(part 3)

>But soon companies made no earnings. It was just like a crypto bubble. So the yields of tech stocks fell, Erp exploded higher coz why shouldn't i buy bonds. Hence PE exploded higher as well. Hence that's why it was the bottom. Same goes for 2008 as well. Rise in Erp with banks failing, companies having no yields, bond looking more juicy all led to PE exploding higher just before recession.

I'm putting on my banker voice here: This is not at all how this works. It's close, but it's a backward-looking misunderstanding of the process for how banks and other institutions buying bonds influences market P/E.

I know, I was there, working in the banking system at the time.

First of all, P/Es didn't expand "just before recession" they expanded in 2009 after the recession began, when everyone was calling for them to drop. That recession was not declared until after it had begun, so there was uncertainty as P/Es declined... basically, you get the decline before the recession, the explosion during it in large part because recession isn't news while you're in it.

Again, that crash everyone's expecting during the recession? It happens before it.

Just check the graph, it's all right there.

But that's a minor issue. The larger issue is the connection you're drawing between bond yields being "juicy" and P/E ratios going up... and I just don't understand what you're thinking with that statement.

If bond yields are high, and elevating, then P/Es decline until banks reach the yield level that they want from bonds because, in the circumstances you laid out, stocks are ultra-risky.

That shifts prices down with earnings. The only way to get a P/E elevation with declining earnings is to either run out of sellers and/or to have an influx of buyers.

If you overlay the data, what you'll find isn't that "bonds are juicy" is the thing that drives P/Es *up*... that correlates to them dropping... it's when bond yields decline that P/Es start rising again, because at that point banks have found their ideal buying point and the rate of return on stocks increases. The bond yield rate doesn't have to decline much to get to that point, since all you need is for bonds to become predictable with yield, either through zero coupon or direct interest returns. It's the constant expectation of elevating yields that drives flows out of equities.

Since bonds are a risk offset (risk-"free" money since the only way US treasuries don't get paid is if the country collapses, and then you have bigger problems) they promote riskier spending by banks.

Something specific happened in 2008, too, that drove this dynamic. With MBS risk-offset collapsing, banks turned to bonds as a collateral offset. That thing you were surprised by?

That started like 15 years ago, man.

That's how the bond market exploded $20T over like 10 years since 2009.

And that walks hand-in-hand with the expansion of the market, and the same will happen this time because nothing's really changed with how capital is flowing into and out of the banks mechanically or with regard to how higher yields create a higher appetite for risk, but you have to get through the compression period first.

>So now it's upto you to decide which story will play out this time around. I personally like the idea of lost decade i.e. a sideways markets. Play tactically and you will make money. If you're a long term investor you wait for that pain in markets around 2023-24 moments before recession and by then just simply be in bonds and eat yields. As a short term investor it's tricky. You have to use tactical strategies and hope it works out using technical + macro env + fundamentals. You could hit or miss it. It's a 50-50.

You don't have to pick a side. I didn't last year in my core account and that made money. I just play a hedge where I run neutral when I don't know which way the market will go and then shift when the technicals tell me to do so. I basically have a hedge fund structure that I maintain where I balance small long positions against net short/long inverse market hedging.

Buying bonds and CDs right now in barbell is tempting, but you can totally play both sides of this if you're smart.

And you also have to be ready to accept a position no one here ever seems to want to: Neutral.

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>So yes i agree my model is flawed otherwise everybody can make money. But one thing is certain you're not having a new bull market. It's gonna be a sideways chop for a very long time atleast till 2024-25 minimum or it just crashes -50% and make us all bears happy. But seeing PE ratio of russell at 45 and nasdaq at 25 makes me kinda optimistic for crash.

I do think it's probably true that things will be volatile and uncertain probably this year and into next, but the thesis that we'll crash because of a P/E ratio thesis is a bit thin right now... 3200 isn't entirely out of reach, but it's also not certain.

You have to leave room to be wrong, or the market will teach you the lesson that you can't predict it. You see sideways chop, I understand that and agree that it won't be 2020/2021 with 30% returns... but that doesn't really take a bull run off the table. I suspect volatility will remain the name of the game, but that doesn't mean the bears are right, either, especially when the thesis is based on a model that is definitely not reflecting the fair value of P/Es relative to the amount of addressable capital in the market and the Fed data is indicating that P/E fair value is higher.

> Sorry for giving you a response you don't wanna hear. I like the idea of you destroying my model and banker's model as well which is used by pretty much everyone on street by saying what if the model is wrong. I like this approach.

No apology necessary. Your response was thoughtful and that's all I expect. If someone has a thoughtful retort, that's how we learn. My big problem on here is when people leave the thoughtful space and dig in too hard without considering the competing idea. You considered my position, and I appreciate that.

