This key indicator just hit a 16-year high, but don’t get carried away
Earlier this week, the latest U.S. Consumer Confidence index figure was released, showing that consumers are the most confident they’ve been in 16> READ MORE
Earlier this week, the latest U.S. Consumer Confidence index figure was released, showing that consumers are the most confident they’ve been in 16> READ MORE
I think the person best qualified to manage your money is you. That’s the philosophy behind Stansberry Churchouse Publishing: To help give you — our readers> READ MORE
Another day, another survey showing that Hong Kong is one of the most expensive cities in the world to live. The Economist Intelligence Unit’s Worldwide Cost> READ MORE
When was the last time you learned something new? Did it make you richer, happier or more productive? If the answer is no, you could be an information junkie.> READ MORE
Earlier this week, the latest U.S. Consumer Confidence index figure was released, showing that consumers are the most confident they’ve been in 16 years.
This might sound great but as they say, the higher you are the farther you fall.
Let me explain.
The Consumer Confidence index is created from a monthly survey of 5,000 U.S. households. The questions and the way they’re collected are largely unchanged since 1967. This means that it’s one of the longest running, and most consistent, indicators of the direction of the American economy.
The survey asks respondents to comment on business and employment conditions today, and their expectations of where they’ll be in six months. People who answer the survey are also asked about their expectations of family income in six months.
The U.S. consumer is a huge financial force. It’s the largest component of domestic GDP. And U.S. consumers – though they account for just under 5 percent of the global population – are responsible for around a quarter of the US$43 trillion that households all around the world spend every year. (We’ve written about how the Chinese consumer will be one of the most important forces in the global economy… in the meantime, the American consumer still sits on that throne, though.)
So the Consumer Confidence figure is an extremely important and closely-watched indicator – both for the American economy and for the global economy. It’s a gauge of optimism about the overall state of the economy and the consumer’s personal financial decisions. If consumers are happy and optimistic, they’ll tend to spend more and save less.
Over time, we see clear trends and cycles in consumer confidence. Take a look at the chart below showing the index all the way back to its inception in 1967.
The first thing you’ll notice is the index isn’t above 125 (its current level) very often. In the past 50 years, it only hit that level in two cycles.
And more telling, with the exception of 1997 to 2000, when the index is at or near the level it is now, we often see a sharp reversal soon thereafter.
Consumer confidence and the stock market are also closely linked. If we look back at the last three bull markets in U.S. stocks, we see a close correlation with the consumer confidence index (see chart below). That means that consumer confidence and the U.S. stock market tend to move together.
This makes sense. Consumers are confident when they have jobs, and feel a sense of stability – and they then feel more inclined to spend than save. And given the huge importance of the U.S. consumer to the economy, consumer spending means profits and economic growth.
So, with confidence at a 16-year high, should you be rushing out and buying stocks?
A strong consumer confidence figure is good for the economy. But it’s a lagging indicator, not a leading one. That means that consumer confidence tells you about the state of where the economy is, not necessarily where it’s heading. It’s a lagging indicator because economic growth takes time to filter through to consumers in the form of employment and wages, which are primary drivers of how the index is determined.
In the short term, strong U.S. consumer confidence is positive for:
The U.S. dollar – Higher consumer demand suggests that prices will rise faster. As a result, the Federal Reserve may lean towards raising interest rates faster – which makes the dollar a more attractive asset.
Consumer discretionary stocks – In periods of weaker economic growth and lower consumer confidence, consumer staple stocks (like Kraft Heinz, Colgate-Palmolive, and Proctor & Gamble) tend to outperform. These companies sell your everyday necessity items. But when the person in the street has a little extra cash in his pocket and feel good about their prospects, they’re more likely to upgrade their phone, take a vacation or splurge a little extra cash on something nice.
Asian exporters – China is by far the biggest exporter to the U.S. All those TV’s, phones, and iPads are made in China. And coupled with a stronger dollar, these imports are even more attractive to the U.S .consumer (because they’ll be cheaper for American buyers with the stronger U.S. dollar). South Korea and Japan are other large U.S. export markets.
In the medium term, U.S. stocks are still expensive by historical standards. The S&P 500 trades at a forward price-to-earnings ratio of around 18 times. That compares to an average of about 16 times since 1990.
We’ve written about how the so-called Trump Rally is going to end soon. So far, it hasn’t, and the S&P 500 is up 5.3 percent in 2017 so far. But such a high Consumer Confidence figure suggests that – if history holds – U.S. stocks are getting very close to their high for this market cycle.
