1:00 Market is currently overbought
Lance: Potential correction here. Take some risks, take profits, tax loss selling. During October lows, everyone tends to be super bearish and sell low, buy high. Now bullish sentiment is getting overbought, technicals overbought, going to be a correction here. Various catalysts can cause it: Fed reiterating "higher for longer and inflation concerns"
4:30 Speculator vs Investor
- The longer the market flattens from here, averages could catch up which is bullish.
- Lance: uses Fibonacci sequences. Peak to bottom we recovered almost 100% of selloff earlier in the year. Terrific retracement. Probably going to get a pullback to some of the % retracement levels, which are previous resistance levels that are now support. (I'm not a fan on Fibonacci numbers, preferring other indicators but the price levels of interest from various indictors often converge.)
- Last correction in October was 10.3%. The mistake of investors is that they extrapolate the present circumstance into the indefinite future - if market is going up it will always go up forever, if going down, they expect it to go down forever.
- Overall the S&P "has done well this year".
16:00 Oil - contrast with S&P performance
- Oil is ending the year flat. Lance: Remember that last year oil and energy stocks were up 60% while the rest of the market was down 20% - any good news was already priced in. Oil prices have corrected.
- Big fear was that Israel conflict would spark WW3 - that hasn't happened yet so it hasn't affected oil. If we get a slower rate of economic growth last year that would bring oil prices down.
21:09 PPI vs CPI
- Oil factors into the price of everything. It's an input cost that affects Producer Price Index. When oil goes down, it pulls down PPI. PPI is not the best indicator for recession or market crash because it has a much smaller impact than many alarmists make it out to be.
- AT: If you invest by the headlines, it's a recipe to lose your money.
22:24 Inverted Yield Curve
- It's the un-inversion that gets you. We've had this one for a long time.
- Lance: This is another narrative. When it inverted, everyone was saying "recession is coming". It's not the inversion but the uninversion that's important. People forget about the yield curve [referring to the coming un-inversion?] after a while. We probably won't see un-inversion until next year.
- Valuations. Cape valuations - Dr. Robert Schiller's version of smoothed valuations to make a cyclical PE ratio. Whenever PE ratios his 20 or 30x, narrative becomes that stocks will crash. But it doesn't happen that quickly. Last time we had 20-30X earnings was 2 years ago and we've had sideways trading since.
- Lance: Focus on what's happening underneath the surface. That's why technicals are important.
25:00 - don't get wrapped up in long term macro narratives
- 2007 narrative was "peak oil", that oil was going to be perpetually over $100. Didn't happen because of fracking. 2021 similar narrative about high oil, but prices have come down. Be cautious of these macro narratives because a technology could come up that changes the long term outlook.
- Lance doesn't care about reports talking about a 20 year macro outlook. So many different things can happen. He's focused on making money right now
31:30 Uranium bull market & narratives
- AT: Uranium bull market took longer than expected but has finally kicked in. How do you time these big trends? Lance: If you have this view of a long term strategy, buy a very small investment in it (less than 1% of your portfolio) and let it sit there. If it starts to work, then add to it. If it goes to $0 not a big deal. Think of it like Vegas blackjack money.
- AT: There is a proclivity to prefer hard assets. Commodity supercycle argument. Don't throw all your money into it. Just but some of your money into it. If and as the market starts performing the way you think it will, start adding into it.
- Lance: and know when to sell. Has seen a lot of people get the trend right but didnt' sell out.
- Lance: Most investors haven't made a lot of money in financial markets becuase they do the wrong things. They bet on narratives, don't manage risk, emotions drive sell low and buy high. Most people don't research narratives. They hear some guy talking about something on TV who's also selling a product related to it (Lance slammed the gold promoters who sell a narrative and also the gold to go with it). Are those people on TV selling something in alignment with your financial goals? If you die 10 years before the idea manifests, it doesn't work for you.
37:00 Behavior economists
- AT: enjoys the academics of behavioral economics because they quantify the decision making into rules. Suggested joint interview with Lance and someone like Peter Atwater.
38:00 Debate earlier this week on future of the dollar with Brent Johnson and Matthew Piepenberg.
- Dollar is ending the year where it started. Lance: dollar has a lot of impact in terms of economic outcomes and is a key component of financial conditions. Like energy, the dollar is another hot macro topic. At the end of the day, the dollar will maintain a balance relative to other currencies in the world. If it gets too overvalued, market pulls it back relative to other currencies. 70% of all global transactions in dollar and that won't change soon.
