Juggling Dynamite

December 14 is expected to mark the US Fed’s 7th consecutive rate hike this cycle with a 50bp increase that will take the fed funds rate to 4.25-4.50%, the highest since December 2007. Chair Powell says they intend to hike more in 2023. We shall see!

As of last Friday’s close, the 10-year minus 3-month US Treasury yield spread reached -83 bps. This degree of curve inversion has only happened three times in the previous 60 years, as shown below: 2000 (recession followed in 2001), 1979-82 (recessions in 1980, 1981-82) and 1974 (recession 1973-75). A 60bp inversion in February 2007 preceded the  “great” recession (December 2007 to June 2009).
Higher short-term rates increase cash and bond yields to the benefit of savers. For debtors, real estate and equity owners, the opposite is true.

All four of the previous steepest yield inversions preceded the deepest bear markets of the last 40 years when stocks underperformed government bonds by 32 to 65% (as shown below courtesy of Absolute Strategy Research) after the US Fed had paused its tightening efforts (the last pause meeting before the first cut is marked below).
Worse this time, after a 40% leap in the M2 money supply from 2020-21, the last seven months have marked the sharpest decline (-1.5%) since at least 1959. As shown below (courtesy of Zerohedge), the upside is that inflation (CPI) is set to follow M2 lower. Plunging liquidity in the financial system is sparking the fastest decline in single-family home sales of any Fed tightening cycle on record (2022 in red below courtesy of Macro Alf), along with cascading strife through real estate-focused funds and investment products.

This makes macro sense because, as shown below, courtesy of Charlie Bilello, the US median housing payment now takes 46% of the median household income compared with 42% at the last housing bubble peak in 2006. After 2006, US home prices fell 26% nationally until median housing payments reached 26.7% of the median household income. Median prices stayed less than 33% of household income until the 2021 explosion. This time a median price drop of 26% would only take US national home prices back to where they were in the fall of 2020. That would be a modest retreat in the big picture.

Peer-reviewed scientific studies keep finding that lifestyle choices like minimizing processed foods with a focus on plant-based nutrition, and minimizing alcohol and sugar, while maximizing physical and mental exercise and sleep all extend both the quantity and quality of our life, despite any genetic predispositions. This is a widely underappreciated message.

Chris Hemsworth’s new mini-series Limitless (streaming on Disney) offers an entertaining overview on point. He discussed it on Good Morning America.

In the new National Geographic show, “Limitless with Chris Hemsworth,” the “Thor” actor discovered he has a risk of developing Alzheimer’s eight to 10 times higher than the general population. Here is a direct video link.

A recent deep dive into nutrition and health on the Huberman Lab podcast is also illuminating. The segment can be listened to on audio-streaming platforms like Spotify here. The piece is two hours long but can be consumed in shorter snippets.

It can also be viewed on Youtube if preferred. Here is a direct video link.

Chris Palmer, M.D., is a board-certified psychiatrist and assistant professor of psychiatry at Harvard Medical School. He explains the important connection between nutrition, metabolism and mental health and his pioneering work using the ketogenic diet to successfully treat patients with various mental illnesses, including depression and schizophrenia. Dr. Palmer explains how the ketogenic diet is an evidenced-based treatment for epilepsy, mimics the fasted state and can offset the cognitive decline in Alzheimer’s. He describes the key roles of mitochondria in mental health, how certain conditions likely arise from mitochondrial dysfunction, and how low-carbohydrate diets increase mitochondrial turnover to improve mental health.

The host in this segment is awkward, but Grantham’s responses are worth a listen.

When it comes to fighting climate change Jeremy Grantham is optimistic about technology – but worried about timing. Known widely for his acuity in identifying bubbles, the British investor contends that the one created by our dependence on fossil fuels is about to pop. He’s on a mission to make green energy cheaper, faster and is well on his way. After a lifetime spent thinking about resources, he’s using his to power the development of green technology. Here is a direct video link.