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7 charts and themes from the past week that tell an interesting story in markets and investing…
1) Unsustainable Levels
The unaffordability of the US housing market has risen to unsustainable levels.
Exhibit A: The average price of a new home in the US is now over 10x higher than per capita disposable income, the highest ratio in history.

Exhibit B: US Home prices have hit a record high 39 months in a row, increasing 20% over the last year and 38% over the last 2 years.

Exhibit C: The gap between US Home Prices and overall inflation (CPI) has never been wider.

Exhibit D: Every major metro area in the US has seen a double-digit % increase in home prices over the last year and is at an all-time high.

Exhibit E: US rents hit another record high in June, up 14% over the last year.

2) Pouring Fuel on the Fire
What did the Federal Reserve do with the mountain of evidence, month after month, pointing to a second nationwide housing bubble?
They chose to pour fuel on the fire, buying over $1 trillion of mortgage bonds in an effort to suppress mortgage rates and drive prices even higher.

And with inflation hitting a 40-year high, the Fed has actually increased their overall balance sheet by another 2% so far this year.

Which is further evidence as to why 12 people sitting in a room (FOMC voting members) probably shouldn’t be dictating key interest rates and the supply of money for an entire economy.
3) The End of the Easy Money Era
Speaking of the money supply, its growth has flatlined over the last 3 months, the first time we’ve seen that happen in over a decade. With the Fed just starting its balance sheet reduction, this trend should continue in the coming months.

At the same time, the Fed is expected to continue hiking rates throughout the remainder of the year (market-based expectations according to Fed Funds Futures):
- -July: 75 bps increase to 2.25%-2.50%
- -September: 50 bps increase to 2.75%-3.00%
- -November: 25 bps increase to 3.00%-3.25%
- -December: 25 bps increase to 3.25%-3.50%.
The end of the easy money era has led to a rapid repricing of risk across all markets, but is perhaps most notable in the mortgage market. After hitting an all-time low of 2.37% just 6 months ago, Adjustable Rate Mortgages in the US are now at 4.50%, their highest level since 2009.

4) The First Sign of Light
What could potentially alter the Fed’s rate hiking plans? Any signs of a peak in inflation.
On that front, the Fed’s “preferred measure of inflation” (Core PCE Price Index, which excludes Food & Energy) has now shown a decline in the year-over-year inflation rate for 3 consecutive months, moving from a high of 5.3% down to 4.7%.

The coast is not clear by any means, but in what has been a long, dark inflationary tunnel, this is one of the first signs of light.
Another positive development has been the downward trend in market-based inflation expectations. 5-year breakevens are now at 2.59%, their lowest levels of the year and down a full percentage point from the peak in March (3.59%).

5) Welcomed Declines
Declines are not usually something to celebrate, but this is a notable exception that hopefully will continue.
Corn, Wheat, and Soybeans are all down over 20% from their recent highs, providing a much needed respite from the painful increases we’ve seen in the past year.

In addition, the price of Cotton has plummeted over 40% and is now lower on the year.

6) Oil, Gas, and Everything Else
It’s been a great year thus far for Oil & Gas stocks, with 16 out of the top 20 S&P 500 gainers in that industry. For nearly everything else, it’s been rough going.

If we zoom out, though, the story changes. The worst performing stock in the S&P 500 this year, Netflix (-70%), is still best performer over the last 15 years with a 6,000+% gain.

7) A First Half to Forget
The S&P 500 ended the first half the year down 20.6%, the worst start to a year since 1962. What will happen in the back half? If history is a guide, continued volatility should be expected. As for the direction, anything is possible…

And that’s it for this week.
Have a great long weekend everyone and Happy 4th!
-Charlie
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