Inflation continues to fall

[pubic_assistance]

6 hours ago, stevenkesslar said:

A brief eyeball check on Bloomberg says average apartment rents in Manhattan were $3700ish in early 2020, right before COVID.  And they dipped at low as maybe $2700, a $1000 price cut, by the end of 2020.  Ouch!  Bloomberg says they recently reached an all time high of about $4150.

Yes. That sounds about right.

Many of my units in prime areas like Greenwich Village were going for $4000 in 2019. Vacant by mid 2020. Filled by millennials at $3200 in 2021. Back to $4200 in 2022 and now at $5000 a month for a one bedroom apartment. If it weren't for the ever growing real-estate taxes in NYC I could retire.

[+ stevenkesslar]

On 7/31/2023 at 5:18 PM, pubic_assistance said:

Yes. That sounds about right.

Many of my units in prime areas like Greenwich Village were going for $4000 in 2019. Vacant by mid 2020. Filled by millennials at $3200 in 2021. Back to $4200 in 2022 and now at $5000 a month for a one bedroom apartment. If it weren't for the ever growing real-estate taxes in NYC I could retire.

It is interesting.  Just going from the CPI alone, one third of which is housing, there was clearly way more COVIDflation nationally than COVIDe-flation. But NYC got COVIDe-flation for a while.  Not a surprise since it was basically Ground Zero for the first deadly wave.  I think the way to visualize is is there was a steady increasing price trend, and COVID deflated it for a bit.  But it sounds like it's now right back to trend.

My nephew sent me this housing price index for high tier homes in San Francisco.  I've now switched the topic from renting apartments to buying homes.  But it's a good example of the opposite.  There was an obvious price surge up above the trend, which has now more or less deflated.  Some unfortunate buyers lured by low interest rates no doubt bought pricey homes at levels they may now regret.  This house right by Dolores Park in SF was one I always loved, right around the block from where I rented an apartment.  Good example.  Its Zestimate was basically in the ballpark of $2 million.  Although it dipped a little in the first months of COVID.  But then it surged to $3 million in 2021, when interest rates were record lows.  And since then has basically dropped back down to where it was.  Somebody had to buy a house like that for $3 million nearby.  And they probably now regret it.

A friend of mine in SF who posts here had the exact opposite.  His one bedroom condo near City Hall plunged, and has yet to recover.  All the young techies who worked at Twitter and wanted to walk to work are now probably buying or renting in the burbs.

What all this suggests is that rumors of the death of New York City or even San Francisco are greatly exaggerated.  People are still willing to pay a premium to live there.  

[ICTJOCK]

Certainly glad to see and experience the lower inflationary environment.    The market for July really responded to the news,  despite the rise by the Fed of a 25 basis point increase.   Hopefully no more.    While always a worry about a recession,  it looks like the rise in interest rates didn't create one.   We'll see what the end of the year brings.

[+ bigjoey]

Warren Buffett on economists buying stocks:

https://www.facebook.com/reel/295781309613940?fs=e&s=aEkTS0&mibextid=z9DgKg

 

[samhexum]

Stocks rose and bond yields fell after US inflation data reinforced speculation the Federal Reserve will pause its interest-rate hikes in September.

Read in Bloomberg: https://apple.news/AiZrT9zxaRACCRRzuJrzgng

 

U.S. consumer prices increased moderately in July as higher rents were mostly offset by declining costs of goods such as motor vehicles and furniture, a trend that could persuade the Federal Reserve to leave interest rates unchanged next month.

Read in Reuters: https://apple.news/AQtIXtgTsRGWwRGDYchsN4g

[+ stevenkesslar]

On 8/9/2023 at 9:31 AM, bigjoey said:

Warren Buffett on economists buying stocks:

https://www.facebook.com/reel/295781309613940?fs=e&s=aEkTS0&mibextid=z9DgKg

 

So riddle me this, Batman.

Here's one that blew my mind when I learned it several years ago:

Corporate Profits After Tax

Buffet's argument is that it's not the economy, stupid.  Except in the very long run.  It's the profits of the strong companies you buy for cheap, and hold on to as they grow.  As he has famously proven.  Therefore, it follows that a period when corporate profits boom is great for stocks, right?

Nope.  In the short term, it's not necessarily even the profits, stupid.  From 1996 to 2000 corporate profits languished, from 587 billion in 1997 to 490 billion in 2000, as that FRED chart shows.  Meanwhile the Nasdaq quadrupled, from 1250 to 5000 or so.  Then from 2000 to 2006 corporate profits tripled, to almost $1.5 trillion.  The Nasdaq went from 5000 to 2500 or so.  When I first saw that years ago, I decided that's a riddle I can't figure out.  Other than if you build a bubble on companies like Pets.com, that earn nothing, maybe it all makes sense.

More recently, the stock market behaved better.  Corporate profits soared for a few years during COVID.  So did the S & P 500.

Buffet himself diagnosed one of the problems in this 1999 essay.  He pointed out that between 1964 and 1981 the US GDP rose 370 % and Fortune 500 revenues sextupled.  During those 17 years, the Dow went from 874 to 875.  The culprit?  Buffet points to the precise subject of this thread: inflation.  More specifically, sky high interest rates and things like 14 % 30 year Treasury bonds. 

I think Buffet is right that is there is one consistent way to fuck up the stock market, it's the inflation, stupid.  Pick any period when inflation stayed above 5 % for a year or more, and that's a stock bear market.  From mid 1946 to end of 1947, pretty much the whole period from 1973 to 1992, and recently of course from late 2021 to end of 2022.  They all sucked for stocks.

This still doesn't explain why the stock market went sideways in the Naughts.  Even though inflation and interest rates were low and corporate profits soared.  Slow digestion after we burped up a bubble, maybe?  Sky highs PEs in the late 90's didn't help, either.

Thankfully, I read that essay decades ago and decided I can't compete with Buffet.  So I'll just be a dumb whore, I figured.  It worked out well for me.  But when it comes to stocks, I figure it's best to be like Buffet.  Apple is by far the biggest chunk of his portfolio.  And it's the poster child for consistently growing profits and even a relatively consistent PE.

Anyhoo, now that COVIDflation is working its way out of the planet's digestion, hopefully it's clear skies ahead. 

