Markets Weekly August 17, 2024
Summary
TLDRIn this Markets Weekly update, the host discusses the market's strong performance, attributing it to positive economic data and a reduced fear of recession. They delve into Kamala Harris's economic proposals, including housing subsidies and controversial price controls, and their potential impact on inflation. The surge in gold prices is also analyzed, with the weaker dollar and global rate cuts being the likely drivers.
Takeaways
- 📈 The markets had a strong week, with the S&P 500 recovering from panic selling and experiencing a vertical surge, which is considered uncommon and a reason for caution.
- 📊 Positive economic data contributed to the market surge, including benign PPI and CPI inflation figures, suggesting a reduction in recession concerns.
- 💹 The Federal Reserve (FED) is likely to cut rates in September, as inflation seems to be heading towards the 2% target, with the market pricing in multiple cuts for the rest of the year.
- 🛍️ Retail sales data and Walmart's earnings report indicated strong consumer spending, which is a positive sign for the economy and reduces recession fears.
- 🏠 Kamala Harris proposed a $25,000 subsidy for new home buyers and potential price controls to address inflation, which could stimulate demand but may not address supply constraints effectively.
- 🏦 Price controls have historically led to shortages and worsened inflation, as seen in examples from Roman Emperor Diocletian to President Nixon and contemporary Venezuela.
- 🌐 The weakening dollar seemed to be the main driver behind gold's surge to new all-time highs, as a result of the market pricing in substantial rate cuts by the FED.
- 🌍 Geopolitical risks, while present, do not appear to be the primary driver for gold's price movement, as recent developments suggest some de-escalation in conflicts.
- 📉 The market's reaction to Harris's economic proposals is uncertain, but historically, such measures have led to stagflation, shortages, and higher prices.
- 📊 Gold prices are influenced by various factors, including monetary policy, geopolitical risks, and trend-following behavior, with the weaker dollar being a clear factor in the recent surge.
- 🔮 The speaker is positive on gold for the coming years, noting its potential volatility but also its traditional role as a hedge against inflation and economic uncertainty.
Q & A
What was the significant event in the markets during the past week mentioned in the script?
-The significant event was the surge in the markets every single day, with the S&P 500 completely wiping out the panic selling from the first two weeks of August.
Why is the recent vertical move in the markets considered uncommon and a reason for caution?
-The vertical move is considered uncommon because such sharp and rapid increases are not typical in markets, and it could indicate an overreaction or a lack of stability, hence the reason for caution.
What economic data contributed to the upward surge in markets according to the script?
-The data included benign PPI and CPI inflation figures, which were lower than expected, indicating disinflation and reducing concerns of a US recession.
How did the market react to the inflation data, and what does it imply for the Federal Reserve's actions?
-The market reacted positively to the inflation data, as it confirmed that inflation is heading towards the Federal Reserve's target of 2%, implying that the Fed is likely to cut rates in September.
What is the market's current expectation regarding the Federal Reserve's interest rate decisions?
-The market is pricing in a September rate cut and expects around 100 basis points of cuts throughout the rest of the year, with some probability of a 50 basis point cut.
What recent economic indicators suggested less concern for a US recession?
-Economic indicators such as higher retail sales on a month-over-month basis, Walmart's earnings report guiding for high revenues and higher profits, and benign unemployment claims data suggested less concern for a US recession.
What are Kamala Harris's proposed economic policies discussed in the script?
-Kamala Harris proposed a $25,000 subsidy for new home buyers and the possibility of federal price gouging laws, which could include some form of price control to address inflation.
How could the proposed $25,000 housing subsidy impact the housing market?
-The subsidy could stimulate home construction and boost demand, but it might also drive house prices higher due to the sudden increase in demand without an immediate corresponding increase in supply.
What are the historical implications of price controls as discussed in the script?
-Price controls have historically led to shortages, inflation, and economic instability, as seen in examples from the Roman Empire, the US under President Nixon, and Venezuela.
What was the recent surge in gold prices, and what could be the driving factor?
-Gold prices surged to new all-time highs, likely driven by the weaker US dollar, as the market is pricing in substantial rate cuts by the Federal Reserve.
