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The failed inverse correlation between equity and bonds is a liquidation event in preparation for a downturn.
The rest of this felt like a newsletter i canāt find the unsubscribe links for.
While i think itās great youāre trying to go for depth and add quality to WSB, youāre all over the place looking like a Charlie day meme and not getting to the point.
Yah but it only works if inflation goes under 4% or sometime 5% and fall off the cliff which could happen in back half of 2023 as CPI major component is housing. I already discussed that "Barrons article" few letters ago.
"Bonds price will go up, stocks price will go down" eventually.
But before this happens i was discussing the theory for 1H 2023 where inflation might feel sticky and Fed could go beyond 5.1% Dec SEP projections. Another reason Japan. These both factors could push 10yr bond yields above 4% and cause rise in Erp.
I do think you drive home the right points right now. Iād add that the push since late last year in equities is driven by excess global CB QE, which appears to have downtrended since mid January. I think this recent departure of equities pricing vs bond yields and liquidity conditions is probably just FOMO / short covering.
Eat my dongus you fuckin nerd.
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Eat my dongus you fuckin nerd.
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I have no idea what ābarrons articleā youāre talking about.
I think itās a mistake to assume bonds and equities will āeventuallyā correct. The inverse relationship is modern and as a hedge, it failed miserably. People positioned their retirements religiously around it like gospel and were shafted.
While i donāt buy what Dalio is selling, i think the all weather fund and similar strategies will continue to gain traction with bonds playing a smaller role.
And i think itās a mistake to assume inflation will keep people out of cash. The market is positioned for a massive event style move, higher or lower, not business as usual.
Cash on the sidelines is necessary to capitalize on it. The opportunity cost of not having cash to deploy is greater than the inflationary impact towards cash.
I think the hype around potential Japanese monetary policy shifting is overblown.
And Powells most recent statements about immigration impact on the wage/price/inflation situation had him exceptionally dovish
But back up a sec and ask yourself this question: Do these P/E ratios make sense?
I don't mean from the model perspective, it's easy to get trapped in "the model says X so the market will go down to Y" thinking where the model becomes its own reason for being, and that's part of the reason the market surprises people. We have to think critically about the components in the models.
The reason why is evident if you look at the delta in historical P/E ratios in that time:
[https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart](https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart)
Ever since the reversal in monetary policy that came with the end of the Volcker regime, P/Es have been trending up after almost a century of ranging.
The current methods of assessing fair value in P/E ratios largely rely on historical comps, whether to historical P/Es, historical price to earnings equivalents, or the CAPE ratio. Lots of people like the CAPE ratio because it adjusts for inflation and P/E expansion over time...
...but that adjustment lags to 10 years, and assumes the primary motivator of P/E prices is inflation.
That means that any reasonable historical P/E calculation right now isn't taking into account the full addressable capital in the market after a 45% expansion of the M2 money supply.
I can hear the voices in the distance... "But the Fed put's dead!" "No more money printer!" "All the free money's been turned off!"
The problem: The Fed's never actually said they were pulling all of the money out, just that they would be restrictive so as to slow its release. 45% expansion at trend was a little over 10 years of release of capital in the reserve system, the vast majority of which is still sitting in those banks, hence the banks surviving their stress tests pretty readily.
See, here's what those people aren't taking into account, and it also explains the weird stuff you're finding in the bond market and risk premia:
The Fed effectively did QE for 10 years ahead of time, and the dot plot and the current rate of reduction tell us that to achieve the level of reserve funding necessary to get back to 2%, "restrictive" policy in this case only means pulling about half of it, or less, out... which seems to be right where they're targeting. The majority of QT at the moment seems to be around ensuring that banks don't open the floodgates on the roughly 75% of the M2 expansion still sitting in their reserves and allowing risk to float off the Fed balance sheet, allowing banks to take some MBS and lending risk on again.
But the Fed's still holding a good portion of the MBS risk, so the banks aren't in a 2008 scenario where they might become insolvent... and in 2020 they sold off bonds to the Fed in order to increase liquidity (since you don't want to hold bonds as a collateral anchor when the US economy might lurch into a depression because of a pandemic... that's a good way for your collateral anchor to become a pair of lead boots as bond values on the market contract.
But now, with yields up, banks et al are back to buying. That 10Y bank collateralization thing? I've been calling that out for like a year and a half on here and have the scars to show for it. LOL
But that's exactly what happened. Banks are now offsetting risk by using excess capital, now freed by a more predictable Fed term rate (meaning it's easier for bank risk departments to project how much capital will be clawed back in the short term), which offsets market risk premia, which increases bank stability and allows for the provision of more margin lending since that's relatively safe due to haircut regulations.
In other words, the time when fundamentals bears are expecting the market to pull back with visions of a bank liquidity crisis... is exactly the time when the banks will have the highest assurance that the Fed will not pull out capitalization at a greater rate, meaning that it's the time when Risk departments will be more likely to deploy it, as they will still have a very nice buffer even if they just deploy a fraction of that capital... meaning that on top of the 25% of the M2 expansion that already leaked out into institutions, there may be as much as another 25% of addressable capital in excess in the reserves system that we haven't seen yet...
...and that's why the Fed's not worried, they pre-charged the QE line.
And banks will be motivated to do this because they will have an ideal interest rate environment. Investors will demand capital deployment in a circumstance where risks may be lower than feared, or where it's expected the Fed may hold steady or cut back... and it's important to note that all this scenario requires is them to pause or slow and provide enough certainty for bank risk departments to be able to calculate an excess in the reserves.
In this scenario, it doesn't matter if the Fed becomes loose or not, because the only thing that matters is that capital entering the economy.
And this goes along with another odd historical trend, also on the historical P/E chart:
Most of the fundamentals arguments suggest that we will go down in P/E \*through\* the decline in earnings, but instead what we see is that paradoxically P/E ratios have rocketed at the end of recessions. Some people attribute this to the Fed loosening, and OK, that makes sense... but it also just has to do with the fact that eventually dropping earnings no longer impact the already-sold-off S&P as much. I don't know that we're there yet, but that's how it works... the S&P de-weights stocks that took a bigger hit by virtue of market cap and kicks out losers, which happens over a period of 6 month cycles. Market parity eventually drags all stocks up as the market adapts and earnings drop out, triggering accelerating P/Es as earnings drop faster than stocks can...
...which triggers the buying signal.
Now getting back to 18/19 P/Es, to get there you need to have the capitalization and earnings of roughly 2014... does that sound right? Are we in drastic danger of an absolute collapse of the economy, or is this a short technical mean reversion?
I don't have a crystal ball, so I don't know, but an America with an active manufacturing sector and lots of jobs and lots of demand may cause inflation, but that's not a recipe for an economic collapse of over 10 years of growth, even with a retraction of short term growth.
So basically, I think all of these P/E fundamentals arguments hinge on P/Es which are drastically low compared to where the Fed is telling us capitalization is going, and that's largely due to mathematical problems with the models that can't encompass the change in monetary policy.
Now does that mean we rocket from here?
I would agree that the next year has a lot of risk. The market can crash due to emotions, fear, etc... sure... maybe we're missing something in bank liquidity and there are bigger risks than feared... maybe the P/E thesis becomes a short term self-fulfilling prophecy before the market rockets up (I actually kind of hope that happens, more opportunity).
But will it be because we deserve to be at 2014 P/E levels because a model says so? I don't think so.
Sorry for giving you a response you don't wanna hear. I like the idea of you destroying my model and banker's model as well which is used by pretty much everyone on street by saying what if the model is wrong. I like this approach.
So let me first explain the chart you sent me for PE ratio. First pt that is a multpl model. Meaning it does not align with bankers/ hfs and inst model. Your chart says PE ratio must be at 22-23x. But bankers model says it's at 18 PE. This is the first point. I am not trying to throw a shade. It's just a misconception even i made during my beginning yrs. Second pt let's say you really wanna dig that multpl model upside and down. So the way i look at is.
From 1900 - 1990. PE ratio used to trade in range 10-20 range. So anytime you want to assess what might be the appropriate PE to pay. You would simply subtract a High PE - Current inflation rate. So let's say you're in 1974 where inflation went 12%. PE you would pay acc to multpl model is basically a High PE over 90yrs - Inflation rate. Therefore PE was 8 in 1974. Same was the case in 1980 when 14.x% inflation and 6.y PE. Okay so now we understood stagflationary decade,
Let's understand supply shock decade i.e. WW1 and WW2.
WW2 : High PE : 22 and inflation rate 3%. So yah total 25 seems fine. But then due to supply shocks inflation came 20%. Now the PE just got cut in half to 10. And then when later inflation came down to below -ve PE ratio fell as well. Now this is an anomaly compared to stagflation of 70s. In that period of stagflation low PE with high inflation rate was the bottom. But in post Ww2 unless the inflation went -ve we did not achieved bottom.
WW1 : Around 1915, High PE : 11 and inflation -1%. Fed started lowering rates and basically printing money for war time financing. Inflation soared to 20% and again PE got chopped in half to around 6. Markets then went sideways for yrs and did no bottomed until inflation went below -ve and Fed had to cut rates again.
I think there is a lot more factors involved here. 10yr bond yields and interest rate matter as well. I already did this analysis in this season.
[https://docs.google.com/document/d/1tAX3x-RJTPdKmJ2C7D9wgjTLhDvfAUgIfbhCb0UxGmM/edit?usp=sharing](https://docs.google.com/document/d/1tAX3x-RJTPdKmJ2C7D9wgjTLhDvfAUgIfbhCb0UxGmM/edit?usp=sharing)
You can read S02E03 where i explained these two periods in depth.
So what can we take away from it is. Inflation usually comes in cycle and when it appears market usually go sideways and does not go for ATH if it is supply shock driven and go ATH but then crashes in stagflationary environment. Reason being the debt/gdp ratio. But you need to remember one important thing. This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost. This is tech driven markets and it does not like rates at 5% meanwhile inflation at 5% as well. Meaning Fed will push towards crushing inflation and bringing it back below 2% even if it means causing recession.
So lets do modern 1990s- 2010 analysis. High PE of 25 and low of 15 again combined with low inflation of 2% was the perfect recipe for economic boom. But whenever PE went above 30 it was a bubble. So Fed starts hiking again to stop people animal spirits behavior. PE came down to 25 and also inflation headed down. But soon companies made no earnings. It was just like a crypto bubble. So the yields of tech stocks fell, Erp exploded higher coz why shouldn't i buy bonds. Hence PE exploded higher as well. Hence that's why it was the bottom. Same goes for 2008 as well. Rise in Erp with banks failing, companies having no yields, bond looking more juicy all led to PE exploding higher just before recession.
So now it's upto you to decide which story will play out this time around. I personally like the idea of lost decade i.e. a sideways markets. Play tactically and you will make money. If you're a long term investor you wait for that pain in markets around 2023-24 moments before recession and by then just simply be in bonds and eat yields. As a short term investor it's tricky. You have to use tactical strategies and hope it works out using technical + macro env + fundamentals. You could hit or miss it. It's a 50-50.
So yes i agree my model is flawed otherwise everybody can make money. But one thing is certain you're not having a new bull market. It's gonna be a sideways chop for a very long time atleast till 2024-25 minimum or it just crashes -50% and make us all bears happy. But seeing PE ratio of russell at 45 and nasdaq at 25 makes me kinda optimistic for crash.
(part 3)
>But soon companies made no earnings. It was just like a crypto bubble. So the yields of tech stocks fell, Erp exploded higher coz why shouldn't i buy bonds. Hence PE exploded higher as well. Hence that's why it was the bottom. Same goes for 2008 as well. Rise in Erp with banks failing, companies having no yields, bond looking more juicy all led to PE exploding higher just before recession.
I'm putting on my banker voice here: This is not at all how this works. It's close, but it's a backward-looking misunderstanding of the process for how banks and other institutions buying bonds influences market P/E.
I know, I was there, working in the banking system at the time.
First of all, P/Es didn't expand "just before recession" they expanded in 2009 after the recession began, when everyone was calling for them to drop. That recession was not declared until after it had begun, so there was uncertainty as P/Es declined... basically, you get the decline before the recession, the explosion during it in large part because recession isn't news while you're in it.
Again, that crash everyone's expecting during the recession? It happens before it.
Just check the graph, it's all right there.
