The Bond Market's Message to the Fed | The Week in Charts (11/20/24) | Charlie Bilello

Hello, everyone. Welcome back to another edition of The Week in Charts. I'm your host, Charlie Bilello, bringing you the most important charts and themes that I'm seeing today. If you're watching this on YouTube, take a moment, hit that subscribe button for more content just like it. A lot of new, interesting content that we're putting out in the next few weeks, so make sure you're subscribed to the channel. All right, as we approach your end, if you're looking for a second opinion on your portfolio, on your financial plan, reach out to us today at creativeplanning.com slash Charlie, fill out this form, schedule a call or a meeting with an advisor today, and we're gonna give you a free wealth path analysis. And with that, we're gonna look at your portfolio, look at your financial plan, making sure everything's in order and giving you proactive tax strategies and doing an insurance and estate planning review as well. At Creative Planning, we're in all 50 states, so we likely have a location right near you or abroad as well. So if you're an expat living abroad, reach out to us today. We have a great international team as well. Over 325 billion in assets under management and advisement, and we're here to help, creativeplanning.com slash Charlie. What's on the docket today? A lot going on. Inflation isn't going away. Unfortunately, we'll discuss the latest CPI report. The bond market has a clear message for the Fed, and we'll tell you what that is. If you've been following the 10-year Treasury yield, you can probably guess what that is. Number three, borrowing from our future. This is a concept I've been talking about for a while, but it's unfortunately moving in the wrong direction, the deficit hitting $2 trillion once again. Doge versus Dogecoin, Doge being the Department of Government Efficiency and Dogecoin being the meme coin. I'll discuss the interesting parallel there. Post-election market euphoria seems to be fading here, so we had that big rally after the election, and some of that seems to be coming in, looking at the US stock market. Number six, we end with something positive, as we always do, and that would be rising real wages. Over the past year, wages outpacing inflation once again. So speaking of inflation, does not seem to be going away anytime soon. October CPI report, you can see the numbers here. This is kind of what we expected, a tick up in terms of inflation, so overall CPI moved up to 2.6%. Core CPI moves up to 3.3%, and we're kind of having a difficult time now pushing lower in terms of that core inflation reading, which excludes food and energy, so that's definitely something to watch. And you can see here, the months above 3% are starting to build here. 42 now consecutive months where core inflation has been above 3%. That's the longest period of high inflation in the US since the early 1990s. Let's dig into some of the components here. This is comparing the October readings with June 2022. Why June 2022? Well, that's when the inflation rate in the US peaked at 9.1%, it was the highest rate that we've seen since the early 1980s. As you can see, many of these components in a much better position, particularly gasoline, which is down over the past year, and fuel oil down over the past year, 21% decline there. New and used cars actually declining over the past year, which is definitely good news. And you can see back in June 2022, all of these were moving substantially higher. What seems to be sticky here, things like transportation, still showing an elevated increase, 8.2% over the past year, and shelter being far and away the most important component in terms of CPI, still a relatively high reading here, 4.9% increase over the past year. What's driving transportation costs higher? Many factors here, but I wanna call attention once again to auto insurance because it's just absolutely insane. I've experienced this, I'm sure you have as well, just looking at that statement that you're getting from your auto insurance, saying, can this be real? The increases are just astronomical. And if you try to shop around, you see they're all going much higher, so you really can't switch and really save much money, even though they all seem to tell you that you can. So 53% increase over the past three years in auto insurance rates, that's the highest three-year increase since 1975 to 1978. Who's benefiting from this? Definitely car insurance companies, Progressive, one of the biggest auto insurance in the US, just skyrocketing higher this year. You can see over the past 10 years, it's actually up over 1,000% versus a 241% gain for the S&P 500. Let's talk about shelter CPI. Again, over a third of the index, by far the most important component, and we had expected this number to come down. Most people were saying it was likely to come down. It hasn't. Why were they saying it's likely to come down? Because if you look at