Fed's Kashkari: Staying the course

[WendyBG]

The Treasury yield curve has been dropping as bond traders speculate that the Fed will start to cut the fed funds rate as early as the middle of next year, caving in as the economy slows even if inflation stays high. They also believe that inflation will subside and a recession is in the cards, shown by a negative yield spread between the 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity.

https://stockcharts.com/freecharts/yieldcurve.php
https://fred.stlouisfed.org/series/T10Y2Y

The Wall Street Journal has had several articles about this. Guess what? The Fed reads the WSJ and watches the bond market!

https://www.nytimes.com/2022/07/29/business/economy/neel-kas…

**Fed’s Kashkari says officials are ‘a long way’ from backing off inflation fight.**

**Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said the Fed had more work to do in trying to control price increases.**

**By Jeanna Smialek, The New York Times, July 29, 2022**

**Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, suggested on Friday that markets had gotten ahead of themselves in anticipating that the central bank — which has been raising interest rates swiftly this year — would soon begin to back off.**

**“I’m surprised by markets’ interpretation,” Mr. Kashkari said in an interview. “The committee is united in our determination to get inflation back down to 2 percent, and I think we’re going to continue to do what we need to do until we are convinced that inflation is well on its way back down to 2 percent — and we are a long way away from that.”**
**...**
**“I don’t know what the bond market is looking at in reaching that conclusion,” Mr. Kashkari said, adding that the bar would be “very, very high” to lower rates....** [end quote]

The bond market is looking at late 2018, when Powell’s Fed backed off of raising rates when the market had a hissy fit. (Inflation was not high at that point.) The bond market is looking at the 1970s, when the Fed backed off of raising rates when the economy slowed even though inflation was still high, enabling even higher inflation.

If Powell and Kashkari are serious, the Fed will continue to raise the fed funds rate (and maybe also speed the roll-off of their huge book of longer-dated bonds). The yield curve will either rise or become inverted (which usually predicts a recession).

If the bar will be very, very high to lower rates the markets will be surprised. That implies a much longer pathway through and out of a recession.

Bond and stock prices are not reflecting this. That implies a negative shock to both markets.

Wendy

[iampops5]

Powell backed down in 2018 due to political pressure that cannot be discussed here. On that score, this time really is different. I am banking on the Fed sticking to its guns this time, another serious but more sustained market downturn this time, and an opportunity to buy when others are selling.

Unless I lose my nerve again.

[38Packard]

Pops,

I’m with you. It seems given the tone of the Fed, that they will not back down on inflation, and they really mean it. If that happens, it follows that Wall St will be in for a surprise when rates continue to rise - eventually slowing the economy, and with it, profits. Earnings will suffer and the prices of stocks will again go lower.

It’s no secret here that I’ve been 90% in CASH (and equivalents) since 2018. I’ve been patiently waiting for this overheated market to finally come to the realization that the end of easy money is over (for the time being) and the global messes we hear about daily don’t help very much either

Across our entire portfolio, we need 3% annually for our financial plan to work. We’re a couple of points off that for the past 3 years or so, but rates are heading up again, and I’ll also look to lock in some good rates on all of the rest of the cash laying around.

I’m thankful for the information and links that are available to me as a visitor of this board. Thanks so much for the folks here, Wendy, intercst, Notehound, Goofy, flyerboys and others that I’ve learned so much from over the decades.

I’m really hoping that we do see a significant market downturn. I’ll wait until the mungofitch99 indicator starts to indicate a positive direction, and then I’ll start to deploy some of our IRA funds into some low cost Index Funds.

Cheers,
'38Packard

[ptheland]

If the bar will be very, very high to lower rates the markets will be surprised. That implies a much longer pathway through and out of a recession.

Bond and stock prices are not reflecting this. That implies a negative shock to both markets.

That’s basically the same thing I said yesterday.

Now is not the time to be adding to speculative investments. It’s time to hunker down for a recession - although my guess is not a big one. But switching entirely to interest bearing investments is going to lose to inflation. Best bets are probably well established companies that will not go out of business in a long but shallow recession and that start selling at discounts to recent prices.

I’d look for Stagflation 2.0, where the economy isn’t growing, employment doesn’t get terrible, but inflation keeps hanging around - not high, not low, but enough over the Fed’s 2% target that they keep interest rates high. I’ll stick my neck out and say inflation will be in the 5% - 9% range for at least a year, and maybe as long as two.

