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Economic cracks big enough to drive a car industry into are opening up all over the globe. Trade gaps are opening up between major allies. Widening spreads between the dollar and other currencies are shredding emerging markets. As we start into summer, these cracks and several others described below have become big enough to get everyone’s attention, just as I said last year would become the situation.

I had, as readers here know, predicted the same for last summer but revised my timing to this summer after Trump was elected and the hope for tax cuts lit on fire one of the world’s greatest stock rallies. Those tax cuts are also creating another rapidly rising gap between government revenue and government spending.

That rally died, pretty much as I said it would, almost as soon as those tax cuts became law. In fact, it died sooner than I said it would because I thought the tax cuts would provide more economic levity than they have. The Dow and S&P 500, as of last Monday’s close, hit their longest correction period since 1984! That’s more than half of my lifetime since we saw a correction period last this long.

However, now that the trade war is officially engaged, FANGMAN stocks (Facebook, Apple, Netflix, Google, Microsoft, Amazon and NVIDIA) are taking the market up again. Whether they will undo my prediction that the second leg down in the stock market will occur in early summer … remains to be seen.

Even so, this past Monday, when nearly every expert fully expected Netflix would blaze the trail upward as markets refocused on “earnings”, Netflix shares got slammed (down 13% in one mammoth stomp) because it had almost 20% fewer new subscribers than it had projected in April.

…click on the above link to read the rest of the article…

Are You Prepared for the End of Fake Money?

July 21, 2018

Are You Prepared for the End of Fake Money?

What Is Money?

Today we begin with a fundamental question: What is money? This, no doubt, is an important question. And we ask it with clear intent and purpose. Namely, we want to better understand how it’s possible for America to rack up such a massive trade deficit with China.

China-US imports and exports of goods. It has to be stressed that the most often cited figure is the trade deficit in goods, which is the “scariest” figure. The US surplus in services with China has grown rapidly in recent years. It was $33 billion in 2015, doubling from $16.5 billion just four years earlier. By 2017 it had grown to $38.5 billion. The idea that a trade deficit is somehow “bad” is highly dubious. “Countries” do not trade with each other anyway – individuals and companies do, and they obviously do so because they deem it advantageous for both sides. Moreover, these aggregate statistics obscure more than they reveal. The global supply chain is extremely complex – a single $3 t-shirt “Made in China” will contribute to the incomes of people in some 15 to 20 countries before a consumer in the US plucks it off a shelf at Wal-Mart. If we were to talk incessantly about the US capital account surplus – which offsets the trade deficit – would anyone complain? [PT]

America’s trade deficit with China, in 2017 alone, was $375 billion. That’s a gap of over $31 billion a month – or $1 billion a day. We believe having a better grasp on what money is will bring clarity to the nasty trade deficit that’s motivating today’s burgeoning trade war.

With respect to our initial inquiry we turn to Victorian economist William Stanley Jevons for edification. In his 1875 work, Money and the Mechanism of Exchange, Jevons stated that money has four functions. It’s a medium of exchange, a common measure of value, a standard of value, and a store of value.

…click on the above link to read the rest of the article…

Ignore Tariffs, According To Goldman This Is The Biggest Risk From A Global Trade War

July 21, 2018

Ignore Tariffs, According To Goldman This Is The Biggest Risk From A Global Trade War

One month ago, when previewing the potential fallout from an “all out” global trade war, which for simplicity’s sake many have equated with an across-the-board 10% tariff on all US imports and exports, we presented an analysis from Barclays, according to which the hit to 2018 EPS for S&P 500 companies would be ~11% and, thus, “completely offset the positive fiscal stimulus from tax reform.”

Furthermore, the impact on exporters which would be directly affected, would be 5%, while that on US companies that import finished goods or inputs would be higher, at roughly 6%. This, to Barclays, highlights the unintended consequences of imposing tariffs given the global nature of current supply chains.

