Misguided Markets

Financial markets are worthless in predicting future events. To wit, in mid-January Wall Street was predicting that the Fed would cut the Fed funds rate by a total of 170bps in 2024, almost seven quarter-point cuts, even though the Fed was suggesting three. By 2/1/24, markets were predicting five quarter-point cuts, by early February four cuts, and now 3.5 cuts. This dramatic reversal shows how markets generally overreact.

Budget Blowout

Through the first four months of FY24 (October-January), the budget deficit reached $532 billion, up 16% or $73 billion compared to a deficit of $459 billion during the same period in FY2023. While seemingly expansionary, the increase was more than 100% driven by a rise in interest payments of 37% or $100 billion, to $357 billion. Despite the rise in the deficit, the budget is so far mildly contractionary.

Borrowing Bonanza

In 23Q4, consumer debt rose $212 billion. Mortgage balances increased $112 billion, HELOCs rose $11 billion, credit card balances added $50 billion, auto loans were up $12 billion, and other balances such as retail cards and consumer loans increased $25 billion. In 23Q4, consumer spending was up $208 billion, meaning that over 100% of the rise in consumer spending was debt-financed, not a sign of healthy households.

Price Pickup

While existing home sales are very weak, home prices keep rising. The Case-Shiller National Index was up 5.1% Y-o-Y in November, up from 4.7% Y-o-Y in October. Similarly, the FHFA Index saw home prices rise 6.6% Y-o-Y in November, up from 6.3% in October. Moreover, the single-family mortgage seriously delinquent rate was just 0.55% in November, well below pre-pandemic lows and at rates last seen late in the Housing Boom.

Monetary Moves

While the Fed didn’t lower interest rates after their meeting, it suggested that cuts are on the way. However, by reiterating that he wants to see continued declines in inflationary pressures before the Fed cuts rates, Powell gave markets no indication that cuts were imminent and simultaneously has provided the Fed with strategic ambiguity as to when it will start cutting rates. A June cut remains my base case.

Cable Contraction

In 1980, the number of households with pay-tv subscriptions including cable, satellite, and telecom firms totaled 20 million. By 1989 it was 50 million, in 2000 it surpassed 75 million, and the peak was 100 million between 2009-2014. Since then, it’s steadily declined. In 23Q3, it was almost 75 million, however that number includes 20 million internet-TV providers including YouTube TV, Sling TV, and others. Cable erosion has been staggering.

Fantastic Football

Super Bowl LVIII was watched by 123.4 million viewers, the highest number of viewers of the same broadcast in US history. That number is the average number that were tuned in at any given moment. The number that watched any part of the game was 202.4 million. As for advertising, CBS sold $635 million in standard commercial time and $60 million more during overtime.

Super Success

Since the start of CY2019, the KC Chiefs have played 20 games when the moon is a waxing crescent, a growing toenail sliver. And of those 20 games they have won 19. By contrast the 49ers are 15-15 in the last 30 waxing crescent games they have played. Lunar analysis says the Chiefs will win. The economist in me is overwhelmed at the correlation. As for causality…

Favorite FICO

While there are many newer FICO versions for home mortgages, FICO Score 5 is based on Equifax data, FICO Score 4 is based on TransUnion data, and FICO Score 2 is based on Experian data. Your mortgage FICO score is the median of these scores. Fannie and Freddie currently only accept these FICO versions. Moreover, if, for example, you go directly to TransUnion you’ll get a VantageScore, not a FICO.

Real Rates

At present, the Fed funds rate is 5.375% and the Fed’s preferred inflation measure is 2.6%, making the real Fed funds rate, Fed funds minus inflation, 2.775%. Dating back to 1954, the median real Fed funds rate has been 2.8% when the Fed starts cutting rates after a rate rising cycle. Moreover, inflation continues to fall. This suggests rate cuts are not far off, certainly in June, maybe in May.

Excellent Employment

Employers created a stunningly strong 353,000 new jobs in January, and December employment was revised up from 216,000 to a hefty 333,000. While freakishly cold weather and seasonal adjustment factors undoubtedly had an impact, the economy isn’t rolling over. Moreover, wage growth was a strong 0.6% M-o-M and 4.5% Y-o-Y. While stellar for job hunters, this is putting the Fed on hold. An initial June rate cut is most likely.

Data Divergence

Despite job growth of 353,000, the January employment report contained troubling data. Ignoring weather-related phenomena including the length of the workweek, which shrank, hourly earnings, that jumped, and personal income, which was flat, the data is showing a troubling rise in part-time employment growth and reduced full-time work. Moreover, the broadest measure of unemployment rose to 7.2%, the highest level since 12/21, and manufacturing overtime hours sank. Mildly unnerving.

Dwelling Downer

December existing housing sales slid to a seasonally adjusted annualized rate of 3.87 million, the lowest level since 8/10 and the end of the second round of ill-fated congressionally enacted first-time homebuyer incentives. Excluding that, 12/23 was the worst month since late 2008. 2023 sales were 4.09 million, the lowest since 1995, down from 5.03 million in 2022, and 6.12 million in 2021. 12/23 is likely this cycle’s sales trough.

Construction Coverage

For the year ending 11/23, construction spending totaled $2.05 trillion, 7.3% of GDP, and is up 11.3% Y-o-Y. Total private construction was $1.59 trillion, up 10% largely due to private manufacturing which totaled $209 billion, up from $131 billion Y-o-Y, a rise of a staggering 59%. Private residential construction totaled $897 billion, up 3.7% Y-o-Y from $865 billion. Public construction was $455 billion and rose a significant 16.2% Y-o-Y.

Checkout Choices

The Friday File: When given a choice, 34% of the public prefer a self-checkout kiosk, 56% prefer a live cashier, and 10% don’t care. Among those 18-44, 48% prefer self-checkout, 37% prefer a cashier, 15% don’t care. For 45–54-year-olds, 30% prefer self-checkout, 60% a cashier and 10% don’t care. For those 55+, just 24% prefer self-checkout, a huge 66% want a cashier, and 10% don’t care. I detest self-checkout.

Red Rocks

The Friday File: The most visited entertainment venue of any type or size for the CY2023 was London’s O2 arena with 2.4 million tickets sold, followed by Mexico City’s Foro Sol Stadium with 2 million tickets sold. In third, NYC’s Madison Square Garden with 1.6 million, and the largest gross at $223 million, then Denver’s Red Rock’s with 1.4 million in ticket sales, and the most attended outdoor U.S. venue.

Passive Performance

The amount of money in all passively managed (index) U.S. mutual funds and ETFs recently surpassed $13.3 trillion. That exceeds, for the first time, the amount in actively managed mutual funds and ETFs at $13.2 trillion. The amount in passively managed U.S. equity funds surpassed the amount of money invested in actively managed equity funds for the first time in 2022. This is because systematically beating the market is impossible.

School Spending

Recent data show boosting capital investment in public schools raises student test scores and nearby home prices. Conversely, investment in basic school infrastructure such as HVAC or the removal of pollutants to improve student health/safety boosts test scores but not house prices. Lastly, increased investment in athletic amenities, new land, and buses boosts home prices but not test scores. College alumni donation preferences seem much like those of property taxpayers.