European Resurgence

By John Mauldin



One of COVID-19’s many less-than-obvious consequences is the way it makes us look inward. Facing mortality has always done that, of course. West Texas Judge Roy Bean reportedly said, “Nothing focuses the mind like a good hanging.” For the vulnerable and those of us of a certain age (ahem), this virus goes beyond the normal daily risks.

The difference this time is we are vulnerable based on proximity The virus threatens us only if it is physically near. That’s one reason Americans didn’t take it seriously at first. It was far-way Chinese and Italian news. Like reading about the all-too-terrible prospect of China’s Three Gorges Dam collapsing, or the current famine in Africa. You know it’s bad, but it’s not in your backyard.

Then, as the virus spread here, our protective measures required heightened awareness of local conditions. Whether that stranger is getting too close to you may be more important than events overseas.

As a result, we haven’t paid enough attention to some important developments elsewhere. Big things have been brewing in Europe. The same continent that two years ago I said was going through “monetary drug withdrawal,” is now set to outpace US growth by a wide margin. And US growth, which had led the world for years, now looks likely to lag it.

That turnaround has potential major market consequences, which can be either good or bad depending on the market. We need to pay attention. What happens around the world affects us and our markets. The global connectivity may be slightly less today, but it is not going away. Today we’ll review what is happening and what it could mean for you.

But first, we have to take a quick look at a few US numbers.
 
From Peter Boockvar today:

… we continue to wait for Congress to make a deal with the unemployment benefit extension the main focus. To quantify, with 30mm people collecting benefits, that extra $600 is $18 billion per week of extra cash that people have been getting. That’s about $72 billion per month That’s $216 billion over the past three months. Big money that Amazon and Apple have been big beneficiaries of since they are vendors of choice. Facebook and Google have certainly benefited from PPP money so any extension of that will be relevant too. To repeat, according to a University of Chicago study, 68% of those collecting this money has been getting more than what they made prior with the median increase of 34% above. I’ve seen a few different proposals on an extension. One, that won’t likely happen, is just reducing it to $200. Another is scaling it down in the coming months to eventually $300 by October. So, an extension will happen, but the rate of change will slow. 

 
If that were to continue, it would further expand US debt, on top of all the other programs contemplated. The US deficit is not going down anytime soon, nor is anyone else’s.
 
China is using massive debt driven infrastructure spending to maintain even 2–3% GDP growth. Anything less will call into question the current government’s legitimacy. Countries all over the world are doing the same: using debt to shore up growth and employment.

Our friends at Quill Intelligence offer this chart. US household productivity has been dropping for two years. Business productivity has begun to drop coincident with the COVID recession.
 


Source: Quill Intelligence

 
Two major points:

First, reduced federal and state assistance will negatively impact consumer spending. Clearly, the federal unemployment assistance was being spent. (The PPP program is a disaster, giving money to companies that don’t need it and not to hotels and other small businesses in any usable form. Unless Congress acts soon, the hotel industry will simply collapse and take two million jobs with it, plus another six million dependent upon the industry. I would argue that hotels are at least as important as airlines.)

Second, future headlines will talk about recovery in terms of quarter over quarter.
 
Twelve months from now, we will talk about year-over-year, which of course should be better (we desperately hope!) And while that will be good, true recovery analysis will use 2019 quarterly numbers as the comparison.

Recovery is going to take years. The world is being repriced. By the end of August, I expect well over 100,000 small businesses (and a few large ones) to have permanently closed. It’s going to take these entrepreneurs more time and money than you might think to figure out a new game plan in a completely different business landscape.

And that brings us to Europe. They have their challenges, too.

Bridge Too Far

People have dreamed of a “united Europe” since the end of World War II, and with good reason. The continent is so varied (geographically, linguistically, and culturally) it was long prone (as in for 2,000 years) to unproductive and occasionally destructive conflicts. No one liked that part, but the question was how to have both consistent economic policies and national autonomy.

The European Union is an attempt to do that. The smaller Eurozone currency pact is another. Both have advantages and drawbacks, which the Greek debt crisis highlighted. More recently, Italy has been the spotlight.

The core problem: It’s hard to sustain common policies and/or a common currency without a central authority that can issue common debt. And to do that, the central authority needs taxing power.

That was a bridge too far for many in the UK, which is why it never adopted the euro currency and one of the reasons it finally left the EU completely. Some other members were none too happy, either. Many observers, including me, were skeptical the monetary union could hold together in a world where decentralization was the dominant trend.

Then came COVID-19. Now it seems to have changed everything, but that wasn’t the case at first. Back in March/April (which now seem like ancient history, I know) the virus hit Italy and Spain very hard. Members of the “open borders” alliance started closing borders instead, along with hoarding medical supplies and generally blaming each other. It was ugly for a time. EU breakup talk grew noticeably louder.

About that time, American news coverage turned to our own outbreaks, and we mostly tuned out Europe. European leaders, realizing US weakness guaranteed a global recession, saw an existential threat to their export-dependent economies. Hardliners turned suddenly flexible.

They could do this because they also managed to get the virus under some semblance of control. They did so by various means, but in most cases through longer and stricter shutdowns than we saw in the US (Sweden being the obvious exception). It took a terrible economic toll. Europe is not virus-free by any means. Daily life isn’t back to normal.

Parts of Spain are having outbreaks, prompting the UK and Germany to impose travel restrictions. But the EU countries generally handled the pandemic far better than the US has, and they are now recovering faster.

We can debate the reasons, but political structure and cultural cohesion seems to be part of it. As sometimes happens in families, crisis brought an otherwise dysfunctional group together.
 

 
Germany and France are the EU’s two largest economies and top exporters. Between the self-inflicted shutdown damage and the global recession, both entered this spring facing serious economic harm. Angela Merkel and Emmanuel Macron realized the only feasible solution would require drastic steps many EU members, particularly Germany, had previously resisted.

Let’s stop here and note something. In the US, we are accustomed to Congress approving legislation by majority vote. Someone always loses.

The EU operates more by total consensus. Nothing major happens unless every member government agrees. That makes reaching agreement harder, but they have more “buy-in” once made.

So back in May, Macron and Merkel agreed the EU should make huge loans and grants to hard-hit countries. This was partly self-preservation. Their own economies need those other countries to buy French and German goods.

Understand, without aid, Italy was on a trajectory to leave the EU. There is (still) a significant anti-EU movement in Italy. Why be part of a monetary union which would let your nation collapse is not an unreasonable question, especially if you are already prone to be an EU skeptic.

Merkel and Macron and others recognized the danger. The EU helped Greece, even if they did force Athens into a five-year depression. The idea of a country leaving was unthinkable. The EU without Italy collapses. Brexit was a wake-up call for EU leadership.