Since then, trade tensions have only escalated at an alarming pace. In context, the US has already imposed tariffs on $79 billion of US imports and proposed tariffs on an additional $702 billion, with the combined $781 billion in targeted goods representing 27% of total US imports.

Reflecting this escalation in trade tensions, the Trade Policy Uncertainty Index recently notched its highest reading since 1994 around the time of NAFTA’s inception.

Adding fuel to the fire, in recent days all out currency war has also broken out following a sharp devaluation in the Yuan, which has tumbled at an annualized pace of 30%, far faster than during the 2015 devaluation…

… and eventually prompted Trump to also enter the fray, when he first complained about the Yuan “dropping like a rock” on a CNBC interview (coupled with some not so veiled suggestions against the Fed rate hiking ambitions), followed by vows to impose more tariffs and complaints about “illegal currency manipulation”, which have resulted in a rollercoaster move in the Yuan and, inversely, the dollar, and prompted Goldman to write that “trade war is evolving into currency war.”

…click on the above link to read the rest of the article…

Trump Threatens to Place Tariffs on All $500B China Imports, Blasts Fed Again

July 21, 2018

Trump Threatens to Place Tariffs on All $500B China Imports, Blasts Fed Again

Trump blasted the Fed, the EU, China today with threats to put tariffs on everything. China and the EU are manipulators.

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….The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?

8:51 AM – Jul 20, 2018

The WSJ reports Trump Escalates Criticism of Fed, Renews Threat on China Imports

President Donald Trump escalated his criticism of the Federal Reserve Friday, saying in a tweet that its efforts to raise short-term interest rates hurt the U.S. economic expansion, and he accused China and the European Union of manipulating their currencies to hurt the U.S. on trade.

The tweets came shortly after CNBC broadcast an interview with Mr. Trump in which the president said he was prepared to raise U.S. tariffs on $500 billion worth of imports from China as part of his push to narrow U.S. trade deficits with China. In the same interview he said he wasn’t happy about Fed rate increases.

The central bank’s campaign to slowly raise interest rates“hurts all that we have done,” he wrote Friday. “The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”

The president has threatened tariffs on $500 billion in Chinese imports before. On July 6 on Air Force One, the president told reporters that tariffs could eventually hit all U.S. imports from China, affecting nearly $505 billion in imports.

…click on the above link to read the rest of the article…

Trump Tariffs Could Delay Permian Relief

July 20, 2018

Trump Tariffs Could Delay Permian Relief

The oil and gas industry hoped they would be spared from Donald Trump’s trade war, but the Permian basin was just hit with some bad news.

The Permian basin has run up against a bottleneck for pipeline capacity. Gushing oil from West Texas will surpass the available space on the region’s pipelines this year, which could force output growth to suddenly plateau after expanding at a blistering pace over the past few years. New pipelines are still a year away.

One of the crucial pipeline projects slated to come online at some point next year is the Plains All American Pipeline LP’s Cactus II project, which will ferry 585,000 bpd crude oil from the Permian basin to the Gulf Coast at Corpus Christi.

Plains All American sent a request to the Trump administration, seeking an exemption from the 25 percent tariffs on imported steel. An industry estimate finds that about three-quarters of all the steel used in oil and gas pipelines comes from abroad, often because projects use a special type of steel that is hard to find domestically.

The Trump administration just shot down the request from Plains All American, the first rejection for a major oil and gas project. The denial could significantly raise the cost of the $1.1 billion Cactus II pipeline. The Commerce Department justified its rejection by arguing that there was sufficient supply of steel found within the United States.

A long line of other companies are also seeking exemptions, and the Commerce Department has to go through one by one. The agency has granted 267 exemptions and denied another 452, according to Reuters. There have been over 25,000 requests. Royal Dutch Shell and Chevron recently received an exemption on steel used in specific types of equipment for their offshore drilling projects in the Gulf of Mexico.