Caution is preferable to exuberance.
I think the person best qualified to manage your money is you. That’s the philosophy behind Stansberry Churchouse Publishing: To help give you — our readers and subscribers — the tools and insight to make better financial investment decisions.
And as part of this, we want to help you avoid the car mechanic syndrome.
The car mechanic syndrome
The financial-industrial complex is my name for the vast web of interests eager to get their hands on your cash and “help” you invest it, from the mainstream financial media to private bankers and “financial advisors” to policymakers who let those guys have their way with your money. Its purpose is to separate you from your money. An important part of that is to make finance and investing sound more complicated than it really is. I call this the car mechanic syndrome.
The car mechanic syndrome is what happens when someone who knows nothing about cars (like me) goes to a mechanic when the car is making a funny noise.
“Can you tell me what’s wrong with it?” you ask.
You want to be sure that your car isn’t going to self-destruct. You want it fixed quickly, and you want to be on your way.
After popping the hood and casting his master eye over its contents for a few seconds, the car mechanic tut-tuts.
“When was the last time you brought this in for a checkup?” he asks with an arched brow. “Umm, I’m not sure,” you stutter back. “Well, it looks like your carburetor lower incisor has a myocardial fibrillation, and we’ll have to drain the accelerator abscess and replace the dynamical half plug,” he says.
Well, he doesn’t say that, of course, but he says something that means about as much as that to you.
You nod glumly. And $2,000 later, you’re on your way, with a severe case of car mechanic syndrome: You’ve been fooled by an “expert” into overpaying for a service that’s should be a lot simpler, and less expensive, than you’ve been led to believe. But because you don’t have the time/money/inclination/desire to learn more about that service to be able to have a conversation “as equals” with the “expert,” you continue to not understand, pay up, and move on. That’s a recipe for a lifetime of being ripped off by car mechanics — and financial advisors.
The only person who will protect you is…
You. In brief, this is how the financial-industrial complex operates… first they confuse you, then they concern you, and then they overcharge you. Every penny that you give to a private banker or asset manager — in the form of fees and expenses and loads and wraps and other fancy-sounding structures that the financial industry comes up with — is one less penny that can work the magic of compounding for you. And it’s one less penny that can go towards your retirement or your kids’ education or that new flat.
Some people think that their financial advisor is duty-bound to recommend only the best and most appropriate financial instruments or investments. But that’s generally not the case. Financial advisors in most markets are only required to offer you products that are “suitable” — but they’re not legally required to put your interests first (read more about this important distinction here). And as I’ve written before, the best person to take care of your money — the only person who will look after your financial interests as if it were their own money — is, well, you.
Three questions to ask
That’s not to say that there’s no role for others to help you with figuring out what to do with your money, and how to make it grow. The best source of insight is people who know what they’re talking about, provide unbiased and honest insight, and who have no incentive to guide you toward any one vehicle or another — and who are interested only in helping you make better financial decisions. (Like us, for example.)
There may, in fact, be a role for a financial advisor or private banker in your financial life — if for no other reason than to listen to what they have to say. Many of them are smart, experienced people with real insight on investing. The problem is that they make money when they take some of yours.
So the decision to let someone else — whether it’s a private banker or investment advisor or someone similar — is a big one. (Again… I firmly believe that it’s a far better idea to figure out your own finances. But I know that isn’t an option for everyone.) So to cut the chances that you suffer from car mechanic syndrome, I’d suggest you ask these three questions of him or her:
Of course, this is the story of finance… it’s a hugely broad question. It’s like asking a religious person to dis/prove the existence of a greater being. But the point is to see how she or he responds — and, most importantly, whether you understand the response. Remember how my car mechanic’s insight about what ailed my car sounded to me? It sounded like verbal garbage. If your potential financial advisor sounds like that, you should take your money elsewhere. If you don’t understand him now, you’re not going to understand him later… and if you don’t understand him, you’ll wind up paying dearly for your ignorance. (Similarly, if your financial advisor ever pitches you an investment idea that doesn’t meet the crayon test, walk away.)
Would you take advice from a marriage counselor who’s never been married? Or be the first patient of a just-out-of-school dentist? Or listen to a lawyer who’s never practiced law? Of course not. For the same reason, you should think long and hard before letting someone who’s never experienced the violence of different market environments manage your money. Stressful situations involving money — yours and especially others’ — can bring emotions into play in a way that can be destructive to your personal wealth (get our free report about how to keep your emotions out your money here). If you’ve never been through a real bear market before, you don’t know what to expect. You don’t want your money to be in the hands of the financial equivalent of a surgeon who’s never operated on someone before.