Personal story: Three years ago, I was in Frankfurt giving a speech to a German pension fund conference. I was told the 200+ attendees represented the significant majority of German pension assets. With the host’s permission, I asked the attendees if they thought the EU was a good thing. 90% plus raised their hands.

I then asked them if they would be willing to finance some of the southern European countries in a crisis to keep the EU together. Less than 10% raised their hands. Reminding them that Germany was 50% exports, and that a euro that was primarily German would be much higher relative to southern Europe and would devastate Germany and their economy, would you consider helping southern Europe? About 90% still sat on their hands.

These were economically sophisticated people. They understood exactly what I was saying. I followed up that conversation in the halls and at dinners and found little difference in their public and private postures. I came away realizing that if this group was so determined not to use German financing to help southern Europe, what would the good German burghers of Bavaria think?

Macron also has sizable opposition within France. For Merkel and Macron to recognize the need for a pan-European finance plan, and actually have the ability to bring it about is utterly amazing.

The plan will effectively give the EU its own fiscal policy, going beyond the various smaller support measures taken in the last euro crisis. I have long noted that there has been no monetary union anywhere in history that did not eventually encompass fiscal union.

For Europe, this would mean mutualization of much of the national debt. I have always felt that without that mutualization, the EU would eventually break up. Make no mistake, the latest European plan is one small step leading to an even bigger leap to a closer European Union. How did this come about?

A group of nations in northern Europe, Germany being the largest, have long blocked such ideas on “moral hazard” grounds. Those objections appear to have dissipated, at least for this first €750 billion package. Staring your own economic mortality in the eye has a way of doing that. It very much focused their collective minds.

But give Merkel and Macron credit, too. They persuaded other leaders to swallow their pride/reservations and got all 27 members to agree.

My friend Ian Bremmer, top geopolitical expert at Eurasia Group, called it, “by far the most successful and proactive display of international leadership since the pandemic began (and, indeed, since the end of the great recession in 2008–2009).” That’s not something he would say lightly.
 
He went on (this is from his July 27 private client letter):

In the near term, everyone’s a winner—something we’re not saying much in these pandemic days. German Chancellor Angela Merkel and French President Emmanuel Macron push a pro-European integrationist agenda, weakening euro-skeptics both at home and across the continent. European Commission President Ursula von der Leyen can tout a successful government-led response to a 10% plus economic contraction, one that doesn’t further burden member states with higher debt levels and limited fiscal space. The Italians and Spaniards get desperately needed support, boosting both of their governments against (what had been) growing anti-establishment surges at home. While existing populist leaders in east Europe had their potential vetoes bought off by ensuring there were limited political conditionalities for transfer. Even the so-called frugal countries, led by Dutch Prime Minister Mark Rutte, were able to pocket sufficient political for their domestic constituencies, some rebates on their EU budget contributions and the ability to delay payments should economic policymaking by recipient states not result in serious economic restructuring (labor market and pension reforms) that the ‘Frugals’ want to see. 

 
This has wider implications, too. The poorer states that will receive this money are also the ones where populist and anti-EU feelings are strongest. The loans and grants should draw them at least somewhat closer to the union.

Bottom line: The very real possibility, just a few months ago, of Brexit-like feelings leading to an EU breakup now seems off the table—at least for a few more years. Pro-EU leaders have successfully used the pandemic to expand EU power and buy off the opposition.

This is a major change in the Zeitgeist. It will have financial consequences everywhere. The principle that the European Commission can issue bonds and collect taxes to pay them is now established. This is a big deal.

But let’s translate that into how you can profit from that transition.

Relative Stumbles

Active traders and investors know of something called a “spread” trade. It’s used when you think one asset will rise more than another one. You buy the faster-gaining one and short the laggard. What matters is the “spread” between them, not the direction. You’re betting that the loser will be weaker than the winner, whether they both go up or down or not.

We may shortly see something like that with the US and EU economies. Whatever happens in the next year or so, Europe seems likely to outperform. That might mean it just shrinks less, but it would still matter.

Consider what we know:

  • The EU has, for now at least, suppressed COVID-19 cases to a much lower level. This is allowing Europe to resume some semblance of normal economic activity.

  • Meanwhile, rising cases and deaths in the US have compelled some governors to reimpose business and movement restrictions. Extensive precautions seem likely to continue into autumn as schools reopen (or try to) and the normal flu season begins.

We also have widespread street protests and a contentious election, neither of which helps the public health response.

US growth projections are all over the board. This year’s second quarter was brutal. We can still hope for a Q3 “bounce,” but it is becoming less likely that it will be as significant as hoped, on a year-over-year basis.

The latest Atlanta Fed GDPNow Q3 estimate is +11.9%. That would be nice but still leave us deep in the hole. It will seem significant and make for great headlines. But in any case, it is hard to see the US economy outpacing the EU.

My friend Sam Rines of Avalon Advisors shared these charts showing Eurozone GDP is expected to outpace US GDP by 1.60 percentage points in 2021.
 
That’s huge. If it happens, it will be the Eurozone’s best relative growth since 2007. Pay attention to the second chart.


Source: Avalon Advisors


Source: Avalon Advisors

 
Now, look at those periods of European outperformance and notice how the euro strengthens relative to the dollar during those periods. When the US significantly outperforms the eurozone, as it did in recent years, the euro drops relative to the dollar.
 
It came close to hitting the one-dollar mark—or parity. It is now back to $1.18. We could see the euro rise much further as Europe outperforms the US in the coming year or two.
 


Source: Avalon Advisors

 
We also have the Federal Reserve pledging to keep interest rates near zero.

This “lower for longer” outlook has an effect on the US dollar. It has been relatively strong because our rates, while low, are at least not negative as in Japan and much of Europe.

Normally, a weaker dollar has benefits. It makes US exports cheaper. But with most of the world now trying to be as self-sufficient as possible (in addition to being in recession), we probably shouldn’t expect anything like normal trade volumes.

The most obvious winner in this is gold.

Lower interest rates reduce (or actually eliminate) the opportunity cost of holding a non-yielding asset. While low growth is keeping the inflation outlook mild, it isn’t zero. That helps gold, too.

Now, a great deal of this depends on the pandemic. It could get either better or worse on both sides of the Atlantic. If human trials are positive, a vaccine could be available early next year.

More sanguine analysts think we won’t see a vaccine until late 2021. In any case, key questions will be how fast it can be distributed, and who would get it first.

Same for treatments. If scientists find a drug that prevents most fatalities and reduces hospital stays, it might restore enough confidence to get consumers out again. Travel could resume without fear your life is at undue risk. A treatment is far more likely within the year.

Remove the virus from the equation and we return to an economy governed by the other factors that preceded it. From the point of the spread trade, it is likely you would see the US once again outperform and the euro fall. Sic transit gloria.

