10-Chart Monday (7/18/22)

By Charlie Bilello

18 Jul 2022

Note: I have a new channel on YouTube where I share my latest thoughts on markets and investing. You can view the most recent video here.

10 charts and themes from the past week that tell an interesting story in markets and investing

1) Hello 9%

The US Inflation Rate rose to 9.1% in June, its highest level since November 1981.

The major difference between 1981 and today continues to be Fed policy. In November 1981, the Fed Funds Rate was over 12%. Today it’s still below 2%, which leaves the Fed far behind the curve.

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But that massive gap is expected to narrow considerably in the months to come, with the market now anticipating a 75 bps hike in July (to 2.25%-2.50%), another 75 bps hike in September (to 3.00-3.25%), and 25 bps hikes in November (to 3.25%-3.50%) and December (to 3.50%-3.75%).

These aren’t set in stone, of course, and if the inflation rate shows any sign of peaking we could see a slowdown in the pace of hikes.

If we look at a breakdown of price increases in the latest CPI report, everything is rising, but Fuel Oil and Gasoline continue to stand out with the largest year-over-year increases.

But this doesn’t reflect the recent declines in Commodities, with gas prices down 50 cents a gallon from their all-time high in mid-June.

The broad S&P GCI Commodity Index is now showing its smallest year-over-year percentage increase since early 2021. Which means that if Commodity prices don’t bounce back in the next few weeks, we should see this moderation reflected in the July CPI report.

What we’re not likely to see, though, is a decline in the single largest component of CPI: Shelter. The 5.6% increase there continues to wildly understate true housing inflation, with rents up 14% over the last year and home prices up over 20%. Which means that even if food/energy prices come down, the rise in shelter will offset that to some extent, and overall inflation is likely to remain elevated in the near term.

Judging by a recent poll I conducted, many believe high inflation is here to stay for a while, with few expecting inflation drop below 3% over the next year while >50% of respondents expect inflation to remain above 6%.

2) The Ravages of Inflation

US wage growth has failed to keep pace with rising prices now for 15 consecutive months. This is a decline in prosperity for the American worker and the primary reason why the Fed must continue normalizing interest rates.

All of the US wage growth since the start of the borrowing/printing binge has been a mirage, up 12.3% in nominal terms but -1.5% after adjusting for higher prices. Initially, everyone loves “free money.” It’s only with the passage of time that the ravages of inflation are revealed.

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3) Small Business Blues

Rising prices are not only hurting individuals, but businesses as well. In the recent NFIB report, 34% of small business owners reported inflation to be their single most important problem in operating their business, the highest percentage since 1980.

The number of small business owners expecting better business conditions over the next 6 months fell to the lowest level recorded in the 48-year survey.

4) A Tale of Two Sales: Nominal vs. Real

In nominal terms, US Retail Sales still appear to be booming, hitting another all-time high in June with an increase of 7.7% over the last year. But after adjusting for inflation, the story changes dramatically. Real Retail Sales peaked back in April 2021 and are down 1.2% YoY.

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5) Why You Need to Invest, In One Chart

With stocks off to one of their worst starts to a year in history, some are wondering why they should invest at all. While putting money under your mattress may have worked better over the last six months, it hasn’t been a very good long-term strategy.


Because of inflation and the impact it has on the purchasing power of the dollar over time. The chart below illustrates the erosion of what a dollar can buy over the years and how the stock market has not only kept pace with rising prices, but exceeded them.

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Does this mean stocks always keep pace with inflation? Absolutely not. There’s no such thing as a perfect inflation hedge as we saw in the 1970s/early 80s, in the 2000s, and again this year. But in the last hundred years there’s been no better way to generate real wealth over time.

6) Savers Rejoice

The bond market is quickly pricing in future rate hikes, to the benefit of savers.

The 3-Month Treasury Bill yield has moved up to 2.40%, its highest level in 3 years. It entered the year at 0.06%.

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The 1-Year US Treasury yield has moved up to 3.21%, its highest level since December 2007. Only 13 month ago (in June 2021) it hit an all-time low of 0.04%.

7) Breaking the Buck

The Euro has broken below parity with the US Dollar for the first time since 2002. Meanwhile, the Yen is faring even worst, down over 45% from its peak and at its lowest level since 1998.

These are the 2 largest components of the US Dollar Index which is now at a 20-year high.

The strength in the Dollar will be an additional headwind for US corporations with international operations (29% of S&P 500 revenues in 2021 came from overseas), reducing the value of their overseas profits and making their products less competitive.

8) From Big Oil to Big Tech

A lot can change in a decade, and a table of the largest US companies over time is a clear illustration of that.

Interesting fact: in 1980, 6 out of the 10 largest companies in the US were in the Oil/Energy sector (Exxon, Amomo, Mobil, Chevron, Atlantic Richfield, and Shell). Today, that number is 0 while 6 out of 10 are in Tech (Apple, Microsoft, Alphabet, Amazon, NVIDIA, and Meta).

9) Declining Deficit

The US Federal Budget Deficit has moved down to $1.05 trillion, its lowest level since 2019. The Deficit peaked at $4.1 trillion in March 2021. Reducing the rate of borrowing/spending has been a painful adjustment in the short run but is the only path to prosperity for a nation in the long run.

10) Here Come the Price Cuts

The percentage US homes for sale that have cut their asking price over the last 4 weeks is at the highest level we’ve seen since Redfin started tracking the data in 2015.

Mortgage payments are up a stunning 43.5% over the last year, making the average house unaffordable to the average American household. First this hits demand with a collapse in sales, and then with a lag come the price declines.

And that’s it for this week.

Have a great week everyone!


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