Thoughts on Asset Repricing

[joesxm3]

Here are some things I am noodling about lately. I format them as facts, but they are just my opinion.

In early 2020 the money supply was dramatically increased by pandemic stimulus. Most of this money found its way into assets such as stocks. The rise in stock prices closely tracks the rise in the money supply.

Many said that so much money being injected into the system would cause inflation, but it did not seem to do so. Some said that this was because the velocity of money was low.

The stock market reached all-time highs and was said to be grossly overvalued, but was actually not overvalued if you used the Fed balance sheet as the denominator. Basically the stock price value was tied to the money supply.

Inflation finally started. Maybe the velocity of money increased. Some are now saying that the high prices and the impending recession are now reducing the velocity of money. Maybe that will cause the rate of inflation increase to slow down.

The Fed is raising interest rates and doing quantitative tightening. This should eventually reduce or claw back the massive amount of stimulus injected into the money supply.

If the money supply decreases, the stocks need to be repriced based on the lower money supply. See above, money supply pushing stock prices. Maybe we are seeing this now.

This makes me wonder if stock prices need to be evaluated in terms of their fair value in early 2020 before the stimulus. This would assume that all of the stimulus would be clawed back and the stock prices would need to be recalculated. Some feel that it will not be possible to claw back all of the stimulus or that the fed will need to pivot and resume stimulus either in response to the recession or due to the pending 2022 election.

The recession is likely to have a negative effect on corporate earnings, cash flow and margins. Some feel that this has yet to be priced in by the analysts. If that is the case it would be a second hit to prices after the repricing to account for reducing the money supply.

So, one question is how will the recession, velocity of money etc. affect the actions of the fed going forward. I guess it is a coin toss.

Today I am going to analyze my high tech growth stocks in terms of how close their beaten down prices are to the early 2020 fair value prices and maybe try to access the potential effect of the recession on the earnings and cash flow of each one.

Thoughts?

 

[pb4uski]

In theory, the Fed's dual mandate is to manage inflation and employment and, again in theory, stock prices and elections should have no real influence on their actions to manage inflation and employment.

I think that in the long run that high inflation is a higher societal risk than a recession, so I hope that the Fed prioritizes reducing inflation over avoiding or minimizing a recession. Again, in theory if reducing inflation results in a recession and causes an increase in unemployment then the Fed would need to consider both inflation and unemployment in concert when deciding what actions they should take... so their mandate to manage employment as well as inflation serves as a bit of a check on managing recessions as well. I'd actually favor a mild recession if necessary to curb inflation back down to the Fed's 2% target.

And the stock market will do what it does because the stock market is not the economy and the economy is not the stock market. Even with the recent stock decline, both current an forward P/E ratios are still pretty high in relation to historic norms, so I'm bearish in the near term. And that doesn't even consider potential reductions in corporate profits from the economic slowdown or recession.

At the same time, I don't have much in equities other than some Dec 2023 and Dec 2024 SPY LEAP call options so I hope that the carnage sorts out in the 1-1/2 or 2-1/2 years before those LEAPs expire.

 

[RetireBy90]

I think about these issues and questions a lot lately. I don’t know what that says about me but that is another thread
I think the Fed and Chair Powell have said many times that they will prioritize bringing inflation down over unemployed.
If we take them at their word, I’m left with how long will this take and will they cut off the fight at 3% and again flood the economy with money or will they try to pull back to even policies ? I think they are tired of being the headliner responsible for all the problems.
Just one who doesn’t know much. Should be interesting time.

 

[joesxm3]

pb4uski,

You made a really good call going to cash. I wish I had not lost faith in my original thesis and stayed with my previous heavy cash allocation.

I agree with you regarding the high P/E and the potential impact of forward guidance in the upcoming earnings season. We have lowered the P, but not yet adjusted the E.

I also agree that the societal impact of prolonged high inflation will be much worse than a recession. It will hit those who can least afford it most. But then, some of those may lose their jobs in a recession.

