Black Monday

[bull....]

all blacks losing bound to add to nz50 pessimism

[mike2020]

So you are forgetting the big bounce back in between? I.e they were both selling opportunities, followed by a large buying opportunity in between.
I did rather nicely out of buying on that dip & selling it out earlier in 2023.

The question for mine is, when is the next buying opportunity?

I have shifted my Super perhaps prematurely back to equities, but having it out whilst the market came down 10% is anfmd picking up interest on the way has worked well.

I still have my investment portfolio & trading portfolios largely on standby.

I don't trade so yeah completely forgot the bounce(s). My NZ portfolio is well green, so long term I have no worries, I guess this is "sharetrader" and I have picked up some good buys here along the way, I'm hopeful BRW pays for Christmas, preferably this year.

[moka]

https://www.youtube.com/watch?v=7RLfKaxH-Og
Grants 40th Anniversary: "Rates Can Never Rise" 10-3-23. DoubleLine CEO Jeffrey Gundlach.

0:30 My title page at this conference in 2016 was rates can never rise. I actually was so bold in 2016 as to say I believe that within about five or six years, six years I think I said rates will possibly at be at 6% and boy did I get lampooned for that statement but hey they're at 550 so I'm going to say close enough.

One of the things I've learned from 40 years in the investment business is you might have a good vision of where things are headed but it takes forever in the investment business. People want things to happen in their normal life cycle like weekly, monthly, quarterly but it takes years and years and years nothing happens and then all of a sudden it all collapses.

In our management of the economy we have two tools, zero interest rates and quantitative easing and budget deficit, so I guess that's three but the quantitive easing and budget deficit are sort of the same thing.
And you'll notice that we claim to have a good economy but we have nearly an 8% budget deficit as a percentage of GDP and I think the guessing is that GDP in the United States will be around 2 and a half % real for this year, nominal will probably more like 6% or 7% but that's all the budget deficit.

If we didn't have a budget deficit we'd have zero growth and the level of the budget deficit now is about the same as a percentage of GDP as it was at the depths of the global financial crisis. And here we are probably heading into another bout of stimulus in response to the next recession. We've been raising interest rates. We'll notice that the one that started last year in 2022 is by far the steepest by far and the largest and this goes all the way back to 87. This is kind of Volckeresque type of interest rate increases.

But it's not just the United States it's all over the world and it's very interesting how synchronized everything seems to be. At the left hand side of this chart there was some people that were cutting while others were not. Not anymore, it's sort of like everybody's hiking together. It's almost like we have a global Central Bank the way that they all work together.

So what we've got here is an interest burden problem and you'll notice the orangish the bluish line is the defense budget and in billions of dollars and the blue line is the interest expense and it's gone up by something like $400 billion since the FED started raising interest rates.

And so it's about three years it takes really for the interest rates to cycle through but this is obviously going to be a huge problem.
And Powell kind of stepped in it when he decided he was going to use super core inflation so PCE core less shelter. I mean you're you're down to what? Boxes of pencils, what are we what are we measuring here? I mean there's no food, there's no energy there's no shelter.

He decided that this is the one that has to get down to 2% but it's a 4.7 and it's actually not improved at all really since the Fed started raising interest rates.
So what happens when you raise interest rates, borrowing costs go way up. Businesses used to pay about 4% a little over 18 months ago and now they're up at 9%. That's a pretty big increase.

6:12 How far along are we in this process? I'm going to come up with three slides that are the most important I think in monitoring the economy right now. These are recessionary indicators. The one that is the earliest to be on watch for recession is the yield curve two's 10 yield curve inverts and then it stays inverted for a while. That's why it's an early indicator and then something happens. It's not the inversion that puts you on what was it, basement mode, it's when it de inverts. You'll notice that we're de inverting. In fact today we've got to 108 basis points inverted 2,10 several months ago. And now we're inside right at 40 so it's already come in by 68 basis points and it's de inverting fast. And you'll notice it's when it de inverts that you really have to worry about things and that's what's happening.

[moka]

https://www.youtube.com/watch?v=7RLfKaxH-Og
Grants 40th Anniversary: "Rates Can Never Rise" 10-3-23. DoubleLine CEO Jeffrey Gundlach.
7:29 Somebody sent me a very helpful chart and he looked at the twos 10 on a weekly basis versus its 30 week moving average and that has an absolutely perfect record in forecasting recession. And it has crossed above its 30 week moving average in recent couple of weeks.

