What is a “Blood in the Streets” Moment?

hank

Interesting (but ad filled) article addressing the issue (please ignore ads) The Capitalist

For: “Everyone is telling you not to buy and the news is extremely negative. The media is known to exaggerate issues and cause negative emotions like fear, rage, and hopelessness.”

Against: “Japan also crashed in 1991 and did not recover to this day.”

Here’s an Investopedia article mentioning Warren Buffett and Sir John Templeton’s takes on the issue of contrarian investing: https://www.investopedia.com/articles/financial-theory/08/contrarian-investing.asp

Not intended as investment advice. Posted simply to stimulate thought … Any indicators (technical or otherwise) as to the “right” amount of bloodletting needed to make equities appealing to you again?

Crash

Thanks for those references @hank. To respond to your concluding question: wouldn't it depend a lot on which SECTOR we're talking about?

Example: I bought the Postal REIT (PSTL) just weeks ago. Along with EVERYTHING else, it got beat up more recently. REITs are supposedly poison at this moment. But I'm holding it, with a view toward a few years out from now. Maybe add to it. But waiting till rate hikes stop, I suppose. If the market gets me back to even-steven in the current environment with PSTL, I can't bitch. Let it sit. See if my invested money might produce over time. Isn't that what it's all about, anyhoo? And it also seems to me that a REIT which invests in postal properties is unique. Which is why I chose it in the first place.

Ya gotta remember why you threw money at any company. but if there's a serious sea change, then a thorough reevaluation is in order.

Crash

https://www.investopedia.com/ask/answers/081114/how-does-warren-buffett-choose-what-companies-buy.asp

hank

Crash said:

To respond to your concluding question: wouldn't it depend a lot on which SECTOR we're talking about?

Feel free to slice and dice this any way you want.

Baseball_Fan

Guys...what happens if we have a dead decade ahead of us in the markets (Reference Druckenmiller's recent commentary)...who says the CBs/Fed will come to the rescue again with the brrrrrr money printer...I really don't think that is going to happen.

Why take the drawdown in an environment like this? I get it, really tough (impossible) to time the markets, ya might get lucky but likely not repeatable...I could see staying in during more "normal" times but this is some real wacko jacko markets we done got here, no?

I think we are due for a bounce within the next couple weeks, too many Puts have been bought....but....I think many are sanguine, hearing maybe down another 10-15% then markets should turn up as the fed again starts easing....and The Gundlach thinks we are going to overshoot to the downside next year...from the 9% (really more like 14-15%) to mayb even -3, -4%.....and if he is right, I don;t see any way how markets rally...

Hey, like they say, it;s your money. do what you need to do to feel sexy, don't listen to clowns on a chat board especially not me.

Best,

Baseball Fan

hank

Re - “Hey, like they say, it;s your money. do what you need to do to feel sexy, don't listen to clowns on a chat board especially not me.”

Clownish is as clownish does … @Baseball_Fan, You’ve made some great points re the current state of markets. There are some open-ended rhetorical questions in your response that I doubt anyone could answer.

I do take exception to your characterization of others who may disagree with you and who may have added to their risk assets / equity positions recently. Nobody’s investing and posting here to look / feel “sexy.” It’s real money. If you consider yourself a “clown” so be it. But that is not my impression of the MFO community in general.

LewisBraham

The other thing I would say about message boards and investing advice online is half the quotes attributed to famous people are fake as is most likely the case here with Rothschild: https://grammarphobia.com/blog/2013/04/waxing-rothschild.html I would note the last paragraph of this article exploring the real provenance of these quotes:

It’s worth noting, by the way, that many of the Internet repetitions of these quotes appear on anti-Semitic or “global conspiracy” websites.

larryB

@Lewis Braham. Thanks for sharing that post.

Crash

holy crap and happy new year. baron rothschild did not say that stuff? But (although it's cold and uncaring sounding,) it's smart! Maybe it's hyperbole, but it's smart. I'm reminded of Jeremiah buying the field at Anatoth--- even BEFORE the blood hit the streets and the exile began. That was more an expression of ultimate trust, rather than a choice expecting monetary profit, though. The exile lasted about 50 years, so I was taught.