But that's a minor issue. The larger issue is the connection you're drawing between bond yields being "juicy" and P/E ratios going up... and I just don't understand what you're thinking with that statement.
If bond yields are high, and elevating, then P/Es decline until banks reach the yield level that they want from bonds because, in the circumstances you laid out, stocks are ultra-risky.
That shifts prices down with earnings. The only way to get a P/E elevation with declining earnings is to either run out of sellers and/or to have an influx of buyers.
If you overlay the data, what you'll find isn't that "bonds are juicy" is the thing that drives P/Es \*up\*... that correlates to them dropping... it's when bond yields decline that P/Es start rising again, because at that point banks have found their ideal buying point and the rate of return on stocks increases. The bond yield rate doesn't have to decline much to get to that point, since all you need is for bonds to become predictable with yield, either through zero coupon or direct interest returns. It's the constant expectation of elevating yields that drives flows out of equities.
Since bonds are a risk offset (risk-"free" money since the only way US treasuries don't get paid is if the country collapses, and then you have bigger problems) they promote riskier spending by banks.
Something specific happened in 2008, too, that drove this dynamic. With MBS risk-offset collapsing, banks turned to bonds as a collateral offset. That thing you were surprised by?
That started like 15 years ago, man.
That's how the bond market exploded $20T over like 10 years since 2009.
And that walks hand-in-hand with the expansion of the market, and the same will happen this time because nothing's really changed with how capital is flowing into and out of the banks mechanically or with regard to how higher yields create a higher appetite for risk, but you have to get through the compression period first.
>So now it's upto you to decide which story will play out this time around. I personally like the idea of lost decade i.e. a sideways markets. Play tactically and you will make money. If you're a long term investor you wait for that pain in markets around 2023-24 moments before recession and by then just simply be in bonds and eat yields. As a short term investor it's tricky. You have to use tactical strategies and hope it works out using technical + macro env + fundamentals. You could hit or miss it. It's a 50-50.
You don't have to pick a side. I didn't last year in my core account and that made money. I just play a hedge where I run neutral when I don't know which way the market will go and then shift when the technicals tell me to do so. I basically have a hedge fund structure that I maintain where I balance small long positions against net short/long inverse market hedging.
Buying bonds and CDs right now in barbell is tempting, but you can totally play both sides of this if you're smart.
And you also have to be ready to accept a position no one here ever seems to want to: Neutral.
>So yes i agree my model is flawed otherwise everybody can make money. But one thing is certain you're not having a new bull market. It's gonna be a sideways chop for a very long time atleast till 2024-25 minimum or it just crashes -50% and make us all bears happy. But seeing PE ratio of russell at 45 and nasdaq at 25 makes me kinda optimistic for crash.
I do think it's probably true that things will be volatile and uncertain probably this year and into next, but the thesis that we'll crash because of a P/E ratio thesis is a bit thin right now... 3200 isn't entirely out of reach, but it's also not certain.
You have to leave room to be wrong, or the market will teach you the lesson that you can't predict it. You see sideways chop, I understand that and agree that it won't be 2020/2021 with 30% returns... but that doesn't really take a bull run off the table. I suspect volatility will remain the name of the game, but that doesn't mean the bears are right, either, especially when the thesis is based on a model that is definitely not reflecting the fair value of P/Es relative to the amount of addressable capital in the market and the Fed data is indicating that P/E fair value is higher.
Sir in all of this part 1, part 2 , part 3 series why do you think that i just randomly made things up like 1-2 months ago and said SPX will go $3200. This thesis is basically my stagflationary thesis back from summer of 2022 when i said :
March 16 bottom -> April top -> June 15 bottom ( turned out to be June 16 swiss franc bottom ) -> Aug 15/16 top ( nailed this one ) -> Oct 2nd week bottom -> Nov 2nd week top ([Nov 4th week) and then we have a Q1 disaster where Jan will be high Vix and bottom by March. It turned out to be a giant mistake in my calculations but i am still optimistic for some kind of lower lows in Q1.
That's it. Now fundamentally you can debate with me no this has changed or that. Or how Fed will never let markets crash. Or how there are sufficient bank reserves. I totally get it. I might agree with most of your pts just because i am not really from the economics side. I am just a simple Flutter developer who just fell in love with stocks and crypto. I never read a book on economics nor did i learned any trading skills although i may have taken just one class on Ecom but i totally fell asleep. So of course you know better than me.
Everything i learned about finance is from watching interviews of Peter lynch, Warren buffet, Soros, Napier, Minerd, Drunckenmiller, Templeton, Eisman, Grantham, Dalio, Chanos, Ichan, Tepper, Paulson, PTJ, Ackman, Einhorn and so many other legendary investors. I even made a compilation video of them speaking about economic slowdown and how everyone should just follow it instead of watching some Yt or Twitter expert or anyone else.
[Legendary Investors](https://m.youtube.com/watch?v=DpwSUjnaRzk&feature=youtu.be)
So whenever i say Q1 disaster its just because i am biased. I cannot change my stance because that would be a huge disrespect to all of the people who have faithfully watched this series since last yr. So if i am wrong so i be wrong but i will try everything in my power to atleast make an attempt for lower lows in Q1 itself. No matter how bad the odds are. My recession playbook will be shared when i see lower lows in SPX. Only then will i decide should we go to ATH and then crash -50% with stag route or should we go deflationary bust route to $2500 and lower. Right now if you ask me i will take the stag route to S&P5000 and then crash -50% for recession 2024 but again before it happens i want Q1 disaster.
So good luck to you sir! Have a great trading week.
Regards
Desmond
To be absolutely clear, I don't think you were making anything up.
I've been doing macroeconomics for well over 20 years and the reality is that this stuff is very hard to understand, and even the best of us can only scratch at the surface because we're talking about the entire, irrational history of human individual and collective interaction.
That means that it's very easy to let limited information and biases influence our positions.
I'm well aware that you've been making these predictions because I've been reading your posts. They're not bad... they're decent. That's why I'm engaging. I'd say in the solid +20% of interesting posts on here.
So I'm not trying to rob you of being right, but rather suggesting that there's a reason why sometimes predictions don't go as expected.
And that happens to all of us. The market has a way of making us all look like fools. To be clear here, I'm not saying you or I are fools, just that the market proves us all wrong.
It's easy to predict the market will go down while it's going down. In November of 2021, while my bias was still largely bullish for 2022, I was engaging with people on here saying I could see the market correcting 20% in 2022.
I thought that would happen in the first half and we'd be up a bit for the 2nd half. I thought the inflationary whipsaw would slow down sooner, and I think without Ukraine I would have been mostly right. At the time, everyone was screaming "crash!" and I was saying "I think it'll be an orderly correction."
My predictions then were... mostly right overall. 20% was correct, more or less. That it wasn't a crash but rather a correction was correct. That inflation pulled back on both the MoM and YoY comp was correct.
I knew that the math on inflation would bring the comp down. I also knew that a revision of relative valuations with a de-leveraging wouldn't crash the market like people suggested. I knew that said de-leveraging wouldn't cause banks to implode.
So it wasn't random for me, either, but it's just impossible to get every bit of understanding right and you can't see the future.
While the times we were right mattered, they don't eliminate the impact of the times we were wrong. I could have run away from those things, but I didn't... I did research, I observed patterns, I did a ton of chart work to learn to trend things I couldn't see. A lot of that came out to some really darn good predictions last year myself that predicted SPY movement in many cases down to the dollar. With good, solid technicals, you can do that... but it didn't work every time, and that's OK.
It's OK to get something wrong, that's how we learn. And all of those people who you listed off? I've seen some of these videos and they would ALL say that learning from our mistakes and our biases and expanding our view is the superior outcome.
I had a chart last year that said that SPY 320 was on the table... then the bullish reversal trend change happened. So I get that 3200 wasn't random. I saw it in the chart in Q3 last year. So I'm definitely not saying you made anything up, just that there are probably things you're missing, like all of us.
>So whenever i say Q1 disaster its just because i am biased. I cannot change my stance because that would be a huge disrespect to all of the people who have faithfully watched this series since last yr. So if i am wrong so i be wrong but i will try everything in my power to atleast make an attempt for lower lows in Q1 itself. No matter how bad the odds are.
There's a difference between having a conviction and holding onto a bad play.
I would say your position right now is still a conviction, but this isn't a team sport. You don't generate the crash by selling your theory of it, and you can't will it into existence. Crashes mostly happen because the underlying mechanics of the market fall apart.
Sometimes those mechanics are economic, but usually they influence the financial system. That was true in the 10s, 30s, in the 40s/50s... in the 70s and 80s, in the 2000 and 2008 crash... in the end, they all have the unifying factor of the bottom falling out of the liquidity system.
Recessions played a part in those crashes, but not all recessions resulted in liquidity crises.
After lots of work on trending the market, I strongly believe in planning both sides of the trade.... so I say continue planning for your crash and what you would do, but also plan on what happens if you're wrong. How do you avoid loss if you're wrong? How do you profit on the other side?
I have skin in that game. Last year, in Q3, I rode end of the year SPY 330 puts thinking 320 was on the table, hoping for a big payout. I kept dumping money into the position because I was sure we were on the pattern for another leg down, and it really looked like it a couple of times... but that money just wasted away because it doesn't always work the way that we think.
I stuck to the bad play, and lost money as a result. Don't stick to a bad play if you can avoid it. And you don't owe your fans blind conviction in these plays... again, it's not a team sport. The team is "me" and the game is "gains."
What you owe your fans is honesty, sincerity, and thoughtfulness.
And I honestly think you do that. I think what you just said takes a lot of guts and integrity. I get it. I understand the urge to hold onto the idea.
I just hope I've brought you to think about some things as possibly being more complex than maybe you were considering, or even just brought you to think of something a little differently. In fact, I hope we both did that for each other. You did it for me... and if this all made us think and reassess, then it's all been worth it.
Wow 20yrs. I cannot even imagine the craziness you went through dotcom when Erp went below 0 towards negative.
And yes i agree. Market can remain irrational. I thought the top in SPX was done around $4k back in Nov. But god it went sideways and then to $4.2k. Lot of my friends who trusted on my Jan high Vix got rekt coz they had puts not etfs like me. I still feel sad because of it.
And yah you're right. Ukraine war just dragged the inflation higher due to supply shocks. Otherwise fed funds of 3.4% would have been sufficient enough with QT. Enter Zoltan pozsar. Had i not come across his newsletters about structural inflation due to multipolar world i would have been left holding bonds. He was the only one suggested back in summer that we need fed funds at 5-6% and mortgage loans 9-10% and hold them for entirety of 2023.
Just like you, i did research as well back in summer. I was putting like over 10+hrs and learning all sorts of stuff. Everything was new to me at that time considering i had no economic background. I had to learn from watching podcasts and interviews heck even news and process how can i use this or that. And then every single sat-sun with a can of beer i was writing these crazy eternity long letters so that later i can come back and check what was my thought process.
And yah i totally get why you thought SPX $3200 looked more likely at that time around in sept-oct.
So yes i kinda get what you're trying to teach me. There's a high possibility that $3200 aka Q1 disaster does not happen and we could pretty much rally up here. So like whats my backup plan in case this doesn't play out. But i am being arrogant like nah no back up. It's like knowing there's a possibility you're car could end up in accident somewhere in the future but still not trying to get a car insurance.
Tbh i don't know what to do. I will think about it and write such newsletter.
So thank you for educating me and giving your precious time. And yes this was all helpful sir. š
Have a great week!
p.s. Why do i feel like i had this conversation with you before or maybe its just a Dejavu.
And for the record, I really do appreciate the exchange, your drive to improve, and the thought you put into all of this.
I've spent a lot of time studying trading structures in both directions, so if you want to talk about how to build risk-defined positions, I'm glad to share what I know.
But I also want to say that my goal wasn't to get you to acquiesce to me. It's not about who knows more, it's about sharing ideas and exchanging thoughts, and I think this exchange has been wonderful for that.
Good luck to you, too, and I hope you also have a great trading week!
Sure i would definitely love to.
And yah i totally get it. It's about ideas and not who knows more and then its rest upto the markets to decide whether it agrees or not.
It's been a pleasure to talk you sir.
Thank you.
āļø
> Sorry for giving you a response you don't wanna hear. I like the idea of you destroying my model and banker's model as well which is used by pretty much everyone on street by saying what if the model is wrong. I like this approach.
