When Donald Trump won the race for the White House last year, markets rallied. The so-called “Trump trade” rested on the hope that the US president would deliver business friendly reforms that would boost growth. This was a bit of a misnomer: what executives and investors have really been betting on for most of this year is a “Cohn trade”.
…The question that investors and executives are asking is whether that “Cohn trade” still works. It certainly looks like a higher risk bet. Never mind the fact that Mr Cohn and John Kelly, the president’s chief of staff, failed to stop Mr Trump from making his inflammatory comments this week about the Charlottesville protests. What is most telling is that this disaster happened at the very moment that Mr Cohn’s star was supposed to shine.
…This does not necessarily mean that all the investor optimism around the Cohn trade has disappeared. Stock markets are still flushed with oodles of central bank liquidity and boosted by moderate economic growth. And one important detail about the Cohn-cum-Trump trade that is often forgotten is that markets did not merely rally because business hoped reforms would get done. Executives were also excited about what might not occur under Mr Trump — Barack Obama-style regulatory creep.
“Anglo-Saxon political angst” is spurring a shift in investment from U.S. and British equities to Europe, according to the latest survey of fund managers by Bank of America Merrill Lynch.
The most important market news of the day.
Money managers of $587 billion polled from Aug. 4 to 10 cut allocations to the two nations to a post-financial crisis low, while boosting positions in European shares. They cite the risk of policy blunders by major central banks as their foremost concerns, followed by a bond crash and escalating tensions with North Korea.
The momentum of the first half fizzled away last month after the country’s leadership listed financial risks as major threats to the health of China’s US$11 trillion economy.
A slowdown in property investment and home sales, along with an easing in overseas shipments, point to further weakness down the road as President Xi Jinping seeks to cement his power at a key Communist Party congress this year and push ahead with a long-delayed economic restructure.
Yao Wei, chief China economist at Societe Generale, said Beijing’s efforts to curb risks would be clearer after the congress and this was a fundamental reason to be cautious about growth in China.
“Deleveraging and lowering risk in the financial system are now clearly among the top medium-term objectives of the Xi administration,” Yao said.
Growth in China’s exports came in last month at the slowest rate since exiting contraction in March, with the rise in value of shipments to most major trading partners decelerating markedly.
The dollar value of outbound shipments from China climbed 7.2 per cent year on year in July, according to the General Administration of Customs, slowing from growth of 11.3 per cent a month earlier and coming in well below a median forecast of 10.9 per cent growth from economists surveyed by Reuters.
Growth in exports to most major trading partners was down visibly, with those to the US falling more than 10 percentage points from the previous month to notch year-on-year growth of just 8.9 per cent in July.
CNBC/Berkeley Lovelace Jr./08-04-17
The strong U.S. jobs numbers don’t look sustainable but wages are likely to increase, said Jan Hatzius, chief economist at Goldman Sachs.
Hatzius spoke after the Labor Department said Friday that the U.S. economy added 209,000 jobs in July and the unemployment rate fell to 4.3 percent from 4.4 percent, the lowest since March 2001. The number of employed Americans hit a new high of 153.5 million.
“All of it looks quite solid from the demand side but what’s not sustainable is to see these kinds of numbers with the unemployment rate as low as it is, U6 as low as it is,” Hatzius said Friday on CNBC’s “Squawk on the Street.”
“I’m not saying it’s going to stop in the next few months but we’re not going to be able to sustain that kind of job growth in the long term. I think the trend is probably below (100,000).”
The savings rates in the US and the UK are dropping, and economists are trying to figure out what that means.
When the US government released its annual revisions to economic growth last week, it made sharp downward revisions to the personal saving rate. Savings as a share of disposable income was 4.9% last year, not 5.7% as earlier calculated, the Bureau of Economic Analysis said.
The update showed that incomes were less than previously reported, while consumption was higher.
Albert Edwards, a Societe Generale strategist and permabear, published the doomsday interpretation of this data in a note on Thursday. For Edwards, it’s the eve of the financial crisis all over again.
