It doesn't surprise me that you're a binary thinker, because that's how people like you are.

So it's either "women worked in everything" or "women didn't work."

What they did in the 1950s, like my baby boomer grandmother, was to work part time jobs because demand was so high and pay was so good. Typically it was in the service industry, manufacturing, or administrative work... many worked as nannies, nurses, and teachers.

You're thinking of the 1920s and 1930s and prior when women were career-locked to specific positions like nurses. That ended with WWII when women entered the workforce and filled jobs as men were drafted.

Remember Rosie the Riveter and the drive to employ women in manufacturing during WWII?

Of course you don't, you don't actually know anything about this... in fact, you don't have any opinion that hasn't been given to you.

But go on, binary thinker, take that shovel and keep digging that binary thinker hole. Eventually you'll get it deeper than 2 inches LOL. Just try harder.

Most adult women actually worked in the 1950s, you're thinking about the 1920s.

And it's ALWAYS in the 60% range because about 1/3rd of the population is always either not of working age or infirm in some sense. This is why we don't judge unemployment against the whole census population.

The fluctuation over 100 years of the workforce participation rate is about 5%, topping off as the baby boomers hit the nadir (that means top) of their working age curve.

Basically, you're complaining about a roughly 4% difference between now and the top in 1998 and hoping no one else is smart enough to realize what you're doing LOL.

Against trend from 2000-2019, the participation rate is actually about 1% OVER projections and that's against 2020 census numbers, so it's an undercount.

> Employment rate is around 60%

*Hands 5 year olds and 90 year olds shovels to work in the mines because u/Fun-Transition1230 thinks they should be included in employment metrics*

My first options trade I made $3600 playing AMD calls after predicting the August 2021 post-earnings run (post in my history). I made some decent money with puts on Zoom back then, too. Then I got happy and lost a bunch of money playing into September thinking I couldn't go wrong LOL.

That set me straight and I started really spending serious time learning to trend the market. That brought me to the place where I could detect weakness in the trend change and liquidated all of my individual equities in December 2021, detecting the decline. I then shifted to a buy and accumulate strategy against S&P sectors to ride out the storm but that wasn't doing what I wanted, so I began running a hedge strat using a combination of SPY puts and SPY/SPXU and QQQ/SQQQ trend cover strat where I accept risk when we go long and cycle the short when we have high risk periods, mostly using the EMA 8 high and low as a trigger.

I've found I'm pretty good at trending on the 1Y SPY chart and correlating that with movement against individual equities.

In January I made some decent cash playing calls post AMD earnings riding the overall market wave. Basically scalping IV and value expansion during the run. My ideal play is based in Cup & Handle structures which display solid risk and play expectations for me and I've gotten pretty good at playing them.

In between I had a number of decent wins and losses. Played towel stock and made money.

When I have planned plays, I do really well. My weakness is largely around degenerate gamble plays but I'm getting better at avoiding them. LOL

I've found that one of the structures that works for me as far as trade structures is concerned are spreads. Very limited return, but they're cheap and they can be positioned just barely out of the money.. within the pay range so they have a higher chance to hit... my problem is I win a bunch of them and start playing naked calls or puts and then overleverage. One of my rules now is that I avoid leveraging into a play.

Anyway, that's an unstructured discussion on strats... I'll see if I can write something up on my favorite hedge plays.

One structure I recommend playing with is calendar trades. They're good ways of limiting cost on options but maximizing potential return.

Likewise!

I'll try to put something together on how I think about trades. There are lots of trade structures out there, I could probably spend the rest of my life experimenting with all of them, but have done enough to have a decent understanding.

Where are you starting from? What kind of trades have you done and what were your best ones?

I think we've had this convo before but I feel like this one was more productive. I don't remember specifics from before, but now is what matters hehe.

Yeah, this game is hard. We can all learn from each other with an open mind.

Let me know what you come up with for an alternate plan. It can result in cognitive dissonance to plan both sides, but the stress is a LOT less when you have an exit plan.

The trick is to put enough risk on the table so that you don't get shaken out easily, but that's a process that people have to go through to find their own appetite for risk. If you just want to put everything on the table and say "down or bust," cool... but just be aware that "bust" is a real possibility. LOL

It's really about being honest about the risks that we're taking.

And my advice is to be critical and check everything. Including what I say. Don't trust ANYONE in the market. Everyone's playing their own game.