 

[joesxm3]

I did a quick analysis of how the price of my main holdings compares to their price on 4/20/2020.

TSLA is still 315% over. Not sure if this is a valid comparison.

GOOG is 76% over.
AMZN is 27% over.
SPY is 30% over.
VTI is 37% over.
This seems to be the "normal case" and leaves room to drop.

SQ is 6% under.
PLTR was not around on 4/20/2020, but is about even with its IPO price.
ARKK is 2% under.
ARKG is 10% over.
I am not sure what to make of this group. Perhaps they were ahead of the curve and have been beaten down already. Perhaps they are waiting to get whacked even more? Arbitrage opportunity for the brave or foolish?

The argument that the stock prices are simply an arithmetic calculation based on the set of inputs has some traction with me. It seems reasonable that when the inputs change the price is recalculated.

 

[Happyras]

pb4uski,


I agree with you regarding the high P/E and the potential impact of forward guidance in the upcoming earnings season. We have lowered the P, but not yet adjusted the E.

I also agree that the societal impact of prolonged high inflation will be much worse than a recession.

Exactly my interpretation, The big E is yet to surprise us all, well some. This cycle really rhymes with the 70's build and the 80's fight against inflation. However, since we left the gold standard and started printing money faster than the GDP, we began a hopeless spiral. Something has to correlate real assets to the money used to valuate them. Its catch up time or else.

 

[copyright1997reloaded]

Here are some things I am noodling about lately. I format them as facts, but they are just my opinion.

In early 2020 the money supply was dramatically increased by pandemic stimulus. Most of this money found its way into assets such as stocks. The rise in stock prices closely tracks the rise in the money supply.

Many said that so much money being injected into the system would cause inflation, but it did not seem to do so. Some said that this was because the velocity of money was low.

The stock market reached all-time highs and was said to be grossly overvalued, but was actually not overvalued if you used the Fed balance sheet as the denominator. Basically the stock price value was tied to the money supply.

Inflation finally started. Maybe the velocity of money increased. Some are now saying that the high prices and the impending recession are now reducing the velocity of money. Maybe that will cause the rate of inflation increase to slow down.

The Fed is raising interest rates and doing quantitative tightening. This should eventually reduce or claw back the massive amount of stimulus injected into the money supply.

If the money supply decreases, the stocks need to be repriced based on the lower money supply. See above, money supply pushing stock prices. Maybe we are seeing this now.

This makes me wonder if stock prices need to be evaluated in terms of their fair value in early 2020 before the stimulus. This would assume that all of the stimulus would be clawed back and the stock prices would need to be recalculated. Some feel that it will not be possible to claw back all of the stimulus or that the fed will need to pivot and resume stimulus either in response to the recession or due to the pending 2022 election.

The recession is likely to have a negative effect on corporate earnings, cash flow and margins. Some feel that this has yet to be priced in by the analysts. If that is the case it would be a second hit to prices after the repricing to account for reducing the money supply.

So, one question is how will the recession, velocity of money etc. affect the actions of the fed going forward. I guess it is a coin toss.

Today I am going to analyze my high tech growth stocks in terms of how close their beaten down prices are to the early 2020 fair value prices and maybe try to access the potential effect of the recession on the earnings and cash flow of each one.

Thoughts?

There are reasons why we should "revisit" SP 500 levels prior to the COVID slump breakout. That would be in the 3350 or so level, down 12.% or so from current levels, and off 30% or so from the peak.

Let's assume that company profits, expectations, and so on were fairly priced at the end of Feb 2020. Then C19, shutdown, followed by stimulus to get things going and a giant pull-forward of demand in a number of areas (e.g. work from home technologies). Now we are having to process through that demand pull-forward (i.e. work it off). That would suggest that the E needs to fall to reflect the work it off period.

Now I of course have no crystal ball and end of June could have been the bottom. But that same philosophy might have made every one of the previous localized bottom's the bottom, so in my mind, a bottom needs to be proven and not be trusted.