And, in deference to Buffet, I also think it's the PE, stupid.  Apple went from a 20 year average PE of 25 to a forward PE of 32 today.  A bit high.  But nothing a little correction someday won't fix.  Meanwhile, NVDA went from a 20 year average PE of 68 to a forward PE of 220.  Talk about PE inflation!  It's always fun while it lasts.  But look out below.

Edited August 10, 2023 by stevenkesslar

[+ bigjoey]

On 8/10/2023 at 2:41 PM, stevenkesslar said:

So riddle me this, Batman.

Here's one that blew my mind when I learned it several years ago:

Corporate Profits After Tax

Buffet's argument is that it's not the economy, stupid.  Except in the very long run.  It's the profits of the strong companies you buy for cheap, and hold on to as they grow.  As he has famously proven.  Therefore, it follows that a period when corporate profits boom is great for stocks, right?

Nope.  In the short term, it's not necessarily even the profits, stupid.  From 1996 to 2000 corporate profits languished, from 587 billion in 1997 to 490 billion in 2000, as that FRED chart shows.  Meanwhile the Nasdaq quadrupled, from 1250 to 5000 or so.  Then from 2000 to 2006 corporate profits tripled, to almost $1.5 trillion.  The Nasdaq went from 5000 to 2500 or so.  When I first saw that years ago, I decided that's a riddle I can't figure out.  Other than if you build a bubble on companies like Pets.com, that earn nothing, maybe it all makes sense.

More recently, the stock market behaved better.  Corporate profits soared for a few years during COVID.  So did the S & P 500.

Buffet himself diagnosed one of the problems in this 1999 essay.  He pointed out that between 1964 and 1981 the US GDP rose 370 % and Fortune 500 revenues sextupled.  During those 17 years, the Dow went from 874 to 875.  The culprit?  Buffet points to the precise subject of this thread: inflation.  More specifically, sky high interest rates and things like 14 % 30 year Treasury bonds. 

I think Buffet is right that is there is one consistent way to fuck up the stock market, it's the inflation, stupid.  Pick any period when inflation stayed above 5 % for a year or more, and that's a stock bear market.  From mid 1946 to end of 1947, pretty much the whole period from 1973 to 1992, and recently of course from late 2021 to end of 2022.  They all sucked for stocks.

This still doesn't explain why the stock market went sideways in the Naughts.  Even though inflation and interest rates were low and corporate profits soared.  Slow digestion after we burped up a bubble, maybe?  Sky highs PEs in the late 90's didn't help, either.

Thankfully, I read that essay decades ago and decided I can't compete with Buffet.  So I'll just be a dumb whore, I figured.  It worked out well for me.  But when it comes to stocks, I figure it's best to be like Buffet.  Apple is by far the biggest chunk of his portfolio.  And it's the poster child for consistently growing profits and even a relatively consistent PE.

Anyhoo, now that COVIDflation is working its way out of the planet's digestion, hopefully it's clear skies ahead. 

And, in deference to Buffet, I also think it's the PE, stupid.  Apple went from a 20 year average PE of 25 to a forward PE of 32 today.  A bit high.  But nothing a little correction someday won't fix.  Meanwhile, NVDA went from a 20 year average PE of 68 to a forward PE of 220.  Talk about PE inflation!  It's always fun while it lasts.  But look out below.

The answer to the riddle is really easy.

The graphs and economic data you list are all aggregate data for an entire economy.  No matter what the investment asset purchased (real estate, a bond, a stock), you are buying a singular investment asset and not the aggregate (unless buying an index fund).

For buying a specific asset, information about the general economy is interesting but not terribly relevant in making a decision on a specific asset.  
 

Example: No matter the interest rate, inflation rate, GDP growth rate, unemployment rate, etc, a specific real estate piece’s value depends more on location, tenant, condition of building, length of lease, local and government policies, why the real estate is for sale, what purpose the buyer has in mind, etc.  Aggregate factors in the general economy like interest rates will impact the value to some extent but other factors may over ride the aggregate ones.

The same with bonds and stocks.  When the aggregate market is hitting new highs, there are usually a few stocks hitting new lows.  When stocks in the aggregate market are hitting new lows, there are often a few hitting new highs.

The “art” of investing in real estate, bonds or stocks is focusing on a specific asset.  Warren Buffett made his mark picking specific stocks and he often is buying when others are selling.  He is often buying when aggregate factors are sending sell signals.  He holds stocks for the long run and doesn’t sell when aggregate factors send sell signals that the market is going down.  

Finally, no matter the theory one uses to buy, sell or hold investments, there is a luck factor.  We need to acknowledge that no matter how skilled the investor is, luck plays a role.

[+ augustus]

6 hours ago, bigjoey said:

The same with bonds and stocks.  When the aggregate market is hitting new highs, there are usually a few stocks hitting new lows.  When stocks in the aggregate market are hitting new lows, there are often a few hitting new highs.

Very true.  With this market, 70% of the S&P 500's gain this year is concentrated in just 8 stocks (Amazon, Apple, Nvidia, FB, Google, Tesla, etc.) which makes for a very narrow breadth, which is not a good sign.  We shall see.  

[+ stevenkesslar]

10 hours ago, augustus said:

Very true.  With this market, 70% of the S&P 500's gain this year is concentrated in just 8 stocks (Amazon, Apple, Nvidia, FB, Google, Tesla, etc.) which makes for a very narrow breadth, which is not a good sign.  We shall see.  

Exactly.   We shall see.  Maybe the market will broaden out, which it appears to be doing right now.  Or maybe a recession (how long has it been missing now?  I've lost track) will bring it all crashing down.  But that's a very good example of @bigjoey's point.  It's not the overall economy, stupid.  It's the specific stock.

That said, it's not necessarily that NVDA, which my nephew holds, is more profitable than OLED, which I hold.  They're both good tech stocks.  OLED made $4.37 a share last year, about three times as much as the  $1.47 a share last year made by NVDA.  Yet OLED is selling for $154 and is up 28 % YTD.   NVDA is selling for $409 a share, and is up 179 % YTD.  

What's the difference?  PE inflation.  OLED has a PE of 35, well below it's 20 year average PE.  NVDA has a PE of 213, about four times its 20 year average PE.  As Stanley Druckenmiller commented in an interview on inflation I posted earlier in the thread, that's "nosebleed" territory. 