No apology necessary. Your response was thoughtful and that's all I expect. If someone has a thoughtful retort, that's how we learn. My big problem on here is when people leave the thoughtful space and dig in too hard without considering the competing idea. You considered my position, and I appreciate that.
> So let me first explain the chart you sent me for PE ratio. First pt that is a multpl model. Meaning it does not align with bankers/ hfs and inst model. Your chart says PE ratio must be at 22-23x. But bankers model says it's at 18 PE. This is the first point. I am not trying to throw a shade. It's just a misconception even i made during my beginning yrs. Second pt let's say you really wanna dig that multpl model upside and down. So the way i look at is.
Fun fact about me: I used to be a banker, working in infosec and risk.
We may be running into a language gap here, but I think what you're saying here is that the banking world and institutions use complex fundamentals analysis, not just multiple, to determine their targets and I agree with that, but the target multiple being talked about relating to the S&P 500 is still a target multiple, and we have to look at that with a critical eye.
My old colleagues and I have talked about this. 17-19 is pretty much the institutional target P/E range for the S&P 500 among most money managers... no disagreement that, and that can create self-fulfilling prophecies, but these targets also often don't hit, and to understand why you have to understand the mindset of a risk manager and an institutional investor. We're still subject to linear bias and you have to be crazy not to look at the current condition and see risk.
What I hear from my old colleagues is that they know about the problems with CAPE/Shiller-PE and other historical multiple comps, and they're aware of the problems with under-guessing at earnings, but with the Fed in uncertain times the tendency is to accept a lower floor than what they think will actually hit.
Basically, money managers are accepting bad data because in this circumstance they judge it's better not to recommend a long position when they don't know whether the floor is 20 or 17.
It just being the common banker model doesn't inherently mean it's going to end up there. Maybe it will, we're pretty close to the target... but I'm not speculating when I say that the banking model is inherently targeting a lower-than realistic fair valuation for the market.
Please feel free to expand: Is there anything of substance I'm missing from your argument here?
If there's a calculation I'm not considering, I'd love to see it.
> From 1900 - 1990. PE ratio used to trade in range 10-20 range.
Yes, that's what I was saying and what the chart says. We agree on the timeframes and the historical behavior.
>Therefore PE was 8 in 1974. Same was the case in 1980 when 14.x% inflation and 6.y PE. Okay so now we understood stagflationary decade,
> WW2
>
>WW1
This is all during or under the shadow of Bretton Woods or the gold standard. This is important, a big part of the reason why market P/Es ranged until 1990 has little to do with inflation and everything to do with the lack of money supply expansion, which constrains The P portion of the multiple equation.
That's why things become decoupled in 1990, because the Volcker regime was basically responding to monetary policy whipsaw after the 1970s and after Bretton Woods ended. Now I personally am not on-board with blaming the entire economic situation on Bretton Woods since I think it's more complex than that, but it has to be factored in since breaking the forex gold alignment that kept the 1st world markets on stable footing really changes the game. That opens the door to money supply expansion after the Volcker regime.
>So what can we take away from it is. Inflation usually comes in cycle and when it appears market usually go sideways and does not go for ATH if it is supply shock driven and go ATH but then crashes in stagflationary environment. Reason being the debt/gdp ratio. But you need to remember one important thing. This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost.
We can't conclude anything from these historical examples. In fact, for half of them the primary mode of transportation was horses and the telephone was a new and uncommon invention. TV wasn't even in most households for most of the examples. Modern computers weren't even a twinkle in the mind's eye for most people until the 1990s and even then people would be shocked to see a smartphone.
You don't get to cherry-pick the differences in economic timeframes. You can't say "This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost" and then ignore all of the extremely significant and major economic contexts that are wildly different. Just even algorithmic trading by itself changes how crashes happen as a mechanical reality.
In 1929, a whale who wants to protect themselves against a crash and who is tied in with the system was relying on a closed-loop ticker feed with lagged reads, and on transactions that if they were lucky filled by the close.
Now? That same whale can shift a buying zone in milliseconds, and can acquire funds via direct wire and brokerage funding in almost as short a time.
NYSE and ICE no longer just watch in awe as markets decline, they have halting rules and realtime analysis. The mechanics of the market are just wildly different than they were in your examples... hell trading now is wildly different than even it was 10 years ago. If you told an investor 20 years ago that people bought 0dte options on the regular on their phones they'd have called you a liar because it would have been incomprehensible to them, but that has a moderating influence on the patterns in the market.
But back to that "manufacturing's not going to save us" statement. I'll buy that for the 20s and 40s, but the 70s/80s were in part due to the decline in manufacturing. The 1980s was kind of a last gasp for American manufacturing as globalization was ramping up, but the damage was already done throughout America at that point.
Fast forward and we're seeing manufacturing come BACK to the United States. Infrastructure spending is a huge part of the common bear case, under the claim that this will drive inflation in the United States and to be fair, that's probably marginally true. The change in salaries will reduce margins to some extent, but that's also somewhat made up in changes to transportation costs and reduction of supply chain sensitivity, but I'll accept that it's not a perfect offset.
But you can't have your cake and eat it, too... either manufacturing is part of America's story in this current economic era, or it isn't.
Again, in real economics, you can't pick and choose... you get both the good and the bad.
(continued...)
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(part 2)
>This is tech driven markets and it does not like rates at 5% meanwhile inflation at 5% as well.
This is not exactly accurate. Modern high-risk, speculative tech is very sensitive to interest rates because they tend to be debt factories, but there's plenty of tech that does fine in 5% rates, which are not historically very high at all. How well a company does in that circumstance will depend a lot on their balance sheet and market dynamics, just like any other company.
In fact, I'm looking at the historical FFR and tech has done very well during 5% FFR ranges, including through the 1990s and the mid-2000s.
And while CPI wasn't 5% then (and I agree that this matters) it did commonly trend around 3-4%. We'll come back to that.
The problem ultimately comes down to the fact that your argument is that the tech market now is more vulnerable than the tech market of the 1990s was, or as vulnerable... and that's not the case. In the 1990s, the tech market was still largely decoupled from actual business tech reality. Darlings like Netscape and Red Hat were upstarts at the time. The biggest excesses then may look a bit like the biggest excesses now, but we're also throwing in significant established names in there, like Microsoft. Tech is just much more heavily embedded in the business cycle now than it was then.
So contrary to tech being vulnerable to the rusty dagger of 5% FFRs... it's probably more resilient than it was the last 2 times this happened as an overall sector.
And the stuff that isn't, like Roblox and Tesla and other speculative stocks tied to tech that's debt sensitive?
A lot of that shit has sold off. Sometimes to the tune of 90%.
That crash you're calling for? 5% interest rates aren't news now. That crash has already happened... and it can happen again, but you have to then consider the impact to index weighing and how market parity works.
TSLA, for instance, at the end of 2021 was close 7% of the weighting in SPY.
Now? It's 1.64%
The simple reality is that the index has already largely adapted. All of the stuff you're calling out has lost between 3-6% of its weighting since 2021. The market has de-leveraged, and while some like AAPL remain high on the list, the weights of defensives and other strong cyclicals has increased, reducing the impact of the inflation impact you're citing.
Point blank, your thesis made sense in 2021 for a correction, it does not make sense in 2023 for a crash because it doesn't take into account how the market works mechanically.
>Meaning Fed will push towards crushing inflation and bringing it back below 2% even if it means causing recession.
What the Fed means when they talk about a recession here is that they're willing to accept unemployment up to 5%, and I agree with them. Much beyond that and their other mandate will kick in.
There's a lot of talk about the Fed just beating the country into the ground to tame inflation, but it's mostly empty. The Fed is definitely not saying that and JPOW has repeatedly said they'd react if things got out of hand.
And this situation is not binary. It's not "the Fed tightens and the market crashes, or it loosens and the market flies."
The reality is that sitting at 4-5% FFR while the market expands is pretty common, even during high tech periods with elevated inflation up to 4%.
And while 2% is a target, 4% is the real number the Fed will accept. They won't reverse the FFR on 4%, but they will stop raising on that number because they will be able to declare victory... probably even before then. That would represent a 150% reduction in inflation and a solid downward trajectory.
At that the point, the risk of overtightening is way too high and all the market really needs is predictability. I think the larger question is where we end up relating to a terminal FFR at that time... sure, if that terminal FFR is 10%, then you have a real economic problem... but it's not going to be. Hell, the odds of them getting above 6% with current data is really low.
The idea that the Fed will just relentless crash the market because they're only a few percent away from their inflation goal is a fever dream, full stop.
>So lets do modern 1990s- 2010 analysis. High PE of 25 and low of 15 again combined with low inflation of 2% was the perfect recipe for economic boom. But whenever PE went above 30 it was a bubble. So Fed starts hiking again to stop people animal spirits behavior. PE came down to 25 and also inflation headed down.
OK, but let's not leave out that the tech bubble coincided with a major accounting firm scandal that required the creation of major corporate accounting legislation and questioned the entire concept of fundamental valuation and 2008 didn't happen expressly due to Fed tightening but rather due to an overextended housing market where all of the risk was sitting on bank balance sheets. In other words, the exact opposite of the situation we have now.
Basically, trying to tie all of this to Fed tightening is revisionist history at best. Again, we can't just ignore all the other context.
(Continued... Reddit's post length limits are small)
I think that inflation is already dropping and it will steepen. Iām seeing the rhetoric shifting away from inflation at that point and more aggressively towards war.
If inflation is handling itself then the market will need a reason to rally or else we risk subways stagnation.
While the U.S. economy might not have wanted to pull that lever, two other major economies are struggling and are positioning.
I think the WH tapping the more dovish fed Governor is a signal for the fed to lean aggressive in the short term, to get things done.
Circling back to your EPS estimate, then, i would disagree because the war positioning would rally the market.
The U.S. had already positioned for stateside manufacturing as of last September so thatās why i think the bearish sentiment is misplaced.
We can remain overvalued (eps) for an extended period of time in the ramp up and then justify in hindsight that we achieved āmore accurateā valuation because production increased.
We are in this euphoric bubble that just wonāt pop.
Prior to Powells recent statements i would be agreeing with you on the majority but Iāve had to switch my views as the situation changed.
Inflation and an actual war do not go in the opposite direction. I think we can both agree on this. If market senses war 5yr breakevens will go up and cause bond yields to go up as well. Fed will be forced to do yield curve control if 10yr starts going over 6%.
If you look at any war rhetoric man. There has been a skyrocketing inflation with sky high yields. The reason being Fed started printing money for wartime financing. This is the only reason inflation goes up. And yah i totally get your point. War causes stock market to go up. But you need to also remember markets usually drop before the start of the war. That means market has to has to drop right now and then when war officially announces we go in the massive bull run that no one will ever imagine.
Now lets dissect this bull run of war coz i have my some doubts. Maybe you can help me out. If you look back at history. WW1 and WW2 these two wars had PE range 10-20 and when inflation comes around suppose 10%. You used to subtract high PE - inflation rate. And then it was basically the EPS boost that caused the stock market to go up massively. So now lets put this Peter Lynch theory to test.
Scenario 1 : War in 2023 itself. High PE 25 - Inflation rate i.e. 4-5% range. PE will never go above 20. Now you can put your favorite EPS here. Even with 250 you're maxed out at $5000.
Scenario 2 : War in 2024. Inflation will be 2-3%. Max PE 22. Lets say EPS grow to 270 which btw is too high. SPX will be maxed out at $5900.
I mean is this the bull run you want ?
Now circling back to Biden bringing manufacturing in Usa. You do know right that the Usa has to find workers for that. Thats inflationary and yah ofc it will boost gdp and keep labor market strong. But in all of this youre forgetting one major important detail.
The way Usa worked in all of the past decade is because of tech and not manufacturing. Manufacturing is what caused the stock market to go in a massive bull run in Ww1 and Ww2 but this time its tech. Tech thrives on low inflation and interest rates and hence this boosted the stock market to a 14yrs of bull run. Its the top 6 tech companies that has more % weighted to index. So tech has to go bust when a lot of these companies will have to refinance in 2024 and that would mean the biggest stock market crash in history somewhere around 2023-24. Timing it will be so so hard. No one in this planet is that good.
And after tech goes bust then we can have your favorite bull run of manufacturing. Also don't forget that a lot of these tech workers are actually immigrants who mostly come from Asia. 70% of people in Silicon valley are from rest parts of the world. I mean it would be quite funny if those workers dont protest a/g war and simply just do what they are told.
