Rate Reversal

Since 1955, the Fed has unwound 86%, on average, of the prior rate hikes during the ensuing rate easing cycle, which we’re entering. This means the Fed funds rate bottoms out at 0.75%. The smallest historical reversal would suggest that Fed funds hit 2.25%. Yet the market is now expecting a Fed funds rate trough of 3.25%. This means there is probably way more easing to come than we expect.

Limp Labor

Employers added 114,000 net July jobs, the lowest level since 12/20 except for the 108,000 three months ago. May and June were revised down by 29,000 and wage growth slowed to 3.6%, barely ahead of inflation, the weakest reading since 5/21. The unemployment rate rose to 4.3%, the highest rate since 10/21. It’s now risen enough to trigger the Sahm Rule which has correctly forecasted every recession since 1970.

Foreign Funds

For the year end 3/24, foreigners purchased 54,300 homes, down 36% Y-o-Y, and the lowest number since recordkeeping began in 2009. The biggest impediments; a strong dollar and limited inventory. Dollar volume fell 21% to $42 billion despite an average price of $780,300/median price of $475,000, the highest on record. Sales volume peaked in 2017 at $153 billion when sales approached 300,000. Florida was #1 with 20% of purchases.

Parisian Pounds

The Friday File: The lightest Olympic athletes are Marathon and 10,000m runners. Female contestants average about 110 lbs., male competitors average about 135 lbs. The next lightest athletes compete in the 5,000m, followed by the 20km walk, and then the 1,500m. The heaviest competitors are in Shot Put, with women weighing in at almost 200 lbs. and the men at 260 lbs., roughly double the weight of the lightest athletes.

Single-Family Slowdown

While June housing starts were up 3% M-o-M to a 1.353-million-unit annualized rate, the rise was all volatile multifamily driven. Single-family starts fell 2.2% and are now down four months in a row. Moreover, June starts came in at 980,000 annualized, an eight-month low. Lastly, single-family building permits fell 2.3% M-o-M, on top of a 2.2% slide in May and are now down five months in a row.

Monthly Matter

Traditionally, house prices have declined when months-of-inventory exceeds six months. However, in 2022 we saw prices fall for seven months despite months-of-inventory in the 3s! That was probably a knee-jerk reaction to rapidly rising rates and memories of 2008/09. Months-of-supply are now 3.7 months, up from 2.6 in spring 2023. I suspect national prices will start declining if months-of-inventory exceeds 5.0 months as so many homeowners have so much equity.

Inflationary Income

Perhaps the key reason surveys of consumer sentiment are so lousy is the impact of inflation, or more accurately the cumulative rise in prices from 2021. What gets lost is even though real wages fell behind inflation in 2021 and 2022, for almost two years average wages have been gaining on inflation, and real wages are now higher, on average, than pre-pandemic.

Naturally Nvidia

Yesterday, Nvidia’s market capitalization jumped $329 billion, the largest one-day rise. The increase alone would make the firm the 23rd largest in the S&P 500. The second largest one-day rise is $276.6 billion on 2/22/24 by Nvidia. The third largest rise $217.7 billion on 5/23/24 by, you guessed it, Nvidia. Apple holds the fourth largest one-day value increase of $215.1 billion on 6/11/24, followed by Meta at $196.8 on 2/2/24.

Infinitesimal Inflation

Inflation, as measured by the CPI, declined 0.1% in June, the first M-o-M decline since 5/20 as inflation pressures continue receding. Y-o-Y inflation was 3.0%, the lowest reading since 6/23. Core inflation, a better measure, rose a scant 0.1% M-o-M, the mildest rise since 1/21, and 3.3% Y-o-Y, the lowest reading in three years. Critically, housing inflation is slowing. Collectively, this makes a September Fed rate cut an easy call.

Reduced Reserves

In 2000, the percentage of foreign exchange reserves held by governments in dollars was 71%. Today it’s 60%. Oddly, Euro/yen/pound holdings are virtually unchanged at 31%. China accounts for 25% of the shift from the dollar, largely due to Russia. Most of the shift is due to rising holdings of Australian, Canadian, South Korean, and Swedish currency, all well-managed nations with sound, stable policies and floating exchange rates. Benign.

Stock Shrinkage

Since 1930, a period of almost 100 years, the S&P 500 has historically declined by 5% about 3.3 times a year. The frequency of a 10% decline, or a correction, is 1.1 times a year, while the historic frequency of a 15% decline averages just once every other year. Lastly, the average incidence of a 20% fall, or a bear market, in the S&P 500 happens once every three years

Powell Power

Unsurprisingly, the Fed left rates unchanged but put markets on notice that a mid-September cut is highly likely. The Fed is now, finally, concerned not just about inflation, which they described almost benignly as just “somewhat elevated,” but more importantly, about labor markets which worryingly are slowly and steadily deteriorating. Expect a 25bps cut on 9/18/24 and hopefully 50bps on 12/18/24. See Powell Cut. Cut Powell cut. Cut, cut, cut.

TSA Travel

On 7/6/24, 3.013 million people passed through US airport security checkpoints. This was the first time the total surpassed 3 million, is up 14% from the same day Y-o-Y and breaks the previous record of 2.99 million set on 6/23/24. Pre-Covid, the total was 2.5 million. Through 7/6/24, 460.7 million persons have been screened, up from 430.1 million last year. It’s a combination of a strong dollar and falling airfares.

Restrictive Rates

When the Fed began raising rates in 3/22, Fed funds were 0.125% and the CPI was 8.5%, thus the real Fed funds rate was a very stimulative negative 8.375%. Today Fed funds is 5.375% and the CPI is 3%. Thus, the real Fed funds rate is a restrictive 2.375%. This means the rise in real Fed funds rate is 10.75 percentage points, more than when Paul Volker was Fed Head.

Record Run

The Friday file: On 7/26/1903, Horatio Jackson was the first to cross the US by car. The journey from San Francisco to Manhattan with a mechanic took 63 days. The current record is 25 hours and 39 minutes, set in 5/20 by Toman and Tabutt. Their run, like all recent cross-country speed attempts, now starts in New York and ends in San Francisco and is known as the Cannonball Run.

Doctor Dollars

The cost of virtual consultation with a primary care physician is $99. Seeing the same doctor in their office raises the cost of service to $170. If you go to an urgent-care center/clinic the cost to provide care rises to $185. But if you go to the emergency room it costs $2,700. As for primary-care doctor salaries, pediatricians earn $251,000/year, family medicine providers earn $255,000/year, and internal medicine pays $273,000/year.

Museum Movement

The most visited museum in the world is the Louvre in Paris with 8.86 million visitors in 2023, down from 9.6 million in 2019. In second, the Vatican Museums at 6.76 million, then the British Museum with 5.80 million visitors. NYC’s Metropolitan Museum is 5th with 5.36 million entrants. The most popular Smithsonian is Natural History in 8th with 4.4 million guests.