My explanation for it is that Wall Street is now gaga about AI.  The same way they were gaga about moving factories to China 20 years ago.  It helps keep inflation down, and what not.  One wonders what the long term impact will be.  But that's beyond the scope of a thread on inflation.  Let's just move on and say it's Wall Street going gaga, stupid.

17 hours ago, bigjoey said:

Example: No matter the interest rate, inflation rate, GDP growth rate, unemployment rate, etc, a specific real estate piece’s value depends more on location, tenant, condition of building, length of lease, local and government policies, why the real estate is for sale, what purpose the buyer has in mind, etc.  Aggregate factors in the general economy like interest rates will impact the value to some extent but other factors may over ride the aggregate ones.

Yes and no.  To the "yes" part, I'll add the "pain in the ass" factor.  I bought a home in Utah in 2005 which was a total pain in the ass for over a decade.  It was an old home that kept having issues, I was several states away, and unlike other cities I never managed to find a reliable handyman that stuck around.  The only good thing I can say is if I ended up buying in California instead in 2005, at the height of a national housing bubble, I would have been one of the millions who got foreclosed on, perhaps.

My nephew thinks real estate is all about location.  Specifically, California versus Illinois.  He's trying to convince his retirement age Mom to move out of a home in a nice Chicago suburb she's lived in for over 40 years.  That home, while pricey, is only worth about 10 % more than it was in 2006, at the height of the subprime bubble.  Meanwhile, since he's my stock and financial pen pal (and, believe it or not, just as verbose as me), he knows I just sold a home in California for three times what I bought it for a decade ago.  Talk about housing inflation!  

Lest anyone mistakenly get a good impression of California, it is really all about timing.  Not location.  I bought the home in 2012, at the bottom of a massive foreclosure fire sale.  At the time it cost me about 60 % less than the 2004 sales price.  I'm guessing it probably just sold for about what it was worth in 2006.  So my sister-in-law arguably did a little better, since at least her value is a little higher than the nosebleed days of 2006.  But in both cases, it's really not where you buy.  It's when.

17 hours ago, bigjoey said:

Warren Buffett made his mark picking specific stocks and he often is buying when others are selling.  He is often buying when aggregate factors are sending sell signals.  He holds stocks for the long run ...

Which is the key point.   Buy cheap, and hold for the long run.  To that point, my sister-in-law isn't really needing a pity party.  Since she and my brother bought the house 43 years ago for about one-tenth of what she could probably sell it for now.  So maybe it's not worth much more than 2006.  But she'll be fine.  Chicago is actually relatively affordable.  So it will help when she decides to be a retired tenant paying rent instead.

Meanwhile, my nephew stupidly invested about $50,000 of his Mom's money in SOXL last fall, of which NVDA is the biggest component.  It's now gained about four times.  So in six months he pretty much made up the appreciation his Mom didn't make since 2006.  I'm not sure it actually makes any sense based on valuation or any actual characteristic of the asset, honestly.  My nephew and I agree it's mostly just Wall Street going gaga, stupid.  😉

That's the thing about inflation, as we're now learning.  Whether it's 9 % annual inflation, or PE's of over 200.  What goes up like a space ship always comes down.  Look out below!

[+ stevenkesslar]

19 hours ago, bigjoey said:

Warren Buffett made his mark picking specific stocks and he often is buying when others are selling.  He is often buying when aggregate factors are sending sell signals.  He holds stocks for the long run and doesn’t sell when aggregate factors send sell signals that the market is going down.  

Just out of curiosity, I checked.  This relates to the point about whether aggregate economic factors, like inflation, really make a difference.  Or whether what matters more is good value-based stock picking, like Buffet does.

And since you aced the first riddle, I'll try another.

Buffet and Charlie Munger decided to have a competition.  Over a period of several years, Buffet bought stocks that increased in value at the rate of 38 % annualized.  Munger did the same.  Except his basket of stocks actually decreased about 2 % a year.  Then Buffet let Munger in on a little secret.  After that, Munger's next set of investments grew at the rate of 16 % a year.  What do you think Warren's little secret is?

I read a very verbose and technical article years ago that argued that Warren Buffet is a secret market timer.  And therein may lie the answer to the riddle.

Those numbers are correct.  But it wasn't Buffet v.  Munger.  It was Buffet and Munger v. Time.

Berkshire Hathaway started around a low of $245 a share in 1980.  By 1998, when it hit a peak, it was worth $84,000 a share.  A crude calculation is that's about 38 % a year compounded.

From 1998 to 2009 Berkshire went from $84,000 a share to $70,000 a share.  That's about a 2 % a year decline.

From 2009 to now Berkshire went from $70,000 to $543,000 and change.  Crude calculation is that's about 16 % a year.

I'd argue it's not that timing is of the essence.  It's that timing is the essence. 

Of course, Buffet's point would still be that you can't predict these things.  Like I argued, corporate profits actually grew way more in the Naughts than in the Nineties.  And Buffet's portfolio is big and diverse enough that things like GDP and aggregate corporate profits and inflation matter.  So since these things can't be predicted, just buy and hold, he says.

What's interesting that I just learned looking at the chart is that Berkshire Hathaway hit a peak in 1998.  And then it actually hit a low in Spring 2000.  Right when the Nasdaq was topping at 5000 thanks to companies like Pets.com.  Another riddle.  But that answer is simple:  Coke.  Buffet's beloved Coca Cola was worth about $1 in split-adjusted terms back when Berkshire got started in 1980.  It peaked at $44 a share in 1998.  By Spring 2000, when Pets.com was all the rage, Coke lost half its value and was selling for $22.  

Coke is worth $60 today.  If you bought it for $40 in 1998, you did okay. If you bought it for $20 in 2009, you did better. 

 

Meanwhile, Pets.com hasn't been seen for a long time.  Just like the imminent recession.  😉

 

Edited August 13, 2023 by stevenkesslar

[+ bigjoey]

22 hours ago, stevenkesslar said:

Just out of curiosity, I checked.  This relates to the point about whether aggregate economic factors, like inflation, really make a difference.  Or whether what matters more is good value-based stock picking, like Buffet does.

And since you aced the first riddle, I'll try another.

