With this screaming rally in mortgage rates, one would think that it would have a negative impact on housing prices because debt becomes more expensive, but that has not been the case at all!  In fact, house prices across America have gone up about 40% since 2022:

This leads us to the final question, how has this impacted the average buyer of a new house?  If we take a rough example and assume a 2020 average house price of $275,000 (which is approximately true) and compare it to the new reality of a 40% increase in prices leaving that buyer with a $385,000 purchase for the same house, the math is painful.  Not only was the buyer hurt by the higher purchase price, but also by a dramatically higher required downpayment and mortgage rate:

The buyer is faced with a $110,000 higher purchase price, a $22,000 higher downpayment, and a $1,239 or 132% higher monthly mortgage payment!  It is a wonder that the housing market has held up as well as it has.

The post The Mortgage Payment Crisis first appeared on SurlyTrader.

The second way to diversify your portfolio is to diversify among asset classes.  In the broader context, the main asset classes are public equities, private equities, fixed income and real assets.  The onion can be continuously pealed with more narrow “asset classes” such as breaking apart public equities into sectors such as cyclical, non-cyclical, technology, utilities etc.  Likewise, you could break apart fixed income into treasuries, investment grade corporate bonds, securitized fixed income, high yield bonds, etc.  The definitions of specific asset classes are arguable, but the theme is consistent.  For this discussion, we will only focus on equity and fixed income as they are the dominant asset classes in any portfolio construct and will contribute the most impact to any return and risk outcome for a portfolio.

For this analysis we will focus on two of the most followed indices in the financial markets – the S&P 500 Total Return Index (S&P 500) and the Bloomberg Barclays Aggregate US Fixed Income Total Return Index (US Aggregate Bond).

If we look at the long term geometric annual return of the S&P 500 on a total return basis it is quite impressive at 10.7% from the beginning of 1989 through June 2023.  This phenomenal return is accompanied by its risk with annual volatility of returns being 18.1%.  This metric implies (given a normal distribution of returns which is never true) that about 67% of the time the annual return will be +/- 18% of the annual average return.  This is a good metric for describing stock return “noise”, but a more deeply painful metric is what investors experience from peak price to trough price in a large equity market sell-off.  For the S&P 500 during this ~25 year period we experienced that with the Great Financial Crisis between 2007 and 2009.  During that period, the S&P 500 sold off by more than 55%:

This period was also a strong return period for fixed income as interest rates predominantly dropped during the period.  The annual return was not nearly as strong for the Bloomberg Barclays aggregate at 5.3%, but the risk was much smaller with only 4% volatility and a drawdown of -18.4%.  It is not only the reduction in risk or volatility that makes fixed income such a great diversifier for equities, but also because its returns generally move in opposite or uncorrelated ways with the equity markets.  If you look at the same period and measure the correlation of daily returns, you can see that the Bloomberg Barclays Aggregate has a -.07 correlation with the S&P 500:

With this as a backdrop it makes perfect sense to look at mixed allocations of equities with fixed income.  Many financial advisors use a moderate allocation for most clients which targets a 60% allocation to equities and 40% allocation to fixed income.  As you can see below, this has produced a strong annual return of 9% with a volatility or risk metric of 10.9%.  In context, the 60/40 balanced portfolio has captured 84% of the S&P 500’s return while maintaining only about 60% of the risk as measured by volatility or standard deviation:

Lastly, it is important to acknowledge that annualized volatility is not the only risk metric that investors should look at.  In reality, the most emotional pain is caused by how much your portfolio value is reduced from its peak valuation to its minimum valuation during a strong risk asset sell-off or correction.  This is calculated by using the drawdown metric instead of annualized volatility and as you can see, the outperformance on a upside/downside basis stills holds true for balanced portfolios:

The end result is that investors should carefully assess how much risk they are willing to take and adjust the portfolio accordingly.  It is great to shoot for strong returns by increasing equity allocations, but we all need to be cognizant of the extra downside risk that is being introduced to the portfolio.  When bonds were yielding ~2% per year, many investors moved to equities to increase projected returns.  Now that many low risk fixed income investments can yield north of 5%, it is a great time to reassess the risk that is being taken in the investment portfolio.

The post The Right Balancing Act first appeared on SurlyTrader.

In aggregate, natural gas and petroleum are the largest sources of energy in the United States, but Coal, Nuclear and Renewable make up about 30% of total energy production:

Energy production from Coal in the United States is still about 10% in total production, but with some egregious outliers by specific states:

Total energy production from Nuclear power plants is about 8%, but also has huge variation by state:

Lastly, energy production from renewables (Biomass, Hydropower, Geothermal, Wind & Solar) has been increasing rapidly in certain states and made up about 13% of total energy consumption:

In aggregate, the United States is headed in the right direction but it is still a hot topic with climate change and pollution.  In 1900 coal made up 71.4% of US production so we can say that progress has been made.

The post Energy Production in the United States by State first appeared on SurlyTrader.

The post US Savings Level Lowest Recorded Since 1970 first appeared on SurlyTrader.

The truth is that quantitative easing has not and will not work.  In fact, I believe that it will cause more pain than the sum of the total past benefits.  Given the situation that we found ourselves in during the Great Financial Crisis, it is fair to say that quantitative easing and the actions of central banks made the immediate blow softer than it would have been.  Unfortunately, the actions have also borrowed from the future and created instabilities that cannot last.