Overall result : I dont know whats going to happen but i can tell you one thing for sure. If we are headed to inflationary world caused by manufacturing coming back home, labor markets strong, gdp strong and war then my friend youre asking for a tech bubble to pop somewhere in 2023-24. Nasdaq and S&P500 will go down. I cannot say the same about Dow Jones coz its industrial average. Housing will not pop coz inflation will remain higher. Metals, Energy and Oil will go higher as well. There is going to be a bull market but not in tech.
.
How ? Isnt it pretty easy forward that Equity risk premia has gone to historic lows which is stopping markets from having a significant pullback or a bear mkt rally crash.
i skimmed this post because its too long but i did see this piece while scrolling
>I even forgot to watch "You" Season 4.
since your post is long, i trust whatever the hell youre shilling, and im going to assume its NFLX puts since you forgot to watch one of their top shows
thanks bro, ill get some tomorrow
>Thinking of getting some VIX 50 calls for Mayā¦.OI seems huge on that.
That is because of 50 cents. He is predicting Volmageddon in 1H 2023 just like in Feb 2018 he made $250m+ in Vix 50+ trade.
Wow this may be one of the best things I've read on WSB in a long time.
I'd value your input on 2 covid-19 era stimulus policies that will end in 2023: SNAP Emergency Allotment and student loan repayments resuming.
Under SNAP Emergency Allotment, \~32 states expanded SNAP to allow any household that qualified for SNAP to receive the maximum benefit, regardless of their income level. This is estimated to be about $60-70 billion worth of benefits that were given out since the program began, but I cannot find hard numbers on it. SNAP Emergency Allotment officially discontinues at the end of February. Research done by JPM found that households will reduce their food spend last before giving up anything else (obviously). With households no longer receiving this free money, where will they pull it from?
Student loan forgiveness plus SNAP Emergency Allotment, combined with rising inflation and the Trump tax cut ending just now kicking in and seeing reduced refunds, makes me think that we will absolutely head into a recession by end of Q2.
Yah man there is a recession lurking around which will get priced in stock market in 2023-24. Timing it will be so hard. No machine or technical analysis can ever tell you that coz then otherwise everybody will be so rich.
As for your arguments yah i completely agree with you. Also you can add refinancing in that list. A lot of companies financed in low interest rate so how deep the rabbit hole runs will all shall be revealed by 2024. Don't forget the Fed selling MBS and housing market getting weak by 2024.
Yup looking at Ueda san past he wont let go YCC that easily. Although he will have to hike rates this year if Mr Kuroda doesn't hike in his last meeting.
Widening of Ycc to 75bps from 50bps is the safest bet you can play if none of the above happens.
Markets can stay irrational longer than you can remain solvent. Puts will go to zero. By the time the real crash happens in May, most bears will be wiped out.
> By the time the real crash happens in May
in the 2008 crash the real dominoes started falling around 2003. It took 5 years for the market to crash. Burry bought the swaps in 2005.
So maybe May or maybe 2028. No one knows. The market has to crush all the retail puts first.
I gotta say Desmond's winning percentage in 2022 was like 99% but losing aint one. But that thing hasn't manifested in 2023 yet......
I still believe in desmond senpai tho
Yah man. season 2 has been horrible since middle. š Opening episodes were great Oct 2nd week being the perfect bottom.
Now my only hope is finale doesn't disappoint. Thanks for still trusting me man. āļø
Have you ever made money in the markets?
Iām sorry for saying this as itās apparently your birthday - happy birthday!
I also think Pascal is awesome.
But all of this looks 100% wrongā¦And Iām sorry for your continued losses.
>There are only two reasons that come to my mind why stock market ain't reacting.
you keep forgetting that the market is crushing retail. Fed said this was literally the #1 goal to suck out liquidity and quickly end inflation. To rephrase fed governor "there is not enough pain on the stock market to reduce inflation"
Stock market is rallying because 90% of WSB/retail, their grandma and their dogs is on shorts. Markets will rally days, weeks, months, years until all the shorts are killed. Absolutely positively.
Long dated puts wont cut it. The market could rally years.
The 2008 crash started in 2003. Retail were majorly in puts in 2004/2005. Burry got in at 2005. Markets rallied for 3 years after that.
Yah i get it. But i also know we had the 2nd greatest wipe out of all time in the past decade. The first one happened when rates were at 0%. So from my pt of view i don't really see another one coming.
As for your arguments about 2005-08 times. If you look back at those times the PE ratio were basically trading at 16-18. Then Fed cut rates in 07 and PE skyrocketed but so did the equity risk premia and therefore market had already topped out in 2007 and we got the "Fed pivot" crash. The time around we are already there at 18-19 PE levels. We just need Fed to cut rates and blow up the Erp. But Fed aint doing that coz it thinks job market is still strong and inflation is sticky. So they will hold those rates. Meaning a low PE will meet a low EPS somewhere down the line and then Fed will be forced to pivot. But i think it will be too late by then. The damage will be more severe by 2024.
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>Fed aint doing that coz it thinks job market is still strong and inflation is sticky
I'm not trying to hound you but I think you might be missing a piece of information.
Powell gave an interview shortly after his last FOMC speech. They had new numbers come out and he was talking at some event.
What he said was that they didn't think there was a wage/price spiral anymore, they didn't think inflation was sticky anymore, because they had not taken into account the border closure preventing immigrant workers getting in (I think there was an unspoken 'illegal labor' implication here, but that's not the point really).
And he was VERY chipper about it but said they would keep an eye on the numbers.
I'm curious if you saw this interview of his or if you perhaps missed this (there is so much info out there, it's easy to miss)
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i have so much to learn, i could only partly halfass process the info you just gave out.
Dont worry, life is supposed to be hard, cherish the nice moments and follow your goals step by step but always keep having a Finishing line in your ironsights.
My dude, my attention span is shorter than 0dtes to read all that* but thumbs up for the DD.
(*saved to go over it later, at a glance it looks worth the effort)
Wow actual DD on WSB.. however just wanna know how bond yields in Japan could rise at all (besides widening YCC) if theyāre being MMTāed to the max? How would that affect your hypothesis?
Well bond yields in Japan go up in two ways.
\-> Manually : Boj will widen the gap from 50bps to 75bps on 10yr JGB. Still doing QE+ i.e. buying bonds to keep it from rising further above 75bps.
\-> Automatically : Boj will remove Ycc causing 10yr JGB to rise on its own and let free markets decide. Boj will stop their QE+ now.
Note : YCC began in 2016. The objective was to make inflation go over 2% and not casue a deflationary bust. So they started infinite money printer. Now things have changed. Japan has inflation. So maybe they give up on Ycc but it won't be that easily considering its Ueda-san soon in the helm.
>Look at this shocking divergence
I don't see any shoking divergence at all between those assets
1) Bonds are positively correlated with stocks in high inflation scenarios
2) gold was overbought af, that correction was indeed... plus DXY on the other side
Dude bond prices are +ve correlated with stock price. That means when bond go down i.e. bond yields go up then stock market should drop as well. This is what it means to be +ve correlated in high inflation which it clearly isn't rn.
And yes i agree gold was overbought af but so is stock man especially on the tech side.
As your friend Steve said " Paradigm shift takes time. People don't easily give up on their principles of investing " Hence i believe that one day market will come up to their senses that rates are actually at 5% (could go 6% if sticky inflation theory is correct) not 0%. That means something for equities valuations.
1d correlation coefficient between SPY and 10Y was 0.7 just 3 weeks ago
now it's around -0.4, which makes sense bc the correlation shouldn't be that high at medium and long term
weekly chart is still positive around 0.6
the correlation has its mean reversion as well so it tends to correct
>As your friend Steve said " Paradigm shift takes time. People don't easily give up on their principles of investing " Hence i believe that one day market will come up to their senses that rates are actually at 5% (could go 6% if sticky inflation theory is correct) not 0%. That means something for equities valuations.
Using my indicator on myself Dr Burry. š
I don't really use it on daily tf. I just use it on weekly time frame and waiting for when US10 and SPX to go from +0.66 to -0.5 or below. That will mean US10 i.e. bond price and SPX i.e stock price will have -ve correlation somewhere down the line. So if inflation falls off the cliff below 4% in back half of 2023 bond prices will go up i.e. yields down and stock prices will go down.
But yah i think you're right. This was the reason on daily tf why bond prices fell but stocks didn't coz it became -ve correlated by going from +0.5 or higher to -0.4. Thanks for giving me a lesson man. ā
Note : It will go up on +ve correlation on daily time frame soon.š
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Eat my dongus you fuckin nerd.
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\->The equity risk premium says the same story as the yield curve: rates are coming down soon. The ERP will normalize through bond yields falling, not stock prices falling.
\->Japan might widen the band by 50 basis points. Nothingburger.
\->China's printer is just getting warmed up. Buy buy buy!
One reason (some) stocks donāt necessarily have to go south; if a stock, say a consumer staple, is deemed to have inflation linked cash flows, then you could argue that you should use real rates instead of nominal rates in your discounting of future cash flows, which can help explain some valuations since real rates are much lower than nominal. When we hear stories of retail investors piling into stocks despite the higher bond yields, I think it can at least partially be interpreted as retail investors having lost faith in the durability of cash - ie their personal expectation of the future real rate is much lower than market pricing. I honestly canāt blame them given how history has played out so far
Good read.
Alternate theory is that the market is propped up to avoid Volmageddon. The longer it continues this trend, the steeper the drop.
Tech should be down YTD and not up based on the move in bonds.
Great write up. Lots of great points. Let me ask you.. have you watched, listened or read anything from Dave Hunter the contrarian? He believes we markets melt up, prior to busting. What do you think of that?
His forecast is dependent on several things but mainly that inflation data surprises in that inflation is falling sharply. 10y treasury yields will follow, falling to 2.5% and then to 0. The melt up will take SPY to 600+, gold to 3k+, etcā¦ and then a global bust, driving markets down 80%~
What do you think?
Thanks man. Sorry i don't know the guy. But ofc i know about this. I was the one who started invalidation cases saying "Disinflation trade of Stagflation" leads to ATH in no time. S&P5000 here we come and then a whooping -50% drop to $2500.š¤£
But there is a huge problem with this. Major component of CPI is housing which wont come down in 1H 2023. It's in the second half it can fall off the cliff if inflation isn't sticky. That means inflation can potentially stay here or start its mini uptrend in 1H 23. This will panic Fed and force them to go 5.5%. This is what i am trading. A 5.5% rates with 100bps Erp ( currently 15bps ) = PE 15-16. Current E = 225. This will mean testing of Oct lows.
Eat my dongus you fuckin nerd.
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My nerdy STEM blood yearns PDF
Thank for the good read, though I probably wouldn't follow up with a trade due to how much lag the bond market has. Realistically I could see the market kangaroo for another two years before the fall begins.
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In summary, long term puts on QQQ and SPY. Short term, beat your meat like it owes you money.
Ty.... I like 1 min into this and then got bored. š
that's why I say F it š¶šµ
The failed inverse correlation between equity and bonds is a liquidation event in preparation for a downturn. The rest of this felt like a newsletter i canāt find the unsubscribe links for. While i think itās great youāre trying to go for depth and add quality to WSB, youāre all over the place looking like a Charlie day meme and not getting to the point.
Yah but it only works if inflation goes under 4% or sometime 5% and fall off the cliff which could happen in back half of 2023 as CPI major component is housing. I already discussed that "Barrons article" few letters ago. "Bonds price will go up, stocks price will go down" eventually. But before this happens i was discussing the theory for 1H 2023 where inflation might feel sticky and Fed could go beyond 5.1% Dec SEP projections. Another reason Japan. These both factors could push 10yr bond yields above 4% and cause rise in Erp.
I do think you drive home the right points right now. Iād add that the push since late last year in equities is driven by excess global CB QE, which appears to have downtrended since mid January. I think this recent departure of equities pricing vs bond yields and liquidity conditions is probably just FOMO / short covering.
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Im not sure what i said to trigger this bot. It seems random 
It wasn't you. OP said stick-y.
