Top Market News: What Happened In Investing Today
Mortgage Rates, Interest Rates, And The Fed
(A good sign. Wikipedia )
I was on vacation in Portland, Oregon, last week. A friend who works for Nike ( NKE ) and who owns a couple residential properties asked me over brunch, "Interest rates are going up, but why are mortgage rates not going up?"
I said two things: First: "Is that really true?" Second: "I don't know why." But now that I'm back near a computer, let's take a quick look. Here are the last 47 years of the Fed Funds rate (in red) charted together with the average 30-year fixed rate mortgage rate (in blue).
So, the answer is "Mortgage rates are not rising in lock step with the Fed Funds Rate." Eyeballing the chart, it looks like they have at some times in the past, like in the early 80s, the mid-90s, and the late 90s. But they didn't during the flat-to-inverted yield curve anxiety of the mid-2000s, and they are not today. At the very right hand side of the chart, you can even see 30-year mortgage rates decreasing even as the Fed Funds rate picks up.
Do we have an answer for why? My first guess would be that borrowing appetites are not as great. Here is the Case/Shiller U.S. National Home Price Index for the last 10 years. It's back above post-crisis highs.
Is it possible that demand for debt has slowed down? The narrative driving our last housing cycle was that speculative interest drove increased demand for debt even as home prices rose. If you could sell to the next buyer at a profit, why worry about the cost of your debt? Maybe a decade later, buyers are a little more price and debt sensitive at these levels. Meanwhile, the yield curve is flatter than it's been since the start of the Great Recession.
In Canada, subprime lender Home Capital Group secured an investment from Warren Buffett's Berkshire Hathaway amid a prominent bear case laid out by short seller Marc Cohodes. That investment may work out well for Buffett and calm Home Capital shareholders, but as this Financial Times article points out, the housing market in Canada remains fragile. Recent stories press a particular narrative: Global investment in Canadian housing is on the wane.
Across pricey assets, there's been a bit of a "price insensitive foreign buyer" narrative surrounding claims of overvaluation. I've seen headlines applying this rubric to U.S. commercial real estate, U.S. venture capital investments, and U.S. stocks. As a trend, it's hard for me to independently corroborate, but I haven't fully written it off either.
A lot of assets real and financial look expensive, but everything always looks scary, and most of the time stocks go up anyway. For what it's worth, a non-finance friend asked me today what's going on with the VIX. We will just have to wait and see.
- Yellen: Banks stronger, next financial crisis not 'in our lifetime'
- Fed's Harker still backs rate hikes
- U.S. automobile industry adjusts to lower volume
- Interest rate surge sends financial sector up more than 1%
Strategic Candy Alternatives Update
(Third Point went on a buying ___. Wikipedia )
I mentioned a few weeks ago the exciting potential for a hypothetical candy spinoff from Nestle ( NSRGY ). In between then and now, Third Point has disclosed a position and written a letter asking the company to shed non-core businesses, among other shareholder-friendly activities. It appears Nestle's stake in L'Oreal ( LRLCF ) is more in Third Point's crosshairs, but why get hung up on the details?
Probably not coincidentally, Nestle has announced a buyback and broad strategic review.
- Marc Cohodes (@AlderLaneeggs) has praise for fellow short seller Badger Daylight.
- Valentin Schmid (@vxschmid) compares inflation to ketchup.
- Michael Santoli (@michaelsantoli) shares a Baupost letter from the mid-1990s.
- LST (@LongShortTrader) shares a YouTube video alleging George Soros' involvement in the cryptocurrency market. Peter Atwater (@Peter_Atwater) shares a chart comparing tulip prices to those of Ethereum .
See also Update On Platinum Group Metals on seekingalpha.com