Capital preservation is more important than catching the bottom. (Gotta keep telling MYSELF this over and over.)

 

[copyright1997reloaded]

I did a quick analysis of how the price of my main holdings compares to their price on 4/20/2020.

TSLA is still 315% over. Not sure if this is a valid comparison.

GOOG is 76% over.
AMZN is 27% over.
SPY is 30% over.
VTI is 37% over.
This seems to be the "normal case" and leaves room to drop.

SQ is 6% under.
PLTR was not around on 4/20/2020, but is about even with its IPO price.
ARKK is 2% under.
ARKG is 10% over.
I am not sure what to make of this group. Perhaps they were ahead of the curve and have been beaten down already. Perhaps they are waiting to get whacked even more? Arbitrage opportunity for the brave or foolish?

The argument that the stock prices are simply an arithmetic calculation based on the set of inputs has some traction with me. It seems reasonable that when the inputs change the price is recalculated.

You seem very tech heavy.
Disclaimer: AAPL is my largest holding.

Having stated my disclaimer: There are plenty of nice, boring industries who have been able to utilize technological advances to be more efficient. Just something to think about.

 

[daylatedollarshort]

Recessions impact those unemployed the most, which is still likely to be way less than 10% of the population. But high inflation impacts almost everyone, so I believe the Fed members have learned that historically it is better to have a short term recession than long term inflation. If they were Vulcan, it would be the logical course of action. But since they are human, I don't know what they will actually do.

 

[Montecfo]

I did a quick analysis of how the price of my main holdings compares to their price on 4/20/2020.

TSLA is still 315% over. Not sure if this is a valid comparison.

GOOG is 76% over.
AMZN is 27% over.
SPY is 30% over.
VTI is 37% over.
This seems to be the "normal case" and leaves room to drop.

SQ is 6% under.
PLTR was not around on 4/20/2020, but is about even with its IPO price.
ARKK is 2% under.
ARKG is 10% over.
I am not sure what to make of this group. Perhaps they were ahead of the curve and have been beaten down already. Perhaps they are waiting to get whacked even more? Arbitrage opportunity for the brave or foolish?

The argument that the stock prices are simply an arithmetic calculation based on the set of inputs has some traction with me. It seems reasonable that when the inputs change the price is recalculated.

Can't ignore earnings growth.

 

[milford]

I did a quick analysis of how the price of my main holdings compares to their price on 4/20/2020.

TSLA is still 315% over. Not sure if this is a valid comparison.

GOOG is 76% over.
AMZN is 27% over.
SPY is 30% over.
VTI is 37% over.
This seems to be the "normal case" and leaves room to drop.

SQ is 6% under.
PLTR was not around on 4/20/2020, but is about even with its IPO price.
ARKK is 2% under.
ARKG is 10% over.
I am not sure what to make of this group. Perhaps they were ahead of the curve and have been beaten down already. Perhaps they are waiting to get whacked even more? Arbitrage opportunity for the brave or foolish?

The argument that the stock prices are simply an arithmetic calculation based on the set of inputs has some traction with me. It seems reasonable that when the inputs change the price is recalculated.

Technically this might work, but realistically there are way to many variables that it makes it impossible to calculate.

On a macroeconomics level, I agree things do not look rosy as earnings have not been recalibrated based on the impact of high inflation on everything (raw materials, oil/gas, labor) and reduced consumption as real wage growth has fallen, so there seems to be a good amount of adjustments in stock prices that still haven't been reflected yet.

 

[RetireBy90]

Technically this might work, but realistically there are way to many variables that it makes it impossible to calculate.

On a macroeconomics level, I agree things do not look rosy as earnings have not been recalibrated based on the impact of high inflation on everything (raw materials, oil/gas, labor) and reduced consumption as real wage growth has fallen, so there seems to be a good amount of adjustments in stock prices that still haven't been reflected yet.