You're a good dude, and I appreciate this conversation and your honesty.

Have a great weekend!

And for the record, I really do appreciate the exchange, your drive to improve, and the thought you put into all of this.

I've spent a lot of time studying trading structures in both directions, so if you want to talk about how to build risk-defined positions, I'm glad to share what I know.

But I also want to say that my goal wasn't to get you to acquiesce to me. It's not about who knows more, it's about sharing ideas and exchanging thoughts, and I think this exchange has been wonderful for that.

​

Good luck to you, too, and I hope you also have a great trading week!

To be absolutely clear, I don't think you were making anything up.

I've been doing macroeconomics for well over 20 years and the reality is that this stuff is very hard to understand, and even the best of us can only scratch at the surface because we're talking about the entire, irrational history of human individual and collective interaction.

That means that it's very easy to let limited information and biases influence our positions.

I'm well aware that you've been making these predictions because I've been reading your posts. They're not bad... they're decent. That's why I'm engaging. I'd say in the solid +20% of interesting posts on here.

So I'm not trying to rob you of being right, but rather suggesting that there's a reason why sometimes predictions don't go as expected.

And that happens to all of us. The market has a way of making us all look like fools. To be clear here, I'm not saying you or I are fools, just that the market proves us all wrong.

​

It's easy to predict the market will go down while it's going down. In November of 2021, while my bias was still largely bullish for 2022, I was engaging with people on here saying I could see the market correcting 20% in 2022.

I thought that would happen in the first half and we'd be up a bit for the 2nd half. I thought the inflationary whipsaw would slow down sooner, and I think without Ukraine I would have been mostly right. At the time, everyone was screaming "crash!" and I was saying "I think it'll be an orderly correction."

My predictions then were... mostly right overall. 20% was correct, more or less. That it wasn't a crash but rather a correction was correct. That inflation pulled back on both the MoM and YoY comp was correct.

I knew that the math on inflation would bring the comp down. I also knew that a revision of relative valuations with a de-leveraging wouldn't crash the market like people suggested. I knew that said de-leveraging wouldn't cause banks to implode.

​

So it wasn't random for me, either, but it's just impossible to get every bit of understanding right and you can't see the future.

While the times we were right mattered, they don't eliminate the impact of the times we were wrong. I could have run away from those things, but I didn't... I did research, I observed patterns, I did a ton of chart work to learn to trend things I couldn't see. A lot of that came out to some really darn good predictions last year myself that predicted SPY movement in many cases down to the dollar. With good, solid technicals, you can do that... but it didn't work every time, and that's OK.

​

It's OK to get something wrong, that's how we learn. And all of those people who you listed off? I've seen some of these videos and they would ALL say that learning from our mistakes and our biases and expanding our view is the superior outcome.

I had a chart last year that said that SPY 320 was on the table... then the bullish reversal trend change happened. So I get that 3200 wasn't random. I saw it in the chart in Q3 last year. So I'm definitely not saying you made anything up, just that there are probably things you're missing, like all of us.

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>So whenever i say Q1 disaster its just because i am biased. I cannot change my stance because that would be a huge disrespect to all of the people who have faithfully watched this series since last yr. So if i am wrong so i be wrong but i will try everything in my power to atleast make an attempt for lower lows in Q1 itself. No matter how bad the odds are.

There's a difference between having a conviction and holding onto a bad play.

I would say your position right now is still a conviction, but this isn't a team sport. You don't generate the crash by selling your theory of it, and you can't will it into existence. Crashes mostly happen because the underlying mechanics of the market fall apart.

Sometimes those mechanics are economic, but usually they influence the financial system. That was true in the 10s, 30s, in the 40s/50s... in the 70s and 80s, in the 2000 and 2008 crash... in the end, they all have the unifying factor of the bottom falling out of the liquidity system.

Recessions played a part in those crashes, but not all recessions resulted in liquidity crises.

After lots of work on trending the market, I strongly believe in planning both sides of the trade.... so I say continue planning for your crash and what you would do, but also plan on what happens if you're wrong. How do you avoid loss if you're wrong? How do you profit on the other side?

I have skin in that game. Last year, in Q3, I rode end of the year SPY 330 puts thinking 320 was on the table, hoping for a big payout. I kept dumping money into the position because I was sure we were on the pattern for another leg down, and it really looked like it a couple of times... but that money just wasted away because it doesn't always work the way that we think.

