Permits Plunge But Starts Surge As Housing Data Suggests Rough Future Ahead

After April’s disappointing dip in starts and permits, and following an unexpected drop in homebuilder optimism (blamed on surging lumber prices, and therefore Trump), May was expected to see a modest rebound – but it didn’t work out that way.

It was a very mixed picture that paints an ugly scenario for what comes next…

  • Housing Starts surged a huge 5.0% MoM in May (smashing the 1.9% rebound expected) after a revised 3.1% drop in April.

  • Building Permits plunged a shocking 4.6% MoM (notably worse than the 1.0% decline expected) and dramatically worse than the revised 0.9% MoM drop in April.

Starts rose most since January as Permits puked most since Feb 2017…

The surge in Starts was driven by an 11.3% spike in multifamily starts to 404K from 363K, highest since January. Single-family starts up 3.9% to 936K from 901, highest since November.

The permits plunge was driven by multifamily (rental) permits, which dropped 8.5% from 460K to 421K, lowest since February. Single Family permits dropped 2.2% from 863K to 844K, lowest since September.

Also of note that is the new-, pending-, and existing-home sales all dipped in April (and after a brief rebound).

Broadly speaking, US housing data has been notably disappointing this year, and homebuilder stocks are following that trend…

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Trump Tells Cook iPhones Will Be Spared Chinese Tariffs: NYT

America’s business community is being squeezed by a Chinese government that is threatening hardball tactics like unexpected “customs delays” for goods produced by American (-owned or -invested) firms; and a White House that has steadfastly refused to back down from what by now has been acknowledged as a trade war by most. Gradually, even the market is waking up to the reality (considering that Dow futures are down 300+ points after Trump threatened another $200 billion in tariffs).

China

In the latest story of how American companies are responding to this fluid situation (there have been a lot of them in recent days), the New York Times  reports how all three constituencies – the Chinese government, the US government and the US business community (or at least one of its most high-profile factions) – have turned to Apple CEO Tim Cook as the unofficial “top diplomat” of America’s tech community.

Apple’s chief executive, Timothy D. Cook, may be the leader of the world’s most valuable public company, but lately he has had to act a lot like the tech industry’s top diplomat.

Last month he visited the Oval Office to warn President Trump that tough talk on China could threaten Apple’s position in the country. In March, at a major summit meeting in Beijing, he called for “calmer heads” to prevail between the world’s two most powerful countries.

But in what is the key detail of the story the NYT – citing an anonymous individual – claims that the Trump Administration told Cook it won’t slap tariffs on iPhones.

The Trump administration has told Mr. Cook that it would not place tariffs on iPhones, which are assembled in China, according to a person familiar with the talks who declined to speak on the record for fear of upsetting negotiations. But Apple is worried China will retaliate in ways that hamstring its business, according to three people close to Apple who declined to be named because they were not authorized to speak publicly.

Apple fears “the Chinese-bureaucracy machine is going to kick in,” meaning the Chinese government could cause delays in its supply chain and increase scrutiny of its products under the guise of national-security concerns, according to one person close to the company. Apple has faced such retaliation before, another person said, and Reuters reported Ford vehicles are already facing delays at Chinese ports.

There is also concern that Apple could face reprisals for legal and regulatory efforts in Washington that have made it difficult for the Chinese tech giant Huawei to sell its phones and telecom equipment in the United States.

While Cook met with Trump at the White House last month to discuss trade policy, it’s unclear when the president made this promise. Of course, the White House’s word is always subject to change, which is probably why Cook has embraced his new role with such zeal. And why not? His company has a lot to lose if it suddenly must raise the price of each iPhone X by 25%, or 250$ (giving it an astronomically unaffordable price tag of $1,250)…

But Cook has plenty to worry about from the Chinese government, too.

In a trade and technology showdown between the United States and China, Apple and Mr. Cook have a lot to lose. With 41 stores and hundreds of millions of iPhones sold in the country, there is arguably no American company in China as successful, as high-profile and with as big a target on its back.

He also has a lot riding on this personally: Apple’s growth in China is Cook’s biggest on-paper accomplishment since taking over in 2011 from his mentor, Steve Jobs.

Since he took over Apple from its co-founder Steve Jobs, in 2011, questions about whether Mr. Cook, 57, could recreate the magic that led to the iPod and iPhone have persisted. For Mr. Cook, the analogous breakthrough — and potentially his legacy as the heir to Mr. Jobs — has come not from a gadget, but from a geography: China.

Under Mr. Cook’s leadership, Apple’s business in China grew from a fledgling success to an empire with annual revenues of around $50 billion — just a bit under a quarter of what the company takes in worldwide. He did this while China was tightening internet controls and shutting out other American tech giants.

Given China’s growing importance to Apple’s bottom line, Cook has spent quite a bit of time in the country, schmoozing with officials from the Communist Party. He can apparently speak basic Mandarin.

Mr. Cook, who knows a bit of Mandarin, has attended China’s most important political events in a critical year for Mr. Xi. Days after a Chinese Communist Party congress wrote Mr. Xi’s ideas and name into the constitution, elevating him to the same status as Mao Zedong, Mr. Cook joined a small group of American and Chinese executives for a meeting where Mr. Xi lectured about innovation and reform.

Later, Mr. Cook attended China’s World Internet Conference, an effort by Beijing to create a Davos-like conference for technology. There he met Wang Huning, a new member of China’s standing committee — the party’s top leadership group — and an ideological force behind China’s deepening authoritarianism.

In March, just after an annual meeting of China’s rubber-stamp Parliament formally abolished presidential term limits, Mr. Cook attended a major summit meeting that brings together Chinese policymakers and corporate leaders.

And when critics assail him for condoning the Chinese government’s increasingly authoritarian bent, Cook offers a convenient excuse: He’s trying to change things “from the inside,” he says.

Mr. Cook has long defended Apple’s presence in China as a way to help change the country from the inside. “Each country in the world decides their laws and their regulations. And so your choice is: Do you participate, or do you stand on the sideline and yell at how things should be?” he said at a Fortune event in China in December. “You get in the arena, because nothing ever changes from the sideline.”

Of course, if China actually believed that “regime change” was anywhere near the top of Cook’s priorities, Apple would’ve been tossed out of the country with the other American tech giants. Meanwhile, the NYT says Cook has found it easier to access top officials from the Trump Administration than their counterparts from the Obama era.

