2018 Redux?

2018 Redux?

When assessing what a prospective down-trade for US equities into year-end might look like, 2018 might be a useful analogue. (Sans autocrat.) There are quite a few similarities. Stocks are near records and real yields are rising, for example. And the Fed could be one hawkish communications misstep away from pushing the envelope too far. Back then, 10-year real yields were "all the way up" at 1% (figure below). That the threshold for destabilizing risk assets is now far lower (indeed, it's prob
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10 thoughts on “2018 Redux?

  1. 2018 redux seems like a worst-case scenario to me. Fed is way too accommodative and, for the good of the overall economy (velocity of money, business formation, retirees) rather than Wall St., needs to do something about its balance sheet. But I mean, it hasn’t even announced a taper and when and if it does, it’s likely to be a modest $10B/month in MBS, starting, maybe in 1Q22. Not exactly the end of the world. I mean, if the market gives up 20% (or more) in response, well, then…I dunno, maybe we should mint a couple of those trillion-dollar coins and stop pretending we live in a capitalist system.

    1. I would think a recession would be the natural response to a pandemic. To NOT have capital losses in a pandemic (or other natural disaster) would be an aberration. That’s the reason that capital is rewarded — because it takes the risk in the first place.

      Apparently, however, for the Fed, capital losses were unacceptable and printing money was the answer.

      Seems to me that we have been well outside the capitalistic playbook for quite some time.

  2. The Fed would be smart to announce a dovish taper in December after seeing 2 more at least decent employment reports. Then pledge to reduce buying a small amount each month. Like 5-10 billion per month, with the caveat that they could taper faster if things improved or stop tapering if they got worse. That would get the taper off their back. If they can make the taper really boring and market friendly, that would really help, and would get the issue behind them. The market would be unlikely to have a tantrum- but at least the Fed could say they began the process.

  3. It is only October 6. Delta is ticking lower, but it seems prudent, as Powell has stated on multiple occasions, not to be too early with tightening- which means we need to make sure we don’t have another variant surface this fall or winter, the vaccination rate increases and people actually get their booster shots (I have my doubts). This will take time.

    Who knows where this inflation scale settles- somewhere between rampant inflation and returning to the pre-covid curve is the range of reasonable possibilities.

    Not all facts are leaning “inflationary”. By some estimates, 20% of the workforce will remain remote and that 20% gap (to 2019) in people passing thru TSA checkpoints, will not be quickly, if ever, refilled by business boondoggles. This is all good news for corporate profits. Also, let’s not forget the $2.4T in excess savings (over pre-covid trend), sitting on the sidelines- not chasing used cars/TVs, cruises or stuff. Will this stay in savings? Finally, when covid is truly in the rear view mirror, I am guessing that some of the 3M who left the workforce during covid, especially women and the 55+ crowd, will reenter (downward pressure on wages). As far as oil/gas prices, Biden will blink- is my base case because I think the desire to get Democrats re-elected will overrule a Green agenda.

    I will wait (in equities) until I have a clearer picture of the future. In the meantime, I just purchased some unbelievably cheap airline tickets for my kids for our “year end gathering”.

  4. Marko Kalanovic has the right idea. Dump high multiple tech and buy everything else.

    It is high time for TSLA stock to come in. High oil prices are good for Tesla, but not good enough to overcome a 412 PE ratio. TSLA has barely budged these last three weeks, and sits at a 6-month high.

    1. Earnings aren’t the issue. Look at AMZN history. The thing to question is – will Sales grow fast enough to get their P/S to a reasonable number within a reasonable timeframe, while their margins improve…

      And it’s a truly difficult question as adoption of electric vehicle in the next 10 years would be a arduous enough question if you didn’t have to contend with things like battery technology and its applications plus self driving AI and therefore the ultimate potential of fleets of leased automated Tesla taxis… At which point, good luck determining the ‘right’ TAM…

      Basically, TSLA right now is either wildly overpriced or severely cheap – depending on which future plays out. And fine, it’s like that for everything except I’d argue trying to guess at the ‘correct’ probability weighting of these outcomes is particularly difficult.

  5. H-Man the 800 pound gorilla in the room is inflation. This will drive the bus more than any other factor. Subdued or transitory, good for equities. Out of the bottle, look out and run from equities.

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