Buffet and Charlie Munger decided to have a competition.  Over a period of several years, Buffet bought stocks that increased in value at the rate of 38 % annualized.  Munger did the same.  Except his basket of stocks actually decreased about 2 % a year.  Then Buffet let Munger in on a little secret.  After that, Munger's next set of investments grew at the rate of 16 % a year.  What do you think Warren's little secret is?

I read a very verbose and technical article years ago that argued that Warren Buffet is a secret market timer.  And therein may lie the answer to the riddle.

Those numbers are correct.  But it wasn't Buffet v.  Munger.  It was Buffet and Munger v. Time.

Berkshire Hathaway started around a low of $245 a share in 1980.  By 1998, when it hit a peak, it was worth $84,000 a share.  A crude calculation is that's about 38 % a year compounded.

From 1998 to 2009 Berkshire went from $84,000 a share to $70,000 a share.  That's about a 2 % a year decline.

From 2009 to now Berkshire went from $70,000 to $543,000 and change.  Crude calculation is that's about 16 % a year.

I'd argue it's not that timing is of the essence.  It's that timing is the essence. 

Of course, Buffet's point would still be that you can't predict these things.  Like I argued, corporate profits actually grew way more in the Naughts than in the Nineties.  And Buffet's portfolio is big and diverse enough that things like GDP and aggregate corporate profits and inflation matter.  So since these things can't be predicted, just buy and hold, he says.

What's interesting that I just learned looking at the chart is that Berkshire Hathaway hit a peak in 1998.  And then it actually hit a low in Spring 2000.  Right when the Nasdaq was topping at 5000 thanks to companies like Pets.com.  Another riddle.  But that answer is simple:  Coke.  Buffet's beloved Coca Cola was worth about $1 in split-adjusted terms back when Berkshire got started in 1980.  It peaked at $44 a share in 1998.  By Spring 2000, when Pets.com was all the rage, Coke lost half its value and was selling for $22.  

Coke is worth $60 today.  If you bought it for $40 in 1998, you did okay. If you bought it for $20 in 2009, you did better. 

 

Meanwhile, Pets.com hasn't been seen for a long time.  Just like the imminent recession.  😉

 

Thoughts:

1- Buffett’s strategy includes stocks that pay huge dividends year after year: https://www.kiplinger.com/investing/stocks/best-warren-buffett-dividend-stocks#:~:text=And%20the%20best%20Warren%20Buffett,and%20%244.89%20billion%20in%202020.
Getting $6 billion in cash dividends adds value no matter what the market says Berkshire is worth.  (At some point, after Buffett dies, I would expect the company to payout some of this largesse.)

2-because many of the Buffett stocks are held decades and the dividends keep flowing, short term ups and downs in the market price of those stocks are not important.  Think: Coke.  As long as the dividend is “safe” year-to-year change in the stock’s price does not mean much.  

Buffett holds stocks like HP whose growth potential is limited and the printer machine business declines BUT the ink business is a cash cow and adds to Berkshire’s cash pile💵💰.  Instead of trying to “time the market,” the long term certainty has paid off well.  Rather than try to run after short term gains with “hot,” flavor of the month stocks, slow and steady has done well.

3-looking at Berkshire’s stock between carefully selected  time points is dangerous (and often can produce different results by changing the window) as well as looking in a rear view mirror.  A better approach is to be “neutral” and use arbitrary “windows” like 5, 10, 15 or 20 to see how effective an asset holding strategy is. 
 

For “seniors”:  No matter what theory one uses for buying stocks, personally I believe it is best to be diversified among asset classes and even within any asset class.  This will smooth out market ups and downs.

 For example in the asset class of stocks, I hold mostly great dividend paying stocks but also I hold some stocks that don’t pay dividends but are stocks with a great, long term future (El Pollo Loco- a profitable restaurant chain that’s expanding nationally) or a solid record that produces long term capital gains (O Reilly Automotive).

[+ stevenkesslar]

6 hours ago, bigjoey said:

2-because many of the Buffett stocks are held decades and the dividends keep flowing, short term ups and downs in the market price of those stocks are not important.  Think: Coke.  As long as the dividend is “safe” year-to-year change in the stock’s price does not mean much.  

Well, again, yes and no.

Yes.  You're right that if you bought Coke stock in 1980 and sold it today, it went from a split-adjusted price of $1 to about $60.  Not bad.  And you got dividends along the way, which as of now are about 3 % a year.  As I said above, my calculation of Berkshire's annualized return of 38 % a year compounded from 1980 to 1998 was crude.  Because I didn't even include dividends.

No.  Coke is an excellent example of my point above.  If you bought Coke for $44 in 1998, at a peak, it took about 15 years for the stock to simply be worth what you first bought it for.  Again, there's dividends along the way.  But that's a long dry run for Coke if you're simply counting on dividends.

If we are talking Buffet-level wealth, the other thing that has to be factored in is capital gains taxes.  It certainly makes no sense to pay short term capital gains rates by gaming a stock like KO every year.  In large part because there's no reason to sell a stock like Coke when the stock price keeps going up.  On the other hand, if you'd owned it for a decade and you thought it was topping in 1998 it could make sense to pay long term capital gains and get out and invest in something else.  You'd have had 15 year to try "something else" and you could still buy it back for the same price.

Stanley Druckenmiller is a good example of an alternative billionaire strategy.  His idea is to jump from one asset type to another.  If Coke ain't working for you, buy gold.   He's made money every year.

I'm not arguing against Buffet.  Quite the opposite.  My best investments have all been buy and hold real estate.  And that works nicely because of the leverage of using the bank's money on a mortgage paid by tenants to gain appreciation. 

When I first started trading stocks in 2000 I got the wrong impression, precisely because of what I pointed out above.  In January 2000 buying Coke or Procter & Gamble was a bad idea.  You wanted to buy some worthless biotech or .com company and make 100 % in a month or so.  For some strange reason, that didn't last long.  So what I eventually figured out is that it's better to view stocks like little homes.  The more expensive, like Apple, usually the better.  Although Berkshire itself costs more than most people's homes.

I posted that chart from John Hussman earlier in the thread.  It's worth a repeat on this point of buy and hold.  The debate I've been having with my nephew, who is skeptical about how long this bull market will last, is whether at some point it will just makes sense to buy Treasuries instead.  The red line shows the annual return of the S & P 500 over Treasury bonds.  Obviously, in most years going back a century it is better to invest in stocks rather than bonds.

