Private Wealth

Weekly Research Briefing: The Picture Becomes More Clear

June 14, 2022

May's CPI was a big surprise. This is not a market that wants surprises. The trust in the Fed and Captain Powell to land Air America took a big hit on Friday. Dreams of a September pause in rate hikes have now been replaced by five 50 basis point rate increases for each meeting left in 2022. If the market is correct, then today's 0.75% Fed Funds rate will move to 3.25% by year end, and to 3.75% before this hiking cycle is complete. So now the question becomes: Does the FOMC spread the rate increases evenly or do they come in early with 75 basis point hike? A cattle prod to the neck might be just what equity bulls need to regain their faith in the Federal Reserve. This week's meeting will give us plenty of hot thoughts to chew on, but until confidence returns, the equity and higher risk credit markets have few catalysts. The U.S. economy will slow as $5.00+ gasoline and higher core prices take away from discretionary spending. Last week's Univ. of Michigan Consumer Sentiment survey very clearly reflected this. 6% mortgage interest rates will halt housing demand, which will end job growth in the new home build/mortgage/realty ecosystem. Higher interest rates and fuel costs will also begin to alter and slow ICE auto manufacturing plans. But at least the airlines, hotels and theme parks are running full.

In the markets, equities are seeing broad-based, high volume selling. Bonds are falling as new Fed plans are drawn up. Credit had its week in the sun and now has turned back lower. Gold continues to confuse investors with its continued selling. Crypto is now in a complete meltdown for those coins that are still trading, while others have stopped trading entirely. The best major asset in the world is the U.S. Dollar, which only melts upward to become the best asset in your wallet and portfolio. But unfortunately, unless it is appreciating at a near double digit annual rate, then you are losing money due to inflation running so hot. Welcome to the worst summer market environment for investors in many years. Selling in May and going to the beach has never sounded so good.

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We all hoped that consumer prices would come down last month...

Instead, we got the biggest upward surprise in a year.

US job vacancies rate

The Daily Shot

One of the more concerning readings was the jump in housing cost inflation...

@bencasselman: Rents were up 0.6% in May, and are up 5.2% over the past year. The steady pickup in rents is troubling not just because it's hard on families (which it is), but because rents tend to be sticky.

US job vacancies rate

The Daily Shot

And with 30-yr mortgage rates going to 6%, it is less likely that renters will become owners...

Meanwhile, homeowners with adjustable rates can look forward to higher monthly mortgage costs.

US job vacancies rate

The Daily Shot

Higher mortgage rates and higher housing prices are doing a number on current housing activity...

  • In the last six months, the pending home sales index — which leads existing home sales by 2-3 months — has declined, with April decreasing 3.9% m/m (Figure 1).
  • For the last four months, new single family home sales have declined, with April falling 16.6% m/m saar.
  • Homebuilder sentiment fell from 77 in April to 69 in May – a significantly larger drop than consensus.
Market pricing for the number of 25 bps Fed rate hikes

J.P. Morgan

And probably a good assumption that the residential building products industry is not ready to shift from 5th gear directly into reverse...

Market pricing for the number of 25 bps Fed rate hikes


For confirmation of cooling, let's look at the highest end of the hottest housing markets...

Two years ago, Austin real-estate agent Amy Deane, of Moreland Properties, was working with so many wealthy out-of-state buyers that she showed one $15 million house five times in 30 days. Now, she might get one call every other week for showings in that price range. “That big buyer pool has slowed down,” she said. “The first movers committed and moved.”

After an epic two-year run—not just in Austin, Texas, but in major cities around the country—the luxury real-estate market is finally cooling.

Real-estate agents in places like New York, Los Angeles, and the Hamptons say the frenzied deal making and record-setting prices that characterized the past few years has eased, thanks to a growing disconnect between what sellers want and what buyers will pay. Meanwhile, buyers are grappling with inflation, this year’s interest-rate hike and the volatile stock market. Gas prices and the war in Ukraine are adding to feelings of economic uncertainty, effectively throwing cold water on luxury sales.

