“The truth is more important than the facts.”
-Frank Lloyd Wright
I just got back from a vacation to Arizona with my daughter. One of the highlights of the trip was a visit to Taliesin West, which was Frank Lloyd Wright's winter home.
Many consider Wright the greatest American architect of all time. He created more than 1,000 structures, mentored and trained hundreds of future architects with his Taliesin fellowships, has 8 buildings on the list of UNESCO World Heritage sites, and had a career that spanned some 70 years. Now that is outperformance!
I'm not a big architecture guy, but I've always been a huge fan of Wright. He looked at the world differently and it is evident in his architectural creations. He was also very process oriented.
Similarly, as investors we need to, at times, have a unique view of the world. The most obvious recent example of this relates to the path of interest rates.
Six interest rate cuts in 2024 was the consensus view just two months ago. This was priced into Fed Funds futures and plastered across financial media headlines. Even if you don't quantify these things as closely as we do, it was a view of the world that didn't really pass the smell test.
Currently, according to Fed Fund Futures, the March and May rate cuts are basically completely off the table. The June rate cut has about a 35% probability of happening, so it is no sure thing. And to make matters worse, or better depending on your perspective, there is now chatter of another rate hike.
None of this has really mattered for global stocks, which have started the year on a strong note. But interest rate sensitive positions, on the other hand, have struggled in a big way... just as many were positioned for the start of the next big bull market in bonds.
Back to the Global Macro Grind ...
One big challenge in eventually getting inflation to a sustainable level, which is 2% or below according to the Fed, is housing. Or put another way: the lack of housing.
In the Chart of the Day, we look at total U.S. Housing Inventory going back to the 1980s. As the chart very clearly shows, we are basically at near an all-time low on this data series at 1.0 million units in December, which was down more than 10% month-over-month.
Some people believe that as rates come down, more houses will come on the market and increase supply. The theory being that with lower rates, people will list their homes as they are now actually able to afford to buy the next one. There may be some merit to that, but the reality remains that housing inventory U.S. remains abnormally low.
You don’t have to be the Frank Lloyd Wright of economics to understand that this abnormally low supply will keep the supply / demand dynamics tight and keep a bid on housing prices. This matters because housing is roughly 1/3 of CPI.
If you can’t do much on the supply side in the short term, the only way to balance demand is, of course, to make houses more expensive. This comes via higher rates or sustained high rates. Housing will be helped by some easier comparisons as the year progresses, but longer term this 1/3 of CPI is in a supply and demand pickle!
We saw this demand impact from the impact of rates in real-time yesterday with weekly mortgage applications coming in down -10.6% W/W. Demand also remains down more than double digits from a year ago. Mortgage rates north of 7% are not good for demand it seems!
The broader impact from higher rates for longer is slowing growth. We saw this to some extend in yesterday’s flash PMIs in the U.S. in which the composite number slowed to 51.4 in February from 52.0 in January.
Now to be fair, this is still an expansionary report. In addition, the preponderance of U.S. economic data this year has been better than expected.
But to the extent, we shift the likelihood of a rate even further out or even, gasp, increase rates again . . . then the slowing we saw yesterday in housing demand will become more prevalent across the U.S. economy. Needless to say, not many investors have the possibility of Fed raising rates in 2024 on their Bingo cards . . .
The easiest way for us to show our truth versus all of the “facts” out there is to highlight our current Macro ETF positioning, which as of yesterday morning was as follows:
- Macro ETFs by Rank: FDRXX, BUXX, TFLO, TBIL, UUP, KBWP, QQQ, IWO, EWN, PJP, SPMO, SMIN, XLG, PFF, AMLP, PINK, ITB, EPHE, EWD, INDA, IAK, IPO, XLP, ITA, NLR, BDRY, UGA, MSOS, IBIT, WEED, URA
Process and staying power are two keys to finding truth in the long run.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.33-4.55% (bullish)
UST 10yr Yield 4.12-4.40% (bullish)
UST 2yr Yield 4.42-4.75% (bullish)
SPX 4 (bullish)
NASDAQ 15,551-16,149 (bullish)
RUT 1 (neutral)
Tech (XLK) 200-211 (bullish)
Insurance (IAK) 106.99-111.92(bullish)
S&P Momentum (SPMO) 72.97-76.94 (bullish)
Healthcare (PINK) 29.10-30.71 (bullish)
Shanghai Comp 2 (bullish)
Nikkei 36,906-39,192 (bullish)
BSE Sensex (India) 71,505-74,111 (bullish)
VIX 12.85-16.25 (bullish)
USD 103.55-104.90 (bullish)
Oil (WTI) 76.01-79.08 (bullish)
Oil (Brent) 80.26-84.25 (bullish)
MSFT 401-422 (bullish)
AAPL 179-189 (bearish)
NVDA 701-815 (bullish)
Bitcoin 50,119-52,775 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