That pre-COVID economy wasn’t especially great, but it was far better than what we have now. We may be entering a radically different world for the next year or so, one in which US economic leadership is no longer assumed. Exactly what that would look like is unclear. Former FDA commissioner Scott Gottlieb has a guess.


Source: twitter

 
 
(By the way, you really should follow me on twitter. I highlight items like this, as well as make my own observations here.)

That would be ugly all around, especially for the dollar, but it’s possible if we don’t get a vaccine or treatments fairly soon—or at a minimum get the virus under control. Imagine a world in which Americans can’t leave and foreigners can’t enter, while Europeans can cross borders far more freely. What does that do to each side’s relative economic growth?

But I’m an optimist. I believe we will get out of this, one way or another. I can’t tell you when or how, nor can I promise it will be easy, but I think we will stumble through. Let’s try not to scrape our knees any more than necessary.

Tropical Storms, Hurricanes, and Puerto Rico

It is hurricane season in the Caribbean. I have friends asking if we are okay in Tropical Storm Isaias, as their news reports sounded rather dire. I am still getting used to Puerto Rico’s weather patterns. The island is large enough to affect storms. They tend to hit the eastern/southern side first, then the mountains and rain forest generally reduce the effects by the time the reach Dorado Beach, where I live, on the northern coast nearer the western tip.

Using my pool as an unofficial rain gauge, we got about 4+ inches of rain over 36 hours. Never as heavy as a West Texas thunderstorm, but steady rain nonetheless, and not much wind at all. Electricity went out across the island, although those of us fortunate enough to have generator backup didn’t notice all that much.

That was not the case on the eastern side. My friends there report massive rains and significant winds, with some trees down across roads. Here are pictures (thank to my friend Sean McCaffrey) from the Las Palmas golf course. These “lakes” are not water hazards. They were the fairways a few days ago. Some of the greens are now island greens. That’s a lot of rain.


 
All in all, not too bad as storms here go, although many areas are still without power accompanied by the usual damage. But the forecast is that it will be category two Hurricane Isaias by the time it hits Eastern Florida. That is a far more significant event than we faced here. I wish my friends there Godspeed.

As an aside, Puerto Rico is also getting earthquakes for the first time in 40 years. The last truly big one was in 1918. We have had a few of significant size over the last few quarters. Again, the earthquakes usually originate on the south side and we barely feel them in the north. Like hurricanes and tornadoes and severe storms in Texas, one will eventually come your way.

Now we all deal with the pandemic, which has been a far greater destructive force, in terms of lives and ongoing health issues and of course the economy.
 
Like Roseanne Roseannadanna:


Source: Pinterest

 
Have a great week and be careful out there!

Your wondering what the next thing is analyst,


 

John Mauldin
Co-Founder, Mauldin Economics

Europe and US can still beat Chinese tech

The first step should be easy: create a transatlantic technology detente

Rana Foroohar

Matt Kenyon’s illustration of Rana Foroohar column ‘We need a Transatlantic Tech Detente‘
© Matt Kenyon


One of the biggest mistakes that Donald Trump has made in recent years, amid a very long list, was trying to go it alone in his technology and trade war with China.

Europeans share many of concerns that the US has about the Chinese surveillance state, and the dangers that it poses to competition, privacy and liberal democracy.

The US president could have drawn Europe into an alliance that would have pressured China about old trade grievances as well as the need for a new global framework on how digital business should be governed.

Instead, the Trump administration took on all the world at once, slapping tariffs on enemies and allies alike. The result has been the creation of a tri-polar world in which the US, Europe and China are moving in separate digital directions.

Events last week underscored the fragmentation. A European court struck down the Privacy Shield data sharing agreement between the US and EU, which many companies depend on to transfer safely across borders information such as payroll data. The UK, under pressure from the US, also decided to pull Huawei out of its telecoms networks.

EU nations such as Germany are hedging their bets, for now. Even so, a recent Deutsche Bank report estimates that this Sino-US-UK tech cold war will cost $3.5tn over the next five years.

That is not all. Last week, the EU was also defeated in its efforts to force Apple to pay €14.3bn in back taxes to Ireland, which had given the Silicon Valley giant a sweetheart deal for years.

Separate national tax regimes are perfectly legal. But they also create a race to the bottom that pits countries against each other and allows companies to shop for the best deal. It’s a technological tragedy of the commons.

That is especially so now, when highly indebted governments need more tax revenues to support spending during the pandemic.

The US and Europe are also fighting about how to tax companies that profit from consumer data. As the world shifts towards an ever more intangible economy, the EU wants a regime that targets Big Tech.

But the US argues that other multinationals — such as, say, a European handbag maker that also collects personal data from customers — should pay tax in the US too, and has threatened new tariffs against France.

As data is a resource currently mined for free by Big Tech and other multinationals, it is in the interests of both sides to come up with a shared taxation framework. The fact that Mr Trump is still threatening Brussels with various tariffs makes that all but impossible.

There are only two winners so far in this transatlantic war. The first is Big Tech and other digital data miners, which continue to grow in wealth and power. The second is China, which is rolling out 5G telecoms systems globally much faster than either the US or Europe.

Beijing has already drawn dozens of emerging market nations into its orbit through its Belt and Road Initiative, other development programmes, and its influential position at the UN’s International Telecommunication Union, which sets global telecoms standards.

And who can blame these countries, given the inability of the US and Europe to create cohesive or long-term standards and strategies about digital governance? Without these, it is impossible to predict — let alone join — the liberal democratic west’s alternative to China’s digital surveillance model.

“It would very much serve US interests to build an alliance with Europe and other countries based on the values that we hold to be important,” says Victoria Espinel, head of the Business Software Alliance, one of the largest tech lobbying groups. True. But that can’t happen until “we” Americans and “we” Europeans agree about what this alternative should be.

If Joe Biden wins the US presidency, the basic dynamics of US-China tech decoupling are unlikely to change. Recent statements by the Democrat party’s presumptive candidate have made clear that he wants more domestic innovation, and safer and shorter supply chains too.

However, unlike Mr Trump, Mr Biden has stressed the need to co-operate with US allies.

Creating a new transatlantic trade and technology framework should be top of his agenda.

Angela Merkel, German chancellor, and Emmanuel Macron, French president, should meanwhile draw up a list of what they’d like that framework to include.

The EU has unprecedented negotiating power right now. For one, the US cannot compete alone against China in 5G. If Mr Biden becomes the next US president, he will also have to spend some goodwill to fix the damage Mr Trump inflicted on transatlantic relations.