I stuck to the bad play, and lost money as a result. Don't stick to a bad play if you can avoid it. And you don't owe your fans blind conviction in these plays... again, it's not a team sport. The team is "me" and the game is "gains."

What you owe your fans is honesty, sincerity, and thoughtfulness.

And I honestly think you do that. I think what you just said takes a lot of guts and integrity. I get it. I understand the urge to hold onto the idea.

​

​

I just hope I've brought you to think about some things as possibly being more complex than maybe you were considering, or even just brought you to think of something a little differently. In fact, I hope we both did that for each other. You did it for me... and if this all made us think and reassess, then it's all been worth it.

(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.

​

>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.

(part 2)

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

​

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.

​

>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.

​

>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)

> 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.

​

> 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.

​

> 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.

​

>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,

​

> 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.

​

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...)

But back up a sec and ask yourself this question: Do these P/E ratios make sense?

I don't mean from the model perspective, it's easy to get trapped in "the model says X so the market will go down to Y" thinking where the model becomes its own reason for being, and that's part of the reason the market surprises people. We have to think critically about the components in the models.

The reason why is evident if you look at the delta in historical P/E ratios in that time:

https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart

Ever since the reversal in monetary policy that came with the end of the Volcker regime, P/Es have been trending up after almost a century of ranging.

The current methods of assessing fair value in P/E ratios largely rely on historical comps, whether to historical P/Es, historical price to earnings equivalents, or the CAPE ratio. Lots of people like the CAPE ratio because it adjusts for inflation and P/E expansion over time...

...but that adjustment lags to 10 years, and assumes the primary motivator of P/E prices is inflation.

That means that any reasonable historical P/E calculation right now isn't taking into account the full addressable capital in the market after a 45% expansion of the M2 money supply.

​

I can hear the voices in the distance... "But the Fed put's dead!" "No more money printer!" "All the free money's been turned off!"

​

The problem: The Fed's never actually said they were pulling all of the money out, just that they would be restrictive so as to slow its release. 45% expansion at trend was a little over 10 years of release of capital in the reserve system, the vast majority of which is still sitting in those banks, hence the banks surviving their stress tests pretty readily.

See, here's what those people aren't taking into account, and it also explains the weird stuff you're finding in the bond market and risk premia:

​

The Fed effectively did QE for 10 years ahead of time, and the dot plot and the current rate of reduction tell us that to achieve the level of reserve funding necessary to get back to 2%, "restrictive" policy in this case only means pulling about half of it, or less, out... which seems to be right where they're targeting. The majority of QT at the moment seems to be around ensuring that banks don't open the floodgates on the roughly 75% of the M2 expansion still sitting in their reserves and allowing risk to float off the Fed balance sheet, allowing banks to take some MBS and lending risk on again.

But the Fed's still holding a good portion of the MBS risk, so the banks aren't in a 2008 scenario where they might become insolvent... and in 2020 they sold off bonds to the Fed in order to increase liquidity (since you don't want to hold bonds as a collateral anchor when the US economy might lurch into a depression because of a pandemic... that's a good way for your collateral anchor to become a pair of lead boots as bond values on the market contract.

But now, with yields up, banks et al are back to buying. That 10Y bank collateralization thing? I've been calling that out for like a year and a half on here and have the scars to show for it. LOL

But that's exactly what happened. Banks are now offsetting risk by using excess capital, now freed by a more predictable Fed term rate (meaning it's easier for bank risk departments to project how much capital will be clawed back in the short term), which offsets market risk premia, which increases bank stability and allows for the provision of more margin lending since that's relatively safe due to haircut regulations.

​

In other words, the time when fundamentals bears are expecting the market to pull back with visions of a bank liquidity crisis... is exactly the time when the banks will have the highest assurance that the Fed will not pull out capitalization at a greater rate, meaning that it's the time when Risk departments will be more likely to deploy it, as they will still have a very nice buffer even if they just deploy a fraction of that capital... meaning that on top of the 25% of the M2 expansion that already leaked out into institutions, there may be as much as another 25% of addressable capital in excess in the reserves system that we haven't seen yet...

...and that's why the Fed's not worried, they pre-charged the QE line.

And banks will be motivated to do this because they will have an ideal interest rate environment. Investors will demand capital deployment in a circumstance where risks may be lower than feared, or where it's expected the Fed may hold steady or cut back... and it's important to note that all this scenario requires is them to pause or slow and provide enough certainty for bank risk departments to be able to calculate an excess in the reserves.