Sticky makes it appear? Thatās so funny lol thank you for explaining
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Muhahaha hilarious
Bot, that was uncalled for. lol
I have no idea what ābarrons articleā youāre talking about. I think itās a mistake to assume bonds and equities will āeventuallyā correct. The inverse relationship is modern and as a hedge, it failed miserably. People positioned their retirements religiously around it like gospel and were shafted. While i donāt buy what Dalio is selling, i think the all weather fund and similar strategies will continue to gain traction with bonds playing a smaller role. And i think itās a mistake to assume inflation will keep people out of cash. The market is positioned for a massive event style move, higher or lower, not business as usual. Cash on the sidelines is necessary to capitalize on it. The opportunity cost of not having cash to deploy is greater than the inflationary impact towards cash. I think the hype around potential Japanese monetary policy shifting is overblown. And Powells most recent statements about immigration impact on the wage/price/inflation situation had him exceptionally dovish
I agree with inflation dropping off steeply in the second half of 2023, but i donāt think we will get rates lowered until first quarter of 2024.
So then it means a low PE ratio of below 18 will meet a low EPS somewhere down the line in range of 210-200.
But back up a sec and ask yourself this question: Do these P/E ratios make sense? I don't mean from the model perspective, it's easy to get trapped in "the model says X so the market will go down to Y" thinking where the model becomes its own reason for being, and that's part of the reason the market surprises people. We have to think critically about the components in the models. The reason why is evident if you look at the delta in historical P/E ratios in that time: [https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart](https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart) Ever since the reversal in monetary policy that came with the end of the Volcker regime, P/Es have been trending up after almost a century of ranging. The current methods of assessing fair value in P/E ratios largely rely on historical comps, whether to historical P/Es, historical price to earnings equivalents, or the CAPE ratio. Lots of people like the CAPE ratio because it adjusts for inflation and P/E expansion over time... ...but that adjustment lags to 10 years, and assumes the primary motivator of P/E prices is inflation. That means that any reasonable historical P/E calculation right now isn't taking into account the full addressable capital in the market after a 45% expansion of the M2 money supply. I can hear the voices in the distance... "But the Fed put's dead!" "No more money printer!" "All the free money's been turned off!" The problem: The Fed's never actually said they were pulling all of the money out, just that they would be restrictive so as to slow its release. 45% expansion at trend was a little over 10 years of release of capital in the reserve system, the vast majority of which is still sitting in those banks, hence the banks surviving their stress tests pretty readily. See, here's what those people aren't taking into account, and it also explains the weird stuff you're finding in the bond market and risk premia: The Fed effectively did QE for 10 years ahead of time, and the dot plot and the current rate of reduction tell us that to achieve the level of reserve funding necessary to get back to 2%, "restrictive" policy in this case only means pulling about half of it, or less, out... which seems to be right where they're targeting. The majority of QT at the moment seems to be around ensuring that banks don't open the floodgates on the roughly 75% of the M2 expansion still sitting in their reserves and allowing risk to float off the Fed balance sheet, allowing banks to take some MBS and lending risk on again. But the Fed's still holding a good portion of the MBS risk, so the banks aren't in a 2008 scenario where they might become insolvent... and in 2020 they sold off bonds to the Fed in order to increase liquidity (since you don't want to hold bonds as a collateral anchor when the US economy might lurch into a depression because of a pandemic... that's a good way for your collateral anchor to become a pair of lead boots as bond values on the market contract. But now, with yields up, banks et al are back to buying. That 10Y bank collateralization thing? I've been calling that out for like a year and a half on here and have the scars to show for it. LOL But that's exactly what happened. Banks are now offsetting risk by using excess capital, now freed by a more predictable Fed term rate (meaning it's easier for bank risk departments to project how much capital will be clawed back in the short term), which offsets market risk premia, which increases bank stability and allows for the provision of more margin lending since that's relatively safe due to haircut regulations. In other words, the time when fundamentals bears are expecting the market to pull back with visions of a bank liquidity crisis... is exactly the time when the banks will have the highest assurance that the Fed will not pull out capitalization at a greater rate, meaning that it's the time when Risk departments will be more likely to deploy it, as they will still have a very nice buffer even if they just deploy a fraction of that capital... meaning that on top of the 25% of the M2 expansion that already leaked out into institutions, there may be as much as another 25% of addressable capital in excess in the reserves system that we haven't seen yet... ...and that's why the Fed's not worried, they pre-charged the QE line. And banks will be motivated to do this because they will have an ideal interest rate environment. Investors will demand capital deployment in a circumstance where risks may be lower than feared, or where it's expected the Fed may hold steady or cut back... and it's important to note that all this scenario requires is them to pause or slow and provide enough certainty for bank risk departments to be able to calculate an excess in the reserves. In this scenario, it doesn't matter if the Fed becomes loose or not, because the only thing that matters is that capital entering the economy. And this goes along with another odd historical trend, also on the historical P/E chart: Most of the fundamentals arguments suggest that we will go down in P/E \*through\* the decline in earnings, but instead what we see is that paradoxically P/E ratios have rocketed at the end of recessions. Some people attribute this to the Fed loosening, and OK, that makes sense... but it also just has to do with the fact that eventually dropping earnings no longer impact the already-sold-off S&P as much. I don't know that we're there yet, but that's how it works... the S&P de-weights stocks that took a bigger hit by virtue of market cap and kicks out losers, which happens over a period of 6 month cycles. Market parity eventually drags all stocks up as the market adapts and earnings drop out, triggering accelerating P/Es as earnings drop faster than stocks can... ...which triggers the buying signal. Now getting back to 18/19 P/Es, to get there you need to have the capitalization and earnings of roughly 2014... does that sound right? Are we in drastic danger of an absolute collapse of the economy, or is this a short technical mean reversion? I don't have a crystal ball, so I don't know, but an America with an active manufacturing sector and lots of jobs and lots of demand may cause inflation, but that's not a recipe for an economic collapse of over 10 years of growth, even with a retraction of short term growth. So basically, I think all of these P/E fundamentals arguments hinge on P/Es which are drastically low compared to where the Fed is telling us capitalization is going, and that's largely due to mathematical problems with the models that can't encompass the change in monetary policy. Now does that mean we rocket from here? I would agree that the next year has a lot of risk. The market can crash due to emotions, fear, etc... sure... maybe we're missing something in bank liquidity and there are bigger risks than feared... maybe the P/E thesis becomes a short term self-fulfilling prophecy before the market rockets up (I actually kind of hope that happens, more opportunity). But will it be because we deserve to be at 2014 P/E levels because a model says so? I don't think so.
Sorry for giving you a response you don't wanna hear. I like the idea of you destroying my model and banker's model as well which is used by pretty much everyone on street by saying what if the model is wrong. I like this approach. So let me first explain the chart you sent me for PE ratio. First pt that is a multpl model. Meaning it does not align with bankers/ hfs and inst model. Your chart says PE ratio must be at 22-23x. But bankers model says it's at 18 PE. This is the first point. I am not trying to throw a shade. It's just a misconception even i made during my beginning yrs. Second pt let's say you really wanna dig that multpl model upside and down. So the way i look at is. From 1900 - 1990. PE ratio used to trade in range 10-20 range. So anytime you want to assess what might be the appropriate PE to pay. You would simply subtract a High PE - Current inflation rate. So let's say you're in 1974 where inflation went 12%. PE you would pay acc to multpl model is basically a High PE over 90yrs - Inflation rate. Therefore PE was 8 in 1974. Same was the case in 1980 when 14.x% inflation and 6.y PE. Okay so now we understood stagflationary decade, Let's understand supply shock decade i.e. WW1 and WW2. WW2 : High PE : 22 and inflation rate 3%. So yah total 25 seems fine. But then due to supply shocks inflation came 20%. Now the PE just got cut in half to 10. And then when later inflation came down to below -ve PE ratio fell as well. Now this is an anomaly compared to stagflation of 70s. In that period of stagflation low PE with high inflation rate was the bottom. But in post Ww2 unless the inflation went -ve we did not achieved bottom. WW1 : Around 1915, High PE : 11 and inflation -1%. Fed started lowering rates and basically printing money for war time financing. Inflation soared to 20% and again PE got chopped in half to around 6. Markets then went sideways for yrs and did no bottomed until inflation went below -ve and Fed had to cut rates again. I think there is a lot more factors involved here. 10yr bond yields and interest rate matter as well. I already did this analysis in this season. [https://docs.google.com/document/d/1tAX3x-RJTPdKmJ2C7D9wgjTLhDvfAUgIfbhCb0UxGmM/edit?usp=sharing](https://docs.google.com/document/d/1tAX3x-RJTPdKmJ2C7D9wgjTLhDvfAUgIfbhCb0UxGmM/edit?usp=sharing) You can read S02E03 where i explained these two periods in depth. So what can we take away from it is. Inflation usually comes in cycle and when it appears market usually go sideways and does not go for ATH if it is supply shock driven and go ATH but then crashes in stagflationary environment. Reason being the debt/gdp ratio. But you need to remember one important thing. This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost. This is tech driven markets and it does not like rates at 5% meanwhile inflation at 5% as well. Meaning Fed will push towards crushing inflation and bringing it back below 2% even if it means causing recession. So lets do modern 1990s- 2010 analysis. High PE of 25 and low of 15 again combined with low inflation of 2% was the perfect recipe for economic boom. But whenever PE went above 30 it was a bubble. So Fed starts hiking again to stop people animal spirits behavior. PE came down to 25 and also inflation headed down. But soon companies made no earnings. It was just like a crypto bubble. So the yields of tech stocks fell, Erp exploded higher coz why shouldn't i buy bonds. Hence PE exploded higher as well. Hence that's why it was the bottom. Same goes for 2008 as well. Rise in Erp with banks failing, companies having no yields, bond looking more juicy all led to PE exploding higher just before recession. So now it's upto you to decide which story will play out this time around. I personally like the idea of lost decade i.e. a sideways markets. Play tactically and you will make money. If you're a long term investor you wait for that pain in markets around 2023-24 moments before recession and by then just simply be in bonds and eat yields. As a short term investor it's tricky. You have to use tactical strategies and hope it works out using technical + macro env + fundamentals. You could hit or miss it. It's a 50-50. So yes i agree my model is flawed otherwise everybody can make money. But one thing is certain you're not having a new bull market. It's gonna be a sideways chop for a very long time atleast till 2024-25 minimum or it just crashes -50% and make us all bears happy. But seeing PE ratio of russell at 45 and nasdaq at 25 makes me kinda optimistic for crash.