Then there's sentiment. Its future expectations less the current situation. People always feel sort of bad in these surveys about the future. They often feel very good about the present, but they are concerned about the future. So you see when the area gets very red down there, it means they feel really bad about the future but they're still feeling decent about the present. But then when the red area starts to shrink. It means that they're starting to feel bad about today relative to the future. And I must say it has that same look again, where it's been down here for a while and here we go, it's starting to shrink in that red area. So this is less of a long-term predictor, it's more of a real-time predictor than the twos 10 but it's starting to shift.

And then we have the unemployment rate which is of course the most lagging indicator of them all. What we have here is the unemployment rate that's reported every month going to get one on Friday versus its 12 month moving average. And there we see the recessions again in red and it's really interesting it gets low and then it stops falling and then it starts to gradually rise and then it crosses over its 12-month moving average which has happened and then it tends to kind of explode to the upside.

I figured these layoffs are coming. Well in the world of economics and the world of investments you can see what's coming but it takes forever. It takes much longer than you think. Well my gut tells me that these layoffs are coming like at the end of this year.

10:55 Now the one that really matters and I didn't include it is the unemployment rate versus its 36 month moving average, it's three year moving average has a perfect record when that crosses over you're cooked. And that's going to happen I think with high probability in the first quarter of 2024.

So we're going to be having some problems with the current Fed policy and the budget deficit is going to explode.
So that's what we got left - print and pay wealth tax. Well that won't solve the problem but it'll make some people feel better

So when the next recession comes what's it going to be? Well I believe there will be a bond rally in a pavlovian sense when the recession comes. But I'm not sure it's going to last. So the problem is that the response is very likely to be about helicopter money. So let's say we go out and print all this money, send checks to everybody. So obviously printing money will lead to inflation.

We start to see that at 6% interest rates we have a huge increase of about $1-1.5 trillion in interest expense as a percentage of GDP. In other words it would go up by about six percentage points. So what we'd have is interest expense as a share of GDP would be up at such a large number that it obviously crowds out the mandatory spending, military spending and so forth but what if it goes to 12% of GDP which is sort of a base case. We're at eight now. If there's a recession I don't think the deficit is going to shrink. So what happens well the interest expense as a percentage GDP goes up to about 133%. So now we're talking about some real money. We're talking about $3 trillion. We're talking about a really, really big deficit problem. So what is this going to cost us if this all happens. Well using the CBO’s baselines which is the same as about a 4% of GDP deficit we see that the interest expense goes up about 40% of tax revenue. So what happens to the defense budget?

There's a big part of the budget like 70% that's so-called mandatory. So what this means is there'd be no money for anything but the so-called mandatory stuff. So how are you supposed to go forward with that? Well what if what if the primary deficit is 8% of GDP? Now we're at 40% what if it's 12% of GDP, we're up at 70% so you can't fund the mandatory items so what are you supposed to do?

18:18 And what if God forbid interest rates are at 9% which is certainly plausible if you have this type of crazy spending program. Well I’ve got bad news for you. Over 140% of tax revenue goes to paying the interest expense.

[moka]

https://www.youtube.com/watch?v=7RLfKaxH-Og
Grants 40th Anniversary: "Rates Can Never Rise" 10-3-23. DoubleLine CEO Jeffrey Gundlach.

19:53 Okay so we've had this long longterm interest rate trend.
This is a 30-year treasury yield which did nothing but fall since 1990s, early 90s in a fairly controlled pattern. You'll notice it was pretty well contained inside of these bands but it's pretty clear that something changed and now we're completely out of the context of the past. And one of the things that I've been thinking about really for the past 5 years, but more intently since the 2020 situation when interest rates got insanely low. I mean the intraday the 10 year treasury got to 50 basis points for about an hour, the long bond got to 1% for about an hour but those were obviously panic levels.

But when you've been around for 40 years you think you've learned stuff. You think that you understand relationships. You can tap into your experience and how things interrelate and act. But what if your experience is all informed by a secular trend that isn't in place anymore? What happens if falling interest rates were significant in creating those relationships?

21:12 And if they're not falling anymore maybe those relationships are irrelevant, maybe they're even misleading. For example, during this long interest rate decline did any high yield bonds ever mature? I don't think so, I think they were defaulted or got refinanced. So if your company's in trouble and the economy gets weak you can refinance at ever lower interest rates. And that obviously bails you out. Your interest expense goes down.