What is the potential impact of price controls on supply and demand dynamics?
-Price controls can limit the increase in supply by restricting the profits businesses can make, which can exacerbate shortages and worsen inflation.
Outlines
📈 Market Surge and Economic Data Analysis
This paragraph discusses the exceptional performance of the markets in the week of August 17th, with a daily surge that erased panic selling from the first two weeks of August. The speaker highlights the uncommon vertical move in the S&P 500 and cautions about such market behavior. The summary also covers the positive economic data from the past week, which contributed to the market's upward trend, including inflation data indicating disinflation and reduced recession concerns. The Federal Reserve's (FED) reaction to this data, with expectations of a rate cut in September, is also detailed. Additionally, retail sales, Walmart's earnings report, and unemployment claims data are mentioned as factors contributing to the market's optimism about a soft landing for the economy.
🏠 Kamala Harris's Housing and Inflation Proposals
The second paragraph delves into Vice President Kamala Harris's economic proposals, focusing on solutions for the US housing crisis and inflation. Harris suggests a $25,000 subsidy for new home buyers, which could stimulate demand and construction but may also drive house prices higher due to supply constraints, particularly in states with strict building regulations. The paragraph also addresses her support for price controls as a response to inflation, drawing on historical examples of failed price control policies, such as those implemented by Roman Emperor Diocletian and US President Nixon, as well as more recent experiences in Venezuela. The summary critiques these proposals, suggesting they could exacerbate inflation and shortages.
🌐 Geopolitical Impacts and Gold Market Dynamics
In this paragraph, the speaker explores the recent surge in gold prices, reaching all-time highs, and considers various potential drivers, such as the weaker US dollar, geopolitical risks, and global monetary policy. While acknowledging the difficulty in pinpointing a single cause for gold's rise, the summary emphasizes the correlation between the weakening dollar and increasing gold prices. It also touches on the ongoing geopolitical conflicts in the Middle East and Eastern Europe, suggesting that despite some negotiation efforts, there may be market anticipation of further developments. The role of central banks in gold purchases and the influence of trend-following investors are also discussed as contributing factors to gold's price movement.
📊 Gold Market Outlook and Final Thoughts
The final paragraph wraps up the discussion with a personal outlook on gold, expressing optimism for its future performance despite acknowledging its potential for volatility. The speaker also invites viewers to follow their blog at fedguy.com for more insights and to explore online courses at CentralBanking101.com for a deeper understanding of market dynamics. The summary concludes with a reminder for viewers to like, subscribe, and engage with the content for ongoing updates and analysis.
Mindmap
Keywords
💡Markets
💡Inflation
💡FED (Federal Reserve)
💡PPI (Producer Price Index)
💡CPI (Consumer Price Index)
💡PCE (Personal Consumption Expenditures)
💡Recession
💡Unemployment Rate
💡Housing Subsidies
💡Price Controls
💡Gold
Highlights
The S&P 500 experienced a surge every day of the past week, erasing panic selling from the first two weeks of August.
The market's vertical move is uncommon, indicating a reason for caution.
Good data from the past week contributed to the upward surge in markets.
Public policy is identified as the most important driver of asset prices.
Policy proposals from Vice President Harris include housing purchase subsidies and price controls.
The surge in gold reaching new all-time highs is a notable event of the past week.
Inflation data has been closely watched by the market due to its impact on Federal Reserve's interest rate decisions.
Recent inflation data, including PPI and CPI, indicates a benign trend, with CPI under 3%.
The Cleveland Fed's inflation forecast aligns with the benign trend observed in PPI and CPI.
Market expectations for a rate cut in September are high, with some probability of a 50 basis point cut.
Retail sales data and Walmart's earnings report suggest a healthy consumer spending environment, reducing recession concerns.
Unemployment claims data provided comfort to the market, suggesting no imminent recession.
Vice President Harris's proposal of a $25,000 subsidy for new home buyers could stimulate demand but may also drive house prices higher.
Price controls as a solution to inflation have historically been unsuccessful and can lead to shortages and worsened inflation.
