Why Can’t it Just Crash Already

I want to buy more TQQQ but every time the market seems to get the faintest sniff that things are not absolutely crumbling, it just nuts itself. "Oh look! Inflation is only 8.5% compared to the 8.7% we expected! I think I'll go ruin my pants now and gain 3%!" Yeah things are totally fine.

And then you have the Wall Street Journal acting like the economy is great with their stupid ass "Nasdaq enters bull market" headlines. Suuuuuure as soon as we're "technically" in a bull market you want to write all about it, but when we're "technically" in a recession you didn't want to say anything. So fucking dumb. What am I missing here?

 

My man. Don’t you see it? My boys JoeyB and JPow have a very specific mandate to pump up the stock market so that the ‘smart money’ can have some extra time to liquidate assets. Once their positions have been unwinded and their hedges are in place, it’s back to recession town. For fuck’s sake, JoeyB literally said on camera ‘Inflation for July was 0%’. If that is not a play to get the dumb money to buy the dip then I don’t know what is.

The same goes for all the finance media.

 
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Here's my dummy-version of why I think there's not really going to be a massive crash.

1. Virtually all of the 'crash' we saw in Nasdaq first half of the year was driven Companies who literally don't have a profitable business model - and in some cases, literally don't even have a line of sight to one. That's not a "crash". That's just the market coming back to fundamentals.

2. Absent inflation - there is literally no to little weakness in the macro-economy today. Unemployment levels are low, wages are growing. Consumers have a huge amount of pocketed savings that they want to spend. 

3. Which brings me to inflation. What are the root causes this time around for inflation? Okay yes - the Fed printing machine printed a lot of money... - but how's that different than what happened for 10 years prior to 2020? And inflation was at kept at bay there. I think what really changed this time around was that the whole world shut-down - and supply chains got disrupted. Bull-whip effect happened. All of a sudden - there was a reduction in the supply of goods. Now combine THAT and excess savings, and the Fed Printer going Brrrrr - voila - inflation.

4. So if you believe that the variable that has fundamentally changed here is effectively a bull-whip effect induced supply shortage - then once that supply chain corrects itself, inflation should moderate. Consumers still have a lot of money. Employment is high. There's no turbo-charged leverage in the banking system. Housing prices sure are high - but there's not trillions of CMBS backed by non-existent underwriting standards this time around. I see a path to a soft-landing here. 

By the way - 8.5% is YoY inflation. It was 0% - MTM. If it stays at this level, definitionally inflation readings are going to decline quickly to low-single digits by next year once we start lapping the price increases we've already had. Wages will re-adjust to this new normal. Oh and by the way - corporate America has never had fatter profit margins...  

 
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But Fox News told me the economy has never been worse! You must work for Bidens PR team you evil optimistic liberal

 

The only way we stay at 0% MTM the next couple months is if gas prices continue to decline by as much as they did in July. Owner's Equivalent Rent isn't even close to done (was up 0.6pp in July alone), and will probably continue to accelerate since it drastically lags housing prices. And it's by far the largest component of CPI.

Annual wage gains also continue to exceed 5% YoY every month this year. Food inflation seems to be chugging along. Something tells me we are very unlikely to be at 2-3% next summer, at least not without many more rate hikes.

 

- What about when people realize everyone and their mom was double ordering Chips? Do new and used auto prices suddenly come down? Do we have an auto inventory glut and as a result, auto companies / used card retailers etc need to cut jobs?

- What happens when companies like Google/Meta start cutting high paying jobs: https://www.business-standard.com/article/international/too-many-employ…

- What happens when people start to realize we're in a huge inventory glut in general?

- What happens when people have to continue to go into debt as wages aren't keeping up with inflation (even if inflation doesn't go up from here)

- What happens when some of these "tech" companies run out of money next year as they have absolutely no business plan and they need to lay off their workforce/file for BK? Btw, these unprofitable fantasy companies help support ad/cloud spending -- guess who's going to cut jobs as a result?

-  What happens when Rate Hikes actually start to truly impact the economy? (it's been noted that it takes ~6+ months for the effects to be truly felt)

- What happens when the RE Market does indeed dive? It's slowly but surely happening.

I'm not saying it's going to be a 2008, but I strongly believe some will get hurt from the looming slowdown/recession. I'm admittedly hoping for a mild recession - need to see layoffs / wage deflation in industries/jobs that got paid absurd amounts due to COVID/bullwhip effect. I'm not trying to pay 40%+ for what I could've got a house in 2019. 