…click on the above link to read the rest of the article…

Trump’s Trade War May Spark a Chinese Debt Crisis

July 20, 2018

Trump’s Trade War May Spark a Chinese Debt Crisis

(Bloomberg Opinion) — There’s no chance China will cut its trade surplus with the U.S. in response to President Donald Trump’s tariff threats. For starters, Washington has made no specific demand to which Beijing can respond. But its efforts may have an unexpected side effect: a debt crisis in China.

The 25 percent additional tariffs on exports of machinery and electronics looked, at first blush, like a stealth tax on offshoring. The focus on categories like semiconductors and nuclear components, in which U.S.-owned manufacturers in China are strong, recalled Trump’s 2016 promise to tax “a ny business that leaves our country.”

It seems, though, that offshoring wasn’t the target after all. Now, with the imposition of new tariffs on low-value exports that mostly involve Asian value chains, the simple fact of selling cheap products that the U.S. buys has become the problem.

Either way, the administration appears set on shrinking its current-account deficit (which, at a moderate 2.4 percent of GDP, is far lower than the 6 percent clocked in 2006-7) just as the Federal Reserve raises interest rates. Distress has already been registered in China. On July 13, the yuan (also known as the renminbi) hit 6.725 to the dollar, the weakest in a year and 5 percent lower than at the end of May.

Such a move is nothing earth-shaking for less controlled currencies. But a stable renminbi is a key plank in the leadership’s promise to its people, and the exchange rate is tightly managed by the central bank.

Chinese investors have been buying official assurances for a year that the renminbi would be a fortress, but now they’re not so sure and are exporting money again: May saw net capital outflows and a decline in the foreign-exchange reserves.

…click on the above link to read the rest of the article…

Trade War With China Morphs Into Currency War: Biggest Loser is the EU

July 19, 2018

Trade War With China Morphs Into Currency War: Biggest Loser is the EU

Those who think “trade wars are good and easy to win” need to stop and reflect on currency wars.

Trade Wars Easy to Win

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When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!

6:50 AM – Mar 2, 2018

Trump’s “logic” rests on the notion that China has a huge trade surplus and the US can hurt China more than China can hurt the US.

Such logic is seriously misguided.

Trade is not a zero sum game. One does not gain by losing less. Losing is losing.
Yes, Trump is correct that the US can place more tariffs on Chinese goods than China can place on US goods. However, Trump cannot ignore US farmers, but the unelected leaders in China can suppress all dissent.
The US dollar floats, the Renmimbi (Yuan) doesn’t. Thus, China can manipulate it currency, albeit with risks of capital flight, to mitigate some or all of US tariffs.

Currency charts can be confusing. Sometimes up is down and sometimes down is up, It depends on which currency is fist. The lead chart shows a 7.4% decline in the yuan vs the US dollar since April 16.

Meanwhile the dollar index itself has advanced.

US Dollar Index

Relative to the overall US Dollar Index Weighting, the Yuan has effectively declined 13.8%.

Combined with China’s counter-tariffs on US goods, that relative decline effectively counteracts most, if not all, Trump’s tariffs.

…click on the above link to read the rest of the article…

Canary in the Coal-MIne–Emerging Market Contagion

July 17, 2018

CANARY IN THE COAL-MINE – EMERGING MARKET CONTAGION

Emerging market currencies, bonds and stocks have weakened
Fears about the impact of US tariffs have been felt here most clearly
The risk to Europe and Japan is significant
Turkey may be the key market to watch

As US interest rates continue to normalise and US tariffs begin to bite, a number of emerging markets (EM’s) have come under pressure. Of course, the largest market to exhibit signs of stress is China, the MSCI China Index is down 7% since mid-June, whilst the RMB has also weakened against the US$ by more than 6% since its April low. Will contagion spread to developed markets and, if so, which country might be the ‘carrier’?

To begin to answer these questions we need to investigate this year’s casualties. Argentina is an obvious candidate. Other troubled countries include Brazil, Egypt and Turkey. In each case, government debt has exacerbated instability, as each country’s currency came under pressure. Other measures of instability include budget and trade deficits.

