Weekly Comment- June 9, 2022

June 09, 2022 | Nick Foglietta


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Real World Statistics

 

The weekly comments typically spend a lot of time focusing on markets, central banks and other financially oriented themes. This past weekend I found myself in a conversation with a friend and somehow we drifted into these types of themes and she said, “I really don’t care about that stuff, I’m just trying to live my life and it’s not easy.” (Paraphrased).

So this week is dedicated to “real world statistics” or better said, “Real life.”

The first chart looks at food inflation for food in the grocery store vs. in a restaurant.

 

The move higher in restaurant prices (away from home) has been fairly steady but is now accelerating. But look at the cost of eating at home!

Obviously eating at home is not a discretionary expense. Fixed budgets cannot easily incorporate rising food costs. It is a major reason interest rates keep rising. Food prices require stability.

The next thing I want to show you is a graphic from a survey by Parent’s Together Action looking at food spending trends. What you will notice here is a direct result of the issues seen in the graphic above.

When families are financially stretched the last place they tend to cut back is food budget bought from the grocery store. Therefore, this survey suggests a lot of other cutting back has taken place before they have arrived at the decisions outlined above.

The next chart is more of a “financial” chart but it does validate my point mentioned in the paragraph above.

 

 

When the economy slows quickly, consumers start to cut back across their entire budget.

One of the most interesting behavioral realities of 2022 has been the surge in travel by many. It completely makes sense that people were bottled up for two years and decided they really needed to take a vacation.

What makes it interesting is that the data shows that travel plans were funded out of:

  1. Excess savings that have now been drawn down to record lows and
  2. Home equity from fresh new highs in the real estate market.

I cannot tell you how many people I have heard say “you only live once and who knows when I will get a chance to do this (travel) again” since the end of the COVID travel restrictions.

Expensive trips tend to have a large lead time to plan.

So it will be interesting to see how travel spending holds up in coming quarters. One sign of how this trend might be going is to look at the number of Google searches for different categories. (Below)

 

Definitely less searching for discretionary spending ideas.

Canadians are carrying near record amounts of debt against their inflated homes and real estate investments. We can’t leave this snapshot of things without a chart of the rise in interest rates.

We will use a 5 year Government of Canada bond for our example. Basically all of the interest rate charts have a similar feel to them. Going from an all-time low of 0.32% to 3.22% as I write is quite amazing!

 

 

Lastly, it is tough not to look at housing costs as part of this discussion. The Redfin data below shows how the cost for the average priced home at the average mortgage rate has shot up in 2022.

 

In summary, food and shelter prices have risen dramatically. I’m pretty sure you already noticed the higher gas and oil prices…and interest rates are causing higher carrying costs on all types of floating rate debt.

Even with all of those historical increases factored in, consumers went travel crazy in the last year. By doing so, they depleted their spending power going forward.

Where these trends head next is anybody’s guess?

Good quality, dividend paying companies in Canada have held up relatively well during this unique time.

Let’s see what the summer brings….