As I’ve been known to say, probably more than I should, I’ve seen a lot over the years. But this time I mean it. I really really mean it. Take the pieces of a raging bull market, interest rates on a big move higher, a massive amount of chaos regarding anything politics or global leadership.
Oh wait, there’s more! Did I mention that inflation concerns are raging, home prices are out of sight, and the fear is palpable? With all of that in play, I’m going to call this a platypus phase for markets and the economy. You see all the parts and pieces but can’t quite make out what it is. Let’s talk about which more parts we can add.
Before I get going in earnest, I want to be fully transparent, all of the charts you are about to see about interest rates, inflation, and the economy are for a good reason. To me, and many other observers and analysts, liquidity is a very key component to asset prices. It simply is. That’s not investment advice like ‘buy stocks when rates go down’. But accommodation is accommodation.
I say this because I want you to ease into the top-down narrative as the bottoms up AI version gets flogged daily. Maybe even hourly. I also want to be crystal clear, I want everyone to make money and be happy. If my explanations for what asset pricing looks like is at all of controversy, please remember it’s from three and a half decades of seeing a lot. Both the good and the bad in both. And we for sure are in a good and bad, and both moment
I’m going to say something that nobody else is willing to say but let me be bold. If you give people very cheap money they will likely borrow and buy things hand over fist. If you lend to people money with a 7% interest rate six years later, they might not borrow as much. If that same person locked in buying assets with cheap money, and now that same money costs 7%, what do you think likely happens? The asset purchased at 3% stays on the books while the money that costs 7% goes looking for nothing to buy because the payment is too much. Interest rates just hit multi-decade highs, meaning borrowed money did too.
Thirty year duration mortgage rate
Housing is a big part of the economy, consumer confidence, and the assets that people keep on the books the longest. They can go roughly sideways for years, just pacing with inflation. Could that happen this time? History says it can.
I love my country and sometimes love who runs it. But the fog of war makes decisions tough at times. In this humble observer’s opinion, the Jerome Powell led Fed held onto to a ‘lower for longer’ rate policy in front of a pandemic threat that didn’t materialize as bad as people thought. Kevin Warsh is now having to pay back that liquidity. The bill came due, and it’s a big one. While it may not happen at the next FOMC meeting, another rate hike is probable before year end.
All of these charts are from the same date set, ten years up to today. Please, tell me you see the correlation? The upside is that this asset inflation period lifted a lot of boats. And while your boat may not be as big as the guy next door, it’s still likely bigger today.
The data comes from the very useful data sets that the St. Louis Federal Reserve produces. And FTR, any charts or numbers the US government produces are fair game to use and not copyright protected. And for that I am grateful.
This one shows the overall level of household net worth. Notice the further correlation that it’s gone up 80% since money got cheap in 2020. It’s not getting cheaper anymore.
Here is the further kicker. The top one percent of the public owns about 50% of all equities and mutual funds. Yup, 1% of the people own 50% of stocks. While I don’t have the chart, I think it’s about 90% if you go down to include the top 30% of the citizenry. While I wish it would be different, wishes don’t get you very far sometimes.
Why am I harping on this point? Because consumer prices for things and services don’t discriminate. They simply don’t. That steak or eggs have no clue if the guy or gal buying them is a pauper or a prince. This hurts everyone, and I love everyone. No seriously, I can hear you laughing out there.
CPI with a 5%, 6%, 7% and 8% handle over a four-year period is going to put a serious pig (higher prices for things) in the python (we who have to consume things). And other measures used are showing a forward look that is even more frightening.
Soapbox time, for the next six weeks politicians seeking office, or looking to retain office, are going to tell you about their focus on inflation, or the new hip phrase ‘the affordability crisis’. From left, right and center…don’t believe the hype. Sadly, for most, the only thing that likely can make prices go negative for a while is a recession. And no politician is going to run on a ‘vote for me because I’ll help cause a recession’. Good luck, shooter. Getting off my soapbox now.
We’ve beaten the top-down power of liquidity and asset prices, now let’s take it down a notch and talk about how strong the earnings bull market has been. Same data set, ten years. Even robust numbers call these robust numbers.
That has led to elevated valuation levels at least measured by the stock market capitalization (market cap) to GDP. This has been one of the Oracle of Omaha’s favorite valuation measures and goes by the name ‘the Buffet Indicator’. I took this data set back to 1975 to give the longest-term perspective as possible. Right now, we are riding a 50 year high. I’ll let you make your own determination in terms of what you see…and what you don’t. History doesn’t repeat itself, but it often rhymes.
That’s it for this month. I hope everyone is enjoying the return of football to the scene. I’m more a college guy, not the pros. I like the traditions, tailgates and now parity. I’ve seen a lot, and the Arroyo Secco is my home. While the Bruins are .500 over the last 20 years, but I’ve never lost a tailgate. Looking good so far, but I’ve seen this movie before. My disciples, we shall meet at the corner of Rose and Arroyo soon enough.