 

Generally agree with everything you said, and would also add there is quite a bit of debt coming due in '23, '24, and '25. I think right now, the expectation is that rate hikes will not continue past '23 and then will taper/pullback from there. However, if this is not the case, there are going to be many companies that are going to run into difficulties refinancing their debt. All of the cov-lite term loans that were issued like crazy the past couple years are going to get expensive real quick due to their adjustable interest rates. Couple that with all of the issues you outlined, there will be operational headwinds and possible liquidity issues for these companies as well. Things could get bad pretty fast here. 

 

I can’t believe people like you will make outright false claims about the macro environment on a finance forum and expect to get away with it

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Source:

https://www.piie.com/blogs/realtime-economic-issues-watch/us-wages-grew…

The graphs on the left show nominal wage gains , but the more important graphs on the right show real wage changes. Real wages have declined worse than they did in ‘08 from a percentage standpoint.

Inflation is the highest it’s been in 40 years and wages aren’t picking up

Consumer sentiment isn’t good with many consumers having tons of savings as you claim. In fact, consumer sentiment is the worst it’s been since the measure was recorded (40+ years)

https://fred.stlouisfed.org/series/UMCSENT

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His statement that "macro is okay" isn't exactly incorrect. I'm sure you can find other theoretical models outside of business cycle theory to also support the idea that the economy has certain abnormalities to it, but the truth is that on a very broad level, there isn't enough here to justify a massive decline in stock prices, knowing that the market is a price-ahead mechanism. 

The thing some people don't get is that existing inflation is nothing more than the continuous ramping of exogenous shocks. You had OG Covid,  you had supply chains, you had delta, omicron, war, commodities. And before people say "Inflation was already there before X [or Y, or Z]", mind you that COVID was a net positive to household savings and consumer debt levels are also well-above pre-COVID levels, while factoring in supply chain issues which purely economically force people to pay more to get low quantity items (best example was GFX cards).

Just to directly address your graphic: Lets think about real wages and salaries - here's an image to showcase real wages & salaries in Europe from 1990 to 2020 (I saw this on Twitter in May). Over 30 years, most of the primary European economies saw CAGRs of around 1%. Another thing to note: Real wages are, as I'm sure you know, nominal wages that have been adjusted for inflation. Our current inflation is more than 5x the average annual rate of ~1.5% from 2008 to 2015 (academic source). Look at that graphic's methodology - it uses the employment cost index which is a time-series with positive trend, i.e. non-stationary. So when you're operating in a disinflationary environment (which the GFC was - inflation was below it's original trend level of 2%), keeping the ratio between cost index and price index above base-line will be easier as the increase necessary (based on the source, 1.5% vs. the current 8.5%) will be smaller.

In our current environment, real wages can't keep up with this type of inflation, otherwise you'd see a wage-price spiral. The only option is to have the people eat it and then come out on the other side with the higher price level as the new norm. I constantly kept hearing CNBC talking heads talk about stagflation and it pisses me off to this day. Stagflation's definition is simultaneous high inflation and unemployment. Unemployment is not a problem, therefore central bank policy will be effective (there is no simultaneous need to boost employment while also decreasing inflation, meaning you can ice the economy).

 

If you've overheated the economy with too much spending causing inflation, you would expect unemployment to be low for now.

Also, great that your rearview mirror on spending and inflation goes back 10 years. Have you thought about examining perhaps a 100 years data set or looking at other economies?  The very people who said that we would never see inflation this high are the exact ones who made your point: "well we spent a lot of money before and nothing happened". That logic has already been proved wrong.

 

I want to address your inflation point specifically. Prior to the pandemic, we did have a lot of "inflation." Not increases in prices of household goods & services, but asset price "inflation" in housing prices, risky asset prices, etc. That's the direct consequence of QE buying up lower risk assets like treasuries and agency MBS and thus pushing money out into the risky assets. However, this time around, money was directly injected into the pockets of the regular people through handouts. With fatter checkings accounts, the regular person went out on shopping sprees, driving up demand, while the supply chain was still constrained. Supply chain problems are not the primary factor to blame here - it's really the fact that money was printed and injected directly into the economy instead of seeping in via the financial markets (via permanent open market operations by the Fed). As Milton Friedman said, "inflation is always and everywhere a monetary phenomenon."

The worsening wealth inequality is a direct consequence of QE pumping up risky asset prices to astronomical levels. But that's a topic for another day.