In an effort to narrow the breadth of this Macro Letter, I will confine my analysis to those countries with twin government and current account deficits. In the table which follow, the countries are sorted by percentage of world GDP. The colour coding reflects the latest MSCI categorisation; yellow, denotes a fully-fledged EM, white, equals a standard EM, green, is on the secondary list and blue is reserved for those countries which are so ‘frontier’ in nature as not to be currently assessed by MSCI: –

EM Debt and GDP

Source: Trading Economics, Investing.com, IMF, World Bank

For the purposes of this analysis, the larger the EM as a percentage of world GDP and the higher its investment rating, the more likely it is to act as a catalyst for contagion. Whilst this is a simplistic approach, it represents a useful the starting point.

…click on the above link to read the rest of the article…

World Trade War Has Begun

July 16, 2018

World Trade War Has Begun

“By imposing tariffs of 25% on hundreds of products imported from China worth US$34 billion a year on Friday, July 6, the United States has violated the rules of the World Trade Organization and launched the largest trade war in the world’s economic history,” a statement by China’s Commerce Ministry declarae.

Beijing claims that it was committed to not firing the first shot, but has been forced to take action in response to the situation created by the United States and has notified the World Trade Organization.

“U.S. actions affect global supply and value chains, but they are also opening fire on everyone, including themselves,” said a spokesman for the Asian nation’s trade ministry.

The Chinese agency has denounced the mercantile “bullying” with which Washington is putting pressure on its trading partners by means of tariff threats that go against the conduct demanded today.

China called on all countries of the world to join forces against trade protectionism and to support multilateralism. The Asian giant claims to have wanted to avoid the trade war that the United States has provoked, but has been forced to fight this war as much as necessary to protect the interests of the nation and its people.

In retaliation, Beijing announced the introduction of an identical tariff rate for the same monetary value for several U.S. goods, some of which would begin to be taxed as of the date set by Washington.

A trade war between the US and China, the two largest economies in the world, could affect not only both nations, but the world economy as a whole, according to a projection by economists at Pictet Asset Management in London, one of Europe’s leading independent asset and wealth managers.

…click on the above link to read the rest of the article…

Record Deficits, Stronger Dollar Equals Record China Trade Deficit

July 16, 2018

Record Deficits, Stronger Dollar Equals Record China Trade Deficit

Sometimes math is a real bitch. Donald Trump is a smart guy. I know he knows math.

Too bad he’s ignoring it.

Here’s the gig. The title says it all. Government spending is rising rapidly. More actual money is flowing into the US economy. Where is that spending going? To buy cell phones, computers, cars, office supplies and all the rest.

It doesn’t matter if the purchase is made at Best Buy through a Purchase Order, the money still goes to stuff built and imported from China. The second order effect is that even if it goes to subsidize a farmer in Iowa or a defense contractor in California, that money winds up in the hands of a consumer who does what?

Goes to Best Buy and buys a new TV. This isn’t rocket science folks, it is simple cause and effect.

More money chases those goods. Despite the naysayers, Apple is selling a crap-ton of $1200 phones…. built where? China.

So, the budget deficit thanks to record spending is fueling the very trade deficit with China that Trump is complaining about daily.

Here’s the math.

Big Badda Boom

First up is the budget deficit numbers through nine months of fiscal year 2018, courtesy of Zerohedge.

This resulted in a June budget deficit of $75 billion, better than the consensus estimate of $98BN, and an improvement from the $147 billion deficit in May and as well as slightly less than the deficit of $90.2 billion recorded in June of 2017.This was the second biggest June budget deficit since the financial crisis…

…The June deficit brought the cumulative 2018F budget deficit to over $607BN during the first nine month of the fiscal year, up 16% over the past year; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion.

…click on the above link to read the rest of the article…

World’s Largest Shipping Company Collapses As Trade War Reality Strikes

July 15, 2018

World’s Largest Shipping Company Collapses As Trade War Reality Strikes

While US equity markets (well a few mega-cap tech stocks anyway) have remained resilient in the context of rising protectionist fears, theworld’s largest shipping company is seeing its stock eviscerated as investor anxiety over trade wars finds an outlet that makes rational sense.

