Existing home sales fell in August … the two-year treasury yield is soaring … Russia threatens to use nukes … the lithium trade keeps climbing
Today, let’s take a breather from the Fed. Instead, let’s look at some important headlines that are likely impacting your wealth.
Existing home sales and home prices fell again in August
Yesterday, the National Association of Realtors reported that sales of previously owned homes fell 0.4% from July to August. On a year-over-year basis, sales were down 19.9% from August 2021.
It’s a sign that the red-hot housing market might finally be cooling off.
On the price front, the median price of an existing home sold in August was $389,500. While that’s 7.7% higher than prices one year ago, it’s down from recent months.
Here’s CNBC with more:
Home prices historically drop from July to August, due to seasonality, but the drop this year was wider than usual, suggesting a significant softening.
From June through August, prices usually decline about 2%, but this year they have fallen about 6%.
“The housing market is showing an immediate impact from the changes in monetary policy,” said Lawrence Yun, chief economist for the Realtors.
I would think so – Fed rate hikes have pushed the popular 30-year fixed mortgage from 3% at the start of this year, to nearly 6.5% today.
While most people are aware this is a big jump, the real-world specifics of “how big” aren’t as clear.
For a little perspective, let’s compare a 3% fixed rate mortgage to a 6% fixed rate mortgage on an $800,000 home.
The monthly difference in payments is $1,139. Over the life of the mortgage, the 3% rate eats up $331,000 in interest payments compared to $741,000 for the 6% rate.
So, the higher rate sucks an additional $410,000 out of your pocket – more than half the price of the home in our example.
And that’s from 3% to 6%. As we noted earlier, the 30-year fixed rate mortgage is closer to 6.5% today.
This is the real-world cost of fighting inflation with rising rates.
Speaking of rising rates, yesterday, the 2-year Treasury yield topped 4% for the first time since 2007
As I write Thursday morning, it’s at 4.129%.
Meanwhile, the yield on the 10-year Treasury is up to 3.69%, which is an 11-year high.
This dynamic – short-term rates coming in higher than long-term rates – is a phenomenon we’ve written about a great deal here in the Digest. It’s called a yield curve inversion, and it reflects fear and uncertainty about upcoming economic conditions.
This “10/2 inversion” has historically been viewed as a precursor to a recession. It has predicted every recession from 1955 to 2018, though there have also been times when it inverted yet the economy didn’t fall into a recession.
Typically, the longer the inversion (in terms of time) and deeper (magnitude), the more significant the ensuing recession.
Our latest inversion has existed since early-July. The last time we saw a 10/2-inversion of this length or longer was back in 2007/2008. That was the eight-month inversion that preceded the financial crisis.
And the time before that?
Shortly before the dot-com bubble peak in 2000. That one lasted about a year.
In terms of its depth, we’re at -0.51%. This is already a fairly deep inversion and the trend suggests it will continue widening.
However, if we look at this inversion from a different angle, it’s a great way to put a little cash in your pocket
While this inversion is not a good sign of what’s to come, lofty short-term yields offer cautious investors a safe way to generate some return on cash while waiting for other investment opportunities to emerge.
For example, right now, a four-week treasury bill yields 2.67% annualized.
If you’re willing to extend your duration to 13-weeks, you can get 3.27% annualized.
No, you’re not beating inflation, but you’re crushing the returns from other comparatively “safe” places to put your cash. For example, the national average annual percentage yield on savings accounts is just 0.13%!
Plus, these short durations mean you can access this cash relatively quickly in case the market capitulates and you want to put money into stocks.
It’s the best of both worlds for your cash – respectable yields without an extended lock-up period.
To put your cash to work with short-term bills, go to TreasuryDirect.gov to open an account. You’ll link your bank account directly.
Meanwhile, keep your eyes on the world’s wildcard variable – Russia
Yesterday, Russian President Vladimir Putin ordered military reservists into active service. He also called for a boost to weapons production.
Most significantly, he made a direct threat about using nuclear weapons.
Here are Putin’s specific words:
When the territorial integrity of our country is threatened, we will certainly use all the means at our disposal to protect Russia and our people.
This is not a bluff. Those who are trying to blackmail us with nuclear weapons should know that the wind patterns can also turn in their direction.
To those who allow themselves such statements, I would like to remind them, Russia also has many types of weapons of destruction, the components of which in some cases are more modern than those of the countries of NATO.
It’s a virtual certainty that Putin won’t use a nuclear weapon – Moscow would be wiped off the map when the west responded.
But we need to take this threat seriously because it’s evidence Putin is feeling backed into a corner. He doesn’t have to use nukes to inflict massive pain on the world. He could intensify his weaponization of oil, or perhaps block food exports from Ukraine, or just use a heavy payload non-nuclear weapon of some kind.
In terms of Putin and your portfolio, watch oil and commodities prices. They’ll be the most sensitive to elevated tensions.
We’ll keep you updated here.
The lithium trade keeps chugging along
Back in May, we highlighted the massive demand for lithium due to the world’s transition toward electric vehicles (EV).
EV batteries require huge volumes of metals, one of the most important of which is lithium. The problem is the world has been facing a major lithium shortage.
With that as our background, here’s The Wall Street Journal from earlier this week:
Surging prices for lithium are intensifying a race between auto makers to lock up supplies and raising concerns that a shortage of the battery metal could slow the adoption of electric vehicles.
Lithium carbonate prices in China, the benchmark in the fast-growing market, stand at about $71,000 a metric ton, according to price-assessment firm Benchmark Mineral Intelligence. That is almost four times as high as a year ago and just below the record set this March in yuan terms.
Back in our May Digest, we recommended investors consider three investments to play lithium demand:
Since then, these investments are up, respectively, 4.3%, 16%, and 17.2%.
But selloffs are just part of the game. More importantly, from the looks of the global supply/demand imbalance, we believe we’ll be returning to those previous levels – and far higher – in the months to come.
We’ll keep you updated on all these stories here in the Digest.
Have a good evening,