The number of luxury homes—defined as the top 5% of the market—that sold during a three-month period from Feb. 1 to April 30, 2022, dropped 18% compared with the number of sales during the same period in 2021, according to a new report from the real-estate brokerage Redfin. That is the biggest decline since the pandemic started, when the number of luxury sales plunged 23.6% during the three-month period between April 1 and June 30, 2020, compared with the same period in 2019. Prices are still holding, but they are unlikely to keep reaching new heights as buyers retreat, according to Sheharyar Bokhari, a Redfin senior economist...

According to Redfin, the biggest drops in luxury sales took place in Nassau County, N.Y., where sales slid 43.5% for the three-month period between Feb. 1 and April 30, 2022, compared with the year-earlier period, followed by Oakland, Calif., with a 35.1% decline. During the same period in Dallas and Austin, where values skyrocketed during the pandemic, sales slipped 33.9% and 33%, respectively, and West Palm Beach’s luxury sales were down 32.8%, Redfin data show. “We had unsustainable, huge demand last year. Homes were just flying off the shelves,” Mr. Bokhari said.


If you are studying to get your realtor license this summer, you might want to choose another subject instead...

Wide distribution of outcomes after historical yield curve inversions


$125-150 tanks of gas are going to be the norm this summer...

And the extra $50-75 to fill up one's car will cause changes in consumer discretionary (and even staples) spending.

Wide distribution of outcomes after historical yield curve inversions

The Daily Shot

It is going to take real demand destruction to get energy prices lower...

We are now in the final inning to get a top bid for your gas guzzler.

Question: Oil prices are up around 60% and gasoline prices are up almost 50% this year. That can't all be due to Russia's invasion of Ukraine, right?

Chris: It’s not all a result of the invasion, but the war certainly didn’t help. The situation in the oil market has been deteriorating for the better part of a year. The main issue is that the difference between supply and demand has been razor thin for months, leaving little margin for error.

Oil demand plummeted during the pandemic, leading many producers to pull back dramatically on investing. So, when global economies roared out of pandemic shutdowns, production was unable to grow quickly enough to meet the surprisingly fast demand rebound. Many oil companies are still holding back on spending after investors harangued them for years to stop chasing growth. That means that right now, there’s basically just enough supply to meet demand and little cushion if something goes wrong.

That gets us to the invasion. Russia was the world’s largest oil and gas exporter prior to the war. So when Russia invaded, triggering a barrage of Western sanctions on its energy exports, the oil market impact was…significant.


Could 2022 be oil's best year ever?

Wide distribution of outcomes after historical yield curve inversions

BofA Global Research

After Friday's CPI, we can only hope that 9% is the peak in inflation...

Wide distribution of outcomes after historical yield curve inversions

J.P. Morgan

Meanwhile, the consumer appears to have given up...

@ReutersJamie: University of Michigan's U.S. consumer sentiment index plunges to *record low* of 50.2. As clear a recession warning as you can get.

Cumulative personal savings in the pandemic

Inside of the U of Michigan survey was the negative look that long-term inflation views are lifting off...

@RenMacLLC: The risk to our sanguine view. As bad as the inflation data ran today, longer-run inflation expectations for both consumers and professional forecasters are running at fresh highs. If inflation expectations are running away from the Fed, we have yet to see "peak hawkishness."

Cumulative personal savings in the pandemic

Higher inflation expectations have the 10-yr Treasury yield reaching the highest since 2011...

Wide distribution of outcomes after historical yield curve inversions

And remember that great big upward move in credit two week ago? It's gone...

Think about the beach, the sand, the water. Forget about stocks. Delete your favorite financial app and read a book instead.

Best Year for Commodities

Central Bank rate hike expectations are not just increasing in the U.S...

Credit quality is also widening out in Europe. So instead of stoxx, I would recommend French beaches, Italian sand and Greek islands.

