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Here are three things I think I am thinking about this weekend:

1) Disinflation is Still Entrenched

This week’s CPI report showed more of the same trends we’ve been seeing in the last year. The reading came in a touch higher than expected, but still showed the same persistent slowing of inflation that we’ve seen for several years now. So, the rate of inflation is slowing, but continues to slow less quickly than the Fed would like.
 

The most encouraging part of the report was something I’ve talked about a million times in recent years – the lagging effect of shelter. Shelter is 35% of CPI so it’s a hugely important component and it’s still showing a 4.8% year over year reading. 4.8% would be the highest reading since 1987 and yet we know that rents aren’t growing at anything close to 4.8%. The Zillow Rent Index is growing at 3.3% and the New Tenant Rent Index was -1.1% in its most recent reading. The NTRI is especially important because it has consistently led shelter CPI by about 12 months. So its current negative reading means that there’s a lot more downside left in future shelter readings and at 35% of CPI you’d need something very significant to offset that.

I’ve consistently said that a big commodity spike and oil spike from the Middle East tensions are the most likely culprit here, but even with the unfolding conflict there oil prices haven’t budged too much. So I think it’s still safe to say that inflation is on the way down and for now appears to be moving lower to sideways.

2) Buy Vs Rent Debates

Here’s a thoughtful article from Ben Felix about buying vs renting. Ben makes a bunch of good points, but I’ve come to the conclusion that this is one of the silliest debates we have in finance. Buying vs renting is a deeply personal decision. It depends on your personal needs and wants. It isn’t one of these things that you can just input into a “buy rent calculator” to spit out an objective answer. That’s not how it works. My general criteria for this decision would be as follows:

• How expensive is the purchase as a percent of pre-tax income? If it’s over 35% then buying might not make sense for you.
• How long will you live there? If it’s less than 5 years then buying might not make sense for you.¹
• Are you making a good decision for your family? Don’t buy a house just for the sake of buying a house. Buy a house because it’s a place where your family will be happy.
• Now do the buy/rent calculator. This is the last thing I would assess here. Housing is ALWAYS a directional price bet relative to other assets. If house prices had been stable while the stock market was down 50% and I had $1 million to allocate you can be virtually certain that the stock market is going to be a better relative directional bet than housing. You have to make a directional bet when buying a house, but thinking of your house as a financial investment is not the most important criteria to assess when considering renting vs buying.

3) Does BlackRock Own the Financial World?

I liked this piece by Nick Magguilli talking about the never ending narrative about BlackRock and Vanguard owning the world. This is one of those terrible narratives that makes sense on the surface and is fairly unimportant when you look under the hood.

The basic narrative is that Vanguard and BlackRock “own” all the stocks in the world because they’re the big indexing firms. So, if you buy an S&P 500 ETF you get a synthetic version of the S&P 500. You don’t technically own the stocks in the S&P 500 because you really just own an ETF that is benchmarked to the S&P 500 Index. Meanwhile, the ETF Trust owned by Vanguard holds the actual stocks for the index as reflected in your purchase of the ETF. This is important because it means that Vanguard shows up as the technical owner and they even get all the voting rights as a result of this.

So, in some highly technical manner you can argue that Vanguard owns all those stocks and therefore has undue influence over the way those companies operate. But this narrative is wildly overblown.

First, Vanguard and the big indexing firms almost always vote with management’s views when it comes to shareholder votes. This is what we should want because as indexers we don’t want shareholders influencing corporate outcomes. The whole point of being a passive investor is to let management do what it is good at and not interfere in a discretionary manner in their expertise. But more importantly these shareholder votes have much less influence on the world than the media would make us think. I’ve gotten thousands of voting notices in the mail over my lifetime. I have never, ever looked at one that appeared so urgent that it needed my immediate life altering attention. Not even once. That doesn’t mean that there aren’t cases where the votes matter a great deal. But the vast majority of these shareholder votes are largely inconsequential to the success of the companies and especially unimportant to the rest of us at a personal level. And your vote probably isn’t even going to make the difference anyhow because it’s the big activists that have most of the power anyhow. I can’t think of a single time in my entire financial career where one of these corporate votes very meaningfully impacted my life in a negative manner.

Anyhow, this isn’t to imply that this cannot matter at all. There are certainly times where it does. If I worked for Apple Corp and they were voting on something important I’d have more of a vested interest. But for most of us this stuff just isn’t that important. And so it’s still to think that Vanguard’s ownership of huge chunks of corporate America is going to ruin the world or cause some sort of significant harm. We wouldn’t want Vanguard to turn into some demonic activist investor of course and I guess that’s kind of a risk, but if that ever happened I am pretty sure their “passive” investors would have a panic attack and call for change. As of now, they don’t because we know that Vanguard isn’t destroying the world by voting with management most of the time.

Lastly, if you have hate mail about this topic please send it to Nick because he’s to blame for me writing about this in the first place.

I hope you have a great weekend.

1 – Moving might be the worst thing in human existence, and yes, I know that Socialism is a thing. Limiting the number of times you move throughout your life is a key to happiness.

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