Apr 23, 2021

Axios Markets

Happy Friday! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,227 words, < 5 minutes.)

🎙 “I believe I can do anything if I just try.” - See who said it and why it matters at the bottom.

1 big thing: 87% of Americans are worried about inflation
Expand chart
Data: CivicScience; Chart: Will Chase/Axios

Americans are growing more concerned about rising costs and are consistently boosting their inflation expectations, new data show.

Driving the news: A new survey from CivicScience shows 87% of those surveyed in a representative sample of U.S. adults say they are at least "somewhat concerned" about the increasing cost of household expenses (all numbers are rounded to the nearest percentage point).

  • That's up 10 percentage points from its survey in March.
  • The problem is growing especially acute for lower-income households who say they are cutting back on purchases because of rising costs.

Why it matters: "It’s very real for people to worry about inflation right now," Clark Kendall, president and CEO of Kendall Capital, tells Axios.

  • "Sitting across from clients they are very concerned ... they are worried about inflation and they’re worried about if you’re looking to retire at 60-65, 'Will I have enough money to buy toilet paper, toothpaste 20 years from now?'"

What's happening: As I wrote on Wednesday, the Fed and most mainstream economists are largely in agreement that the current uptick in prices will be temporary, but the data show customers already are reacting.

  • Major brands have rolled out price hikes consistently over the course of the year, along with notable increases in the price of cars, construction, furniture and gas that are starting to show signs of staying power.
  • The CivicScience survey found that, among households earning $50,000 a year or under, 33% say they are buying less because of rising prices.
  • More than a quarter of all households (27%) say rising prices have caused them to buy less than they did previously.

Between the lines: Rising prices are exactly what the Fed wants, explains Lou Brien, rates strategist at DRW Trading.

  • "The preeminent monetary policy challenge of this era is moving inflation expectations, inflation, the policy rate and even the 10-year [Treasury yield] away from zero, because that’s inhibited their policy rate over last 10 years," he tells Axios.
  • "They haven’t been able to cut rates aggressively when they’ve needed to because [the policy rate] was already too close to zero."

Where it stands: As part of its new policy regime, the Fed has taken a new approach, Brien says.

  • "The Fed is saying, 'When inflation gets to our target we’re going to go out for beers. We’re going to allow it to run above our target for a certain time.'"
  • But the "grab a beer" policy isn't going exactly as planned.
Bonus chart: Consumers are cutting back
Expand chart
Data: CivicScience; Chart: Will Chase/Axios

The problem is that wages are not rising along with prices and most Americans don't expect that they will in the future.

What we're seeing: The New York Fed's survey of consumers finds that while inflation expectations are the highest in 7 years, at 3.2% for one- and 3.1% for three-year-ahead timeframes, expectations for household income growth remain at 2.7%, below where they were in January 2020.

The big picture: While this has not become a major concern for the economy yet, it very well could once enhanced unemployment, mortgage forbearance and eviction moratoriums expire and stimulus checks have been spent.

  • "Government payments added $1.5 trillion to personal income last year, which accounted for 8.5% of after-tax personal income," Brien wrote in a recent note to clients.
  • "For comparison’s sake, the jobless benefits addition to personal income in 2019 accounted for just 0.1% of disposable income."

The last word: If and when government assistance dries up, a growing share of Americans may find that the booming economy and its steadily increasing prices have further left them behind.

2. Catch up quick

President Biden plans to propose increasing the capital gains tax rate from 20% to 39.6% for those earning $1 million or more (43.4% including ACA surtax) as part of the second leg of an infrastructure package. (Bloomberg Tax)

U.S. health officials are leaning towards lifting the pause on Johnson & Johnson's vaccine after only a limited number of additional cases of blood clots were uncovered. (N.Y. Times)

The Bank of Canada became the first major central bank to reduce its weekly purchases of government bonds and offered fresh hints that interest rates will rise next year as the economy surges. (CBC)

European Central Bank president Christine Lagarde said the EU's economy remains "on crutches" and in need of support from both the central bank and government spending as the eurozone undergoes extended coronavirus lockdowns. (DW)

3. Eroding affordability
Data: Investing.com, YCharts; Chart: Axios Visuals

Sales of existing homes fell 3.7% in March to a seasonally adjusted annualized 6.01 million units, the National Association of Realtors reported Thursday, the second straight monthly decline and the slowest sales pace since August.

