknown and  MASSIVE influx of illegal migrants coming across the border.....my new theory of that period......is J-Pow had to do something with rates (when summed up all the money injected into the US was extreme and more extreme than other advanced economies) and rates being held where they we're are/were necessary.....but IMO the 'X Factor' was illegal migrants saved the day.....which is to say that it didn't take a recession to cool inflation......cause 10 million who knows 15 million plus workers flowed through the southern border...that combined with the cooling effect of higher rates fixed inflation enough so that we didnt need a recession to fix it this time (unlike all the previous periods)..or maybe thats a story I tell myself and it was all just supply chains!!

[Gregmal]

6 minutes ago, changegonnacome said:

cause 10 million who knows 15 million plus workers flowed through the southern border..

You know, I honestly hadn’t considered that but it’s definitely something worth chewing on. 

[changegonnacome]

3 minutes ago, Gregmal said:

You know, I honestly hadn’t considered that but it’s definitely something worth chewing on. 

 

yep you might remember I had my whole a productivity miracle wasn't going to save the day because you only have so many workers and demographics are terrible and so the US really had this fixed output potential problem against which wage growth & COLA adjustments was just overwhelming the kinda fixed slowly growing productivity output potential....the delta being inflation........what I got totally wrong and in my defense it wasn't in the data, cause these we're illegals......was Joe & Kamala's incompetence had enabled an absolute avalanche of working age (& highly motivated individuals) enter the US through the Southern Border & Airports!.....and I know these guys and you know these guys.......they work two jobs.......so 10m of them in get in......and its really like adding 15-20m standard American workers to the workforce.....anyway at some point I think we get a post-mortem on this period and the recession that never was & the miraculous disinflation.....your theory of its just the supply chains stupid, at this point, has stood up way better than mine.

[Gregmal]

Seeing first hand, 1 illegal probably does the work of 3-4 pleasantly plump patrons of proper documentation.

[TwoCitiesCapital]

1 hour ago, Parsad said:

 

There's been inflation since the beginning of the United States and the printing of the U.S. dollar.  Whether you look at 10 years, 20 years, or 100 years...stocks are a better hedge for inflation than anything else.  

 

There are periods where it is acute and periods where it is low. 

 

Stocks, along with most investments, do well when its low and terribly when it elevates. That doesn't mean stocks are an inflation hedge - it means that leverage and productivity in the low years have been able to outrun the few bad periods we've had. But that doesn't mean bad periods don't ravage those returns when they occur or that bad periods will remain few for the next 20-30 years. 

 

1 hour ago, Parsad said:

When it comes to contraction of valuations, you have to remember that you could see a spike in earnings growth for several years, that justifies current valuations and reduces the market's overall valuation 5 years out. 

 

It's possible. I'm skeptical the growth will be enough, on average, to fill the current multiple expansion as well as providing attractive forward returns in excess of the 5% already being provided in fixed income.  

 

1 hour ago, Parsad said:

 

Based on what Trump is doing, the market is justifying the higher valuations because it believes earnings will grow faster than normal for the foreseeable future (his term and maybe a couple of years after). 

 

The market might think that. I tend to think that earnings have already stagnated and we're beginning to see some of the weakness that has been under the surface in the labor market.

 

Tariffs are a consideration as well - they dent consumer spending if passed through to consumers. They'll probably dent some corporate margins if eaten by the companies. 

 

My point about large the large distortions due to this AI gold rush stand. NVDA alone declared $70+ billion in earnings this last 12 months (which still wasn't enough to get real earnings growth vs 2021!). But it's $140 billion of revenue is largely going to be written off as depreciation by other companies in coming years. And that's true of ALL of these chip companies currently wallowing in cash. 

 

That's a hard dynamic  to outrun the moment earnings growth peaks for these AI chip cos. 

 

1 hour ago, Parsad said:

I look for distressed investments

 

Same. My equities have largely been asset plays at discounts in foreign countries and opportunistically purchased in drawdowns. Things like Exor, Fairfax, and Prosus have done well outrunning broad US equities for me and we're largely purchased based on discounts to NAVs. 

 

1 hour ago, Parsad said:

At some point, things will slow and those valuations will contract, but I just don't see it happening any time soon. 

 

I'm not so ready to discount leading indicators, yield curves, and the decline in real earnings we're witnessing. 

 

1 hour ago, Parsad said:

I think the best historic period to "rhyme with" might be 1982-1991...

 

Valuation in 1982 were unusually low (single digit P/Es) after the miserably inflationary decade of the 1970s. 