“Every day more evidence mounts that almost exactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today,” he said.
Slumping savings rates in the US and the UK were last seen in 2007, “just before the bursting debt bubble blew the global economy and financial system to smithereens.”
The Guardian/Larry Elliott/07-26-17
Britain’s economy grew by just 0.3% in the second quarter of 2017 after what government statisticians called a “notable slowdown” in the first half of the year.
The expansion in the three months to June followed 0.2% growth in the first quarter and was in line with City expectations for the eagerly awaited first estimate of the economy’s recent performance.
…Darren Morgan, head of national accounts at the Office for National Statistics, said: “The economy has experienced a notable slowdown in the first half of this year. While services such as retail, and film production and distribution showed some improvement in the second quarter, a weaker performance from construction and manufacturing pulled down overall growth.”
The IMF on Sunday lowered its economic growth forecasts for the United States to 2.1% for this year and the next, down from the 2.3% for 2017 and 2.5% for 2018 that it had predicted in April.
That’s a far cry from the 4% growth President Trump promised on the campaign trail, and significantly lower than the 3% growth he has targeted since assuming office.
The global financial institution cited the “uncertainty” over the Trump administration’s policies as the main reason for the downgrade.
“The major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes,” the IMF said in its latest World Economic Outlook released Sunday.
NYT/Keith Bradsher & Sui-Lee Wee/07-23-17
Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about “gray rhinos” — large and visible problems in the economy that are ignored until they start moving fast.
The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.
Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a “gray rhinoceros,” without naming specific companies.
Chinese regulators have become increasingly concerned that some of the biggest conglomerates have borrowed so much that they could pose risks to the financial system. Banking officials are ramping up scrutiny of companies’ balance sheets.
Daily Reckoning/Jim Rickards/07-19-17
Last week the Fed raised the white flag on further rate hikes. There won’t be any for the foreseeable future.
No rate hikes are coming at the July, September or November Fed FOMC meetings. The earliest rate hike might be at the December 13, 2017 FOMC meeting, but even that has a less than 50% probability as of today. I’ll update those probabilities using my proprietary models in the weeks and months ahead.
…Tight money, a weak economy, and a stock market bubble is a classic recipe for a stock market crash. It’s time for investors to go into a defensive crouch by selling stocks and reallocating assets to cash, Treasury notes, gold and gold mining shares.
PG View: Rickards sees potential for a “20% decline in stock prices at best, and possibly a 30% market crash before the end of the year.” It may be prudent to heed his advise and take profits in stocks and move some of that capital to the safety of gold.
Americans barely increased spending in May and choose to save more money instead even as decelerating inflation gave them more bang for the buck.
Consumer spending rose 0.1% last month after back-to-back 0.4% gains in April and March, the Commerce Department reported Friday. That matched the Marketwatch forecast of economists.
The meager increase in spending took place against a backdrop of slowing inflation.
PG View: Not typically an environment where the central bank would be tightening policy.
European Central Bank President Mario Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, when his comments sent the euro higher this week, sources familiar with Draghi’s thinking said on Wednesday.
Draghi’s intention was to set up September as the earliest the bank would discuss rolling back stimulus, they said, but stressed it was by no means certain that it would come to a decision then.
“The market failed to take note of the caveats in Draghi’s speech,” one of the sources said.
The International Monetary Fund cut its outlook for the U.S. economy, removing assumptions of President Donald Trump’s plans to cut taxes and boost infrastructure spending to spur growth.
The IMF reduced its forecast for U.S. growth this year to 2.1 percent, from 2.3 percent in the fund’s April update to its world economic outlook. The Washington-based fund also cut its projection for U.S. growth next year to 2.1 percent, from 2.5 percent in April.
The world’s biggest economy will probably have a hard time hitting Trump’s target of 3 percent annual growth as it’s faced with problems ranging from an aging population to low productivity growth, and with a labor market already back at full employment, the fund said in its annual assessment of the U.S. economy released Tuesday.
Given broad uncertainty on policy, “we have removed the assumed fiscal stimulus from our forecast,” Alejandro Werner, director of the IMF’s Western Hemisphere Department, said at a press briefing in Washington.
