Bob’s Journal for 10/3

The Big Moves in China

Many investors have been fixated on China for the last week or so, and with good reason.

Significant stimulus moves by the government had direct and substantial effects on the markets. China’s Shanghai CSI 300 Index went from a 52-week low to a 52-week high in less than two weeks.

There was an 8% gain in one day, and the index rose for nine consecutive days. The CSI 300 rose 25% in five trading days.

The index had its highest one-day gain in more than 15 years, and there were only three other days since 2000 that the index had larger one-day gains, according to Bespoke Investment Group. These short-term results were made possible by a series of stimulus measures from China’s central bank and other policymakers.

The People’s Bank of China announced a reduction in its benchmark interest rate, a cut in the amount of cash banks must hold in reserve, lower down payments for second homes and lower interest rates on existing mortgages.

Best of all for the stock market, the bank announced it would make available 500 billion yuan (about $70 billion) in loans to banks, brokers and insurers to buy Chinese stocks. That’s a sample of the stimulus measures announced, and there were promises that more are on the way.

No wonder China’s stock indexes surged higher. Those recent returns are spectacular numbers, but they’re overwhelmed by the long-term results.

The CSI 300 still is 30% lower than where it was two years ago, and it is well below its post-Covid high in February 2021. It also has been essentially unchanged for the last five years.

About 600 of the 8,000 China-based companies listed on its public exchanges had an average return of capital exceeding 10% over the last five years, according to investment firm Baillie Gifford. A way to interpret that is that only 10% of Chinese companies earned a high enough return to justify investing in them.

The ETF MSCI China (MCHI) has a total annualized return of negative 6.90% over three years, positive 0.08% over five years and positive 2.29% over 10 years.

Meanwhile, for one comparison, MSCI India (INDA) has respective positive returns of 8.13%, 13.65% and 8.15%.

There continue to be significant problems in China’s real estate sector, including heavy debt burdens and overbuilding. China needs to boost domestic consumer consumption, since it is being excluded from some foreign markets.

China has suffered an extended period of low growth and falling prices that it needs to reverse, especially if the government wants to achieve its noneconomic goals.

The economy has steadily declined in 2024, and there are signs of deflation. That’s why Chinese authorities moved away from the measured policies of recent years in favor of a broad package of big moves.

Even so, as with the Fed’s big moves in 2009, there’s a lot more work to be done and it will take time for these and additional changes to have significant effects on China’s economy.

Gold’s Rally Continues

Gold has been the best investment in 2024 for most investors, and the rally recently made a new leg upward.

In late September, after the Federal Reserve announced its interest rate reduction, gold rose every day for six consecutive days before taking a break, and closed at a record high five days in a row.

This series of price increases came after gold moved steadily and substantially higher since mid-February.

Bespoke Investment Group went through the history to show how unique this year has been for gold.

Since 1976, gold closed at a record high on only 2% of trading days, and those days were concentrated in three fairly brief periods. There was the late 1970s through the early 1980s, and then from the financial crisis until about 2011.

Finally, there is the current period. So far in 2024, gold closed at a new high at least 36 times, which is 14% of all its record closing highs.

Those are only the most recent returns. Gold has been doing well since at least late 2022, and its most recent low was in late 2019.

What’s remarkable about gold’s strength during this period is the environment in which it happened.

Past surges in gold’s price occurred when Western investors, especially those in the United States, were buying because of worries about either inflation or financial crises.

The recent surge occurred when inflation was falling in the United States and interest rates were high. The Fed was engaged in its fastest tightening of monetary policy in at least 40 years during part of the period. Data show there hasn’t been a lot of buying from the West.

Instead, central banks from emerging markets, especially China and Russia, were responsible for a lot of the gold buying and support for gold’s price.

Consumers in India and China typically are big gold buyers and continued buying during this period. Recently, India reduced its tariffs on imported gold, which should boost demand.

Essentially, Western investors were selling gold in recent years while the central banks and a few others purchased it.

Now, with the Fed reducing interest rates and trying to stimulate growth, Westerners are becoming more interested in gold. The central banks in Russia and China probably won’t lose their interest in gold, and their purchases have been insensitive to higher prices the last few years.

Those are reasons to expect support for higher gold prices to continue. There aren’t any obvious sources of gold selling to offset the demand.

The Pros and Cons of Silent Trusts

They’re not right for every family, but there are times when a silent trust is a good idea.

A silent trust is one that isn’t revealed to the beneficiary by either the trustee or trust grantor. The trustee manages the assets and usually doesn’t make distributions to the beneficiary. After a period of years, the trustee reveals the trust to the beneficiary.

Some states don’t allow silent trusts. They believe a beneficiary should know about a trust to ensure the trustee isn’t mismanaging it. The status of silent trusts isn’t clear in some other states, and some states specifically allow them.

For example, Michigan recently enacted a law allowing silent trusts that aren’t disclosed to the beneficiaries for up to 25 years. At the 25-year mark or before, the beneficiary must be informed of the trust.

There are multiple reasons someone might want to create a silent trust.

Some people don’t want young beneficiaries to know the details of a trust, because they think the knowledge might inhibit the beneficiary’s full development or reduce the motivation to accomplish things.

