Th3 Core

I get the Schwab newsletter, which I almost always ignore for the simple reason that it seems like no matter how dire things, get, they always say "Despite the chatter, everything is rosy, stay the course, keep pouring money into your brokerage account, buy buy buy."

But something caught my eye in the current on and suddenly, there's a lot of talk of recession that isn't flat out dismissive. It's cautious.

https://www.schwab.com/resource-center/insights/content/end-has-start-keeping-eye-on-recession-indicators
https://www.schwab.com/resource-center/insights/content/on-watch-is-there-more-trouble-ahead-stocks
https://www.schwab.com/resource-center/insights/content/will-fed-go-too-far-this-cycle-3-indicators-to-watch

It's not so much that their analysis is amazing. It's that there has been a sudden shift in tone in the newsletter, which is what I see as the real indicator that worry is growing.

The odd one is the idea that recessions are typically timed to when unemployment rate is equal to the inflation rate. I'd never heard that before. My first reaction was that there were so few data points, that could be a spurious correlation (and it might be), but it seems to hold pretty well since 1990 across a half-dozen countries.

I don't think my economics brain is sophisticated enough to see why that in particular would provoke/indicate recession

Where I read, they've been hollering for 6 weeks now. ^{(As opposed to where Mackin reads, where they're *always* hollerin'. hhh)}

Housing starts are down. New construction sales are down.  Mortgage rates up.  Consumer debt going off the charts again.  All fundamental signs pointing to downturn.

> macro, philosophical, boring, level-headed observation

Yep. That's why the "C School" was the hardest major at W&L.

We're at about 40% liquid atm, waiting. 

I'm working my way through Howard Marks "Mastering the Cycle" book.

I had never heard of him before, until last week when I listened to this
https://tim.blog/2018/09/25/howard-marks/

Analyst who predicted the 2008 crash warns of bubble brewing in U.S. household wealth

https://www.marketwatch.com/story/analyst-who-predicted-the-2008-crash-warns-of-bubble-brewing-in-us-household-wealth-2018-10-18

And keep in mind that people are now buying suvs & pickups that are well north of $40k. $60-80k is not unheard of in my neighborhood.  Travoli posted somewhere that 60% (??) are upside-down and just continue to roll it forward.

What really haunts me is that th3core nailed the last housing recession months before it happened ---and did nothing.  Laughed it off as impossible that housing values could drop (a mere) 25%.

^{<saved you a click>}

"The mortgage pain point
Interest rates on the most common type of mortgage topped 5 percent last week for the first time since January 2011, said Wolf Richter at WolfStreet, and another point higher will hit the "pain threshold" for the housing market. Thirty-year fixed rates for "conforming loans" — mortgages for single family homes priced below $453,100, with a 20 percent down payment — are now at 5.05 percent, up from below 4 percent in 2016. While that's still a historically low number, it's likely to rise as the Federal Reserve steadily lifts the interest rate it charges to banks. A 6 percent rate would take mortgages close to where they stood in the housing bubble. That "will block a considerable number of potential buyers from buying at current prices." Cities where prices have "surged" as much as 55 percent from their housing bubble peak — including Seattle, San Francisco, and Denver — could be hit particularly hard."

http://theweek.com/articles/802647/mortgage-pain-point

The odd one is the idea that recessions are typically timed to when unemployment rate is equal to the inflation rate. I'd never heard that before. My first reaction was that there were so few data points, that could be a spurious correlation (and it might be), but it seems to hold pretty well since 1990 across a half-dozen countries.

I don't think my economics brain is sophisticated enough to see why that in particular would provoke/indicate recession

If the unemployment rate is low it suggests there might not be a lot of slack in the economy (or that the economy might already be overheating) & that inflation might pick up (as rate shifts take about 3 to 6 months to work their way through the economy, they care just as much about the trend as the level), which would encourage the central bank to lift rates, which in turn would cause credit growth to slow & financial asset prices to fall.

Analyst who predicted the 2008 crash warns of bubble brewing in U.S. household wealth

Assets are priced at some multiple of earnings based on discounting forward cash flows, but many/most assets are either highly illiquid or are priced on the margin based on a small portion of the market turning over. Each stock transaction changes the imputed market cap of the company & even a few percent of a company's shares being sold can have a dramatic impact on its value. Check out the trade volume of Yandex over the last couple days compared against their float & look at how much their market cap has dropped in a couple days. On Thursday they opened at $35.50 and by Friday they had fallen to $24.90, a 30% slide in 2 days. 

Some assets are priced based entirely on ponzi pricing where almost everyone hopes they'll be able to sell to the greater fool. But ultimately financial asset prices are based as much (or more) on debt leverage than financial savings.  Look at Netflix today announcing another $2 billion bond offering. And how any hundreds of billions of debt have their competitors (AT&T, Disney, Comcast, etc) took on to beef up to compete.

As interest rates rise the cost of carrying debt goes up when it needs to be rolled over. If the cost of market rates at the time of roll over is too high it might need to be paid down rather than rolled over. Money spent on debt servicing or paying down debt lowers the amount of money that can be spent on share buybacks, acquisitions, etc.