At Stansberry Churchouse Research, my colleague Peter Churchouse and I have plenty of battle scars between us. Peter has worked in finance and real estate in Hong Kong since the early 1980’s. He had a front row seat to countless regional booms and busts, the Asian Financial Crisis, SARS… you name it. Me? I had a front row for the 1998 financial crisis at a bank in Moscow when the market fell 93 percent… and a decade later, I was running a hedge fund right into the global economic crisis.
Many investment advisors are paid — either directly or indirectly — on a commission basis. That means that they make money only if you buy or sell (and, in particular, if you buy high-priced specialised vehicles called by a fancy acronym — see below). But as we’ve written before, often doing nothing is the best thing to do. If your financial advisor — who after all also has to put chicken rice on the table — only makes money if you do something, you’ll wind up buying and selling a lot more than you should. Instead, find a financial advisor who is paid based on your total assets, or a flat fee. That means s/he won’t be incentivised to put you into vehicles that don’t make sense for you (but which generate lots of fees for him), or to buy and sell a lot more than you should.
(Here at Stansberry Churchouse Research, we take no commissions for anything and we get no kickbacks from anyone. We’re here to serve our readers and no one else. If we recommend a service, it’s because we believe it will make you money – not because we’re making money for recommending it to you!)
If your financial advisor ever recommends an asset that’s described with some kind of fancy acronym (like, for example, BCTTLIHIRSSN, which stands for Bermudan Callable Three Times Leveraged Inverse HIBOR in-arrears Resettable Step-up Snowball Note), run away, fast. (Tama recently wrote about this in the derivatives world, here.) No matter how good it sounds, you can bet that it’s designed to separate you from more of your money, faster, than anything that isn’t described by some kind of new acronym (which you can bet was devised by a well-paid team of marketers).
Taking your car into the repair shop is much like investing; the more you know about the topic, the less money you’ll likely spend. One of the key objectives of Stansberry Churchouse Publishing is to help individual investors help themselves. For example, see our personal finance section, and our investment glossary.
If you’re ready to step up, click here to become a charter subscriber to our exclusive investment research product, the Churchouse Letter. Our subscribers pay less than the price of a couple bottles of decent wine for their year-long subscription to The Churchouse Letter. If they don’t like what they see they can have their money back, no questions asked, in the first 30 days.
Another day, another survey showing that Hong Kong is one of the most expensive cities in the world to live.
The Economist Intelligence Unit’s Worldwide Cost of Living Survey released recently showed Singapore as the most expensive city to live in, with Hong Kong second.
When it comes to the cost of real estate, Hong Kong prices are at the top of the list. Buying a no-frills one-bedroom apartment near Hong Kong’s central business district will set you back around US$1 million.
Just take a look at Hong Kong’s residential prices since 2008 versus the U.S. and U.K. Prices are up more than 100 percent!
Why is Hong Kong property in such a massive bull market?
Over the past few weeks, I’ve been asked about this numerous times. The week before it was Bloomberg’s Rishaad Salamat doing the asking (click here to watch the interview.)
And then last week I spoke about Hong Kong’s property market at Morgan Stanley’s 7th Annual Hong Kong Investor Summit.
A lot of people think that buyers from mainland China are pushing up prices in Hong Kong. (Remember, Hong Kong is politically separate from China, but it’s under Chinese control.)
Over the past few years, we’ve seen the story of “Hot Mainland China Money” playing out across real estate markets all over the world.
There’s a lot of mainland Chinese cash looking for a home outside of China, for diversification reasons and because wealthy folks simply want to move their money outside of China’s borders.
Their number one investment target is offshore real estate in markets like London, Los Angeles, New York, Vancouver, Sydney and Auckland, to name some prominent examples.
This “hot” mainland China money has also gotten a lot of the blame for property price increases in Hong Kong.
But I want to show you some data on why that conclusion is wrong for Hong Kong.
Here’s why Hong Kong is different
You see, back in 2012, the Hong Kong government introduced a new stamp duty aimed at cooling Hong Kong’s red-hot property market.
This additional Buyers Stamp Duty (BSD) added a whopping 15 percent to the purchase price of residential property for certain buyers. Any buyer who is not a permanent resident of Hong Kong is subject to this stamp duty, along with corporate buyers acquiring a property in the name of a company.