Reports say people are still spending. I don’t know if they are buying less quantity but higher prices or if quantity is keeping level. What we are buying as a country is changing from goods to experiences and services but we are still buying. If this keeps up then no need for big drops in earnings.
I do agree lots of variables, too many for me, so i have to look at do a list of positive and negative reports to see where the majority fall.

 

[target2019]

I did a quick analysis of how the price of my main holdings compares to their price on 4/20/2020.

TSLA is still 315% over. Not sure if this is a valid comparison.

GOOG is 76% over.
AMZN is 27% over.
SPY is 30% over.
VTI is 37% over.
This seems to be the "normal case" and leaves room to drop.

SQ is 6% under.
PLTR was not around on 4/20/2020, but is about even with its IPO price.
ARKK is 2% under.
ARKG is 10% over.
I am not sure what to make of this group. Perhaps they were ahead of the curve and have been beaten down already. Perhaps they are waiting to get whacked even more? Arbitrage opportunity for the brave or foolish?

The argument that the stock prices are simply an arithmetic calculation based on the set of inputs has some traction with me. It seems reasonable that when the inputs change the price is recalculated.

Your second group are poor performers when compared to your first group for that period. You can analyze further, but you will still see that the companies/fund manger cannot outperform the giants or broad index funds.

This is a 1-year heat map for reference.
https://finviz.com/published_map.ashx?t=sec&st=w52&f=070422&i=sec_w52_083828581

 

[Phroig]

I think about these issues and questions a lot lately. I don’t know what that says about me but that is another thread

I think the Fed and Chair Powell have said many times that they will prioritize bringing inflation down over unemployed.

If we take them at their word, I’m left with how long will this take and will they cut off the fight at 3% and again flood the economy with money or will they try to pull back to even policies ? I think they are tired of being the headliner responsible for all the problems.

Just one who doesn’t know much. Should be interesting time.

Powell said last week the Board would emphasize controlling inflation even if that significantly increased the risk of a recession. Of course, if we do get into a recession, the Board will be subject to intense political pressure to do something about it. Perhaps we need to move to a system of lifetime appointments for Board members, as with federal judges.

 

[aja8888]

Powell said last week the Board would emphasize controlling inflation even if that significantly increased the risk of a recession. Of course, if we do get into a recession, the Board will be subject to intense political pressure to do something about it. Perhaps we need to move to a system of lifetime appointments for Board members, as with federal judges.[/QUOTE]

 

[copyright1997reloaded]

Powell said last week the Board would emphasize controlling inflation even if that significantly increased the risk of a recession. Of course, if we do get into a recession, the Board will be subject to intense political pressure to do something about it. Perhaps we need to move to a system of lifetime appointments for Board members, as with federal judges.

Or, just hear me out here, we need to move to a system where a central planning committee doesn't think they can or should control market rates (interest rates).

 

[Exchme]

I think we have several big things that we are only partially done working through.

We've got a classic oversupply of money, where at the start of the year, the M2 money supply was 20% over its long term trend due to COVID stimulus. M2 has now stopped growing and rampant inflation has devalued some of that excess. We're not at the end, but an endpoint at least exists, possibly we'll see it next year.

We've got supply chain problems due to COVID overhang, especially in China, that's constraining supply. Hopefully that will be fading away later this year.

We have an energy crisis, initially caused by the rebound from COVID, then made worse by the lack of growth in shale production (which has been been the swing producer for several years), amplified by the inability of OPEC to raise production, and made excruciating by Russia's invasion of Ukraine. This will be slower to resolve itself, projects big enough to move a multi-trillion $/year market take a long time.

We've had a speculative frenzy especially in tech, crypto and real estate due to many years of low interest rates. Obviously interest rates have been moving up somewhat and forcing some glimmers of rationality on the most speculative investments.

Not really discussed much, but I worry about about contagion from the speculative bubbles collapsing. For instance, in crypto, folks are waking up to discover a lot of players owe big money and can't pay, so then the place they borrowed from can't pay. Hopefully, those speculator's losses will not spill over into rest of the world.

