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.

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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.

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From 1900 - 1990. PE ratio used to trade in range 10-20 range. So anytime you want to assess what might be the appropriate PE to pay. You would simply subtract a High PE - Current inflation rate. So let's say you're in 1974 where inflation went 12%. PE you would pay acc to multpl model is basically a High PE over 90yrs - Inflation rate. 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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Let's understand supply shock decade i.e. WW1 and WW2.

WW2 : High PE : 22 and inflation rate 3%. So yah total 25 seems fine. But then due to supply shocks inflation came 20%. Now the PE just got cut in half to 10. And then when later inflation came down to below -ve PE ratio fell as well. Now this is an anomaly compared to stagflation of 70s. In that period of stagflation low PE with high inflation rate was the bottom. But in post Ww2 unless the inflation went -ve we did not achieved bottom.

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WW1 : Around 1915, High PE : 11 and inflation -1%. Fed started lowering rates and basically printing money for war time financing. Inflation soared to 20% and again PE got chopped in half to around 6. Markets then went sideways for yrs and did no bottomed until inflation went below -ve and Fed had to cut rates again.

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I think there is a lot more factors involved here. 10yr bond yields and interest rate matter as well. I already did this analysis in this season.

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https://docs.google.com/document/d/1tAX3x-RJTPdKmJ2C7D9wgjTLhDvfAUgIfbhCb0UxGmM/edit?usp=sharing

You can read S02E03 where i explained these two periods in depth.

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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. This is tech driven markets and it does not like rates at 5% meanwhile inflation at 5% as well. Meaning Fed will push towards crushing inflation and bringing it back below 2% even if it means causing recession.

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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. 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.

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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.

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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.

My horoscope said I should make my own path today so I am suspicious of your conclusions.

Day traders rarely use the 4H chart for their TA.

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Y'all also have family day in the US?

These charts give me a headache

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Bears are about to get Fukt!!

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.

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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!"

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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:

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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.

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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.

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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.

Panda bears or grizzly bears?

$TSLA has entered the chat

that's why I say F it 🎶🎵

Weekends must be tough on you not having any friends

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Great write up. Lots of great points. Let me ask you.. have you watched, listened or read anything from Dave Hunter the contrarian? He believes we markets melt up, prior to busting. What do you think of that?

His forecast is dependent on several things but mainly that inflation data surprises in that inflation is falling sharply. 10y treasury yields will follow, falling to 2.5% and then to 0. The melt up will take SPY to 600+, gold to 3k+, etc… and then a global bust, driving markets down 80%~

What do you think?

Eat my dongus you fuckin nerd.

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>As your friend Steve said " Paradigm shift takes time. People don't easily give up on their principles of investing " Hence i believe that one day market will come up to their senses that rates are actually at 5% (could go 6% if sticky inflation theory is correct) not 0%. That means something for equities valuations.

Using my indicator on myself Dr Burry. 😂

I don't really use it on daily tf. I just use it on weekly time frame and waiting for when US10 and SPX to go from +0.66 to -0.5 or below. That will mean US10 i.e. bond price and SPX i.e stock price will have -ve correlation somewhere down the line. So if inflation falls off the cliff below 4% in back half of 2023 bond prices will go up i.e. yields down and stock prices will go down.

But yah i think you're right. This was the reason on daily tf why bond prices fell but stocks didn't coz it became -ve correlated by going from +0.5 or higher to -0.4. Thanks for giving me a lesson man. ✌

Note : It will go up on +ve correlation on daily time frame soon.😜

Yah man there is a recession lurking around which will get priced in stock market in 2023-24. Timing it will be so hard. No machine or technical analysis can ever tell you that coz then otherwise everybody will be so rich.

As for your arguments yah i completely agree with you. Also you can add refinancing in that list. A lot of companies financed in low interest rate so how deep the rabbit hole runs will all shall be revealed by 2024. Don't forget the Fed selling MBS and housing market getting weak by 2024.

Straddle or strangle or the ever more secure iron condor.

Shit looks like tesla chart before the crash

TLDR: yes

Why was it closed so long?