The Cost of Living Will Cause More Pain
As inflation continues to climb, let's reflect on why we're here and where we could see more damage.
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Inflation is likely to be more resilient and persistent than investors and the Federal Reserve are anticipating. The massive fiscal deficit the federal government is running, even during an economic expansion, is part of the reason for this mess, as I explained in my column on Monday. This deficit came to $1.8 trillion in the federal government’s recently completed fiscal 2024 year.
Famed billionaire and fund manager Paul Tudor Jones brought up the danger of this spiraling debt load up on CNBC on Tuesday, and believes a reckoning is on the horizon. I am happy to have some more well-known company with this view, as I have felt like Don Quixote tilting at windmills over the past year on identifying the 800-pound gorilla in the room that few want to acknowledge.
The Yield Surprise
The 10-Year Treasury yield closed at over 4.2% on Tuesday. This is up nearly 60-basis points since the central bank cut the Fed Funds rate for the first time since early in 2020 by half a percentage point in mid-September. This is hardly what Fed Chairman Jerome Powell or Treasury Secretary Janet Yellen were anticipating. Of course, these economic wunderkinds thought inflation was "transitionary" throughout 2021, as well. Not surprisingly, gold hit another all-time high in trading on Tuesday. As I stated Monday, I wish I would have taken larger exposures in my gold-related trades early this summer.
Homebuilders' Hurting
The realization that rates are not coming down as planned has taken a significant toll on the stocks of homebuilders in recent trading sessions. Of course, the SPDR S&P Homebuilders exchange-traded fund XHB should never have advanced by nearly 15% on the anticipation and implementation of a half-percentage point reduction in the Fed Funds rate in the first place. Not when home builders like Lennar LEN were trading at their highest price-to-book values in memory. In addition, thanks to higher rates and the housing appreciation of the past few years, it now takes nearly $120,000 in annual household income to qualify for the basic mortgage around the average priced home in the U.S. This is a major problem, given the average annual household income in the U.S. is a bit under $85,000. This is why I have no exposure to the home building sector in my portfolio currently.
Eating In
Inflation and the struggles at the lower- and middle-end of the income curve is continuing to be a major headwind for consumer-facing businesses. The restaurant sector has been hit particularly hard. It looks like TGI Fridays will become the latest casualty here as it mulls filing bankruptcy. It will join a long list of other chains like Red Lobster to do the same as 2024 will see the greatest number of restaurant bankruptcies of any year in decades, according to the Wall Street Journal. Outside the pandemic year of 2020, of course. Black Box Intelligence reported that same-store sales traffic at U.S. restaurants was down just over 3% on a year-over-year basis in its most recent monthly reading. Casual dining saw visits decrease 4.5%. Headwinds for this part of the economy are likely to persist well into 2025, if not beyond. This is why I have no exposure to this sector outside of Dave & Busters PLAY, which is as much an entertainment play.
Closing on a brighter investment call, I have been building up a heavier allocation to the energy sector in recent months in my portfolio. It should benefit from some of the same forces moving gold higher over time. Not to mention increasing geopolitical tensions as well or note that the last time the country had a prolonged bout of stagflation, the energy sector notably outperformed the overall market.
At the time of publication, Jensen was long PLAY.
