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2023 will be a recession. Stocks will be down. Howard Marks sees a Sea Change in investing

The six month treasury now pays 4.69% — more than the one year (4.62%) , which pays a lot more than the ten year (3.48%).

I like treasuries. Their yields are 100% guaranteed by the U.S. Government.

If you earn 4.69% in 2023, you will do better than 99% of hedge funds and mutual funds.

This is a weird world in which short-term bonds pay more than long-term ones. It’s called inversion and typically means we’re going to have a recession.

Forget inversion. even Blind Freddie (my mythical idiot) can see we’re headed to a recession.

Figure the Fed for a 100% certain recession.

The Fed is trying to bring down today’s 8% inflation to 2%.

It has two tools. The first is to suck money out of the economy by selling the bonds it owns.

Its biggest tool is messing with interest rates. By raising them it brakes the economy — especially the 40% that’s housing. It makes housing unaffordable by making mortgages hugely expensive.

Sadly, not everything is interest rate sensitive. So the Fed has to pray that its interest rate hikes will hurt the economy indirectly. That means bringing wages under control, by , inter alia, firing people. That’s working in the tech sector. But not so far most other places.

This week Powell bumped interest rates up 50 basis points — a smaller increase than his other increases in 2022. Here’s the chart.

In his press conference, Powell said, “We’ve made less progress on inflation than we expected… We’re going into the new year with inflation higher than we expected. …There will be no rate cuts in 2023.”

In short he’s going to raise interest rates in 2023. His next Fed meeting is February. There’s no meeting in January. So expect another 50 basis point rise in February.

Now look at the chart. When we had the Great Financial Crisis Recession in 07 -08, the Fed cut interest rates to almost zero by 2010. That led to a huge spike in the value of our assets — from real estate to stocks. Money was ultra-cheap. Borrow money. Buy assets. It was pure euphoria. Everyone was getting rich as the price of stocks  soared and soared. We all thought we were geniuses buying stocks at P/Es into the hundreds. It didn’t matter how high the P/E was or how fast the earnings were growing, we knew in our heart of hearts, there’d be somebody who buy our stocks at even higher prices.

Everyone got caught up in the frenzy. One of Cramer’s fav stocks was CRM. In November last year, it hit $311. Last night it was $130.44 — down a whopping 58%. Tesla is down 61%. Nvidia is down 50%.

They’re probably still overpriced.  CRM’s P/E is 464. Tesla’s is 48. Nvidia is 75. Still much higher than historical standards.

All in all, a lousy time for most stocks — especially with that recession on the horizon.

Hence a sea change in the way we look at investments.

One of our best commentators on all this stuff is Howard Marks of Oaktree Capital Management, who this week released his latest memo, called (naturally) Sea Change.

Here’s Marks commenting on what’s happening in our world:

You can read Howard Marks’ Sea Change memo. Click here.


+ Airlines are nuts. They send you a Check-In email 24 hours in advance. My experience: 50% of domestic check-ins don’t work online. 99% of international flights don’t work. Better: Check in at the airport. It’s faster.

+ Keep your finger on your iPhone’s space key. Watch how it magically becomes a mouse and lets you move easily around words on your phone.

+ TSA Pre is the greatest travel boon. Saves so much time at the airport.

+ When crossing a street (in a car or on foot) look both ways twice. Watch out for messengers riding motorized bikes. The bikes are heavy and they cause real damage when they hit you — as they have done to friends recently.

Favorite candy

Totally addictive.

Favorite cartoons

From Borowitz at the New Yorker

Crypto is still sucking them in

Shark Tank investor Kevin O’Leary invested his own money in FTX. Then he became a public spokesman for them. He even evangelized about FTX and the potential of cryptocurrencies during testimony before Congress:

“We need to get to the bottom of what happened at FTX, but we can’t let its collapse cause us to abandon the great promise and potential of crypto,” O’Leary said in his written testimony for the Senate Committee on Banking, Housing and Urban Affairs’ hearing on FTX’s collapse and alleged fraud.

Kevin O’Leary has been on CNBC’s Shark Tank since 2009.

Yesterday somebody paid $17,414.10 for one bitcoin. What can I say? The Greater Fool Theory . At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled artisan. There were almost as many varieties of tulips then as there are cryptocurrencies today.

Why isn’t bitcoin zero? Because somebody believes that if they buy it for $17,14.10, someone sometime will pay more. And they’ll get rich beyond their wildest expectations.

Bitcoin (BTC) reached an all-time high of $68,000 in November 2021 after starting the year at just under $30,000, and the crypto industry as a whole grew to a total market cap of more than $2 trillion. By contrast, the entire national debt of the U.S. is only $31 trillion. This is about as mad as it gets.

Off to Down Under

I’m off to Australia tomorrow to see my family. It will be fun and warmer.

I’d go there more often if it weren’t so doggone far away.

Since the earth is round, you can draw it any way you want.

Here’s a map of the world, with Australia in its rightful place — the center. It’s in green. Notice how large Russia is!

See you soon. — Harry Newton