Why the US economy is diverging from China: Stocks in Translation podcast

[Music] welcome to stocks in Translation our essential conversation cutting through the market Mayhem the noisy numbers and hyperbole to give you the information you need for your portfolio we have today we have Yen nordvig he is a CEO of exante data and Market reader thank you and we also have Sydney Fred our Rockstar producer so on the docket today we are talking about the US economy uh is it quote forever fine we're going to talk to you about that yens and our word of the day is AI is that even a word we're going to discuss and this episode is brought to you by the number two as in that 2% inflation Target that looms large inside those Hollywood fed corridors now Yen and said the story of the week is a US economy I want to get to GDP first that's growth domestic product a reading on the US economy uh by the time you're listening to this at home we might have the reading but let me tell you the expectations are for 25% for the first quarter that's pretty strong what do you make of this economy it's a bit surprising now for many quarters like the really for a year a lot of people have been saying okay the recession is right around the corner recession around the corner and then last last summer it was kind of like a wake up wake up call we cut a GDP number that was essentially five uh in the third quarter right there was the quarter where the recession was supposed to be happening right that's amazing and then and we didn't have any setback in the fourth quarter right so when you have five the odd is going to be it was going to reverse the next one right and now we have another one where it's it's going to be around two and a half right so we've had just an incredible string of surprises uh that really have shocked people's belief in how resilent the economy could be to these much High interest rates and what's double shocking is that if you compare to the rest of the world right there's been a bunch of other economies where it's kind of going in the opp Opposite Direction at least until very recently like China has had a massive disappointment Europe had had big issues right so the US kind of side surprises it's like very us specific it's not something that's happened globally why do you think this is we'll get to China specifically in a second but you mentioned Europe the dichotomy is huge and it's often been that way at least over since the time I've been monitoring markets over the last few decades but why now why such the big disparity well there's uh we have the biggest war in Europe since the second world war going on right now it's had big implications in terms of like energy supplies from U Russia that are not happening anymore right so lots of industry in Europe we relying on that cheap energy and it's not coming anymore right so you can see it if you look at production in Germany it's just tanking compared to the United States so that's definitely a part of it uh and that should not be underestimated uh in the in the US obviously we still have a situation where we have a lot of funds coming into the economy from the government side right yes the stimulus it's not never it's not that the checks are coming exactly like in 2020 and 21 right I was going to say where's my check yeah exactly so it's a bit different but it's still there right the overall fiscal deficit is very very high like we've never had a situation where there's not a crisis an acute crisis and we have a fiscal deficit of 67% of GDP right so we are injecting a lot of funds into the system through the fiscal account still uh like something you don't see in your mailbox right is that we do have infrastructure the infrastructure spending is ongoing right that's kind of if you own a semiconductor plant you would be sitting pretty right oh yeah I wish I I saw a look on your face we're talking about GDP we're talking about GDP I want to go back to basics here because this is stocks in Translation I want to go GDP in Translation what even is GDP what is it how do we measure it why do we why do we measure it I I'll take the first uh Round Here GDP the national accounting identities go back to what 1940 something like that and it was a commission by I think Winston Churchill had a hand in it Churchill this is a long time ago he he was fighting the Nazis he was about to and then he was engaged in a long-term struggle and he had to justify long-term long-term deficit spending which at the time was thought to be a no no that you're never going to get away with this um now that's a somewhat there are various interpretations of exactly how this went down but the the net effect is that we came out with these apples to oranges numbers like you can put a GDP number on the entire economy of the US one number number so you got to take these things with a grain of salt but you also have to measure things in the first place and so once once we got these National accounting identities and there are different components of them inflation is one we can measure that different ways I think it was it was all to be able to uh you know however you want to look at it whatever the whatever the concerns were at the time they wanted to be able to do different things with their economy and that was kind of the justification yes yes tap it in tap it in so this is like going going back to uh first year in economics in uh in University so I studied economics for 100 years so it's nice to go back to the first years I should have let you start this question please prove me wrong but um like there's like what we're trying to do is we're trying to measure okay how big is the economy how's the economy growing right and this a pretty complicated thing right because the econom is Big there's all kinds of sectors right there three ways of doing it uh so the one we used to is we say okay how people spend money so how people consuming at the household level like what are they investing at at the business level and government spending so so that's the expenditure thing another way of doing it is okay what kind of income are people getting that's