Yahoo Finance/Julia La Roche/06-25-17
Legendary bankruptcy expert Dr. Edward Altman cautioned that this benign credit cycle — characterized by low default rates, low yields, low spreads, and lots of liquidity — could come to an abrupt end.
“It’s been a terrific market for investors for quite a long time and if anything is concerning it’s that we now are more than eight years into a benign credit cycle,” Altman, a professor at NYU Stern School of Business, told Yahoo Finance. “We’ve never had such a long benign cycle. And just that one little fact is something that we should be concerned about because if it comes to one and it could come to an end very dramatically.”
Altman, the creator of the financial-distress sniffing Altman Z-Score, warned in mid-2007 of a “Great Credit Bubble” and that there was going to be trouble in the market. He predicted that a meltdown would stem from corporate defaults. While the primary culprit of the financial crisis turned out to be mortgage-backed securities, investors who heeded Altman’s warning nevertheless avoided a lot of grief.
…Troublingly, Altman sees the reckless behavior of 2007 surfacing again.
Sears Canada filed for bankruptcy early Thursday, making it the latest casualty of the crisis among traditional brick-and-mortar retailers. It’s also another sign of trouble for the iconic retailer.
Sears Canada, which has more than 200 stores and about 17,000 employees, was spun-off as an independent company in 2012. But the filing is still bad news for Sears Holdings (SHLD), which owns both the Sears and Kmart brands in the United States. Sears Holdings still owns 12% of its shares.
…Sears and Sears Canada are hardly the only struggling retailers. In the United States, retail bankruptcies are up about 30% so far this year, according to BankruptcyData.com. Well known names including RadioShack, Gymboree, Sports Authority and Payless Shoes have all filed for bankruptcy within the last year. Total store closings across the U.S. are likely to reach record levels this year.
By some estimates, 25% of U.S. malls could close within the next five years.
PG View: Jonathan and I discussed this developing crisis in depth back in May. You can see the video HERE.
BusinessInsider/Pedro Nicolaci da Costa/06-22-17
The Federal Reserve keeps telling the bond market it wants interest rates to move higher, but traders aren’t listening.
That suggests investors don’t believe the Fed’s justification for interest rate increases, which are predicated not only on recent economic improvement but also on a continued bright outlook.
One startling chart from Societe Generale’s Albert Edwards illustrates the Fed’s dilemma. Two-year notes are historically the maturity that is most responsive to moves in the official federal funds rate.
But look at what’s happened to the two-year note’s yield this year as the Fed ratcheted up its monetary tightening campaign. Absolutely nothing.
In hiking rates and, more notably, reaffirming its forward policy guidance and setting out plans for the phased contraction of its balance sheet, the Federal Reserve signalled last week that it has become less data dependent and more emboldened to normalise monetary policy. Yet, judging from asset prices, markets are failing to internalise sufficiently the shift in the policy regime. Should this discrepancy prevail in the months to come, the Fed could well be forced into the type of policy tightening process that could prove quite unpleasant for markets.
…the Fed is now more intent on gradually normalising both its interest rate structure and its balance sheet. As such, it is more willing to “look through” weak growth and inflation data.
BusinessInsider/Pedro Nicolaci da Costa/06-15-17
Larry Summers isn’t mincing words when it comes to Federal Reserve policy: he thinks it’s way off.
In a stinging new post in the Washington Post’s Wonkblog, the former Treasury Secretary and Harvard economist says the central bank has lost crediblity with financial markets because of its consistently misguided optimism about growth prospects and the Fed’s ability to raise interest rates.
“The Fed is not credible with the markets at this point,” Summers writes. “Its dots plots predict four rate increases over the next 18 months compared with the markets’ expectation of less than two.”
…”The Fed has been highly unrealistic in its forecasts for several years,” he points out.
