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 Drver 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.
