The Fed vs. The Market

The market and the Fed can’t agree on the path for interest rates June 21, 2024 | Peel #735 In this issue of the Peel: - 🌟 The housing market needs help, ideally from Oprah Winfrey - 🤖 AI and buzzwords are booming while Trump and weed tumbled - 🤔 The market and the Fed can’t agree on the path for interest rates Market Snapshot 📸 Banana Bits 🍌 - Bigbox streaming [is going retail](, letting you apes bring your dates to somewhere other than your parent's basement - OpenAI’s top competitor came out swinging with a [new, powerful model]( - Is ETH the “[internet bond](”? (Whatever tf that means) - If the U.S. continues to avoid a recession, it’ll be the “[loudest bond market false alarm on record]()” Your Finance Career, Customized: Choose Your Track = Step into a finance career that's tailored just for you with WSO Academy's new tracks. Whether you're drawn to Investment Banking, captivated by Venture Capital, or intrigued by Asset Management, we have a specialized path crafted for your ambitions. Our tracks offer focused mentorship, industry-specific skills, and networking opportunities in your chosen field. Don't settle for a one-size-fits-all approach. Choose your track, embrace your niche, and prepare for a career that aligns perfectly with your goals. At WSO Academy, your unique finance journey awaits. [Click here to join the WSO Academy Waitlist. Limited slots only.]( Macro Monkey Says 🐒 This Is the Problem I nominate Oprah Winfrey as the new Secretary of Housing and Urban Development. With her in charge, you get a house, you get a house—f*ck it—everyone gets a house! Thanks, Oprah. But until that day comes, this is the kind of New Residential Construction we’re stuck with. Let’s get into it. The Numbers In May, homebuilders focused more on the “home” than the “building” part as total housing starts clocked in at an annual rate of just 1.277mn, the lowest since July 2020. That’s 5.5% below April’s total housing starts and a massive 19.3% decline from May 2023. [Source]( The rest of the data makes me want to commit arson, too, with permits off 3.8% monthly and 9.5% for the year. Lastly, the lone bright spot could be found in housing completions. Although down 8.4% for the month, completions still rose an entire 1% from May of last year. The volatility seen speaks to the struggles of the industry. You’d think that given record home prices and near-infinite demand, they’d be pumping out houses faster than banking analysts lose their hair. But, traumas from the GFC and the high-rate environment make the enormous investments of building a home much less worth the risk. Housing starts have been back at pre-pandemic levels for a while now, but as we can see below, this remains well-off from pre-GFC rates of housing starts: [Source](=) In theory, there should be even more incentive for new construction as Millennial and Gen Z buyers today don’t want to buy the same kind of houses that they grew up in. Older homes are smaller, more poorly constructed, and perhaps most importantly, don’t have what I like to call the “first sh*t premium,” as being the first person to take a sh*t in your house is a scarce delight. Personal anecdote: In my home search, I have a “built after 1978” filter because I almost bought a terribly remodeled 1920s death box with asbestos and a wonky, century-old beam holding the whole thing up. Built-in the 2020s sounds a lot better. According to this [Zillow study](=), the U.S. housing market is short 4.5mn homes or ~4 years’ worth of supply at May’s rate. Making the issue worse, housing affordability has only ever been this bad during the peak of the housing crisis. Take a look: [Source](=) Lastly, unaffordable housing creates all kinds of other issues that plague broader society. Homes are forced savings vehicles, but the harder they are to buy, the harder it is to get in on this passive saving. Unaffordable housing also slows household formation, reduces tax revenue, disengages citizens from their communities, increases crime, reduces spending on other goods and services, and disincentivizes pursuance of the American Dream. The housing market is the bedrock of the U.S. economy. And we’re blowing it. The Takeaway? I’ll say it again for the apes in the back—this problem is not going to change anytime soon. Loyal apes know I hate the government almost as much as I hate myself, but it’s areas like this where legislators should create some kind of incentive for builders to construct more single-family residences. Other countries face dire housing issues too, but unique to the U.S. and, to a lesser extent, Canada is the lack of medium-density housing. Common in Europe and other regions but practically non-existent in the U.S. since the earlier parts of the 20th century, medium-density housing combines affordability and convenience in a way that interstate superhighways really hate. This might be the first [actually useful thread](=) I’ve ever seen on X, so go check it out. We always like to kill two birds with one stone, but increased single-family and medium-density