Some people want a trust to be a secret when the beneficiary has substance abuse, behavioral or mental health issues. Withholding knowledge of the trust also can be helpful when the beneficiary has current or potential problems with creditors.

When a beneficiary is in a troubled marriage or other relationship, keeping the trust a secret could protect the assets and keep the trust out of litigation.

Some people want to keep a trust secret for a while because they are treating beneficiaries unequally in their estates.

A person might create a trust to benefit himself for life and then have beneficiaries receive the remaining trust assets. They believe during their lifetime it is best that the beneficiaries not know details of the trust.

A silent trust doesn’t have to be a complete secret. Some information about it might be provided to the beneficiary, depending on the grantor’s preferences.

When creating a silent trust, the grantor should name one or more other people to oversee the trustee, receive trust accounting information and have the power to replace the trustee in some circumstances.

As I said, a silent trust isn’t for every estate.

The existence of a silent trust might make it less likely that a beneficiary will learn how to manage a large amount of money and become comfortable owning it.

Perhaps it would be better for the beneficiary to know about the money and receive it in stages.

When wealth is to remain in a trust for an extended period of years, it might not matter whether the beneficiary knows about the trust. The beneficiary will know the money is out of reach for an extended period.

When a trust is a secret, the trustee can’t have candid conversations with the beneficiary and might not acquire all the information needed to manage the trust for the beneficiary’s maximum benefit.

It’s difficult for the trustee to make distributions for the beneficiary during the silent period without arousing suspicions and questions about the source of the money.

The requirement of silence also might reduce some of the trustee’s flexibility and the range of actions that can be taken.

Before creating a silent trust, talk about all the angles with an estate planner and consider both the advantages and disadvantages.

The Data

The Personal Consumption Expenditure (PCE) Price Index increased 0.1% in August and 0.2% in July. The index rose 2.2% over the 12 months ending in August and 2.5% for the 12 months ending in July.

The Fed’s preferred measure of inflation, the core PCE Price Index (which excludes food and energy prices), increased 0.1% in August and 0.2% in July.

Over 12 months, the core PCE Price Index rose 2.7% through August and 2.6% through July.

Personal income was 0.2% higher in August after rising 0.3% in July.

The compensation part of income increased 0.5% in August (0.3% in July) while income from assets declined by 0.5%, the same amount as in July.

Personal spending rose 0.2% in August, the smallest increase since January, following a 0.5% rise in July. Spending on services increased in August, while spending on goods declined.

The Consumer Sentiment Index from the University of Michigan was 70.1 at the end of September, its highest level in five months. The index was 69 in mid-September and 67.9 at the end of August.

Consumers’ assessments of current conditions improved, as did their expectations for up to five years. Inflationary expectations declined.

There were 143,000 new jobs created in the private sector in September, according to the ADP Employment Report. That’s that highest level in three months and an increase from 103,000 in August.

The number of job openings increased in August to 8.04 million from 7.711 million in July, according to the JOLTS (Job Openings and Labor Turnover Survey) report.

Job openings increased in construction and state and local government, excluding education. They declined in most other sectors.

The number of separations didn’t change much, indicating employers aren’t laying off workers.

Voluntary separations (also known as quits) declined to their lowest level since August 2020. An increase in quits is considered a sign that workers believe they can easily obtain jobs at higher compensation. A decline in quits indicates workers are less optimistic about the job market.

The ISM Manufacturing Index was 47.2 in September, the same as in August.

For six consecutive months, the index has been below 50.0, which indicates the sector is contracting. March 2024 was the only month the index was above 50.0 since September 2022.

The PMI Manufacturing Index declined a little in September to 47.3 from 47.9 in August.

The Kansas City Fed Manufacturing Index made a sharp decline to negative 18 in September after being positive 6 in August. The September level is a 14-month low.

The index has been positive only twice in the last 12 months.

The Dallas Fed Manufacturing Index was negative 9.0 in September, a small improvement from negative 9.7 in July.

Durable goods orders were unchanged in August after rising 9.8% in July.

After excluding defense and transportation orders, which is considered a good proxy of business investment, durable goods orders increased 0.2% in August following a 0.2% decline in July.

Pending home sales increased 0.6% in August after plunging 5.5% in July.

Pending home sales were down 3.0% for the 12 months ending in August after being down 8.5% for the 12 months through July.

GDP increased at an annualized rate of 3.0% in the second quarter, according to the third and final estimate. That’s an increase from 1.6% in the second quarter.

New unemployment claims fell by 4,000 to 218,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.834 million from 1.821 million.

The Markets

The S&P 500 lost 0.47% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 0.15%. The Russell 2000 decreased 1.12%. The All-Country World Index (excluding U.S. stocks) added 0.42%. Emerging market equities advanced 1.45%.

Long-term treasuries gained 0.16% for the week. Investment-grade bonds increased 0.04%. Treasury Inflation-Protected Securities (TIPS) were unchanged. High-yield bonds gained 0.18%.

On the currency front, the U.S. dollar gained 1.00%.

Energy-based commodities increased 0.09%. Broader-based commodities rose 0.99%. Gold declined 0.20%.

Bob’s News & Updates

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