This Space Is Getting Hot

There are things you can replace

And others you cannot

The time has come to weigh those things

This space is gettin’ hot

You know this space is gettin’ hot

Althea (Grateful Dead)

John Mayer never knew anything about the Grateful Dead’s music until he was checking out songs on Spotify and came across Althea. As an aside, this version is considered one of the best.

 

He said that when he listens to guitar parts, he can almost always visualize the chords and hand movements along the neck of the guitar. For whatever reason, when he heard Althea, he could not visualize how Jerry Garcia was playing the song. This not only perplexed him but, more importantly, intrigued him as well. John Mayer followed Issac Asimov’s assertion.

“The most exciting phrase to hear in science, the one that heralds new discoveries, is not ‘Eureka!’ but ‘That’s funny…’”

And why did he say this? I encourage you to watch the video associated with this post, but here is what the author says about the importance of “That’s funny.”

“That’s funny…” is the sound of something catching in your brain. A contradiction, an anomaly, just plain weird: something doesn’t fit what you expected. That something can niggle away at the back of your mind. If you let it, “That’s funny…” can lead to an insight and a brilliant new idea.

Mayer’s perplexity regarding Althea led him to start going down the rabbit hole of Jerry Garcia’s music and the Grateful Dead catalog, particularly live performances. The rest is history as he was eventually introduced to Bob Weir, and ultimately, Dead & Company was formed. It has been incredibly successful and extremely liberating for Mayer and helped catalyze many creative breakthroughs and enhance his live performances. 

Dead & Co. toured for eight years and called it quits from a touring perspective in 2023. Lo and behold, however, with the opening of The Sphere in Las Vegas and the ending of U2’s very successful run of shows there, another perfect match ensued as Dead & Co. has the fan base that can fill multiple nights of a 19,000-seat venue. Twenty-four booked shows later, the band will embark on another phase of its creative expression when it hits the stage in May at this incredible venue. 

I bring all of this up because the song Althea has the line referenced at the beginning that,

“This space is gettin’ hot. You know this space is gettin’ hot.”

The market’s perception of the inflation space is that of one getting hot as well. Treasuries sold off quite significantly after the inflation misses last Wednesday’s for CPI as well as Friday for PPI.

10-year yields bottomed at the end of January at 3.82% intraday, and since then, they have gone up in almost a straight line to 4.29% last week.

The more sensitive Treasury to Fed policy is the 2-year. This has gone up even more by approximately 0.53% versus 0.47% for the 10-year. And once again, the market has scaled back the timing and number of rate cuts, as this chart shows. The market took out one rate cut for 2024.

The rest of this post will show how the inflation space is heating up while also pointing out a housing inflation anomaly that needs to be watched closely.

Although supply chain pressures have definitely lessened and the trend is going in the right direction, it is still elevated relative to its pre-Covid trend. 

Turning to CPI itself, this shows how month-over-month CPI has increased over the last four months, although it is still within the pre-Covid range. The market, however, was not happy with the index going higher than expected.

And when stripping out food and energy, Core CPI showed an even greater acceleration. 

Another subset of measuring inflation is called Supercore CPI, which represents core services excluding housing, and this, too, is running hot.

And here is the real head-scratcher, which is Shelter. One can see how it has accelerated to almost Covid levels, which is honestly quite shocking.

These next two graphs show how anomalous the housing data is. Housing CPI is made up of two primary components which tend to correlate closely with each other. Not this time, however, in which they have deviated significantly.

Finally, this is the money chart from my perspective since it represents the reality of what we’re seeing in the apartment space. New leases being signed among renters are deflating, which, if history is any guide, should flow through to one of the components of housing CPI. 

And while housing CPI should start to see much lower growth rates in the months ahead, I also don’t want to ignore that the Supercore CPI Index, which excludes housing, is still running very hot, even higher than most readings during Covid.

I will wrap up this post with a short clip that I think reflects both the market’s and the Fed’s concern about inflation. I have become increasingly convinced, like a lot of people, that the structural forces keeping inflation low may now be in reverse and that inflation space is not only getting hot but may continue to do so in the years ahead.