In this scenario, it doesn't matter if the Fed becomes loose or not, because the only thing that matters is that capital entering the economy.

​

And this goes along with another odd historical trend, also on the historical P/E chart:

Most of the fundamentals arguments suggest that we will go down in P/E *through* the decline in earnings, but instead what we see is that paradoxically P/E ratios have rocketed at the end of recessions. Some people attribute this to the Fed loosening, and OK, that makes sense... but it also just has to do with the fact that eventually dropping earnings no longer impact the already-sold-off S&P as much. I don't know that we're there yet, but that's how it works... the S&P de-weights stocks that took a bigger hit by virtue of market cap and kicks out losers, which happens over a period of 6 month cycles. Market parity eventually drags all stocks up as the market adapts and earnings drop out, triggering accelerating P/Es as earnings drop faster than stocks can...

...which triggers the buying signal.

Now getting back to 18/19 P/Es, to get there you need to have the capitalization and earnings of roughly 2014... does that sound right? Are we in drastic danger of an absolute collapse of the economy, or is this a short technical mean reversion?

I don't have a crystal ball, so I don't know, but an America with an active manufacturing sector and lots of jobs and lots of demand may cause inflation, but that's not a recipe for an economic collapse of over 10 years of growth, even with a retraction of short term growth.

So basically, I think all of these P/E fundamentals arguments hinge on P/Es which are drastically low compared to where the Fed is telling us capitalization is going, and that's largely due to mathematical problems with the models that can't encompass the change in monetary policy.

Now does that mean we rocket from here?

I would agree that the next year has a lot of risk. The market can crash due to emotions, fear, etc... sure... maybe we're missing something in bank liquidity and there are bigger risks than feared... maybe the P/E thesis becomes a short term self-fulfilling prophecy before the market rockets up (I actually kind of hope that happens, more opportunity).

But will it be because we deserve to be at 2014 P/E levels because a model says so? I don't think so.

>You should not think all war is confined to conventional arms or insurrectionists.

You're just not paying attention to what I'm saying because you seem to want an argument rather than a discussion.

You just rephrased my entire point as if it was a retort. LOL

You literally just distilled my entire argument into one sentence and then acted like that was somehow correcting me.

Also if the scenario you're talking about happens and world powers fragment and fracture, the Fed Funds Rate's not gonna be a thing anymore. Your entire scenario depends on the continuation of the world power structure, which is the core of my point... once we hit that point where the poison pill makes sense, things have radically changed in much more significant ways.

>big money will already be on the other side of the trade

If 2020 taught us anything, it's that capital flows matter and the economy basically doesn't.

>Scenario 2 is an interesting prospect and is exactly what the inflation doomers have been shouting - that every previous period of inflation has had periods of cooling followed by even more rapid inflation. The gas prices might signal a resurgence here, but my personal experience (and the data) suggest that inflation in the price of goods is just about done.

This is called the "Whipsaw Effect." It's an expected part of the inflationary prediction. The periods of inflation are also getting shorter and less relatively impactful. It just feels like it hurts more because years of inflation are compounding and we have headlines like the price of eggs to look at... but as the order and contract system catch up and cycles emerge, it'll get easier to ride the inflation waves for companies and that means better margins.

Edit: I do agree that in the nearterm, there's a risk of an earnings recession, mostly agreeing with the dynamics u/acneadjr has laid out... but I would only say that the market may surprise us if things aren't as much of a downward spiral as they're suggesting.

I think looking at consumer patterns is the right place to look overall... I just don't know that it necessarily correlates with a market decline or that it necessarily cyclically builds to the extent it appears it could.

Re-read my comment again. I did not say that the last decades of fights are the "future of war."

What I said was that IF a world war broke out, it would be explicitly DIFFERENT from the last decades of wars in that it wouldn't be an escalation of people so much as an escalation of threat and action.

I have no idea where you got that I was ' falling into the classic trap that the last decades of fights are "the future of war. " ' but it definitely wasn't from what I wrote.

What you're not considering is that the scenario you've suggested would completely tank the global economy, hurt our allies, and crash our own economy in the process. When there are other options, they're not going to do that.

Currently there's about $20T unspent in government bond rotational funds to tap. Then there are the loans accessible to the government via the reserve. The military's expensive, but a mass mobilization can still be done with that money without crashing the economy.