The weaker dollar is identified as a likely driver behind the surge in gold prices.
Geopolitical conflicts and global rate-cutting cycles are also potential drivers for gold's performance.
Trend followers in the market can amplify gold's price movements when in an uptrend.
The speaker is positive on gold for the coming years but notes its potential volatility.
Transcripts
hello my friends today is August 17th
and this is Markets weekly so this past
week was a great week in markets we
basically surged every single day and
looking at the S&P 500 have completely
wiped out our Panic selling in the first
two weeks of August now this type of
basically vertical move is pretty
uncommon in markets so I think that's
reason for caution now today let's talk
about three things first first let's
talk about some of the good data we got
the past week that contributed to the
upward surge in markets secondly as you
all know I think public policy is the
most important driver of asset prices
and finally we got some policy proposals
from
Harris it looks like she is in favor of
housing purchase subsidies and also
price controls so let's talk about what
that could mean for the economy and
lastly what really stood out to me the
past week was the surge in gold which on
Friday reached new all-time highs let's
talk about what could be driving that
surge all right starting with the data
so just for some context the past couple
years the market has been paying very
close attention to inflation data why
because the FED has been paying
attention to inflation data and when
inflation comes into too hot the FED
would hike rates and inflation was
coming in cold the FED would cut rates
Market really likes rate cuts and so
they really cheered um lwi inflation
data but more recently the market has
become more concerned with a potential
us recession on the last jobs report we
saw the unemployment rate take up
surprisingly to 4.33% and that really
freaked the market out this past week we
got data that confirmed that
disinflation is firmly in train and also
that
there is less concern for a US recession
now starting with the inflation data now
we got PPI which was prices paid by
businesses and also CPI a popular
measure of prices paid by consumers PPI
very benign even cold and CPI was also
pretty benign on a year-over-year basis
CPI was under 3% so at 2.9% the lowest
it's been for some time looking at the
underlying components of CPI also pretty
benign now as we all know what the FED
really cares about is not PPI or CPI but
pce uh looking at the Cleveland fed's
inflation now casting which after we get
PPI and CPI is pretty accurate the
Cleveland fed is forecasting a pretty
benign pce print as well so taking that
all together now the FED definitely has
enough data over the past few weeks to
feel confident that inflation is heading
towards 2% and they are uh definitely
going to cut rates in September now the
market also firmly prices in a September
cut as well actually it's pricing in
some probability of a 50 basis point cut
and it's pricing in 100 basis points of
cuts uh throughout the rest of the year
now part of the reason why the market is
pricing in so many Cuts is because the
market isn't concerned is concerned
about uh a recession which could push up
the unemployment rate
rate now with respect to infl with
respect to recession the market got some
pretty comforting news as well it
started with retail sales which on a
month-over-month basis has been higher
than it's been for over a year so as we
all know the US economy is heavily
consumer-driven so if the consumers are
spending there's less likelihood of
recession now the good uh consumer
spending data was corroborated by the
earnings report from Walmart again a
huge retailer so they have their pulse
on the US economy now Walmart across the
board guided for high revenues higher
profits and the market really liked it
now to be clear some of their guidance
is because consumers are retrenching
moving away from luxury Brands to to
shopping at Walmart but the market took
the Walmart earnings uh as a positive
note on the US consumer and thus the US
economy in addition to all that we also
got the unemployment claims data which
which were okay now a couple weeks ago
unemployment claims shot up people were
worried that maybe we're heading into a
recession now unemployment claims more
benign that again gives the market more
comfort so taking this all in stride the
market thinks uh seems to think that uh
we are again in soft Landing territory
and so it's not too worried whether or
not that's the case we'll find out as we
get more data in the coming weeks and
especially as we get to hear what Cher
Paul says at Jackson Hall next week uh
where we'll hear here hear his take on
the
data all right now the second thing that
I want to talk about is kamla Harris's
economic proposals now Vice President
Harris hasn't done a lot of interviews
but now she did do a big speech last
week uh talking about her solution to
the housing crisis in the US and to
inflation as regards to housing she
proposes a $25,000
uh subsid to new home buyers as to high
prices she's subscribing to the theory
of uh basically greed inflation that is
to say inflation is in part driven by
the corporate greed and so maybe we
