Category Archives: Inflation

Bitcoin Is Not Gold 2.0

It's not often we can use math to definitively shut down a claim being made to pitch an investment, but here we are.

The pitch involves the cryptocurrency Bitcoin (BTC). The claim, most famously made by the Winklevoss brothers in 2017, is that "Bitcoin is Gold 2.0". Here's a more recent clip of the brothers repeating their pitch on CNBC on 10 July 2019:

While they may be among the most prominent pitchmen for Bitcoin, they're far from alone in claiming Bitcoin has gold-like investing properties. Here's a selection of articles we turned up from 2013 through 2022 where analysts have made similar claims:

Let's address the elephant in the room. For Bitcoin to be Gold 2.0, it needs to share gold's top investing characteristic: it needs to provide an effective hedge against inflation by rising in value as inflation reduces real yields. Gold, or as BTC enthusiasts would describe it, Gold 1.0, does exactly that when real interest rates fall and become negative as the rate of inflation grows to exceed nominal interest rates. Here's the chart we featured in previous analysis showing the price of gold doing just that, rising in value as real interest rates decline in value and vice versa.

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 17 March 2022

Now, here's a chart that presents the value of Bitcoin with respect to the same data for the inflation-adjusted yields of 10-year Constant Maturity U.S. Treasuries over the period from 17 September 2014 through 21 April 2022, covering nearly the entire period where we can identify that the claim that "Bitcoin is Gold 2.0" has been prominently made. Spoiler alert: Bitcoin is not Gold 2.0!

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 17 March 2022

The chart of Bitcoin's "relationship" with real yields looks like something that could have been created on an Etch-a-Sketch. The value of BTC either moves sideways or up-and-down.

That observation aside, we see three main periods for Bitcoin's valuation history in this chart:

  1. 17 September 2014 to 7 October 2020. The price of Bitcoin in U.S. dollars has virtually no relationship with real interest rates, despite substantial changes in their value during this period. In math terms, the slope of the trendlines whenever real interest rates are changing in value is nearly equal to zero, because the value of Bitcoin isn't changing with them.
  2. 8 October 2020 - 6 January 2022. This is the period when the biggest changes in the valuation of Bitcoin has occurred, and we find that while Bitcoin's value has ranged all over the map from nearly $11,000 to a peak of $67,567 during this second period, it's matched against very little change in real interest rates. In math terms, the effectively vertical movement in Bitcoin's valuation is not defined with respect to changes in real interest rates. In practical terms, whatever moved Bitcoin prices during this time was unconnected to how inflation affected interest rates.
  3. 7 January 2022 - 21 April 2022. Shown as the green circles on the chart, we find once again there is little change in the value of Bitcoin even though real interest rates have substantially changed. Just like in the first period, the value of Bitcoin shows little to no, or dare we say, zero connection to changes in real interest rates.

For the record, we're just the latest to conclude that Bitcoin is not Gold 2.0, though perhaps the first to show it using tools available to middle and high school algebra students. Here is other analysis that finds Bitcoin lacks gold's most attractive investing properties for extra credit reading:

With respect to changes in inflation-adjusted interest rates, we've demonstrated the value of Bitcoin either moves sideways or up-and-down with little rhyme or reason, making it very different from how gold has performed during the period of their shared existence. Bitcoin is not Gold 2.0.

Previously on Political Calculations

References

Federal Reserve Economic Data. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Inflation-Indexed. [Online Database (Text File)]. Accessed 22 April 2022.

Yahoo! Finance. Bitcoin USD (BTC-USD), 14 September 2014 through 21 April 2022. [Online Database]. Accessed 22 April 2022.

Raw Affordability of New Homes Holds Steady at Record Low

The raw affordability of new homes held steady at record low levels in February 2022. While median household income increased, that increase kept pace with the ongoing escalation of new home prices.

The following chart confirms that assessment. We find median household income stayed at a record low of 17.8% of the median sale price of a new home in February 2022, effectively tying for the lowest level of affordability by this measure on record.

Relative Affordability of New Home Prices | Annual: 1967-2020 | Monthly: December 2000 - February 2022

Extending out several more decimal places, January 2022 edges February 2022 for having the lowest-ever level of raw affordability for new homes in the U.S.

Taking the average 30-year conventional mortgage rate for February 2022 into account however, we find the mortgage payment for the median new home sold in February 2022 dipped slightly as a share of the typical income earned by an American household. Alas, not enough to break the uptrend that began after the Coronavirus Recession ended in April 2020. The next chart shows that outcome:

Mortgage Payment for a Median New Home as a Percentage of Median Household Income, January 2000 - February 2022

The average mortgage payment for a median new home sold in February 2022 represents 29.8% of the income for the median American household.