I still think the driving factor here is supply issues. The economy can’t grow until supply starts growing again. Until supply begins to grow we will see inflation as an adequate amount of dollars are chasing too scarce goods.

–Peter

[MarkR]

It’s no secret here that I’ve been 90% in CASH (and equivalents) since 2018.
…
Across our entire portfolio, we need 3% annually for our financial plan to work.

I assume you mean 3% adjusted by inflation each year. If you are 90% cash since 2018, and inflation has been about 18% since then, then the other 10% must be gaining at a very healthy clip to keep up with 3% adjusted by about 18% since then! If not, then how are you doing it? Inquiring minds want to know.

[38Packard]

Hi MarkR,

Inquiring minds want to know.

Please don’t bash me on this. I’m not that scientific. We have been burning some cash in the past 3-4 years, but my DW still works and brings home the “bacon bits and benefits”. She will be retiring next May, and we’ll both be on SS and Medicare with Supplemental medical insurance. I have a small pension coming from P&G but have decided to forego it until I’m 70 - and I’ll take the spousal coverage option for DW.

We’re fortunate to not have any major health issues and all of our debts are paid, so we can manage our finances fairly easily. We’ve been LBYM for years and years, and have a nice nest egg on which we can draw from over the remainder of our lifetimes. I travelled extensively across the globe for work and have little interest in international travel - or most travel right now. DW has also done lots of travel and we’re OK hanging out around our beautiful home in Southeastern MA. (Lots of varied places for us to go on day trips around here). Staycations are OK with us and we drive (nice) used cars.

We’ve worked with our financial planner to formulate and validate our plan - which is also confirmed by Quicken Lifetime Planner - which is also an awesome tool for folks to plan for retirement.

We don’t need to leave a mountain of cash to our 2 kids. We gave then roots and wings, and no college loans - and they are doing just fine without our money. (We would help them out in a split second if asked).

So, our nest egg is maybe dwindling a bit these past years, but I’m pretty confident that we can get back into low-cost Index ETF’s with some portion of our cash and do just fine.

Thanks for asking!
'38Packard

[captainccs]

It’s no secret here that I’ve been 90% in CASH (and equivalents) since 2018. I’ve been patiently waiting for this overheated market to finally come to the realization that the end of easy money is over (for the time being) and the global messes we hear about daily don’t help very much either

Across our entire portfolio, we need 3% annually for our financial plan to work. We’re a couple of points off that for the past 3 years or so, but rates are heading up again, and I’ll also look to lock in some good rates on all of the rest of the cash laying around.

The purpose of this reply is to show that timing the market does not work. It’s nothing personal!

I’ve stayed fully invested. From January 2018 until today my port is up 2.8% after paying all my expenses and funding a Euro bank account. Adding back the Euro bank account the port would be up 3.7%. Adding back my expenses the port would be up 12.5%.

Had I done this calculation at the low point of this bear market the results would have been down -3.1% or down -2.0% adding back the Euro bank account and up 8.4% adding back my expenses. 06/30/22 is not the exact bottom because I only keep end of month records.

 **To         To**
**To        08/03/22   06/30/22**
Port        2.8%      -3.1%
**Add back**
€ account   3.7%      -2.0%	
Expenses   12.5%       8.4%

Timing the market since 2018 missed out on two incredibly bullish years, 2020-21, and the 3 month recovery now underway. The bottom for the 5 year period was in February 2020.

S&P 500, 5 years: https://bigcharts.marketwatch.com/advchart/frames/frames.asp…

For ten years or so I wondered when the bull run would end but I know that I could not predict the top any more than I can predict the bottom, you only know them in hindsight! This is the reason I stay fully invested, the market average is higher than interest rates so it’s the horse to bet on.

BTW, I’m not bragging, from January 2018 the S&P 500 has 10% while the NASDAQ was up 12.7%. My 12.5% is in between.

All rates are annualized.

The Captain

[38Packard]

Hi Captain,

The purpose of this reply is to show that timing the market does not work. It’s nothing personal!

I’ve heard that probably a million times. Does that help to modify my paranoia to NOT get out of the market when I see RED, RED, RED every day? NOPE.

I can’t sleep when I see RED every day. I don’t like seeing RED every day. It drives me nuts.
I sleep well when I don’t see RED. (I know. some will say - don’t bother looking very day. Sorry, but my OCD about money management would have me looking for sure).