another way of measuring it and a third way of measuring is like what is actually being produced where you run around kind of industrial production energy production and so forth right all those things in theory should add up but they don't but so we have fre sets of measures of of the size of the economy and growth I'm so glad we invited Economist today yeah yeah we go yens we mentioned China a minute ago I want to get to that now because you were you worked for Goldman Sachs back in the day uh in Emerging Markets tell us about what's going on with China the the restart of their economy didn't live up to the hype uh but where are we right now yeah like um we when we had all the different covid waves right and different countries opening up at a different timetable like China was by far the last right they they shut down the economy for a long time and they finally opened and when they opened it was tempting to think okay when they open it's going to be similar to all the other economies that's going to reopen right we're going to have inflationary pressures there's going to be a demand boom and so forth it didn't play out like that at all and the one reason is that President XI has a totally different way of thinking about stimulus so stimulus in China is about building productive capacity they call it social stim they call it some social financing I think yeah but there's not really a tradition of giving people money to spend so that was not done in China the stimulus is typically like okay here's a government Enterprise is something that needs to invest more or a bridge being built or an airport or something like that that's how stimulus been done and there was the same thing in this cycle there was very little checks sent around to Chinese citizens right so when they escaped their lockdown there was not the same consumption Boom at all and at the same time they had a housing uh Market that is in a full-blown meltdown right so they've had a couple decades I think it's fa to say of overbuilding right and they don't have population growth in China anymore so like the the an important point there demographically their boom has kind of plateaued and and you can even see it in uh if you look at fertility rates right it used to be the case that okay they were certainly below two and now that fertility rate has also dropped there's something about the co shock that has changed psychology in ch to a degree where people literally don't want to expand the family anymore right so lots of things going on and and one thing that's really important from a Global Perspective is that since China didn't play out like all these other economies and didn't generate inflationary pressure we actually have the opposite coming out of China we have all this excess production we we we lot talk about a lot a lot in terms of electric vehicles we don't import a lot of them in the US but globally electric vehicles from is massively important right and they they weren't there 5 years ago it's a totally new thing they're putting downward pressure on prices so we actually have this even though we talk about inflation all the time if we look at what the impulse is from China it's actually deflationary one and we can see that when we when we dissect the inflation numbers in the US you can see that there's like there's two things going on there's services are expensive and now the goods prices actually starting to be really under control no inflation at all and China is an important part of that excellent now we got move we have to move on to the word of the day which is AI so maybe it's a phrase but yes you're the you're the CEO of a couple different companies one is Market reader and this is you're trying to give reasons why the market is moving it's a simple as that but it's a large undertaking and the tools to be able to do this have only emerged very recently tell us about how you go about this yeah uh it's it's a simple problem but it's not so easy to solve so um the the issue is that if you're trying to explain what's going on in the market using you know just one angle it's going to work once in a while but in order to really explain all the different moves in the market you need to have a very kind of multi-dimensional approach so when you set up a piece of software and algorithm AI assistant and so forth it's important to be multifaceted and have like really uh cover different dimensions right so just name a few of them right so we can certainly have a news Dimension we can have a social media Dimension but we also need to know in the system how different assets are related right when United Airlines move it's very often that Delta Airlines move like system know software and I really like that it gives you the sector correlations historically and and just tell you exactly sometimes there's actually no news sometimes it's just a stock is moving because it's Industry Group is a lot of what we're trying to do is to weed out the noise thank you like if if like there's so much noise in like if if I pull up uh like a at JP Morgan news feed there's going to be 35 stories every day right and most of them are totally irrelevant right that's the worst part so yeah so our system is really designed to get rid of the noise and say okay this is the important bit so that investors can can very quickly get a the gist of what's going on why is it that like sometimes the markets are moving in a way that you think they are they're reacting to some data point and you agree and sometimes it's moving in like the opposite direction or it's not movs good news is bad news or just like or why is it good news or why is it not moving why is it flat when you think it should be moving you know what accounts for all that so I think when we're building a tool like this it is also important that we have a degree of humility in the system like so we can certainly have instances right where there's a company that reports earnings and the earnings are very good the revenue looks very good guidance very good and then the stock is down or like yesterday when Tesla came on with opposite earnings were not very