could have some kind of federal price
gouging law that sets limits on on
basically some form of price control
again webly won't know the details at
this moment it's just an idea now on the
housing
front yes for for sure if you give
everyone who wants every new home buyer
$25,000 to buy a new home that's going
to stimulate um home construction
obviously it's going to boost demand
because people can now have more money
to spend on a new house and so we'll
also have new houses built but also note
though that if you suddenly give all
these new home buyers 25,000 well that's
sudden and very quick increase in the
demand for housing and it takes time to
build new housing supply of housing you
know you got you need materials you need
labor you need a whole bunch of
regulations uh to so forth permits and
so forth so uh that Supply is going to
come online gradually but the demand is
much faster so that's very likely you're
going to drive house prices even
higher now I think in general if you
have prices that are too high two
solutions you have either less demand or
more Supply now looking at us States for
example in Texas it's much easier to
build than in other states so when house
prices rise you have a whole bunch of
Builders come in build hundreds of
thousands of houses and home prices
stabilize or go down in contrast State
like California where there's a lot more
regulation when it comes to building
home prices go up and they keep going up
and become increasingly unaffordable now
this type of legislation increases
demand uh without addressing any of the
uh Supply constraints so it's likely
just going to lead to higher prices but
yes at the end of the day uh you will
get more houses
built although it's although it's not
clear um whether not they will be more
affordable because even though you have
$25,000 more in subsidies maybe the
house price also goes up a lot as well
so but again if you are a home builder
this is uh great news now the second
proposal that's a lot more controversial
is price controls now historically
people have
governments have used price controls
basically today and for thousands of
years as a solution to
inflation uh professor John Cochran had
an interesting blog post the past week
on the Roman Emperor di deis who uh I
think around 300 BC had a tremendous
inflation problem so uh what he did was
what we're doing right now price
controls back then uh so the Roman
Empire was running out of money to pay
its soldiers and they really needed the
soldiers to prop them up so they did
what was the most common sensical thing
to do uh they basically debase their
currency by basically giving soldiers
coins with less and less silver content
now to be clear back then their
understanding of the cony was not super
sophisticated so maybe they actually
didn't know that uh by simply printing
more uh coins they would cause inflation
in any Case by paying the so by printing
more coins with lower silver content to
pay the soldiers obviously that
contributed to a lot of inflation now
the emperor solution was well he know he
knew that you know if you have too much
Supply that pushes prices down but he
seemed to think that higher prices were
the result of bad people being greedy
for example Traders buying low in some
region of the Empire uh going on taking
their stuff putting them on ships and S
elsewhere to sell at higher prices and
he thought that was a bad thing and so
he uh put down this edict which we see
here B basically set limits as to how a
wide range of prices could be from you
know uh goat legs to um beef and so
forth it was actually quite
comprehensive and being uh that being
the Roman way and how things were back
then if you violated this it was not a
fine it was death so uh price controls
enforced by capital punishment now that
obviously didn't make things better
because well if
you if you put a limit as to how much
price how high prices can go then a lot
of people just won't sell all those
Traders he complained about that would
buy low in one part of the Empire to
sell High elsewhere well they they just
stopped coming because well they they
they didn't have any profit to make so
they would stop coming and of course
that that made short that made shortages
even worse and made inflation even worse
as well but we really don't have to look
past uh back a couple thousand years to
see the bad see why price controls is a
bad idea we can just look at actually
back in US history President Nixon also
imposed price controls thinking that it
would at least temporary dampen
inflation ahead of his election that was
not successful as we know afterwards we
had tremendously High inflation and we
can also look at across the world to
Venezuela where they also president
Madera over there also imposed price
controls as a way
to uh to limit inflation and what that
led to was very very long lines to
grocery stores and acute acute shortages
in
everything uh because when you can't
make a profit because you can't sell at
the price that you want to sell then you
just don't sell it at all and so you end
up with shortages another way to think
about this is suppose there were price
controls on the price on your salary
let's say that you could not make more
than $10 an hour obviously if you want
