Stagflation leading to Recession - The Kodiak Bear Thesis

[jjcox82]

I agree completely with the HOPE chart perspective. However from retail standpoint largely what happens if there is essentially a return to old. Is volume offsets profits.

For example. This is going to seem really elementary but is very factual from Retail business standpoint.

You sell 100 loaves of bread for 1 dollar a piece= 100 dollars

You sell 200 loaves of bread for .75 cents = 150 dollars.

This is largely how retail business has been built for many many years. Until the last couple. Overall gross profits remain the same however the inventories needed to do so need to be doubled as well.

This is essentially sale prices you see on anything. You make the difference in profits up in volume. COST for example had huge inventory however their overall earnings were better than forecast and large.

I like to use the saying to my sales guys let’s make a little on a lot as opposed to a lot on a little.

Thanks for your thoughts on the QT and QE. Was my thoughts as well.

[FlyinKite]

So, is the current thinking that the main force behind todays bullish movement that the BoE’s actions hint at the Fed easing up earlier than expected?

[macromicrodick]

again, thanks to @hansolo for this insight on how close we came to a financial meltdown in the UK that could have had repercussions here:

(x.com)

[TheHouse]

Thanks for bringing this up, there is definitely some chatter about this, however J Pow has mentioned multiple times that they dont want to ease too early as that was the mistake made by Volcker in the early 70’s.
With that said, if a black swan event appears like the one we saw in the UK today I would imagine they would step in as that would fall under their 2nd mandate.

So unless a Lehman style event presents itself in the US financial system, I think the safest bet would be to assume they will continue hiking until they tell us otherwise.

[Kevin]

The latest bull argument is “the fed will pivot because the US financial system will be on brink of collapse”. Yes, read that again.

[TheMadBeaker]

Yesterday morning we saw news about supposedly Apple’s slowing iPhone sales (causing a big drop in the stock, with a decent recovery to only be down -1.27%). Today we got some PT’s that came out for Apple and the stock is now down -2.3% premarket:

• Apple Price Target Cut to $160.00/Share From $185.00 by B of A Securities
• Apple Cut to Neutral From Buy by B of A Securities
• Apple Price Target Raised to $189.00/Share From $160.00 by Rosenblatt

https://seekingalpha.com/news/3887058-apple-falls-as-bofa-hits-it-with-rare-downgrade-on-worries-over-weaker-consumer-demand

Will be interesting to see how Apple moves today and if more news comes out. If the mega giant is starting to show slowdown, then what chance in hell does the rest of the market have?

[rexxxar]

What PCE number would be bullish and actually bullish?

[SuckyMayor]

For full August PCE, we’d want to see something at or below -0.1% tomorrow. On the Core PCE side, anything at or below 0.4% is going to elicit a bullish response. Anything above either of those numbers will likely be fiercely bearish.

[nightowlzen]

The U.S. financial system is on the brink of collapse. But hey that’s just “doom and gloom.” Bears IYKYK.

[The_Ni]

The Fed put is very real.

[Kain]

Has there ever been a crash when everyone expects it and has hedges? Sort of curious… I can see grinding lower lows over time in a channel but a break? Maybe if a nuke gets dropped or something but for some reason I’m bullish lately… I’m probably wrong still newish at this but it seems like a giant trap to me waiting for 1 bit of good news. (I actually have bullish leaps and some shares around here, some dead tqqq lottos too, but expect spy 300 at some point after everyone thinks the marlet’s hunky dory)
That being said I will scalp both ways and the leaps are gambles swept into another account and are only $2.5k
That jpm collar and volatility unwinding could be the trap I think.
I’ll miss out on max profits if it drops out but I’m always super suspicious of “it’s gonna crash and everyone has puts/shorts” days… especially at lows of the year.

[TheHouse]

From Mav of Wallstreet who nailed the last few CPI and PCE prints.

Core PCE MoM > .10= Bearish
Core PCE MoM < .00= Bullish

[Kevin]

FYI here’s a link explaining the differences between CPI and PCE: PCE and CPI Inflation: What’s the Difference?

They’re both measures of inflation based on a basket of goods, so what’s the difference?

tl;dr

• Weight effect. CPI and PCE assign different weighting to various goods. The CPI is based on a survey of what households are buying; the PCE is based on surveys of what businesses are selling.

• Coverage or scope. The CPI only covers out-of-pocket expenditures on goods and services purchased. It excludes other expenditures that are not paid for directly, for example, medical care paid for by employer-provided insurance, Medicare, and Medicaid. These are, however, included in the PCE.

• Different formulas. The two indexes differ in how they are literally calculated. The gist of the matter is that the PCE tries to account for substitution between goods when one good gets more expensive. Thus, if the price of bread goes up, people buy less bread, and the PCE uses a new basket of goods that accounts for people buying less bread. The CPI uses the same basket as before

Note that historically, both headline and core CPI prints have been higher than the respective PCE print.

[TheMadBeaker]

Forbes poll mentioning that 87% of manufacturing CEOs plan to raise prices in 2023. I think that figure is kind of a fudge according to their chart, but I’m just reporting what the article is saying. Still, even if you consider the 45% from definitely / very likely, that’s not a positive thing for fighting inflation.