The U.S. economy has been growing for 96 straight months, its third longest expansion on record, and if this were any previous expansion, the Federal Reserve’s decision on Wednesday would be a no-brainer: It would be time to raise interest rates. The unemployment rate, at 4.3 percent, is at its lowest level since 2001 and job growth has remained strong for this stage of the recovery. Most importantly, the Fed currently has its target rate set at just 0.75-1.00 percent, far below historic levels. After eight years of unusually low interest rates, the conditions appear ripe to bring them back up.
But one critical economic indicator is saying otherwise: inflation. Normally when the economy is humming, inflation starts to rise, but in this case, the Fed’s preferred measure of annual inflation has actually declined for three months in a row, hitting 1.7 percent in April. If you exclude volatile food and energy prices, inflation is even lower, at 1.5 percent. (The Fed’s inflation target is 2 percent.) And on Monday, the New York Federal Reserve reported that consumer inflation expectations had declined as well; expectations for inflation three years from now hit their lowest point since January, 2016.
BusinessInsider/Jacqui Frank & Kara Chin/06-09-17
Legendary investor Jim Rogers sat down with Business Insider CEO Henry Blodget on this week’s episode of “The Bottom Line.” Rogers predicts a market crash in the next few years, one that he says will rival anything he has seen in his lifetime.
It’s going to be the biggest in my lifetime and I’m older than you. No, it’s going to be serious stuff. We’ve had financial problems in America — let’s use America — every four to seven years, since the beginning of the republic. Well, it’s been over eight since the last one. This is the longest or second longest in recorded history, so it’s coming. And the next time it comes — you know, in 2008, we had a problem because of debt. Henry, the debt now — that debt is nothing compared to what’s happening now. In 2008, the Chinese had a lot of money saved for a rainy day. It started raining. They started spending the money. Now, even the Chinese have debt and the debt is much higher. The federal reserves, the central bank in America, the balance sheet is up over five times, since 2008. It’s going to be the worst in your lifetime, my lifetime too. Be worried. — Jim Rogers
PG View: Rogers sees this happening “later this year or next.” And while the Fed will attempt a rescue as they did in 2008, “this time it won’t work.”
Bloomberg/ Lauren Coleman-Lochner & Eliza Ronalds-Hannon/06-09-17
As if malls didn’t have enough problems, count one more: retailers looking to slash the duration of their leases.
After more than a dozen bankruptcies this year contributed to thousands of store closures, visibility for the industry is so poor that retailers are pushing for lease renewals as short as a year or two — down from five to 10 years.
…Somewhere between 9,000 and 10,000 stores will close in the U.S. this year, said Garrick Brown, vice president of Americas retail research for commercial broker Cushman & Wakefield — more than twice as many as the 4,000 last year. He sees this figure rising to about 13,000 next year.
PG View: And yet we continue to add retail square footage, because money remains cheap. This is not going to end well.
The list of U.S. retailers with troubled financials that could make them potential bankruptcy risks, now totals 22, according to Moody’s Investors Service — topping the 19 recorded at the peak of the Great Recession.
Confronting a major shift to online shopping Sears Holdings, Neiman Marcus Group and others on the list face a “perfect storm,” senior Moody’s retail analyst Charles O’Shea said Thursday, as he invoked the name of the Massachusetts fishing boat lost with all hands in a 1991 tempest. The disaster, chronicled by author Sebastian Junger, was later made into a movie featuring actors George Clooney and Mark Wahlberg.
“You’re on the Andrea Gail right now, and the water’s starting to get very choppy,” O’Shea said of the financial conditions buffeting troubled retailers.
PG View: This is a real crisis in the making, as outlined in our video from last month: http://www.usagold.com/cpmforum/2017/05/15/week-in-review-special-report-a-crisis-in-the-making-and-what-it-means-for-gold/
Children’s clothing company Gymboree is anticipated to file for bankruptcy protection sooner rather than later, as the retailer struggles to manage its debt and churn a profit.
Gymboree missed an interest payment due June 1 for its outstanding 9.125 percent senior notes due 2018, according to a Thursday filing with the Securities and Exchange Commission.
