10-Chart Thursday (9/15/22)

By Charlie Bilello

15 Sep 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.


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

1) An Unpleasant Surprise

US inflation came in hotter than expected, rising 8.3% year-over-year in August. While still down from July’s 8.5% rate, market participants were anticipating a much larger drop (8% was the consensus estimate).

Importantly, the core rate (which excludes food and energy) moved up to 6.3%, its highest level since March.

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A major driver of that move higher was the increase “Shelter,” which rose to 6.2% from 5.7% in the prior month.

Shelter is the single biggest component of CPI (33% of the Index) and is still being understated (@ +6.2% YoY) with rents up 10% over the last year and home prices up 18%.

Which means that a) the true inflation rate is higher than 8.3%, and b) we’re likely to see elevated inflation rates persist until the Shelter component of CPI closes the gap with actual housing inflation over the past two years.

2) 17 Months and Counting

US wage growth has now failed to keep pace with rising prices for 17 consecutive months. This is a decline in prosperity for the American worker and the primary reason why the Fed must continue to hike interest rates.

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On that front, the market is currently expecting a 75 bps hike from the Fed next week (to 3.00-3.25%) and another 75 bps hike in November (to 3.75-4.00%). That’s an upward shift of 25 bps at the November meeting from where expectations stood before the inflation report.

Looking out further, the market is now pricing in Fed rate hikes to 4.25-4.50% by the first quarter of next year, followed by rate cuts in the back half of 2023 and more cuts in 2024.

3) Why Would the Fed Cut Rates Next Year?

You may be wondering why market participants are predicting rate cuts next year.

What are they expecting?

Likely a downturn in the economy, which in turn drives down the rate of inflation.

But isn’t retail sales growth of 8.9% over the last year evidence of a strong economy?

Not necessarily when you have inflation running over 8%. If you adjust for higher prices, the year-over-year growth rate in retail sales falls to 0.6%.

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With prices outpacing wages for 17 months, how are consumers still maintaining their spending? They’re saving less (savings rate at lowest level since 2009) and borrowing more (consumer credit increasing at fastest pace since 2011).

4) The Times They Are A-Changin’

It’s been a while since savers earned a decent yield on their cash, but the times they are a-changin’.

The highest yielding online savings account has moved up to 2.61% and should quickly move above 3% after the Fed hikes rates next week (see here for my recent post on how to earn a higher yield on your cash).

The 1-Year US Treasury yield has jumped to 3.92%, its highest level since October 2007. Only 15 month ago it hit an all-time low of 0.04%.

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Treasury yields of all durations are moving higher, with the largest increases found in the shorter end of the curve. This is leading to a major inversion of the curve with the 1-year yield now 50 bps above the 10-year yield.

Here’s a look at Treasury yields going back to 1990…

5) More Mortgage Pain

Treasuries aren’t the only rates moving higher. Mortgages continue to climb as well.

The 30-year mortgage rate in the US has moved above 6% for the first time since November 2008, doubling over the past year.

The combination of rising prices and rising mortgage rates has made the average house unaffordable to the average American household.

Here’s the math behind that…

Two years ago, the 30-year mortgage rate was 2.87% and the average new home price in the US was $405k.

Today, the 30-year mortgage rate is 6.02% and average new home price is $547k.

The Result: a $28k increase in the required down payment (assuming 20% down) and 96% increase in the monthly payment (from $1,343 to $2,628). And this doesn’t include property taxes, insurance, utilities, and repairs/maintenance which have all seen significant increases as well.

6) Tapping the Reserves

One of the bright spots in the inflation report was the sharp decline in gasoline prices, which has continued this month.

Gas prices in the US have moved down to $3.71/gallon (national average), 26% below their all-time high in mid-June and at their lowest levels in 6 months.

At the same time, we’ve seen a significant drawdown in the US Strategic Petroleum Reserve, which has moved down to its lowest level since 1984.

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The 25% decline this year is already the largest ever for a calendar year by a wide margin, and there’s still 3.5 months to go.

How much of the decline in Gas Prices is due to tapping the Oil reserves? It’s impossible to say as the market for Crude Oil is a global market based on a multitude of factors, but the impact is not likely as large as one might assume. Global Consumption of Crude Oil is estimated to be around 100 million barrels per day and selling down the Strategic Petroleum Reserve has added less than 1% to the daily supply of Oil so far this year.

While the additional supply may be helpful, the much bigger factor of late has been the global economic slowdown (particularly in China, the world’s biggest Oil importer), which has led to a reduction in demand.

7) The Hidden Cost of Covid

Average math scores for 9-year old US students fell 7 points from 2020 to 2022, the first statistically significant decline since long-term trend assessments began in the 1970s. Reading scores fell 5 points during the same period, the sharpest decline since 1990.

The reason: pandemic shutdowns, quarantines, and long periods of remote learning left many children behind, particularly those most in need of help. Hopefully, we’ll find a way for these students to catch up in the coming years, but it’s not going to be easy task. This story about a public school in Florida gives me hope that with ingenuity and effort, the education model can be improved and lead to better outcomes for students.

Source: WSJ

8) The Worst Year for Bonds in History

US Bonds are on pace for their worst year in history, down over 11% year-to-date.

On a monthly basis, this is now the longest US bond market drawdown ever (25 months and counting) and the largest (-12.3%) since 1980.

Needless to say, fixed income investors aren’t accustomed to such declines as bonds tend to be synonymous with safety. Which begs the question: is there there a way to earn bond-like returns without seeing drawdowns? Click here for my recent post answering this important question.

9) A Global Slowdown

80% of major economies are seeing a slowdown in real GDP so far this year as compared to their growth rates in 2021.

The primary reason? Rising inflation and the tightening of monetary policy that is still ongoing, and likely to lead to a further slowdown to come.

10) Moore’s Law

In the 1970s, Gordon Moore (co-founder of Intel) made the bold prediction that the number of transistors in a semiconductor microprocessor would double every two years, which is a annualized growth rate of 41%.

The formula used to predict the number of transistors in a future year became known as “Moore’s Law.”

Here’s how the number of transistors has increased over the years…

  • 1971: 2,300
  • 1974: 5,000
  • 1978: 29,000
  • 1982: 134,000
  • 1985: 275,000
  • 1989: 1,180,000
  • 1993: 3,100,000
  • 1997: 8,800,000
  • 2001: 45,000,000
  • 2005: 228,000,000
  • 2009: 904,000,000
  • 2013: 4,200,000,000
  • 2017: 19,200,000,000
  • 2022: 114,000,000,000

What was the number predicted in 2022 using Moore’s formula? 109,143,205,468.

As Larry David would say…

And that’s it for this week.

Have a great rest of the week everyone!


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