Tag: Economy

Is it possible that US inflation data is “tweaked”?

US reported Feb CPI (inflation) data: +0.4% mom and +3.2% yoy

Core CPI: +0.4% mom and +3.8% yoy

Slightly ahead, which makes it more difficult for Fed to cut rates.

However, is the data a bit inflated? I say possible.

Here is another inflation gauge by Truflation: only +1.64% yoy in March; below 2% in Feb

It’s true that US economy is stronger than most other places around the world.

However, it’s hard not to think that maybe there are some political reasons to “influence” CPI, which can influence Fed decision. After all, Fed is “data dependent”. See this post (Fed is bullied by the market – why?) as well.

Some elements from official CPI data can be more easily to “influence” e.g. used cars.

I will just stop there.

Why property price to income ratio this high?

China doesn’t have a nationwide recurrent property tax that applies to all residential.

  • in some cities with property tax experiment, usually certain area is exempted from taxation, e.g. Chongqing is 180 sqm

Hukou policy means residential property comes with other value. Not owning one will cause inconveniences: e.g. renting is not similar to ownership in education etc.

Renter’s right vs landlord is not like what usually seen in mature markets.

Most people don’t pay tax on rental income.

One-child policy plus decades of economic growth created massive buying power for this one-child generation. When you have 4 parents supporting the new couple to buy 1 home, that purchasing power is hugely inflated.

Local gov’s budget is partially financed by selling lands (use rights) for residential property development. High price -> higher budget.

 

How China exported deflation & what data to watch

1/ China PPI

China’ PPI (12-month) started to decline from Nov 2021 (Dec 2020 – Nov 2021 when global demand running high and supply running low), and entered the negative territory in Oct 2022 (global demand shock after Fed hiked rates & war in Ukraine)

China’ PPI (12-month) has remained in negative territory for 16 month as of Jan 2024 data. Looks to remain negative for next 6 month at least.

 

2/ RMB depreciation

Average exchange rate for RMB has depreciated ~9% in 2 years against USD, which caused additional price deflation.

Average exchange rate in 2023: 0.1415 USD.

Average exchange rate in 2021: 0.155 USD.

 

3/ Domestic demand

Hard to quantify, but weak China domestic demand is partially causing weakness in global demand in commodities etc., especially from the real estate sector., thus reducing inflation pressure.

The sharp dropped happened in August 2021, when Evergrande’s debt problem was catching world’s attention.

What did Japan’s housing price look like during 1990s housing bubble?

Price-to-income ratio

The average price of a new 70 sqm apartment in 1990 in Tokyo was 107,660,000 Yen, or 1,538,000 Yen/sqm, while the average annual income was 5,940,000 Yen. Before the bubble, the average price-to-income ratio in 1985 was 8.08.

Financial Times article (https://www.ft.com/content/2ba1cb74-f598-3a4e-9edd-4e55a48d3480)

So in 1990, new home price is ~18x annual income and before bubble is ~8x.

Relative performance

Price rose ~4x in 15 years

Peak to bottom took 5 years; declined ~40% (1990-1995)

From 1975 – 1995, price still rose ~2.5x in 20 years.

Source: Home Ownership and Economic Change in Japan

Relative to global (before bubble)

Price-to-income ratio is actually more than doubling US-level and is the highest among developed countries.

Source: Introduction to “Housing Markets in the U.S. and Japan”

However, Japan’s women work participation rate is lower than the US back then, which can impact household income.

Source: Lessons from the rise of women’s labor force participation in Japan

Income level

Peak income is actually lower for later generations.

Source: The Impact of the Rise and Collapse of Japan’s Housing Price Bubble on Households’ Lifetime Utility

Due to other reasons, e.g. Asia Financial Crisis, the property market didn’t seem to recover until later years.

Source: New apartment prices in Japan since 1956,
Tokyo Kantei via JAPAN PROPERTY CENTRAL

Fed is bullied by the market – why?

Market news nowadays are saying that Fed is bullied by the market.

e.g. FT article: The Fed should resist market bullying

What’s “bullying”? Seems to me that market is leading and Fed is just following the market.

Why is this the case? I got three reasons:

1/ 2024 is election year. Market knows Fed needs to help the economy.

2/ Market understands data better, and Fed has been saying it’s “data-dependent”; no wonder why market (e.g. hedge funds) is leading with all those high-frequency data. Hedge funds can simply simulate what data Fed is receiving and even have better real-time data than the Fed.

3/ Some market players can “influence” or “control” the data. Sounds absurd. Just an example – what if hedge funds can buy up goods which would cause inflation when needed, or sell them at low prices to cause deflation when needed. As long as they can make huge profits in the market, it can be worth the cost.

Nikkei 250

After a 20-year [1982 to 2002] journey, Nikkei 250 index was back to the starting point.

And it hasn’t yet reached the previous high 34 years ago (1989 level) as of 2023.

What happened?

A lot of things to unpack.

GDP

I am looking at GDP (in local currency terms) first – equity market should be a ratio of GDP.

Japan already enjoyed a robust growth (1972-1982) with GDP almost tripped in 10 years (!), which translates to 11.4% cagr. 

The miracle continued for another decade.

1991 GDP also grew 6.4% yoy vs. 1990; however, GDP growth dropped to 2.5% in 1992 and to 0.0% in 1993.

During the second phase of which ended on 1991, Japan’s GDP still compounded at ~6% cagr (1981 – 1991), although not as high as the last decade. And Nikkei index climbed during this period as well.

What’s wrong then?

The “10-year GDP cagr” would drop continuously from 1991’s 6% to below 1% in 2002. 

Remember, Nikkei index peaked in 1989 (red mark).

While in 1990 and 1991 Japan’s GDP still enjoyed 7.6% and 6.4% growth, 1992 would be 2.5% and 1993 would be 0%.

It was the mid-term / 5-year projection that’s worrisome. And indeed, the 10-year GDP cagr would start to decay, with no reversal in sight.

Nikkei index bottomed in 2003, when the dot-com bubble also came to an end. S&P 500 dropped ~24% in 2002 (after double-digit drop in 2000 and 2001), but grew 26% in 2003.

The index bottomed as the 10-year GDP growth would be bottoming and things won’t go much worse from here.

 

Nikkei index is now (2023) ~4x the 2003 bottom though, what happened?

Nikkei index climbed 4 consecutive years (2003 – 2006), before the Global Financial Crisis hit.

Japan’s 10-year GDP cagr would still be ~0% in 2007, but from 2004 to 2007 it experienced a 4 consecutive year of GDP growth.

Things would look better in 2012, when Japan GDP would be re-entering a growth mode. 10-year GDP cagr would bottom in 2011 at -0.7% and recovered to 0.1% in 2015 and to 1.2% in 2019 before covid.

To make it a full graph.

As mentioned above, although 10-year GDP cagr still has pressure from 2003 onward, actually yearly GDP growth is positive from 2004-2007. Therefore the 3-5 year outlook would actually be reversing in 2003.

US new home sales resilient

Looks like the monthly sales is still health. Month to clear inventory is steady and up a bit to ~7.8 months in Oct 2023.

Currently monthly sales pace is better than 2018 and 2022, despite record high interest rate in recent years.

New homes for sales has gone up more. So the number month to clear new home inventory has gone up to 7-8 months recently vs. an average of 6.2 months in 2018. And is much better than the 2020-21 average of 5.1 months.

Better availability should be good for inflation and soft-landing scenario.

New residential sales Oct 2023

See the other post for China new home sales – the inventory stood at over 20 months the last time I checked.