To close, we have a bonus chart for this month's analysis, which visualizes the trailing twelve month averages for both median new home sale prices and median household income.

U.S. Median New Home Sale Price vs Median Household Income | Annual: 1999-2020 | Monthly: December 2000 - February 2022

Notice how new home sale prices suddenly accelerated after March 2021, when President Biden's American Rescue Plan stimulus checks started flooding into the U.S. economy? The median sale price of new homes has increased by $56,975, far outstripping the $4,611 increase in median household income. But that doesn't consider the effect of the additional inflation that has eroded the purchasing power of the typical American household in the period since.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 25 February 2022. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 23 March 2022. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 23 March 2022.

Real Yields and the Price of Gold

Not long ago, we were asked about how inflation affects the price of gold. It's something of an occupational hazard, where a lot of people assume that because we know quite a lot about how stock prices work, that knowledge directly carries over to things like commodities.

For most commodities, like copper, or oil, or turkeys, we would default to supply and demand analysis or dig into the factors affecting their cost of production to explain their changes in prices over time.

Gold falls into a different category that doesn't fit well into that basic mold. Aside from its use in jewelry, it's not used in great quantity to support any industrial applications like nearly all other metals are. Instead, it's used in financial applications, often as a hedge for inflation. Which is to say that when inflation runs hot, the price of gold will rise. But not always. Something else affects it as well.

That something else would appear to be interest rates, where the recent history for gold prices points to their having an inverse relationship with inflation-indexed interest rates. By inverse relationship, that means that as real interest rates fall, the price of gold tends to rise in response. The following chart shows the relationship we found between the daily closing spot price for gold and the daily inflation-indexed market yield of 10-year constant maturity U.S. Treasuries over the past 15 years.

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 17 March 2022

While the chart picks up the action at the start of January 2007, the pattern it shows began taking hold in 2006, coinciding with the deflation phase of the U.S. housing bubble. The inverse relationship we've identified only holds for the current period.

The most recent data point shown in the chart, for 17 March 2022, has the inflation-indexed market yield on 10-Year constant maturity U.S. Treasury securities at -0.71%, which is paired with gold's closing spot price for the day of $1,944.05. For reference, the nominal market yield for a 10-Year constant maturity U.S. Treasury was 2.20%. The inflation-indexed yield is negative because expected inflation rate over the 10 year period of the security is greater than the non-inflation indexed yield. That situation is consistent with a high price for gold.

After finding this relationship, we went searching for insight from other analysts who were already well familiar with it. Here's how Longtermtrends describes how gold prices work:

According to Erb and Harvey the correlation between real interest rates and the price of gold is -0.82. In other words, when real yields go down gold goes up. This correlation explains why inflation is gold's best friend while rate hikes are its worst enemy.

Here is a possible explanation for this relationship. Rising interest rates also mean rising opportunity costs of holding gold. Gold neither pays dividends nor interest. Thus, it is relatively expensive to hold it in the portfolio when real interest rates are high. On the other hand, when real yields are negative, holders of cash and bonds are losing wealth. In such a scenario, they are more prone to buy gold.

The Erb and Harvey study Lontermtrends references is from 2013, but it's good to see that the relationship we found is still very much in the same ballpark as the correlation they found. Just so, the price of gold is still governed by supply and demand. It's just that the demand for gold works quite a bit differently than it does for other commodities given its primary use as a hedge for negative real yields in today's financial applications.

References

Claude B. Erb and Campbell R. Harvey. The Golden Dilemma. Financial Analysts Journal. Vol. 69. No. 4. July/August 2013, pp 10-42. DOI: 10.2139/ssrn.2078535.

Federal Reserve Economic Data. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Inflation-Indexed. Online Database (Text File)]. Accessed 19 March 2022.

USAGold. Daily Gold Price History. [Online Database]. Accessed 19 March 2022.

Major Grocers Continue Hiking Tomato Soup Prices

Price increases promised by Campbell Soup (NYSE: CPB) CEO Mark Clouse back in December 2021 continued to take hold at grocery stores around the United States since our previous update.

