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Markets Weekly May 18, 2024

发布时间 2024-05-19 00:47:43    来源


federalreserve #marketsanalysis China Supports Property Market US Pulling Ahead in Productivity Silver Surging 00:00 - Intro ...



Hello my friends, today is May 18th and this is Markets Weekly. So this past week was a good weekend markets. We had all the major stock market indexes make new all-time highs. Now when I'm looking at this, I'm always trying to figure out whether or not the trend is higher or lower. Now when you're making new all-time highs, it's a good sign that the trend is higher. So let's see how that unfolds over the coming weeks.

Today I want to talk about three things. First, I've been reading a lot about the new measures the Chinese government is putting forward to try to support their property markets. So let's talk about what's happening in China. Secondly, I've also been seeing a lot of articles about how living standards in the US have been steadily pulling further away from living standards in peer countries, say European countries and Canada over the past few decades. So that seems to be a big structural story that's been playing out and looks to continue to play out over the foreseeable future. So let's talk about what might be driving that divergence.

And lastly, when I look at the markets the past week, what really stands out to me is silver. Now silver absolutely surged and broke $30 and is at multi-year highs. Let's talk a little bit about what's happening over there and see how that could be part of a broader commodity bull market. Okay, starting with China. So let's level set a little bit first. So over the past couple of years, the property market in China basically imploded. If you look at property prices, they've been trading lower. If you look at sales volumes compared to the peak a few years ago, sales volumes are more than 50% lower now. Now what happened there is a tail as old as time. So people bought a lot of property property. Property buyers went up. They felt richer. They bought even more property developers saw that the property buyers were going higher. They bought, they built more, sold more, built more, sold more and everything was going really well. Everyone was making a lot of money until one day the music stopped.

Now we had that happen in the US in our property, boom and bust from 2006 to 2008. We saw the same thing happen in Japan. Many people think it's still happening in Australia and Canada. So when you have a property bubble bust, it has a lot of economic implications. Well, first off, of course, the people who made loans, they suffered potential losses. The people who were building houses, they have losses. And of course, the people who own houses, they have losses as well. Now in the US, the banks had a whole lot of mortgages on their balance sheet and these mortgages were backed by property that was worth less than the mortgage. So the banks were basically underwater and insolvent. And that was a big problem because if you have a banking sector that's not healthy, then the banks can't make loans. A credit dries up. The whole economy stops. So back then, the federal government basically took the bad loans off the balance sheet of the commercial banks and injected a whole lot of new equity. The Fed at the time cut interest rates bought a whole lot of agency mortgage backed securities, hoping that lower interest rates would provide some support to the housing sector.

Now in China, things are a little bit different because the government basically owns the banks so the banks can't go bust. There's no concern there. And the government can also basically make the banks to lend to whoever they want. And so this really know the liquidity event. The government can always say, hey, bank lend to this property developer and continue to roll over their loans forever. So there's never any liquidity risk.

But a property bubble does have a lot of negative economic implications. Now real estate, property development, big part of China's GDP. When you have less construction, less growth, fewer jobs. And if you are a household that owns a home that's now worth less than when you initially purchased it at, then you are underwater, you feel poor, maybe you spend less money.

So the Chinese government is doing something that I haven't seen other governments do. That's really interesting. And that is actually buying homes directly. So what they're doing is that they're providing financing to government related entities to go and just basically buy the unsold homes that are sitting on the balance sheets of the property developers.

Now this will be helpful because property developers then will have some, okay, unload their homes, have some cash to repay the money they owe. And of course, if you have a bid for housing, house prices will be supported and maybe the households don't feel like they're losing as much money. Maybe it'll improve consumer sentiment. Now in addition to this, the Chinese government has also made it known that they will reduce the down payment required to buy a home.

So mortgages from 20% to 15% and will also make measures to try to further lower mortgage rates. Now I don't know if this is going to be enough, but if you look at an index of publicly traded Chinese real estate property for property development companies, they absolutely surged the past week. So it seems like the people, investors are getting a sense that the government is trying to do more and that's really supportive. Now ultimately, if it's not enough, I imagine they'll just go and do even more.

Now I would also note that in the US, the government is also doing new things to try to stimulate the economy. So Freddie Mac has a new proposal to try to basically securitize second liens on home mortgages. So which is what I'm going to write about in my blog this week. It could potentially be a big deal. Okay.

