Existing home sales fell in August…two-year Treasury yields soar…Russia threatens to use nuclear weapons…lithium trade continues to climb
Today, let’s take a break from the Fed. Instead, let’s take a look at a few major stocks that are likely to impact your wealth.
Existing home sales and house 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. Year over year, sales were down 19.9% from August 2021.
It’s a sign that the scorching housing market may finally be cooling off.
On the price side, the median price of an existing home sold in August was $389,500. Although this is 7.7% more than a year ago, it is down from recent months.
Here is CNBC with more:
House prices historically decline from July to August, due to seasonality, but the drop this year has been larger than usual, suggesting a significant slowdown.
From June to August, prices typically fall by around 2%, but this year they have fallen by around 6%.
“The housing market is showing an immediate impact from monetary policy changes,” said Lawrence Yun, chief economist for real estate agents.
I think so – Fed rate hikes have taken the popular 30-year fixed-rate mortgage from 3% at the start of this year to nearly 6.5% today.
While most people are aware that this is a big leap, the real-world specifics of “how big” aren’t quite as clear.
For some perspective, let’s compare a 3% fixed rate mortgage to a 6% fixed rate mortgage on an $800,000 home.
The monthly payment difference is $1,139. Over the life of the mortgage, the 3% rate consumes $331,000 in interest payments, compared to $741,000 for the 6% rate.
So the higher rate sucks an extra $410,000 out of your pocket, or more than half the price of the house in our example.
And that’s 3% to 6%. As we noted earlier, the 30-year fixed rate mortgage is closer to 6.5% today.
This is the real cost of fighting inflation with rising rates.
Speaking of rate hikes, yesterday the 2-year Treasury yield topped 4% for the first time since 2007
As I write Thursday morning, it is at 4.129%.
Meanwhile, the 10-year Treasury yield is up to 3.69%, which is an 11-year high.
This dynamic – with short-term rates being higher than long-term rates – is something we have written about extensively here in the Digest. This is called an inversion of the yield curve, and it reflects fear and uncertainty about future economic conditions.
This “10/2 inversion” has always been considered a precursor to a recession. It predicted every recession from 1955 to 2018, although there were times when it reversed without the economy falling into recession.
Generally, the longer (in time) and deeper (amplitude) the reversal, the greater the ensuing recession.
Our latest inversion has existed since early July. The last time we saw a 10/2 reversal of this length or longer was in 2007/2008. It was the eight-month inversion that preceded the financial crisis.
And the time before?
Shortly before the peak of the Internet bubble in 2000. It lasted about a year.
In terms of its depth, we are at -0.51%. This is already quite a deep reversal and the trend suggests it will continue to widen.
However, if you look at this inversion from another angle, it’s a great way to put some money in your pocket.
While this reversal isn’t a good sign of what’s to come, high short-term yields offer cautious investors a safe way to generate a return on cash while they wait for other investment opportunities to arise.
For example, right now a four-week Treasury bill is yielding 2.67% annualized.
If you’re willing to extend your term to 13 weeks, you can get 3.27% annualized.
No, you are not beating inflation, but you are crushing the returns of other relatively “safe” places to put your money. For example, the national average annual percentage return on savings accounts is only 0.13%!
Additionally, these short durations mean that you can access this cash relatively quickly in case the market capitulates and you want to invest in stocks.
It’s the best of both worlds for your money: respectable returns without an extended lock-up period.
To put your money to work with short-term bills, go to TreasuryDirect.gov to open an account. You will directly link your bank account.
In the meantime, keep an eye out for the world’s wildcard variable: Russia.
Yesterday, Russian President Vladimir Putin ordered the active service of military reservists. He also called for an increase in arms production.
More importantly, he directly threatened to use 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.
It’s not a bluff. Those who try to blackmail us with nuclear weapons should know that the winds can also turn in their direction.
To those who allow themselves such statements, I would like to remind that Russia also has many types of weapons of destruction, the components of which are sometimes more modern than those of NATO countries.
It is a virtual certainty that Putin will not use a nuclear weapon – Moscow would be wiped off the map when the West reacts.
But we must take this threat seriously because it is proof that Putin feels cornered. He doesn’t need to use nuclear weapons to inflict massive pain on the world. He could step up his militarization of oil, or maybe block Ukraine’s food exports, or just use some heavy load non-nuclear weapon of some kind.
When it comes to Putin and your wallet, watch oil and commodity prices. They will be the most sensitive to high voltages.
We will keep you posted here.
Lithium trade continues to grow
Last May, we highlighted the massive demand for lithium due to the global transition to electric vehicles (EVs).
Electric vehicle batteries require huge volumes of metals, one of the most important of which is lithium. The problem is that the world is facing a severe shortage of lithium.
With that as a background, here The Wall Street Journal from the beginning of this week:
Soaring lithium prices are intensifying a race among automakers to lock in supplies and raising fears that a shortage of battery metal could slow the adoption of electric vehicles.
Lithium carbonate prices in China, the benchmark in the fast-growing market, are around $71,000 per metric ton, according to pricing firm Benchmark Mineral Intelligence. That’s almost four times higher than a year ago and just below the record set in March in yuan terms.
Back in our month of May DigestWe recommended investors consider three investments to play on lithium demand:
- The Lithium & Battery Tech ETF (BED)
- Albémarle (ALB)
- Livent Corp (LTHM)
Since then, these investments have increased by 4.3%, 16% and 17.2% respectively.
But selling is only part of the game. More importantly, from the looks of the global imbalance between supply and demand, we believe we will return to those earlier – and much higher – levels in the coming months. coming months.
We’ll keep you posted on all these stories here in the Digest.
Have a good evening,