In a different direction, it always makes me smile to think of musician Dan Bern's caustic, sarcastic irony in naming his first, early-career band "The Int'l Jewish Banking Conspiracy."
https://archive.org/details/dan-bern-and-the-international-jewish-banking-conspiracy-2002-05-18-maxwells-sbd-t-flac16

Observant1

I'm using the S&P 500 as a bellwether for the broad U.S. market.
There have been twelve S&P 500 bear markets (peak to trough declines > 20%) since the end of WWII ¹.
The current year was taken out of consideration since it is a "work in progress."
The median peak to trough decline after WWII was 30.75%.
In the current environment, U.S. equities might appeal to me after the S&P 500 declines 35%.


¹ The S&P 500 was launched on March 4, 1957. Info prior to the launch date is hypothetical.
Bear markets were noted in 1946 (-26.6%) and 1948/1949 (-20.6%).

LewisBraham

The article uses an interesting term I rather like “quote magnet.” Certain famous people are quote magnets online for things they never said. Mark Twain is a big one for witty remarks. The Rothschild one is obviously more disturbing. I also find that the founding fathers are awful quote magnets people use to justify their politics. I see quotes attributed to Jefferson and others all the time that they never said:
https://gizmodo.com/thomas-jefferson-fake-viral-quotes-1848423134/amp

hank

@LewisBraham - The editors of The Capitalist should have qualified the statement with a phrase like: “purportedly remarked” or “is sometimes said to have remarked“. If Rothschild is mythical, than that too should have been made clear. I agree with you to that extent. Did George Washington really chop down that cherry tree and confess to his father: “I cannot tell a lie”?

You are spot-on in debunking the attributed original source of the often cited “blood in the streets” expression, which itself varies from purported author to author. I posted not to praise condemn or describe Mr. Rothschild. I used the remark to try and stimulate discussion on the question of buying assets after their values have depreciated sharply. You haven’t debunked Buffett’ and Templeton yet, both of whom were also referenced in the original post.

It appears that the idea of buying equities / equity funds after they’ve fallen 20-30% or more in price from a year earlier is a very unpopular notion here. Prevailing wisdom / discussion nowadays is of short-term bonds, TIPS and money market funds. With a few years perspective behind us, that may prove to have been the proper course, though it runs contrary to most everything I’ve learned about investing from the greats like Buffett, Bogle, Marks and Templeton. I will need to accept the more popular notion at the moment and learn to keep my mouth shut on the question

Regards

LewisBraham

@hank

.You are spot-on in debunking the attributed original source of the often cited “blood in the streets” expression, which itself varies from purported author to author. I posted not to praise condemn or describe Mr. Rothschild.

I know. I didn’t think you did, yet I feel it’s important that these quote attributions not be perpetuated if untrue.

As for buying, assuming markets are rational—a big assumption—one can look at the earnings yield of stocks—the inverse of the p-e— and compare it to the yield of long-term Treasuries or high quality corporate bonds and ask two questions: Is that earnings yield sustainable and is the yield you get on stocks at a significant enough premium to bonds to justify owning stocks?

The thing about stocks is their earnings are not contractually or legally guaranteed. Legally, bond issuers must pay their yields or declare bankruptcy. Every time interest rates go up there is more of a reason to purchase the “guaranteed” income stream of bonds versus the ever fluctuating earnings of stocks. So a rate increase immediately makes stocks less valuable in comparison. On top of this is the fact that what if the earnings stream actually weakens because of inflation and interest rates? The earnings yield premium may disappear.

Then there is the basic fact that companies in many cases don’t pay out their earnings in the form of dividends and do other, often stupid, things with them. Dividends make stocks more bond like but of course that yield isn’t contractually or legally guaranteed and can be cut any time. The flip side of course is the earnings yield can also rise when times are good while bond yields of existing already issued bonds are fixed so bonds upside is limited, generally nil if you buy them when issued and hold until maturity.

As for buying bonds, the question is whether the yield you receive is secure and whether or not the yield exceeds where you expect rates to be in the future—the latter often determined by the inflation rate and the Fed’s reaction to it. As rates rise, the likelihood of default increases as companies struggle to adjust to the increased cost of capital. Assuming there are no defaults, it becomes a game as to determine whether rates have peaked or not.

I should add by “rates have peaked,” I mean the rates of the kind of bonds you’re actually buying, not the Fed’s rates. That’s relevant because it’s possible for instance that the 10-year Treasury’s current rate is already pricing in the Fed’s rate increases in the future and could be undervalued. So the question isn’t whether the Fed’s rates have peaked but whether the 10-year Treasury’s rate has?

