What’s up Graham, it’s guys here :-)

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Last year, Micheal Burry tweeted that

He followed it up with a chart that shows that since the 1940s, inflation never occurred once and then disappeared. In every case, inflation will first decline causing people to celebrate by spending more money and then inflation will re-appear as long as a decade.

Even the White House did an analysis of inflation post World War 2 and concluded that in almost every case, inflation took several years to normalize from the peak and it never suddenly flatlined.

If you are wondering why I am suddenly talking about inflation, it's because after reaching the most expensive interest rates we have seen since 2001, the Federal Reserve has officially made its decision to pause an upcoming rate hike in the month of September. This definitely comes as a breather for borrowers after the 11 continuous hikes since 2022. The Fed said it will hold the federal funds rate in a range of 5.25% to 5.5%, the same level as it announced at its last meeting, in July.

Unfortunately, it appears that this might only be temporary.

The 2% target

On the most basic level, the Federal Reserve wants inflation to return to its 2% target and then it can begin to reduce interest rates. But, on September 13th, it was revealed that overall inflation across all items rose by 3.7% year-over-year -- Up from the 3% we saw back in June.

Food was the main driver of inflation with frozen vegetables up 14.7%, salad dressing up 12%, and apples up 8.5% YoY. Even if you remove food, car insurance was up 19%, shipping was up 10% and rent of primary residence was up 7.8%.

If you are wondering why the Fed has paused its rate hikes given these disastrous inflation numbers, it is because the Federal Reserve prefers another metric to determine their rate hikes -> Core CPI

Core CPI purposely excludes volatile items like food and energy since these tend to be more seasonal. So if you remove food and energy from the mix, the core inflation actually went down to 4.3% in August from 4.7% in July which was largely in line with expectations.

What happened in the Federal Reserve meeting?

As I mentioned earlier, the Federal Reserve decided to pause their rate hike for the month of September until they can get a more definitive direction on how badly inflation persists.

This means, their stance will largely be unchanged for the next month until November 1st, at which point there’s a modest chance we’ll see one more 25 basis point hike if needed.

After all, Core CPI, which is their preferred measure of inflation is consistently trending lower and they anticipate that housing, which makes up the largest portion of that index will be coming down over the following few months.

In fact, the chief economist of Realtor.com said that:

It's also clear that the Fed knows this and they are anticipating these results into future projections. But, it seems unlikely that the Fed is going to be lowering interest rates anytime soon. They will wait until the inflation is consistently below the 2% target and the market isn't pricing a strong chance of that happening until Sep of next year :(

What's happening in the housing market?

On the surface, national housing prices have increased by only 2.5% year over year which is less than the rate of inflation. The problem is that mortgage rates have increased so much that on average your monthly payments today are 19% more expensive than just a year ago.

Housing prices are not coming down due to a lack of inventory. Mortgage rates are so expensive that almost anyone with an existing mortgage doesn't want to sell and get another loan. So, the only properties that are on the market are from builders or from people who absolutely need to sell.

An added issue is that whatever houses that are on the market are not getting sold. It’s theorized that sellers who aren’t getting their price are simply choosing to take their home off the market and perhaps wait for a better time to list.

In terms of where the housing market will go in the future, it's expected that home prices will remain flat in 2024 as inventory is down compared to a year ago. On top of that, it’s also worth noting that housing affordability could look even worse in the coming months because it generally takes 7 weeks to close a mortgage. So, all the latest mortgage data hasn’t had time to reflect the actual price that buyers are paying.

My plan going forward

You should know this by now, but, I don’t believe in timing the market and I don’t believe in buying or selling to try to buy things perfectly. Most of the time predicting whether the market will go up or down is like guessing heads or tails. Sometimes you might get it right, but, in the long run, it’s unnecessary, and most people who chase the markets end up losing.

This is exactly why I personally prefer dollar cost averaging into the overall market regardless of price or what the Fed says.

That's it for this week. I hope you enjoyed this article. I’d love to hear your thoughts - Just hit respond to this email - I read every single one :)

Stay safe, stay invested and I will see you next week – Graham Stephan.

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