A new deal might include lifting tariffs in exchange for developing a shared framework for the digital economy. This framework should exclude China’s Huawei from 5G systems, and be built around Qualcomm, Nokia and Ericsson instead. It would require a mutual EU-US digital privacy agreement.

There would also have to be a digital tax system that allowed nations to capture tax revenues from companies that monetised citizen data. Lastly, an independent bureau should address competition and transparency issues.

Agreeing on all these issues would be very hard. But it would also ensure that the US and Europe are better placed to compete against China in an ever more fragmented digital world.

Gold And Gold Stocks Enter Autumn Rally Season

Adam Hamilton



Summary

- Gold and gold stocks are entering their strong season, starting with their autumn rally mostly in August and September. That's normally fueled by Asian seasonal gold demand ramping back up.

- But all this year's pandemic craziness has also unleashed strong sustained investment buying from around the world. These big capital inflows should make for supercharged gold and gold-stock autumn rallies.

- Technically, gold has blasted vertically to extremely-overbought levels in recent weeks, complicating its autumn-rally outlook. After gold soared too far too fast historically, pullbacks or corrections soon followed.


The gold miners' stocks have rocketed higher this summer, smashing out of their usual summer-doldrums sideways grind. That atypical strength has been driven by gold steadily marching to major new secular highs, fueled by strong investment demand.

This has carried gold stocks and the metal they mine back to their traditional strong season, which begins with robust autumn rallies usually accelerating in late summers.

Seasonality is the tendency for prices to exhibit recurring patterns at certain times during the calendar year. While seasonality doesn't drive price action, it quantifies annually-repeating behavior driven by sentiment, technicals, and fundamentals.

We, humans, are creatures of habit and herd, which naturally colors our trading decisions. The calendar year's passage affects the timing and intensity of buying and selling.

Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Gold's seasonality, generally, isn't driven by supply fluctuations like grown commodities see, as its mined supply remains relatively steady year-round.

Instead, gold's major seasonality is demand-driven, with global investment demand varying considerably depending on the time in the calendar year.

This gold seasonality is fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world. Starting in late summers, Asian farmers begin to reap their harvests. As they figure out how much surplus income was generated from all their hard work during the growing season, they wisely plow some of their savings into gold. Asian harvest is followed by India's famous wedding season.

Indians believe getting married during their autumn festivals is auspicious, increasing the likelihood of long, successful, happy, and even lucky marriages. And Indian parents outfit their brides with beautiful and intricate 22-karat gold jewelry, which they buy in vast quantities. That's not only for adornment on their wedding days, but these dowries secure brides' financial independence within their husbands' families.

So, during its bull-market years, gold has usually tended to enjoy major autumn rallies driven by these sequential episodes of outsized demand. Naturally, the gold stocks follow gold higher, amplifying its gains due to their profits leverage to the gold price. Today, gold stocks are once again back at their most-bullish seasonal juncture, the transition between the typically-drifting summer doldrums and big autumn rallies.

Since it is gold's own demand-driven seasonality that fuels gold stocks' seasonality, that's logically the best place to start to understand what's likely coming. Price action is very different between bull and bear years, and gold remains in a middle-aged bull market. After falling to a 6.1-year secular low in mid-December 2015 as the Fed kicked off its last rate-hike cycle, gold powered 29.9% higher over the next 6.7 months.

Crossing the +20% threshold in March 2016 confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthy selling was greatly exacerbated after Trump's surprise election win. Investors fled gold to chase the taxphoria stock-market surge. Gold's correction cascaded to serious proportions, hitting -17.3% in mid-December 2016. But that remained shy of a new bear's -20%.

Gold rebounded sharply from those anomalous severe-correction lows, nearly fully recovering by early September 2017. But gold failed to break out to new bull-market highs, then and several times after. That left gold's bull increasingly doubted, until June 2019. Then, gold surged to a major decisive breakout confirming its bull remained alive and well! Its total gains grew to 87.3% over 4.6 years by late July 2020, still modest.

Gold's last mighty bull market ran from April 2001 to August 2011, where it soared 638.2% higher! And while gold consolidated high in 2012, that was technically a bull year too since gold just slid 18.8% at worst from its bull-market peak. Gold didn't enter formal bear-market territory until April 2013, thanks to the crazy stock-market levitation driven by extreme distortions from the Fed's QE3 bond monetizations.

So, the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, then resumed in 2016 to 2020. Thus, these are the years most relevant to understanding gold's typical seasonal performance throughout the calendar year. We're interested in bull-market seasonality because gold remains in its latest bull today and bear-market action is quite dissimilar.

Prevailing gold prices varied radically throughout these modern bull-market years, running between $257 when gold's last secular bull was born and to this week's newest record high of $1,969. All those long years with that great range of gold levels have to first be rendered in like-percentage terms in order to make them perfectly comparable. Only then can they be averaged together to distill out gold's bull-market seasonality.

That's accomplished by individually indexing each calendar year's gold price action to its final close of the preceding year, which is recast at 100. Then, all gold price action of the following year is calculated off that common indexed baseline, normalizing all years regardless of price levels. So, gold trading at an indexed level of 105 simply means it has rallied 5% from the prior year's close, while 95 shows it's down 5%.

This chart averages the individually-indexed full-year gold performances in those bull-market years from 2001 to 2012 and 2016 to 2019. 2020 isn't included yet since it remains a work in progress. This bull-market-seasonality methodology reveals that late summers are when gold's long parade of big seasonal rallies really gets underway. That starts with the major autumn rally which is born in gold's summer doldrums.




During these modern bull-market years, gold has enjoyed a strong and pronounced seasonal uptrend. From that prior-year-final-close 100 baseline, it has powered 15.0% higher on average by year-end.

These are major gains by any standard, especially averaged across 16 different years. While this chart is rendered in familiar calendar-year terms easiest for us to parse, gold's seasonal years actually start in summers.

Gold tends to see its major summer-doldrums low in mid-June, the best seasonal buying opportunity of the year in precious metals. But then, it usually spends the next 6 weeks into late July drifting sideways to modestly higher. On average, gold slowly inches up 1.4% over that span, plodding middling gains often too inconsequential to register on investors' radars. The first 2/3rds of gold's summers are typically fairly dull.

But strong August action shatters that summer-doldrums malaise as gold's major autumn rally picks up steam. Starting in late July, Asian-harvest gold buying really accelerates. While gold's average gain in July between 2001 to 2012 and 2016 to 2019 was just +0.5%, in August that nearly quintupled to +2.3%. Surprisingly, given gold's weak summer reputation, August has proven its third-best month seasonally.

Then, September weighs in at fourth at 2.1% average gains in these modern bull-market years.

