Tesla Investor's General Macroeconomic / Market Discussion

[Auzie]

OK I'll be more specific. The S&P traded at a PE of 33 in 1999. Now it is at a PE of 20. It would be awesome if we shot back up to 33.

As far as preparing for a downturn I am really not prepared. I only prepare mentally:
1) First, I know that it is normal and can happen and I should not be surprised if and when it happens.
2) I am prepared to reduce expenses so that I can put more money into stocks during a downturn and I might even take on some extra debt to make that happen if the market is down to historically low PE levels.

Now, if my portfolio continues to grow as fast as it has for the last 18 months I will start getting more defensive and holding fewer individual stocks and more index funds. If it keeps going even further I might even start buying some bonds.

Not sure how holding index funds helps in the downturn. They are all likely to go down in the event of market turnaround. And going down might be much faster than going up.

Some serious paranoid traders hold gold, not in gold stocks, they hold real gold bricks in safes.

In Australia, real estate is a good market (stocks) hedge, but not in US. That can change.

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Bitcoin is my hedge against government mucking up the economy or the USD failing

It will be interesting to see how bitcoin story unfolds. Might work out ok to be a new type of hedge.

 

[green1]

1. Learn about market dynamics as much as you can
2. Watch market and world politics all the time
3. Be ready to sell some or all holdings if you see downturn on the horizon
4. Take some profits every year. This also helps to minimize tax.
5. Diversify. Diversification reduces losses in the downturn.
6. Avoid or reduce holdings in leveraged businesses

I think you misinterpret, I personally am fairly well positioned in this case (not immune by any stretch, but fairly well positioned). But I am only one member of society. Seeing the mistakes in policy and in the average person's financial status is still worrying because other people's mistakes do affect us all.
The worry is that by the government keeping interest rates so low for so long, that they no longer have their most important tool if a new recession were to strike. Coupled with governments increasing debt loads makes stimulus spending difficult as well, and the end result is fairly bleak.

 

[Auzie]

I think you misinterpret, I personally am fairly well positioned in this case (not immune by any stretch, but fairly well positioned). But I am only one member of society. Seeing the mistakes in policy and in the average person's financial status is still worrying because other people's mistakes do affect us all.
The worry is that by the government keeping interest rates so low for so long, that they no longer have their most important tool if a new recession were to strike. Coupled with governments increasing debt loads makes stimulus spending difficult as well, and the end result is fairly bleak.

Glad for you that you feel confident about your position.:smile:

I do not worry too much about other people's mistakes even if they affect me, have too many of my own to worry about

If we go down the drain, then all I can do is put things in perspective; my first world problem may seem less bleak then:biggrin:

 

[FluxCap]

Could be in for a bit of a macro morning. We shall see.

S&P futures vs fair value: -7.90. Nasdaq futures vs fair value: -11.30. U.S. equity futures hold losses amid cautious action overseas. The S&P 500 futures trade eight points below fair value with the bulk of the weakness coming after Ukraine's President Petro Poroshenko was quoted as saying Russian forces have invaded an area southeast of Donetsk. The news sent futures to lows around 6:00 ET, but a portion of that loss has been recovered after a correction to reports indicated Ukraine's President did not use the word "invade," but rather said Russian troops "entered" Ukraine. The change to the wording gave futures a two-point boost off the lows.

The second estimate of second quarter GDP pointed to an expansion of 4.2%, up from the 4.0% increase observed in the preliminary reading. The upwardly revised increase is higher than the 4.0% growth that economists polled by Briefing.com had expected. The fourth quarter GDP Deflator was revised up to 2.1% from 2.0%.

The latest weekly initial jobless claims count totaled 298,000, while the Briefing.com consensus expected a reading of 302,000. Today's tally was below the revised prior week count of 299,000 (from 298,000). As for continuing claims, they rose to 2.527 million from 2.502 million.

 

[Auzie]

More good news

Consumer spending drives stock market to new highs

Few extracts:

The chart below highlights the recent improvement in the labor market, as well as the gradual decline of the 10-year interest rate that has held up business activity.
The chart shows that from 2000 to present day, the 10-year Treasury yield has been on a steady downtrend. That has helped the economy recover from multiple recessions, because it has enabled cheap financing and credit.

The chart also highlights the steady swing of the labor market since the turn of the millennium. Employment declined following the stock market crash in 2000 and again fell during the financial crisis, but during the past two years, job growth has accelerated.

Low interest rates and an improving labor market have helped consumer confidence and consumer spending rebound, and businesses see stronger spending coming over the next year.
Index of consumer confidence rose to 92.4 in August from a reading of 90.3 in July.

Cyclical stocks linked to consumer spending are leading the market higher, which bodes well for further gains in U.S. equities. As the economy continues to heal and consumers increase their spending, companies tied to consumer-discretionary spending should profit. Analysts may question the strength of the bull market based on low volumes, but the real indicator lies in the companies driving the market higher. When those companies are tied to consumer spending, there is no telling how long the bull market will remain in place.:smile:

 

[Jack6591]

Sergio Marchionne (Fiat CEO) says US market is doing extremely well

Consumer spending drives stock market to new highs

Few extracts:

The chart below highlights the recent improvement in the labor market, as well as the gradual decline of the 10-year interest rate that has held up business activity.
The chart shows that from 2000 to present day, the 10-year Treasury yield has been on a steady downtrend. That has helped the economy recover from multiple recessions, because it has enabled cheap financing and credit.

