“Housing wealth – the net equity held by households, consisting of the value of their homes minus their mortgage debt – is the most important source of wealth for all but those at the very top.” ― Janet Yellen
“Housing traditionally is not viewed as a great investment. It takes maintenance; it depreciates. It goes out of style. All of those are problems. And there’s technical progress in housing. So, new ones are better. So, why was it considered an investment? That was a fad.” ― Robert Shiller
A short one this week.
A technology focused private equity fund manager is buying a stake in an English football club at a huge mark up over its last valuation. LVMH is acquiring Tiffany’s by paying a premium of 37 per cent over its undisturbed share price and in the process more than doubling its market share in branded jewellery. Saudi Aramco is slated to go public imminently with the largest market capitalisation for any company listed across any market.
These are exactly the kinds of events that would be expected in and around market tops. It is getting precarious and we would not be surprised to see a pull back with bullish sentiment so high and VIX so low. With global central banks in easing mode and given the abundance of liquidity, we still expect markets to push on to higher levels before the party ultimately ends. For markets to continue marching to higher level, however, we think there is a need for another catalyst ― what that may be remains to be seen.
On to the update.
US Housing and Consumer Charts and More
US Housing and Durables Goods Spending
Falling long-term interest rates equate to more affordable housing and on a relative basis make the economics of owning a home better than of renting one. With, US long rates having dropped sharply during the summer, US home purchases have picked up.
On an annual basis, sales in October increased 4.6 per month from the same month the previous year, marking the fourth straight month of year-over-year gains.
With homeowners in the US remaining in their homes thirteen years on average, five years longer than they did in 2010, and housing inventory estimated to be at an 11-year low, the surge in demand for housing is rippling through to increased applications for and issuance of building permits.
The thing about buying a home is that, once you have bought one, it comes a with a long list of mandatory and not-so-mandatory purchases. For this reason, US consumer durable goods spending tends to closely track home sales and housing permit issuance with a lag.
The below are charts of the year-over-year change in new houses sold and new residential building permits issued versus the year-over-year growth in consumer spending on consumer durables, respectively.
While demand for housing fluctuates with long-term interest rates, once a house has been bought the spending that follows it, will follow irrespective of the fluctuation in interest rates. This makes consumer durable plays, broadly the consumer discretionary sector, a less interest-rate sensitive means of gaining exposure to the robust demand for US housing.
The following is a chart of the Consumer Discretionary Select Sector SPDR ETF $XLY versus monthly consumer durable expenditures.
If spending on consumer durables picks up as is suggested by the pickup in demand for housing, the consumer discretionary sector is likely to be one of the better performing sectors in the US market in the coming months.
US Real GDP and Real Long-Term Yields
The below is a chart of US real GDP growth versus the yield on 10-year Treasury bonds deflated by CPI. Barring a sharp drop in the GDP print for the second half of the year, long-term bonds still look expensive.
The Search for Anti-Fragility
Nassim Taleb describes antifragility as a property of systems that increase in capability to thrive as a result of stressors, shocks, volatility, noise, mistakes, faults, attacks, or failures.
As markets scale to new heights, it becomes increasingly important to scale into assets that provide some degree of antifragility, that is benefit from rising volatility.
Over the coming weeks and months, we hope to identify as many antifragile assets as we can to provide different options investors can incorporate into their portfolios. One such asset is the Japanese yen.
Since the beginning of 2009, the VIX has increased by 10% or more from one trading day to the next on 225 occasions, on average the Japanese yen, versus the US dollar, has gone up by 30 basis points on those days. The VIX has increased by 20% or more from one trading day to the next on 61 occasions, on average the Japanese yen has gone up by 50 basis points on those days. The VIX has increased by 30% or more from one trading day to the next on 22 occasions, on average the Japanese yen has gone up by 80 basis points on those days. The very definition of antifragile.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.