A selloff in European government bonds gathered momentum as traders priced in a more aggressive pace of tightening from the European Central Bank amid mounting concern over the deteriorating inflation outlook worldwide.

Italian bonds tumbled for a fourth day as they lead losses across the region, with 10-year yields pushing past 4% for the first time since 2014. That drove the spread over German equivalents, a key gauge of risk, to as much as 240 basis points, the widest level since May 2020.

The yield on Germany’s two-year government debt -- the most sensitive to changes in policy -- climbed above 1% for the first time in more than a decade. Traders are now wagering on two half-point hikes and a quarter-point increase by October, up from just 50 basis points of increases in total this year as of April.

Best Year for Commodities


"Betting on a soft landing is a real long shot"...

“The probabilities of being a soft landing are pretty remote john historically I think we've only pulled off two or three in history the one I lived through I remember so well was the 94-95 one but we've never had a soft landing after inflation's gotten above 4.5% and the situation we face now is extraordinary -- you're so far behind the inflation rate and there's so much wood to chop and there's been such a broad asset bubble going into it it's very hard for me to say that the probabilities favor soft landing indeed I think they aggressively point to a hard landing anything's possible as I said earlier I've been wrong plenty of times in my career but betting on a soft landing to me is a real long shot. The other statistical fact is once inflation's got above 5%, to use your word, it's never been tamed without a recession so if you're predicting a soft landing you're going against decades of history could happen anything's possible but I don't think it's probable” - Duquesne Capital Founder Stanley Druckenmiller

The Transcript

Market is at about a 30% chance of Wednesday's hike being +75 basis points...

Best Year for Commodities

CME Group

Lower highs and lower lows...

The S&P 500 is in a foul mood. Sure, the average valuation might be below the ten-year average, but it lacks any significant catalysts to buy stocks right now. Beach, sand, water.

Best Year for Commodities

Four consecutive 1%+ declines in the S&P 500 often happen at lows...

@michaelbatnick: The S&P 500 fell > 1% for each of the last three days. The last time it hit four in a row was December 2018.
The other times this happened, with the exception of 2008, were at or near bottoms.

S&P 500

But if the economy continues to slow due to the aggressive Fed actions, then maybe the earnings estimate needs to be revised lower...

@carlquintanilla: GOLDMAN: “.. If the EPS estimate moves to $225, halfway to the recession scenario of $200, a 14x P/E would bring the S&P 500 to 3150.” [Kostin]

S&P 500

Lower prices in the public markets continue to provide an opportunity for others...

Prologis Inc. is buying Duke Realty Corp. in a deal valued at $26 billion, giving the world’s largest warehouse operator a larger footprint even as the e-commerce sector faces headwinds from slowing demand.

The two real-estate companies unveiled the deal Monday, after months of pursuit by Prologis and Duke Realty’s initial rejection of a $24 billion offer last month. The all-stock deal, which includes debt, is expected to close later this year. It adds to Prologis’s vast footprint of warehouses and distribution centers serving the online shopping ecosystem.

Prologis runs a one-billion-square-foot network of industrial facilities around the globe that help store, process and ship online orders for companies including Inc., FedEx Corp. and others. Duke Realty adds another 160 million square feet of space in 19 major U.S. logistics markets to the Prologis empire.


Family offices are a good read on what the most conservative of investors are doing...

For the most part, family offices are made up of one or more investors who have made their big money and who are now primarily looking to protect it. They will take risk when downside is more limited or when market opportunities arise. These investors do not like to lose money. So, it’s important to notice that family offices are continuing to increase their allocations into private market assets and away from public market ones.

Billionaire investors are increasing their exposure to private equity in spite of concerns that the end of loose monetary policy will hurt weaker firms in the sector.

Family offices managing vast fortunes for wealthy individuals have increased their allocation to private equity from about 15 per cent in 2019 to a fifth last year — the largest gain for any asset class. Many plan to keep putting more money into private companies over the next five years, according to a report by Swiss bank UBS.