I’d sleep rather well knowing that we have enough without seeing RED. It’s just me. That’s why I worked my butt off and did invest when the market was hot and I could tolerate some RED. Now I don’t.

I did some analysis of my investment portfolio historically and shared the results with my older brother a few weeks ago. Over the course of 35 years of investing (1983 - 2018) I had 16 losing positions and 21 winner positions. I wouldn’t say that’s great investing prowess, but my brother said “Hey - you have more winners than losers! That’s something to write home about!” The winners outweighed the losing positions by a factor of 5:1.

I also retired when I was 60 so that I could enjoy our home and gardens and lake that we live on. I worked too hard for that cash (having my own business for many years - with no employer contributions) and I don’t want some computer on Wall Street stealing it away from me.

We all have our choices that we make in life - money management is one of them and lots of folks have different opinions about how that can be accomplished. I’d rather sleep well at night than see RED in my dreams. Others can live with it and ride the downside. Nothing personal!!!

Another question that I have when considering whether / when to get back into the market is - How much is enough? If you have enough - why bother risking it?

'38Packard

[flyerboys]

I like to do timing, and so I have mostly quit securities investing where it is detrimental to neutral, and shifted to real estate and specialized lending where timing can give huge advantage.

Resort locations in the process of being discovered by rich people usually (!) go through very predictable boom and bust cycles as crowds of people looking for their “dream” vacation or retirement homes are as reliably predictable as gas molecules in an acoustic system.

david fb

[captainccs]

'38Packard, let’s take your points by order of importance, top down!

I can’t sleep when I see RED every day.

Sleep is of utmost importance, you need a port that lets you sleep well.

How much is enough? If you have enough - why bother risking it?

As you accumulate wealth it’s best to move from capital growth to capital preservation. Back when my income was enough to support me I made the mistake of trying to double my port just one more time. That was the most expensive investment lesson in my life.

Does that help to modify my paranoia to NOT get out of the market when I see RED, RED, RED every day? NOPE.

It’s not paranoia! It’s your ancestral fight or flight instinct that helped our African ancestors survive on the Savannah. Imagine you are an antelope and you see a lion charging. You see red and run for your life! When you see green, you stop to munch on the succulent leaves. The problem is that this instinct is the wrong tool for the Stock Market Savannah. The only way I know of dropping this ancestral instinct is by learning and understanding the mechanics of the Stock Market Savannah. This is why I’m so interested in the laws that rule the market, stuff like the Pareto distribution, the “S” growth curve, the Technology Adoption Life Cycle (TALC) with emphasis on “Crossing the Chasm,” the Gartner Hype Chart, Wright’s Law, Increasing Returns, and a lot that one can learn from the Science of Complexity that disproves much of classical economics based on ‘physics envy.’ Additionally, to try to find out the secret sauce of truly successful investors like Peter Lynch and Warren Buffett. Add to the above a dollop of TA to extract value from price charts.

The Captain

[flyerboys]

Captain, what a lovely informative post, but you left eager curious readers wanting more! (as a retired publisher let me say that is a valuable skill).

This bit is high grade ore for people who have not thought through the ideas:

“Pareto distribution, the “S” growth curve, the Technology Adoption Life Cycle (TALC) with emphasis on “Crossing the Chasm,” the Gartner Hype Chart, Wright’s Law, Increasing Returns, and a lot that one can learn from the Science of Complexity that disproves much of classical economics based on 'physics envy.”

First, let me fill in the one subject you mentioned that I was unfamiliar with: the Gardner Hype Cycle. I looked it up. Here is the link

https://www.gartner.com/en/research/methodologies/gartner-hy…

and here is a bit radically cut to tease people to go to the source.

Each Hype Cycle drills down into the five key phases of a technology’s life cycle.

**Innovation Trigger:** A potential technology breakthrough...Early proof-of-concept stories...viability is unproven.

**Peak of Inflated Expectations:** success stories...scores of failures.

**Trough of Disillusionment**: Interest wanes as experiments and implementations fail to deliver. Producers of the technology shake out or fail.

**Slope of Enlightenment**: ...technology...more widely understood. Second- and third-generation products appear

**Plateau of Productivity**: Mainstream adoption starts to take off....broad market applicability and relevance are clearly paying off.

david fb

[38Packard]

'38Packard, let’s take your points by order of importance, top down!