 

1982 was coming OUT of the third recession in a decade. Leading indicators were turning up, unemployment was high and falling, yield curve was steepening. In other words, the bar was low for outperformance. 

 

None of that is true today. I don't expect the a similar experience as a result.

 

1 hour ago, Parsad said:

I just don't see markets collapsing to half their valuations unless some outlier event happens...big war, another pandemic, some large country failing, etc. It will happen, but no way of predicting when.   

 

They don't need to crash. They could simply replay 2021 - 2025. An earnings drawdown similar to 2021/2022 - either via recession or another spike in inflation - and 4-5 years for corporate earnings to recover to their prior real and nominal peaks like we're witnessing now.

 

The end result of that is that real earnings basically went nowhere for a decade. Is that the type of environment people are excited to pay 30x earnings in when bonds were paying 5% the whole time? 

 

[RichardGibbons]

2 hours ago, TwoCitiesCapital said:

They don't need to crash. They could simply replay 2021 - 2025. An earnings drawdown similar to 2021/2022 - either via recession or another spike in inflation - and 4-5 years for corporate earnings to recover to their prior real and nominal peaks like we're witnessing now.

 

The end result of that is that real earnings basically went nowhere for a decade. Is that the type of environment people are excited to pay 30x earnings in when bonds were paying 5% the whole time? 

 

In an inflationary environment, how are bonds paying 5% nominal any better than businesses?  Do you see 20x earnings with no chance of nominal growth being better than 30x earnings with a high chance of nominal growth?

 

[TwoCitiesCapital]

6 hours ago, RichardGibbons said:

 

In an inflationary environment, how are bonds paying 5% nominal any better than businesses? 

 

 

1) stocks are longer duration than bonds and have demonstrated an inability to raise revenues/profits as quickly as rates. This is why they do worse than bonds in historical inflations

 

2) right now bonds are yield more than inflation - stocks not so much. Bonds have a better starting point because the growth hasnt been there either but the rising  rates have. This is likely to help their relative performance. Particularly for shorter duration bonds (1-5 years). 

 

3) there are plenty of options within bonds - short duration bonds, floating rate bonds, bonds with a larger credit spread buffer, CEFs at NAV discounts and double digit yields, TIPS (for longer duration hedging), etc.

 

It also doesn't take much trading expertise to be in short duration bonds when inflation/rates are low and accelerating (2021) and move to more intermediate bonds to lock in higher yields as rates/Inflation moderate along the way (2023 - 2025). 

 

6 hours ago, RichardGibbons said:

Do you see 20x earnings with no chance of nominal growth being better than 30x earnings with a high chance of nominal growth?

 

 

All depends on the growth rate. But in a flat or negative growth environment, I'd gladly take 20x guaranteed over 30x after having been wrong about my projected growth rates for 5 years. 

Edited July 31, 2025 by TwoCitiesCapital

[73 Reds]

8 minutes ago, TwoCitiesCapital said:

 

1) stocks are longer duration than bonds and have demonstrated an inability to raise revenues/profits as quickly as rates. This is why they do worse than bonds in historical inflations

 

2) right now bonds are yield more than inflation - stocks not so much. Bonds have a better starting point because the growth hasnt been there either but the rising  rates have. This is likely to help their relative performance. Particularly for shorter duration bonds (1-5 years). 

 

3) there are plenty of options within bonds - short duration bonds, floating rate bonds, bonds with a larger credit spread buffer, CEFs at NAV discounts and double digit yields, TIPS (for longer duration hedging), etc.

 

It also doesn't take much trading expertise to be in short duration bonds when inflation/rates are low and accelerating (2021) and move to more intermediate bonds to lock in higher yields as rates/Inflation moderate along the way (2023 - 2025). 

 

 

All depends on the growth rate. But in a flat or negative growth environment, I'd gladly take 20x guaranteed over 30x after having been wrong about my projected growth rates for 5 years. 

I dunno.  In reading all the comments in this and other threads regarding macro-economic data points, none of it makes a hill of beans of difference to the way I invest.  As private investors we have the ability to ignore much of the noise and use whatever we like to our respective advantages.

[RichardGibbons]

3 hours ago, TwoCitiesCapital said:

All depends on the growth rate. But in a flat or negative growth environment, I'd gladly take 20x guaranteed over 30x after having been wrong about my projected growth rates for 5 years. 

 

Thanks--I don't think it'll affect my strategy, but I appreciate you sharing your reasoning.

[changegonnacome]

17 hours ago, Gregmal said:

Seeing first hand, 1 illegal probably does the work of 3-4 pleasantly plump patrons of proper documentation.