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> So let me first explain the chart you sent me for PE ratio. First pt that is a multpl model. Meaning it does not align with bankers/ hfs and inst model. Your chart says PE ratio must be at 22-23x. But bankers model says it's at 18 PE. This is the first point. I am not trying to throw a shade. It's just a misconception even i made during my beginning yrs. Second pt let's say you really wanna dig that multpl model upside and down. So the way i look at is.

Fun fact about me: I used to be a banker, working in infosec and risk.

We may be running into a language gap here, but I think what you're saying here is that the banking world and institutions use complex fundamentals analysis, not just multiple, to determine their targets and I agree with that, but the target multiple being talked about relating to the S&P 500 is still a target multiple, and we have to look at that with a critical eye.

My old colleagues and I have talked about this. 17-19 is pretty much the institutional target P/E range for the S&P 500 among most money managers... no disagreement that, and that can create self-fulfilling prophecies, but these targets also often don't hit, and to understand why you have to understand the mindset of a risk manager and an institutional investor. We're still subject to linear bias and you have to be crazy not to look at the current condition and see risk.

What I hear from my old colleagues is that they know about the problems with CAPE/Shiller-PE and other historical multiple comps, and they're aware of the problems with under-guessing at earnings, but with the Fed in uncertain times the tendency is to accept a lower floor than what they think will actually hit.

Basically, money managers are accepting bad data because in this circumstance they judge it's better not to recommend a long position when they don't know whether the floor is 20 or 17.

It just being the common banker model doesn't inherently mean it's going to end up there. Maybe it will, we're pretty close to the target... but I'm not speculating when I say that the banking model is inherently targeting a lower-than realistic fair valuation for the market.

Please feel free to expand: Is there anything of substance I'm missing from your argument here?

If there's a calculation I'm not considering, I'd love to see it.

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> From 1900 - 1990. PE ratio used to trade in range 10-20 range.

Yes, that's what I was saying and what the chart says. We agree on the timeframes and the historical behavior.

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>Therefore PE was 8 in 1974. Same was the case in 1980 when 14.x% inflation and 6.y PE. Okay so now we understood stagflationary decade,

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> WW2
>
>WW1

This is all during or under the shadow of Bretton Woods or the gold standard. This is important, a big part of the reason why market P/Es ranged until 1990 has little to do with inflation and everything to do with the lack of money supply expansion, which constrains The P portion of the multiple equation.

That's why things become decoupled in 1990, because the Volcker regime was basically responding to monetary policy whipsaw after the 1970s and after Bretton Woods ended. Now I personally am not on-board with blaming the entire economic situation on Bretton Woods since I think it's more complex than that, but it has to be factored in since breaking the forex gold alignment that kept the 1st world markets on stable footing really changes the game. That opens the door to money supply expansion after the Volcker regime.

>So what can we take away from it is. Inflation usually comes in cycle and when it appears market usually go sideways and does not go for ATH if it is supply shock driven and go ATH but then crashes in stagflationary environment. Reason being the debt/gdp ratio. But you need to remember one important thing. This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost.

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We can't conclude anything from these historical examples. In fact, for half of them the primary mode of transportation was horses and the telephone was a new and uncommon invention. TV wasn't even in most households for most of the examples. Modern computers weren't even a twinkle in the mind's eye for most people until the 1990s and even then people would be shocked to see a smartphone.

You don't get to cherry-pick the differences in economic timeframes. You can't say "This is not 70's, 40s or 20s where manufacturing came and saved us with their earnings boost" and then ignore all of the extremely significant and major economic contexts that are wildly different. Just even algorithmic trading by itself changes how crashes happen as a mechanical reality.

In 1929, a whale who wants to protect themselves against a crash and who is tied in with the system was relying on a closed-loop ticker feed with lagged reads, and on transactions that if they were lucky filled by the close.

Now? That same whale can shift a buying zone in milliseconds, and can acquire funds via direct wire and brokerage funding in almost as short a time.

NYSE and ICE no longer just watch in awe as markets decline, they have halting rules and realtime analysis. The mechanics of the market are just wildly different than they were in your examples... hell trading now is wildly different than even it was 10 years ago. If you told an investor 20 years ago that people bought 0dte options on the regular on their phones they'd have called you a liar because it would have been incomprehensible to them, but that has a moderating influence on the patterns in the market.

But back to that "manufacturing's not going to save us" statement. I'll buy that for the 20s and 40s, but the 70s/80s were in part due to the decline in manufacturing. The 1980s was kind of a last gasp for American manufacturing as globalization was ramping up, but the damage was already done throughout America at that point.

