Recent comments in /f/wallstreetbets

Moist_Lunch_5075 t1_j9hgk4i wrote

Reply to comment by DesmondMilesDant in Wall Street Newsletter S02E07 : Why is there such a disconnect b/w Stock and Bond market? by DesmondMilesDant

(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.

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Moist_Lunch_5075 t1_j9heabe wrote

Reply to comment by DesmondMilesDant in Wall Street Newsletter S02E07 : Why is there such a disconnect b/w Stock and Bond market? by DesmondMilesDant

(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)

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