 

You bet - I'm in NYC......sometimes I stop and look around and the ONLY people I see working are these folks.

 

The flip side of Trump's immigration crackdown....is upward pressure on labor availability (basically the inverse of my illegals solved 2022 inflation story).....I get the pro-Main St. element to this.....labor might have a shot of squeezing more terms from capital......company margins should go down and real wages should go up....its an admirable project.....income & wealth inequality works beautifully (for the top) for a while, till the revolt kicks-in....Donalds political success & Bernie's nearly political success plus Mamdani in NYC are the populists canary's in the coal mine that if the system doesn't get a bit more equitable.......well strange things will happen.

 

Edited July 31, 2025 by changegonnacome

[Parsad]

19 hours ago, TwoCitiesCapital said:

 

There are periods where it is acute and periods where it is low. 

 

Stocks, along with most investments, do well when its low and terribly when it elevates. That doesn't mean stocks are an inflation hedge - it means that leverage and productivity in the low years have been able to outrun the few bad periods we've had. But that doesn't mean bad periods don't ravage those returns when they occur or that bad periods will remain few for the next 20-30 years. 

 

Yeah, but people shouldn't worry about inflation in the short-term, but how inflation ravages their savings long-term.  In those term, stocks are a better inflation hedge than anything else.  

 

19 hours ago, TwoCitiesCapital said:

 

 

Valuation in 1982 were unusually low (single digit P/Es) after the miserably inflationary decade of the 1970s. 

 

1982 was coming OUT of the third recession in a decade. Leading indicators were turning up, unemployment was high and falling, yield curve was steepening. In other words, the bar was low for outperformance. 

 

None of that is true today. I don't expect the a similar experience as a result.

 

No, I meant that 1980-1981 would have been the Pandemic, followed by the spike in interest rates in 2021-2022 like 1981-1982.  Even though rates only approached 6% on the 10-year, the jump was quite significant from the lows, not unlike 1981.  Of course the jump in 1981 was larger, but much of the market in 2020 was at low single digit P/E's during the Pandemic and into 2021 many stocks were still very cheap.  The Trump tariffs effect would have been the October crash in 1987...where stocks rebounded up until 1987 like stocks did up until 2025...you then had a bull run until 1991 and we could see one here until 2028. 

  

19 hours ago, TwoCitiesCapital said:

 

 

They don't need to crash. They could simply replay 2021 - 2025. An earnings drawdown similar to 2021/2022 - either via recession or another spike in inflation - and 4-5 years for corporate earnings to recover to their prior real and nominal peaks like we're witnessing now.

 

The end result of that is that real earnings basically went nowhere for a decade. Is that the type of environment people are excited to pay 30x earnings in when bonds were paying 5% the whole time? 

 

 

Yes, but this is about as likely to happen as earnings rising because of policy and valuations contracting.  It's really a 50/50 chance of stocks remaining/continuing in a bull market.  Cheers!

[Loss Horizon]

On 7/31/2025 at 2:33 AM, TwoCitiesCapital said:

 

Would go even further to say this chart is inflated itself - because names like NVDAs revenues/profits are CaPEx of other companies. So every $ of revenue/profit NVDA is booking today is going to be written of via depreciation over the next 3-5 years by other companies. So this is counting those earnings, but not reflecting that future earnings will be reduced by the same amount as a result. 

 

 

Very good point.

 

That would be a problem only if these CapEx investments don't produce a reasonable profit to cover the depreciation. So yes, it's probably a big problem.

 

But I wouldn't try to predict timing for the end of speculative mania. Maybe when AI fails to deliver, the companies can pump and mine a new cryptocoin with the gigantic useless GPU capacity and report new "profits". And then something else after that.

[TwoCitiesCapital]

16 minutes ago, Loss Horizon said:

Very good point.

 

That would be a problem only if these CapEx investments don't produce a reasonable profit to cover the depreciation. So yes, it's probably a big problem.

 

But I wouldn't try to predict timing for the end of speculative mania. Maybe when AI fails to deliver, the companies can pump and mine a new cryptocoin with the gigantic useless GPU capacity and report new "profits". And then something else after that.

 

AI won't fail to deliver. It probably won't even fail to meet expectations. It just won't do it tomorrow which will be the problem. 

 

The Internet was everything they said it would be and more. There was still a popping of the Internet bubble. 

 

The revenues that get written off massively exceed the profits currently being booked. The saving grace is the write offs occur over years while the profits are booked immediately. The dynamic of profits outrunning the depreciation  can only exist for as long as the profit growth allows it to outrun the fractional depreciation. The moment profit growth slows/stalls is the moment depreciation catches up.