 

You make an interesting point. Based on JPows behavior over the past 3 years, I really find it hard to believe that he has the sack to fully curb inflation. It is going to take more prolonged and aggressive rate hikes than I think most people anticipate, and once things start going bad, what's to say that he doesn't immediately pull back and revert to his money printer? JPow is a big posturing guy. Perfect example was during Covid with his stimulus package where he bought treasuries/HYG and basically signaled that the Fed would not let the economy fail. I don't think the same sort of tactics work here. I strongly believe he thinks that the current rate hike communications are enough to slow inflation, but what if it is not? If hikes go past the 3.5% target, things prob get bad. We could be in for a rough few years.

 

Jerome nor Biden have any sort of spine to pull this off. Of course, getting re-elected will always be more important than the well being of the general population, but I still don't think they will fix this. The US economy is completely addicted to cheap debt and what happens when all of these companies have to refi for 2x-3x their initial borrowing cost?? Nothing good

 

The Great Recession absolutely disfigured people's perception of what a common recession actually looks like. A massive financial crisis and stock market "crash" in excess of what we've already seen from unprofitable tech stocks is NOT the norm. Trying to benchmark this recession to 2008 and asking when the "crash" is coming, is like benchmarking a common cold outbreak to Ebola. 2008 level blood in the water is NOT the norm. 

Drives me crazy everyone is so busy trying to redefine what a recession is, nobody has thought to simply explain that while two quarters of negative growth IS a recession, and while the United States IS currently in a recession, a common, cyclical recession is NOT a massive crisis where everything explodes, entire industries go under and we all die. Why can the Fed not just speak to people like adults, admit raising rates is going to cause a technical recession but then explain that a technical recession isn't some terrifying crisis? 

Side Note: I would just start dollar-cost averaging into TQQQ with every paycheck. It's too risky / timing dependent to try and throw one entire bonus into it. God forbid the timing is off and you'll play yourself like a fool. 

 

Tbh the legacy of the financial crisis makes it less likely that we will see another crisis in the coming decades of similar depth and duration. People are permanently scarred and more risk averse. It's like the 'volatility smile' but applied to economic behaviour.

 

I don’t think finance people are scarred in the way you think and will always willingly do the right thing. Roles that provide a bonus for lending/market profits but no downside for losses incentivizes traders/lenders to make highly leveraged bets. The reality is that there is a ton of banking regulation these days regarding market trades, credit lending, balance sheet amounts, etc. (basically the entirety of the risk management group) that make it impossible for a traditional bank to put themselves in a financially troubling position like pre “08.

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The bottom will be when moral hazard has died. I.e. when there stops being news articles every single day with some rationale as to why the fed might stop raising rates. The crackhead mentality has to be broken. Also the bottom will be when people give up on bitcoin and never speak of it again. People are going to have to be dope sick for a long time.

 

Everyone I know who is older thinks greener pastures ahead; everyone I know who is younger thinks we’re fucked.

(Related to the other thread: Everyone I know who is older thinks if you don’t show face in an office 5 days a week means you lack passion in your career; everyone I know who is younger thinks hybrid is the new normal and it doesn’t sacrifice productivity.)

 

This is actually really interesting. I think older people saw their 401ks, trading accounts, and home values skyrocket during covid, so they are probably feeling pretty good about themselves. This demographic also most likely does not want to think about the value of their assets tumbling as they near/enter retirement. Whereas young people I think are finding it very difficult to be optimistic. They don't have the same asset base as the boomers, and were unable to enjoy a ripping market. What we did experience though, were astronomical rent prices in urban areas, homeownership becoming unrealistic for many people, and antiquated corporate policies and return to the office initiatives. I think many young people WANT a crash just so things arent so expensive anymore.

 

So, uh, you guys do know there's literally statistical analysis backing up the idea that you'll actually make more money in the long-term buying at the 'highs' as opposed to sitting on the sidelines and waiting for a 'pullback' right?

Invest when the market is high

 

fr though what systematic methodology are you guys using to time the market? care to enlighten us and help us all make a big pile of cash from this? or are you just trying to gamble?

 

For anyone sitting on this forum with an expected investment time horizon of 20 - 40 years - buying some every month with every paycheck and bonus is the right answer period. Trying to time the market does not work. Over the long-run stocks go up - particularly U.S. stocks. And if U.S. stocks are not going up on a 20-40 year horizon - we all have bigger problems to worry about. 

 

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