And that is despite gold's autumn rally topping in late September at 6.2% average gains. Of gold's three major seasonal rallies, this +6.2% autumn one ranks in the middle between the powerful +9.1% winter rally and the comparatively-anemic +3.3% spring rally. Nearly 6/10ths of autumn-rally gains accrue by the end of August.

While getting deployed in precious-metals positions in mid-June ahead of gold's troika of seasonal rallies is ideal, late July is normally the last chance to buy in relatively low. In typical summer-doldrums years where gold sentiment is apathetic, it takes a resolute contrarian bent to fight seasonal weakness and shift capital into the precious metals before the autumn rally. Gold's huge counter-seasonal strength this year is unusual.

With their kids out of school, a sizable fraction of global traders takes vacation time to enjoy summers. So, gold investment demand usually withers in June and July. But that certainly hasn't happened during this odd pandemic-scarred summer. The best daily proxy for global gold investment demand is the holdings of the dominant American GLD SPDR Gold Shares gold ETF (GLD), which I last explored in a mid-June essay.

Contrary to normal summer-doldrums behavior, in June, GLD shares experienced such heavy differential buying that this ETF's physical-gold-bullion holdings ballooned a large 5.0%.

Rising GLD holdings show investment capital migrating into gold. GLD's holdings climbed to major secular highs on 10 of June's 22 trading days, helping push gold to major secular highs of its own on 5 of those. Investors really wanted gold.

Their outsized counter-seasonal demand hasn't abated in July either. Month-to-date, as of Wednesday, GLD's holdings have surged an even-bigger 5.4% on GLD-share buying persistently outpacing gold's own.

Did this big summer investment rush pull forward some of gold's autumn rally or will demand still grow like usual in August and September pushing gold higher? Gold's extreme overboughtness complicates this.

With COVID-19 and governments' heavy-handed responses to it disrupting pretty much everything all over the world, summer 2020 is wildly unprecedented. Investors are flocking to gold via its ETFs led by GLD because of this crazy situation. They saw the stock markets collapse into a brutal panic on the draconian economic lockdowns, then saw central banks conjure up trillions of dollars to reverse that ugly selling.

In just over a month into late March, the flagship benchmark S&P 500 stock index plummeted 33.9% in a rare full-blown stock panic. That's a 20%+ cratering in 2 weeks or less. Stock panics force investors to remember that market cycles still exist, stock markets rise and fall. Those traumatic events dramatically alter psychology for years after, elevating perceived risks for more serious downside. That's great for gold.

After the prior stock panic in October 2008, gold soared 166.5% higher over the next 2.8 years.

That was fueled by a massive 71.5% or 535.5 metric-ton GLD-holdings build. After suffering stock panics, investors flock back to gold for a long time to prudently diversify their stock-heavy portfolios.

So, even without this scary pandemic, gold investment demand will likely remain elevated for years in the wake of March's panic.

Fed officials were terrified with the extreme fear from COVID-19, governments' lockdowns and the plunging stock markets would spiral into a devastating depression. The US economy is overwhelmingly driven by consumer spending, so when Americans pull in their horns en masse economic contraction cascades into a vicious circle. To attempt to stave this off, the Fed ramped its money printing far beyond stratospheric.

From mid-March to mid-June, the Fed's balance sheet skyrocketed up 66.3% or $2,857b.

In only 3 months, it evoked enough new dollars to force their overall supply 2/3rds higher. That is radically unprecedented, as close to hyperinflation as this 107-year-old central bank has ever dared tread. High inflation, relatively more money chasing relatively less goods and services, drives outsized gold investment.

The Fed's $2.9t monetary deluge bought a massive 44.5% rebound rally in the S&P 500 by early June.

But the elite American companies in this index aren't earning anywhere near enough profits to justify such lofty Fed-goosed levels. At the end of June, the S&P 500 stocks averaged trailing-twelve-month price-to-earnings ratios of 27.8x. Weighted by market capitalizations, that ran 33.1x. Anything over 28x is a stock bubble.

And that was even before any disastrous Q2 earnings were reported, in the peak-lockdown quarter where economic activity collapsed. Lower profits will force prevailing valuations even higher into dangerous bubble territory. So investors are very justified in fearing more serious stock-market selling. As long as they do, gold investment demand will remain elevated. Stock markets need to reflect this COVID-19 world.

This unusual strong global investment demand should combine with typical strong Indian investment demand in this year's autumn rally. Indian economic growth had stagnated even before this pandemic, and India's COVID-19 cases have rocketed to the third-highest in the world despite low per-capita testing. The Indian rupee has fallen to record lows against the US dollar this year too, heightening inflation fears.

Thus, rupee gold prices have soared to dazzling record highs. Indians are usually shrewd price-conscious gold buyers. But with COVID-19 spreading fast and more draconian lockdowns likely, moving capital into gold to protect from currency debasement should be a powerful motivator to step up investment demand. Way behind on their typical gold buying this year, stressed-out Indians should be anxious to stack more gold.

So, 2020's autumn gold rally has real potential to keep growing much larger than normal driven by unusually-strong gold investment demand. That is very bullish for gold stocks. The major miners of the leading GDX VanEck Vectors Gold Miners ETF (GDX) tend to amplify material gold upside by 2x to 3x. And these higher-prevailing gold prices are dramatically boosting their earnings, fundamentally justifying big stock-price gains.

Gold miners won't finish reporting their Q2 results until mid-August, but they will look awesome excluding COVID-19-lockdown disruptions. Over the past four quarters ending in Q1, the top 25 GDX gold miners reported average all-in-sustaining costs of $904 per ounce.

AISCs don't change much since mining costs are largely fixed regardless of gold levels. In Q2, gold averaged a high of $1,714, implying big sector profitability.

The major gold miners of GDX could've earned $810 per ounce last quarter had lockdowns not briefly shuttered some operations. That would've made for astounding 84.5% year-over-year profits growth.

Of course, higher gold prices mean much-higher earnings in future quarters too. Soaring gold-mining profits are attractive anytime but irresistible in bubble stock markets plagued by falling general corporate earnings.

This next chart applies this same modern-gold-bull-year seasonality methodology to gold stocks. Since GDX was just born in May 2006, its price history is insufficient for longer-term studies. Thus, the classic HUI gold-stock index is used instead. GDX and the HUI closely track each other, they are functionally interchangeable containing most of the same major gold stocks. Gold gains drive their autumn rally.




The major gold stocks have averaged a 10.4% autumn rally in 2001 to 2012 and 2016 to 2019.

Like gold that starts grinding higher in mid-June, stalls to drift back down into late July, then greatly accelerates in August before topping in late September. Gold stocks' autumn rally kicks off their strong season, which runs until early the following June. This contrarian sector's overall seasonal uptrend is incredibly strong.

On average, across these 16 gold-bull-market years, gold stocks have powered 27.4% higher.