Hussman is an excellent example of how to totally fuck up long-term investing.  As I cited in a post above, he has been arguing since 2014 that the market is overvalued and it's time to get out.  As his blue line "risk premium model" above shows.  So he has the great distinction of being wrong and having crappy returns pretty much every year for a decade.  I'd listen to Buffet instead.

The issue as I see it is if it is 1998 or 2000, and stocks like Intel or Coke, let alone Pets.com, having been going up like a skyrocket, maybe it is time to get out of a long term trade.  And buy Treasuries, or something else.  We now know that would have been a smart move in 2000.  But by 2002 it was better to buy stocks again for years to come.

And in 2022, thanks to inflation, we also learned that even though it may have made sense to sell stocks and buy Treasuries, it turned out they both sucked.   Basically, inflation sucks.

So, yes.  It's always smartest to be like Buffet as Plan A.  That said, I know my nephew is simply praying the rally lasts til Fall so he can cash out a 300  or 400 or 500 % gain, or whatever it is at that point, pay capital gains tax on a huge tech stock win at the long term rate, and try Plan B.  Fucking Millennials!  No patience.  They always want it now.

[+ FrankR]

8 hours ago, stevenkesslar said:

Well, again, yes and no.

Yes.  You're right that if you bought Coke stock in 1980 and sold it today, it went from a split-adjusted price of $1 to about $60.  Not bad.  And you got dividends along the way, which as of now are about 3 % a year.  As I said above, my calculation of Berkshire's annualized return of 38 % a year compounded from 1980 to 1998 was crude.  Because I didn't even include dividends.

No.  Coke is an excellent example of my point above.  If you bought Coke for $44 in 1998, at a peak, it took about 15 years for the stock to simply be worth what you first bought it for.  Again, there's dividends along the way.  But that's a long dry run for Coke if you're simply counting on dividends.

If we are talking Buffet-level wealth, the other thing that has to be factored in is capital gains taxes.  It certainly makes no sense to pay short term capital gains rates by gaming a stock like KO every year.  In large part because there's no reason to sell a stock like Coke when the stock price keeps going up.  On the other hand, if you'd owned it for a decade and you thought it was topping in 1998 it could make sense to pay long term capital gains and get out and invest in something else.  You'd have had 15 year to try "something else" and you could still buy it back for the same price.

Stanley Druckenmiller is a good example of an alternative billionaire strategy.  His idea is to jump from one asset type to another.  If Coke ain't working for you, buy gold.   He's made money every year.

I'm not arguing against Buffet.  Quite the opposite.  My best investments have all been buy and hold real estate.  And that works nicely because of the leverage of using the bank's money on a mortgage paid by tenants to gain appreciation. 

When I first started trading stocks in 2000 I got the wrong impression, precisely because of what I pointed out above.  In January 2000 buying Coke or Procter & Gamble was a bad idea.  You wanted to buy some worthless biotech or .com company and make 100 % in a month or so.  For some strange reason, that didn't last long.  So what I eventually figured out is that it's better to view stocks like little homes.  The more expensive, like Apple, usually the better.  Although Berkshire itself costs more than most people's homes.

I posted that chart from John Hussman earlier in the thread.  It's worth a repeat on this point of buy and hold.  The debate I've been having with my nephew, who is skeptical about how long this bull market will last, is whether at some point it will just makes sense to buy Treasuries instead.  The red line shows the annual return of the S & P 500 over Treasury bonds.  Obviously, in most years going back a century it is better to invest in stocks rather than bonds.

Hussman is an excellent example of how to totally fuck up long-term investing.  As I cited in a post above, he has been arguing since 2014 that the market is overvalued and it's time to get out.  As his blue line "risk premium model" above shows.  So he has the great distinction of being wrong and having crappy returns pretty much every year for a decade.  I'd listen to Buffet instead.

The issue as I see it is if it is 1998 or 2000, and stocks like Intel or Coke, let alone Pets.com, having been going up like a skyrocket, maybe it is time to get out of a long term trade.  And buy Treasuries, or something else.  We now know that would have been a smart move in 2000.  But by 2002 it was better to buy stocks again for years to come.

And in 2022, thanks to inflation, we also learned that even though it may have made sense to sell stocks and buy Treasuries, it turned out they both sucked.   Basically, inflation sucks.

So, yes.  It's always smartest to be like Buffet as Plan A.  That said, I know my nephew is simply praying the rally lasts til Fall so he can cash out a 300  or 400 or 500 % gain, or whatever it is at that point, pay capital gains tax on a huge tech stock win at the long term rate, and try Plan B.  Fucking Millennials!  No patience.  They always want it now.

You may find this interesting…

https://fortune.com/2023/07/05/jeremy-grantham-billionaire-investor-gmo-predicts-stock-crash/

 

[+ bigjoey]

8 hours ago, stevenkesslar said:

Well, again, yes and no.

Yes.  You're right that if you bought Coke stock in 1980 and sold it today, it went from a split-adjusted price of $1 to about $60.  Not bad.  And you got dividends along the way, which as of now are about 3 % a year.  As I said above, my calculation of Berkshire's annualized return of 38 % a year compounded from 1980 to 1998 was crude.  Because I didn't even include dividends.

No.  Coke is an excellent example of my point above.  If you bought Coke for $44 in 1998, at a peak, it took about 15 years for the stock to simply be worth what you first bought it for.  Again, there's dividends along the way.  But that's a long dry run for Coke if you're simply counting on dividends.

If we are talking Buffet-level wealth, the other thing that has to be factored in is capital gains taxes.  It certainly makes no sense to pay short term capital gains rates by gaming a stock like KO every year.  In large part because there's no reason to sell a stock like Coke when the stock price keeps going up.  On the other hand, if you'd owned it for a decade and you thought it was topping in 1998 it could make sense to pay long term capital gains and get out and invest in something else.  You'd have had 15 year to try "something else" and you could still buy it back for the same price.

Stanley Druckenmiller is a good example of an alternative billionaire strategy.  His idea is to jump from one asset type to another.  If Coke ain't working for you, buy gold.   He's made money every year.

I'm not arguing against Buffet.  Quite the opposite.  My best investments have all been buy and hold real estate.  And that works nicely because of the leverage of using the bank's money on a mortgage paid by tenants to gain appreciation. 

