Weekly Reflection for December 1, 2023

The Week - An Update in Charts

The Dow Jones had a stand-out week, especially compared to its index peers. Investors continued to be giddy about interest rate cuts, strongly assumed to be coming next year given falling inflation metrics. Eurozone inflation is also falling and clocked in at 2.4%. The decline in stock prices that plagued world markets throughout the late summer and fall has decidedly reversed trend.

It is happening - inflation really is trending down. After sitting in the 4-6% range for most of the last two years, inflation is now 3.5% year-over-year based on the core Personal Consumption Expenditures (PCE) Index. "Core" means that food and energy are excluded from the calculation.

Stocks are up in large part because inflation is down and investors are cheery over the prospects of lower rates. The Federal Reserve is now expected to start cutting interest rates below 5% in the late spring. The Fed Funds rate is currently 5.25%.

Brazil, currently the 7th largest producer of oil, was recently invited to join OPEC+ (Organization of the Petroleum Exporting Countries). OPEC+, led by Saudi Arabia and Russia, also announced plans for more production cuts in an efforts to keep prices propped up. It will be difficult to lose Brazil as an independent market. But growing U.S. production has led to a little glut in oil. China is still producing but not using nearly as much due to its sluggish economy. These two factors have made OPEC's efforts to raise global oil prices more challenging.

Oops, Target, your ruse was uncovered. A savvy shopper posted on TikTok her discovery that the special Black Friday sales matched the advertised price of the product the day before. Millions of people saw the video showing that Target's special deals were not discounted prices at all. Target says the sales prices were posted early. So now there are Black Friday deals and "early", or essentially the same, Black Friday deals.

Mastercard reported that credit card sales were up 2.5% over last year on Black Friday. But this is a warning to Target that they will have to do better to convince buyers that sales are really worth going for now.

Charlie Munger, the equally sage and witty partner to Warren Buffet, died last week at age 99. He had an estimated net worth of $2.2 billion according to Forbes. Munger apparently never did sign The Giving Pledge that was started by Buffett and Bill Gates, saying that essentially he had already transferred so much to his children that he had violated the premise of giving most of one’s wealth away to charity.

Munger is not alone. Per UBS Group AG’s annual study, a greater number of newly minted billionaires are accumulating their wealth via inheritance and not by their own entrepreneurship. More than $5 trillion is expected to pass to heirs from a thousand aging billionaire entrepreneurs in the next 20-30 years. And, unless The Giving Pledge can convince them otherwise, those heirs are less philanthropic than their parents and grandparents, per UBS.

For the Non-Fiction Reader on Your List

Bill Gates reportedly reads at least 50 books a year and in what has become his annual tradition, he posts on his website GatesNotes.com his favorites ahead of the holidays. As has been his norm, the top three this year are non-fiction.

The Song of the Cell by Siddhartha Mukherjee

The song is about the cells in your body and how our understanding of them has evolved in the last 400 years. Gates says learning about how everything we do, healthy or sick, good or bad, comes down to our cells. Part history, part foretelling the future, the author discusses how scientists’ manipulation of cells is leading to new therapeutic medical breakthroughs. More of a thrilling story of science rather than a lecture, Gates says the book will help us better understand our own body.

Not the End of the World by Hannah Ritchie

“Everyone who wants to have an informed conversation about climate change should read this book,” Gates says. The title alone lets us know that this book wants to be different. “Refreshing” is how many reviewers described it and the author is determined to ignore the doomsayers, instead encouraging her readers to keep on with the work of improving our planet’s health.

Invention and Innovation: A Brief History of Hype and Failure by Vaclav Smil

Gates says that he has read all of Vaclav Smil's 44 books and this is the latest by the Canadian professor. Another history lesson of sorts, this book takes a deep look at promising human innovations that turned out to be disastrous, disappointing and disappearing. He concludes with his own wish list of what would be most helpful to us today. Smil urges us to be better and do better. This is his “perhaps most readable book” says his publisher.

For more of Gates' favorite songs, shows and lectures, visit the rest of his list here: https://www.gatesnotes.com/Holiday-list-2023

The 3 Home Expenses Bugging Buyers

Today renting is often a better financial decision than buying a home, says Mark Zandi, the chief economist of Moody’s Analytics in The New York Times. With mortgage rates still around 7.3% for a 30-year mortgage, stubbornly high home prices and agent commissions, buying has never been so expensive.You can do the math yourself if you are not convinced. Take the annual cost of rent and multiply it by 16; the product is the most a renter should pay for a house. If a potential buyer can not find a house for less than the comparable annual rent times 16, it is better to keep on renting.

Realistically home prices should be falling. But they are not, even as borrowing rates have soared and wallets are getting thinner. Part of the problem is emotional – sellers get attached to their homes and price them according to what they feel it is worth. Unwilling to reduce the price, they would rather take it off of the market. Prices remain higher today than when mortgage rates were very low.

Not helping high prices and high mortgage rates are broker commissions which are typically 5.5% of the home’s sales price, which is paid by the seller and split between the buyer and seller agents. In 2020, Americans paid over $85 billion in residential real estate commissions. This sum is much more than the commission in other countries - Germans pay 4.5%, Australians pay 2.5% and the British pay 1.3%.

A fight over commissions has been in the courts lately. The powerful real estate lobbying group, National Association of Realtors (NAR), was sued by some real estate firms who alleged that the group, along with two other real estate companies, colluded to keep commissions artificially high. A court in Missouri found that NAR is liable and awared $1.8 billion in damages. NAR plans to appeal the verdict.