But what happens if interest rates are going up?
I think the default rate will be higher than any other time. I also think recovery rates will be lower, so there's more risk. When you have higher interest rates, obviously rising interest rates don't help. The stock market bottomed out when 1982 when rates were at their peak.

22:22 We've gone from a situation where stocks at the beginning of 2022 were wickedly overvalued. The S&P 500 as a proxy versus their internal history of price to book, PE ratio, Schiller ratio, price to sales but as overvalued as they were versus their own history they were in the top few percentile of overvalued versus decades long history, they were very cheap to bonds amazingly so as stocks were rich, bonds were even richer with the 10yr treasury laughably as inflation was heading to 5, 6, 7, 8, 9% the 10year treasury was hanging out down at a one handle. What a joke. Not any more.

Bond yields are up at 5% five and a half on Fed funds and you can buy Double B bank loans which at some point you're going to want to sell them because their high yield is a it's a kind of a blessing and a curse. It's a blessing because you get the income. It's a curse because the company has to pay it. So you got to watch out for that. But stocks were twice as cheap as bonds 18 months ago. And now they're twice as rich. There's been a four-time re-evaluation of stocks versus bonds on evaluation basis.

So Mark Twain had one of the statements that I've been thinking about a lot over the past five years and that's it's not what you don't know that gets you in trouble, it's what you think you know that just ain't so.
And that's what I think investors should be careful about because what they think they know things.

But what you know is falling interest rates. And it's not happening anymore and I think you'll get a bond rally again in a pavlovian fashion when this recession comes but if you do it'll be a pretty good selling opportunity because I think yields have to go much higher in the context of this interest expense problem that I've outlined.

So what else has changed as the interest rate trend has gone from declining secularly to at least for now being on the increase? Well one thing is people's forecasts.
You'll notice that for every year up until about 2021 the 10year yield undershot the forecast every single year. The white line is behind is underneath the colored line every single time.

25:13 Not anymore now. What we see is they are underestimating where the rate is going to be.
It's not terribly convincing but because it's only 18 months or so but it is a change in trend.

[moka]

https://www.youtube.com/watch?v=7RLfKaxH-Og
Grants 40th Anniversary: "Rates Can Never Rise" 10-3-23. DoubleLine CEO Jeffrey Gundlach.

25:42 Until a couple of years ago the FED funds rate was always estimated to go up pretty much more than it did or the same as it did.

Now everybody's expecting the Fed funds rate to come down. Interesting how everything has changed with that secular change in the yield curve. Here's two slides that I used back in 2016 and I think they proved helpful.
The first is nominal GDP seven-year moving average and the 10year US Treasury yield and you'll notice that the white line which is the nominal GDP 7year average kept going up until the early 80s, and you'll notice that it dragged the yellow line the 10year Treasury yield dragged it higher.

And then something changed and 7-year moving average of nominal GDP started to fall almost monotonically from 1982 until about 2016 or 2020. And when I spoke in 2016 I said this white line is about to go up and that's why “this rates can never rise” mantra is nonsense because this white line is going to drag the yellow line higher and sure enough that's exactly what's happening. You'll notice this is exactly in line with that 40-year trend of the 30-year treasury yield that I talked about.

So this looks like it's dragging yields higher ultimately. and then we have another one that I used 7 years ago. This is the core PCE 7year moving average and the 10-year treasury yield. Same exact picture isn't it? Rises up and it fuels the 10year treasury yield going up in sync with it and then it peaks in the early 80s and starts declining almost monotonically all the way into 2020 and now it's going up. Another variable that is likely to have secular problems for interest rates.

30:06 Fourth Turnings - there seem to be these cycles and stuff like this society gets shocked and there's a reset and institutions have to be recreated and rethought and you can think of the New Deal, you can think of the World War II and how we came out of that.
And you get a system that is set up where the means of production and the property relations, which are the way the fruits of production are split up in the society are in sync. And everybody is sort of happy and they buy into this deal of okay we're going to organize society this way, here's the property relations, here's the means of production and everything goes fine except as the time passes the property relations are very, very, very slow to change because the people that benefit from the property relations don't want them to change.
So you get wealth inequality and you get a tension between part parts of the society because the means of production change very rapidly, think radio, television, internet, AI. They change very, very radically and the property relations are calcified and so things get terribly out of sync.