When I first started trading stocks in 2000 I got the wrong impression, precisely because of what I pointed out above.  In January 2000 buying Coke or Procter & Gamble was a bad idea.  You wanted to buy some worthless biotech or .com company and make 100 % in a month or so.  For some strange reason, that didn't last long.  So what I eventually figured out is that it's better to view stocks like little homes.  The more expensive, like Apple, usually the better.  Although Berkshire itself costs more than most people's homes.

I posted that chart from John Hussman earlier in the thread.  It's worth a repeat on this point of buy and hold.  The debate I've been having with my nephew, who is skeptical about how long this bull market will last, is whether at some point it will just makes sense to buy Treasuries instead.  The red line shows the annual return of the S & P 500 over Treasury bonds.  Obviously, in most years going back a century it is better to invest in stocks rather than bonds.

Hussman is an excellent example of how to totally fuck up long-term investing.  As I cited in a post above, he has been arguing since 2014 that the market is overvalued and it's time to get out.  As his blue line "risk premium model" above shows.  So he has the great distinction of being wrong and having crappy returns pretty much every year for a decade.  I'd listen to Buffet instead.

The issue as I see it is if it is 1998 or 2000, and stocks like Intel or Coke, let alone Pets.com, having been going up like a skyrocket, maybe it is time to get out of a long term trade.  And buy Treasuries, or something else.  We now know that would have been a smart move in 2000.  But by 2002 it was better to buy stocks again for years to come.

And in 2022, thanks to inflation, we also learned that even though it may have made sense to sell stocks and buy Treasuries, it turned out they both sucked.   Basically, inflation sucks.

So, yes.  It's always smartest to be like Buffet as Plan A.  That said, I know my nephew is simply praying the rally lasts til Fall so he can cash out a 300  or 400 or 500 % gain, or whatever it is at that point, pay capital gains tax on a huge tech stock win at the long term rate, and try Plan B.  Fucking Millennials!  No patience.  They always want it now.

The problem knowing that you shouldn’t have bought Coke in 1998 and that it would be 15 years before it reached that price level again is you are looking in a rear view mirror.  While it’s obvious now, it wasn’t then.  At any point in time with the knowledge of the time, decisions need to be made to buy and sell.

If you had bought Coke in 1998, looking at its past history, as it dropped the logical thought would have been that this is a temporary setback and will soon return to its upward path.  When you take the very long term Buffett view of holding a dividend paying, quality company it seems to work (a long life helps, too).  Market timing doesn’t work.

I agree with you about real estate.  Normally, it’s a great long term investment. 

One thing that needs to be considered: inflation.  To accurately measure any investment return, the return needs to be inflation adjusted.  Stocks, bonds and real estate returns to be accurate and to be compared over time must be inflation adjusted.  A 10% return now and a 10% return during the high inflation Jimmy Carter years are different.

[+ bigjoey]

17 minutes ago, FrankR said:

You may find this interesting…

https://fortune.com/2023/07/05/jeremy-grantham-billionaire-investor-gmo-predicts-stock-crash/

 

And the problem is: we’ll have to wait and only looking back know if he is correct.  However, I find it interesting that he hedges his bet.  He does not say the market will crash.  He puts his prediction in percentage terms.

At any given time, a normal investor is saying a stock price has peaked and is selling and another investor is buying because they think it will go up.  50% of the investors are wrong.  (I say “normal investor” because there is always some  “forced” selling due to death, divorce and debt).

Like buying Coke in 1998, the “smart”, short term investor was a seller and the wrong, short term investor was a buyer.  At that moment, the outcome was unknown; now, decades later we know who was right.

[+ stevenkesslar]

13 hours ago, FrankR said:

You may find this interesting…

https://fortune.com/2023/07/05/jeremy-grantham-billionaire-investor-gmo-predicts-stock-crash/

 

It's a perfect example of why it makes sense to pay attention to macro factors like inflation.  And why it is also very difficult to figure out what to then actually do.  Pick your poison. 

This also indirectly addresses the question of whether there was any way in 1998 to guess Coke would go flat for 15 years or so.  One way to look at it is even if you were wrong by a year, either way, and you sold Coke in either 1997 or 1999, you still had a decade or so to buy Coke stock back for way cheaper than you sold it for.  The fundamental issue is whether it ever makes sense to head for the doors if you think something like inflation is going to be driving a massive bear market.  There was a thread about that here just like a year ago.

So here's perma-bear Grantham, who is in fact one of my favorite talking heads, and his bubble call being discussed in a brief segment about one year ago.  And here he is four months ago in a very cogent one hour interview I paid particularly close attention to.  Part of the reason I like him is he sounds like a socialist capitalist, if there is such a thing.  Like he talks about how in the good old days companies used to use capital to build factories and hire workers.  Now they do stock buybacks instead.  But I digress.  In both cases, if we are simply talking about calling a bubble and using rear view mirror judgment, he was wrong .......... so far.  A year ago would have been a particularly good time to buy a lot of stocks. 

I took Grantham's detailed warning four months ago as a sign to be cautious.  Because he talked through the fundamentals, and addressed the fact that we seemed to have already gone through the first phase of a secular bear market.  Which made perfect sense at the time.  One way I think about it is that from 2000 to 2002 the S & P basically went down 30 %, had a bear market rally, then went down a total of 40 %, had a bear market rally, then went down a total of 50 %.  Which was finally the bottom.  In March 2023 Grantham could sensibly argue when you factor in inflation the S & P is already down over 30 %.  So enjoy your bear market rally.  But what do we think comes next, folks?

The easy familial way to say it is this is precisely where and why my nephew completely kicked my ass.  We were exchanging lots of emails with lots of charts about this at the time.  Including Jeremy's rant.  The analogy my nephew used is that if you have a chance to pick up pennies in front of a steamroller, you might want to give it a pass.  If it's instead picking up gold bars before a bicycle whizzes by, that's a different thing.  In this case, it turned out to be gold bars.  My big capital gain this year came from selling a rental home.  My nephew, who rents, seems to be poised to make enough on tech stocks to buy a house in a nice suburb.  And bikes for him and his wife, too.  Fucking smart ass Millennials!