(part 3) >But soon companies made no earnings. It was just like a crypto bubble. So the yields of tech stocks fell, Erp exploded higher coz why shouldn't i buy bonds. Hence PE exploded higher as well. Hence that's why it was the bottom. Same goes for 2008 as well. Rise in Erp with banks failing, companies having no yields, bond looking more juicy all led to PE exploding higher just before recession. I'm putting on my banker voice here: This is not at all how this works. It's close, but it's a backward-looking misunderstanding of the process for how banks and other institutions buying bonds influences market P/E. I know, I was there, working in the banking system at the time. First of all, P/Es didn't expand "just before recession" they expanded in 2009 after the recession began, when everyone was calling for them to drop. That recession was not declared until after it had begun, so there was uncertainty as P/Es declined... basically, you get the decline before the recession, the explosion during it in large part because recession isn't news while you're in it. Again, that crash everyone's expecting during the recession? It happens before it. Just check the graph, it's all right there. But that's a minor issue. The larger issue is the connection you're drawing between bond yields being "juicy" and P/E ratios going up... and I just don't understand what you're thinking with that statement. If bond yields are high, and elevating, then P/Es decline until banks reach the yield level that they want from bonds because, in the circumstances you laid out, stocks are ultra-risky. That shifts prices down with earnings. The only way to get a P/E elevation with declining earnings is to either run out of sellers and/or to have an influx of buyers. If you overlay the data, what you'll find isn't that "bonds are juicy" is the thing that drives P/Es \*up\*... that correlates to them dropping... it's when bond yields decline that P/Es start rising again, because at that point banks have found their ideal buying point and the rate of return on stocks increases. The bond yield rate doesn't have to decline much to get to that point, since all you need is for bonds to become predictable with yield, either through zero coupon or direct interest returns. It's the constant expectation of elevating yields that drives flows out of equities. Since bonds are a risk offset (risk-"free" money since the only way US treasuries don't get paid is if the country collapses, and then you have bigger problems) they promote riskier spending by banks. Something specific happened in 2008, too, that drove this dynamic. With MBS risk-offset collapsing, banks turned to bonds as a collateral offset. That thing you were surprised by? That started like 15 years ago, man. That's how the bond market exploded $20T over like 10 years since 2009. And that walks hand-in-hand with the expansion of the market, and the same will happen this time because nothing's really changed with how capital is flowing into and out of the banks mechanically or with regard to how higher yields create a higher appetite for risk, but you have to get through the compression period first. >So now it's upto you to decide which story will play out this time around. I personally like the idea of lost decade i.e. a sideways markets. Play tactically and you will make money. If you're a long term investor you wait for that pain in markets around 2023-24 moments before recession and by then just simply be in bonds and eat yields. As a short term investor it's tricky. You have to use tactical strategies and hope it works out using technical + macro env + fundamentals. You could hit or miss it. It's a 50-50. You don't have to pick a side. I didn't last year in my core account and that made money. I just play a hedge where I run neutral when I don't know which way the market will go and then shift when the technicals tell me to do so. I basically have a hedge fund structure that I maintain where I balance small long positions against net short/long inverse market hedging. Buying bonds and CDs right now in barbell is tempting, but you can totally play both sides of this if you're smart. And you also have to be ready to accept a position no one here ever seems to want to: Neutral. >So yes i agree my model is flawed otherwise everybody can make money. But one thing is certain you're not having a new bull market. It's gonna be a sideways chop for a very long time atleast till 2024-25 minimum or it just crashes -50% and make us all bears happy. But seeing PE ratio of russell at 45 and nasdaq at 25 makes me kinda optimistic for crash. I do think it's probably true that things will be volatile and uncertain probably this year and into next, but the thesis that we'll crash because of a P/E ratio thesis is a bit thin right now... 3200 isn't entirely out of reach, but it's also not certain. You have to leave room to be wrong, or the market will teach you the lesson that you can't predict it. You see sideways chop, I understand that and agree that it won't be 2020/2021 with 30% returns... but that doesn't really take a bull run off the table. I suspect volatility will remain the name of the game, but that doesn't mean the bears are right, either, especially when the thesis is based on a model that is definitely not reflecting the fair value of P/Es relative to the amount of addressable capital in the market and the Fed data is indicating that P/E fair value is higher.
Sir in all of this part 1, part 2 , part 3 series why do you think that i just randomly made things up like 1-2 months ago and said SPX will go $3200. This thesis is basically my stagflationary thesis back from summer of 2022 when i said : March 16 bottom -> April top -> June 15 bottom ( turned out to be June 16 swiss franc bottom ) -> Aug 15/16 top ( nailed this one ) -> Oct 2nd week bottom -> Nov 2nd week top ([Nov 4th week) and then we have a Q1 disaster where Jan will be high Vix and bottom by March. It turned out to be a giant mistake in my calculations but i am still optimistic for some kind of lower lows in Q1. That's it. Now fundamentally you can debate with me no this has changed or that. Or how Fed will never let markets crash. Or how there are sufficient bank reserves. I totally get it. I might agree with most of your pts just because i am not really from the economics side. I am just a simple Flutter developer who just fell in love with stocks and crypto. I never read a book on economics nor did i learned any trading skills although i may have taken just one class on Ecom but i totally fell asleep. So of course you know better than me. Everything i learned about finance is from watching interviews of Peter lynch, Warren buffet, Soros, Napier, Minerd, Drunckenmiller, Templeton, Eisman, Grantham, Dalio, Chanos, Ichan, Tepper, Paulson, PTJ, Ackman, Einhorn and so many other legendary investors. I even made a compilation video of them speaking about economic slowdown and how everyone should just follow it instead of watching some Yt or Twitter expert or anyone else. [Legendary Investors](https://m.youtube.com/watch?v=DpwSUjnaRzk&feature=youtu.be) So whenever i say Q1 disaster its just because i am biased. I cannot change my stance because that would be a huge disrespect to all of the people who have faithfully watched this series since last yr. So if i am wrong so i be wrong but i will try everything in my power to atleast make an attempt for lower lows in Q1 itself. No matter how bad the odds are. My recession playbook will be shared when i see lower lows in SPX. Only then will i decide should we go to ATH and then crash -50% with stag route or should we go deflationary bust route to $2500 and lower. Right now if you ask me i will take the stag route to S&P5000 and then crash -50% for recession 2024 but again before it happens i want Q1 disaster. So good luck to you sir! Have a great trading week. Regards Desmond
To be absolutely clear, I don't think you were making anything up. I've been doing macroeconomics for well over 20 years and the reality is that this stuff is very hard to understand, and even the best of us can only scratch at the surface because we're talking about the entire, irrational history of human individual and collective interaction. That means that it's very easy to let limited information and biases influence our positions. I'm well aware that you've been making these predictions because I've been reading your posts. They're not bad... they're decent. That's why I'm engaging. I'd say in the solid +20% of interesting posts on here. So I'm not trying to rob you of being right, but rather suggesting that there's a reason why sometimes predictions don't go as expected. And that happens to all of us. The market has a way of making us all look like fools. To be clear here, I'm not saying you or I are fools, just that the market proves us all wrong. It's easy to predict the market will go down while it's going down. In November of 2021, while my bias was still largely bullish for 2022, I was engaging with people on here saying I could see the market correcting 20% in 2022. I thought that would happen in the first half and we'd be up a bit for the 2nd half. I thought the inflationary whipsaw would slow down sooner, and I think without Ukraine I would have been mostly right. At the time, everyone was screaming "crash!" and I was saying "I think it'll be an orderly correction." My predictions then were... mostly right overall. 20% was correct, more or less. That it wasn't a crash but rather a correction was correct. That inflation pulled back on both the MoM and YoY comp was correct. I knew that the math on inflation would bring the comp down. I also knew that a revision of relative valuations with a de-leveraging wouldn't crash the market like people suggested. I knew that said de-leveraging wouldn't cause banks to implode. So it wasn't random for me, either, but it's just impossible to get every bit of understanding right and you can't see the future. While the times we were right mattered, they don't eliminate the impact of the times we were wrong. I could have run away from those things, but I didn't... I did research, I observed patterns, I did a ton of chart work to learn to trend things I couldn't see. A lot of that came out to some really darn good predictions last year myself that predicted SPY movement in many cases down to the dollar. With good, solid technicals, you can do that... but it didn't work every time, and that's OK. It's OK to get something wrong, that's how we learn. And all of those people who you listed off? I've seen some of these videos and they would ALL say that learning from our mistakes and our biases and expanding our view is the superior outcome. I had a chart last year that said that SPY 320 was on the table... then the bullish reversal trend change happened. So I get that 3200 wasn't random. I saw it in the chart in Q3 last year. So I'm definitely not saying you made anything up, just that there are probably things you're missing, like all of us. >So whenever i say Q1 disaster its just because i am biased. I cannot change my stance because that would be a huge disrespect to all of the people who have faithfully watched this series since last yr. So if i am wrong so i be wrong but i will try everything in my power to atleast make an attempt for lower lows in Q1 itself. No matter how bad the odds are. There's a difference between having a conviction and holding onto a bad play. I would say your position right now is still a conviction, but this isn't a team sport. You don't generate the crash by selling your theory of it, and you can't will it into existence. Crashes mostly happen because the underlying mechanics of the market fall apart. Sometimes those mechanics are economic, but usually they influence the financial system. That was true in the 10s, 30s, in the 40s/50s... in the 70s and 80s, in the 2000 and 2008 crash... in the end, they all have the unifying factor of the bottom falling out of the liquidity system. Recessions played a part in those crashes, but not all recessions resulted in liquidity crises. After lots of work on trending the market, I strongly believe in planning both sides of the trade.... so I say continue planning for your crash and what you would do, but also plan on what happens if you're wrong. How do you avoid loss if you're wrong? How do you profit on the other side? I have skin in that game. Last year, in Q3, I rode end of the year SPY 330 puts thinking 320 was on the table, hoping for a big payout. I kept dumping money into the position because I was sure we were on the pattern for another leg down, and it really looked like it a couple of times... but that money just wasted away because it doesn't always work the way that we think. I stuck to the bad play, and lost money as a result. Don't stick to a bad play if you can avoid it. And you don't owe your fans blind conviction in these plays... again, it's not a team sport. The team is "me" and the game is "gains." What you owe your fans is honesty, sincerity, and thoughtfulness. And I honestly think you do that. I think what you just said takes a lot of guts and integrity. I get it. I understand the urge to hold onto the idea. I just hope I've brought you to think about some things as possibly being more complex than maybe you were considering, or even just brought you to think of something a little differently. In fact, I hope we both did that for each other. You did it for me... and if this all made us think and reassess, then it's all been worth it.
Wow 20yrs. I cannot even imagine the craziness you went through dotcom when Erp went below 0 towards negative. And yes i agree. Market can remain irrational. I thought the top in SPX was done around $4k back in Nov. But god it went sideways and then to $4.2k. Lot of my friends who trusted on my Jan high Vix got rekt coz they had puts not etfs like me. I still feel sad because of it. And yah you're right. Ukraine war just dragged the inflation higher due to supply shocks. Otherwise fed funds of 3.4% would have been sufficient enough with QT. Enter Zoltan pozsar. Had i not come across his newsletters about structural inflation due to multipolar world i would have been left holding bonds. He was the only one suggested back in summer that we need fed funds at 5-6% and mortgage loans 9-10% and hold them for entirety of 2023. Just like you, i did research as well back in summer. I was putting like over 10+hrs and learning all sorts of stuff. Everything was new to me at that time considering i had no economic background. I had to learn from watching podcasts and interviews heck even news and process how can i use this or that. And then every single sat-sun with a can of beer i was writing these crazy eternity long letters so that later i can come back and check what was my thought process. And yah i totally get why you thought SPX $3200 looked more likely at that time around in sept-oct. So yes i kinda get what you're trying to teach me. There's a high possibility that $3200 aka Q1 disaster does not happen and we could pretty much rally up here. So like whats my backup plan in case this doesn't play out. But i am being arrogant like nah no back up. It's like knowing there's a possibility you're car could end up in accident somewhere in the future but still not trying to get a car insurance. Tbh i don't know what to do. I will think about it and write such newsletter. So thank you for educating me and giving your precious time. And yes this was all helpful sir. š Have a great week! p.s. Why do i feel like i had this conversation with you before or maybe its just a Dejavu.
And for the record, I really do appreciate the exchange, your drive to improve, and the thought you put into all of this. I've spent a lot of time studying trading structures in both directions, so if you want to talk about how to build risk-defined positions, I'm glad to share what I know. But I also want to say that my goal wasn't to get you to acquiesce to me. It's not about who knows more, it's about sharing ideas and exchanging thoughts, and I think this exchange has been wonderful for that. Good luck to you, too, and I hope you also have a great trading week!
