Valuation extremes combined with macro inflection signals provide generational opportunities to position opposite the crowd for potentially large gains.

A🧵👇 👇👇 As the chart above shows, analysts’ estimates for Microsoft and Apple’s free cash flow have been trending down for two years, but their stock prices have grossly diverged to the upside.

The prevalent notion that the economy is headed for a disinflationary soft landing is likely to be proven wrong on both counts.🧵👇 Value-oriented, contrarian investors positioned for a stagflationary hard landing have had to endure some short-term pain in 2023. It has been extremely frustrating but should be well rewarded soon.

A Case Study on Charles Schwab...

🧵👇 The insolvency problems revealed by rising interest rates that translated into the failures at Silicon Valley Bank, Signature Bank, and First Republic may just be the first casualties of a systemic problem that affects the entirety of the US public and private securities markets.

Inflation is one of the most mispriced macro variables in markets today.

CPI is running 5.1% higher than two years, but five-year forward inflation expectations are essentially unchanged, which is just wrong.

🧵👇👇👇 Structural forces are likely to keep the annual growth rate in consumer prices elevated for much longer and substantially higher than currently priced in the markets.

The percentage of inversions in the US Treasury yield curve just exceeded the critical 70% level last week. Every breach of this threshold in the history of the data back to 1970 has led to a near-term recession.

h/t @TaviCosta 🧵 Furthermore, Tavi’s work has identified what was a highly profitable macro trade over the next two years following the triggering of this indicator which is simply to buy gold and sell short the S&P 500 Index.

At Crescat, we are fans of seeking value and avoiding bull traps.

In our analysis, it is still way too risky to buy the dip in mega-cap tech stocks.

Valuations are still higher than the PEAK of the dotcom bubble as we show in my two charts that follow in this thread.

👇👇👇 There is substantial downside ahead based on the comparison to the early 2000’s tech bust at its washout point.

My first chart shows the top-10 market cap tech stocks at the beginning of this year in terms of enterprise value relative to GDP.

Looks like the smart money is rotating out of overvalued financial assets and into undervalued inflation-hedge assets. We call this overriding theme “The Great Rotation”.

A thread 👇👇👇 We prefer value stocks in the energy, materials, and agricultural sectors today that have low multiples and high projected intermediate-term growth.

The length of the business cycle is substantially shorter in inflationary environments.

Expect more frequent recessions.

Let me explain...

A thread 👇👇👇 The Covid-19 recession turned out to be a mere blip in what in all practicality is still the longest bull market and largest valuation bubble in US history for both stocks and bonds.

The Psychology of Inflation

A thread👇👇👇

Net profit margins are at record highs today. S&P 500 companies have been able to pass rising costs onto their customers in the short run. These windfall profit margins are unsustainable and poised to reverse. The two biggest costs of running America’s largest corporations that affect net profit margins are on track to rise imminently: taxes and labor.

The Tech Bubble Then and Now

A thread...
👇👇👇 The US stock market today is historically overextended and poses substantial risks. To understand, we need to start by comparing it with the tech bubble in 2000.

The US Stock market is at risk of P/E deflation.

Just look at the relationship between CPI and the earnings yield (inverse of P/E) of the S&P 500 Index over the last seven decades.

A thread 👇👇👇 Note the high near-term risk to the S&P 500 posed by the sharpness of today’s upward inflationary divergence.

The Great Rotation out of large cap growth and mega cap tech has begun.

crescat.net/february-resea…

Thread 👇 It is more than a shift from growth to value style investing. The Great Rotation is a move out of overvalued long duration equities and fixed income securities and into undervalued commodities and basic resource stocks.

Get ready for the Great Rotation.

A stagflationary shift like 1973-74:

crescat.net/crescat-capita…

Thread… Investors live off fear and greed. The Great Rotation is all about the impending move out of record overvalued large cap growth and technology stocks and corporate credit and into undervalued commodities and scarce resource equities. It should look a lot like the tech bust.

Thread:

Markets are cyclical. Today, stocks trade at record high valuations while commodities are historically cheap in relation. Comparable conditions were present with the 1972 Nifty Fifty and 2000 Dotcom bubbles. As capital seeks to redeploy towards the highest growth and lowest valuation opportunities, analytically minded investors should be rotating, if not stampeding, out of expensive deflation-era growth equities and fixed income securities and into cheap hard assets.