If you go back to what Grantham was saying this Spring, it's extremely difficult to say this is turning out to be a bear market like 2000 or 2008.  If it had played out that way, we wouldn't be heading back up right now.  In the interview you just posted (here's the Yahoo version, since the Fortune version you posted was behind a paywall) Grantham comments specifically on this recent turn:

Quote

"I'm a little bit disturbed by the emergence of the kind of mini bubble in artificial intelligence," Grantham said, adding that he was still unsure if the excitement for generative AI was strong enough to alter the final stage of the stock market's bubble. "I suspect it already has elongated this process somewhat. There is some fairly small chance I think it will mitigate it to such an extent that we will only have a modest decline," he added.

Well ......... yes, no, maybe.  He is hedging his bets.

If this were a bear market, a reasonable comparison would be one of the biggest gaga stocks of the 2000 bubble, Intel.  It went from $75 in 2000 to $15 in 2002.  Again, it could make sense to hit the sell button before that happens - just like Coke.  But AI-based Nvidia going from about $300 a share in May, which was still below its 2021 high, to a new ATH of almost $500 recently just can't be discussed in a bear market framework.  Grantham himself is more or less conceding that his "we're in the middle of a bear market" call earlier this year wasn't quite right.  

Again, one could argue this is why you should just ride it out, even if it hurts awful.  In that interview of Druckenmiller I posted earlier in this thread he mentioned NVDA as one of his biggest current holdings.  Stanley said he thinks this AI stuff is so powerful it will keep going up for years.  Take that, Jeremy!

Since I am basically reciting greatest hits, I'll mention Lynn Alden again, who I posted an interview of above.  She makes a point that is aging well.  Which is that this is less like the Naughties bear markets.  Or even the inflationary bear market of the 1970's.  She compared it to the post-WWII 1940's, when supply constraints caused a big inflationary spike for about a year that led the market to tank in 1946. It's an interesting comparison.  In part because the second act was a 1947 lull and then a recession in 1948.  It's actually the last time a sitting President was re-elected during a recession.  In part because the 1946 inflation hurt was over.  And the brief and shallow recession didn't actually start until November 1948. 

My crystal ball sucks.  But that's an inflation-related historical stock market example that I'm keeping my eye on.  Grantham's big bubble pop certainly seems like it may have taken a detour.  Or maybe it was hijacked by AI.  😉

 

 

Edited August 15, 2023 by stevenkesslar

[+ bigjoey]

Interesting video on inflation:

https://www.facebook.com/reel/2875969319203371?fs=e&s=aEkTS0&mibextid=RgwyXk

 

[+ stevenkesslar]

On 8/14/2023 at 7:08 AM, bigjoey said:

If you had bought Coke in 1998, looking at its past history, as it dropped the logical thought would have been that this is a temporary setback and will soon return to its upward path.  When you take the very long term Buffett view of holding a dividend paying, quality company it seems to work (a long life helps, too).  Market timing doesn’t work.

I thought this was a really great interview with Aswath Damodaran.  It makes interesting points about several topics we have been discussing here, plus many others.  Well worth half an hour.

What caught my eye was the part about NVDA's valuation.  So I have three points I want to make.

Aswath gives two very different answers on his own version of market timing, and whether you should sell at the peak.  At 15:00 in the interview he says this, relating to his own holdings in NVDA:  "If you wouldn't buy them at today's prices, why wouldn't you sell them at today's prices?  I have two words:  California, and taxes."  🤑   LOL  

At 18:50 he gives a completely different answer.  Which is that he's sold half his NVDA holdings for about 7x what he bought them for, sounds like back in 2018 or so.  And the other half are "on watch," he says.  But his argument has more to do with fundamentals than market timing.  He says to be worth what it is today, NVDA would have to have 100 % of the $350 billion AI market, and also 100 % of a new market that doesn't exist yet.  Where's the upside?

The second point is I think he calmly knocks down some of these "sky is falling" ideas.  Like about how inflation or inverted yield curves inevitably mean we are headed to a recession or some other form of doom and gloom.  In a sense, he's just doing Buffet 101:  pay attention to what the markets are doing, not what you think they are going to do.  Or, in his own words, "trust markets over experts."  I definitely feel I trusted the bears, like Mike Wilson, too much earlier this year, and sold a lot of stuff I regret selling.  That said, I made money selling it.  That of course doesn't mean buying now is smart.  Buy my nerdy nephew and I have been seeing the same price bottoms and RSI divergences and buying more now, for better or worse.

If only to prove guys way smarter than me can also be way more verbose than me, take a look at this blog piece Aswath refers to in that conversation, about the correlations between inverted yield curves and recessions and stock market performance.  There's no getting around the fact that whenever a yield curve inverts, a recession usually follows in a few years.  That said, so what?  In his own words, in the piece:

Quote

It is true that a portion of the yield curve inverted, but if history is any guide, its predictive power for the economy is weak and for the market, even weaker. The other is that we are taking rules of thumb developed in the US in the last century and assuming that they still work in a  vastly different economic environment. 

Third point.  I view this guy as an anti-Jim Cramer.  Way more modest.  And not hawking advice that he is sure of.  Until he is spectacularly wrong.  I take this to be a fairly upbeat but cautious view of the short- and intermediate-term.  Including ongoing volatility whenever Powell opens his mouth or some new jobs report comes out.   I think he's more likely than not to be right that sectors that have not been part of the index recovery, or lagging stocks in sectors that have been part of the index recovery, are probably good ones to buy.  That said, SOXL (which has NVDA as its biggest component) is worth one-third less than a month ago.  Or, it was a few days ago, when I was buying it on the dip.

To close with this idea of whether you sell and pay the taxes just because you think you are at a peak, I know my answer is fluid.  A client of mine who owned NVDA told me years ago that he wasn't worried about a 20 % dip.  But he was worried about a 50 % dip.  As Aswath says, NVDA had a couple 80 % dips, and survived and grew both times.  So we now know the correct answer was, "Hold, and buy more."  But not every stock acts that way.    Which is probably why a smart guy like Aswath sold half his shares and sent Gavin and Joe big checks.

I have about half a dozen models in my mind of what the next recession could look like.  But if I had to pick one, it's 1990.  Brief and shallow recession that happened a few years after THE BIG DUMP (1987).  Which some know-nothing investor named Stanley Druckenmiller humbly admits he thought was the start of a depression.  My point about 1990 is that it was over and done in six months:  three months for the indexes to drop 20 %, and three months for them to climb back to where they were.  The index got back to its ATH right around the time the brief recession ended.  In that case, we now know the party was just getting started. 