real-time rents, so apartment list, looking at what the landlords are actually listing in terms of rents, well, they're seeing year-over-year declines in those asking prices for rents. But shelter CPI, very lagging indicator, and appears to be even more lagging than people expected, certainly more lagging than I expected here, still at 4.9% increase despite the fact that real-time rents are actually going lower. So obviously, a lot going into this number that isn't simply reflected in current rental prices. Housing inflation's a complicated animal to cover. We know it's not just simply the monthly mortgage payment or the monthly rent payment. There's other costs that go into housing that have gone up a lot as well. You have homeowners insurance, you got property taxes, you got the cost of repairs and maintenance. So overall, this is likely a more realistic reflection of what's actually gone on in terms of shelter CPI. Just the surprising thing is how long it's remained this elevated, and now it's been 35 consecutive months above 4% for the shelter CPI number. That's the longest period of high housing inflation since the late 1980s, early 1990s. And who is this hurting the most? Of course, it's hurting the people with the lowest income. That's true for any inflation number you look at, whether it's groceries, whether it's cost to fill up your tank. Anything hits people with lower income more because it's going to be a higher percentage of their income. So Redfin had this report and a survey looking at people who make less than $50,000 annually and what they were doing to try to make ends meet in terms of increasing housing payments, in terms of the increasing housing inflation. You can see here, they're eating out at restaurants less often, that seems to be the number one response. They're taking fewer or no vacations. They're borrowing money from friends and family or they're skipping meals completely, something, of course, you definitely don't want to see. Hopefully, housing inflation comes down in the coming years. It's really crushing, obviously, to continue at this pace, 4.9% over the past year. Outpacing, of course, most people's wage increases. So while overall inflation has come down, the fact that shelter inflation is still running at 4.9%, definitely not what you want to see. If we look at the last five years in terms of homebuilders, higher prices don't seem to be affecting them. That inflation seems to be able to be passed on by homebuilders, very much so. You're seeing increasing profit margins there. And look at the price appreciation for homebuilders versus the S&P 500, 167% versus 103% for the S&P 500. And as we talked about, just a massive shortage of homes in the U.S., massive deficit of homes in the U.S. So homebuilders really have the upper hand here because they're an increasing share of the markets with so few existing homes on the market. Let's talk about healthcare because this is simply the most absurd number in the CPI report month after month. I talk about this because it's so absolutely ridiculous that the U.S. government is saying that the cost of health insurance is actually down 29% over the last two years and 12% over the last five years. Anyone who's paying for health insurance, of course, knows that the cost only goes in one direction and that would be up. I'm showing you here the average family health insurance premium cost in the U.S. since 1999. As you can see here, it never goes down, it only goes up. And that increase has been 342% since 1999 versus 86% for overall inflation in the U.S. 6.1% increase per year in terms of health insurance versus 2.5% per year in terms of overall CPI. Who has benefited from this the most? Definitely health insurance companies. Number one health insurance company in the U.S., UnitedHealthcare, up over 2,000% since the Affordable Care Act was signed into law in March 2010 versus a 554% gain for the S&P 500. Let's talk about the bond market. Big message it seems to be sending for the Fed here. You can see in terms of bond yields, this is about where the Fed cut interest rates in September. They did that 50 basis point cut. Ten year was around 3.6%. Now it's up at 4.4%. You can see 30 year yields moving higher as well. And this has caused pain in the bond market because as yields rise, prices go down. And this has extended what has already been by far the longest drawdown in history for the bond market. Now we're at 51 months and counting as of the end of October, 8% drawdown still. So while the stock market's hitting over 50 all-time highs so far this year, the bond market's still below where it was in the summer of 2020. And very interesting here, this seems to be the message from the bond market with yields going up, they're really questioning the Fed's ability to aggressively cut rates going forward here. It's very different than what we saw in prior rate cutting cycles. After the Fed first cut rates in 2019, if you look two months later, 