Twelve Charts This Week - 10/25/2024

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Oct 25, 2024

1

Investors have been nervous recently because Treasury yields have risen since the Fed made its 50bps rate cut, the first in this cycle. The 10-year yield is up from 3.7% to 4.2% since September 18th, the date of the cut, and the 30-YEAR AVERAGE MORTGAGE RATE is up from 6.1% to 6.5%. This chart however shows that yields have reacted in similar ways before and after some previous rate cuts. In 1995 and 1998, the 30-year mortgage rate rose after the Fed’s first rate cut, with no lasting adverse effect on the stock market. The chart also shows that most of the decline in yields usually occurs before the first rate cut.

2

The way to read this chart is to choose a bar and understand its coordinates. If we go with the tallest, it tells us that in 10% of rolling 10-year periods, the S&P 500 had an annualized return of 8%. The second tallest tells us that in 9% of rolling 10-year periods, the index had an annualized return of 15%. The grey bar shows that in the past decade, the annualized return was 13%, and that this return occurred in 5% of rolling 10-year periods. GOLDMAN SACHS’ FORECAST FOR THE S&P 500 IN THE NEXT TEN YEARS IS AN ANNUALIZED RETURN OF 3%, the short blue bar on the left, the type of decade that has occurred less than 2% of the time. The historic average for all rolling 10-year periods is 11% (green bar). The current forecast reflects stretched valuations and all-time highs in the market.

3

We mentioned gold several times in recent weeks. Gold investors are sometimes called “gold bugs”. And gold is “a barbarous relic” that pops up only to remind us of our society’s failings, in contrast with stocks that help us celebrate its progress and innovations. A rising price of gold is an affront to our human constructs, and a barometer that something is wrong. Nonetheless, it behooves an investor to be philosophically agnostic in these matters and to recognize that there are periods in which, like it or not, gold outperforms equities. This chart for example shows that GOLD HAS OUTPERFORMED EQUITIES OVER THE PAST TWENTY YEARS and that it was doing so at almost any point of the period starting at the end of 2004. Most of this outperformance came during 2007-11 when gold (yellow in the chart) soared to what was in 2011 an all-time high, while the S&P 500 (blue) and Russell 2000 (orange) grappled with the stock crash of 2007-09 and its aftermath. If gold is the inverse of trust in governance, as we argued, things have not been going well with governance since the start of the new millennium.

4

STARBUCKS ISSUED A PROFIT WARNING just weeks after naming a new CEO. This is called ‘kitchen-sinking’ among analysts, an announcement in which a new CEO dumps all the bad news in one go, in order to create a clean slate and to mark the start of his own strategy for recovery. But recent operating performance is so bad that the announcement may not quite achieve the desired effect, in the sense that there may be more bad news ahead. Starbucks global comparable store sales fell 7% in Q3, with North America down 6% and China down a startling 14%. Starbucks CFO is making no promise of a quick rebound: “We are developing a plan to turn around our business, but it will take time.” However, investors seem more confident. Starbucks stock (chart) made back half of its losses (measured from its 2001 high) after its new CEO was announced, and there was no major decline after the profit warning. Starbucks sees China as its major growth opportunity because coffee consumption is still low among the Chinese. But competition from Chinese chains has been fierce.

5

The United States has 4% of the world’s population but accounts for over 30% of global consumer spending (chart). Some people may not like it for a slew of reasons, but THE AMERICAN CONSUMER IS THE MAIN VARIABLE IN GLOBAL GDP and it drives the economies of other countries including China, Brazil and the resource-rich exporters. China with 18% of the world’s population only accounts for 12% of global consumer spending. The BRICS countries taken together account for less than 20%.

6

This chart projects for 2030 the BIGGEST SHARE OF SPENDING BY GENERATION IN EACH COUNTRY. The biggest spenders in the US today are boomers but by 2030, Gen X will weigh in more heavily. In Russia, China, much of the Middle East and North Africa, Australia and a few other places, Millennials will spend more than other generations. And in the youngest countries of the world, the countries with the lowest median ages, Gen Z will outspend each of the older generations. Only in France will baby boomers still be in the lead of generational spending.