The findings, which are based on a survey of some 200 family offices that each manage more than $2bn on average, come despite worries that central banks’ effort to tame inflation by cooling the economy will expose weaker private equity firms.

“Certainly the change in monetary policy that we’re currently undergoing will have an impact on private equity. Especially what it will do is expose the funds that had principally ridden this liquidity driven rally and used leverage and fancy stories versus those who had focused on adding value,” said Max Kunkel, chief investment officer for global family and institutional wealth at UBS.

Despite these risks, Kunkel said many family offices were confident that they could still find superior returns in private markets through tighter due diligence and leveraging their longstanding relationship with top managers to gain privileged access to deals. “Nobody is being naive about this. They have been in this for too long,” he said.

Financial Times

Easy to see why family offices are increasing their allocations to private equities...

Looking into our massive Cobalt database and grabbing all the PE fund data available to me, here is what I found. Over 27 years of returns, I see the average venture capital fund returning over 5x more than the MSCI World Index. PE buyouts returning over 6x more. And growth equity 11x more. And this is just for the 'average' fund in our database. Ask anyone on our Hamilton Lane team what the returns look like for investing in top quartile funds.

(If you want the 12/31/2021 numbers: MSCI World = $8.34, Buyouts = $51.74, Growth Equity = $91.81, and VC = $42.57.)

S&P 500

Source: Hamilton Lane Data via Cobalt LP. As of Dec. 31 2021.

A recent survey of global private equity investors showed that 5x more investors outperformed in the private equity versus the public equity markets...

S&P 500

So, it makes sense that these same investors have increased their allocation to private equity...

S&P 500

And here is how they plan on changing their alternative allocations in the future...

S&P 500

Coller Research Institute

Star Wars fans can only hope that the Broncos will change their mascot to the Tauntans for all December home games...

Pending new Broncos ownership group will include Mellody Hobson

A group led by Walmart heir Rob Walton has agreed to buy the Denver Broncos for $4.65 billion, pending NFL approval.

Walton will be the majority owner. His daughter, Carrie Walton Penner, and his son-in-law, Greg Penner, will become minority owners.

The Walton-Penner group announced Tuesday evening that Ariel Investments co-CEO Mellody Hobson will also be joining ownership...

“Beyond her role at Ariel, Mellody is an influential leader in corporate and civic organizations across the nation,” Rob Walton said in a press release.

“Mellody currently serves as Chair of the Board of Starbucks Corporation and is also a director of JPMorgan Chase. We know she will bring her strategic acumen and leadership perspective to our team.”...

Hobson and her husband, George Lucas, live in California with their daughter, Everest.

Broncos Wire

S&P 500

Star Wars

Golf's newest Senior Tour kicked off this week in London...

I have yet to find anyone who watched or went to the event, so I am curious to see the financials for this new league given the size of the purse and the guaranteed payouts to attend. I don't remember Ray Kinsella paying Shoeless Joe Jackson $200m just to show up and play ball.

A tournament featuring pub quiz-style team names is novel enough. The prize money is something else. The 48 players are competing for a staggering purse of $25mn, roughly twice what last year’s US Open paid to 71 golfers last year.

That pot of gold has so far failed to persuade Rory McIlroy, Jon Rahm, and world number one Scottie Scheffler to defect from the US PGA Tour, the world’s toughest circuit. Instead, LIV has bulked up its player list with golfing nonentities, supplementing such well-known veterans as Sergio García, Lee Westwood and Phil Mickelson. These pro golfers have been pushed from the top of world rankings by twenty-something rivals.

Purses aside, appearance fees and guaranteed payouts over several years may, according to golf industry gossip, total tens to hundreds of millions of dollars. LIV players have awkwardly and unconvincingly tried to deny their apostasy has anything to do with cash.

On Thursday, the US PGA suspended the 17 golfers who chose to play in London in violation of their contractual obligation to remain on their home circuit.

S&P 500

Financial Times

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The author has current equity ownership in: J.P. Morgan Chase & Co. 

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