While other tech firms have balked, Apple has acquiesced to seemingly every one of the Chinese government’s demands. It stores data on Chinese-run servers, it removes apps from its China app store when the Chinese government disapproves. Still, Apple has faced retaliation from China in the past: After the Obama administration indicted five Chinese military hackers back in 2014, China delayed approvals of the iPhone 6, flagging it for additional security review. Apple viewed this as retaliation for US policy. And in 2018, Apple has more money invested in different parts of the Chinese economy than it ever has before, including two research-and-development centers and a $1 billion investment in the Chinese ride-sharing company Didi Chuxing.

In other words, Apple has a lot to lose if this trade war goes off the rails. And Wall Street analysts will be watching closely for any sign that the Communist Party is turning against Apple. As Dean Garfield, head of the Information Technology Industry Council, a trade group that represents Apple and other tech companies, tells the NYT that while Chinese consumers do love Apple products “they would also love Facebook and Google.”

“Xi and the national party will do what’s in their interest.”

In other words: For Apple, it’s either play ball, or get out.

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LAUSD’s Fiscal Crisis Can’t be Blamed on Charter Schools or Declining Enrollment: New at Reason

Los Angeles Unified School District has lost 245,000 students over the last 15 years. Officials frequently claim charter schools are taking students and causing LAUSD’s budget crisis in the process. But a new report shows the district’s spending, including its hiring of more administrators as enrollment drops, is to blame.

A new Reason Foundation study finds only 35 percent of LAUSD’s enrollment decline over the past 15 years is due to students going to charter schools. In fact, as the district continues to lose students—losing 55,000 since 2013—a smaller percentage of the loss can be attributed to charter school students, writes Lisa Snell.

View this article.

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Cali Judge Rules Twitter Can Be Sued For Falsely Advertising They Allow Free Speech

Authored by Mac Slavo via SHTFplan.com,

A California judge has ruled that social media giant Twitter can be sued for falsely advertising free speech. As Bloomberg reports, the judge said that Twitter’s policy of banning users “at any time, for any reason or for no reason” may constitute an “unconscionable contract” for a company which advertises free speech.

The judge rejected Twitter’s motion to dismiss the lawsuit from Jared Taylor, who was banned by the platform in December last year, according to Breitbart.  Taylor, a self-described “white activist” may proceed with his lawsuit against Twitter because the social media company falsely advertises free speech, yet bans users for “any or no reason.”  The judge also ruled that Twitter could be sued on the basis of misleading its users, due to the platform’s promise not to ban accounts on the basis of viewpoint or political affiliation, which is frequently violated.

“This ruling has massive implications for the platform going forward,” said Noah Peters, Jared Taylor’s lawyer. “this is the first time that a social media company’s argument that it can censor user speech has been rejected by a court.”

Taylor describes himself as a “race realist” and has defended white separatism, claiming that races are “not equal”, but his attorney says this trial is not about his client’s particular views, and that’s a correct assessment.  The trial is about Twitter’s disallowance of free speech although they use that term to advertise the social media platform.

“Our lawsuit is not about whether Taylor is right or wrong,” Peters said in February. “It’s about whether Twitter and other technology companies have the right to ban individuals from using their services based on their perceived viewpoints and affiliations.”

By now, it should be well understood that the terms “hate facts” and “hate speech” are nothing more than buzzwords used by the left as an excuse to suppress the speech of those with which they disagree.  This is becoming more and more apparent as we devolve quickly toward a fully totalitarian system too.

Breitbart reported that the most high-profile individual to be banned on this basis was Islam critic Tommy Robinson, who received a permanent ban from Twitter after he posted statistics showing that Muslims are vastly overrepresented in child grooming gangs in the UK. Robinson is now taking Twitter to court to prove that “facts are now treated as hate.” SHTFPlan

Twitter employees have also been caught on camera boasting about their actions to keep conservatives and Trump supporters off the platform.  They also, along with YouTube, have scrubbed videos that do not align with the government and mainstream media’s “official narrative” with regards to incidents such as the Parkland, Florida school shooting. 

One employee even discussed shadowbanning political accounts, a practice that Twitter has continually denied using.  Another employee claimed that accounts that expressed an interest in “god, guns, and America” were likely to be flagged as “bots.” Another employee, Mo Norai, explained that Twitter moderators regularly discriminated against accounts deemed to be pro-Trump.

Twitter’s double standards can be seen in the way it handles complaints of abuse against conservatives and individuals linked to conservatives. But it isn’t just Twitter who is attempting to censor and suppress free speech. YouTubeGoogle, and Facebookare on the front lines of the fight for totalitarianism by silencing those with whom they disagree, much like the Nazis of Hitler’s regime.

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Here Are The Six Ways China Could Retaliate In Trade War With The U.S.

It’s all about the trade war between the US and China this morning, and more specifically, how will Xi retaliate to Trump.

For those who missed the overnight fireworks, late on Monday, President Trump asked the US Trade Representative to identify USD 200BN in Chinese goods for further tariffs of 10% which will be imposed if China refuses to change its practices and goes ahead with its retaliation threat, while he also stated that China raising tariffs is unacceptable and that the US will pursue tariffs on another USD 200bln of Chinese goods if China increases tariffs yet again.

Predictably, China – which last week responded instantly to Trump’s first round of $50BN in tariffs – again responded immediately, which wasted no time in accusing Trump of “blackmail.”

China’s commerce ministry said on its website that if the US “irrationally” moves forward with the tariffs then China has no choice but to “forcefully fight back” with “qualitative” and “quantitative” measures.

“China’s response is to safeguard the interests of the country and its people,” China’s Mofcom said, adding that the US “practice of extreme pressure and blackmail departed from the consensus reached by both sides during multiple negotiations and has also greatly disappointed international society”.

But now that the chips are on the table, and Trump is locked into a tit-for-tat strategy with China from which neither he nor Xi can “defect” without losing face, the question is how exactly will China retaliate to punish the US while minimizing the damage to China’s economy as much as possible.

