First off, before any **** slinging about your least favorite politicians, let's understand this... Fiscal stimulus (aka direct payments to people) were given out in 2020 and 2021. Way too much in both cases and plenty of blame fore everyone. Keep your blame for somewhere else and lets try to have a thread about how to best navigate it financially.
A month ago, I would have thought our high inflation numbers would cool this summer as year over year comparisons get into last summer's increasing interest rates. I was also bitching about how when CPI numbers came out they only showed a 4% increase in housing inflation, even though we all know rent and home prices are 3-4x that amount. The BLS also uses this stupid metric called "Owner's Equivalent Rent" which keeps housing inflation data down, but it still should have been above 4%.
Well, earlier this week a paper was published out of Harvard by Larry Summers (former treasury secretary and president of Harvard) and some other economists showing that there is a 13-16 month on housing inflation in the CPI. Below is the link to the full paper if you are really bored. And below that are a couple images from the paper showing the lag in a few charts and their forecast of where housing inflation will be through 2023... If the housing/rent markets level off.*
https://www.nber.org/papers/w29795
View attachment 23996
View attachment 23997
I find this info critical, because as Boom Boom pointed out a while back, the inflation was driven by used vehicles, meat, and fuel up until this point. Well, those three items combined only account for about 10% of CPI. Housing is closer to 40%.
Speaking of fuel and food. Those two items are going to climb significantly, thanks to Russia/Ukraine. Oil/gas, is an obvious one. But food prices are going to keep climbing due to the fact that the 2 countries combine for 15% of the worlds total wheat supply. Wheat is arguably the most important crop in the world and futures pricing are up 40% this week alone as I type this. It effects everything we eat in some form and we can see it driving future prices in corn and soybeans as well which have both climbed to new record highs.
Here is the most recent IRI data showing the still increasing grocery prices broken down by category. Copenhagen and Miller Lite are actually doing okay believe it or not.
View attachment 23998
War is inflationary in of itself. It creates access demand on commodities like fuel, steel, and food. It also causes governments to increase deficit spending. In the US, we have a whole lot of military equipment manufacturing and the demand is going to put a lot of people to work in high paying jobs and creating more labor shortages in an already unbelievably tight market. Wages will continue to rise. Another factor not being captured in rising wages is job changers. Lots of people are leaving jobs for higher paying jobs which is another way of putting excess money into the economy.
Housing, food, and gas comprise about 60% of CPI. Considerably higher CPI data for all 3 of these items are baked in no matter what the Fed does with rates for the next 8-12 months. And speaking of the Fed... Let's discuss the yield curve.
For those not familiar the spread between 2 year and 10 year treasury rates are what we refer to as the yield curve. When the 10 year rates go lower than the 2 year rates, thats an inversion and the most likely forward indicator of a recession. It's predicted every recession in the last 65 years without fail and only had one inversion not followed by recession. Currently, the yield curve spread is 25bps the exact amount that Powell says the Fed will raise rates in a few weeks.
View attachment 23999
https://www.reuters.com/business/fi...en-flattening-why-you-should-care-2022-02-03/
This suggests its almost a foregone conclusion that the yield curve will invert this summer and predict a late 2022 or 2023 recession. (Hat tip to Fishwater, he called this a few months back.) So if we are entering a recession with high inflation, that's stagflation. While I don't think it will be 70's bad, we are certainly going to have similar issues, albeit, probably not as long lasting.
Anyhow, that's what I am seeing. Now what am I doing about it.
1. Buying cheaper **** at the grocery store and cutting back on driving as much as possible. It sound simple, but the easiest way to force prices down is not to pay them if at all possible. I am drinking a "signature select" diet ginger ale right now. $2.99 for a 12 pack vs $5.99 for brand name. 17 them, it's damn near Canadian Dry.
2. Real estate. Specifically single family housing. I know it's high, but I will beat the dead horse again, it's going higher. From 1972 to 1982 median home prices in the US almost tripled. It's the best inflation hedge in the world. It captures higher commodity prices, higher labor prices, a devalued currency, and unlike gold or bitcoin, shelter is a basic tenant of survival. You will sell everything in the world before going homeless.
Other factors are the flat out lack of inventory. We are blowing away supply and price increase records set last year. Don't be fooled by headline date about there being 10% less mortgage applications than this time last year.. Its because there is 30% less inventory than there was this time last year per available home, mortgage applications are up considerably which means more bidding wars as there are more buyers and less homes. Below are 2 charts showing available inventory compared to this week in previous years and pricing... and for the first time in history, the newly listed homes are higher priced than the existing inventory (usually cheaper houses sell fast leaving only expensive homes on the market.) The final chart shows days on market. Last week of February pre pandemic averaged around 90 days, last year was 55 days, this year is at 35 days. It's absolutely nuts.
View attachment 24000
View attachment 24001
View attachment 24002
Housing will cool one day hell it may even crash.. But from where to where? I just saw a house in my neighborhood that was built in 2018 and is now for sale for 124% more with no additions or extra work... There is much greater risk to not buying hoping it will crash than buying, remember 12% was the total housing decline during the "housing bust." For your personal home my advise is always: If you like the house and you can afford the house, buy the house.
3. Equites. I like stuff with pricing power of course. Not as bullish on banks, because I don't think the Fed is going to raise rates as high as before as global gdp is going to take a hit, it would be very dangerous to overshoot rates. But in the last couple of weeks I am building positions in defense stocks, oil stocks, commodity based material companies (miners and timber), and oilfield services. The overall market is in no mans land right now and could go either way from here. War is actually bullish for stocks usually, but rising rates and quantitative tightening are not, so who knows. But I am pretty damn sure Exxon, Lockheed Martin, Weyerhaeuser, and Baker Hughes will have nice top and bottom line growth over the next 12 months.