That is an extraordinary gain across such a long secular span. While gold stocks aren't very popular outside of the usual contrarian circles, they certainly should be. With average annual gains at that scale, speculators and investors can double their capital in major gold stocks in less than 3 years. That's hard to beat anywhere.

Yet, out of gold stocks' three major seasonal rallies that mirror gold's, the autumn one is the most anemic. It is the smallest on average with those 10.4% HUI gains, compared to 15.2% in the subsequent winter rally and 11.5% in the later spring rally. Those run parallel to gold's +6.2%, +9.1%, and +3.3% in its own autumn, winter, and spring rallies. Thus gold stocks' autumn-rally upside leverage to gold has only run about 1.7x.

That's worse than GDX's average gold outperformance of 2x to 3x but in line with the winter rally's similar upside leverage of 1.7x. Gold stocks amplify gold's gains the best in their spring rally, which clocks in way up at 3.5x. But their autumn rally is still well worth trading even with relatively-low upside leverage to gold on average. That is skewed low by weak autumn-rally years where gold and gold stocks fall sharply.

But, in strong autumn-rally years where elevated gold investment demand pushes the yellow metal higher, gold stocks really amplify its gains. Last year was a great case in point. Between late May to early September 2019, roughly the autumn-rally span, GDX soared 51.6% on a 21.4% gold run. That made for good 2.4x upside leverage. When gold rallies strongly like this summer, gold stocks still really outperform.

So, if gold investment demand remains strong as it ought to this August and September, the gold stocks should see much-bigger autumn-rally gains than usual. August has proven gold stocks' second-best month of the year seasonally, enjoying excellent average 4.4% gains. September is no slouch either averaging +2.6%. These months combined are major gold stocks' third-strongest 2-month seasonal span.

That is more apparent in this final chart that slices gold-stock seasonals into calendar months.

Each is indexed to 100 at the previous month's final close, then all like months' indexes are averaged together. These same modern-gold-bull years of 2001 to 2012 and 2016 to 2019 are included. The next couple months are usually an important time to be fully deployed in gold stocks in order to ride their autumn rally.





Gold-stock seasonals are certainly very favorable in these next couple months. Late summers heading into August before gold's and gold stocks' autumn rallies, usually, offer an excellent seasonal buying opportunity.

While not quite as good as the earlier summer-doldrums lows, late summers are just before gold stocks transition into their seasonally-strong autumns, winters, and springs. Those enjoy major gains.

That being said, seasonality reveals mere tendencies. The primary drivers of gold and its miners' stocks are sentiment, technicals, and fundamentals. Seasonality reflects how these average out across calendar years over long spans, but they can easily override seasonals in any given year. But this year's autumn-rally setup still looks quite bullish because it is so wildly unprecedented. We've never seen anything like it.

As long as gold investment demand remains strong pushing this metal higher, the gold stocks will follow it up amplifying its gains. Heading into autumn 2020, it's hard to imagine investors forsaking gold. We just had a rare stock panic, which galvanizes gold investment demand for years. The frantic Fed did all but hyperinflate to dig stock markets out, blasting the dollar supply 2/3rds higher forcing stocks into bubble territory.

And overlaying that big heap of gold bullishness, we are plagued with a raging pandemic still worsening. Its economic impact from both fear and government actions has been devastating already and remains far from over. Wall Street's V-shaped economic recovery is a euphoric fantasy, with a long drawn-out U-shaped one being far more likely. Gold investment demand shouldn't flag given these extraordinary risks.

But, technically, gold has blasted vertically to extremely-overbought levels in recent weeks, complicating its autumn-rally outlook. After gold soared too far too fast historically, pullbacks or corrections soon followed. Excessive euphoric gains pull forward too much near-future buying, exhausting gold's near-term upside potential. Yet, with markets so radically unprecedented now, gold may be able to resist that usual reckoning.

The bottom line is gold and gold stocks are entering their strong season, starting with their autumn rally mostly in August and September. That is normally fueled by Asian seasonal gold demand ramping back up.

But all this year's pandemic craziness has also unleashed strong sustained investment buying from around the world. These big capital inflows should make for supercharged gold and gold-stock autumn rallies.

Investors have been flocking to gold and its miners this summer because they are rightfully very worried. No one knows how terrible COVID-19's economic impact will, ultimately, prove.

And the Fed's radically-extreme monetary inflation has spawned bubble-valued stock markets.

Prudently diversifying portfolios with gold may have never been more important. That trend could fuel one heck of an autumn rally this year.

Financial advisers discard playbook of 2008 crisis

Clients are advised to cancel car insurance, take gap years and bolster cash reserves

Josh Azar

‘This pandemic is creating the need to alter advice or offer new areas of advice that we’ve never had to face before’ - Ric Edelman, founder of Edelman Financial Engines
‘This pandemic is creating the need to alter advice or offer new areas of advice that we’ve never had to face before’ - Ric Edelman, founder of Edelman Financial Engines © Angela Weiss/AFP via Getty


Registered investment advisers across the US have reported a surge in people seeking their services as the pandemic heightens both physical and financial risk.

But while some of the usual advice still applies, advisers say today’s conditions are different from previous crises and require new tactics in response. 

Randy Waesche, president and chief executive of advisory business Resource Management, draws a clear distinction between the pandemic and the financial crisis of more than a decade ago.

“Nobody understood what a [credit default swap] was, so they weren’t as frightened. Everyone understands getting sick and dying,” he says. 

Mr Waesche says that during the current crisis, about a third of his clients could see only doom and he spent “an enormous amount of time talking them off the cliff”, he says. “They were scared that this was the end.”

Another third saw this as an enormous opportunity “and I had to convince them not to put their last nickel into the market” he adds, while the remainder simply accepted this new reality.

The uncertainty has boosted business for financial advisers. Independent adviser Edelman Financial Engines reported a fivefold increase in call volumes during the early weeks of the pandemic.

To handle the uptick, it extended its call centre’s opening hours and increased staffing. Calls came both from existing clients seeking reassurance and new potential clients making contact for the first time.

“This pandemic is creating the need to alter advice or offer new areas of advice that we’ve never had to face before,” says Ric Edelman, founder of Edelman Financial Engines. 

His firm’s advisers for example have suggested clients consider temporarily cancelling their car insurance while vehicles idle in driveways. “That advice has never been pertinent before, but it is now, because no one is driving,” he says. 

Another change of direction is in university planning. Edelman Financial Engines now recommends students consider taking a gap year, or transfer from expensive, out-of-state private schools to cheaper, local colleges. As some universities switch to teaching virtually — at least temporarily — Edelman reasons that, without access to labs, professor office hours or networking opportunities, their value to prospective students has changed. 