There are 5 possible things that China can do at this time, in order of severity

  1. China could de-escalate tensions by presenting a list of actions it will follow to reduce its significant trade deficits in services with the US. This could affect education service institutions, the local tourist industry, and entertainment. However, as the CFR’s Brad Setser writes, it increasingly looks like the Administration is putting China in a position where China cannot make concessions without appearing to cave – which most think China won’t do. Setser, not alone, has trouble seeing a de-escalation option if Trump goes through with the $200b
  2. China will likely launch an economic subsidy for its economy in the form of further easing in financial conditions to offset any potential trade-drag. Some, such as Deutsche Bank have proposed that in order to offset the negative hit to its consumers, China will loosen policy such as tolerating the property and land market boom in tier 3 cities and cutting the RRR twice over the rest of this year to partly offset the potential drags. This would also involve a modest devaluation of the Yuan.
  3. China could unleash differential treatment of local enterprises: as some have suggested, Beijing could simply opt not apply its “market access liberalization” policy recently announced. This could greatly disadvantage US firms greatly. Beijing could also engage in an aggressive crackdown on US firms operating in China (Apple), hinder border passage of US products (automotive), or pursue antitrust and monopoly allegations against US tech names (Micron).
  4. China could pick an aggressive route, and instead of a mild depreciation, it could aggressively pursue a weaker Yuan to boost trade competitiveness: which, ironically, is the catalyst behind much of the Trump administration’s animosity toward China. To achieve this, China would relaxing some of the capital control measures that have helped strengthen the renminbi in the past 2 years. That said, such a move would unleash sizable outflow demand, while boosting precious metals and cryptos.
  5. China could also choose a diplomatic retaliation, and order Kim Jong Un to scuttle the recent agreement North Korea signed with the US, humiliating Trump by showing that it was Beijing all along who made the US-N. Korea summit possible and successful.
  6. China, finally, could pick the nuclear option, and gradually or suddenly liquidate its Treasury holdings. This is a long-running worry by markets given China’s $1.2 trillion in Treasury holdings. In January, Bloomberg reported this was a possibility which was at the time denied by China State Administration of Foreign Exchange; however the recent liquidation of half of Russia‘s Treasurys was seen by some as a rehearsal for what would happen if Beijing decides to pursue this approach.

It could also be some combination of the above or simply continue the tit-for-tat: according to overnight press reports, China is already preparing a second round of tariffs on US energy; US oil, gas and coal face 25% levy in threatened second round of duties.

As a reminder, as noted above whatever China does, the biggest challenge for Beijing would be how to inflicts the least damage on its own economy and credibility while hurting the US. UP until now, China has been responding in a tit-for-tat manner, and has avoided implementing more damage than the US has with a measure conciliatory tone in its statements. That could soon change.

Finally, there is the markets angle. While Beijing would likely want to avoid a currency or bond market war, a recent analysts by Goldman concluded that for the tit-for-tat stalemate to be broken, the markets would have to tumble. And while many believe that China would prefer to avoid directly riling markets, it may soon have no other choice if it plans to send Trump a message. After all, overnight the Shanghai Composite just plunged to the lowest level in 2 years. Will Xi now return the favor?  Keep an eye on TSY yields and, of course stocks, for the answer.

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Trader Spots A “Bad Omen” For Global Markets

A canary in the coal mine of global equities is beginning to warrant attention, and equity bulls would do well to take notice. The signal: an advance in defensive stocks, according to Bloomberg’s Cormac Mullen, who spent more than a decade as an equity analyst, trader and sales trader in Europe before becoming a journalist covering global financial markets.

Mullen explains below:

For a number of years now, defensive stocks have been shunned by investors in favor of cyclical peers that were preferred as the global economic recovery gathered steam. The underperformance of defensive sectors has seen their share in the S&P 500 Index fall to 11% from over 22% in 2009, according to The Leuthold Group.

The past month has seen some change. Even as consumer discretionary and tech stocks led U.S. equities to a 2-percent plus gain, a bunch of defensive stalwarts have been hot on their heels. Consumer staples, real estate, health care, telcos and utilities names have all outperformed cyclical counterparts from industrials, materials and financials to energy stocks.

Those defensive bellwethers, U.S. consumer staples, rose above their 50-day moving average earlier this month for the first time since February, and are close to a two-month high. The long- suffering sector has risen from a more than two-year low reached in May.

And investor demand is picking up — staples and health-care equity ETFs have seen inflows for the last 10 weeks, with almost $11 billion going to global staples ETFs since the beginning of the year, according to Jefferies.

And a move away from cyclical stocks is already underway in other parts of the world. Japanese defensives have been outperforming cyclical peers since the end of January and are trading at a nine-month relative high. European defensives are also beginning to outperform.

It’s early days, and the shift may not yet be the omen for the end of a historic bull run for stocks. At least in the U.S., economic indicators continue to look solid and the Trump administration’s stimulus boost is coursing its way through the corporate veins of the world’s largest economy

But as trade war rhetoric turns to action, political risk in Europe resurfaces, emerging markets across the globe shudder and the Chinese economy starts to slow, this defensive canary is definitely one investors should be keeping an eye on.

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Global Markets Tumble As Trade War Fears Spike; China Crashes

Bulletin headline summary from RanSquawk

  • DAX and FTSE at 1 month lows in sour risk tone as Trump issues USD 200bln tariff threat
  • Tariff threats send the DXY to YTD high
  • Looking ahead, highlights include, the Technical committee meeting between OPEC and non-OPEC members, ECB’s Lane and Fed’s Bullard

The headline news that dominate markets today are not that different from yesterday, especially since it is really just one: the escalating trade war between the US and China. Only unlike yesterday, when futures were modestly lower and levitated higher all day, with the Nasdaq closing in the green and the S&P barely lower, today’s tripling down by the Trump administration, which has now threatened to re-double down and set 10% tariffs on up to $200BN in Chinese imports has finally spooked US equity futures and global markets, with the Dow futures down 340 points this morning, and global markets a sea of red, while safe havens such as the dollar and US Treasurys are sharply bid.

In response, China Mofcom said China will have to adopt comprehensive steps to fight back firmly and warned it will take qualitative
and quantitative measures if US publishes additional tariff list. (Newswires)
China is preparing a second round of tariffs on US energy; US oil, gas and coal face 25% levy in threatened second round
of duties. (Newswires)

 

While tough trade talk is nothing new for investors in 2018, a sense that stress is ratcheting up between the U.S. and China is taking a toll on markets according to Bloomberg. The protectionist moves come at a time when many are already voicing concern that global growth could lose momentum, as it also contends with America’s faster tightening of monetary policy and the end of European stimulus.