10 year yield is down. It's down from 2.02% to 1.64%. In 2007, Fed cuts 50 basis points, starts with a yield of 4.47% on the 10 year, two months later at 4.08. And these other years, you can see, even though the yield didn't go down, it didn't go up very much over the next two months. This is by far the biggest increase we've seen since 1995 after the Fed starts cutting rates. Biggest increase we've seen in that 10 year yield over a two month period. And really what we've seen as a result of that is a change in expectations in terms of what the Fed's actually gonna do. So the bond market's saying to the Fed, slow down here, inflation isn't over, and the bond yields are going to be higher for longer. And as a result, we're seeing this change in this Fed fund futures curve here. So what we're talking about now is still a higher probability than not of the Fed cutting rates in December, although I don't think it's a guarantee anymore. I think it's gonna depend on the next inflation report that we get, the PCE data, and then after that, the jobs report data. So we'll see. We got a few more data points before. I think that's definitively, but it seems to be the case that they wanna cut at least one more time. But after that, it's gonna be, I think, a bigger fight within the Fed. And if the market continues to push higher in terms of 10 year yields and inflation expectations, I think it's gonna be very difficult for the Fed to cut again in January. Right now, the market's pricing in a pause at that point in time. And really, only 50 basis points of rate cuts in all of 2025. So if we look back in September, when the Fed first started cutting interest rates, this end of 2025 projection was at 2.8%. Now we're about a percent higher at 3.8%. So a huge shift higher in terms of what the market is expecting. And a lot of that is just based on what the 10 year treasury yield's doing, what inflation expectations are doing, namely going up, and what the expected path of the inflation data is going to be. So this notion that we're going back to 2%, well, where is it? We still haven't seen that 2% reading in terms of CPI. We got as low as 2.4%, but this month we're at 2.6%. And if we look at the November projection from the Cleveland Fed, they're saying 2.7%. And all this is going on with gas prices actually lower than a year ago, and heating oil lower than a year ago. If those somehow reverse and move higher, you're going to eliminate that tailwind, and all of a sudden we're going to see a CPI likely above 3% again. And if we're looking at core PCE, which is the Fed's preferred measure of inflation, you can see in October, they're expecting it to move higher, and then again in November. So if we start to get these readings, we don't know if they're definitely going to come in like this, but if they do come in like this, going to be very difficult for the Fed to say that war against inflation is clearly won, and we could just keep cutting every single meeting 25 basis points. I think it's going to be tougher and tougher if these readings come in as the Cleveland Fed is expected. And then we go back to this chart, which to me is the main reason the Fed shouldn't have started cutting rates at all, because we never got back to 2%. If you're looking at an average inflation rate, we only got back to 2.4% because we were using inflation over the last year. And you can't use inflation over just a one-year period, you should be using an average or a cumulative level of inflation. And since January 2020, we've seen CPI average 4.2%, which is more than double the Fed's target of 2% in terms of inflation. And this is what people are feeling. They're feeling the last four years of increases in terms of grocery prices up 22%, restaurant prices 25% or more, electricity 30%, gasoline 44%, home prices 45%, auto insurance 63%. So all of this is compounded, all of this has been building. So the idea that just getting back to 2%, a lower rate of growth justifies going back to easy money, I don't agree with it. And the market seems to be pushing back against that as well. Okay, let's talk about borrowing for our future. This is related to the Fed conversation because where is that inflation coming from? As we know, the two primary sources of causing inflation are going to be the money supply and are going to be excess government spending in terms of deficit spending. And we continue to do that here in the US borrowing from our future to spend more money today. The deficit over the last 12 months rose once again above 2 trillion. This is something you rarely see at this point in economic expansion. We're four years into the expansion now that started back in 2020 and we're running a $2 trillion deficit. So just an enormous amount of deficit spending. You can see the gap between spending and revenue widening here. And if we just look at the last 10 years, it doesn't seem to be a revenue problem, this deficit that we have today. It seems to be a