Fed rate increase = lower hifi prices?

Just to bring this back around to the original subject, given the supply constraints wrought largely by China shutting down operations to control Covid, both new and used audio gear prices are likely to be high until things loosen up.  If you can wait you’ll likely find better prices in both markets a year or so from now, or whenever more “normal” supply returns to the market.  

Thanks @ideal8592 I know I’m in the minority among the financial talking heads, but IME and as mentioned before, significant financial/economic downturns are caused by four factors: Recession, over valuation/significant bubble, high inflation/interest rates, or some major exogenous geopolitical event or environmental disaster. Our current situation was obviously caused by Covid shutting down supply lines and Russia’s war on Ukraine raising food and energy prices. Before those exogenous events inflation was all but non existent due to global competition and technology containing and/or driving prices lower. In lawyer speak, “but for” those two exogenous variables we were looking at continued low inflation, low interest rates, and good economic growth, which is the perfect environment for stocks. I still view our current environment to be an anomaly (albeit a very potent one) and once the two exogenous variables subside — and they will probably sooner rather than later — inflation and interest rates will tumble and stocks will once again take off. This assumes the Fed doesn’t do something monumentally stupid like continuing to hike rates into the stratosphere to try to tame this temporary spike in inflation and sending our economy into a completely unnecessary recession. As I mentioned to my B-school buddies, I’d much rather have a job and complain about high prices than not have a job and pay lower prices. We do agree that if you have the fortitude to stay the course and/or average down into particularly good stock values now you’ll be very happy you did so a year from now, but there’s likely to be a lot of noise and volatility between now and then so hold on for the bumpy ride. Bottom line and as counterintuitive as it sounds now, the base case of low inflation and moderate growth is still there under the surface and should prevail once the temporary exogenous variables subside. Just my take FWIW.

@deludedaudiophile hey, just as a rough idea and from a quick, off-the-cuff look, there might be some useful info from the real earnings yield. What I failed to realize initially, because I’m just not that smart, is that by using the real earnings yield you are inherently taking into account market conditions — duh. It appears that when the real yield goes negative it might be a good sell signal, and when it climbs back to 3% or so it might be a good buy signal. Could be wrong, but it sure seems like something worth looking into. The biggest problem is you’re beholden to current earnings estimates (or next year’s estimate if you’re using forward earnings), so any earnings revisions could lead to false buy/sell signals. Such is investing. Anyway, thanks for making me think. BTW, as a coincidence I used to work directly with Ed Yardeni — he was our economist when I was market strategist at Deutsche Bank.

@deludedaudiophile

I find if you push smart people, it makes them think more and you learn more from them.

Case in point, you’ve got me thinking about the value of using the real earnings yield as part of an indicator. The thing is, you really can’t just use the earnings yield alone as an indicator because it’s always in the context of the current economic environment (i.e. an earnings yield of 5% with rates at 3% is completely different from a 5% yield with rates at 8%). So, to take that into account you need to view it relative to something like bond yields to see what it’s really signaling. I use nominal bond yields in our model so that’s why I’m using a nominal earnings yield, but if you’re up for it I’d highly encourage you to explore using the real earnings yield in some fashion to see if it offers useful predictive abilities. I’d certainly be interested in anything you find.

Whose crystal ball is best?

That is an EXCELLENT question. In all my years of experience the answer that seems most likely to me is NOBODY’S. And that certainly includes me. Any model can make someone a hero at a point in time, then the market shifts and you’re a dinosaur. Anecdotal note: after Elaine Garzarelli called the crash in 1987 she was on top of the investment strategy world, but she was absolutely paranoid after that because she knew her rep would be tied to calling when to get back INTO the market. She’d call me monthly (she was a client of ours) to see if our models were supporting what hers were saying to give her peace of mind that she wasn’t missing the boat. Point is, even the best know their crystal ball is right only some of the time.