“What you saw at the start of the year was global synchronized growth,” Emad Mostaque, co-chief investment officer at Capricorn Fund Managers, said in an interview on Bloomberg Television. “It was a cooperative game. Now, we’re moving to a more competitive, negative-sum game.”

In light of the escalating tit-for-tat trade war, which so far shows no signs of stopping, and to the contrary appears to be accelerating, S&P futures have fallen sharply throughout the session, while Dow futures are -340 points, with the cash index set for its 6th consecutive down day.

The MSCI index of Asia-Pacific shares outside Japan fell 1.9 percent to its lowest since early December. The losses intensified through the day as the rout deepened in China where the 3,000 support level in the Shanghai Composite finally gave way as Beijing’s “National Team” plunge protectors failed to step in after Monday’s holiday, resulting in the lowest close in nearly two years as the Shanghai Composite Index plunged 3.8%, its lowest since June 27, 2016, while Hong Kong’s Hang Seng .HSI shed as much 3 percent before ending 2.8% down.

“Trump appears to be employing a similar tactic he used with North Korea, by blustering first in order to gain an advantage in negotiations,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.
“The problem is, such a tactic is unlikely to work with China.”

Predictably, hardest hit were tech stocks which stand to suffer the most in any direct trade war, with Orient Securities, 360 Security Technology plunging by the 10% daily limit, while the tech heavy Shenzhen Composite index crashed -5.9%, while the ChiNext Index of small-cap and tech shares slumped 4.8%, to its lowest level in more than three years, and is now 61% below peak reached in June 2015. Not even the PBOC adding liquidity with 200BN MLF operation and net 50BN reverse repo injection helped boost sentiment.

“You only have to look at how far the main Shanghai index has fallen to see that people would probably want some safe-haven assets at this point,” said DZ Bank analyst Andy Cossor. China had warned it will take “qualitative” and “quantitative” measures if the U.S. government publishes an additional list of tariffs on its products.

China’s economy has already been clouded by a sharp slowdown in fixed asset investment growth due to the government’s deleveraging drive, a problematic property sector, a mounting debt burden and rising credit defaults. Economists at Nomura wrote, “The rising risk of a disruptive trade conflict makes a bad situation tentatively worse.”

Elsewhere, Japan’s Nikkei lost 1.8%, South Korea’s KOSPI dropped 1.3% while Australian stocks bucked the trend and added 0.1%, helped by a depreciating currency and an overnight bounce in commodity prices.

In Europe it was more of the same, with the Stoxx Europe 600 tumbling for a third day. The stock move in Europe was tempered by a weaker euro, however, which unlike its reaction to last week’s trade jitters, promptly tumbled, wiping out all of Monday’s gains. European mining stocks lead the Stoxx 600 Index down to touch lowest level since late-April; the export-heavy DAX underperformed, sliding 1.4% as automakers continue declines.

As usual, during times of stress and suring dollar, emerging markets were in turmoil as the implications of a possible trade war filter through to investors. Developing-nation stocks headed for the biggest drop since March, and currencies slid as the South African rand and Turkish lira led declines.

As one would expect, the safe haven US Dollar advanced across the board and pressured G-10 and EM counterparts, with the EUR/USD sliding below 1.1600 and GBP/USD falls below 1.3200; the Bloomberg Dollar Index, BBDXY, is now the highest it has been since April 2017.

Meanwhile, as Chinese stocks crashed, the yuan hit a five-month low amid speculation that China may launch an aggressive FX devaluation in retaliation hence the scramble to frontrun the next major central bank move. The dollar wasn’t the only safe haven: the Japanese Yen also strengthened 0.7% while commodity-currencies AUD and CAD underperform G-10 peers. The British pound was also under pressure as U.K. Prime Minister Theresa May prepares for another knife-edge Brexit vote on Wednesday. The Australian dollar, often seen as a proxy for China-related trades, brushed a one-year low of $0.7381.

But the big FX story was once again in EM currencies, which as shown below have been another sea of red as capital flight becomes a major concern for most of these nations which until recently were the happy recipients of excess dollar funding.

The rush for safety also manifested itself in the Treasury complex with US 10-year yields sliding as low as 2.85%, before settling three bps lower to 2.88% as T-note futures clear Friday’s high. Elsewhere it was more of the same with Germany’s 10-year yield dropped 4bps to 0.36%, the lowest in almost three weeks with its sixth straight decline; Bunds got further support from Draghi’s Sintra speech which was similar to ECB meeting, and certainly not the fireworks from last year. Britain’s 10-year yield dipped 5bps to 1.324 percent, reaching the lowest in almost three weeks on its sixth straight decline and the biggest decrease in three weeks, while Italy’s 10-year yield dipped less than one basis point to 2.554%, hitting the lowest in more than two weeks.

 

Once again, the stress was highest in emerging markets, where the average yield on domestic currency debt was the highest since March 2017 and fast approaching 7%.

 

The Bloomberg Commodity Index fell 1% as crude, base metals and agriculture products slide in tandem.

With Russia and Saudi Arabia pushing for higher output, crude oil markets remained volatile ahead of Friday’s OPEC meeting. Brent crude futures fell 0.8 percent to $74.76 a barrel after rallying 2.5% overnight, while U.S. light crude futures retreated 0.9 percent to $65.27. Lower-risk assets gained on the latest round of trade threats with spot gold up 0.35% at $1,282.26 an ounce albeit after its sharpest drop in 1-1/2 years late last week.

Looking ahead, highlights include, the Technical committee meeting between OPEC and non-OPEC members, ECB’s Lane and Fed’s Bullard.