  • However, the median sales price for an existing U.S. home rose to a new record high of $329,100.

What it means: Dwindling supply and continued demand are sending prices higher and pushing more buyers out of the market, even as rates stall and begin to decline.

  • Homes sold in an average of just 18 days last month, NAR says, eclipsing the previous record fast pace seen in February.

Don't sleep: Since October prices have risen by 5% while sales have fallen by 12%, according to an Axios analysis of NAR's data.

  • Since the start of the year the divergence has been even more pronounced. Total sales have fallen by 10.2% since January, while prices have increased by 8.4%.

Watch this space: Skyrocketing prices have put the market on a record pace and the Mortgage Bankers Association expects purchase originations to reach an all-time high of $1.67 trillion this year, even as they predict purchase volumes will decline by 14%.

  • MBA expects mortgage rates to continue rising to around 3.7% this year, contributing to a further slowdown in refinance demand.
  • Refinance originations are expected to fall by 33% to $1.62 trillion.

The bottom line: “The widening imbalance of supply and demand is driving up home-price growth and eroding affordability – especially for entry-level buyers,” Mike Fratantoni, MBA's chief economist and senior vice president for research and industry technology, says in a statement.

  • "[T]his environment sets the stage for higher mortgage rates and faster inflation."
4. The challenge continues
Data: FactSet; Chart: Axios Visuals

It's a new year and I am getting beaten like a dirty rug in my investing challenge against my 18-year-old cousin Senya.

Background: Senya graduated from high school last year and as a graduation present I sent her $500. But I told her she had to invest it and that each quarter we would compete to see whose portfolio performed the best.

  • I hadn't updated The Challenge during Q1 in part because of shame and in part because there was a lot of other news to cover.
  • But mostly shame.

Portfolios: I am (perhaps foolishly) sticking with my double serving of gold ETF, IAU; the Direxion work from home ETF, WFH; and EMQQ, the emerging market eCommerce ETF that I picked back in July.

  • She has made no changes to her holdings of logistics REIT Prologis; eBay; Rite-Aid; Gap; and Conagra.

What I've learned: Life comes at you fast.

  • The shift to higher consumer spending and inflation expectations along with a higher 10-year Treasury yield has sent gold sinking along with emerging tech stocks. Chinese tech has suffered its own challenges.
  • Conversely, Gap and eBay have delivered stellar performances so far this year, as investors bet on the reopening trade, delivering 64.6% and 20.9% returns for Senya this year.

Yes, but: This is a quarterly challenge, and so far this quarter I am in the lead. While Senya's portfolio outperformed mine in Q1, returning 21.7% to my embarrassing -2.7%, things are starting to look up for old Dion in Q2.

  • Currently, my portfolio is up 3.0% in the nascent quarter, compared to 1.9% gains for Senya.

Thanks for reading!

Quote: “I believe I can do anything if I just try.”

Why it matters: On April 23, 1856, Granville T. Woods, the inventor known as "The Black Edison," was born.

  • Woods held more than 60 patents in the U.S., perhaps the most notable was the Synchronous Multiplex Railway Telegraph, which used ambient static electricity from existing telegraph lines to send messages between train stations and moving trains.
  • This reduced train accidents significantly and contributed to improved transportation throughout the U.S. in the 19th and 20th centuries.

What they were saying: An 1886 article in The Catholic Tribune declared that Woods, "the greatest colored inventor in the history of the race, and equal, if not superior, to any inventor in the country, is destined to revolutionize the mode of street car transit."

  • "The results of his experiments are no longer a question of doubt. He has excelled in every possible way in all his inventions. He is master of the situation, and his name will be handed down to coming generations as one of the greatest inventors of his time. He has not only elevated himself to the highest position among inventors, but he has shown beyond doubt the possibility of a colored man inventing as well as one of any other race."

**************

This newsletter is written in Smart Brevity®. Learn how your team can communicate in the same smart, clear style with Axios HQ.