Charts of the Month - March '24

The End of an Era… but Context is Needed

A couple of weeks ago witnessed a historic moment for the Bank of Japan as they finally ended the most outlier monetary policy in all financial markets - Negative Interest Rate Policy (NIRP).

While the rest of the developed world was forced into a historically paced rate hiking cycle to combat the post-COVID inflation wave, Japan, a country notorious for living in a decades-long deflationary environment, held fast with interest rates in negative territory.

Today, no longer…

Like most things, however, this historic break requires context.

While the policy rate for the world’s third-largest economy is now in positive territory (being raised from -0.1% to a range of 0% - 0.1%), it’s still just a little bit behind that of other central banks…

What does this mean for Japan? What does it mean for global asset prices, the U.S. Dollar, and repatriation of assets back into Japan?

If you want a deeper look at these answers, Roger put out a fantastic deep-dive last week that you can access here.

The Kids Aren’t All Right

In Morgan Housel’s latest book, Same as Ever, he makes the point that the 1950s in the United States was peak middle class. “The 1950s are so often remembered as the golden age of middle-class prosperity. Ask Americans when the country was at its greatest and the 1950s is usually near the top. Compared to today? Different worlds, no comparison. The overwhelming feeling is: It was better then.”

He then goes on to quote George Friedman, a geopolitical forecaster, as saying, “In the 1950s and 1960s, the median income allowed you to live with a single earner – normally the husband, with the wife typically working as a homemaker – and roughly three children. It permitted the purchase of modest track housing, one late model car and an older one. It allowed a driving vacation somewhere and, with care, some savings as well.”

On a single income, you could own a home, provide for your wife and three kids, own two cars, take a vacation, and have some savings.

I think every Millennial and Gen Z reading this just got lightheaded.

This chart, while not a comparison to the 1950s, looks at the disparity between income and home price for today’s middle-class, Millennials, and the previous generations’ middle class, Boomers.

40 years ago, you needed 3.5x your median household income to buy a median priced home. Today, that ratio is 6.3x.

To add insult to injury, a couple of weeks ago we listened to a somewhat confusing and shockingly dovish FOMC meeting, where J. Powell (1) reiterated the likelihood of three interest rate cuts this year, and (2) announced, once again, that they will be ‘data dependent’ on their decision to do so.

The problem is that no one seems to be able to figure out exactly what data they’re looking at that would make him think three cuts this year will be needed.

CPI is still running above the 2% target (last clocked in at 3.2%) and PPI (a better forecaster of future inflation) is above trend as well. Employment is holding strong, asset prices (the stock market, gold, bitcoin) are all hitting all-time highs, and even the Fed is forecasting solid GDP growth this year.

Easing rates now, in my opinion, seems incredibly irresponsible given the current state of the economy and financial markets.

Why?

Because of what the chart above represents. Easing rates today or at any time this year assuming economic data doesn’t shit the bed, would be yet another setback for the would-be asset owners of the future (the younger Millennials and Gen Z) for the benefit of the current asset owner generation (Boomers).

Homeownership is still the backbone of the American route to prosperity, and it’s already a pipe dream for most who are working towards it. A lowering of rates now puts that dream even further out of reach (and no, lowering mortgage payments is not enough – without a doubling or even tripling of median wages, we’d need a correction in asset prices to bring the income:purchase price ratio back into alignment).

You could confuse an interest rate cut this year as a purely political move – lowering mortgage rates and pushing asset prices further into all-time high territory is a classic election-year economic meddling move by an incumbent president trying to buy more votes.

I’m still waiting for a new wave of leadership in this country that looks after future generations and doesn’t simply continue to juice the savings accounts of the generation that has already had every economic tailwind imaginable in the history of humanity.

The Most Important Ratio No One Knows - 1:6:90

We’ve talked a lot about the incredible amount of materials that will be required if the West is truly going to chase this Net Zero experiment (there is approximately 0% chance that Net Zero 2050 is going to be achieved, so I’m leaving the date out of this section).

While EV adoption has radically slowed over the last year (consumers simply don’t seem interested in buying them), that hasn’t stopped lawmakers from trying to force a square peg in a round hole.