Market Snapshot

  • S&P 500 futures down 1.2% to 2,747.00
  • STOXX Europe 600 down 1.1% to 381.54
  • MXAP down 1.5% to 168.92
  • MXAPJ down 2% to 548.61
  • Nikkei down 1.8% to 22,278.48
  • Topix down 1.6% to 1,743.92
  • Hang Seng Index down 2.8% to 29,468.15
  • Shanghai Composite down 3.8% to 2,907.82
  • Sensex down 0.5% to 35,359.32
  • Australia S&P/ASX 200 down 0.03% to 6,102.12
  • Kospi down 1.5% to 2,340.11
  • German 10Y yield fell 3.8 bps to 0.36%
  • Euro down 0.6% to $1.1555
  • Brent Futures down 0.5% to $74.97/bbl
  • Gold spot up 0.1% to $1,279.24
  • U.S. Dollar Index up 0.5% to 95.18
  • Italian 10Y yield fell 5.4 bps to 2.289%
  • Spanish 10Y yield rose 0.2 bps to 1.256%

Top overnight news from Bloomberg

  • Chinese shares plunged after Trump ordered the identification of up to $200 billion in imports from the country for additional tariffs of 10% — with another $200 billion after that if Beijing retaliates. China vowed to respond “forcefully” to any such moves
  • The ECB will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter, money-market rates “broadly reflects these principles” Draghi said in speech in Sintra, Portugal
  • ECB’s Liikanen says can hold rates even after summer 2019 if needed (NOTE: Liikanen will step down as Finnish central bank governor and GC member next month)
  • The EU’s 27 remaining leaders may warn the U.K. that it faces crashing out of the bloc without a deal and call for contingency preparations, as an update due from the Brexit negotiators is set to highlight the limited progress made since March
  • Anti-Brexit U.K. lawmakers pushing for more power over the divorce process will meet government officials on Tuesday for talks, as the government tries to head off a potentially humiliating defeat in Parliament. After the House of Lords defeated the government on Monday, May won’t be offering more concessions, a person familiar with her position said
  • Fed’s Bostic comfortable continuing to move policy toward more neutral
  • Iran says OPEC output hike would swell oil stockpiles again

Asia-Pac equity markets were mostly lower amid a further escalation of trade tensions after President Trump asked the US Trade Representative to identify USD 200bln in Chinese goods for further tariffs of 10% which will be imposed if China goes ahead with reciprocal tariffs, while he also threatened tariffs on another USD 200bln of goods if China retaliates yet again. This wasn’t taken sitting down by China as Mofcom responded that China will take strong counter measures if US issues a new list. As such, US equity futures sold off and Asia stocks were mostly pressured with Hang Seng (-2.8%) and Shanghai Comp. (-3.8%) feeling the brunt of the blaring sabre-rattling between the world’s 2 largest economies as they move closer to the brink of a trade war. In addition, the mainland blood bath was also exacerbated by the Shanghai Comp.’s decline below the 3000 level for the first time in 2 years. Elsewhere, Nikkei 225 (-1.8%) was also negative alongside the widespread risk averse tone and on JPY strength, while ASX 200 (flat) bucked the trend led by strength in energy following the recent rebound in oil prices. Finally, 10yr JGBs traded marginally higher amid the risk averse tone in the region, but with gains limited as focus was centred on stocks and amid a mixed 30yr JGB auction. PBoC injected CNY 70bln via 7-day reverse repos, CNY 20bln via 14-day reverse repos and CNY 10bln via 28-day reverse repos for a net daily injection of CNY 50bln, while it also PBoC announced CNY 200bln in 1yr MLF loans.

Top Asian News

  • China High-Grade Bond Spreads Widen as Trade Tensions Intensify
  • Xiaomi CDR Said to Be Delayed Amid Valuation Dispute: Reuters
  • China Urges U.S. to Stop Actions Which Will Hurt Both: Ministry
  • Europe Credit Widens as U.S.-China Trade Tensions Roil Markets
  • Emerging-Market ETF Outflows Most in Over a Year as Rout Deepens

European equites are experiencing significant losses (Euro stoxx 50 -1.0%, at 2 month lows) after US President Trump’s announcement asked the US Trade Representative to identify USD 200bln in Chinese goods for further 10% tariffs, with an additional USD 200bln prepared should retaliation occur. This has hammered European markets , with all equity bourses in the red. The DAX is the underperformer (-1.3%) at 1 month lows with FTSE 100 (-0.5%, at 1 month lows) outperforming due to support from a weakening GBP. The technology sector is currently drifting lower as investors are avoiding high beta stocks in the risk off  environment, with Infineon leading the losses in this sector.

Top European News

  • Pound Is on Verge of Large Move as Technical Picture Gets Messy
  • Ifo Sees ‘Storm Clouds’ Over German Economy, Cuts Forecasts
  • Moneysupermarket Falls; Stock May Lose Discount Appeal: Barclays
  • Bain, Cinven Sued by Stada Minority Shareholders Over Payout

In FX, the DXY index and broad Dollar are back in the ascendency amidst ramped up global trade war concerns, as the US and China threaten to impose significantly higher tariffs against each other. The DXY has just eclipsed its previous peak for the year to set new pinnacle at 95.270 and the next decent technical objective around 95.470 is firmly back in sight and within striking distance. JPY/AUD – Polar opposites amidst heightened risk aversion as Usd/Jpy extends and accelerates its pull-back from recent peaks (circa 110.90) to just a few pips off 109.50 and fib support at 109.51. Conversely, Aud/Usd has fallen through fib support at 0.7413 and 0.7400 on the way to 1 year+ lows not far from 0.7350, with dovish-leaning RBA minutes overnight adding further downside pressure on the headline pair.
CHF – The Franc retains a degree of underlying safe-haven demand and relative resilience vs the Greenback within 0.9920-60 trading parameters, but remains reluctant to rally to far against the Eur (hovering above 1.1500 after only a brief dip under) as Thursday’s SNB quarterly review looms with growing prospects of a more concerted attempt to curb the Chf’s appeal. EUR – The next biggest G10 casualty of broad risk-off sentiment, but also on further dovish rate guidance from the ECB, as the single currency probes new post-policy meeting lows sub-1.1540 and could re-test bids/support ahead of the 1.1510 ytd base if stops are tripped. EM – Fresh depths plumbed for the already  beleaguered currencies, and with some predictions that the misery is unlikely to end as forecasts for Usd/Try rise to 5.0000 in some quarters given the increased risk of capital flight.