Here is our summary of prices we surveyed at ten major grocery-selling retailers for March 2022. The most important thing to note is that the discounted sale price per 10.75 ounce can ranges from $0.99 to $1.50 per can, as discounted sale pricing below $0.99 per can has nearly all but disappeared in American grocery stores. Our personal finance tip for tomato soup lovers is that if you find it at $0.99 per can, buy it, because you won't see it at that price for long with President Biden's inflation:

  • Walmart: $1.17/each, unchanged
  • Amazon: $0.99/each, unchanged
  • Kroger: $1.25/each, unchanged
  • Walgreens: $1.50/each, unchanged when you buy 2 cans
  • Target: $1.19/each, increase of $0.20 (+20.2%)
  • CVS: $1.79/each, increase of $0.30 (+20.1%)
  • Albertsons: $1.00/each, decrease of $0.25 (-20.0%)
  • Food Lion: $1.00/each, unchanged but discounted from $1.48, an increase of $0.19 (+14.7%)
  • H-E-B: $1.21/each, increase of $0.20 (+19.8%)
  • Meijer: $1.00/each, decrease of $0.29 (-22.5%)

The most notable price increase in this month's update is the 20.2% price increase at Target, the third largest grocery-selling retailer by annual revenue in the U.S. The biggest surprise is the apparent sale of Campbell's Tomato Soup at Albertsons, where shoppers should act quickly to buy soup at the temporary $1.00 per can price level.

But the most interesting price change happened at Food Lion, which didn't change its discounted sale price of $1.00 per can, but did increase its regular shelf price from $1.29 to $1.48 per can. Here's a screenshot of the new higher regular price:

Food Lion: Campbell's Condensed Tomato Soup Discounted Sale Prices 9 March 2022

Act quickly, Food Lion shoppers. This stealth price hike is your grocer priming you for what to expect when soup stops being on sale!

As expected, the trailing twelve month average for a can of Campbell's condensed tomato soup rose above the one-dollar per can threshold in March 2022, reaching $1.01 per can and matching its previous record high. American consumers should recognize that all 2021 and 2022's price changes to date for Campbell's Condensed Tomato Soup have had nothing to do with Russia's invasion of Ukraine. They've been in the pipeline for an extended period of time now, where you can thank President Biden's inflation for today's escalating prices.

Speaking of which, Campbell Soup's CEO Mark Clouse indicates that inflation is negatively impacting the company's business, though it is still benefiting from the shopping habits consumers developed to cope with the coronavirus pandemic.

Campbell Soup fell short of market expectations for quarterly revenue on Wednesday, in a sign that demand for its sauces and broths is slowing from the pandemic-led surge.

With the COVID-19 pandemic shutting restaurants across the world, packaged food makers benefited from customers stockpiling at home on frozen meals, snacks, sauces and soups.

However, consumers are now returning to restaurants and former food-ordering habits, which has hit demand for Campbell’s products in recent months.

The company’s organic sales were down 2% in the quarter, as it also wrestled with industry-wide supply chain shortfalls and labor shortages.

Our second quarter was challenging as we lapped a difficult comparison and navigated labor and supply constraints, made even tougher by the Omicron surge,” Campbell Chief Executive Mark Clouse said.

The company indicated it will be able to maintain its full year profit target for 2022, benefitting from more stable levels of worker productivity.

Previously on Political Calculations

Political Calculations' analysis of Campbell's Tomato Soup dates back to 2015, when we first posted historic prices for a No. 1 can of Campbell's condensed tomato soup going back to January 1898! Since then, we've filled in the gaps we originally had in the historic price data and have explored America's second-most popular soup from a lot of different angles. We most recently updated our entire history in January 2022:

That article provides links to our previous coverage, if you want to journey through the tomato soup rabbit hole!

Affordability of New Homes in U.S. Resumes Decline in 2022

After breaking a long-running downtrend in December 2021, the question of whether that event marked a change in trend or was the result of noise in the data was raised. Housing data released by the U.S. Census Bureau last week points to noise as the answer to that question.

Combined with the latest median household income estimates, we find the raw affordability of the median new home sold in the U.S. reached an all-time low in January 2022. The following chart reveals that outcome:

Relative Affordability of New Home Prices | Annual: 1967-2020 | Monthly: December 2000 - January 2022

Median household income only covered 17.8% of the median new home sale price in January 2022. This represents the lowest level on record for this measure of raw affordability.

Meanwhile, mortgage rates rose to 3.45%, their highest level since the March 2020 arrival of the coronavirus pandemic in the U.S. Thanks to that development, we find January 2022 saw the resumption of the rising trend for unaffordability established since the coronavirus recession bottomed in April 2020. The next chart confirms that result:

Mortgage Payment for a Median New Home as a Percentage of Median Household Income, January 2000 - January 2022

The average mortgage payment for a median new home sold in January 2022 would consume 30.6% of the income for the median American household. What's remarkable is that we're seeing that level with 30-year conventional mortgage rates still within 1% of their all-time low of 2.68% set back in December 2020. The last time we saw the identical level of affordability was in April 2019, when mortgage rates were at 4.14%.

Exit question: Between rising mortgage rates and rising home prices, which will have the bigger effect on new home affordability?

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 25 February 2022. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 25 February 2022. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 25 February 2022.