good revenue is not very good and the stock was up 10% right so in those situations I think it's important that the way we design the algorithm says and actually we have this overnight we have okay the earnings released on the normal metrics didn't look very good despite of that Tesla's stock is up a lot this is literally what the system wrote I'm very happy with with what the algorithm did I would take that because there's nothing worse than some kind of false huus where where somebody and I see this in the media the financial media all the time where they say all right this stock is up and it's because of X or they imply it and a lot of times it's just not true so we want to have a humility in the system where we we do the best we can right and if it's a complex situation it could also be social media says this and the newswise says this and it's not coinist with each other then we want to we want to convey that there's this sort of mixed mixed opinions yeah yeah and and also you have to consider the macro backdrop if the market is in a bare market and the Dow is down a th000 points that day your earnings result might they might not matter right absolutely doesn't make the cut yeah all right for our viewers on streaming platforms we're going to take a quick break and for everybody else well guess what we're going to continue all right this episode is brought to you by the number two and that's the official inflation Target of the Federal Reserve so let's talk about inflation here we talked about GDP before and part of inflation is Consumer Price Index now we got two main measur CPI as it's called came in a few weeks ago earlier in April for the month of March headline number annualized to 35% this means prices were on average 3.5% more than March of 2023 now we get a separate measure of inflation at the end of this week the FED likes it a little bit better it's called personal consumption expenditures or pce that number is expected to be 2.6% so different amounts 3 and A2 versus 2.6 expected bottom line both of these numbers are above 2% which is a Fed goal what do you see going on with inflation right now so right now uh the big picture is that we had incredibly High inflation two years ago right touching 6 7% depending on how you want to measure it right and now we've had a significant Improvement but we're not quite at Target yet that's why the communication from the FED is kind of confusing now because on the one hand they are happy with the trend that we are on but they're not they're not at the end destination where they want to be yet so like how do they talk about that it's complicated uh there are some technical issues with going on with CPI right uh so if you go back to January just giving you a kind of a crazy example like one of the things that moved a lot in January was the price of nursing homes okay does the price of nursing homes adjust every month no I would think not this is something you get an invo once in a while like you pay for your parents or whatever it is that's happening right but it's in this category of things where you can call it reset effects like there's a reset effect happening once in a while it's often that the reset happens early in the year you're going into a new budget period for the companies that operate those business they have to reset right so when we look at what's happened in the last couple of months where a lot of people have been disappointed that inflation is not coming faster down to Target it's really important to think about okay what is it that's going on is it okay inflation is going back up again or is it a couple of months where we have these reset effects and I think there's a fair amount of evidence that there these reset effects that are important in January and February maybe in March as well we can see that in Europe as well they had some of in January and February and now we've had March data looked a lot better so I think when we look into the second quarter in the US uh things will look better on inflation um the caveat is that it's not only on inflation that the fed's job has gotten hard it's also because the labor market actually looks quite strong right there's something going on on the growth front as well so I think overall right the the message we've gotten from the FED is they're in not in any rush to cut and that's understandable because both looking at the growth side and on inflation side like it's not totally clear-cut that they need to to pun intended I guess to cut right now yeah you're talking so we're talking there's two measures right there's CPI and there's pce we call pce the fed's preferred inflation gauge why are there these two different measures and a base value I understand they contain different things but if pce is preferred why don't we just use that why don't we get rid of CPI yeah uh I think the CPI is the measure that's been around the longest right so it's like you know people have tradition something they attach to you know uh U so uh and it's also something that's available around the world IMF and other Global institutions use it so it's hard to throw the CPI out uh but the the FED likes the pce because uh they are meant to serve the people right and this is personal consumption so it's the the inflation that the consumer is seeing so it sort of me uh makes sense from that perspective and then there's some yeah more technical things like it's weighted in certain ways that uh they think make more sense and the reason why the two things are different is has a lot to do with how rent is weighted like uh the rent is different and there's all kinds of assumptions made these are humans making assumptions a lot of assumptions about a very big space that we call the United States of America which itself is pretty big I hear um all right we want we've covered inflation and I want to talk about gold now this is something that we haven't really talked directly about but putatively it's an inflation hedge and there's no denying that the price of gold is on a tear it's exploded to 2400 almost 2500 stuck in a trading range for a while what's your view on gold so