In commodities, oil is trimming gains seen on Monday, with WTI currently down 1% ahead of the OPEC and non- OPEC technical committee monitoring meeting, with Brent outperforming on Libya losing 400k BPD. The fossil fuel is also being pressured by a soured risk tone on the possibility of Chinese crude tariffs and a rising dollar, which has hit YTD highs. Copper, iron and steel are all being hit by the widening trade war with the construction materials down 3%, 2% and 2.9% respectively, as supply concerns in all of these markets have taken a back seat to potential tariffs in China. OPEC to consider Republic of Congo’s application to join the cartel, according to a delegate. Multiple OPEC source say Venezuela, Iran and Algeria oppose an output increase in oil. OPEC sources say they see strong oil demand in H2 2018, suggesting market may absorb extra production. Iran’s Commerce Minister Kazempour reiterates opposition to output increase in oi

Looking at the day ahead, the ECB Sintra conference features comments from President Draghi again, along with Board Member Praet and Governor Lane. The Fed’s Bullard is also due to take part. Away from that the only data of note is the Euro area’s current account balance reading for April and US housing starts and building permits for May. It’s worth noting that Germany Chancellor Merkel will also meet France President Macron today. Meanwhile, Italy’s Senate will debate the fiscal policy for 2019.

US Event Calendar

  • 7am: ECB’s Lane, St. Louis Fed’s Bullard speak in Sintra, Portugal
  • 8:30am: Housing Starts, est. 1.31m, prior 1.29m; MoM, est. 1.86%, prior -3.7%
  • 8:30am: Building Permits, est. 1.35m, prior 1.35m; MoM, est. -1.03%, prior -1.8%

DB’s Jim Reid concludes the overnight wrap

Markets started yesterday as jumpy as a kangaroo rushing home to watch the football although a bit of a recovery in the US session at least helped put the brakes on. Momentum has been lost in the Asian session though as Mr Trump said in a White House statement late last night that he had instructed the US Trade Rep. Office to identify higher tariffs (+10%) on an additional $200bn worth of Chinese imports and threatened to impose tariffs on another $200bn of goods if China retaliates. He said “the US will no longer be taken advantage of on trade by China and other countries”. On the other side, China’s Ministry of Commerce said “if the US…publishes such a list, China will take comprehensive quantitative and qualitative measures and retaliate forcefully”. Earlier on, Secretary of State Pompeo also stepped up the tension as he noted “Chinese leaders…have been claiming openness and globalisation, but it’s a joke” and added that “it’s the most predatory economic government…” which is “a problem that’s long overdue in being tackled”.

Markets are in a risk off mode following the new US tariff threat with losses accelerating post China’s response. Across the region, the Nikkei (-1.52%) and Kospi (-0.86%) are down while the Hang Seng (-2.18%) and Shenzen Comp. (-4.35%) are leading the declines, with the latter impacted by shares in ZTE (-25% in HK), as the US senate passed legislations that would restore the penalties on the telco company. Elsewhere, safe haven assets are in demand with the YEN c0.6% stronger and UST 10y yields c3bp lower while futures on the S&P are down c0.8%.

Before all this, the German political drama was the main story in Europe where Chancellor Merkel was forced into considering concessions to stave off a potential political crisis. As a reminder all this centres around the migrant debate with Interior Minister Horst Seehofer, who is head of Bavaria’s Christian Social Union party (one-third of the coalition), insisting that Merkel reaches a deal by the end of this month with EU governments to negotiate the return of migrants to countries where they were first registered, or else begin turning migrants away from the German border. Merkel agreed to the timeframe (if not committing to a solution) and announced that she will report back on July 1st. As a reminder the EU summit is scheduled for June 28th and 29th.

Our economists in Germany highlighted in their note yesterday (link) that the setting up of such controls by Seehofer would leave Merkel with only two options, either she would go along with Mr. Seehofer’s more restrictive policy approach – a loss of face she might not survive for very long – or she would have to sack him which would almost certainly cause the CSU to leave the coalition and ultimately result in a collapse of the Groko. Our colleagues consider the latter option very unlikely and see a further muddling through with no clear winner but a substantially damaged Merkel as the most likely outcome. Therefore, they expect this conflict to linger around up until the Bavarian elections on October 14, unless polls provide insights that this approach will not improve the CSU’s election chances. They also add that while yesterday’s compromise buys time for Merkel and her European approach, the German government crisis has weakened her role on the EU and international stage, in particular. Her room for manoeuvre in this question will remain constrained. This will also have repercussions for Merkel’s ability to move forward on euro area reforms as both CDU and CSU are reluctant to back proposals on budget lines for investment and/ or support in case of asymmetric shocks for individual member states.

Staying with Merkel, last night she met with the new Italian PM Mr Conte, where she pledged to “support Italy’s desire for solidarity, and also hopes that Germany receives understanding when it comes to EU solidarity on the question of migration”. This is going to be swiftly followed by a meeting with President Macron today. Migration will be a major topic although the Franco-German meeting was supposed to hammer out a joint position on euro area reforms. Perhaps unsurprisingly President Trump also opined on the Merkel immigration saga, tweeting that “the people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition, big mistake made all over Europe in allowing millions of people in who have so strongly and violently changed their culture”.

Back to the markets from yesterday, no great surprises that Germany underperformed (not helped by VW -2.90% on an executive arrested after the emissions scandal) with the DAX closing -1.36% (worst day since late May) compared to -0.83% for the Stoxx 600, -0.93% for the CAC, -0.83% for the IBEX and -0.41% for the FTSE MIB. The S&P 500 pared back losses to close -0.21% (-0.81% at the lows) helped by stronger energy stocks while the Nasdaq was marginally up. Bonds had a less eventful day. 10y Bunds (-0.6bps to 0.394%) were more or less unchanged while the periphery was 4-6bps lower in yield.  OATs were 1.0bp lower and Treasuries -0.3bp lower (2s10s was also steady at 36.7bp compared to 37.3bp on Friday). Meanwhile the euro was down as much as -0.39% before bouncing back to close +0.11% by the end of play.

Conversely Oil had a much stronger showing with Brent up nearly two Dollars to finish at $75.34/bbl (+2.59%) after having traded as low as $72.45/bbl in the morning session. That came after headlines on Bloomberg suggesting that OPEC countries were discussing a smaller increase in oil production of 300k-600k barrel a day. That compares to the 1.5m bbl per day increase which Russia had previously proposed.

