Alan's Alert 6-29-2021

 

Things are going from hot to hotter across the board but especially in housing.  Today the S&P/Case-Shiller Index was released.  

This is an index that is based on the work of Karl Case and Robert Shiller.  These indices are calculated by using repeat sales of the same homes in an effort to study home pricing trends.  Robert Shiller used the index in his book Irrational Exuberance to analyze long term trends in home prices.  He came to the conclusion that the pattern of changes in home prices had no relation to changes in construction costs, interest rates, or population but that the difference in prices can be explained by inflation.  There’s a strong perception that house prices are continuously increasing and this can fuel bubbles in real estate.  Shiller went on to define irrational exuberance by stating, "Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler's excitement.”

Shiller’s insights are spot on and I highly recommend his book and the YouTube of his courses at Yale.  It’s a good reminder to get into position to take advantage of the trends in the market before the amplification process takes hold.  We’ve seen this most recently with “meme” stocks such as AMC and Gamestop.  Once the enthusiasm of these stocks was picked up by the news media, they spiraled outside the bounds of any basis in fundamentals, even if those fundamentals are based on the idea of a short-squeeze.

In staying with the housing news, the US Federal Housing Finance Agency posted the house price index.

I’ve adjusted the chart to reflect the percentage change from the previous quarter.  As you can see, similar to the Case-Shiller index, we are moving higher in prices for homes.  If we annualize the data and look at it as a percentage change it gives us this:

If Robert Shiller’s insights into the housing market are to be trusted, looking at the house price index in this fashion should give us the best picture of what inflation actually looks like.  Unfortunately, we only get a small peek into the latter part of the 1970s but that small window speaks volumes.

 

Overlaying annualized CPI data, we see that it tracks really well until 1998.

1998 is when the BLS made a “revision” to the way the CPI was calculated.  You can find more info on that here.  In short, they changed the way that the housing index influenced the CPI.  I touched on this topic yesterday with Stephen Roach’s article on Chairman Arthur Burns adjusting the CPI.  Now we see that it had happened again in 1998.  Even though the Fed has stated that they will tolerate higher inflation in the present to make up for the low inflation in the past, I would not put it past the Fed or BLS to “adjust” the CPI to downplay the tidal wave that is coming.

 

 

In other hot news items, the Consumer Confidence Index was posted by the Conference Board.

They revised last month’s reading up to 120.0 and posted the June reading at 127.3.  This was a complete about-face to the consensus estimate of 119.  Neither rises in prices, nor back-orders, nor shortages, nor bottlenecks stay consumers from their swift purchases of goods and services.  According to Senior Director of Economic Indicators at The Conference Board, Lynn Franco, “Consumer confidence increased in June and is currently at its highest-level sine the onset of the pandemic’s first surge in March 2020.  Consumers’ short-term optimism rebounded, buoyed by expectations that business conditions and their own financial prospect will continue improving in the months ahead.  While short-term inflation expectations increased, this had little impact on consumers’ confidence or purchasing intentions.  In fact, the proportion of consumers planning to purchase homes, automobiles, and major appliances all rose – a sign that consumer spending will continue to support economic growth in the short-term.  Vacation intentions also rose, reflecting a continued increase in spending on services.”

 

With consumers not discouraged by rising prices, the “transitory” story that the Fed is touting looks less and less believable.