What the Bond Market Is Telling Us About the Biden Economy; Hedge fund king Bill Ackman bets on interest rate rises crashing markets; 30-Year Mortgage Rate Tops 3% for First Time Since July; Where Have All the Houses Gone?; Winter tires

1) Interest rates are rising, reflecting increasing optimism about robust economic growth going forward as we emerge from the pandemic.

This New York Times article does a good job of explaining what's happening and what could go wrong: What the Bond Market Is Telling Us About the Biden Economy. Excerpt:

While Washington debates the size of a new economic rescue plan, the bond market is sending a message: A meaningful acceleration in both growth and inflation in the years ahead looks more likely now than it did just a few weeks ago.

That would be mostly good news, suggesting an economy recovering quickly from the pandemic. Interest rates remain very low by historical standards, even for the longest-term securities. Bond prices imply that inflation will be consistent with the Federal Reserve's target of 2% annual rises in consumer prices, not a more worrisome spiral.

But the surge in rates has brought an end to a period of several months when borrowing was essentially free, seemingly far into the future. For the Biden administration and the Federal Reserve, that implies that the free-lunch stage of the crisis is ending, and there could be harder questions ahead.

In particular, it means that the potential downside of bad policy – federal spending that doesn't generate much economic activity, for example – is more significant than it was as recently as December.

"We're at a place where the markets are starting to grapple with the question of whether there are trade-offs between more stimulus today and potentially higher rates and more inflation down the road," said Nathan Sheets, chief economist of PGIM Fixed Income and a former official at the Treasury and the Fed.

2) One risk of the unprecedented fiscal and monetary stimulus we've engaged in to offset the effect of the pandemic is rising inflation and interest rates, which could depress stocks.

Pershing Square's Bill Ackman is hedging this risk, according to this article in The Telegraph: Hedge fund king Bill Ackman bets on interest rate rises crashing markets. Excerpt:

"We will see a spike in inflation as early as the middle of the year," Mr. Ackman said. "It is already starting to happen. At some point if rates move enough than it becomes a market risk event."

Mr. Ackman said he had bought "instruments that pay off in a large way in the event of a surprising move in rates".

"There is a finite amount of money we can lose which is not material to the fund and if we are right on rates then we make a lot of money," he added. "We want to protect ourselves against huge market-moving events. We look to buy insurance against disaster."

The hedge fund manager, whose investment trust was promoted to the FTSE 100 last year, said the American government's huge $1.8 trillion stimulus package was sowing the seeds of surge in inflationary pressures.

"That is happening at a time when rates are zero, coupled with the psychological effects of being locked up for a year. That combination will lead to a lot of demand in the economy. Supply won't be able to meet that demand," he said...

Mr. Ackman said a continued rise in inflation would spell more pain for investors in these sorts of companies. "In order to justify the high price of high-flying tech companies you need to have enormous continued growth and eventually have them generate profits," he said.

"The current level of interest rates mean that investors are willing to wait a long time for companies to generate lots of money. A move in interest rates is a big threat to growth companies."

3) It will be interesting to see the effect of rising interest rates on the housing market (see this article in yesterday's Wall Street Journal: 30-Year Mortgage Rate Tops 3% for First Time Since July).

Obviously, higher rates mean less purchasing power, but I think the housing market will continue to be robust thanks to a strong economy (and presumably, higher wages) and extremely tight inventory.

My wife and I saw this last week when we were in Park City, Utah. While we love New York City and have no plans to move, we liked the area (especially Deer Valley) so much that we met with a real estate agent to learn more about the possibility of buying out there. She told us that the market is white-hot, which didn't surprise us given how many people are looking to get out of big cities – either permanently or at least for part of the year.

Nevertheless, I was surprised to see just how little housing inventory there is nationwide, as this New York Times article discusses: Where Have All the Houses Gone? Excerpt:

Much of the housing market has gone missing. On suburban streets and in many urban neighborhoods, across large and midsize metro areas, many homes that would have typically come up for sale over the past year never did. Even in cities with a pandemic glut of empty apartments and falling rents, it has become incredibly hard to buy a home.

Today, if you're looking for one, you're likely to see only about half as many homes for sale as were available last winter, according to data from Altos Research, a firm that tracks the market nationwide. That's a record-shattering decline in inventory, following years of steady erosion.

And it's one flashing sign that the housing market – which can defy basic laws of economics even in normal times – is acting very, very strangely.

The article also includes these three fascinating charts:

All this certainly makes me even more bullish on the homebuilder stock we recommended a month ago in our Empire Stock Investor newsletter!

And it's trading below our buy-up-to price... You can find out how to gain immediate access to this recommendation right here.

4) My wife and I drove home from New Hampshire yesterday and were once again thankful that we bought winter tires for our car. Speaking of which, a friend sent me this e-mail last week:

I just wanted to send a quick thank you for your e-mail on winter tires. My wife and I recently bought a weekend home outside NYC, which has a driveway that goes up a steep winding hill. Between your advice about the safety benefits and my worries about trying to drive up that hill covered in snow, we took the plunge and purchased winter tires.

I found an awesome service, RoadRunner, that comes to your home and changes the tires for you. It was super easy. We got the Bridgestone Blizzak tires, which were highly rated in Consumer Reports, and had them installed before the first big snow storm of the year.

I've driven the car during the recent storms and even tested the tires by braking hard on side roads that were still snow covered, and the tires perform amazingly well.

My wife has driven the car several times during and after the big snowstorms we've had, and I've been greatly comforted by having winter tires to help keep her safe.

Thanks again for your super helpful e-mail!

Best regards,

Whitney