Now turning to Fed speak on rates and the US economy. On rates, the Fed’s Bostic noted he is “comfortable continuing to move policy towards a more neutral stance” – which he believes to be around 2.25%-3%. He also reiterated that he is “still at three” rate hikes for this year, but will “let data inform how rapidly I think we need to be moving”. Meanwhile, he noted that “(business) optimism has almost completely faded among” his contacts, replaced by concerns about trade policy and tariffs, while the bar for new business investments are getting quite high.

Elsewhere, on his first day as the new NY Fed chief, Mr Williams was relatively upbeat as he noted “the US economy is in great shape” and “this solid growth, a strong labour market and inflation near our target are exactly what I want to see”. Although he cautioned that “…paradoxically, it’s precisely the sense that things have gotten so much better that worries me most”.

Finally onto some Brexit headlines. The upper House has voted against PM May’s Brexit legislation, instead backing an amendment to ensure a “meaningful vote” for Parliament on potential Brexit deals agreed with the EU or next steps if there is no deal. The bill will now return to the lower House for negotiations before another vote on Wednesday. Meanwhile DB’s Oliver Harvey published a report discussing a possible compromise to the Brexit negotiations – the Association Agreement outlined by the EU Parliament in March. He believes the Parliament’s proposal deserves serious consideration. As well as being closer to the Norwegian than Canadian model in terms of market access, its framework could address some thorny issues – including an end to freedom of movement and more limited jurisdiction of ECJ, while mitigating EU concerns of cherry picking. Refer to his note for details.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the June NAHB Housing market index fell 2pts mom to a still solid level of 68 (vs. 70 expected). In the UK, the June Rightmove House price index was up 0.4% mom, leading to an annual growth of 1.7 % yoy (vs. 1.1% previous). Elsewhere, Italy’s trade surplus was narrower than last month’s print at €2.9bn (vs. €4.5bn previous).

Looking at the day ahead, the ECB Sintra conference will feature comments from President Draghi again, along with Board Member Praet and Governor Lane. The Fed’s Bullard is also due to take part. Away from that the only data of note is the Euro area’s current account balance reading for April and US housing starts and building permits for May. It’s worth noting that Germany Chancellor Merkel will also meet France President Macron today. Meanwhile, Italy’s Senate will debate the fiscal policy for 2019.

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Crossing The 16% Chasm Is AfD’s Goal In Merkel Fight

Authored by Tom Luongo,

The big news of the week is that German Chancellor Angela Merkel is facing the toughest challenge to her long political career from within her own Union party coalition over immigration.

My latest article at Strategic Culture talks about why this issue is so divisive and why it has a real chance to topple Merkel’s rule.

Immigration is not simply a political asset to be horse-traded by leaders in the legislature. Someone should teach Nancy Pelosi and Chuck Schumer this before the Democratic Party goes the way of the dodo.

It cuts too deeply into people’s personal identity and their sense of community and culture. Like it or not, people tend to seek out people like them.

We are hard-wired for this. And the cultural Marxists pushing for George Soros’ vision of the Open Society are bumping up against one of the most basic of human biases and survival instincts. Demonizing and dehumanizing people for political gain is not a path of societal cohesion but rather violence and civil war.

It is for this reason that movements like Brexit and the rise of both nominally left and right wing populists in Italy were able to take power.  People respond instinctually to this issue.  This is hind brain stuff and not easily overcome.

Whether Merkel survives this challenge or not is up to her.  If she digs her heels in and tries to break CSU Leader Horst Seehofer’s opposition to her EU-first immigration policy then it will lead to a further fracturing of the German political landscape in the long run.

She may hold onto power for now only to lose the war permanently in the future.

The 16% Lesson of Brexit

But, not all populist uprisings are created equal.  As we can see in the U.K., Brexit drove the rise of UKIP as Tories defected on the issue of immigration.  But, not on much else.  And once the Brexit vote happened, and UKIP were polling in the 10-12% range, the main reason for voting UKIP evaporated.

Nigel Farage stepped down, UKIP lost its leadership, and the voters’ protest was over.  Tories went back home and are now being betrayed in parliament by their MP’s.

This is the blueprint for how NOT to pull off a major political revolution.  And the U.K. will learn that lesson the hard way unless something drastic happens soon, like the ouster of Prime Minister Theresa May and a pro-Brexit replacement elected.

The problem for UKIP was never crossing the 16% threshold from ‘protest movement’ to self-sustaining party.

Everett Rogers’ Diffusion of Innovation Theory is applicable to politics as well as products.  The idea being that it takes around 16% adoption for a new technology, ideology, etc. to have the potential to become something bigger.   This was made popular by Malcolm Gladwell in his book Tipping Point.

The Rogers Curve

That idea is expounded upon by Geoffrey Moore which describes ‘The Chasm’ between the Early Adopters and the Early Majority. As it applies to getting through “The Chasm” Chris Maloney argues the marketing has to change in order to breach the chasm between the two demographics.

At that point the marketing has to focus more on ‘social proof’ than innovation of the idea or product. At this point it’s more about ‘join the new group because others have’ and not to keep harping on the same message, which will get stale because it is no longer interesting because it isn’t novel.

The Chasm

In 2012 I kept close tabs on the way Ron Paul’s rise in the polls was happening. 

In 2008 I knew he would never break through the 16% barrier nationally.  In certain sympathetic states he would, but not nationally.

In 2012, however, he did and the primary schedule was changed to dampen his growth. The Powers That Be understand this phenomenon very well and they use it to great effect on any number of issues.

But, once Paul broke through the 16% barrier he should have moved up quickly into the high 20s.

Note what happened with Lega’s support in Italy.  10% to start the year.  17% by the election. 28% today.

The rebranding from the secessionist Northern League to the more inclusive problem-solving party for all of Italy based on Immigration to Lega was immensely successful.

It didn’t work for Paul because, I believe, systemic vote fraud occurred within most of the GOP primaries, not because he didn’t have the support.  There was very strong statistical analysis done on the results to hand Mitt Romney states and delegates that Paul actually won.

UKIP never broke through the barrier because Nigel Farage thought his work was done with Brexit.  He made a massive tactical error, instead of pressing on by rebranding UKIP into the party that will deliver Brexit and real reform to the U.K.