spending problem. How do we know that? Because tax revenue is actually 60% higher than it was 10 years ago. So we have 60% more money coming into the federal government than we had 10 years ago. The problem is we're spending now at a rate that's 93% higher than 10 years ago. So what does this gap create? It creates a need to borrow to fund that deficit. And so what that means simply is we're adding to our national debt, which is fast approaching $36 trillion. We'll likely get there in the next few weeks. So let's talk about Doge versus Dogecoin. This is kind of a fun one here. Department of Government Efficiency, which is going to be led by Elon Musk and Vivek Ramaswamy versus Dogecoin, the meme coin with the dog that Musk has been promoting on and off over the past few years as a kind of as a joke, I think. And it seemed to reach a peak frenzy a few years ago when Elon Musk went on Saturday Night Live and joked about it. Then it crashed thereafter, went down over 90%, but it's since now come back. It's at its highest level since back then. I think it's close to the level of the peak. I'm not quite there yet. I think it was maybe over 80 billion in market cap, but over 60 billion, which is kind of incredible, almost tripling since the election. And at 61 billion, its total market cap is higher than 331 companies in the S&P 500, which is, of course, remarkable. Now, some people make the case in terms of Dogecoin. I've been hearing people say, well, the US dollar is worthless. Why not speculate on Dogecoin? At least they can't create more Dogecoin. But if you look at Dogecoin, it's not the same as Bitcoin that has a maximum supply. Dogecoin operates at least as it stands now with unlimited supply, so it doesn't have a maximum cap. And you can see the circulating supply of Dogecoin has increased and increased and increased over the last 10 years, so it's not stable in terms of supply. They can create more Dogecoins. You can mine more Dogecoins. That's increasing supply of this. So the notion that it's more stable, going to be more stable than the US dollar, well, that's only if Dogecoin stops creating Dogecoin and the money supply in the US just goes absolutely crazy higher once again, which hopefully is not going to be the case. But the ironic thing I would say is that Doge, the Department of Government Efficiency, while they're talking about cutting spending, they're talking about cutting waste, they're cutting fraud, cutting abuse, all of these things that should theoretically lead to less of a need for these alternative currencies, digital currencies, whether you believe Dogecoin is going to be around in the future or not, there's less of a need for that if we have discipline in terms of government spending, discipline in terms of not increasing the money supply. So if this is actually going to happen, we're going to see deficits go down. We're going to see the US dollar continue to strengthen, which, by the way, it's actually strengthened since the election hasn't gone down. So it's just a wacky, wacky thing to see people speculating on this meme coin because of the creation of this department when really, if the department is successful, you would think that Dogecoin and things like its speculative meme coins would actually be going in the opposite direction. So be very, very careful here. I would say we're very similar to where we were when Musk went on Saturday Night Live in terms of the frenzy, in terms of the mania here. I'd be very surprised if Dogecoin was higher a year from now than it is today, and I would not be surprised at all if it went down 80 to 90% once again. So we'll see what happens here. That's my take on Doge versus Dogecoin. Absolutely fascinating, of course, to watch. So let's talk about the post-election euphoria that we saw in the financial markets, and it seems to be fading here if we're looking at the US stock market. S&P 500 up only 2.4% now since the election, giving back a decent portion of its gains. Small Cap's giving back way more, now up only 2.9%. So the gap is smaller here. You can see what has maintained its gains and accelerated its gains has been primarily crypto. Things like Dogecoin up 127%. MicroStrategy, which has that huge Bitcoin holding, up 89%. Coinbase, 67%. Tesla, 38%. So that's kind of what's stuck here. Everything else kind of moving lower. Banks were up even bigger. They're still up 9%, still outperforming, but giving back definitely some gains in the overall US stock market, giving back as well. And then we have international stocks not doing well since that first day bump, moving lower. China continuing to struggle here, down 7%. So a lot of that seems to be tariff-related or fear of tariff-related there. And also, of course, the strength in the dollar and the weakening of international currency. So let's just take a look at a few of the ETFs here. This is the Small Cap ETF. You can see initial bounce higher. That continued for a few days, and now the move