A.P. Moeller-Maersk A/S may struggle to make a profit this year after the U.S. and China descended into a trade war that is already showing stress in sentiment surveys.

As Bloomberg reports, Maersk, which is based in Copenhagen, has already lost almost a third of its market value this year as investors gird for more bad news, and it is losing value in line with the collapse in the US Treasury yield curve.

Trade protectionism means less demand, and history suggests the shipping industry will struggle to make the necessary supply cuts. What’s more, Maersk is now more exposed to shipping as the former conglomerate divests its energy business.

Per Hansen, an investment economist at Nordnet in Copenhagen, says Maersk is currently “in the eye of the hurricane” when it comes to the damage that will be inflicted by a trade war.

The company said earlier in the week it will need to temporarily scale back its service between Asia and North Europe as a result.

“It’s highly likely that Maersk’s valuations could sink to its trough valuations in the coming months as investors avoid shipping stocks until more excess capacity is being removed,” said Corrine Png, chief executive officer and founder of Crucial Perspective, a Singapore-based research provider focusing on transport.

So just keep buying Amazon and Netflix, oh and for good measure, keep buying bonds.

…click on the above link to read the rest of the article…

The Market Gods Are Laughing

July 15, 2018

The Market Gods Are Laughing

POITOU, FRANCE – President Trump escalated the trade war yesterday, making a kamikaze attack on a vast armada of Chinese imports – $200 billion in total – headed for California.

The Chinese say they will retaliate.

Phony Wars

Last month, we opined that the trade war wouldn’t go any better than Vietnam… or Iraq… or any of the feds’ other phony wars – against drugs, poverty, or terrorists.

It will be expensive, futile… and perhaps disastrous.

But that doesn’t mean it won’t be popular. Wars give the spectators something to live for – us versus them… good guys against bad guys… winners versus losers.

Their hat size swells as their champion wallops the Chinese. Their girth shrinks as he challenges and taunts the Canadians. Their manhood grows when the enemy gives in and admits defeat.

But while this puerile entertainment is taking place in the arena, the real action is going on in the expensive skyboxes, where the elite collude against the fans.

Wars shift resources from the boring and productive win-win deals in the private sector to the magnificently absurd win-lose deals of the feds and their cronies. The only real winner is the Deep State.

Weatherman David

We saw our colleague, former U.S. budget chief under President Reagan, David Stockman, on TV yesterday. The interview was painful to watch.

He was bravely trying to explain the trade deficit and why it was caused by monetary policy, not by trade ramparts that were too low.

But the young, know-it-all newscasters were such numbskulls – so lacking in any experience, theory, or historical perspective – he might as well have been instructing a walrus on how to chew gum. The lesson was in vain.

The three TV experts saw no problem with the trade deficit… and no danger approaching from Trump’s war on it.

…click on the above link to read the rest of the article…

The U.S. Energy Industry Can’t Afford A Trade War

July 12, 2018

The U.S. Energy Industry Can’t Afford A Trade War

As the U.S.-China trade spat turns into a full-blown war with tariffs and retaliatory tariffs and threats of further tariffs, U.S. energy exports to China may suffer if Beijing follows through with its threat to slap tariffs on U.S. oil and oil product imports.

China has, in recent years, become a key export market for growing U.S. energy exports. In fact, China is America’s second-largest crude oil customer after Canada and is also one of the biggest importers of U.S. propane and liquefied natural gas (LNG).

Associations of U.S. manufacturers, retailers, and petroleum and chemicals producers have stepped up calls on the U.S. Administration to seek alternative solutions to the tariffs, warning that additional levies would hurt U.S. jobs and growth.

If the United States were to impose tariffs on oil, U.S. oil sellers would have to look for other destinations and attract new customers, which could cost them more.