Anyway, It seems I’ve come across as an arrogant ass here, and for that I apologize. The fact is, the longer you do this and if you’re a realist and smart, the biggest thing you learn is humility. My crystal ball is possibly no better than anyone else’s, although I’ve had the benefit of unlimited data and the ability to test and refine it over time. And I agree with many of the insightful points that have been made here. The only difference is I’ve had the opportunity to test my models and refine them into fairly reliable predictive buy/sell indicators over close to 40 years. If you believe in your assertions made here, I’d encourage you to track your own models against the market and try to create upper and lower bounds bounds that denote reliable buy or sell signals over time. Then you’ll be able to put your ideas to work for you in a truly objective and quantifiable way if you really believe in them. I’ll warn you ahead of time, it’s not quite as easy as it sounds, but it can be well worth the effort. I’ll just leave it there and say peace out. Best of luck!

Sorry, I meant to say hurting your feelings was not my intent at all.  To answer your question, you can’t just look at growth and inflation and hope to predict where stock prices are going.  We use seven proprietary models that track the economy, the Fed. stock valuations, bonds, technicals, etc.  It’s not until we pull all those factors together that we get a clearer picture of the stock market.  This is why I’m saying just looking at inflation and growth and saying stocks will collapse just isn’t sufficient information to draw that conclusion.  And no, I will not share more details about our models as they’ve been developed over many years.  I will say that when the disparity between the earnings yield and bond yields is this high, betting against stocks is rarely a good idea.  Again, FWIW. 

Please poke as big of holes as you feel is appropriate in anything I say. I won't take it personally. Is that earnings yield not based on growth?  Since you have done the research are you able to share some simple math for discussion?

Look man, I spent many years doing primary research, quantitative analysis, and market strategy on Wall Street, so yeah when you throw some BS generalities out there with no justification that contradicts my experience I’m gonna say so.  Sorry if that hurts your feelings.

@ghasley No, and I thought it was rather absurd and useless so I didn’t even address it. In my business we had some of the best economists in the biz and I ran all manner of econometric models that generated pretty respectable numbers (high R-squared, low autocorrelation/heteroskedasticity, etc.), and I found just trying to forecast the next year to be at best a crapshoot much less 13 years out.

With 4-5% inflation without compensatory growth, that would suggest a potential for significant decline of the stock market total asset valuation

That’s just simply not true.  Using a 2022 S&P500 earnings estimate of 230 the current earnings yield is 5.5%, which leaves quite a bit of leeway for rates to rise before putting pressure on stocks (yes, I’ve done the research).  My expectation is after the dust settles we’ll head back down more to the 3% inflation range given our base rate for years has been stuck at less than 2%, but we’ll see.  

Our business subscribes to an economic forecasting firm.  Growth will slow into 2023 but no recession.  Minor recession in 2026.  Inflation will stay in 4 to 5% range for rest of this decade.

Although forecasting is rarely accurate due to unforeseen variables, this seems like a very reasonable forecast to me.  We’ll see. 

@daveyf there’s so much wrong with what retiredfarmer wrote I’m not even gonna take the time to respond. I’ll just say the US Dollar is up since covid and leave it at that. If you wanna put any credibility into the crap he’s spewing be my guest. IMHO he has absolutely no idea what he’s talking about and should stick to opining on farming. If you buy into his crap about us being headed to hyper inflation you’re a fool.

No, at least not to any extent they pose any danger.  Now, if rates were to spike enough to risk a recession that’d certainly be a big problem, but I don’t see that in the current environment.  If you look back, it’s extremely unlikely for the US to go into a recession with rates around 3%, which makes perfect sense.  Now, if the 10-year gets up closer to 4% I’d need to start to reevaluate depending on inflation, etc.  We’ll just have to wait and see, but for reasons I mentioned earlier I believe current inflation rates are temporary.  The bond market is extremely smart, and if it thought we’re looking at sustained 6%+ inflation the 10-year would be a helluva lot higher than 3%.  Just MHO and again FWIW. 

@cd318

Some of still remember 2008 when we were told that it was either plan A or bust! There was no plan B.

In my experience as an analyst on Wall Steet, there are five major factors that lead to big problems and big market capitulation: Overvaluation, recession or other significant economic imbalance, persistent high inflation, some bubble somewhere, or some catastrophic exogenous global or geopolitical event. The first four, in my opinion, are not in play, and unless the Ukraine crisis expands beyond that country’s borders then it’s not a big enough event to create a major global disruption. In 2008 there was a clear and significant bubble in real estate that had significant ripple effects throughout the economy that also rightly rocked the financial markets, but there’s nothing like that present now. Unless one of the five issues above becomes a bigger problem I’m not worried, FWIW.