The second thing I want to talk about is basically how US living standards have really steadily pulled ahead of living standards compared to pure countries over the past few decades. So if you look at this graph, you notice that GDP per capita adjusting for inflation and prices of the US and say European countries in Canada was very comparable in the 1990s, but over the past few decades, the US has really pulled out ahead and I go to Europe a lot and I see this very clearly and that wages in Europe are notably below that of the US. So if you look at prices, prices honestly aren't that much lower.

In some cases, when it comes to things like electronics, it's actually higher than it is in the US. So the material living standard in Europe is notably below that of the US people live in smaller and older houses, drive smaller and older cars and so forth. And that wasn't always the case. So it seems like, so in order to have higher living standards, you have to have higher output per person and you can do that from one of two ways. One of course, you can work more hours, which we do in the US, but you can also produce more per hour of work. That is to say, become more productive. And I think that's been a big theme in driving this difference in living standards over the past few decades. Productivity in the US has just been a lot higher.

Now, Carolyn Rogers, a central banker at the Bank of Canada recently gave a speech that pointedly addressed this, noting that a few decades ago, productivity in the US and Canada were comparable today, not so much. Many European policymakers have made the same observation. Now, Carolyn Rogers' diagnosis is that there's not enough competition in Canada to spur that kind of productivity growth. And that makes a lot of sense, right? So let's say that you are someone who's an athlete. If you have competition, it motivates you to try to improve. Same thing if you are, let's say a student, let's say you have to take a test, try to be the best student, get good grades to go to a good college. Again, you have competition that forces you to work hard, to improve, and that's important in developing country's productivity.

Now, when I look at the US compared to Europe and Canada, I think one of the big differences is that there's just not, first, there's both positive and negative incentives that are lacking. A positive incentive would be that if you, or card if you're more productive, you gain a lot more. But that positive incentive is really different when you compare the US to other countries. For example, looking at tax policy in the US on the federal level, the highest marginal tax rate is 37%. And you hit that 37% bracket when you're making $580,000.

In Europe, if you look at marginal tax brackets, the highest is in the 40s, sometimes in the 50s. But that highest tax bracket tends to hit somewhere between 150 to 200,000 US dollars. So taxes are much higher in Europe and they hit much earlier than they do in the US. And it's the same story in Canada. So you can see that there's a lot less attraction in those countries to work hard because if you just make a little bit more money, you have to give most of it away to the government. And that's something that I think is really noticeable when you look at who's rich in each respective region. In the US, the rich people tend to be people who build their own companies. Bill Gates, Mark Zuckerberg, Elon Musk, Jeff Bezos, these are guys super rich and they build their own companies. Again, they are motivated to do so. They get to keep most of what they earn.

But in Europe, who are the rich people? Well, they're the people who are always rich, like people whose father, great grandfather, great-great grandfather with some kind of Earl or Duke or something like that. It's really difficult for someone who is not rich to become rich in Europe simply because the tax policy is so aggressive in that sense. So I can understand there's less motivation to try to do anything. In fact, you can think of it as a culture that kind of promotes quite quitting. After all, you don't have that much upside. Paradoxically, you also don't have much downside, which is the second part of this incentive structure. In the US, if you don't work hard, well, maybe you get fired, maybe your company goes under. There's some more insecurity in the US that adds a negative incentive there to force people to work harder.

In Europe, there's a lot more protections when it comes to labor. It's hard to fire people. Now you can see this play out very clearly in how the European policymakers handled the pandemic. So in the pandemic, again, the economy shut down. A lot of people in the US lost their jobs. The government did was they stepped in and gave unemployment insurance and sent them a lot of free money, sent them in checks. Ultimately, what happened is that all these unemployed workers found new jobs, oftentimes different jobs at higher wages, jobs that were more suited to them. So the labor market was more dynamic. People got to find places where they fit in more, and that was helpful for wages and productivity.

