A recent hawkish speech by Fed Chairman Jay Powell sparked the first dip for risk sentiment after an eight-day win streak. Added to a softer-than-expected 30-year bond auction, it drove yields higher and applied pressure across nearly every sector, with the exception of semiconductors. Now, I want to share some brief thinking on related macro themed areas such as housing, inflation, and US-China geopolitics, writes Larry Cheung, founder of Letters from Larry.

When it comes to housing in the US, I frankly believe that the current rise in home prices is superficial and based on illiquid market pricing. One of the main reasons that consumer spending in the US has remained so robust is due to homeowners feeling wealthier due to increasing home values.

This is particularly potent as most Americans hold about 60-70% of their net worth in housing. With increasing prices, Americans feel confident with consumption. But this landscape is subject to change, and when it does, it happens in very subtle ways.

The housing sector consists of new home sales and existing home sales, and right now, new home sales are taking on an increasingly large piece of all homes sold – roughly 30.6% as of the last quarter. These figures are increasing rapidly from 25% just a few quarters ago as homebuilders are using very aggressive incentives to lure buyers to buy their newly constructed homes (and away from the existing home market).

New Home Sales
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This macro housing shift away from existing home sales and towards new home sales means that Americans who believe their existing homes can command the high-end of the asking prices on public sites such as Zillow may not have realistic expectations. With the median days on the market for existing homes creeping up in many US cities, a silent rise in unemployment (now in motion) may cause this market’s current illiquidity to result in sharply lower asking prices if owners need to convert housing to cash.

For this reason, the housing market operates in a rhythm of “slowly, then all of a sudden.” Unless homebuyers are prepared to pay all cash for houses, I think real estate is far from desirable here as an asset class.  

As for inflation, just a brief comment here: I expect US inflation figures to come in subdued in the coming months as oil and energy prices have collapsed (they are a 7-9% weight) and this should keep the Fed’s hawkishness in check for the coming FOMC meetings. 

Finally, US and China diplomats are working out constructive plans to manage competition in a way that avoids conflict as I talked about in a previous Daily Market Note. I expect China ADRs to begin stabilizing in the coming weeks. 

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