Don’t Fall in AfD

So, let Brexit be a lesson for Alternative for Germany (AfD) and their protest support within Germany.  With numbers plateauing in the 13-14% range AfD is in trouble of their message getting stale.

This is why I wanted Merkel to seat another cartel-style ‘Grand Coalition’ with the SPD.  It would give AfD time to get comfortable in the Bundestag and gain experience and exposure governing.

Then they can go from the ‘anti-immigrant’ protest party to a viable, responsible governing party.  It’s imperative that they look like a group that has Germany’s best interests at heart by holding office and solving problems.

“Masterplan Purest Campaign Tactic” Seehofer change electors again (new government)

This feels like mixed messaging to me.  Stand your ground on real reform but keep the talk of a new election to a minimum until The Chasm has been breached.  Because that won’t serve AfD as well as they think at this point.

Germany is different than Italy.  The Italians are used to a new government failing every two years or so.  Germany is not at all used to that kind of turmoil at the top.  So, if this government fails it has to look like incompetence and intransigence of existing leadership not that AfD is hoping for it to fail for its gain.

They have to make themselves the only true Alternative for Germany or inertia will send voters back to the SPD or towards the Greens, which is already happening (Greens just polled 14%).

Then let the people themselves take you to the next plateau.  That’s the path to becoming the major party in Germany.  The latest national polls, trumpeted by AfD themselves have them at that crucial 15-16% level.  This is up form the 12.6% that put them in the Bundestag in the first place.

These numbers are not good enough for any kind of change at the polls.

The Gambit

This morning’s compromise by CSU leader Horst Seehofer to give Merkel two weeks to accept a piecemeal implementation of his new immigration policy is a bit of wrangling on his part to put the ball in Merkel’s court.

He’s trying to play the game I just described above.  Put the onus on Merkel to accede to the people’s will.  Give her a chance to save her government and look like the voice of stability and reason.

Is it a bit of a cop-out?  Yes.  But it’s the right course politically.  Let people get used to the idea of an out-of-touch Merkel needing to be overthrown versus the shock of something happening before most people have had a chance to process what’s happening.

With Seehofer’s CSU’s support in Bavaria dropping quickly, now below 40% in latest polling, the possibility of an upset in October’s elections is high.  All AfD has to do to push through The Chasm here is present itself as a strong partner and a voice of stability versus the radicals.

If they don’t then Merkel will use this as a wedge to marginalize both vectors of opposition and re-establish control.  This is the most dangerous period and the one where simply anything is possible.

*  *  *

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Comcast, AT&T Set To Become World’s Most Indebted Companies With Over $350BN In Debt

At a time when the IMF estimates that more than 20% of the world’s companies would be unable to cover their interest payments if interest rates moved sharply higher, Comcast and AT&T are poised to become the most indebted companies in the world following media megadeals that leave the two companies with little room to maneuver if profits fail to materialize, according to the Wall Street Journal.

Comcast

As WSJ points out, assuming both are finalized, the deals would leave the two companies with a combined $350 billion in bonds and loans, more than one-third of a trillion dollars in debt. The number is making some bond fund managers nervous, and some are saying they won’t include Comcast or AT&T debt in their portfolios – unless they bear a suitably high yield.

“It’s a very big number,” said Mike Collins, a bond fund manager at PGIM Fixed Income, which manages $329 billion of corporate debt investments. “It has fixed-income investors a little nervous and rightfully so.”

But rather than looking at these deals as isolated examples, WSJ reminds us that companies only arrived at this level of corporate indebtedness following a decadelong surge in corporate borrowing, as companies – including these two telecoms giants – eagerly bought back their shares to appease investors, and financed these purchases with debt. Global corporate debt, excluding financial institutions, now stands at $11 trillion. Meanwhile, the median leverage for companies with an investment grade rating has increased by 30% since the financial crisis.

Debt

AT&T’s now-closed deal to buy Time Warner has left it with nearly $200 billion in debt,  a leverage ratio that is just below the average for companies rated at the bottom of the investment-grade ladder (though to be sure, the company says it’s leverage is significantly lower).

AT&T will have about $181 billion of debt because of the Time Warner purchase but other liabilities, including operating leases and postretirement obligations, amount to about $50 billion, Mr. Arden says. As a result, S&P estimates the company’s post-deal leverage at about 3.5 times earnings before interest, taxes, depreciation and amortization, or Ebitda. That is slightly below the 3.75 times leverage that S&P views as typical for comparable telecommunications companies rated triple-B-minus, the lowest investment grade rating.

AT&T calculates its leverage at 2.9 times Ebitda, but doesn’t include leases or postretirement obligations in the figure. The telecommunications firm forecasts returning to 2.5 times within four years, a person familiar with the company said.

The company has sought to reassure bond-fund managers by promising to a leverage ratio of 2.5 (by the company’s calculation) within four years. But if ratings agencies do the unthinkable and stick Comcast and AT&T with (well-deserved) junk ratings, fund managers who are prohibited from holding below-investment-grade debt will be forced to preemptively dump the bonds. This worry has caused some fund managers to bail out of media and telecoms corporate debt entirely, thanks to the companies’ typically high debt levels.

“The risk is that everyone wants to get out of the debt at the same time,” Mr. Collins said. “That’s when it gets ugly.” When oil prices plummeted in 2015, for example, the debt of some energy pipeline companies with low investment-grade credit ratings fell 15% in a matter of months.

Gene Tannuzzo, portfolio manager of a $4.3 billion debt fund for Columbia Threadneedle Investments, has halved his exposure to bonds of telecommunications and media companies over the past year because of their rising debt and headwinds facing the industries. He has sold out of Comcast bonds entirely but would consider purchasing debt backing the Fox purchase if it paid a high enough yield, he said.

S&P and Moody’s – the two most important ratings agencies – cut their rating on AT&T’s bonds on Friday to two notches above junk. And a cut and possible downgrade for Comcast would be expected if it closes a deal with 21st Century Fox (a deal that is also being pursued by Disney).

Meanwhile, projections released by the Fed after it announced its decision to raise the Fed funds rate last week showed that FOMC members raised their dots, resulting in an increase in the median expectation from one to two more hikes this year (likely in September and December).

Fed

And with the economic expansion now the second-longest in history, now certainly sounds like a sensible time to take on an unheard of debt burden.

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