Charts of the Week

Happy New Year and welcome to our first Charts of the Week for 2024!

Central Banking and Inflation

For over a decade market participants have been conditioned by the Fed’s propensity to save the financial markets, even when there are relatively minor shocks. This has led to a reflexive buy the dip impulse that remains rather powerful up into the present. Even during 2022, buy the dip was a strategy that many tried, even if it didn’t work well. In 2023, however, it began to work again, reinforcing that same reflexive bid into weakness.

Currently Fed Funds futures are pricing in six rate cuts this year, with the policy rate projected to drop from 5.25-5.5% down to 3.75-4% by year-end. That begs the question, what exactly is the Fed responding to if unemployment is near historic lows, the labor market remains structurally tight with nearly 1.4 jobs available for every unemployed and insured person seeking work, financial conditions have eased meaningfully, and US equities are near all-time highs.

Which begs the question, will this be another policy misstep for Chair Powell’s Fed? One that blinked in late 2018 during its hiking cycle due to apparent political pressure, then later claimed inflation was “transitory” and finally, buckling to pressure, acknowledge that inflation was a real threat and responded with a rather aggressive tightening response, proclaiming “higher for longer” only to pivot away shortly thereafter.

While I have a rather strong distaste for analog charts, the one below is at least worth pondering insofar as if this Fed, one that resembles the institution under Burns more than Volcker, is set to inadvertently push inflation higher again from already very elevated prices.

Another catalyst for inflation could very well be supply chains slowing, with rising delivery times often leading to higher core goods inflation with about a six month lag. With the tensions in the Red Sea and Panama’s shipping canal experiencing a drought, we’re already seeing some signs of structural of bottlenecks re-emerge.

Concentration Consternation

Concentration in US market capitalization vs the rest of the world is nearing an all-time high, suggesting that perhaps there are enticing opportunities elsewhere as many other global markets not only have more attractive valuations, but are also closer to the beginning of their next credit cycle. Meaning there may be momentum + macro themes worth pursuing, similar to the long Mexico idea we shared last year.

Speaking of concentrated exposure, money managers are very long US equities, with the most aggressive exposure that we’ve observed based on NAAIM survey data since November 2021, a time when there was maximal euphoria in sentiment, flows and positioning.

That lopsided bullishness seems to be prompting a rather tumultuous start to 2024, with both bonds and stocks together having the worst start to a year in more than two decades. Going into this year, such stretched long positioning in both areas provided an opportunity for profit taking which deferred capital gains until 2025 (rather than selling in 2023 to pay this year).

Looking Back at 2023

Last year was a wild year! Reviewing the most popular search trends may give us an opportunity to reflect on some of the biggest stories and events that played out. Some of which are continuing to be themes in 2024.

Last year was also a year where global banks were aggressively cutting jobs, led by UBS after the Credit Suisse merger, and followed closely by Wells Fargo, who cleared out much of their mortgage lending department and let many bankers go elsewhere as well.

2023 was also a year where household cash and equivalents reached record highs, and much of this liquidity build is concentrated within the top 20%, whereas the bottom 50% are still struggling to save funds and build a cushion of capital.

Additionally, we saw non-liquid assets rise, like real estate. Housing prices rose at the fastest pace in 40 years reaching all-time highs, despite the Fed for the first time in its history stating that there was a housing bubble and that a reset would be coming. The fact that these prices are continuing to rise could put some upward pressure on inflation as OER surveys begin to factor in prices that continue to rise.

Between the rise in housing prices and the appreciably higher mortgage rates than years prior, 2023 brought the most significant slowdown in existing home sales that we’ve seen since 2011.

Much of this was made possible by mortgage rates rising so rapidly that people felt better staying locked in at lower rates than moving, and potentially having to pay much higher housing costs or downsizing. Home affordability in the US is near all-time lows, with some moderate reprieve of late driven by mortgage rates dropping from their highs.

The Great Divide

Visualizing the division between the haves and have nots demonstrates a rather stark contrast, with so much wealth concentrated in so few hands.

While the top 20% have never had more wealth, the bottom echelons of society are suffering from rather significant cumulative inflationary pressure combined with components of the economy, such as the goods producing sector and many small businesses, struggling. One area we see this stress manifesting is within homelessness, which has rose to record levels last year.

Another factor driving many families into poverty are surging medical costs, which tend to rise at about 3-4 times the rate of inflation. In the US, medical costs are the leading catalyst for personal bankruptcy filings.

Part of that cost is driven by hospital monopolies, whereas many hospitals are in non-competitive markets, and as a result prices may be quite a bit higher than those in competitive markets.

As always, I hope that you enjoyed the latest Charts of the Week. Stay tuned as we’ll be releasing our Charts of the Year soon, covering the most insightful and intriguing charts from 2023!