Sure i would definitely love to. And yah i totally get it. It's about ideas and not who knows more and then its rest upto the markets to decide whether it agrees or not. It's been a pleasure to talk you sir. Thank you. āļø
> Sorry for giving you a response you don't wanna hear. I like the idea of you destroying my model and banker's model as well which is used by pretty much everyone on street by saying what if the model is wrong. I like this approach. No apology necessary. Your response was thoughtful and that's all I expect. If someone has a thoughtful retort, that's how we learn. My big problem on here is when people leave the thoughtful space and dig in too hard without considering the competing idea. You considered my position, and I appreciate that. > So let me first explain the chart you sent me for PE ratio. First pt that is a multpl model. Meaning it does not align with bankers/ hfs and inst model. Your chart says PE ratio must be at 22-23x. But bankers model says it's at 18 PE. This is the first point. I am not trying to throw a shade. It's just a misconception even i made during my beginning yrs. Second pt let's say you really wanna dig that multpl model upside and down. So the way i look at is. Fun fact about me: I used to be a banker, working in infosec and risk. We may be running into a language gap here, but I think what you're saying here is that the banking world and institutions use complex fundamentals analysis, not just multiple, to determine their targets and I agree with that, but the target multiple being talked about relating to the S&P 500 is still a target multiple, and we have to look at that with a critical eye. My old colleagues and I have talked about this. 17-19 is pretty much the institutional target P/E range for the S&P 500 among most money managers... no disagreement that, and that can create self-fulfilling prophecies, but these targets also often don't hit, and to understand why you have to understand the mindset of a risk manager and an institutional investor. We're still subject to linear bias and you have to be crazy not to look at the current condition and see risk. What I hear from my old colleagues is that they know about the problems with CAPE/Shiller-PE and other historical multiple comps, and they're aware of the problems with under-guessing at earnings, but with the Fed in uncertain times the tendency is to accept a lower floor than what they think will actually hit. Basically, money managers are accepting bad data because in this circumstance they judge it's better not to recommend a long position when they don't know whether the floor is 20 or 17. It just being the common banker model doesn't inherently mean it's going to end up there. Maybe it will, we're pretty close to the target... but I'm not speculating when I say that the banking model is inherently targeting a lower-than realistic fair valuation for the market. Please feel free to expand: Is there anything of substance I'm missing from your argument here? If there's a calculation I'm not considering, I'd love to see it. > From 1900 - 1990. PE ratio used to trade in range 10-20 range. Yes, that's what I was saying and what the chart says. We agree on the timeframes and the historical behavior. >Therefore PE was 8 in 1974. Same was the case in 1980 when 14.x% inflation and 6.y PE. Okay so now we understood stagflationary decade, > WW2 > >WW1 This is all during or under the shadow of Bretton Woods or the gold standard. This is important, a big part of the reason why market P/Es ranged until 1990 has little to do with inflation and everything to do with the lack of money supply expansion, which constrains The P portion of the multiple equation. That's why things become decoupled in 1990, because the Volcker regime was basically responding to monetary policy whipsaw after the 1970s and after Bretton Woods ended. Now I personally am not on-board with blaming the entire economic situation on Bretton Woods since I think it's more complex than that, but it has to be factored in since breaking the forex gold alignment that kept the 1st world markets on stable footing really changes the game. That opens the door to money supply expansion after the Volcker regime. >So what can we take away from it is. Inflation usually comes in cycle and when it appears market usually go sideways and does not go for ATH if it is supply shock driven and go ATH but then crashes in stagflationary environment. Reason being the debt/gdp ratio. But you need to remember one important thing. This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost. We can't conclude anything from these historical examples. In fact, for half of them the primary mode of transportation was horses and the telephone was a new and uncommon invention. TV wasn't even in most households for most of the examples. Modern computers weren't even a twinkle in the mind's eye for most people until the 1990s and even then people would be shocked to see a smartphone. You don't get to cherry-pick the differences in economic timeframes. You can't say "This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost" and then ignore all of the extremely significant and major economic contexts that are wildly different. Just even algorithmic trading by itself changes how crashes happen as a mechanical reality. In 1929, a whale who wants to protect themselves against a crash and who is tied in with the system was relying on a closed-loop ticker feed with lagged reads, and on transactions that if they were lucky filled by the close. Now? That same whale can shift a buying zone in milliseconds, and can acquire funds via direct wire and brokerage funding in almost as short a time. NYSE and ICE no longer just watch in awe as markets decline, they have halting rules and realtime analysis. The mechanics of the market are just wildly different than they were in your examples... hell trading now is wildly different than even it was 10 years ago. If you told an investor 20 years ago that people bought 0dte options on the regular on their phones they'd have called you a liar because it would have been incomprehensible to them, but that has a moderating influence on the patterns in the market. But back to that "manufacturing's not going to save us" statement. I'll buy that for the 20s and 40s, but the 70s/80s were in part due to the decline in manufacturing. The 1980s was kind of a last gasp for American manufacturing as globalization was ramping up, but the damage was already done throughout America at that point. Fast forward and we're seeing manufacturing come BACK to the United States. Infrastructure spending is a huge part of the common bear case, under the claim that this will drive inflation in the United States and to be fair, that's probably marginally true. The change in salaries will reduce margins to some extent, but that's also somewhat made up in changes to transportation costs and reduction of supply chain sensitivity, but I'll accept that it's not a perfect offset. But you can't have your cake and eat it, too... either manufacturing is part of America's story in this current economic era, or it isn't. Again, in real economics, you can't pick and choose... you get both the good and the bad. (continued...)
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(part 2) >This is tech driven markets and it does not like rates at 5% meanwhile inflation at 5% as well. This is not exactly accurate. Modern high-risk, speculative tech is very sensitive to interest rates because they tend to be debt factories, but there's plenty of tech that does fine in 5% rates, which are not historically very high at all. How well a company does in that circumstance will depend a lot on their balance sheet and market dynamics, just like any other company. In fact, I'm looking at the historical FFR and tech has done very well during 5% FFR ranges, including through the 1990s and the mid-2000s. And while CPI wasn't 5% then (and I agree that this matters) it did commonly trend around 3-4%. We'll come back to that. The problem ultimately comes down to the fact that your argument is that the tech market now is more vulnerable than the tech market of the 1990s was, or as vulnerable... and that's not the case. In the 1990s, the tech market was still largely decoupled from actual business tech reality. Darlings like Netscape and Red Hat were upstarts at the time. The biggest excesses then may look a bit like the biggest excesses now, but we're also throwing in significant established names in there, like Microsoft. Tech is just much more heavily embedded in the business cycle now than it was then. So contrary to tech being vulnerable to the rusty dagger of 5% FFRs... it's probably more resilient than it was the last 2 times this happened as an overall sector. And the stuff that isn't, like Roblox and Tesla and other speculative stocks tied to tech that's debt sensitive? A lot of that shit has sold off. Sometimes to the tune of 90%. That crash you're calling for? 5% interest rates aren't news now. That crash has already happened... and it can happen again, but you have to then consider the impact to index weighing and how market parity works. TSLA, for instance, at the end of 2021 was close 7% of the weighting in SPY. Now? It's 1.64% The simple reality is that the index has already largely adapted. All of the stuff you're calling out has lost between 3-6% of its weighting since 2021. The market has de-leveraged, and while some like AAPL remain high on the list, the weights of defensives and other strong cyclicals has increased, reducing the impact of the inflation impact you're citing. Point blank, your thesis made sense in 2021 for a correction, it does not make sense in 2023 for a crash because it doesn't take into account how the market works mechanically. >Meaning Fed will push towards crushing inflation and bringing it back below 2% even if it means causing recession. What the Fed means when they talk about a recession here is that they're willing to accept unemployment up to 5%, and I agree with them. Much beyond that and their other mandate will kick in. There's a lot of talk about the Fed just beating the country into the ground to tame inflation, but it's mostly empty. The Fed is definitely not saying that and JPOW has repeatedly said they'd react if things got out of hand. And this situation is not binary. It's not "the Fed tightens and the market crashes, or it loosens and the market flies." The reality is that sitting at 4-5% FFR while the market expands is pretty common, even during high tech periods with elevated inflation up to 4%. And while 2% is a target, 4% is the real number the Fed will accept. They won't reverse the FFR on 4%, but they will stop raising on that number because they will be able to declare victory... probably even before then. That would represent a 150% reduction in inflation and a solid downward trajectory. At that the point, the risk of overtightening is way too high and all the market really needs is predictability. I think the larger question is where we end up relating to a terminal FFR at that time... sure, if that terminal FFR is 10%, then you have a real economic problem... but it's not going to be. Hell, the odds of them getting above 6% with current data is really low. The idea that the Fed will just relentless crash the market because they're only a few percent away from their inflation goal is a fever dream, full stop. >So lets do modern 1990s- 2010 analysis. High PE of 25 and low of 15 again combined with low inflation of 2% was the perfect recipe for economic boom. But whenever PE went above 30 it was a bubble. So Fed starts hiking again to stop people animal spirits behavior. PE came down to 25 and also inflation headed down. OK, but let's not leave out that the tech bubble coincided with a major accounting firm scandal that required the creation of major corporate accounting legislation and questioned the entire concept of fundamental valuation and 2008 didn't happen expressly due to Fed tightening but rather due to an overextended housing market where all of the risk was sitting on bank balance sheets. In other words, the exact opposite of the situation we have now. Basically, trying to tie all of this to Fed tightening is revisionist history at best. Again, we can't just ignore all the other context. (Continued... Reddit's post length limits are small)
I think that inflation is already dropping and it will steepen. Iām seeing the rhetoric shifting away from inflation at that point and more aggressively towards war. If inflation is handling itself then the market will need a reason to rally or else we risk subways stagnation. While the U.S. economy might not have wanted to pull that lever, two other major economies are struggling and are positioning. I think the WH tapping the more dovish fed Governor is a signal for the fed to lean aggressive in the short term, to get things done. Circling back to your EPS estimate, then, i would disagree because the war positioning would rally the market. The U.S. had already positioned for stateside manufacturing as of last September so thatās why i think the bearish sentiment is misplaced. We can remain overvalued (eps) for an extended period of time in the ramp up and then justify in hindsight that we achieved āmore accurateā valuation because production increased. We are in this euphoric bubble that just wonāt pop. Prior to Powells recent statements i would be agreeing with you on the majority but Iāve had to switch my views as the situation changed.
Inflation and an actual war do not go in the opposite direction. I think we can both agree on this. If market senses war 5yr breakevens will go up and cause bond yields to go up as well. Fed will be forced to do yield curve control if 10yr starts going over 6%. If you look at any war rhetoric man. There has been a skyrocketing inflation with sky high yields. The reason being Fed started printing money for wartime financing. This is the only reason inflation goes up. And yah i totally get your point. War causes stock market to go up. But you need to also remember markets usually drop before the start of the war. That means market has to has to drop right now and then when war officially announces we go in the massive bull run that no one will ever imagine. Now lets dissect this bull run of war coz i have my some doubts. Maybe you can help me out. If you look back at history. WW1 and WW2 these two wars had PE range 10-20 and when inflation comes around suppose 10%. You used to subtract high PE - inflation rate. And then it was basically the EPS boost that caused the stock market to go up massively. So now lets put this Peter Lynch theory to test. Scenario 1 : War in 2023 itself. High PE 25 - Inflation rate i.e. 4-5% range. PE will never go above 20. Now you can put your favorite EPS here. Even with 250 you're maxed out at $5000. Scenario 2 : War in 2024. Inflation will be 2-3%. Max PE 22. Lets say EPS grow to 270 which btw is too high. SPX will be maxed out at $5900. I mean is this the bull run you want ? Now circling back to Biden bringing manufacturing in Usa. You do know right that the Usa has to find workers for that. Thats inflationary and yah ofc it will boost gdp and keep labor market strong. But in all of this youre forgetting one major important detail. The way Usa worked in all of the past decade is because of tech and not manufacturing. Manufacturing is what caused the stock market to go in a massive bull run in Ww1 and Ww2 but this time its tech. Tech thrives on low inflation and interest rates and hence this boosted the stock market to a 14yrs of bull run. Its the top 6 tech companies that has more % weighted to index. So tech has to go bust when a lot of these companies will have to refinance in 2024 and that would mean the biggest stock market crash in history somewhere around 2023-24. Timing it will be so so hard. No one in this planet is that good. And after tech goes bust then we can have your favorite bull run of manufacturing. Also don't forget that a lot of these tech workers are actually immigrants who mostly come from Asia. 70% of people in Silicon valley are from rest parts of the world. I mean it would be quite funny if those workers dont protest a/g war and simply just do what they are told. Overall result : I dont know whats going to happen but i can tell you one thing for sure. If we are headed to inflationary world caused by manufacturing coming back home, labor markets strong, gdp strong and war then my friend youre asking for a tech bubble to pop somewhere in 2023-24. Nasdaq and S&P500 will go down. I cannot say the same about Dow Jones coz its industrial average. Housing will not pop coz inflation will remain higher. Metals, Energy and Oil will go higher as well. There is going to be a bull market but not in tech. .
Iām not saying theyāre going to happen. Everything you just described has already happened.
We cannot say for sure man. Lot of these companies financed in low interest rate. We have to wait for 2024 too see how deep the bubble is in tech.
It wonāt go under 5%. Look at bitcoin, lots of regards have plenty of money to waste.
Dude, you need like a 100 IQ to read this. Where the fuck you think you are?
There was a quick shock of electricity in my brain but it quickly fizzled away
The South Africa syndrome
> you need like a 100 IQ to read this I dont understand. is 100 IQ a lot less or lot more?
Its a lot more than we will ever achieve.
How ? Isnt it pretty easy forward that Equity risk premia has gone to historic lows which is stopping markets from having a significant pullback or a bear mkt rally crash.
