Stocks had a mixed close yesterday after the latest housing data showed that the Fed has its hands full when it comes to home prices. Despite an overall softening trend in home value, prices remain stubborn with some regions growing as much as +21% (Southeast) from a year ago – can you guess which state was behind the growth?
What’s NOT in your wallet? The answer to the above question is, of course Florida whose home prices grew by +26% from a year ago! There were some bargains to be had. According to the Federal Housing Finance Agency US House Price Index, in Alaska and South Dakota, house prices rose by +11.1% and +10.8% respectively. If you can deal with wall-to-wall politicians, Washington DC home prices rose by +7.0 % from last year. I will spare you the laundry list of things that will cost you more this year than last. I am sure that you are well aware by now that we are under the thumb of inflation. Under normal circumstances, according to economic theory, inflation is supposed to be self-correcting. If you eat eggs every day for breakfast and you notice that they have jumped by +49.1% in price from a year ago, you might consider switching to cereal to ease the pain on your budget. Your cardiologist is likely to approve of the switch and your accountant would approve as well – breakfast cereal prices have only increased by +13.3% since last year. The way the theory works, you will buy less of something that is too costly and the decreased demand will cause the product’s price to recede back to a normal equilibrium. So goes the theory. Why then have prices remained so high? Can it be that we simply don’t care because our incomes are all rising wildly as well? While you chuckle, take a look at the following 2 charts then keep reading.
The first chart shows year over year change in Personal Income. That shows that, according to the Bureau of Economic Analysis, your income should be about +4.7% higher than it was a year ago. That is not necessarily an anomaly. Though it bounces around a bit, it has been generally around the 5% level since the early 1990s. The second chart should be more recognizable to you if you have been following the economy. That chart contains the yearly Consumer Price Index – CPI, which shows that prices have increased by +7.11 % since last year. There is some good news on that chart. You may notice that it appears to have peaked in the summer, which is, indeed, good news. However, if you look at these two charts together, you will note that your income is not growing fast enough to keep up with growing prices. THAT, my friends, is a problem. Indeed, it is THE problem that the Fed is facing right now.
I am sure that this is not news to you, but it is nice to have the numbers to back up your hunch. So, the question remains: how are folks dealing with all this inflation if their incomes are not rising at the same pace? I will present you with one more chart, which may also not come as a big surprise. Check it out and keep reading. Last chart, I promise.
The above chart shows Personal Savings As % Of Disposable Income. According to the Bureau of Economic Analysis, you are only saving 2.4% of your disposable income. What is important to note here is how quickly that dropped over the past year. In fact, in the larger picture, if we look back to the 1950s, savings is trending downward. That last time the savings rate was this low was a brief period in 2005. For the record, the big spike in 2020/2021 is due to the government stimulus checks and the fact that we had nowhere to spend money during lockdown. That has obviously changed, and it is likely one of the key drivers of the demand-pull inflation that we are experiencing now. The drop to 2.4% means that we are dipping into our savings to keep up with inflation. At some point, this will cause people to pull back on personal consumption, which should… in theory at least, cause inflation to ease. It will also provide you an opportunity to get back to investing for your future.
YESTERDAY’S MARKETS
Stocks gave up earlier gains from China’s grand reopening as investors fretted over hotter than expected home price increases. The S&P500 fell by -0.41%, the Dow Jones Industrial Average gained +0.11%, the Nasdaq Composite Index dropped by -1.38%, and the Russell 2000 Index lost -0.65%. Bonds fell and 10-year Treasury Note yields added +9 basis points to 2.84%. Cryptos slipped by -0.70% and Bitcoin declined by -0.83%.
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