<< Consumers are stretched - but that narrative has been true for more than a year. Breaking point now? It's possible but I don't see it.>>
Harshu, I have shared data already, so tell me where you see a consumer that can continue on? I see one that is weakening. And the argument that they made it this far isn't a good one - share some data.
Credit usage looks like a consumer that just doesn't know how to manage risk themselves:
And with personal savings as a percent of disposable income dropping this looks like a consumer that is trading savings for high interest debt:
And whatever they are weathering it is because corporations have been able to pass costs off and will no longer be able to do that. As margins compress that will drive the rest. Inventories are at the highest levels ever and this stuff is going to be marked down. After the holidays I would expect layoffs will start rolling in as further margin protection comes into forefront:
In April 2000 unemployment was at 3.8% and by April 2001 it was up to 4.4 and then 5.9% by April 2003. November 2007 unemployment was at 4.7% and by November 2008 it was 7.3% and by November 2009 it was 9.9%. My point here is that you are looking at things from a lens of 3.9% unemployment while EFFR sits at 5.33% and proxy fund rates are 6.67%. Right now the market is not pricing in any earnings falling because everything only goes up, right? Do we disregard the caution on the consumer from Walmart?
So if we see a consumer weakening with unemployment at 3.9%, what will they look like as corporate finances begin to change? There are multiple pieces at play so important to look at them all.
Each of us must invest as we are comfortable, Harshu. I do not find any comfort in potentially putting my money to the wolves during a period of what is nothing more than mania. Folks are so bullish that no one is even taking any risk measure:
Folks are calling for a new bull and even Bank of America is projecting SPX to hit 5,000 in 2024:
As they say, markets take the stairs up and the elevator down. In November they took the elevator up and you can only imagine what will happen moving down with no hedging.
At this stage I take it as a sign to buy some very cheap index puts and watch for a bit. I have no care of being the next "Burry" or "Jones" as you note, but I sure do not want to risk any money as folks chase ATH and there's almost no risk management being put into place doing so. Being a market personality isn't my goal, making money is and right now I see some major risks brewing.
<< In essence, own companies you're willing on to crash because they're already so sexy.>>
The companies I value will still be there and I plan to buy them when some dust settles. Perhaps I am early, but that is my bearish nature taking hold. I see some very concerning market moves taking place the past few weeks.
At this point all that is needed is a trigger and this will reverse quicker than you can think. Given there are two wars going on with paths to escalation, weakening consumer, weakening corporate finances, shadow bank troubles (mentioned China + ECB review they just did), fiscal spending that is not controlled, as well as a new respiratory illness breakout in China, there are more downside risks than anything to the upside right now.
A paper released by the federal reserve noted that from 1989-2019 P/E expansion can be attributed to declines in the risk-free rate.
Monetary policy has a 12-18 month lag effect and we're just now starting to feel that full effect. It took 12 months for the US regional banks to feel pressure, how well do you think private equity or general corporate finances will hold up getting the full impact now?
In summary of my stance: safer to wait and see where the dust settles than put money into a tulip chase. The companies I value will still exist and will potentially offer chances to buy in at cheaper prices assuming things to correct. If I am indeed wrong then I have lost only what I have thrown in on cheap index puts and then still have everything to throw back in.
-Sean |
