Inflation Rises Along With Housing Hopes
Before we get into the release of the Consumer Price Index (CPI), and our Composite Inflation Index, I want to clarify that I look at inflation a little differently than most. As an investment manager my job is not to beat some random benchmark index from one month to the next or one year to the next. My job is to make sure that my clients assets adjust to keep the same purchasing power in the future as they have today. This entails two key components: the first is the protection of the underlying principal for dramatic draw downs and secondly, to grow the assets at a rate to offset the "cost of living" adjustments to my clients in the future.
Therefore, we are more focused on the components that our clients spend the most on from one month to the next such as food, gasoline, apparel, medical, transportation and services. As such the headline inflationary number of the CPI index is more much important to us as investment managers than the core calculation of the index. I am not saying that the core index is not an important consideration it is just that with food and energy consuming more than 22% of wages and salaries the headline number is more telling of what is happening at our client's homes.
With that being said the release of CPI this morning showed inflationary pressures continuing to build in the headline number. There have been sharp increases recently in rent prices, food and beverages, apparel, transportation costs, medical care and services as producers are passing along rising costs to protect their profit margins. These price increases directly impact consumers ability to spend which is why inflationary pressures are a major concern to the economic outlook.
Take a look at our composite inflation index above. What is important to note is that headline inflation is now at levels that are normally associated with economic slowdowns as consumers began to struggle with their purchasing power. With savings already on the decline, wages stagnant and the economy weak these inflationary pressures could not be coming at worse possible time.
While energy and food prices are volatile, the use of those commodities by consumers is inescapable. However, even if we just look at the core inflation components those are not only rising as well but also entering the levels that begin to crimp the economy as well. Bottom line, inflation pressures are mounting and qucikly. With the consumer already weak due to lack of wage growth, limited access to credit and low savings levels the impact back to the economy could come more quickly than it has in the past.
Yesterday, we penned a piece called "Snipe Hunting In Housing" where we stated that "Home builders have "hope", which springs eternal, that somehow an over leveraged, over built and bleeding market will somehow began to grow again. The problem is that household formations are at near record lows, unemployment remains at historically high levels and banks are in death throws with months upon months of supply of foreclosed properties sitting on their books. The clearing of the excess will take far longer than most imagine."
Today we are seeing the same exuberance over a release of housing starts and permits. September housing data showed that starts rose 15% after declining 7% last month which works out to a relatively mild increase of 1.4% in the last two months during the seasonally strong season for starts. The comeback in September was led by a monthly 51.3 percent surge in the multifamily component, or apartments for rent, while the single-family component edged up only 1.7 percent after a 2.8 percent decrease the month before. Permits plunged 5% for the month which may very well be indicative of a reversal in next months housing starts data.
However, while the market got all excited this morning immediately after the release of the data, the big question is whether the demand exists to absorb added supply. As we stated yesterday that bit of data is still quite elusive and considering that both starts and permits are running at historically low levels minor upticks in the data at these levels is more statistical noise than anything else.
What is crucially important is that if you want to buy a new house you need a job to qualify and pay for it. Gone are the days of "No Job, No Income and No Money Down" loans which is going to make it incredibly difficult in a high unemployment economy for homebuilders to work off the excesses of properties already on the ground much less trying to build new ones at the same time. Furthermore, the competition from distressed sellers of existing properties will continue to drag on the home builders ability to move inventory through the markets.
The bottom line, as we said yesterday, hunting for the bottom in housing has been as elusive as finding a "Snipe". With all of the overhangs in the economy, as we stated above, this problem is going to take quite some time to resolve.