So for that $1 million small apartment, you now have to pay an additional BSD of US$150,000… and this is before we get to other stamp duties or costs payable.
This BSD, therefore, captures individual mainland Chinese buyers, along with anyone who is looking to buy residential property in the name of a company and not themselves.
But in each of the past two years (2015 and 2016), less than 5 percent of the total residential sales transactions have been subjected to this additional BSD.
So even if ALL of the BSD taxpayers were mainland Chinese (unlikely given that people living in Hong Kong and elsewhere continue to use companies to buy Hong Kong property), it’s obvious that mainland Chinese money cannot be blamed for driving prices up.
Mainland buyers are a fraction of the total. We cannot blame them for Hong Kong’s high apartment prices.
So, if not mainland buyers, who is to blame? The Federal Reserve for keeping interest rates so low for so long? Perhaps, but the real culprit is much closer to home.
The Hong Kong government
All land in Hong Kong is owned and sold by the government. Public housing is provided by the government and either sold or rented. This housing, which accounts for about 56 percent of the total residential housing stock, is provided for lower income families who would normally find private housing unaffordable. These families don’t usually buy in the private real estate market.
On the private side, land parcels are auctioned by the government to local (and increasingly mainland Chinese) developers.
Those residential units are built and sold into the market.
Take a look at the chart below. It shows the number of both public and private residential units completed each year. This is Hong Kong’s total annual housing supply.
Between 1984 and 2005, total annual housing production was around 67,000 units per year.
But between 2006 and 2015, that number dropped to just 24,000… that’s 65 percent below the long-term annual average!
Hong Kong’s population has continued to grow, along with a need for more housing.
Government land policies have cut back the supply of housing to meet those demands, in both private and public sectors.
The government’s own forecasts of future private housing supply in the coming few years still fall well short of long-term average production.
And even their forecasts are often very optimistic. Our research has shown that over some 30 years, the government overestimated future housing supply by an average of 23 percent!
So what does this mean?
Well, from a supply point of view, Economics 101 will tell you that lots of demand without supply will lead to high prices.
And it means that when a government holds so much control over a scarce asset (in this case land) then it commands a huge influence on pricing.
We should use that to our advantage. Hong Kong has some of the largest and most profitable real estate developer companies in the world. Several are trading at very attractive valuations compared to their longer-term averages.
As for the folks trying to get on the world’s most unaffordable property ladder who keep asking me, “Pete, when’s it going to end?”, I’m afraid that the base case scenario is that prices don’t meaningfully correct any time soon.
You might not be able to buy an apartment, but you can still participate in Hong Kong’s property market with the right real estate stocks.
I’ve been covering Hong Kong property stocks for nearly 30 years, and I tend to focus the majority of my recommendations on a handful of top quality companies. (But in the interests of being fair to subscribers of The Churchouse Letter, I won’t include those here.)
Alternatively, you can take a look at the Guggenheim China Real Estate ETF (New York Stock Exchange; ticker: TAO). This gives you a basket of Hong Kong and Mainland Chinese real estate developer stocks and REITs. Around 80 percent of the ETF is in Hong Kong real estate stocks, with mainland China taking up the other 20 percent.
If you’re looking for a Hong Kong property ETF then this is OK. Although jumbling up Hong Kong and mainland China stocks in a single ETF isn’t ideal. These are completely different markets and should be treated as such.
Just yesterday, mainland Chinese developer stocks fell between 3-5 percent in a single day due to real estate tightening curbs announced over the weekend. Hong Kong property stocks were more or less flat!
When was the last time you learned something new? Did it make you richer, happier or more productive? If the answer is no, you could be an information junkie. This week, Mark Ford reminds us that acquiring knowledge is only half the battle… and shares his two simple rules to becoming more successful.
By Mark Ford
I hadn’t seen Dave in almost 20 years.
He had been my dentist for a number of years and had later continued to care for my family. Dave contacted me when he discovered that I was the man behind the “Michael Masterson” pen name.
“How about lunch?” he wrote. “I’ve got a bunch of things I need to ask you.”
The anxious dentist
Several weeks later, we were eating chopped chicken salads together. Dave seemed nervous. It was as if he were intimidated by the Michael Masterson persona. I did my best to assure him I was the same person who used to wince in pain when he cleaned my teeth.
We talked a bit about family news, but it was clear he had something else on his mind.
Eventually, he mentioned a decision he was trying to make: Should he spend $100,000 on the highest level of an internet marketing program he had been looking at?
“I’ve been studying their stuff,” he told me. “It’s really good. But I’m not sure it makes sense for me to invest that kind of money.”