From Semafor: “The U.S. set strict new emission limits for automakers Wednesday, a step toward making most new American cars either electric or hybrid by 2032. The New York Times called it “one of the most significant climate regulations in the nation’s history,” and a major component of President Joe Biden’s climate agenda. The rules will likely face election-year pushback from automakers and Republicans, but the Biden administration is betting that the shift to EVs will also benefit workers. Toyota, which despite being the world’s largest automaker hasn’t fully embraced EVs, said Wednesday that “serious challenges around affordability, charging infrastructure, and supply chain” remain before the mandate can become reality.”

Toyota, long considered the ‘Smartest Guys in the Automotive Room’ and the one automaker who has never fully committed to EVs, conducted a feasibility analysis a couple of years back to determine the materials required to produce a full Battery EV vs. a Plug-In Hybrid vs. a Pure Hybrid.

The findings are incredible, and should wake people up to the realities of this side of the ‘energy transition’.

With the materials required to produce just one Battery EV, you could produce 90 Hybrids, which, many people are unaware, not only get incredibly good gas mileage but also weigh hundreds to thousands of pounds less on average, which is why Battery EVs burn through tires about 20% faster than their ICE or Hybrid counterparts, per Michelin.

From Car and Driver: “Toyota is able to produce enough batteries for 28,000 electric vehicles each year-or for 1.5 million hybrid cars. Per Toyota, selling 1.5 million hybrid cars reduces carbon emissions by a third more than selling 28,000 EVs. Put another way, the company is generating a more positive environmental impact by selling many times more gas-electric hybrid cars than it would by selling far fewer EVs (and therefore, far more fully gasoline- or diesel-powered vehicles), while also providing its customers more practical vehicles (because of no range or charging anxieties) at more affordable prices.”

Not to mention we don’t need to go ripping up the Congo with child slave labor or go mine for more materials on the ocean floor – yes, the UN has just issued 31 exploration licenses for deep-sea mining for “materials required for the energy transition”.

Do As I Say, Not As I Do

From Javier Blas of Bloomberg, pointing out both political hypocrisy and the very real but oft-forgotten inelasticity of demand for energy in a single tweet:

“Spanish PM Pedro Sanchez often talks about his support for Ukraine – but Spain has also DOUBLED its purchases of Russian gas since the invasion of Ukraine, throwing a financial lifeline to Putin.”

Politicians and voters can be idealistic about a lot of things, most things actually, and get away with it, because most of the social discourse that takes place today is relatively meaningless in the grand scheme of it all. But energy security is not one of those things. With energy, you need steely-eyed, ruthless pragmatism. Because if an economy, especially an advanced economy, doesn’t have secure, abundant, and cheap energy on demand, well, as James Hetfield told us in one of the greatest metal songs of all time, Nothing Else Matters.

The Very Real Price of Nationalism

Brian Chingono of Verdad Capital put out a brilliant deep dive on the current state of the British economy that you can check out here. 

In it, he details the measurable effects of Brexit on the UK economy and markets as a whole. There’s a ton of great information in there, but one of the charts that stood out to me is here:

With the rise of passive investing through mutual funds and index ETFs, fund flows (the amount of capital going into or out of an asset or asset class, in this case, British equities) move price more than any other factor, by a wide margin.

The days of active investors building complex financial models, forecasting macro trends, and allocating capital based on risk models, while not dead, are a shell of what they used to be. Today, it’s all about liquidity which drives flows into mostly market cap weighted indexes that indiscriminately buy, no matter the valuation of the asset.

Brexit has, as Verdad illustrates, severely limited the UK’s ability to attract flows coming in from abroad, and coupled with a slowing economy, has seen domestic capital leave for greener pastures into the U.S. and mainland Europe.

All of this helps explain the dramatic underperformance of British equities since the Brexit referendum passed in June 2016… and it’s hard to find any reason why this will change anytime soon.

Check This Out

Jack Raines writes one of the best finance blogs on the web, covering nuanced topics such as balancing your money and your time, figuring out how best to navigate your career, and more. Check out his blog, Young Money, here.

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