Markets Weekly August 17, 2024

Summary

In 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

00:00

📈 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.

05:01

🏠 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.

10:04

🌐 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.

15:06

📊 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.

Keywords

💡Markets

Markets in this context refers to financial markets, where stocks, bonds, and other securities are traded. The video discusses a week of significant growth in these markets, indicating a surge in asset prices. For example, the script mentions the S&P 500, a stock market index that measures the stock performance of 500 companies listed on the stock exchanges in the United States.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The script discusses how inflation data is closely watched by the market and the Federal Reserve, as it influences monetary policy decisions such as interest rate adjustments.

💡FED (Federal Reserve)

The Federal Reserve, often referred to as 'the Fed,' is the central banking system of the United States. It plays a crucial role in setting monetary policy, including interest rates, which in turn affects inflation and economic growth. The script mentions how the Fed's actions in response to inflation data can significantly impact market behavior.

💡PPI (Producer Price Index)

The Producer Price Index measures the average changes in prices received by domestic producers for their output. In the script, PPI is mentioned as one of the indicators of inflation, with a 'benign' reading suggesting lower inflationary pressures.

💡CPI (Consumer Price Index)

The Consumer Price Index measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The script notes that the CPI was under 3%, indicating a decrease in the rate of inflation.

💡PCE (Personal Consumption Expenditures)

The Personal Consumption Expenditures price index is the Federal Reserve's preferred measure of inflation. It is mentioned in the script as a key indicator that the Cleveland Fed is forecasting to show benign inflation levels.

💡Recession

A recession is a period of negative economic growth that lasts for more than a few months. The script discusses market concerns about a potential US recession, citing the unemployment rate and retail sales data as indicators of economic health.

💡Unemployment Rate

The unemployment rate is the number of unemployed workers as a percentage of the labor force. The script mentions a surprising increase in the unemployment rate to 4.33%, which initially caused market concern about a possible recession.

💡Housing Subsidies

Housing subsidies are financial assistance provided to individuals or families to help them afford housing. The script discusses a proposal by Vice President Harris to offer a $25,000 subsidy to new home buyers, which is intended to address the housing crisis and inflation.

💡Price Controls

Price controls are government-imposed regulations that set limits on the prices of goods and services. The script describes Vice President Harris's proposal for potential price controls to combat inflation, referencing historical examples of their ineffectiveness and potential negative consequences.

💡Gold

Gold is often viewed as a safe-haven asset and a hedge against inflation. The script notes a surge in gold prices, reaching all-time highs, and discusses various factors that could be driving this increase, including a weaker dollar and global monetary policy.

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

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hearing my latest thoughts check out my

blog at fed guy.com or if you're

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markets check out my online courses at

Central Banking 101.com talk to you guys

next week