And you need to reset the property relations and you have to redo the institutions, and I'm not exactly sure why that seems to tie in with these interest rate cycles, but it just seems to and so it's not just interest rate cycles, it's societal cycles and the Fourth Turning is a book written by Neil Howe back in 1997. Using demography he predicted there would be a global financial crisis around the year 2006. He's got a new book out called The Fourth Turning is Here. And the fourth turning is when everything falls apart.

[moka]

https://www.youtube.com/watch?v=7RLfKaxH-Og
Grants 40th Anniversary: "Rates Can Never Rise" 10-3-23. DoubleLine CEO Jeffrey Gundlach.

32:34 I've been talking about this debt problem for more than 15 years and in 2012 I said, I know I'm a broken record on this debt problem but I've got excellent news for you. We have a level place to stand here in 2012 because the way the demography is and the way the structure of the market is we're not going to have the debt problem be an issue at least until about 2019, 2020.

And then 2020 came and boom and so here we are, so it's a time of change. The fourth turning is difficult because you're tearing things down but the optimism part of it is what I'm getting actually excited about. There's two things that I'm actually excited about. When the fourth turning is finally over we have the first turning which is we're back in sync, we have a structure of property relations and means of production that works. So I'm happy about that. Also I'm much happier today as a bond investor. We were in the fixed income dungeon for about seven years, you had negative interest rates in Europe we had 1%, 2% treasury yields, we knew inflation was going to come, spreads were non-existent.

Do you know that two years ago the only way to get 5% from a United States bond portfolio was to buy the junk bond index and leverage it 50% and hope you didn't get any defaults. That was what you needed to get 5%. Now there's yield everywhere. So it's exciting to be a bond investor.
I feel sorry for the poor stock investors because if it weren't for the Magnificent 7 the S&P 500 is down this year.

I think one thing that we should all acknowledge is that the rules change very quickly (by the government.) In 2006 the prospectuses on mortgage backed securities were you cannot modify these loans, but they modified them. It's illegal but they did it anyway. The Federal Reserve Act of 1913 says the FED will cannot buy corporate bonds, it's illegal. A friend of mine was at the FED in 2006 through 2008 the global financial crisis and that she said that they had a very, very long discussion should they buy corporate bonds in response to the global financial crisis. And they said we can't do it. We wish we could but we can't.

36:07 Well that went out the window in March of 2020 to first part of April 2020 where they bought corporate bonds, even we're open to buying junk bonds. Why not just buy equities while you're at it.
So sure if tips become a problem they're just going to change the rules. I just don't think there's any doubt about it. So the fundamental point of my fourth turning commentary is the rules are going to change. They're already changing. They've already changed in front of your eyes over and over again.

I increasingly like a fixed income as a financial asset. I've been sort of 60,40 more like 60, 25, 15, 60% bonds, 25% stocks because you know you want some diversification and stuff but I like foreign stocks better than United States stocks. I like India. I've been talking about India for years and years. It's not for 18 months, it's for 18 years.

Amazingly for the present moment I actually think you have profit potential in long-term treasuries. I don't think you want to hold on to them, but I do believe that the recession is coming and there's going to be a pavlovian reaction and you can probably have look the 30-year treasury bond has had a draw down of more than 50% in less than the last two years 50%.
I'm not saying it's going to go back up to 100 from 50 but it can certainly go to 70 and so you have a 40% gain which will help to risk manage in your portfolio for the for the short term.

I like floating rate assets because the FED is just stubbornly not going to cut interest rates maybe not until the recession comes, maybe won't be until eight months from now. I don't know but when it comes to fixed income rate now you have to be on top of it. It's not buy and hold at all. You have to be on top of it because the volatility is very high, the liquidity is terrible, the banks don't have balance sheet anymore. There are days where you can't even get a bid, I mean it's not it's not frequent, but there are days when there's no bid for stuff.

[bull....]

nz50c down again only 7 - 10% more downside too go to the 50% retracement. next yr hopefully we will reach there.

[850man]

I don't trade so yeah completely forgot the bounce(s). My NZ portfolio is well green, so long term I have no worries, I guess this is "sharetrader" and I have picked up some good buys here along the way, I'm hopeful BRW pays for Christmas, preferably this year.

Wish mine was green, even with divies I'm coming up 5% in the red
Think I should stop watching

[Toddy]

nz50c down again only 7 - 10% more downside too go to the 50% retracement. next yr hopefully we will reach there.

Super skinny volumes. So not to many punters are losing real cash.