In addition, the firm is advising clients to hold cash reserves of 24 months’ spending rather than the previous guidance of three to 12 months — though, Edelman says, that should be calculated based on individuals’ April and May spending levels rather than their levels before the pandemic hit. 

Scott Matheson, managing director and head of client solutions at registered investment adviser Captrust, agrees that this crisis is different. “You can’t just take the 2008-09 playbook and slap it on top of this and expect success,” he says. 

If the nature of financial advice has changed, so too has the delivery. A common thread across firms on the FT 300 Top RIAs list is more personal conversations with clients, Mr Matheson says. “The desire to be connected, because of how remote everyone is, it’s actually led to longer, more intimate human conversations.” 

Those human conversations can also help maintain client trust when advisers, too, are trying to navigate an unprecedented situation. 

“If you do make a mistake, make a bad call, by and large you're going to survive that. Because you're not going to get it right. No one gets it right all the time,” Mr Matheson says. 

Edelman suggests students consider taking gap years, as without full access to labs, professor office hours or networking opportunities, the value proposition of universities has changed
Edelman suggests students consider taking gap years, as without full access to labs, professor office hours or networking opportunities, the value proposition of universities has changed © Saul Loeb/AFP via Getty Images


Several advisers echoed this sentiment, arguing that as long as they were clear with their clients about why they made decisions, clients would be more likely to trust and — if necessary — forgive them. 

Conversely, trying to hide difficult decisions from clients can backfire, says Harris Nydick, a managing member at New Jersey-based CFS Investment Advisory Services. 

“If there’s bad news, you don’t want them hearing about it from Jim Cramer,” he says, referring to the host of popular CNBC programme “Mad Money”. In this case, clients’ trust will be lost and they will take their business elsewhere, he argues.

Practical gestures can also count. One of the first things CFS did when the pandemic hit was order washable, reusable face masks to send to high-risk clients, according to Mr Nydick. 

“A year or two, three, four, they’re never going to remember what you said. They’re going to remember how you made them feel,” he says. “The biggest issue, believe it or not, is first securing people’s physical and emotional wellbeing. And after that, it comes to people’s financial wellbeing.”

Europe Bails Out Its Failed States with “Common” (i.e., German) Bonds

BY JOHN RUBINO 


The “European Project” was designed with something like the current crisis in mind.

The adoption of a common currency was just the first, politically easiest, step in a process that would eventually – its architects hoped – culminate in something like the United States, where a bunch of different geographic and cultural entities are subordinate to a central government that handles war, diplomacy, and finance.

The problem was that pretty much every European country was ambivalent about this transfer of national power to a supranational entity. The weaker countries like Italy feared being dominated by a culturally authoritarian Germany, while the Germans hated the idea of being responsible for spendthrift Italians.

So full integration – which would feature European bonds issued by the entire EU and backed by all the member countries – was put off until a crisis came along to make it the least scary option. And, finally, one arrived in the form of a pandemic that by bankrupting the lesser EU countries made integration necessary to preserve the union.

This week’s EU announcement of a massive coronavirus bailout – featuring the first-ever “common” bond issuance – marks the birth of this new integrated Europe, in which all future debt is de facto German rather than French, Greek, etc.

It also marks the end of any hope that the euro will survive the next decade. Think about it: Italy, Greece, Portugal and the rest no longer have any need to control their spending and borrowing, since Germany is officially on the hook for the EU’s future interest payments.

Which in turn means that there can be no future interest payments. The only way to reconcile unconstrained weak-country borrowing with Germany’s ability to manage rising debts is to keep interest rates at least low and preferably negative. Below are the current 10-year bond yields for the major European countries. Note that Germany and France actually get paid to borrow at their current negative rates while the other countries still have to pay their creditors (though only a little).

European bonds


European bonds

So in EU 2.0, everyone is free to borrow as much as they want, safe in the knowledge that one way or another the Germans or the European Central Bank will pick up the tab. And interest rates have to remain at unnaturally low levels to make this possible.

Which will produce at least two new crises, either sequentially or concurrently.

In one scenario, Germany tries to impose spending discipline on the more profligate EU countries, which respond with a curt “whatever” and keep on spending — leading an exasperated EU to impose centralized control of individual members’ spending via system-wide social programs and defense budgets.

In the other scenario, negative interest rates lead to either rising inflation or a plunging euro — or more likely both — with all the resulting instability that that implies.

And somewhere along the road to total integration, the European project is revealed as futile because no form of government, centralized or decentralized, dictatorship or democracy, can survive with this much debt. 

Each successive EU summit will be more contentious and the results less believable until everyone simply gives up, goes back to their original currencies (after massive devaluations), and tries to forget that they ever viewed integration as a cure for socialism.


Government “Insanity” Will Propel Gold Higher

By Nick Giambruno
Chief analyst, The Casey Report



The real crisis today isn’t the coronavirus.

It isn’t even the bursting of the “Everything Bubble,” which has pushed valuations of pretty much every asset class near historical all-time highs.

The real crisis is going to come from the government’s reaction.

First, with the incalculable harm from the unprecedented shutdown of the global economy.

And second, with money printing the likes of which we’ve never seen before.

Governments around the world have thrown out the last semblance of fiscal and monetary sanity.

They are destroying their currencies at a breakneck pace.

The U.S. government is bailing out just about everything… the airlines, the tourist industry, the shale oil industry, car manufacturers. It even sent just about every citizen over $1,000.

Where is the government getting this money? It is simply creating it out of thin air.


Inflation Is the Real Crisis

That’s why this crisis is fundamentally different than the Great Depression.

Back then, a gold standard limited the amount of money the Federal Reserve could create out of thin air. Today, there is no such limit.

Allowing the Everything Bubble to burst and cleanse the economy of its massive distortions would be painful in the short term.

But it would enable the economy to rebuild on a better foundation.

However, that is politically unacceptable. As long as politicians have access to the central bank’s printing presses, it will never happen.

There’s no question that, when faced with the choice, politicians will always choose the money-printing option, which inevitably destroys the currency.

It’s the fundamental relationship between politicians and a fiat money system.

They’ll always choose actions that destroy the currency before they do something that would be economically sound, but not the best political decision.

We’re already seeing that play out in this crisis.

In a matter of days, the Fed has created more currency units out of thin air than it has for most of its existence. In the end, it’s likely to be measured in the tens of trillions of dollars, or more.

The human mind has trouble wrapping itself around such figures. Let me try to put it into perspective.

One million seconds ago was about 11 days ago.

One billion seconds ago was 1988.

One trillion seconds ago was 30,000 BC.

One trillion dollars is almost an unfathomable amount of money.

The Most Conservative Scenario

In the wake of the 2008 crisis, the Federal Reserve printed $3.7 trillion out of thin air, which translated into growing its balance sheet by about five times.

