Charts that call my attention

There's no unifying theme to this post. It's just a collection of charts which I find interesting, some reflecting positive developments, others suggesting caution.

Chart #1

Chart #2

Chart #1 compares the year over year change in the CPI with the ex-shelter version of same, which makes up about ⅓ of the total CPI. Of note, the ex-shelter change in the CPI has been 2% or less in 13 of the past 16 months. If you believe, as I do, that the BLS's method for calculating housing/shelter inflation is flawed, then that means the Fed managed to tame inflation well over one year ago. As I've shown in previous posts, it looks like shelter costs, which drive ⅓ of the CPI, are based on the year-over-year change in US housing prices from 18 months ago; that is the only reason the overall CPI has not fallen below 2%. Chart #2 illustrates this. In the past year or so, housing prices have increased at a much slower rate.

Chart #3

Chart #3 compares industrial production levels in the U.S. and Eurozone. There are several remarkable things going on here. For one, U.S. industrial production levels haven't increased at all over the past decade! Two, Eurozone industrial production is tumbling in a way that suggests recessionary conditions. One reason for this is Germany's obsession with renewable energy sources at the expense of cheap and reliable natural gas and petroleum. Germany's electrical grid is seriously compromised as a result, and electricity costs have skyrocketed. Read all about it, courtesy of Robert Bryce, the best energy analyst I know. 

Key takeaway: the goal of renewable energy is a pipe dream, and seeking it out is kneecapping electric grids and retarding economic progress everywhere, penalizing the poor to satisfy the preening elites who will apparently make any sacrifice in the name of quixotically saving the planet. Cracks in the green energy coalition are already forming in Holland, and this seems sure to spread to other countries in coming years.

Chart #4

Chart #4 makes it clear that housing construction is depressed. Housing starts have been falling for the past two years, and builders see little hope in sight for improvement.

Chart #5

Chart #5 shows why housing is depressed. Mortgage rates have soared in recent years, and new mortgage initiations have plunged and stagnated. Very few can afford to buy homes given sky-high prices coupled with nearly 7% interest rates on mortgages. At the same time, very few homeowners want to sell, since it would mean giving up their 3% mortgages. This is an unstable situation that will eventually be resolved by falling home prices and/or falling mortgage rates.

Chart #6

Chart #6 compares the strength of the dollar (blue line, inverted), with an index of non-energy industrial commodity prices in constant (real) dollars. Up until a few years ago, commodity prices were strongly and inversely correlated with the strength of the dollar (i.e., a stronger dollar tended to depress commodity prices while a weaker dollar tended to boost commodity prices). This relationship broke down starting in early 2021 when inflation began to rise. I suspect that restrictive monetary policy will eventually restore this correlation—meaning commodity prices face downward pressure.

Chart #7

Chart #7 is constructed in a similar fashion to Chart #6, but instead of commodity prices it shows real gold prices. Commodity prices fell sharply beginning in early 2022, but gold prices started to soar in late 2023 in the wake of the Hamas attack on Israel. Unlike virtually all other commodity prices, gold prices have been making new all-time highs (on both a nominal and inflation-adjusted basis) ever since. I think the conclusion is obvious: geopolitical tensions in eastern Europe and the Middle East are close to red-hot. Gold is acting like the ultimate port in a storm that threatens another world war. Steven Hayward describes the mess we're in succinctly. Another thing this chart shows is that the dollar is relatively strong and strengthening of late; both the dollar and gold are benefiting from their status as safe-haven assets. 

Chart #8

I've been fascinated by the decade-long decline in small cap stock prices relative to large cap stock prices. On a total return basis, the S&P 500 index has more than doubled the return on the Russell 2000 index over the past decade! Chart #8 helps illustrate this, while also suggesting that the Fed's monetary policy tightening and easing cycles has had something to do with this. 

The blue line in this chart is the ratio of the Russell 2000 Small Cap Index to the S&P 500 Index. The red line is the inflation-adjusted (real) level of the Fed funds rate, which in turn is the best measure of how tight or how easy the Fed's monetary stance is (inverted to show that a rising red line corresponds to easier monetary policy and vice versa). It's not a perfect correlation, but it seems that Fed easing (which usually comes in the wake of economic weakness) inevitably leads to small cap stock outperformance. By now it's clear the Fed has embarked on an easing cycle. With Trump's policies promising a significant reduction in regulatory burdens (which would help smaller companies much more than larger companies), I think we may therefore be at the beginning of a period of small cap outperformance.

Chart #9

Chart #9 shows the astonishing outperformance of US equities vs. Chinese equities over the past 30 years. (Both y-axes have a similar ratio scale, and both are plotted on a logarithmic basis). China's economic model has failed utterly to compete with ours.