Your scenario is literally one of the most destructive things a country can do to its economy. You can't just accept that they're going to do that without considering the alternatives.

What I am saying is that if we DID get to that point where "destroy the economy" is on the table, you basically have to ask how much things have changed.

Have they changed in that circumstance enough to have a nuclear exchange?

Your last paragraph says it well: War is chaos. It's unpredictable... but we're not relegated to absolute blindness. We can measure the amount of risk a country has to be at to make certain moves. The move you're suggesting is basically economic seppuku, and in a world with nukes we have to consider that once you're there, you've entered the "existential risk" space of risk.

That's what I'm getting at... not that it'd be like the last several decades, but rather it'd be drastically removed from that to an even more extreme threat than you're accounting for.

I'm actually accounting for MORE chaos allowance than you are.

The issue I have with that is that the PE ratio metrics they're largely using are against traditional average ratios.

The asterisk on that metric is that as capital available to lending institutions increases, which comes from the expansion of M2 combined with bank lending appetite and cost of money, the "price" component expands, which since the 1990s has been slowly pushing the average P/E ratio up.

We're currently sitting around the mid-2019 level for the S&P 500's combined P/E ratio.

The thing is... the Fed's not going to suck all of the expansion of M2 out... in fact, probably about 25%, mostly to investment houses, has escaped already and won't be called back. Some of it's in longer term bonds, so that's not coming back right away. There's a lot of uncertainty around how much the Fed will draw down on the balance sheet, with some people guessing a full reset down to 2019 levels, but I would say the pain to get there relative to the gain is not going to allow for that to happen... and current Fed projects indicate that there's no appetite to restrict to reduce the money supply to that extent, reducing the pull-forward from like 10 years to a couple of years is probably enough...

...which still leaves the banks cash-flush and with lots of money to re-enter the market that institutions began pulling out in 2021.

Once stock return projections get higher than the risk-free rate of return again, that should float the P/E ratios up higher than the expected 2019 baseline. Of course individual equities will have their own dynamics, but the flow of the market will also dictate to some extent whether they have strength or not.

In other words, current market pricing could be based in an overly pessimistic view relative to the amount of capital that will be looking for a home in a market reversal... it's safe for them now to take a risk-averse approach, and not wrong to do so given the unknowns... but the reasoning behind their argument regarding P/E ratios has a blindspot.

Edit to add: Prior to the 1990s, the range on the P/E ratio is tighter, in part, because money expansion was generally tighter and because Glass-Steagall meant that more of that M2 expansion made it into the real economy, meaning the 'E' part of 'P/E' was more likely to scale with stock pricing.

What happened in the 1990s other than an explosion in investment speculation and a bit of a change in monetary policy and a tech bubble? GLBA and Glass-Steagall were repealed, which opened the doors to more intermingling of S&L and investment house funding. That drives the 'P' part farther than the 'E' part of the ratio can run.

Hmm... an interesting scenario. Definitely worth some continued thought on my part.

My first thought is that the US government doesn't really have a short-run when it comes to capital available for military efforts. I do suspect that a world war would strain us for more than people think, but I also know that with current bond funding and a low interest rate, the US government has access to options that would have less impact on the economy, such as temporarily raiding entitlement program funds through internal bond transfers and just straight up borrowing the money directly from reserve lenders at a sweetheart interest rate.

Raising the FFR to achieve the goal without having to wait for taxes would be much more costly and probably not necessary given the rather significant bulk of military forces in the United States... in other words, we already have such a high percentage of the military production, staffing, and spend that a scenario where a modern war would require us to massively grow our military is unlikely. Even against China.

It would probably require several large nations ganging up on us with no allies to speak of... which is not likely to happen.

And a modern world war wouldn't really be fought with massive armies. Like if destroying the global economy is on the table, massive cyber warfare and nuclear war are probably also on the table... and a cyber war would require an upscaling in resources, but a nuclear war/nuclear deterrent cycle is already basically paid for... or priced in, if you will...

So that's blocker #1, and I think it's pretty significant.

Blocker #2 has to do with the cyclical nature of bond yields. Basically, if to promote bond sales, the Fed upped the FFR, driving the risk-free rate of return way up and juicing the 10-year T-bill above 10% yield (many of these calculations use the 10-year as a yardstick for the bond rate) it would drive massive demand into those bills, creating a drop in the yield.