WABAC

I bought in early and mid July with the apprehension that things could turn worse as inflation persisted.

But then I probably hold a higher percentage of cash than most people. So I can also afford to do some buying again if inflation remains persistent, interest rates keep rising, and global news remains distressing.

What does capitulation look like? Back in the Great Inflation the S&P 500 PE ratio dropped to single digits. Stocks were declared dead. We seldom see such clear signals of a bottom.

I'm not looking for an absolute bottom. But in my IRA I'm waiting for funds like VDIGX and PRWCX to feel a little more pain before I jump back in. The spread of interest rate fears to utilities is also something I'm keeping an eye on. And consumer staples are practically giddy. ICLN and TAN are two of the funds I bought that have made money for me. I won't be buying more anytime soon.

In my taxable account I have considerable room to add to my dividend sleeve for quite a while. I see that SCHD (for example) is off five bucks since I bought in July. So I expect I'll be buying more of that and the other funds in that sleeve.

BenWP

I certainly don't know where the bottom is, but international equities look cheap, especially given the outsized gains of the US dollar. I nibbled at FNDF, even though I doubt international equities will be big winners. Mean reversion is my hope.

LewisBraham

Assuming markets are rational:
https://multpl.com/shiller-pe

https://gurufocus.com/shiller-PE.php

Observant1

BenWP said:

I certainly don't know where the bottom is, but international equities look cheap, especially given the outsized gains of the US dollar. I nibbled at FNDF, even though I doubt international equities will be big winners. Mean reversion is my hope.

From Jan. 2000 - Dec. 2009 ("lost decade"), international equities outperformed
domestic equities by 2.56% using VGTSX and VTSMX as benchmarks.
From Jan. 2010 - Dec. 2019, domestic stocks trounced foreign stocks by 8.25%.
Domestic equity outperformance (9.61%) continued from Jan. 2020 - Aug. 2022.
U.S. stocks have been on a long winning streak and the U.S. Dollar Index is near 20 year highs.
Like you, I believe in mean reversion.
I don't know when and I don't know how, but I think foreign stock investors will be rewarded in the future.

Old_Joe

"foreign stock investors will be rewarded in the future"

Depends a lot on a factor not previously present: energy sources. Even after Russia/Ukraine situation reaches end game, energy will never resume it's previous supply configuration. No one will ever again trust Russia as a supplier. Even now some major energy customers are shifting production to the US because of the energy situation.

I'm not suggesting that this will mean any sort of permanent "superiority" of US production, merely that the energy situation is so unsettled because of Ukraine and climate change that I don't think that anyone really can predict how this whole thing will eventually resolve itself with respect to energy-intensive manufacturing.

Observant1

@Old_Joe,

There definitely are major energy headwinds to contend with.
I have no idea how the energy situation will be resolved, but it will be resolved at some point.

Old_Joe

And, with respect to energy, I just came across this:

Leading economies sliding into recession as Ukraine war cuts growth –

Impact of energy and inflation crises worse than forecast, with Europe most directly exposed to fallout of Russian invasion

Following are edited excerpts from an article in The Guardian:

The world’s leading economies are sliding into recession as the global energy and inflation crises sparked by Russia’s invasion of Ukraine cuts growth by more than previously forecast, according to the Organisation for Economic Co-operation and Development (OECD).

A heavy dependency on expensive gas for heavy industry and home heating will plunge Germany, Italy and the UK into a long period of recession after global growth was projected by the OECD to slow to 2.2% in 2023 from a forecast in June of 2.8%.

With the global economy needing to grow by about 4% to keep pace with rising populations, the OECD said incomes per head would be lower in many countries.

China’s growth rate is expected to drop this year to 3.2% – its lowest since the 1970s – causing a large decrease in trade with neighbours South Korea, Vietnam and Japan, dragging down their capacity to grow.

A recovery in China next year to 4.7% will be weaker than expected, the OECD said, as Beijing wrestles with a property market and banking sector weighed down by huge debts.

However, the Paris-based policy forum was most alarmed by the outlook across Europe, which is most directly exposed to the fallout from Russia’s war in Ukraine.