7

If you fly from London to Beijing, you will get there two and a half hours faster if you fly with a Chinese airline like China Southern instead of a European airline like British Airways (chart). That is because since the start of the Ukraine war, Russia has banned European airlines from its air space. In 2022, European countries closed their air space to Russian airlines in reaction to the Ukraine invasion. In response, RUSSIA CLOSED ITS AIR SPACE TO EUROPEAN AIRLINES. On China and other Asia routes, European airlines view the Chinese advantage as unfair competition and have been scaling back the frequency of their flights. (via Chingiz Dauletbayev)

8

Speaking of China and flying… Brian Potter, who authors an excellent Substack called Construction Physics just wrote a new piece on CHINA’S ATTEMPT TO BUILD A JETLINER TO COMPETE WITH AIRBUS AND BOEING. Potter says that China’s efforts have been frustrated for a long time because 1) western firms have been careful to limit technology transfers (we are skeptical on this point) and 2) aircraft manufacturing is one of the most complex industrial endeavors. Potter posted this image from CSIS that shows the major suppliers for the C919 plane, China’s equivalent to the Airbus A320 and Boeing 737. Note the large number of western suppliers. The C919’s silhouette and design are nearly identical to those of the A320, a non-surprising fact since Airbus has for over a decade manufactured the A320 in Tianjin China. The C919 has secured over 1,000 orders from Chinese airlines but it has not obtained certification from the US FAA or its European counterpart, a needed milestone if it is to fly to western countries and sell to western airlines. COMAC, the maker of the C919, has also had difficulty in meeting the performance of the A320 and 737 in terms of range and payload. Read Potter’s article > > > Will the China Cycle Come for Airbus and Boeing?

9

Donald Trump has stated that he will deport a large number of migrants if he is elected president. Here is the NUMBER OF DEPORTATIONS THAT TOOK PLACE EVERY YEAR SINCE 2003. Over 2 million were deported during the Obama administration and over a million during Trump’s. In the past two years, there was a huge surge in the number of arrivals. If Trump is able to carry out his plan, the future annual numbers will far exceed what is shown here.

10

One of Trump’s concerns (and likely complaints if he loses) is that there is not sufficient verification that a voter is an actual American citizen. Trump and others have charged that non-citizen immigrants, legal and illegal, have also been voting, and that they tend to vote Democrat. This chart shows that 84% OF AMERICAN VOTERS FAVOR A PHOTO ID REQUIREMENT AT VOTING LOCATIONS and 83% favor a proof-of-citizenship requirement for first-time voters. As many as 76% are in support of early voting.

11

Here are two maps that remind us by how much THE BORDERS OF GERMANY AND POLAND HAVE SHIFTED WEST during the 19th and 20th centuries. In the first map, we see that the Prussia of 1800 is nearly all outside of Germany’s current borders. And in the second map, we see that Poland’s borders have also shifted west since the 17th century. Yesterday’s Germany is today’s Poland. And yesterday’s Poland is today’s Belarus and Ukraine. (via @Valen10Francois)

12

Last week, we showed a chart of the number of notable scholars in Europe, to illustrate that it had dipped badly during the Middle Ages before it surged again after 1,000 AD. Here is a similar chart showing ITEMS ON DISPLAY IN THE LOUVRE BY DATE OF CREATION. Again we see here a large number of items of Greek and Roman origin but very few from medieval times. The Renaissance and subsequent centuries contributed again a large number of artifacts worthy to be displayed at the Louvre. The Middle Ages were not entirely sterile in terms of art or architecture. Some of Europe’s greatest cathedrals were built during that period but this was mainly after the year 1100 when recovery had already started. Between 300 and 1100 AD, there was little in the way of art and artifacts, per the Louvre collection, compared to what was before and what came after. Nonetheless, the Hagia Sofia in Istanbul was built around 530 AD, a low age in this chart but one that still produced some notable buildings and art. Perhaps some of the profile of this chart is due to the Louvre’s own choices and opportunities.

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