In Europe, they did something that was completely different. They basically froze their entire labor market. So basically companies, if you don't fire anyone, the government will subsidize their wages. And so when the pandemic ended, everything was unfrozen and life continued as usual. There was not much disruption in the labor market. So if you think of, if you're a worker, you think, oh, my job is secure. I don't have to worry about finding a new job. And that sounds good and maybe appealing to some. But on the flip side, if you don't lose your job, your boss doesn't end, your boss doesn't lose his job, his boss doesn't lose his job, then there's no personal advancement. There's no room for you to continue to climb, and you're basically doing the same thing until someone retires. So having job security, maybe it's appealing, but then it also leads to stagnation.

Now ultimately, you can think of these as maybe different models, different social models. But I tend to think that this European style, socialism style model is not sustainable, because at the end of the day, people who are more ambitious and more talented will just leave those countries and move to other countries, be it the Middle East, be it the US, where they can exercise your full potential. And the people who are remaining will just have less and less stuff to share among themselves. In addition, if you look across the world, you also have very hungry and ambitious countries like China and India, who are steadily out-competing a lot of these European businesses. For example, BYD is the largest electric car manufacturer in the world. Now they're exporting massively to Europe and these traditional European car manufacturers, be it the Mercedes, be it the Puget, and so forth, just can't compete. And so it seems like this social model that they employ in Europe, and it is just one that leads to stagnation, which is what we've seen over the past few decades and looks like it's going to continue going forward.

So honestly, it doesn't look that good for the social model going forward. But let's see what happens. It's kind of this huge social experiment. And honestly, in the US, I get the sense that many people would like to copy that model. Okay, the last thing that I want to talk about is what happened in the markets the past week. What stood out to me is how silver basically went parabolic and absolutely surged past $30 to multi-year highs. Now silver, if you look at a history of silver prices, you notice that it's a very volatile series. You can see it surging in the 1970s and again, surging about a decade earlier. Again, it goes up a lot and it goes down a lot. Now it's hard to know what's actually driving this recent surge. Now in the 1970s, it was clear there were a couple of billionaire brothers called the Hunt's brothers who tried to corner the silver market. They were telling everyone that there's going to be inflation, dollars debasing, and so forth. So we got to buy silver. They tried to buy as much silver as they could and they bought a lot of money to do that. And if you have billionaires and a billionaire back then, it was a lot more money than it is today, buying a whole bunch of silver. Silver prices went to the moon. But eventually though, and in part due to the government intervention, they were having trouble rolling over their loans and so they had to sell some silver to make margin calls and that kick started a whole process where silver went back down.

A decade ago, I think a lot of the excitement in silver was also due to the perception that Kiwi and whatnot was debasing the currency and so forth. But in any case, silver very emotional metal and it seems like for whatever reason it's going up again. Now I think of silver as a much more retail based metal. So it's not precious in the sense that you would have foreign government actors go and buy silver for their foreign reserves. And it's also in part industrial, but it seems like a lot of retail investors think of it as an investment alternative to the dollar and gold and so forth. But surprisingly, when you look at SLV, which is a silver ETF that I think is a way that a lot of retail investors access silver, it's actually had outflows over the past few weeks. So it doesn't seem like this surge is retail driven. It's super interesting and as you know, it's very volatile, but when it tends to go up, it tends to go up a lot. Now this is the broader context of I think a broader bull market in commodities. If you look at the Bloomberg commodity index, it looks like it's trending higher. If you look at gold, as I wrote about this past week, there's a lot of big positive drivers in gold that seems to suggest that gold prices are going higher and we did see gold turn up. If you look at copper, for example, copper absolutely surging. Some people think it's due to electrification and so forth. But in any case, it looks like there's a big churn in the commodity markets, at least in some commodities. You don't see the same upturn in things like oil and so forth. But it seems like there's something happening in the commodity markets that really bears watching.

Now, part of it could be due to perceptions of what's happening in the government. Part of it could be an upswing in the manufacturing cycle. Part of it could be due to depreciation in the dollar. It's hard to know, but I think a lot of people trade commodities based on momentum. And when they see things like that, they tend to follow it. So at the moment, I'm positive on silver, on gold, as I wrote about before. And let's see what happens. I think we really are in point in time where there's a lot of cross-currents that make commodities really interesting. All right, so that's all I prepared for today. Thanks so much for tuning in. If you're interested in my thoughts, check out my blog at FedGuy.com. And if you're interested in learning more about Mario, check out my online courses at CentralBanking101.com. Talk to you all next week.