The OECD forecast a drop in growth in the eurozone from 3.1% this year to only 0.3% in 2023, meaning that many countries in the 19-member currency bloc will spend at least part of the year in recession. A recession is defined as two straight quarters of contraction.

France could escape a recession if it grows by 0.8% next year as predicted by the OECD, but will suffer along with other European countries after the downgrade in GDP growth since June of 1.3 percentage points.

Russia will shrink by at least 5.5% this year and 4.5% in 2023. Berlin’s dependence on Russian gas before the invasion means the German economy will shrink by 0.7% next year, down from a June estimate of 1.7% growth.

The OECD warned that further disruptions to energy supplies would hit growth and boost inflation, especially in Europe where they could knock activity back another 1.25 percentage points and increase inflation by 1.5 percentage points, pushing many countries into recession for the full year of 2023.

Global output next year is projected to be $2.8tn (£2.6tn) lower than the OECD forecast before Russia attacked Ukraine – a loss of global income equivalent to the UK economy.

“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. GDP growth has stalled in many economies and economic indicators point to an extended slowdown,” the organisation’s secretary-general, Mathias Cormann, said.

A review of the outlook for the US found that while it is likely to grow slowly this year and be in recession for part of 2023, it was less dependent than other countries on energy from Russia or other sources, allowing for a strong recovery in 2024.

The OECD forecast that the world’s biggest economy would slow from 1.5% growth this year to only 0.5% next year, down from June forecasts for 2.5% in 2022 and 1.2% in 2023.

World Bank officials have called on central banks to refrain from competitive rate hikes that will push the global economy into recession and harm the economies of developing world countries the most.

Nevertheless, the OECD said further rate hikes were needed to fight inflation, forecasting that most major central banks’ policy rates would reach at least 4% next year.

"It will be resolved at some point."

Yes, of course it will "be resolved at some point".

But with respect to investment at this time, it's not possible to determine when that future point might be, and even more importantly, what the eventual worldwide industrial configuration will look like when it is "resolved".

Observant1

Thanks for sharing the Guardian article!
The near-term outlook for Europe is rather bleak.
China growth has also slowed considerably.
Inflation in many developed nations is higher than that of the U.S.
and their central banks haven't been as aggressive as the Fed.
To be clear, I was suggesting that foreign stock investors will be rewarded
sometime in the future - not necessarily starting now.

Old_Joe

Also on this general subject:

Factory Jobs Are Booming Like It’s the 1970s-

U.S. manufacturing is experiencing a rebound, with companies adding workers amid high consumer demand for products.

Following are excerpts, severely edited for brevity, from an article in The New York Times:

Ever since American manufacturing entered a long stretch of automation and outsourcing in the late 1970s, every recession has led to the loss of factory jobs that never returned. But the recovery from the pandemic recession has been different: American manufacturers have now added enough jobs to regain all that they shed — and then some.

American manufacturers cut roughly 1.36 million jobs from February to April of 2020, as Covid-19 shut down much of the economy. As of August this year, manufacturers had added back about 1.43 million jobs, a net gain of 67,000 workers above prepandemic levels.

Treasury Secretary Janet L. Yellen said that the recovery of manufacturing jobs was a result of the unique nature of the recession, which was induced by the pandemic, and the robust federal response, including legislation like the $1.9 trillion American Rescue Plan of 2021.

American manufacturers, like many industries, have struggled to find raw materials, component parts and skilled workers. And yet, they have continued to create jobs at a rate that has surprised even some longtime promoters of American factory employment.

In recessions over the last half century, factories have typically laid off a greater share of workers than other employers in the economy, and they have been slower to add jobs back in recoveries. Often, companies have used those economic inflection points to accelerate their pace of outsourcing jobs to foreign countries, where wages are significantly lower, and to invest in technology that replaces human workers.

Manufacturing jobs quickly rebounded in the spring of 2020, then began to climb at a much faster pace than has been typical for factory job creation in recent decades. Since June 2020, under both Mr. Trump and Mr. Biden, factories have added more than 30,000 jobs a month.

Sectors that hemorrhaged employment in recent recessions have fared much better in this recovery. Furniture makers, who eliminated a third of their jobs in the 2008 financial crisis and its aftermath, have nearly returned to their prepandemic employment levels. So have textile mills, paper products companies and computer equipment makers.