Bond yields are decided in part by auction, which is how the 10-year rate is now lower than the FFR. Basically, the government doesn't want to just throw free yield around, so they increase the yield to move the number of bonds expected at the best yield possible at volume. As demand shoots up, competition for bond notes increases and as a result deals can be made at auction with lower yield.

That would wind up crashing the yield and that would create the equilibrium to re-open markets elsewhere our capital needs were met.

Still an interesting exercise in what happens if the risk-free rate of return were to spike suddenly and extremely... I do think you're right that such a scenario would probably cause a larger market crash as flows went to risk-free return.

I'm so tired of correcting the "experts define a recession as two quarters of negative GDP" bullshit. LOL

I especially hate the "the white house changed the definition" idiocy.

A recession has been a broad-based decline across the economy for a long time. The NBER didn't change the definition for this drawdown. It was this way when I started taking econ courses for my degree 25 years ago. I'd say I'm having a Mandela Effect moment, but the NBER's definition remains that it requires a broad-based economic pullback for a recession.

The thing people say to defend this is "GDP IS the economy, dummy" which is bullshit. A macro score of overall productivity? Sure... a sign of overall economic weakness? GDP can decline because of cyclical events as certain sectors of the economy retract, but others can have strength at the same time, which is pretty much what we saw during the two negative quarters this year.

We tell people to look for two quarters because it's a lot easier than explaining what a broad-based pullback in economic activity is and, frankly, people glaze over and often don't get it... and GDP usually goes up. The GDP rule is an indicator of potential coming weakness. Just an indicator, not a definition of a recession... but somehow this BS became a truism.

Weirdly, you can also have a recession with positive GDP once you've entered the decline because GDP growth/retraction is inherently relative... this is the danger of just using GDP, and why it's important not to declare one until you have solid data.

The whole exercise feels silly to me, too. Like... what's the use of trying to pinpoint whether we're in a recession right?

Do we need to do that to consider risk to equities? I mean, yes, it's important to keep an eye on expectations around a recession... but we know they're there. Anyone who can read a chart (which I guess lots of people on this sub can't, so there's that LOL) knows the market's in a downtrend experiencing heavy risk of potential capitulation... and the truth is no matter what we guess, whether we enter a recession this year or not or have already started one, the hedge is basically the same. The risk is basically the same entering into the year... and when that risk level changes, it's gonna be based on information we don't have right now.

So like... what's the fuckin' point of trying to call a recession early besides the political axes some people are grinding?

Anyway... just wrote that to supplement your post.

Exactly this. I use SPXU and SQQQ to hedge my SPY and QQQ positions.

The "10% decay per month" stuff u/awesomedan24 is referencing I've seen come from some fund managers and advisors and sites that reference "back of the envelope" type calculations that don't reflect the actual behavior of the funds but rather some "max leverage/worst case scenario over a long time" type situations.

I mean, yeah... if you hold SQQQ indefinitely, you're gonna lose money. If you hold it during a long term downtrend against a long position, though, you'll be fine.

When I started using my strategy earlier this year, what I found is that the formula for these ETFs is that they work basically on a 1.1x * leverage multiple over short periods of time in both directions, more or less. Basically, the effect of the leverage (with some very minor variance on a day to day basis because of the reset) amplifies the directional bias, and when you're in the correct direction the gains are slightly higher per dollar compared to non-leveraged, and accelerate in the same way on the wrong direction, at around 3.3x

I did long-term TQQQ holding calcs once and IIRC the return was around 2.6x rather than 3x (just buying 3 times the number of QQQ shares) and that matches the probability math around leverage you're talking about.

I also think the idea that these decay so much comes in part from the amplification of losses from movement, which isn't reset decay. Basically, at 3.3x amplification compared to the index, buying TQQQ on a decent decline day against the same capital for QQQ results in 3.3x the decline per dollar, which if you have 3x the capital in it (equal position) suddenly becomes... 10%.

The secret to hedging with this is that you use 1/3rd the capital for the hedged short ETF and keep in mind the excess capital impact when people are swinging longs on a bear run, like TQQQ. It's key to cut the capital exposure to something people are comfortable with in their positioning and it's easy for people to overallocate to leverage.

In reality, though, there isn't a 10% per day decay risk... most of the decline risk is in getting the directionality wrong and in overleveraging. Hell, 10% annual would be way high for decay on these.