The U.S. federal government debt also doubled in the same period.

The price of gold went up by approximately 2.5 times. Using these benchmarks, we can project that we’re looking at the following:

• A Federal Reserve balance sheet increasing by five times to $20 trillion, which translates into about $15 trillion in new currency created out of thin air.

• The U.S. federal government debt doubling, going over $48 trillion.

• Gold prices going up 2.5 times to about $4,600 an ounce.

Let me emphasize that I consider this to be the most conservative scenario. It’s using benchmarks from the 2008 crisis. The current crisis is orders of magnitude larger.

That’s why I expect the Fed’s balance sheet, the federal debt, and the price of gold to all go up even more.

People are increasingly seeing the insanity that central banks are doing.

At the end of the day, gold is just about the only place to be.


The Biggest Gold Bull Market in History

I think there’s an excellent chance that gold could hit $10,000 as this all plays out.

And the price of gold is already up 42% since May last year.


image

This is just the beginning of what could turn out to be the biggest gold bull market in history.

Gold is within a hair of taking out its previous all-time high of around $1,910. Once it does, I expect gold to skyrocket.

Gold is the ultimate form of wealth insurance. For thousands of years, it’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

Owning some physical gold – and keeping it in your own possession – is step one. It’s something everyone should do.

In addition to physical gold, you’ll also want leveraged upside to grow your wealth. For that, we’re looking at companies that are in the business of exploring for, developing, and producing precious metals.

The chances are high that select gold stocks will reward patient speculators with 5-baggers, 10-baggers, or higher returns – if you choose the best companies.

Until next time,

China: The Potential Bubble Of All Bubbles Should Be On Your Radar

Summary
Investors' focus on the markets largely is on COVID-19 containment efforts, the success of the economic restart and the upcoming election.
However, there is a massive housing bubble developing in China, the size of which dwarfs the levels of our housing market before the financial crisis.
We take a look at some key details of the growing bubble that should be on the long term radars of investors in the paragraphs below. 
Before you embark on a journey of revenge, dig two graves." ― Confucius
There was a fascinating article late last week in the Wall Street Journal. It described in detail the huge potential property bubble that continues to form in China. All eyes right now on U.S. equities are focused on the COVID-19 containment and economic restart fronts, not to mention a huge election that is now just three and a half months away.
Image result for 2020 chinese ghost cities
However, given what happened when the U.S. housing market started to collapse in 2007 and the ramifications from that implosion, this is something that should be on investors' longer term 'radars'. It is not something that should cause ripples in the markets this year and probably not next year, but this could be the next catastrophe in the making for equity and credit markets in the foreseeable future.
Image result for sir lancelot holy grail scenes
It is kind of like the classic scene in 1974's cult classic "Monty Python and the Holy Grail' where Sir Lancelot is charging the castle. He remains far, far off in the distance, and then all of a sudden he is right there slaughtering the guards.
To get a decent feel for the potential enormity of this bubble, I have pulled out myriad of factoids from Wall Street Journal's analysis below.
Factoids:
  • At the peak of the U.S. property boom, about $900 billion a year was being invested in residential real estate. In the 12 months ended in June, about $1.4 trillion was invested in Chinese housing.
  • The total value of Chinese homes and developers' inventory hit $52 trillion in 2019, according to Goldman Sachs Group Inc. This is twice the size of the U.S. residential market and more than even the entire U.S. bond market.
  • China's household leverage ratio hit a record high of 57.7% in the first quarter. It was the biggest quarterly jump in the ratio since the first quarter of 2010 and far above levels of recent years.
  • About 21% of homes in urban China were vacant in 2017 which equated to 65 million empty units, according to the most recent data from China Household Finance Survey. Among families who owned two properties, the vacancy rate reached 39.4%, and among those that owned three or more, 48.2% were empty.
  • Rental yields are below 2% in major cities like Beijing, Shanghai, Shenzhen and Chengdu. 96% of China's urban households owned at least one home, according to a Chinese central bank survey released in April, far exceeding the 65% home ownership rate in the U.S.
  • China accounted for around 57% of the $11.6 trillion increase in household borrowing over the decade through 2019, according to Bank for International Settlements data. The U.S. accounted for about 19%.
  • In Tianjin, a city of 15 million southeast of Beijing, apartments in upscale areas sell for around $9,000 a square meter, or about $836 a square foot. That is roughly the price an average buyer would pay in some of the most expensive parts of London, even though disposable incomes are seven times as high in London as in Tianjin.
  • Urban Chinese now have nearly 78% of their wealth tied up in residential property, versus 35% in the U.S.
Earlier last week there was also a good piece in South China Morning Post around authorities' growing concerns about a property bubble in China that best can be summarized by the opening paragraph of the article.
Chinese regulators have warned of heightened risks of an asset bubble in portions of the country's rapidly growing property market, as efforts to free up credit to support the coronavirus-stricken economy have been diverted into real estate"
Despite authorities' attempts to crack down again on China's 'shadow banking' system and cool the property market, it is hard to see how this turns out well. Local governments get over 50% of their revenue from land sales. One key reason that from 'the start of the year until July 6, real estate agency Centaline estimated that 50 cities, including Shanghai and Guangzhou, sold land to developers worth 2.39 trillion yuan, up 15.3 per cent over the same period last year'. China's property developers 'are among the biggest junk bond issuers in Asia, with issuance totaling $46.23 billion last year, double that of 2018, according to Refinitiv data' in a recent CNBC article.
There are also increasing tensions between China and the rest of the world around trade, Uighur concentration camps, the recent crack down in Hong Kong and the militarization of the South China Sea. It is hard to see relations improving in the coming years and global economic growth is likely to remain subdued until COVID-19 is defeated.
We have seen many bubbles over the past twenty years from the Internet Boom and Bust to start this century to the U.S. housing crisis that led to the Great Recession. Both of which were partly fueled by Federal Reserve policies. With central banks expanding their balance sheets in unprecedented ways and with sovereign debt yields near zero, who knows what bubbles we will see in the coming years.
This is one reason I continue to maintain a healthy allocation to cash in my personal portfolio and I am almost exclusivity putting new funds to work using covered call strategies utilizing long date near the money call strikes which provide maximum downside protection. This is the key reason we also established our 'option play of week' feature in the Biotech Forum in July of last year to teach and deploy these simple covered call ideas.
I am not saying the Chinese property market is going to fall apart this year or even next, but it seems likely at some point in the foreseeable future this will happen. It kind of feels like 2005/2006, a few years before our housing crash. Given Chinese housing market dwarfs the size of this country's, what will those ramifications be for global markets and economies? I, for one, don't want to find out but suspect we will at some point in the next few years.
The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved." - Confucius