Alan's Alert 7-27-2021

 

We are looking at a rough road ahead.  The Federal Reserve posted the H.6 Money Stock Measures this morning and it looks downright frightful.

Money supply growth has plummeted.  The last three readings are as follows;

6/21 – 6.36%

6/28 – 3.91%

7/5 – 3.26%

 

We have swiftly gone from a high in the 17-20% range to a low at 3%.  3% might not even be the low!  Typically, the low is around mid-July but we won’t see that data until August 24^th.  These low readings do not bode well for the capital goods sector.  The housing market and the stock market are in for choppy action at best.  I am very tempted to go short here.  In my mind, there is no way that back-to-back weeks of 3% money growth can keep this train on the tracks.  I’m afraid that the stock market will soon be looking for support and at its current dizzying level, support is a long way down.

The S&P/Case-Shiller Home Price Index was also posted today.  The S&P/Case-Shiller Index pushed itself to a new record.  It increased 2.1% over the prior month and 16.6% on a year-over-year comparison.  This is the highest year-over-year climb the index has ever seen.

 

Prior peaks happened in September 2005 at 14.5% and October 2013 at 10.8%.  The increase is housing prices has been dramatic. 

 

I’m a big believer in Robert Shiller’s theory on home prices and how they track inflation.  He spelled this out really well in his book, “Irrational Exuberance”.  Something to keep in mind while viewing this data, the Case-Shiller Home Price Index is a month behind.  We are looking at data from May when the housing market was really on fire.

 

 

 

Finally, I want to touch on the Conference Board’s Consumer Confidence Index which was posted this morning.  The index, which measures consumers’ assessments of current conditions of business and labor, rose to 129.1.  This is up from 128.9 in June.

This is the fifth consecutive month of gains in the index.  Lynn Franco, the senior director of Economic Indicators at The Conference Board stated,

“Short-term inflation expectations eased slightly but remained elevated. Spending intentions picked up in July, with a larger percentage of consumers saying they planned to purchase homes, automobiles, and major appliances in the coming months. Thus, consumer spending should continue to support robust economic growth in the second half of 2021.”

More confidence means more willingness of consumers to spend.  This is stated plainly by Franco.  Consumers are still sitting on a large amount of cash when you look at the deposits sitting at commercial banks.  I touched on this briefly in yesterday’s alert.  Bank of America was quick to use the data and run a trend line.  I covered that in a previous alert.  The bank had anticipated that these funds would be spent when a “sunny day” arrived.  It seems consumers are happy with a cushion in their bank account.  That or they are having trouble securing the products they want to buy due to logistical issues related to port slowdowns and train congestion.  To sweeten their bank accounts further, the Biden administration is now sending out advances on the child tax credits on a monthly basis.  We’ll see if consumers get motivated to spend and still feel confident when the next report is released August 31^st.  I have a feeling we’ll be looking at a completely different picture at that point.

 

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.