Fast forward and we're seeing manufacturing come BACK to the United States. Infrastructure spending is a huge part of the common bear case, under the claim that this will drive inflation in the United States and to be fair, that's probably marginally true. The change in salaries will reduce margins to some extent, but that's also somewhat made up in changes to transportation costs and reduction of supply chain sensitivity, but I'll accept that it's not a perfect offset.

But you can't have your cake and eat it, too... either manufacturing is part of America's story in this current economic era, or it isn't.

Again, in real economics, you can't pick and choose... you get both the good and the bad.

(continued...)

[deleted]

(part 2)

>This is tech driven markets and it does not like rates at 5% meanwhile inflation at 5% as well.

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This is not exactly accurate. Modern high-risk, speculative tech is very sensitive to interest rates because they tend to be debt factories, but there's plenty of tech that does fine in 5% rates, which are not historically very high at all. How well a company does in that circumstance will depend a lot on their balance sheet and market dynamics, just like any other company.

In fact, I'm looking at the historical FFR and tech has done very well during 5% FFR ranges, including through the 1990s and the mid-2000s.

And while CPI wasn't 5% then (and I agree that this matters) it did commonly trend around 3-4%. We'll come back to that.

The problem ultimately comes down to the fact that your argument is that the tech market now is more vulnerable than the tech market of the 1990s was, or as vulnerable... and that's not the case. In the 1990s, the tech market was still largely decoupled from actual business tech reality. Darlings like Netscape and Red Hat were upstarts at the time. The biggest excesses then may look a bit like the biggest excesses now, but we're also throwing in significant established names in there, like Microsoft. Tech is just much more heavily embedded in the business cycle now than it was then.

So contrary to tech being vulnerable to the rusty dagger of 5% FFRs... it's probably more resilient than it was the last 2 times this happened as an overall sector.

And the stuff that isn't, like Roblox and Tesla and other speculative stocks tied to tech that's debt sensitive?

A lot of that shit has sold off. Sometimes to the tune of 90%.

That crash you're calling for? 5% interest rates aren't news now. That crash has already happened... and it can happen again, but you have to then consider the impact to index weighing and how market parity works.

TSLA, for instance, at the end of 2021 was close 7% of the weighting in SPY.

Now? It's 1.64%

The simple reality is that the index has already largely adapted. All of the stuff you're calling out has lost between 3-6% of its weighting since 2021. The market has de-leveraged, and while some like AAPL remain high on the list, the weights of defensives and other strong cyclicals has increased, reducing the impact of the inflation impact you're citing.

Point blank, your thesis made sense in 2021 for a correction, it does not make sense in 2023 for a crash because it doesn't take into account how the market works mechanically.

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>Meaning Fed will push towards crushing inflation and bringing it back below 2% even if it means causing recession.

What the Fed means when they talk about a recession here is that they're willing to accept unemployment up to 5%, and I agree with them. Much beyond that and their other mandate will kick in.

There's a lot of talk about the Fed just beating the country into the ground to tame inflation, but it's mostly empty. The Fed is definitely not saying that and JPOW has repeatedly said they'd react if things got out of hand.

And this situation is not binary. It's not "the Fed tightens and the market crashes, or it loosens and the market flies."

The reality is that sitting at 4-5% FFR while the market expands is pretty common, even during high tech periods with elevated inflation up to 4%.

And while 2% is a target, 4% is the real number the Fed will accept. They won't reverse the FFR on 4%, but they will stop raising on that number because they will be able to declare victory... probably even before then. That would represent a 150% reduction in inflation and a solid downward trajectory.

At that the point, the risk of overtightening is way too high and all the market really needs is predictability. I think the larger question is where we end up relating to a terminal FFR at that time... sure, if that terminal FFR is 10%, then you have a real economic problem... but it's not going to be. Hell, the odds of them getting above 6% with current data is really low.

The idea that the Fed will just relentless crash the market because they're only a few percent away from their inflation goal is a fever dream, full stop.

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>So lets do modern 1990s- 2010 analysis. High PE of 25 and low of 15 again combined with low inflation of 2% was the perfect recipe for economic boom. But whenever PE went above 30 it was a bubble. So Fed starts hiking again to stop people animal spirits behavior. PE came down to 25 and also inflation headed down.

OK, but let's not leave out that the tech bubble coincided with a major accounting firm scandal that required the creation of major corporate accounting legislation and questioned the entire concept of fundamental valuation and 2008 didn't happen expressly due to Fed tightening but rather due to an overextended housing market where all of the risk was sitting on bank balance sheets. In other words, the exact opposite of the situation we have now.

Basically, trying to tie all of this to Fed tightening is revisionist history at best. Again, we can't just ignore all the other context.

(Continued... Reddit's post length limits are small)