Inflation has been rising, and if the expectations of manufacturing CEOs is an indication, it’s not going to let up soon. In a recent poll by Forbes, Xometry and Zogby, 87% of them said they’ll hike prices in 2023.

The poll of 150 manufacturing CEOs surveyed in late August found that nearly half of companies (45%) had passed on the costs of inflation to customers today, while 38% said they had avoided doing so and 17% said their companies absorbed the costs despite the financial hit. With inflation running above 8% in August, the vast majority of executives polled who had passed on the costs of inflation (80%) said that they increased their prices between 5% and 15%. And 12% of them said they hiked prices between 15% and 20%.

Those price increases had an impact. More than half (55%) said they had lost customers over the past year due to price increases, while nearly one in five (19%) have cut their workforce to keep costs in line.

Vast Majority Of Manufacturers Plan Price Increases In 2023, According To New...

[Kevin]

Core PCE year over year unexpectedly rose to 4.9%. 4.7% was forecasted. Month over month also continuing to rise at 0.6%.

This supports the notion that the fed isn’t doing enough. To reiterate, they need to hike rates above the core PCE at a minimum to 5% fed funds rate aka 175 bps, and they need to do it right now. Otherwise they will continue to chase inflation. The fed should be in the driver seat, not inflation.

[macromicrodick]

Thanks to @Kevin for notifying on TF that the UK Prime Minister is likely not going to go through with scrapping high taxes for the wealthiest. The vote on it has been delayed.

It looks like if it gets voted on there are enough members in her party and in the opposition to voted it down. Will be interesting to see how UK markets react tonight/tomorrow pm.

Tory conference: Liz Truss will lose 45p tax rate vote, says Shapps

[TheHouse]

Just want add some quick thoughts on the CS situation. This has potential to be a pretty big event depending on the validity of the CDS speculation.

CS is unbelievably over leveraged and this speculation comes just after the BOE intervention. The BOE intervention was triggered by a massive margin call tied to fixed income. Most of these pension funds have borrowed money to invest as rates allowed them to do so and still collect yield. The problem is bonds have continued to get slaughtered at a level only seen one other time in history, 76 years ago during World War II.

When fixed income is getting margin calls that requires an intervention from a central bank we should all pause. We have spent the last 10 years fine tuning globalization. Trade, resources, financial markets, etc. We are all intertwined in ways previous generations never thought would be possible. This includes financial markets.

This is all to say, we need to be paying close attention to these things.

I also want to point out why all pivots are not created equal. Remember we have 2 mandates.

The type of soft landing Greenspan was trying to engineer in the 90s is an example of lowering rates in anticipation of where the market would be in the future relevant to inflation. This is an example of a fed pivot speaking towards our 1st mandate, inflation.

When Bernanke had an emergency rate cut in Oct 2008, this was because we were in a worldwide financial crisis, its aim was to calm fears and add liquidity to the market. This is an example of a fed pivot that speaks to our 2nd mandate. Unemployment and crisis intervention.

This is why a bullish reaction to the BOE news made no sense. This isnt a soft landing achieved and the worst is behind us. What this tells us is we have stress in our global financial markets that is starting show cracks that demands real intervention. Macro is in charge here, and will be for awhile. News like CS and potential interventions are only a result.

The question we should be asking ourselves is what had caused bond prices to drop to the point where a large pension would get a margin call like this? In fixed income, a market designed for safety?

Im going to continue to scalp strong trends both directions, in and out quickly and swing mainly the downside. Im still playing indexes but Ive had better hit rates and gains playing individual names both directions so im going to continue that until it doesnt work. Im not playing any FD’s and that has been a game changer, much easier to let plays form and run. Dte, strike, and position sizing is how I have been navigating risk. Moving around daily depending on what the market is doing. Always cutting losers as early as possible if things dont go as planned.

We need to pay attention to the fed, data, global news, and how they all relate to equities and the real economy.

Also, looking at TTD and their 853 P/E ratio. Anyone familiar with this company?

[TheHouse]

This is a great chart showing what happens historically when the fed cuts rates. You can see the soft landing Greenspan orchestrated in 94 but you will also see more times than not it leads to a recession (gray columns). But what makes this round interesting and unprecidented, something I mentioned in my Feb Stag thread, we dont have alot of wiggle room. The economic contraction is already being felt, we know there is more to come. See Fedex and Apple as the latest titans to send signals. We can hit 0% rate again real fast but that doesnt mean it will be enough to achieve their 2nd mandate. Okay, so what does that mean?

Negative rates? QE forever? Fiscal policy steps in? all of the above?

This chart also illustrates our last 40 year run cutting rates. Wild to think about the long term credit growth that comes with that

[Kevin]

Annnnnd they’re reversing again!

https://twitter.com/unusual_whales/status/1576816544385880064

[macromicrodick]

I think there’s some confusion because of the double negative. Truss and Kwarteng originally planned to scrap the tax to the rich which upset many because it’s an inflationary, misguided growth concept.

Because they received all this backlash from the public and within their own party, the reversal means Truss caved into public pressure and now won’t go ahead with the misguided tax cut.

So actually bullish for UK fiscal policy.