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Charlie Bilello’s 5 Charts to Show Your Clients: August 2021

Each month, we sit down with Charlie Bilello, Founder and CEO of Compound Capital Advisors, to discuss the most important and current market trends for advisors and their clients. Illustrated through visuals that Charlie creates using YCharts, these trends and topics make for excellent talking points in your own client communication. Click here to register for the next “5 Charts to Show Your Clients” webinar on Wednesday, September 29th.

YCharts users can access all of Charlie’s visuals as pre-built templates in the Fundamental Charts tool. Not a client? Reach out or start a 7-day free trial.

Watch the full discussion here, or read on for highlights from the August 24th webinar:

 

Just How Transitory Is Higher Inflation?

If you had a dollar for every time you heard the phrase “Inflation is transitory”—whether it was on social media or from Fed Chair Jerome Powell himself—you would have a lot of dollars. And in the context of purchasing power, more dollars would be helpful right now! Both the US Consumer Price Index (CPI) and Core Consumer Price Index are at or near their respective highest levels since the early 1990s:

US Consumer Price Index and US Core Consumer Price Index YoY since 1990 through August 2021

Download Visual | Modify in YCharts

If inflation stays above 3%, then “that’s a change” from historical levels, says Charlie. He attributes higher inflation to persisting supply shortages and high consumer demand for products that depend greatly on the parts in short supply, such as vehicles’ need for semiconductor chips.

Charlie also forecasts price pressures will remain elevated. In the vehicle example, he cites significantly lower production numbers from major auto manufacturers Ford (F), Toyota (TOY), and General Motors (GM), which create a supply imbalance in the wake of sustained consumer demand and push car prices higher.

Rising inflation has impacted not only consumers, but investors as well. The Real 10-Year Treasury Rate—the 10-Year Treasury yield less the Consumer Price Index—is below -4% for the first time since May 1980.

Real 10 Year Treasury Rate on July 31st, 2021

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Translation: at this current moment, 10-Year T-note holders are losing over 4% thanks to inflation, nor have they been compensated less since May 1980. Charlie’s two big questions: Why haven’t bond investors sold treasuries so as to push yields higher? And why do they continue to purchase treasuries at such low nominal yields? 

That said, one shift in Fed policy that would change Charlie’s outlook on both the bond market and inflation is any tapering of the central bank’s monthly purchasing of $120 billion in treasury and mortgage bonds over the next six to nine months, barring any economic or market downturn.

 

“China Crash” vs. “The Freedom Premium”

The sheer outperformance of US markets has been known to advisors and investors for more than a decade, but the value of international tilts have been a popular talking point as of late. The chart below illustrates a ratio between the total return levels of a broad Chinese equity basket vs. one of the United States, dating back to 2000.

China vs. US Equity Returns from 2000 through 2021

Download Visual | Modify in YCharts

Had you been fully-invested in either Chinese or US equities from the beginning of 2000 to today, your returns would be about equal. Charlie points out that while many think China has always underperformed relative to the US, the former was an attractive locale for returns from 2001-2007, where in 2007 both GDP growth peaked at 14% and market valuations were double those of the US. China’s YoY GDP growth has slowed back to mid-to-high single digit figures, and Charlie notes that the US CAPE Ratio is now double that of China’s, essentially creating a flip-flop of where valuations stood in 2007. Will history repeat itself?

Furthermore, in the ETF total returns table below, which Charlie created using the YCharts Excel Add-in, he deduces that investors are placing a “premium on freedom.” Charlie points out that countries with greater economic freedoms and democratic elections—both political and in the context of shareholder rights—have posted higher returns over the past decade.

World Stock Market Returns from 2011 through 2021

Download Table

Not only is the “freedom premium” at play for large nations like the USA, Netherlands, and Switzerland, but also in smaller countries such as Taiwan and Hong Kong who too are atop the list. Charlie contrasts those Asian economies with China’s “state capitalism”.

 

Join us for next month’s “5 Charts to Show Your Clients” with Charlie Bilello on Wednesday, September 29th. Click here to register for the webinar.

For YCharts clients: all charts discussed in the webinar are available as templates in Fundamental Charts for further analysis. Not a current client? Start your free trial.

 

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