lower. We haven't filled the gap just yet, but seems to be moving closer in that direction. S&P 500, gap higher, moves higher. Hits a few more record highs on the year, but since then, starting to trend lower. And this is the International ETF, really only one day of positive after the election, and then starts moving in the opposite direction, and now back below its 200-day moving average. And I wanna talk about credit markets because this is just so absolutely stunning to see the euphoria in the credit markets, very rare to see in terms of credit spreads, very, very tight. So this is simply the spread between investment-grade bond yields and high-yield bond yields and treasury bonds. So when it's very tight, there's not a lot of fear. There's a lot of complacency. There's people reaching for yield, assuming defaults are gonna stay very low, and that's what we're seeing today. 77 basis points in terms of investment-grade credit spreads. That's the tightest we've seen since July 1998. And junk bond spreads, 261 now, tightest since June 2007. Now, historically, as I've mentioned in previous episodes, when spreads are very wide, that tends to actually be good for investors, a good time to invest, because there's a lot of fear that investors are tending to be overreacting to the downside, saying there's gonna be way more defaults than there actually is. And when spreads are very tight, the opposite tends to be true, where investors are a little bit overly optimistic. I'd say that's probably where we are today. We'll have to look back in a few years to see what happens here, but you tend to see lower bond returns following tight credit spreads and lower returns for stocks as well. Let's talk about Bitcoin here very quickly. What we've seen is just a continuation of the rally since the election. The assumption is the new administration's going to be good for crypto. Whether that's true or not remains to be seen, but that's the perception, that's the narrative that's driving Bitcoin higher. Here you can see all of the new record-high milestones, all the way up to 94,000 now, up over 120% on the year following a strong year last year. Will this persist? We don't know. What I would say is a lot of money seems to be flowing into the asset class in a very short period of time. And whenever that's happening, you have to kind of take a pause and say, is it too much too soon? We'll see in the coming weeks if that's the case. This is the total assets under management in the Bitcoin ETF from iShares. This is the biggest Bitcoin ETF, 44 billion now in assets under management. This is the fastest growing ETF of all time, 44 billion in assets. And now that's over 10 billion more than the iShares gold ETF, which is stunning. You can see the crossover here, crossing Bitcoin ETF, crossing above the gold ETF in terms of assets. And of course, the younger generation, so people under 30 don't want to hear about gold. They only want to hear about Bitcoin, and I suspect that's driving a lot of it. And the other thing that's driving it is simply people chasing returns here higher, 122%, you're going to get people jumping in and chasing. Be mindful, this is what I always say, any asset class that's gone parabolic, that has a quick move in a short period of time, go back, just remind yourself that that move historically hasn't come without corrections, without drawdown. So just remind yourself, another drawdown is likely to come. Can you stomach it given your position size? Can you stomach this type of drawdown from Bitcoin? We've seen drawdowns, 30% is nothing for Bitcoin. We see that all the time. We saw it earlier this year from March to August, 33% decline, but historically we've seen 80% declines time and time again from Bitcoin. So just keep that in mind as you see this asset class going higher and higher. So ending as we always do with something positive, that will be rising real wages in the US. Happy to report that this is now the 18th consecutive month where wages in the US have outpaced inflation. And that's really the path to prosperity for a nation. We have 4% increase in average hourly earnings over the past year, inflation's up 2.6%. That spread is great news for the American worker. It's leaving more money in your pocket. 1.4% differential, 18th consecutive positive month of year-over-year growth. And that's reversing what we saw previously, which was 25 consecutive months where wages did not keep pace with inflation. So this is why we wanna keep inflation down. This is why we wanna see the Fed remain prudent and mindful that inflation and the war against it hasn't been won just yet. And the reason why we have positive real wage growth is because inflation has come down. Without it, this wouldn't have happened. Okay, with that, we'll end it right there. Thank you everyone for joining me. Have a great rest of the week. If you're watching this on YouTube, subscribe to the channel and I'll see you next time. The Week in Charts.