The chart also highlights the steady swing of the labor market since the turn of the millennium. Employment declined following the stock market crash in 2000 and again fell during the financial crisis, but during the past two years, job growth has accelerated.

Low interest rates and an improving labor market have helped consumer confidence and consumer spending rebound, and businesses see stronger spending coming over the next year.
Index of consumer confidence rose to 92.4 in August from a reading of 90.3 in July.

Cyclical stocks linked to consumer spending are leading the market higher, which bodes well for further gains in U.S. equities. As the economy continues to heal and consumers increase their spending, companies tied to consumer-discretionary spending should profit. Analysts may question the strength of the bull market based on low volumes, but the real indicator lies in the companies driving the market higher. When those companies are tied to consumer spending, there is no telling how long the bull market will remain in place.:smile:

Marchionne Says U.S. Market Doing - Businessweek

 

[FluxCap]

Just a reminder folks: with the Fed meeting concluding, FOMC forecast release and Fed Chair Janet Yellen's public speaking tomorrow on the economy and monetary policy, tomorrow is a very important "Macro day." Be watchful for possible huge swings in all your public equity holdings tomorrow based on what happens at 2pm and shortly after. If the Fed significantly accelerates or decelerates their plans to "taper," this will move the market.

Economic Calendar - Bloomberg

 

[FluxCap]

A good read:

The Fat Pitch: Why The Economic Recovery Has Been So Slow

 

[Auzie]

A good read:

The Fat Pitch: Why The Economic Recovery Has Been So Slow

Appreciated

I like the graph below, so interesting. Different Japan pattern is eye catching, they must have different socio economic dynamics

I also like the conclusions

The corollary to the slow recovery is this: it's not unreasonable to expect the recovery to persist longer than average. The average economic recovery between 1919 and 1945 lasted 35 months; between 1945 and 2007, they lasted 57 months. This one has already lasted 62 months and there are few signs of the cycle topping.

But there is also some caution

The biggest threat is likely to come from equity prices. We will cover valuations in a separate post. For now, suffice it to say that equities are pricey relative to sales, earnings and balance sheets. But if 2000-02 is a model, then a fall in equity markets will be traumatic for investors but not so much for the general economy.

 

[FluxCap]

Indeed Auzie, I noted that chart and those two final points with great interest. I have also been thinking a lot about what will happen after the Fed begins raising rates, whenever that may be. On that note, here's another bit of historical data set "food for thought":

http://www.bespokeinvest.com/thinkbig/2014/9/16/market-performance-on-fed-days.html

 

[Auzie]

I have also been thinking a lot about what will happen after the Fed begins raising rates, whenever that may be.

That's a question worth consulting my trading tool about :biggrin:

It all depends on how it is done. Devil is in the detail. Good captains can land a plane on water, less skilled ones can crash it, and both captains are just doing their job and flying the plane

We the passengers can only hope that our captains are up to the job

 

[FluxCap]

Market getting slammed today on China fears and Home sales. All growth stocks are selling off heavily. Also feels like a post-BABA whiplash effect. We will see how things shake out. I'm not overly concerned about total meltdown, yet.

 

[FluxCap]

Well it might be time to dust off this thread again, not sure. I'll start with an interesting chart on historical volatility:

"A complete history of volatility and panic, illustrated on one huge chart"

 

[Auzie]

Vix has gone from low teens to 21 in the last few months. I do not feel overly alarmed, but I could be wrong.

There are problems in Europe and China. Hong Kong unrest might spiral out of control, unlikely I think. Poverty is the main ingredient in out of control social disturbances, and that ingredient is missing in Hong Kong. The unrest in well-off society is like fire with no oxygen.

Mainland China is unknown to me as it does not seem to follow established developmental patterns. Chinese leaders deserve a lot of credit for pulling billions of people out of poverty.

Chinese economy is now at 17.6trillion, it overtook US which is at 17.4trillion.

There are many issues in China still to be addressed. I have confidence that China will handle its problems without major global disruptions.

Europe may be starting to realize that austerity does not work and might consider shifting to stimulation model, like in US. That may be difficult to execute. It is counterintuitive and very hard to swallow, the transfer of stimulus money from more efficient EU nations to less efficient EU nations. EU needs to resolve its common currency and uncommon fiscal structure issue. I am concerned about EU willingness to do so.

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Update on the subject, from far more credible source than myself:

Here is an article in The Economist, describing the world economy as 'Weaker than it looks'.

Main points:

Good news in US and UK. Their economies are growing.

The Euro zone is in trouble. Germany is likely to hit two consecutive quarters with shrinking GDP, might easily slide back into recession.

Japan may be on the edge of downturn. April's rise in consumption tax is hurting spending more than expected.