…”We do not expect [Gymboree] to make this payment or any other payments on its debt obligations, and expect a general default given ongoing lender negotiations,” S&P Global Ratings wrote in a note to clients Friday.
PG View: Again, please see our video: A Crisis in the Making and What it Means for Gold
Cooler hiring may partly reflect the challenge of finding skilled and experienced workers amid a tightening job market. It may also be a sign businesses are reluctant to expand their workforce until they see more evidence the new administration’s plans are translating into legislation that’ll reduce taxes and spur growth. Even so, with the revisions, the three-month average of payroll gains was the weakest since 2012.
…Retail payrolls declined 6,100, the fourth straight drop.
PG View: If you haven’t seen our videoed discussion about the death of retail, and the far-reaching expectations, I encourage you to do so: CLICK HERE
‘THIS IS A DEATH SPIRAL’: The tsunami of store closures is doubling in size from BusinessInsider
“Store closings have accelerated, even in tier-one markets,” Credit Suisse analysts wrote in a recent research note.
Credit Suisse expects store closings to reach 8,600 before the end of the year!
The U.S. economy continued to grow “modestly” or “moderately” in nearly all regions in recent weeks, though new signs appeared that optimism has waned in some districts, a Federal Reserve survey showed.
The central bank’s Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks through May 22, said several sectors from manufacturing to housing continued to expand slowly. Consumer spending softened, however, with many districts reporting little or no change in non-auto retail sales.
“A majority of districts reported that firms expressed positive near-term outlooks; however, optimism waned somewhat in a few districts,” according to the report, released Wednesday in Washington.
Stocks have moved up based on two things—a big earnings recovery and hopes the Trump administration would cut taxes, slash regulations and build big infrastructure projects. The earnings recovery is still intact, but the Trump agenda is floundering amid Congressional gridlock and the investigation of the Trump campaign’s ties to Russia, which is sucking the oxygen from the room.
…In an economic recovery and bull market that are eight years old, there’s not much room for improvement. I think we’re in the final innings of both. And the S&P 500’s valuation, at 17.5 times projected 2017 earnings, is pretty high.
So when the soft data say buy, buy, buy, and the hard data say not so fast, I’ll trust the hard data. I’m not yet ready to bail on this market, but it’s surely time for caution.
WSJ/Andrew Peaple & Peter Landers/05-24-17
Some economists have long warned that China faces the same fate as Japan, with a debt-fueled boom followed by years of stagnation as the country works its way through the hangover.
After Moody’s decision to downgrade China on Wednesday, the two countries at least now have sovereign credit ratings, at A1, to match.
…Concerns about China’s economy voiced by the likes of Moody’s have some echoes of the problems Japan faced by the early 1990s. As with Japan, heavy capital-spending levels have been central to China’s growth—investment accounted for nearly half of China’s annual growth by 2010, up from a third in 1990.
Moody’s Investors Service on Wednesday downgraded China’s credit rating to A1 from Aa3, changing its outlook to stable from negative, citing concerns efforts to support growth will spur debt growth across the economy.
Marie Diron, senior vice president for Moody’s soverign rating group, told CNBC’s “Street Signs” on Wednesday that the catalyst for the downgrade was a combination of factors, including expectations that potential growth would fall to 5 percent by the end of the decade. It was Moody’s first downgrade for the country since 1989, according to Reuters.
“Official growth targets are also moving down, but probably more slowly. So the economy is increasingly reliant on policy stimulus,” she said, adding that was likely to spur increasing debt levels for the government.
Washington Post/Damian Paletta & Robert Costa/05-22-17
President Trump on Tuesday will propose cutting federal spending by $3.6 trillion over 10 years, a historic budget contraction that would severely ratchet back spending across dozens of programs and could completely reshape government assistance to the poor.
…Mick Mulvaney, director of the Office of Management and Budget, said the spending plan, titled “A New Foundation for American Greatness,” is focused on protecting taxpayer money and cutting spending on programs that are ineffective or encourage people not to work.
…The proposed budget refocuses decades of U.S. spending — both foreign and domestic — to reflect Trump’s belief that too much taxpayer money is simply given away.