Last year, more U.S. crude oil was sent to China than any other destination except Canada, the EIA said in an analysis on Tuesday. China received more U.S. crude oil in 2017 than the third- and fourth-largest importers combined, the United Kingdom and the Netherlands.

U.S. crude oil exports to China averaged 330,000 bpd between January and April this year, with February sales to China beating even exports to Canada, according to the EIA.

And it’s not just crude oil. China was also the third-largest destination for U.S. propane exports last year, behind only Japan and Mexico. Around half of U.S. propane exports went to Asia in 2017, displacing supplies from Middle Eastern countries and some regional production of propane.

For LNG, 15 percent of U.S. exports went to China, making it the third-largest importer of U.S. LNG behind Mexico and South Korea.

…click on the above link to read the rest of the article…

Bank of Canada Hikes Rates By 25bps, Loonie Rises On Hawkish Take

July 11, 2018

Bank of Canada Hikes Rates By 25bps, Loonie Rises On Hawkish Take

The Bank of Canada raised the overnight rate by 25bps to 1.5%, in line with consensus estimates.

In justifying the move, the Bank said it expects the global economy to grow by about 3.75% in 2018 and 3.5% in 2019, adding that the US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. It warned that this is “contributing to financial stresses in some emerging market economies” suggesting that Canada was dragged into the rate hikes rather than welcoming it.

In other words, the BOC hopes that demand from the U.S. will trump the drag on trade from tariffs the two neighbors, as well as the uncertainty over the future of Nafta.

It also noted that while oil prices have risen, the Canadian dollar is lower, reflecting broad-based US dollar strength and concerns about trade actions, noting that “the possibility of more trade protectionism is the most important threat to global prospects.”

Perversely, even as the BOC hiked rates, it warned that household spending is “dampened by higher interest rates and tighter mortgage lending guidelines.”

Curiously, despite market concerns, the BOC raised its Q2 GDP forecast to 2.8% from 2.5% previously, with Q3 seen at 1.5%; The bank also raised the potential output growth to 1.8% in 2018, and 1.9% in 2019 and 2020.

Commenting on the ongoing trade war with the US, the BOC estimates US tariffs on steel and aluminium will reduce level of real Canadian exports by 0.6%, with the impact expected to be felt in H2 2018. Meanwhile, Canadian counter measures estimated to reduce real imports by 0.6% starting Q3, while tariffs will temporarily boost inflation in Q3 2019.

…click on the above link to read the rest of the article…

Goldman: US-China Trade War Set To Worsen

July 11, 2018

Goldman: US-China Trade War Set To Worsen

Echoing the comments laid out last night by Standard Chartered’s Steven Englander, this morning Goldman Sachs doubled down on how the US-China trade war will progress in the near-future, warning that it expects the tensions to get worse, at least initially. Speaking to Bloomberg TV, Goldman’s co-head of EM and FX research, Kamakshya Trivedi, said that “we think that trade tensions will probably worsen before they get better.”

Trivedi also predicted that “we’ll see probably see more weakness in the renminbi” over the next three to six months, a prediction that certainly has proven accurate today, with the onshore Yuan sliding to the lowest level since August 2011.

“There’ll be more stability after that, thanks in part to China’s growth holding up ok”, according to the analyst who doesn’t think that Beijing will “treat the currency as a weapon, but some of the weakness so far won’t be unwelcome to Chinese policy makers.”

In a separate note, overnight Goldman economist Alec Phillips writes that the release of the list of $200BN in tariffs on Chinese imports “raises the probability that further tariffs will be implemented” adding that Goldman was somewhat taken aback by the timing of the announcement: ”

“We had expected that the next round of tariffs on $16bn in goods could be implemented by late August or early September, so the implementation of this next round of $200bn, if it happens, looks unlikely to occur until September at the earliest.”

Phillips also writes that networking equipment, computer components, and furniture would be the most heavily impacted imports in the newest round of tariffs. He adds that the list avoids consumer goods, including apparel more than Goldman had expected, while share of computer components, furniture affected is larger than anticipated.

…click on the above link to read the rest of the article…

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