Love to hear any other ideas or to poke holes in my base case on elevated inflation for longer.
A month ago, I would have thought our high inflation numbers would cool this summer as year over year comparisons get into last summer's increasing interest rates. I was also bitching about how when CPI numbers came out they only showed a 4% increase in housing inflation, even though we all know rent and home prices are 3-4x that amount. The BLS also uses this stupid metric called "Owner's Equivalent Rent" which keeps housing inflation data down, but it still should have been above 4%.
Well, earlier this week a paper was published out of Harvard by Larry Summers (former treasury secretary and president of Harvard) and some other economists showing that there is a 13-16 month on housing inflation in the CPI. Below is the link to the full paper if you are really bored. And below that are a couple images from the paper showing the lag in a few charts and their forecast of where housing inflation will be through 2023... If the housing/rent markets level off.*
https://www.nber.org/papers/w29795
View attachment 23996
View attachment 23997
I find this info critical, because as Boom Boom pointed out a while back, the inflation was driven by used vehicles, meat, and fuel up until this point. Well, those three items combined only account for about 10% of CPI. Housing is closer to 40%.
Speaking of fuel and food. Those two items are going to climb significantly, thanks to Russia/Ukraine. Oil/gas, is an obvious one. But food prices are going to keep climbing due to the fact that the 2 countries combine for 15% of the worlds total wheat supply. Wheat is arguably the most important crop in the world and futures pricing are up 40% this week alone as I type this. It effects everything we eat in some form and we can see it driving future prices in corn and soybeans as well which have both climbed to new record highs.
Here is the most recent IRI data showing the still increasing grocery prices broken down by category. Copenhagen and Miller Lite are actually doing okay believe it or not.
View attachment 23998
War is inflationary in of itself. It creates access demand on commodities like fuel, steel, and food. It also causes governments to increase deficit spending. In the US, we have a whole lot of military equipment manufacturing and the demand is going to put a lot of people to work in high paying jobs and creating more labor shortages in an already unbelievably tight market. Wages will continue to rise. Another factor not being captured in rising wages is job changers. Lots of people are leaving jobs for higher paying jobs which is another way of putting excess money into the economy.
Housing, food, and gas comprise about 60% of CPI. Considerably higher CPI data for all 3 of these items are baked in no matter what the Fed does with rates for the next 8-12 months. And speaking of the Fed... Let's discuss the yield curve.
For those not familiar the spread between 2 year and 10 year treasury rates are what we refer to as the yield curve. When the 10 year rates go lower than the 2 year rates, thats an inversion and the most likely forward indicator of a recession. It's predicted every recession in the last 65 years without fail and only had one inversion not followed by recession. Currently, the yield curve spread is 25bps the exact amount that Powell says the Fed will raise rates in a few weeks.
View attachment 23999
https://www.reuters.com/business/fi...en-flattening-why-you-should-care-2022-02-03/
This suggests its almost a foregone conclusion that the yield curve will invert this summer and predict a late 2022 or 2023 recession. (Hat tip to Fishwater, he called this a few months back.) So if we are entering a recession with high inflation, that's stagflation. While I don't think it will be 70's bad, we are certainly going to have similar issues, albeit, probably not as long lasting.
Anyhow, that's what I am seeing. Now what am I doing about it.
1. Buying cheaper **** at the grocery store and cutting back on driving as much as possible. It sound simple, but the easiest way to force prices down is not to pay them if at all possible. I am drinking a "signature select" diet ginger ale right now. $2.99 for a 12 pack vs $5.99 for brand name. 17 them, it's damn near Canadian Dry.
2. Real estate. Specifically single family housing. I know it's high, but I will beat the dead horse again, it's going higher. From 1972 to 1982 median home prices in the US almost tripled. It's the best inflation hedge in the world. It captures higher commodity prices, higher labor prices, a devalued currency, and unlike gold or bitcoin, shelter is a basic tenant of survival. You will sell everything in the world before going homeless.
Other factors are the flat out lack of inventory. We are blowing away supply and price increase records set last year. Don't be fooled by headline date about there being 10% less mortgage applications than this time last year.. Its because there is 30% less inventory than there was this time last year per available home, mortgage applications are up considerably which means more bidding wars as there are more buyers and less homes. Below are 2 charts showing available inventory compared to this week in previous years and pricing... and for the first time in history, the newly listed homes are higher priced than the existing inventory (usually cheaper houses sell fast leaving only expensive homes on the market.) The final chart shows days on market. Last week of February pre pandemic averaged around 90 days, last year was 55 days, this year is at 35 days. It's absolutely nuts.
View attachment 24000
View attachment 24001
View attachment 24002
Housing will cool one day hell it may even crash.. But from where to where? I just saw a house in my neighborhood that was built in 2018 and is now for sale for 124% more with no additions or extra work... There is much greater risk to not buying hoping it will crash than buying, remember 12% was the total housing decline during the "housing bust." For your personal home my advise is always: If you like the house and you can afford the house, buy the house.
3. Equites. I like stuff with pricing power of course. Not as bullish on banks, because I don't think the Fed is going to raise rates as high as before as global gdp is going to take a hit, it would be very dangerous to overshoot rates. But in the last couple of weeks I am building positions in defense stocks, oil stocks, commodity based material companies (miners and timber), and oilfield services. The overall market is in no mans land right now and could go either way from here. War is actually bullish for stocks usually, but rising rates and quantitative tightening are not, so who knows. But I am pretty damn sure Exxon, Lockheed Martin, Weyerhaeuser, and Baker Hughes will have nice top and bottom line growth over the next 12 months.
Love to hear any other ideas or to poke holes in my base case on elevated inflation for longer.