Similarly 3.4% sounds strong, but in a 6-7% inflation scenario, that is stagflation.

Yeah except 7% inflation is a temporary situation caused by covid. And you’re confusing terms. 3.4% nominal growth IS strong, its real GDP growth that’s weak, but that’s a different concept entirely and doesn’t change the fact that nominal GDP growth is strong. In a few months the CPI comps to last year alone are gonna dramatically reduce inflation, and as supply channels gradually open inflation will fall even further and we’ll still have an economy growing at above 3%. And BTW, this is NOT stagflation — it’s economic growth accompanied by temporarily high inflation. Stagflation is persistent high inflation with high unemployment and stagnant demand , and that is not even close to what we have here. Just sayin’.

@artemus_5

But I assure you the savvy investors know this market is over inflated and is being propped up. When the bubble bursts, who will get hurt?

Well I’m pretty market savvy and I don’t know that at all. What bubble? What valuation metrics are you using to back up these silly statements?

Then as @deludedaudiophile has pointed out, the exorbitant printing of $$$ How many Trillions have we printed?

The Fed was trying to achieve their inflation target and avoid us sliding into disinflation and/or deflation. Take a look at Europe with their negative interest rates — would you prefer paying someone to hold your money rather than earning a return?

Its well known that China would love to have the reserve currency.

It’s well known I want a Ferrari, doesn’t mean it’s ever gonna happen.

I’d love to know why you believe we have a "strong economy"

The annual GDP growth as of 3/22 is 3.4%. I’d call that pretty strong. Dude, you need to stop getting your economic news from Fox News and figure out what’s really going on. Sheesh.

Rates were low pre-covid because inflation was running less than 2%, and as one of the Fed’s two mandates is price stability, which generally means an inflation target of 2% they were justified, given their mandate, to keeping rates low and adding to their balance sheet.  Remember, they were also guarding against the very real risk of disinflation, which is a very unhealthy situation as well.  And much of Europe was fighting negative interest rates so obviously they needed to throw the kitchen sink at the problem even more than we did. Can’t speak to Japan and China, but Japan’s economy and stock market have gone nowhere in 30 years and China, well, who the hell knows what goes on there.  Would you wanna live in either place?  It’s possible they aren’t experiencing shortages of the things they manufacture and normally export around the world and with exports being curtailed we’ve got shortages and thus higher prices in those products.  I’ll just say this, if we were “printing money” unnecessarily pre-covid our inflation rate would’ve been a helluva lot higher than 1.5%.

I don’t know what report you’re referring to and there are certainly companies that have been raising prices despite not experiencing rising input costs (3M, Hostess, etc.) but I’d argue audio companies are not one of those as their input costs (semiconductors, etc.) have certainly increased significantly and are justified if they feel they need to raise prices to cover their significantly increased manufacturing costs.  

Okay, I’m no electrical engineer and have no expertise in equipment design, but I have spent my career in finance as a market strategist and money manager so take this for what it’s worth. In normal times you’d think raising rates leading to a slower economy, decreased demand, and possibly a recession then yes, eventually audio prices might come down somewhat.

But, these are not normal times. Inflation is not being caused by demand but by a lack of supply due to covid shutdowns, China limiting its shipments, etc. Raising rates will do nothing to fix this because demand is not causing the problem. In a few months inflation numbers will have easier comparisons versus last year, which by itself will bring inflation numbers down, and as covid (hopefully) continues to wain and supply channels and factories get back up to speed that will alleviate the supply problem, so between these two factors we could see inflation come WAY down over the next six months or so. That’s my take anyway.

So, bottom line and to answer your question directly, despite rates rising they are still extremely low by historical standards and the underlying economy is strong with historically low unemployment, so a 50bp hike here or their and the 10-year at 3.1% it’s unlikely the economy — and hence demand — will be affected to any significant degree and thus there’s no incentive or need for audio companies to lower their prices. And my bet is once inflation numbers come down for the reasons mentioned above the Fed will feel less pressure to raise further and long yields will moderate and possibly even come back down.  Good question though.