we we live in a very complicated world we we discussed uh a few minutes ago that we have the biggest war in Europe going on since the the second world war right so this is a a situation we've not had for many many decades uh this weekend it was announced that uh United States is going to confiscate any Russian deposits that are in US Banks so this is again related to the the the Russian invasion of Ukraine that this is kind of like a punishment for that uh the the money which is around $6 billion is going to be actually literally given to to fund the the support for Ukraine so why am I mentioning that in relation to Gold it's because these Sovereign links that we had Russia us China us and so forth it's all a part of having like a credible Global Financial system but if we start to seize each other's assets change the rules of the game yeah and you can actually see it the reason Russia only had only $6 billion in deposits in United States when they invaded Ukraine was they had already sold all their Us treasuries in the years before so they were already getting concerned so if you're thinking about these countries that needs to manage their assets their reserves like what kind of assets are they going to be comfortable there's an argument that they would be more comfortable holding assets such such as gold as opposed to sticking them into deposits in the United States where there's like you know hostile relationship so I think that's an important part I think yeah that really makes probably one of the better Arguments for the secular case for gold this decade if you think geopolitics you know if you think um we are on the way to towards a smaller more um bifurcated world where we have Russia and maybe China and not even bifurcated trifurcated if you consider that what are these entities holding gold we saw Russia dollarize before the first invasion of Ukraine I mean Russia's been buying gold going back 10 years that I've seen um in anticipation I just want you mentioned that $6 billion in Gold what do you happen to know what fraction that is of their total gold like how much are they actually holding versus what they're going to have to give up if you happen to know that yeah so the so the six billion is is the amount of money Russia literally had parked in US commercial bank accounts like JP Morgan and so forth right in terms of what they have in Gold I don't think they dis closing it fully anymore I wouldn't be surprised uh so uh the world gold Council actually has some data where uh they try to collect from speaking to Gold dealers around the world how much gold has been bought by central banks and the data that they publish show much more gold accumulation than the individual central banks actually report So within exan of data we literally have like a metric we call like the undisclosed amount which is the difference between those two things and it's growing a lot and it's really taken off after Russia invaded Ukraine so that so the theory I convey it but before is kind of backed by the data there's something new going on here the other thing that's going on which is more recent is that there is a lot of retail demand for gold in China and the reason for that is that in China everything is controlled you cannot take money out of the country very easily at all they they outlawed Bitcoin yeah it's a very good example but gold is not outlawed so gold is one of the one kind of Outlets of having you know an asset that is not a Chinese asset it's kind of like even even if you're holding it in your pocket right it is kind of like a globally recognized asset so there's something going on with that Chinese retail demand and it's like it feels to me like it's like the one it's the one type of capital flight out of Chinese assets that's kind of allowed and it makes a lot of sense that Chinese residents then will focus on that uh one area where it's not it's not something criminal they're doing and they're doing it more and more all right we got time for one more segment there and thank you for that explanation on gold learned a lot uh guess what I'm hearing something is that a knock I don't know it's Hollywood knocking because it's time to Red roll out the red carpet here for a round of who wore it better uh and this is fedspeak Edition so we're going to get some commentary from fed officials we know that inflation has come down quite a bit from the 2021 Highs but that drop has stalled out by many metrics which we've been talking about we know that fed members that's a Federal Reserve members penel in three rate Cuts this year a few months ago but the inflation data may have changed their view three rate cuts and now it's a little bit different here are what two current fed members have remarked on this ominous development here here's NE kashari he's a president of the Minneapolis fed he said I'm in the view of we need need to wait and see be patient as long as it takes until we get convinced that inflation is on its way to 2% and then Austin gby he's a Chicago fed president said right now it makes sense to wait and get more clarity before moving my question to you Jen Yen which fed member takes the win on getting the message out that the FED needs more evidence to make that critical first cut I think gouls said it in a very succinct way just a few words like there's no rush here they can wait right now I'll go with him all right I'm a I'm a ghouls be fan too I like succinct I'm a ghouls be fan cuz I say his name ghouls that makes I'm always I'm always worried that I'm GNA pronounce it wrong to all right uh looks like we're winding down here on uh stocks and translation we'd be remiss without telling you what's on our radar in the coming days so we got this GDP we got pce but we're also tracking earnings guess what next week we got Amazon AMD fizer drum roll Apple see if they can come out of the Apple do drums anyway thank you for watching stocks and translation Sid yens thank you for stopping by thank you thank you [Music]

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Id: iuY-RucY010

Length: 24min 0sec (1440 seconds)

Published: Thu Apr 25 2024