If I were not a dumb whore, or if I did have a crystal ball and I knew the market would ONLY dump 20 % during a 2024 recession - assuming there even is one - I would just ride it out and buy more.  I did that with a lot of oil stocks I bought in 2019.  To my utter horror in 2020, when they seemed to be headed to being worthless. I didn't feel so bad about it in 2021 and 2022.  Other than the crazy fuckers took my pragmatic liberal card away for it.  But that's not something we discuss here.  😉

[+ BOZO T CLOWN]

The fall in inflation cited by the OP was a one-month anomaly.
We're back to the high inflation rates we've experienced over the last 2+ years..

US inflation climbs more than expected in August as gas prices surge

By 

Shannon Thaler

Published Sep. 13, 2023, 8:44 a.m. ET

US inflation climbs more than expected in August as gas prices surge

NYPOST.COM

---

US inflation rose a surprisingly stiff 3.7% in August as prices at the gas pump surged, adding pressure on the Federal Reserve as it weighs additional rate hikes this fall...

BoZo

 

Edited September 13, 2023 by BOZO T CLOWN

[EZEtoGRU]

I wouldn't get concerned about the inflation figures for a single month.  Trends are the most important thing to monitor...not a single month's numbers.  Let's see what the numbers are like through to the end of the year before declaring inflation is back.  Rising gas prices were the biggest culprit for the August numbers.  Many experts still believe there will be no rate increase this month. 

[Kevin Slater]

Reminder that this forum is about personal investing, not politics.  Several posts have been hidden.

[+ stevenkesslar]

On 9/13/2023 at 8:22 AM, BOZO T CLOWN said:

The fall in inflation cited by the OP was a one-month anomaly.

 

Granted, I sucked at calculus.  But I don't think the declines in inflation are the anomaly.  I think what is an anomaly, at least right now, is the last month.  And it is no surprise, given gas prices.

It matters to me because of personal investing.  Having decided I was wrong to put too much trust in the bears earlier this year, I'm now more into stocks than I have been in a while.  And I think it is the inflation, stupid.  So if my beloved clown is right, and we're headed back up to 9 % inflation or what not, the stock market will probably like it about as much as it did in 2022.  It will not end well.

The alternative view is that the global inflation problem is winding down.  (Even the UK is down to "only" 6.8 %, compared to their recent 11 % peak.)  Yet most Americans are still saying loud and clear it still sucks.  If you ever want to buy a home or a car, that is.  Or simply want to use a credit card you don't pay off at the end of the month.  So if inflation is actually waning, a reduction in interest rates can't be far behind.  The stock market will like that.

I'm actually not worried about inflation.  I'm worried about a recession. But a recession would be deflationary, at least.  It just won't be very good for anyone invested in stocks.

Then again, economists do seem to be great at being fundamentally wrong about their educated guesses.  So it won't shock me if the recession predicted the longest in advance by the most experts ever simply doesn't happen.

If it is true that you should trust the market, and not experts, the market has been saying all year long that things are getting better.

Then again, I have always loved clowns.  😍   So I guess I'll just try to stay open-minded.  

 

[+ augustus]

55 minutes ago, stevenkesslar said:

The alternative view is that the global inflation problem is winding down.

Which is true overall BUT, rising interest rates can cause problems in the economy and especially in the financial sector.  We don't know what is going to break.  I think real estate is going to take a big hit.

[+ stevenkesslar]

1 hour ago, augustus said:

Which is true overall BUT, rising interest rates can cause problems in the economy and especially in the financial sector.  We don't know what is going to break.  I think real estate is going to take a big hit.

Just to be clear, what I specifically meant is that if inflation stays around where it is at, like 3 to 4 %, interest rates will drop eventually, too.  I think we agree that rapidly rising interest rates are a problem that could cause a recession.  As has happened many times.  My point above was that lower interest rates will accelerate the economy, not throw us into a recession.  So you are right that the question is whether anything breaks before we get to that point, presumably in 2024.

My gamble is that it won't.  And real estate is part of it.  Most of my assets are real estate.  And I'm shocked how well it has held up.  First, when COVID hit, I emotionally prepared myself for the idea that values would plummet.  And in some places, like Manhattan, they did temporarily.  Not anywhere on the West Coast.  And of course super-low fixed rate mortgages during the height of the pandemic explain why that happened.  Then, second, mortgage rates soared.  But the housing market is still holding on.  Partly because nobody wants to move and swap a 3 % mortgage for one way higher.  But none of this looks like the economy or housing market of The Great Recession.

Another thing people say will break is overall credit use and delinquency.  Maybe.  But I already have a category for it.  Here's three examples of bumper stickers the media used non-stop that seemed like really sloppy writing and research, but I read constantly:   1)  Home prices never go down (circa 2005),  2)  Home prices will never go up again  (circa 2008),  3)  Austerity is in and the rich won't show off their wealth anymore (circa 2010 - ha ha!). 

I've already put all the stuff about how people are maxxed on credit in that category.  Having hit historically low credit delinquency rates thanks to all that bipartisan stimulus in both 2020 and 2021, we are now back to where we were when  COVID hit:  2.7  %.  And that was way below where they were during the GFC:  6.7 %

If anything, based on this time series, credit delinquency in the range of 2-3 % seems like a sweet spot that ran for a whole decade while the stock market soared.

So we agree that something could break.  But it does not look imminent to me.  And it seems possible that both inflation and interest rates could gradually cool down and lead to more economic growth, not a recession, in 2024.

Then again, there is the inverted yield curve.  So I'm not particularly confident, either.

[+ BOZO T CLOWN]

1 hour ago, EZEtoGRU said:

Correct. 

Incorrect.

Based on inflation data over the past 10 years, these past three years have been brutal for the hard-working middle class in the USA.
And a one or two month blip in a three year trend of record high inflation is just that - a blip.

Current US Inflation Rates: 2000-2023

WWW.USINFLATIONCALCULATOR.COM

---

The annual inflation rate for the United States was 3.7% for the 12 months ended August, according to U.S. Labor Department data published on Sept. 13, 2023. This...

You can put lipstick on a pig, but......

BoZo