Russia and Brazil are stagnant.

China is growing at a smooth 7.5%/ year. There are worries about a property bust, a credit bubble and a fall in productivity.

Such loop-sided world economy is unlikely to be stable. The loop-sided growth could fuel destabilizing shifts in the dollar. Dollar is on the rise, fuelled by fast growth and Fed monetary policy.

The Economist sees the grimmest prospects in Euro zone. The German policy makers remain pigheadedly opposed to the stimulus the Euro area needs.

 

[Gtoffo]

The market seems in a tricky spot right now... how worried are you guys?

 

[FluxCap]

The market seems in a tricky spot right now... how worried are you guys?

I'm pretty worried. My spook-meter has gone from 50% scared last week to 75% scared this week about serious macroeconomic problems. We are victims of cheap oil, too much global "austerity" in the face of serious needs for public-sector fiscal stimulus in major economies (including US), and seriously overinflated equity valuations in many areas of the market.

This is a scary chart:

 

[FluxCap]

If anyone cares to dive deeper into global macroeconomics, here is some interesting fodder from Brad DeLong, defending Paul Krugman, who has been shouting from the rooftops about what one of the core problems is for at least the last 8 years, and begging us to learn from Japan's mistakes from it's "lost decade," namely how to dig out of a liquidity trap:

The entire point of the analysis of the liquidity trap since the 1930s has been that at the zero lower bound the substitutability of bonds and cash becomes very, very high: there is no opportunity cost in holding money rather than bonds. As a result:

• The velocity of money becomes indeterminate, and the level of spending is no longer determined as equal to the money stock times the velocity of money by the requirement that households and businesses hold their desired quantity of money balances.
• Instead, the velocity of money is determined as the level of spending divided by the money stock.
• Instead, the level of spending is determined as equal to that level at which S=I by the requirement that households and businesses hold their desired quantity of financial savings vehicles.
• If you understand how the liquidity trap works, you don't expect quantitative easing to have large effects--and the failure of quantitative easing to have large effects comes as no surprise.

That was what Paul Krugman has been arguing since at least... 1998, I believe:
Paul Krugman: Japan 1998: "Here’s the little wonkish paper (pdf) I wrote back in 1998...

...the one that alerted me to the danger of falling into a liquidity trap, so that I was intellectually prepared for the mess we’re in. The whole point of that paper was that when you’re up against the zero lower bound, it doesn’t matter how much money you print--not unless you credibly promise higher inflation...
​

So, yes, it is very clear to Paul Krugman and to his back-up singers that quantitative easing's effects are small unless it is taken as a credible signal of a régime change and thus generates a significant shift in expectations of inflation. It wasn't. So it didn't. That it had at best small effects is an intellectual win for the Keynesian side here.
Everybody who has done their homework recognizes that.

 

[FluxCap]

Further musings while we wait for this disturbing market day to end:

The two major problems this generation of global leaders will face I believe to be:

1) Climate change
2) Widening wealth gap between rich and poor / transfer of global wealth to top 1%

A new Credit Suisse report is disturbing in relation to #2, and could be a signal that further recession is possible until global leaders decide to transfer some wealth back to the 99% in the form of fiscal stimulus that heals economies instead of hurts them. From the report:

“For more than a century, the wealth income ratio has typically fallen in a narrow interval between 4 and 5. However, the ratio briefly rose above 6 in 1999 during the dotcom bubble and broke that barrier again during 2005–2007. It dropped sharply into the “normal band” following the financial crisis, but the decline has since been reversed, and the ratio is now at a recent record high level of 6.5, matched previously only during the great Depression. This is a worrying signal given that abnormally high wealth income ratios have always signaled recession in the past,” the report said.

 

[Johan]

Further musings while we wait for this disturbing market day to end:

The two major problems this generation of global leaders will face I believe to be:

1) Climate change
2) Widening wealth gap between rich and poor / transfer of global wealth to top 1%

A new Credit Suisse report is disturbing in relation to #2, and could be a signal that further recession is possible until global leaders decide to transfer some wealth back to the 99% in the form of fiscal stimulus that heals economies instead of hurts them. From the report:



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Have you read le Capital au XXI:e siècle by Piketty? I haven't read the entire work (it's huge) but a comprehensive summary. Basically he argues exactly this, supported by very substantial historical evidence meticulously collected for some countries back to the 18th century.

His work is highly regarded by most credible economists. One of his conclusions is that widening of the gaps both regarding income and capital slows economic growth. This is not a political or ideological conclusion but one that comes from empirical study of the world's economic history.

 

[FluxCap]

Have you read le Capital au XXI:e siècle by Piketty? I haven't read the entire work (it's huge) but a comprehensive summary. Basically he argues exactly this, supported by very substantial historical evidence meticulously collected for some countries back to the 18th century.

His work is highly regarded by most credible economists. One of his conclusions is that widening of the gaps both regarding income and capital slows economic growth. This is not a political or ideological conclusion but one that comes from empirical study of the world's economic history.

Yes I have read Piketty, and I think he deserves a Nobel Prize for his work.