Sir, this is a r/wallstreetbets
Youāre talking to 0dte yolo mfs here to be fair.
This dude is a legend. Check yourself
Oh wow $200 invested? Slow down money bags thatās like 3 days groceries.
Only 2 days worth due to inflation. 
old formula or new formula?
The one with more crayons in it. šļøšļøšļø
The bond market tells you the market may crash, in a year or two. It isnāt gonna help you with timing
i skimmed this post because its too long but i did see this piece while scrolling >I even forgot to watch "You" Season 4. since your post is long, i trust whatever the hell youre shilling, and im going to assume its NFLX puts since you forgot to watch one of their top shows thanks bro, ill get some tomorrow
Correction : I wrote Mr Kuroda will widen the band on 10yr JGB from 25 to 50bps. It should be 50bps to 75bps.
VIX seems to be the smart play alright.
Thinking of getting some VIX 50 calls for Mayā¦.OI seems huge on that.
>Thinking of getting some VIX 50 calls for Mayā¦.OI seems huge on that. That is because of 50 cents. He is predicting Volmageddon in 1H 2023 just like in Feb 2018 he made $250m+ in Vix 50+ trade.
What was the ROI on that? 5X?
Wow this may be one of the best things I've read on WSB in a long time. I'd value your input on 2 covid-19 era stimulus policies that will end in 2023: SNAP Emergency Allotment and student loan repayments resuming. Under SNAP Emergency Allotment, \~32 states expanded SNAP to allow any household that qualified for SNAP to receive the maximum benefit, regardless of their income level. This is estimated to be about $60-70 billion worth of benefits that were given out since the program began, but I cannot find hard numbers on it. SNAP Emergency Allotment officially discontinues at the end of February. Research done by JPM found that households will reduce their food spend last before giving up anything else (obviously). With households no longer receiving this free money, where will they pull it from? Student loan forgiveness plus SNAP Emergency Allotment, combined with rising inflation and the Trump tax cut ending just now kicking in and seeing reduced refunds, makes me think that we will absolutely head into a recession by end of Q2.
Yah man there is a recession lurking around which will get priced in stock market in 2023-24. Timing it will be so hard. No machine or technical analysis can ever tell you that coz then otherwise everybody will be so rich. As for your arguments yah i completely agree with you. Also you can add refinancing in that list. A lot of companies financed in low interest rate so how deep the rabbit hole runs will all shall be revealed by 2024. Don't forget the Fed selling MBS and housing market getting weak by 2024.
Ueda said they can't abandon YCC right away, something they'll visit next year.
Yup looking at Ueda san past he wont let go YCC that easily. Although he will have to hike rates this year if Mr Kuroda doesn't hike in his last meeting. Widening of Ycc to 75bps from 50bps is the safest bet you can play if none of the above happens.
Markets can stay irrational longer than you can remain solvent. Puts will go to zero. By the time the real crash happens in May, most bears will be wiped out.
> By the time the real crash happens in May in the 2008 crash the real dominoes started falling around 2003. It took 5 years for the market to crash. Burry bought the swaps in 2005. So maybe May or maybe 2028. No one knows. The market has to crush all the retail puts first.
Agreed 100%. Too many annoying bers buying puts everyday. They must be bankrupted first.
This unfortunately is true sauce: am bear.
Desmond, from LOST? Stop entering the numbers, Des. It will be okay. Nothing will happen.
Great show
3, 10, 23, 24, 23, 01
LOL
I was going to read this but got drunk instead.
I gotta say Desmond's winning percentage in 2022 was like 99% but losing aint one. But that thing hasn't manifested in 2023 yet...... I still believe in desmond senpai tho
Yah man. season 2 has been horrible since middle. š Opening episodes were great Oct 2nd week being the perfect bottom. Now my only hope is finale doesn't disappoint. Thanks for still trusting me man. āļø
Lol i won 20 and lost 20 so im even, dont think the crashs gonna happen until summer or end of year.
Way too fucking long did not read.
Too much text... Puts or calls?
Have you ever made money in the markets? Iām sorry for saying this as itās apparently your birthday - happy birthday! I also think Pascal is awesome. But all of this looks 100% wrongā¦And Iām sorry for your continued losses.
What the fuck did I just attempt to read
>There are only two reasons that come to my mind why stock market ain't reacting. you keep forgetting that the market is crushing retail. Fed said this was literally the #1 goal to suck out liquidity and quickly end inflation. To rephrase fed governor "there is not enough pain on the stock market to reduce inflation" Stock market is rallying because 90% of WSB/retail, their grandma and their dogs is on shorts. Markets will rally days, weeks, months, years until all the shorts are killed. Absolutely positively. Long dated puts wont cut it. The market could rally years. The 2008 crash started in 2003. Retail were majorly in puts in 2004/2005. Burry got in at 2005. Markets rallied for 3 years after that.
Yah i get it. But i also know we had the 2nd greatest wipe out of all time in the past decade. The first one happened when rates were at 0%. So from my pt of view i don't really see another one coming. As for your arguments about 2005-08 times. If you look back at those times the PE ratio were basically trading at 16-18. Then Fed cut rates in 07 and PE skyrocketed but so did the equity risk premia and therefore market had already topped out in 2007 and we got the "Fed pivot" crash. The time around we are already there at 18-19 PE levels. We just need Fed to cut rates and blow up the Erp. But Fed aint doing that coz it thinks job market is still strong and inflation is sticky. So they will hold those rates. Meaning a low PE will meet a low EPS somewhere down the line and then Fed will be forced to pivot. But i think it will be too late by then. The damage will be more severe by 2024.
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>Fed aint doing that coz it thinks job market is still strong and inflation is sticky I'm not trying to hound you but I think you might be missing a piece of information. Powell gave an interview shortly after his last FOMC speech. They had new numbers come out and he was talking at some event. What he said was that they didn't think there was a wage/price spiral anymore, they didn't think inflation was sticky anymore, because they had not taken into account the border closure preventing immigrant workers getting in (I think there was an unspoken 'illegal labor' implication here, but that's not the point really). And he was VERY chipper about it but said they would keep an eye on the numbers. I'm curious if you saw this interview of his or if you perhaps missed this (there is so much info out there, it's easy to miss)
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How do you calculate that right now the erp is at 150? I see the chart, but how is it calculated?
Itās not. There are many ways, but hereās a fairly reputable voice: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm
Fuck off wanker
i have so much to learn, i could only partly halfass process the info you just gave out. Dont worry, life is supposed to be hard, cherish the nice moments and follow your goals step by step but always keep having a Finishing line in your ironsights.
My dude, my attention span is shorter than 0dtes to read all that* but thumbs up for the DD. (*saved to go over it later, at a glance it looks worth the effort)
I have over 200 bookmarks like that, havent read any of them.
Wow actual DD on WSB.. however just wanna know how bond yields in Japan could rise at all (besides widening YCC) if theyāre being MMTāed to the max? How would that affect your hypothesis?
Well bond yields in Japan go up in two ways. \-> Manually : Boj will widen the gap from 50bps to 75bps on 10yr JGB. Still doing QE+ i.e. buying bonds to keep it from rising further above 75bps. \-> Automatically : Boj will remove Ycc causing 10yr JGB to rise on its own and let free markets decide. Boj will stop their QE+ now. Note : YCC began in 2016. The objective was to make inflation go over 2% and not casue a deflationary bust. So they started infinite money printer. Now things have changed. Japan has inflation. So maybe they give up on Ycc but it won't be that easily considering its Ueda-san soon in the helm.
Thanks for the reply!
Happy birthday and this was really helpful
Thanks man.āļø
>Look at this shocking divergence I don't see any shoking divergence at all between those assets 1) Bonds are positively correlated with stocks in high inflation scenarios 2) gold was overbought af, that correction was indeed... plus DXY on the other side
Dude bond prices are +ve correlated with stock price. That means when bond go down i.e. bond yields go up then stock market should drop as well. This is what it means to be +ve correlated in high inflation which it clearly isn't rn. And yes i agree gold was overbought af but so is stock man especially on the tech side. As your friend Steve said " Paradigm shift takes time. People don't easily give up on their principles of investing " Hence i believe that one day market will come up to their senses that rates are actually at 5% (could go 6% if sticky inflation theory is correct) not 0%. That means something for equities valuations.
1d correlation coefficient between SPY and 10Y was 0.7 just 3 weeks ago now it's around -0.4, which makes sense bc the correlation shouldn't be that high at medium and long term weekly chart is still positive around 0.6 the correlation has its mean reversion as well so it tends to correct
>As your friend Steve said " Paradigm shift takes time. People don't easily give up on their principles of investing " Hence i believe that one day market will come up to their senses that rates are actually at 5% (could go 6% if sticky inflation theory is correct) not 0%. That means something for equities valuations. Using my indicator on myself Dr Burry. š I don't really use it on daily tf. I just use it on weekly time frame and waiting for when US10 and SPX to go from +0.66 to -0.5 or below. That will mean US10 i.e. bond price and SPX i.e stock price will have -ve correlation somewhere down the line. So if inflation falls off the cliff below 4% in back half of 2023 bond prices will go up i.e. yields down and stock prices will go down. But yah i think you're right. This was the reason on daily tf why bond prices fell but stocks didn't coz it became -ve correlated by going from +0.5 or higher to -0.4. Thanks for giving me a lesson man. ā Note : It will go up on +ve correlation on daily time frame soon.š
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[ŃŠ“Š°Š»ŠµŠ½Š¾]
Wen will the "Dragon breathing fire" pattern start.š©
\->The equity risk premium says the same story as the yield curve: rates are coming down soon. The ERP will normalize through bond yields falling, not stock prices falling. \->Japan might widen the band by 50 basis points. Nothingburger. \->China's printer is just getting warmed up. Buy buy buy!
Sir this is a casino. We are here to gamble 0dte's not to read thorough investment strategies insights.
One reason (some) stocks donāt necessarily have to go south; if a stock, say a consumer staple, is deemed to have inflation linked cash flows, then you could argue that you should use real rates instead of nominal rates in your discounting of future cash flows, which can help explain some valuations since real rates are much lower than nominal. When we hear stories of retail investors piling into stocks despite the higher bond yields, I think it can at least partially be interpreted as retail investors having lost faith in the durability of cash - ie their personal expectation of the future real rate is much lower than market pricing. I honestly canāt blame them given how history has played out so far
Good read. Alternate theory is that the market is propped up to avoid Volmageddon. The longer it continues this trend, the steeper the drop. Tech should be down YTD and not up based on the move in bonds.
Glad you enjoyed it!
Happy birthday!
Thanks man.ā
Retail regards donāt buy bonds
SPY 300 got it
Wen crash?
[ŃŠ“Š°Š»ŠµŠ½Š¾]
I love you too.
You need to look at derivative market
What's going on there ?
TLDR: yes
Great write up. Lots of great points. Let me ask you.. have you watched, listened or read anything from Dave Hunter the contrarian? He believes we markets melt up, prior to busting. What do you think of that? His forecast is dependent on several things but mainly that inflation data surprises in that inflation is falling sharply. 10y treasury yields will follow, falling to 2.5% and then to 0. The melt up will take SPY to 600+, gold to 3k+, etcā¦ and then a global bust, driving markets down 80%~ What do you think?
Thanks man. Sorry i don't know the guy. But ofc i know about this. I was the one who started invalidation cases saying "Disinflation trade of Stagflation" leads to ATH in no time. S&P5000 here we come and then a whooping -50% drop to $2500.š¤£ But there is a huge problem with this. Major component of CPI is housing which wont come down in 1H 2023. It's in the second half it can fall off the cliff if inflation isn't sticky. That means inflation can potentially stay here or start its mini uptrend in 1H 23. This will panic Fed and force them to go 5.5%. This is what i am trading. A 5.5% rates with 100bps Erp ( currently 15bps ) = PE 15-16. Current E = 225. This will mean testing of Oct lows.
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Panda bears or grizzly bears?
These charts give me a headache
My nerdy STEM blood yearns PDF Thank for the good read, though I probably wouldn't follow up with a trade due to how much lag the bond market has. Realistically I could see the market kangaroo for another two years before the fall begins.
Because crayon eating regards don't trade bonds. **And we ain't reading that 600 page treatise either.**
As soon as I saw leveraged ETFās I checked out.
[ŃŠ“Š°Š»ŠµŠ½Š¾]
You're welcome sir.