“A hundred grand is a lot of money,” I said.
“But you get an awful lot for your money,” Dave explained. “They do all the technical stuff for you, which I’m not very good at. All I’d have to do is come up with the ideas.”
“Well,” I said, “what ideas do you have?”
Dave didn’t have a single one. “All I know is that I am in the wrong business,” he said. “I took this self-test online — and I found out I’m in the worst business in the world for me.”
What does Dave want to do?
At nearly 50 years of age, Dave had just concluded that his entire career had been a waste.
“I’ve wanted to be a dentist since I was 8 years old,” he told me. “If I had known then what a bad business it was for me, I would have done something else.”
“Like what?” I asked.
“Like what you do,” he said. He was smiling, but he looked serious.
“Look,” I told him. “My business is a great business — but I don’t think you should conclude that your life has been wasted simply because you took some pop quiz that was probably designed to sell you something.”
“But it was right,” he insisted. “It proved something I had always known but was afraid to admit.”
The waitress filled our drinks. We ate in silence for a while.
“So, what I’m thinking is that, since I’m not into the technical stuff, this internet marketing program would be very good for me.”
“How much time have you invested in learning about internet marketing?” I asked.
“About three years,” he answered.
“And how many information products on the subject have you bought in that three-year period?” I asked.
Dave laughed. “I can’t even count that high,” he said.
“How much money have you spent?”
“Tens of thousands. Probably more.”
“And yet, you haven’t actually started an internet marketing business,” I said.
He nodded, then rattled off the names of every internet marketing program he’d bought — all the ones that I knew and others I had never heard of.
“That’s a lot of buying,” I told him.
“Tell me about it,” he said.
Dave explained that when he reads an advertising promotion pitching a new internet marketing product, he is “totally taken in by it,” even though he realizes he is just reading “a sales pitch.”
“But even though I know that I’m being seduced by a professional wordsmith, I can’t stop myself from buying.”
The (information) junkie dentist
“I hear you,” I said. “You are an information junkie.”
“What about you?” he said. “I read that you read a lot of informational books — about one every week.”
“I do,” I said, “but I’m not an information junkie. I’m an information user.”
“So what’s the difference?”
I explained that the difference is huge. An information junkie is addicted to the process of buying information. Although he may delude himself into thinking otherwise, he has no intention of ever using the information he buys.
An information user is very practical about his purchases. He buys information for specific, pragmatic purposes. He uses the information he buys to achieve specific goals — to start or grow a business, to learn a new language or to improve his negotiating skills.
An information junkie is happiest at the moment he is buying the information. His enthusiasm soon wanes, however. Within hours or days of receiving it, the information junkie is on to other things. The new product goes up on the shelf with the old products. He’s excited about the next new one.
An information user makes progress. See him reading a book about nutrition, and there’s a very good chance (if he likes the book) that his eating habits will change in the immediate future. The information junkie, in contrast, may have 26 books about nutrition in his living room. He may even have read them all — while he was lying on the couch eating potato chips.
An information user is someone who consumes information to profit from it. If he invests $100 in learning about a subject, he expects to see a substantial return on that investment — perhaps a thousand dollars’ worth of value, either material or spiritual. An information junkie consumes information like drugs or candy bars. It gives him an immediate rush and then nothing afterward. That’s why he needs to buy more.
The information user has long-term expectations when it comes to knowledge. He believes the knowledge he acquires now will compound over time as he learns more and is in a better position to leverage what he has learned for a greater benefit. The information junkie is in it for the here-and-now. He doesn’t believe in saving. He’s always on to the next hot thing.
What about you?
Are you an information junkie? Take this test and see.
Answer “Yes” if you agree with the statement below, or “No” if you don’t:
1. In the past year, I’ve purchased more than 12 books that I haven’t read. (If your answer is Yes, give yourself 2 points.)
2. In the past year, I’ve purchased:
3. In the past year, I’ve purchased at least one $1,000 information product that I didn’t use. (Yes = 5 points)
4. I am most excited about the information that I buy:
5. When I read a book, I feel compelled to read it from cover to cover. (Yes = 2 points)
6. I generally take notes when I read something. (Yes = 1 point, No = 2 points)
Well… how did you score?
If you scored 8 or above, you are indeed an information junkie.
If this is the case, don’t despair. You can convert yourself into an information user simply by following two rules:
That’s all there is to it. Obey these two rules, and you’ll not only break your addiction, you will radically improve your life.
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Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.