housing construction would kill a helluva more than just two birds. What's Ripe 🤩 Accenture (ACN) 📈7.3% - After all that circling back and putting a pin in it, Accenture created so much shareholder value in Q1 that they’re adding value to their own shareholders. - They may not have boiled the ocean, missing sales and earnings estimates, but plans to drill down on deliverables in Q2 synergized well with analysts. - Accenture did manage some efficiencies, with total bookings up 22% from last year. We’ll find out soon if they can juice those numbers into 2H24. Advanced Micro Devices (AMD) 📈4.6% - David beat Goliath, and on Thursday, he won once again as AMD surged while Nvidia tumbled and is no longer the largest stock in the world. - Piper Sandler threw AMD an alley-oop, naming the semiconductor supplier a “Top Pick” in the semiconductor industry. - The investment bank said AMD is looking into the light with “bright spots” coming later this year. What's Rotten 🤮 Trump Media & Technology Group (DJT) 📉14.6% - Shares in former President Trump’s social media company fell on Thursday as the company is issuing and allowing the sale of a huge amount of shares. - The firm received a notice of effectiveness from the SEC for its supplemental prospectus detailing a primary and secondary offering of shares. - The firm is diluting investors with up to 14.375mn new common shares and allowing for secondary sales of up to ~146mn shares. - 114.75mn of those represent Trump’s $3.2bn stake in the firm. The only problem is—that’s >$2bn less than they were worth at the start of this month. Aurora Cannabis (ACB) 📉3.5% - Like eating an edible, cannabis companies have been on an emotional roller coaster lately. This one fell off the tracks on Thursday. - Aurora’s quarterly numbers also came in just like eating an edible—higher than expected—but the firm’s outlook disappointed. - Revenue fell YoY, reaching the growth expected from cannabis firms. Other drugs are booming, however, so a lateral into fentanyl might be worth a shot. = Thought Banana 🤔 Neutered By Neutrality Like parents and their teenage children, the Federal Reserve rarely agrees with the market’s opinion. And when it comes to the path forward for interest rates, this time is no different. What Happened? As pointed out by Fidelity’s Head of Macro (a real [head of macro]() this time), markets are believing the Fed’s “higher for longer” narrative a little too much. Or, the Fed’s “higher for longer” narrative is bullsh*t, and the market smells it loud and clear. [Source]() Here, we can see the market’s expected path of interest rates measured by the SOFR forward curve. The Fed’s expectations are in purple, showing the latest dot plot. Basically, Timmer is saying that: - Markets expect a neutral long-term rate in the range of 3.5%-4% - The Fed expects a neutral rate of 2.5%-3% - The long-end of the yield curve remains at fair value, with the 10-year yield in the 4-4.5% range - If the Fed cuts below the market’s expected neutral rate, bonds will rally The Takeaway? The path of rates remains uncertain but is becoming more clear. Timmer expects the market’s outlook to be more accurate, and the Fed will gradually shift more in the direction of a higher neutral rate. But this could be a case of the Fed using its soft tool of expectation setting to make the market believe the neutral rate will be higher than the dotplot is guiding for, at least in the short term. Regardless, the Fed is doing a good job of keeping its communications confusing enough not to send yields tumbling lower, ruining the work it has done already to root out inflation and reduce credit growth. The battle is on. Place your bets wisely. The Big Question: What can we expect from the path of rates in the short and intermediate term? Are long-duration bonds the new meme stocks? Banana Brain Teaser 💡 Previous 🗓 Each year for 4 years, a farmer increased the number of trees in a certain orchard by ¼ of the number of trees in the orchard the preceding year. If all of the trees thrived and there were 6,250 trees in the orchard at the end of the 4-year period, how many trees were in the orchard at the beginning of the 4-year period? Answer: 2,560 Today 🕐 In country C, the unemployment rate among construction workers dropped from 16 percent on September 1, 1992, to 9 percent on September 1, 1996. If the number of construction workers was 20 percent greater on September 1, 1996, than on September 1, 1992, what was the approximate percent change in the number of unemployed construction workers over this period? Send your guesses to vyomesh@wallstreetoasis.com Wise Investor Says 🤓 “The importance of money flows from it being a link between the present and the future.” — John Maynard Keynes How Would You Rate Today's Peel? 😁[All the bananas](=) 😐[Meh]( 😩[Rotten AF](=) Happy Investing, David, Vyom, Jasper & Patrick [ADVERTISE]() // [WSO ALPHA]() // [ACADEMY]() // [COURSES](=) // [LEGAL]() [Unsubscribe]( IB Oasis Corp. (aka "Wall Street Oasis") 14435 Big Basin Way PBN 444 Saratoga, California 95070 United States