Self Evident Truths

We celebrate the birth of our nation this week.

And so for most of us, it’s a light week with markets closing early Wednesday reopening on Friday. While we enjoy some down time, i want to answer a question one of my kids asked the other day (while I was buying a toy that would no doubt be forgotten in a week): Where does money come from?

Our monetary system is entwined with the banking system. The American banking system, as we know it, has its roots deep in the aftermath of the American Revolution. Alexander Hamilton envisioned a robust national banking system that would stabilize the nation's economy. This was a pressing issue of the day because the states owed outrageous sums after raising foreign money to support the revolution.

Hamilton’s vision included a central bank that would manage government funds, issue a stable national currency, and provide loans to stimulate commerce and industry. Hamilton's Bank of the United States, established in 1791, laid the groundwork for our centralized banking system.

Fast forward to today, and our banking system operates primarily on the principles first imagined by Hamilton. Today our banks use fractional reserve banking models to circulate money throughout the economy. In this model, banks are required to keep only a fraction of their deposits in reserve, lending out the rest to generate profits.

This ‘fractional reserve’ system of lending allows banks to create money through by loaning it to businesses and individuals, thus expanding the money supply. While this promotes economic growth, it also means our economy is fundamentally debt-based. In a debt-based economy, new money enters circulation through borrowing, inherently leading to inflation as the supply of money increases relative to goods and services. Said another way, inflation is necessary for our economy to function - without inflation, no new money can be created, which necessarily leads to economic calamity.

Which brings us to the pressing issue of today: the outrageously high cost of housing.

The combination of low-interest rates and high demand has led to a housing market where prices are out of control. Even with higher rates, home prices simply have not come down enough for the market to trade in any significant volume. Many people find themselves priced out of the market, struggling to keep up with rising costs.

So, what’s a savvy investor to do? Let’s talk strategy. I would argue that the American dream of home ownership needs a refresh. What if we reframed the way we think about homes. Rather than imbuing these structures with sentiment, why not treat them like another investible asset?

Renting has a host of benefits over ownership including flexibility (move out at the end of a short term lease) and reduced risk (no maintenance or risk of loss issues). Maybe Instead of pouring our hard-earned money into a home for personal use, we flip that model on its head: rent our primary residence from a landlord, then buy an investment property in a low cost of living area, and collect the rent from that property, reinvesting that stream of income.

This approach allows wealth to grow through appreciation in real estate investments and reinvestment of income, while maintaining the flexibility and reduced risk that renting provides. This feels like a dream that’s more attainable for the majority of Americans. These self evident truths are forcing us to create a new American dream.

As I said earlier It’s a holiday week, so there really isn’t a lot going on. Earnings season will really get underway in earnest after the holiday, but this week I’m watching the lone earnings reporter and for some economic data coming out throughout the week:

Constellation Brands (STZ). Reporting July 3rd, STZ is a major player in the consumer staples sector, owning brands like Corona, Modelo, Robert Mondavi, Kim Crawford, and SVEDKA Vodka. Constellation's performance is a bellwether for consumer spending trends, particularly in discretionary categories like alcohol. Strong earnings can signal robust consumer confidence and spending power, which are critical components of economic health. Moreover, Constellation Brands' strategic decisions, such as its investment in Canopy Growth (a leading cannabis company), reflect broader economic trends and investor interest in emerging markets. analysts have high expectations. The consensus estimate for EPS is around $3.05, with projected revenues of approximately $2.52 billion. This optimistic outlook is driven by the company's strategic investments, robust brand portfolio, and strong market position, particularly in the high-growth Mexican beer segment (and we’re entering peak months for these kinds of beers). This is another chart that’s been range bound, let’s see if the story about consumer strength holds and pushes this chart up and to the right.

Economic Data. With the S&P closing within 30 points of an all time high and inflation data coming up roses, the focus has now shifted to the labor market for potential signs of weakness as the Federal Reserve maintains its restrictive interest rate stance.

The June jobs report, set for release on Friday, will offer a comprehensive view of the labor market's health. Last month we learned that in May the economy added 272,000 new jobs which was a big surprise - in a bad way. We need the job market to cool for inflation to continue to settle.

Throughout the week, updates on private payrolls and job openings will also draw significant attention. Additionally, key reports on manufacturing and services sector activities will be released, providing further insights into the economic landscape.

This past Friday, the latest core PCI data, the Fed’s favorite measure of inflation, revealed that inflation eased in May.With inflation showing signs of improvement and economic activity slowing, many economists are now suggesting that the Fed should consider cutting interest rates sooner rather than later. If these macro trends continue, the likelihood of a soft landing and continued growth increase.