- Lance: Next year dollar will probably get stronger because of continued Fed tightening = flight to safety (i.e. Treasuries). Hard to predict that, but that's his guess based on trends. Sideways or higher.
- Big scandals in the crypto space. Largest crypto exchange Binance fit with billions in fees for money laundering. Clearly a lot of cleanup that needs to happen, but Binance news didn't dent the crypto prices.
- Lance: Bitcoin is a risk asset, risk assets are up, and so Bitcoin is going up. Has been buying Bitcoin for the last 3 years.
- Bear markets occur over time. Not necessarily going down all the time. You just don't make money. It's gotta clear $80k to be in a new bull market. Lance is almost back to breakeven on some of his positions. 😆
- Lance: Outlook has not changed over time. Still not a viable use for Bitcoin. It's not going to be a replacement for currency or the dollar. It won't replace for transactional use. Companies no longer taking payment in Bitcoin because its too volatile. It's just a risk asset. People buy it wanting the price to go up, but it doesn't have a use yet.
- Lance's first purchase of Bitcoin was December of 2018.
50:29 Bonds (LT Treasuries)
- Lance is still bullish on bonds, going long duration.
- Jesse Felder - recession will send interest rates and bond yields higher. He sees a supply/demand imbalance. If we go into a recession that will crater tax receipts, making the current deficit even steeper leading to the issue of more supply of bonds. Under those conditions, bond buyers will demand higher yields. Lance (in disagreement): "There is no historical evidence to support that thesis."
- Lance (disagrees with Jesse Felder): What drives yields? If you have a recession, yields go down becuase yields are a function of economic growth and wages. Whether or not I can loan money at a certain price over time. In a recession, who will be your number one bond buyer? The Fed.
- Powell is not worried about a recession, because "we [The Fed] have the tools to deal with that". Cutting interest rates to 0%. Long end will follow. Inflation will follow because of demand. Can never have spiking yields and a recession - that never occurs.
- AT: Might Powell put the market through more pain for longer this cycle, leading to yield spike in recessionary environment? Lance: Last time we had a banking crisis they started the Bank Term Funding Program. They will immediately intervene in any financial instability. Foreign buyers also buying at same pace, if that slows then the Fed will step in and start buying.
- AT: But what about inflation because he wants to get inflation subdued? Higher for longer? Regular economic pain, not banking crisis. Lance: Fed won't allow inflation to run at 3.5%, it's gotta be at 2%. Bond market yields were doing the Fed's work to some extent, but if they start to rise the markets are screwing themselves by lessening the chance of monetary easing, leaving one more rate hike on the table. Lance would expect yields to go up now in the short term because of the bond rally [in recent weeks] - "bonds have gotten ahead of themselves" so Lance took some bond positions off the table. In the bigger macro picture, the Fed will cut rates.
- AT: I think they will pivot if we get into a recession, but they will wait until the world gets really bad because they are focused on inflation. Lance: they won't wait that long. If the "world comes to them on bended knee, you're in a financial crisis".
- I see a contradiction in Lance's bond position arguments here. He's long bonds (through $TLT) on the anticipation of a macro narrative, that the Fed will intervene in a recession causing yields to tumble and bond prices to go up. So far he's been way too early in his timing of this bond trade. It's interesting to me that he just talked about macro themes like hard assets, and how you shouldn't be too proactive in those big picture ideas because they may not ever happen or that they will happen way far into the future. However, he's kind of doing that with this bond trade. Shorter time frame I know, but it's a big picture macro theme and his timing has been way off. Is he too committed too soon to the idea of a Fed pivot?
- There was no technical recession and Powell cut rates in 2019. Inflation is supply and demand in the economy. Inflation comes down, yields come down.
- AT: John Rubino - one of his recession indicators is RV sales. RV sales down 49% y/y this year.
- Lance: Federal reserve buying bonds is not inflationary, it's an asset swap. What is inflationary are the stimulus checks. Millennials now doing "soft saving", no saving for retirement just spend your money now because retirement saving is futile. What is the trend of RV sales in a normal economic environment? (i.e. without the stimmy check anomalies)
- Lance: It's amazing how far consumers will dig themselves into a hole of debt to maintain an unaffordable lifestyle. It's not until the credit gets shut off that they are forced to make lifestyle changes.
1:10:00 Article about the wisdom of the current investing elders
- Benjamin Graham - "The investor's chief problem and his worst enemy is likely to be himself". Market will go up more often than it goes down. Worst problem investors have is the emotional mistakes and bad timing.