Did you know that the top .1% own as much as the bottom 90%:

Did you know that workers are not retiring because they can’t afford it:

Did you know that median income levels are below those set back in 1997:

Did you know that the labor force participation rate is as low as it was in 1977 when less than 40% of eligible women worked:

The reality is that the US economy is sick, yet financial markets show extremely optimistic valuations with interest rates the lowest in 5,000 years:

and corporate bonds at peak valuations:

At this point we should probably mention that equity valuations are above the levels that were achieved before historic drawdowns:

And that this bull market is 28 months older than the average bull market:

I am not sure when this grand experiment will end, but I am confident that there will be blood in the streets.

The post The Never-Ending Central Bank Experiment? first appeared on SurlyTrader.

Income inequality: poverty falling faster than ever but the 1% are racing ahead – Guardian

Slow economy could prompt Iran to take nuclear deal – Washington Post

Economists Fear Oil-Price ‘Contagion’ Has Hit Canada’s Economy – Huffington Post

Markets:

Stock market rigging is no longer a ‘conspiracy theory’ – New York Post

Fears of a new global crash as debts and dollar’s value rise – Guardian

Deflation Danger Rings Wake-Up Call to East Europe Central Banks – Bloomberg

Politics:

Eurozone can’t survive in current form, says PIMCO – Telegraph

The ECB’s put – explained by Draghi – CNBC

Banks:

Investment banks eye potential trading boost from ECB stimulus – Reuters

The post Noteworthy News – March 30, 2015 first appeared on SurlyTrader.

Wages Haven’t Been This Crucial to U.S. Economy in Half Century – Bloomberg

To move beyond boom and bust, we need a new theory of capitalism – The Guardian

The Coming China Crisis – Naked Capitalism

Markets:

It depends what you study, not where – Economist

Bank of Japan research shows failing bond market liquidity – ForexLive

Sports Stadiums Are Bad Public Investments. So Why Are Cities Still Paying for Them? – Reason.com

Politics:

Fed statement doesn’t rule out lengthy stay at zero, Evans says – MarketWatch

A coming crackdown on Federal Reserve power? – Politico

Vladimir Putin calls for ‘Eurasia’ currency union – Telegraph

Banks:

Banks Keep Loans Close to Home – Wall Street Journal

The post Noteworthy News – March 23, 2015 first appeared on SurlyTrader.

Here Come the Employment Truthers – New York Times(Paul Krugman)

Obesity Is Hurting the U.S. Economy in Surprising Ways – Bloomberg

Economists’ Biggest Failure – Bloomberg

The Fed Knew the Economy Was a Disaster in 2009. Here’s What They Talked About Instead – New York Times

Markets:

S&P 500 companies have bought back $2.1 trillion worth of themselves since the financial crisis – Business Insider

Map: The salary you need to buy a home in 27 U.S. cities – Washington Post

Japanese shares down on revised growth data – BBC

Politics:

US monetary policy and the saving glut – VOX

Impacts of Obamacare insurance coverage expansion for young adults – VOX

Germany Sets Gender Quota in Boardrooms – New York Times

China, central banks are key risks this week – CNBC

Banks:

European banks’ profitability gap shows big cost cuts needed – Reuters

The post Noteworthy News – March 9, 2015 first appeared on SurlyTrader.

Greek debt crisis sharpens, as US jobs report smashes forecasts – The Guardian

The job market is unquestionably improving, and at a nice clip. But wage growth is not heating up – Washington Post

Even as US job market picks up, unemployed face frustration – Associated Press

Piketty Diagnoses Japan’s Sick Economy – Bloomberg

The Uberpreneur: How An Uber Driver Makes $252,000 A Year – Forbes

Markets:

Central Banks Move to Drive Down Currencies, Yielding Domino Effect – Wall Street Journal

U.S. companies face billions in Venezuela currency losses, Reuters analysis shows – Reuters

Ukraine’s currency just collapsed 50 percent in two days – Washington Post

Politics:

Greece: Greenspan predicts exit from euro inevitable – BBC

Russia optimistic on Ukraine deal, warns on arming Kiev – Reuters

Banks:

U.S. Banks Say Soaring Dollar Puts Them at Disadvantage – Wall Street Journal

The post Noteworthy News – February 9, 2015 first appeared on SurlyTrader.

Why college isn’t always worth it – Washington Post

American CEOs Most Bearish on Earnings Since 2008 Crisis – Bloomberg

U.S. economy cools in fourth quarter, but consumer spending shines – Reuters

When Bread Bags Weren’t Funny – Bloomberg

Markets:

Loose monetary policy has not solved the world’s economic problems – Guardian (Nouriel Roubini)

Eurozone deflation gathers pace in January – BBC

U.S. homeownership hits 20-year low, but new households growing – Reuters

Politics:

Greece really might leave the euro – Washington Post

Obama Wants a New Tax on U.S. Companies’ Overseas Profits – Bloomberg

How and why retired politicians get lucrative appointments on corporate boards – Washington Post

Putin Fingerprints Seen All Over Surprise Interest-Rate Reversal – Bloomberg

Banks:

JPMorgan to pay $99.5 mln to resolve currency rigging lawsuit – Reuters

Bailed-out banks set for windfalls as distressed debt markets recover – The Independent

The post Noteworthy News – February 2, 2015 first appeared on SurlyTrader.