Sorry, you can only recommend a post to the Best of once.

Thanks Captain!!

'38Packard

[38Packard]

david -

I’m familiar with the Gartner Hype Cycle after spending my career in the IT industry. Early years as a coder, analyst, architect and then as a Chief architect retiring from managing large global IT Data Architecture and Analytics teams for big companies.

We relied on Gartner to share the results of their analysis around technology trends for many years. It’s amazing how much we’ve progressed in architecture of large systems, from the hardware to the layers of software that eventually end up as the end user experience. Gartner had analysts that could talk with you about each component, and how best to put them all together - or not.

It’s also amazing how many buzzwords and FUD (and everything else that is out there) can be thrown in your direction when you have a budget and a salesperson has to make their quota

That’s when you would refer to the Gartner Hype Cycle to try and determine where this newest, latest and shiniest object is on the Hype scale.

Cheers!
'38Packard

[captainccs]

I like to do timing, and so I have mostly quit securities investing where it is detrimental to neutral, and shifted to real estate and specialized lending where timing can give huge advantage.

Cyclicals is a different kettle of fish. Peter Lynch dedicates some pages to it in One Up On Wall Street or in another of his books.

The Captain

[captainccs]

Captain, what a lovely informative post, but you left eager curious readers wanting more! (as a retired publisher let me say that is a valuable skill).

Keep up the praises and I’ll need a bigger hat! Thanks! My intention is not to force feed Fools but to give them topics to research saying only that for me they have been very helpful.

First, let me fill in the one subject you mentioned that I was unfamiliar with: the Gardner Hype Cycle. I looked it up.

The Gardner Hype Cycle is a variation on Crossing The Chasm. Both say that there is no need to be the first kid on the block with the new gadget. As a risk averse investor wait until the technology crosses the chasm or reaches the slope of enlightenment.

The Captain

[captainccs]

Channeling Steve Jobs, “One More Thing!”

James O’Shaughnessy’s very popular investing book is titled, “What Works on Wall Street,” but Wall Street has its moods and tantrums. Louis Navellier calls his quarterly research "What is Working on Wall Street Now," ‘Now’ being the operative word.

We cannot see the future, we can only guess it – and rather poorly. I’ve often said that we can only see tops and bottoms in hindsight. Adopting Navellier’s tactic, why instead of guessing or fearing a future top, why not check if there was a top or a bottom during the past 90 days?

The mungofitch’s 99-day rule is one attempt to do so and quite popular with Wendy! 99 is 7.5 days longer than a quarter!

Author: WendyBG
Subject: mungofitch’s 99-day rule

Feste-award winner mungofitch has been posting carefully-research, thoroughly-backtested analyses on the Mechanical Investing Board for many years.

In my humble opinion, one of mungofitch’s most valuable concepts is the 99-day rule for stocks.

https://discussion.fool.com/mungofitchs-99-day-rule-30082893.asp…

BTW: The whole decade old thread is highly relevant to this discussion.

BTW2: The “mungofitch’s 99-day rule” is Fool Home Cooking!!! LOL

The Captain

Note for would be authors, Human interest:
Steve Jobs
James O’Shaughnessy
Louis Navellier
mungofitch
WendyBG

[DrBob2]

The mungofitch’s 99-day rule is one attempt to do so and quite popular with Wendy! 99 is 7.5 days longer than a quarter!

It’s just short of five months as there are 21 trading days per month.

DB2

[captainccs]

It’s just short of five months as there are 21 trading days per month.

Trading days? I though it was calendar days. Thanks!

Unlike mungofitch’s 99-day rule I just eyeball the charts and greatly favor candlestick charts as more visually informative. When a formation looks favorable I look for confirmation. For example:

On Jul 26 Enphase closed at $216.10 and had a good earnings report
Jul 27, Gapped up to $254.77
Jul 28, Gapped up to $274.18
Aug 1, First down day after earnings

Aug 1, Late in the day when ENPH was at around $280, up almost 30% from earnings day, I sold $340 calls one month out at $5.20 (1.86%). Most likely the calls will expire worthless which is an annualized profit of around 22%

If called capital gains of 21.4% and a good chance of buying the shares back cheaper. Look where 340 is on the chart

https://bigcharts.marketwatch.com/advchart/frames/frames.asp…

Funny thing, one hopes ENPH stays below $340 until September 2 then maybe one can sell similar call options.

The Captain