people to work more then you want to pay
them more but if you limit how much you
can pay them say to $10 an hour or even
let's say $5 an hour you get fewer
people working and if you get fewer
people working that means there's less
of a supply for labor fewer things
produced everything becomes more scarce
and the way that governments usually
regulate the problem would be some kind
of quota where if you are friends with
the government or have some kind of
connections you get the goods that you
need otherwise everyone else does not
get anything so again back to what I
discussed earlier if you have prices
that are too high the classic response
less demand which is what the FED is
doing with higher interest rates or more
Supply uh which could be through higher
prices again price is high companies
want to make money then they go and they
produce more classic classic uh Market
mechanism price controls limit the
increase in Supply because it limits the
amount of profits businesses can make
and uh always always makes things worse
it's really surprising that uh vice
president Harris would have this kind of
proposal that is just there's so much
evidence over and over again uh that it
doesn't work however also good evidence
that people always fall for it so maybe
it is is a smart decision politically
for her after all uh that being said all
this needs to be implemented through
Congress and right now it's just merely
an aspirational idea and I think it's
concerning as as to uh as to what a
Harris presidency Harris presidency
could be pricing controls basically
guarantees stack
flation okay now moving on to our last
topic let's talk about gold now now gold
really surprisingly surged on Friday
making new all-time highs now as we
discussed before it's really hard to
know what actually drives gold prices
because there are so many potential
drivers now sometimes people point to
the size of the fed's balance sheet
sometimes people point to The Stance of
monetary policy sometimes people point
to geopolitical risk uh other times you
know it's could be momentum uh or it
could be inflation things like that it's
never quite clear but looking at what
happen the past week I think what's
driving gold the past week at least is
the weaker dollar now the dollar notably
sold off with the Euro above 1.1 again
hitting into the end of the week and the
gold seemed to be tracking the weakening
dollar uh and going higher now the
market is pricing in a substantial
amount of cuts by the fed and I think
the the uh currency markets are
interpreting that as smaller interest
rate differentials between the Us and
other countries and there weakening
dollar and thus higher gold but of
course there are also other potential
drivers as well as we all know there is
ongoing geopolitical conflict in the
Middle East as well as in Eastern Europe
now I don't think that geopolitical
risks are the Big Driver in Gold because
the headlines we've got the past week
seem to suggest less geopolitical risk
where there seems to be some negotiation
between uh Israel and Iran for for some
kind of deescalation so that would
suggest less gical uh
attention unless of course someone knows
something in the markets again when it
comes to geopolitics if you are a big
country making a decision involves
thousands of people and so someone
always knows and can act ahead in global
markets like gold so that is possible as
well now when it comes to monetary
policy we are definitely in a global
rate cutting cycle so it does make sense
on that s side for gold um to rise
Global rate cutting cycle easier
monetary conditions monetary metals like
gold usually get a bid now looking at
the sovere looking at the central banks
though it's clear that over the past few
months at least according to official
data big buyers like China haven't been
in the markets so it doesn't seem like
this recent surge is driven by Central
Bank buying now one last possible story
is that the market reacted violently
because it did not like uh the economic
prop proposals of Vice President Harris
which as I noted earlier almost always
always leads to stack inflation
shortages and higher prices and maybe
the market is reacting to that I I don't
place a lot of weight on that though it
seems too much of a
stretch um one other thing that I'll
note is that markets like gold are very
heavily uh driven by uh Trend followers
and so when they see momentum when they
see something is going up the strategy
for these guys is to buy and if you have
gold in a very clear uptrend like that
you'll have a lot of these Trend
followers Pile in which makes the move
go further to the upside so a lot of
possible explanations for gold for me
again I think the clearest uh from my
read the clearest explanation is just
the weaker
dollar so we'll see if that continues
again I think over the coming years I'm
very positive on gold uh but again gold
can be volatile okay so that's all
prepared for this week thanks so much
for tuning in and remember to like And
subscribe and if you're interested in
hearing my latest thoughts check out my
blog at fed guy.com or if you're
interested in learning more about
markets check out my online courses at
Central Banking 101.com talk to you guys
next week
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