Manufacturers say the numbers could be even stronger, if not for their continued difficulties attracting and hiring skilled workers amid 3.7 percent unemployment.

Businesses are also beginning to question the wisdom of producing so many goods in China, amid rising tensions between Washington and Beijing over trade and technology. The Chinese government’s insistence on a zero-Covid policy, despite the severe disruptions it has caused for the economy, has especially shaken many executives’ confidence in their ability to operate in China.

But while growth in the U.S. manufacturing sector was strong last year, so were imports of manufactured goods. That suggests that the growth of manufacturing probably reflects strong consumer demand in the United States through the pandemic, rather than a shift to production in the United States.

The director of the National Economic Council said “One of the most striking things that we are seeing now is the number of companies — U.S. companies and global companies — that are committing to build and expand their manufacturing footprint in the United States, and doing so based on their view that not only did the pandemic highlight the need for more resilience in their supply chains, but that the United States is creating a policy environment that makes long term investment here in the United States more attractive.”

Personal comment: Russia, Ukraine, China, Taiwan, cost of energy, sources of energy, climate change...

Not a particularly good time to guess what the future will be looking like.

Mark

I'm keeping it just mostly simple. Until the 50-day MA of things I want to own breaks above the 200=day MA of same my cash stays in my pocket.

Crash

Mark said:

I'm keeping it just mostly simple. Until the 50-day MA of things I want to own breaks above the 200=day MA of same my cash stays in my pocket.

Well, hey! THERE ya go! +1.

hank

Lots of great discussion. Many thanks to all who chimed in (or who may add to what’s already been said).

Frankly, I’m surprised at the continuing carnage across so many different asset classes and non-dollar currencies as well. And I may be proven wrong in my stalwart leaning into risk. Thing is - it takes time to really know. One of the best, David Giroux, cites a 3 year time frame in terms of containing losses for his investors. We’re just 8.5 months into this thing. As shocking as one day’s or one month’s losses may seem, that impact should fade over time. Rationality returns. Valuations reach their fair equilibrium.

(He says wistfully)

Crash

+1.

BenWP

@Observant1: thanks very much for compiling the stats on relative performance of international markets. I don't know how many times over the last 10 or so years I heard that EM or international would make a recovery, only to see crummy returns.

Observant1

I've also heard much of the same.
There seem to be varying cycles where either foreign or domestic stocks outperform.



"The 1970s and 1980s saw Pacifics stocks, led by Japan, annihilate US and European stocks, which also lifted the performance of the World ex-US."

"The 1990s were dominated by US stocks, and the meanest reversion of all led to the horrible performance in Pacific stocks we discussed earlier."

"The 2000s were unkind to the S&P 500, as it finished the 2000-2009 period with a negative return. International stocks picked up the slack somewhat and outperformed on a relative basis for much of that time frame."

"Now you can see the divergence once again as US stocks have handily outpaced the rest of the world over the past decade."

Link

LewisBraham

Would it grieve anyone here to think all of that past performance is meaningless and no guarantee of future results? The only thing that matters is the present and future when it comes to the market. Unless there is something in that past price performance you can identify as a precursor to the future, and that will predict somehow that performance will repeat in some way, it has little value. This is why Old Joe's analysis, which is fundamental, seems more meaningful to me. What is predictive perhaps in that performance is the lower valuations of foreign stocks embedded into it. Consider this p-e ratio:
https://morningstar.com/etfs/arcx/avdv/portfolio
versus this p-e ratio: https://morningstar.com/etfs/arcx/ivv/portfolio
Then consider how our currency is at a 20-year high. That foreign small-cap ETF has a p-e of 7 versus the S&P 500's 17.5. At what point does that valuation gap begin to matter?

Observant1

Past performance may be of limited use but I wouldn't say the corresponding info is meaningless.
Analyzing market history can assist investors in setting a range of expectations.
Of course, future investment results are not guaranteed.
Low P/E stocks can decline further; high P/E stocks may climb higher.
All things being equal, low P/E stocks have higher expected future returns.
Valuations may be high after an asset class outperforms for an extended period.
This can lead to eventual mean reversion.

LewisBraham

Agreed, but is the mean reversion price/return based or valuation based? If it is valuation based, why not go to the source of the future returns and graph the historical valuations instead of the price movements to see where the valuation gap currently stands?