Another possible flash point that seems far away but actually seems a bit risky is the Chinese property market, which is way over-built, over-leveraged and over-valued. The failure of Evergrande shows how tenuous it all is, hopefully the damage will be contained to China.

We are only partly done dealing with those things. I feel like I'd be smart to get out of the market, but long experience has taught me that I'm too primed to see risks as the market is going down and even if I am right on the macro trends (a big if), I simply can't predict how others feel, so can't predict what the market will do. So I'll stay put and take my lumps, but will automatically be in the market when it comes back.

 

[aja8888]

I think we have several big things that we are only partially done working through.

We've got a classic oversupply of money, where at the start of the year, the M2 money supply was 20% over its long term trend due to COVID stimulus. M2 has now stopped growing and rampant inflation has devalued some of that excess. We're not at the end, but an endpoint at least exists, possibly we'll see it next year.

We've got supply chain problems due to COVID overhang, especially in China, that's constraining supply. Hopefully that will be fading away later this year.

We have an energy crisis, initially caused by the rebound from COVID, then made worse by the lack of growth in shale production (which has been been the swing producer for several years), amplified by the inability of OPEC to raise production, and made excruciating by Russia's invasion of Ukraine. This will be slower to resolve itself, projects big enough to move a multi-trillion $/year market take a long time.

We've had a speculative frenzy especially in tech, crypto and real estate due to many years of low interest rates. Obviously interest rates have been moving up somewhat and forcing some glimmers of rationality on the most speculative investments.

Not really discussed much, but I worry about about contagion from the speculative bubbles collapsing. For instance, in crypto, folks are waking up to discover a lot of players owe big money and can't pay, so then the place they borrowed from can't pay. Hopefully, those speculator's losses will not spill over into rest of the world.

Another possible flash point that seems far away but actually seems a bit risky is the Chinese property market, which is way over-built, over-leveraged and over-valued. The failure of Evergrande shows how tenuous it all is, hopefully the damage will be contained to China.

We are only partly done dealing with those things. I feel like I'd be smart to get out of the market, but long experience has taught me that I'm too primed to see risks as the market is going down and even if I am right on the macro trends (a big if), I simply can't predict how others feel, so can't predict what the market will do. So I'll stay put and take my lumps, but will automatically be in the market when it comes back.

Nice summary and believable. Let's hope the Central Bankers and politicians don't screw up any part of this going forward (more than they have already).

 

[copyright1997reloaded]

Another possible flash point that seems far away but actually seems a bit risky is the Chinese property market, which is way over-built, over-leveraged and over-valued. The failure of Evergrande shows how tenuous it all is, hopefully the damage will be contained to China.

Just this morning, Shimao Group has missed a payment on a $1.5Billion offshore note.

source: https://money.usnews.com/investing/news/articles/2022-07-03/chinese-property-developer-shimao-misses-repayment-on-1-billion-bond#:~:text=July%203%2C%202022%2C%20at%207%3A51%20a.m.&text=HONG%20KONG%20(Reuters)%20%2D%20Chinese,to%20China's%20embattled%20property%20market.

Note that this is a US dollar denominated instrument.

 

[milford]

Reports say people are still spending. I don’t know if they are buying less quantity but higher prices or if quantity is keeping level. What we are buying as a country is changing from goods to experiences and services but we are still buying. If this keeps up then no need for big drops in earnings.
I do agree lots of variables, too many for me, so i have to look at do a list of positive and negative reports to see where the majority fall.

Less quantity since prices have gone up. The thing with experiences and services is that everyone was cooped up for basically the entire last year so currently there is a surge to go out and about to do something no matter what the prices are (spend some of that stimulus money too). Prices for hotels and airfare are insane this summer. Once the summer is over, I suspect there will be a significant drop in demand for goods and services as you come back to reality and prioritize basic living cost first.