9-Chart Monday (6/13/22)

By Charlie Bilello

13 Jun 2022


Register here for my webinar with YCharts on June 14 (2pm EST). We’ll be discussing the history of bear markets, the lowest consumer sentiment in history, the only path to long-term prosperity, and much more.

-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.

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

1) Tightening in a Bear Market

During the last 8 bear markets, the Fed responded with easy money every single time (rate cuts, QE, etc.). This year they’re doing the complete opposite, tightening monetary policy and expected to continue to do so for the remainder of the year. We haven’t seen a hawkish Fed during a bear market since the early 1980s under Paul Volcker.

The bond market is now pricing in at least a 0.50% rate hike (50 basis points) at each of the next 5 FOMC meetings:

-June (this week): 50 bps hike to 1.25%-1.50%

-July: 50 bps hike to 1.75%-2.00%

-September: 50 bps hike to 2.25%-2.50%

-November: 50 bps hike to 2.75%-3.00%

-December: 50 bps hike to 3.25%-3.50%.

2) The Elephant in the Room

Why is the Fed expected to continue hiking rates in spite of the weakness in markets?

The elephant in the room, which is that they remain far behind the curve.

The US Inflation Rate now stands at 8.6%, its highest level since December 1981.

The big difference between now and then?

In December 1981, the Fed Funds Rate was over 13%; today’s it’s still below 1%.

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Where are prices rising?

Everywhere. Here’s the breakdown of price increases in the latest CPI report…

Once again, shelter (the single biggest component of CPI at 33% of the Index) inflation is being wildly understated (@ +5.5% YoY increase) with rents up 15.4% over the last year and home prices up a record 20.6%. Which means that the true inflation rate is much higher than 8.6%.

3) A Decline in Prosperity

US wage growth has now failed to keep pace with rising prices for 14 consecutive months. This is a decline in prosperity for the American worker.

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All of the US wage growth since the start of the borrowing/printing binge has been a mirage, up 11.9% in nominal terms but down 0.6% after adjusting for higher prices.

4) The US Consumer Has Never Felt Worse

The US consumer sentiment index from the University of Michigan goes back to 1952. It has never been lower than it is today.

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In a new Wall Street Journal-NORC poll, 35% of Americans said they were not satisfied at all with their present financial situation, the highest level of dissatisfaction recorded since the poll began in 1972.

What’s driving this negativity?

Inflation, inflation, inflation.

A constant reminder has been the price of gas, which crossed above $5.00 per gallon in the US for the first time ever (note: national average).

In a poll I conducted last week, 59% of respondents said the US economy is already in a recession…

5) The Worst Year for Bonds in History

The US 10-Year Treasury bond is on pace for its worst year in history with a loss of 12.8%. Entering the year, the 11.1% decline in 2009 was the largest ever.

In the fixed income space, there’s been no place to hide this year with the exception of Treasury bills ($BIL ETF)…

The combination of weakness in stocks and weakness bonds has led to a difficult year for diversified stock/bond portfolios.

A 60/40 portfolio of the S&P 500 and 10-Year Treasury Bond is down 15.7% year-to-date, on pace for its worst year since 1937.

Here are the largest annual declines for US 60/40 with data going back to 1928:

1) 1931: -27.3%

2) 1937: -20.7%

3) 1974: -14.7%

4) 2008: -13.9%

5) 1930: -13.3%

6) The Housing Affordability Collapse

Spiking mortgage rates coupled with skyrocketing home prices has led to a collapse in the affordability of housing.

The median American household needed 38.6% of their income to afford payments on a median-priced home, the highest percentage since August 2007.

7) The Iron Rule of Financial Markets

John Bogle once said that reversion to the mean was the “iron rule of financial markets.”

Two recent examples of that…

a) Commodities ($DBC ETF) up 89% over the last 16 months versus a 72% loss for the ARK Innovation ETF ($ARKK ETF).

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b) Exxon Mobil ($XOM) gaining 183% since it was removed from the Dow in August 2020 versus a 37% decline for Salesforce ($CRM) which was added to the index.

8) Crypto Correction Continues

Bitcoin is now down 66% from its high and at its lowest level since December 2020.

Dogecoin, a favorite among meme traders, is now down 93% from the Musk SNL peak.

9) The Unwinding of Excesses

The US Federal Budget Deficit has moved down to $1.1 trillion, its lowest level since March 2020. The Deficit peaked at $4.1 trillion in March 2021. We now have declining deficits and declining money supply, an unwinding of excesses that will be painful in the short run but good for the economy and the prosperity of the nation in the long run.

And that’s it for this week.

Have a great week everyone!


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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

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