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By Michael Every of Rabobank

If there’s one clear ‘trend’ at the moment that gets market tongues wagging and teenage scribblers scribbling, it’s that the USD is in trouble. “Down goes the dollar,” say the market press headlines. “And it can go further.” Indeed, from a technical point of view we are also approaching some key trend lines too and already saw a ‘death cross’ on Friday as the 50-day moving average went through the 200.

How exciting this all is. And how desperately inaccurate.

Yes, it’s undeniable that the broad USD index, or DXY, is on the back foot again today, and has been for months, and it is down 3% in July alone. However, DXY is about as much use as a chocolate teapot. It’s overwhelmingly skewed to just a few major crosses such as EUR/USD and USD/JPY, which makes it institutionally useful, perhaps, but an irrelevance for a huge swathe of the globe. Let’s take a year-to-date snapshot of some currencies to underline what I mean.

• EUR: as I type, EUR is at 1.1706. EUR started 2020 at 1.1213, so that’s a genuine gain. Not bad for a bloc seeing the second-largest economy leave the EU with no guarantee of anything other than trade-shattering WTO terms by year end; or for a tourism-focused region as Spain sees virus cases flare up again, prompting several countries to reimposed lockdown for those returning from it.
• JPY: is at 105.6 when it started at 108.6. Again, that’s a real gain. Not a huge one, but a gain.
• GBP: is at 1.2840 despite all the Boris-ness that this current government brings with it (no trade deal with the EU? Well we will have one with the US. No trade deal with the US? Well, we will have one with India. No trade deal with India? Look, the Premier League and cricket have re-started!) GBP started the year at 1.3257. Such a USD slump.
• CNY: Of particular focus here, and standing at 7.0 having started the year at 6.96. What a devastating plunge in the greenback vs. the currency of the world’s second-largest economy. Devastating. (And as the US consulate in Chengdu closes today.)
• AUD: is at 0.7137, which makes no sense to me, but against the 0.7037 at the start of the year. Again, not much of a fall.
• NZD: stands at 0.6675 vs. 0.6740 – so the USD is still up year to date despite Kiwi virus success.
• INR: is at 74.7 vs. 71.38 at the beginning of 2020. That’s a sizable USD gain.
• IDR: sits at 14,563 vs. 13,866. Again, a big USD appreciation.
• BRL: is 5.23 vs. 4.02, a staggering USD gain.
• ARS: is at 71.89 vs. 59.87, again a total slump in the local currency.
• MXN: is 22.22 vs. 18.92 – so chalk up another USD ‘win’.
• ZAR: stands at 16.57 vs 14.00, showing the same trend.

In short, this is mainly a DXY story driven by risk-on in EUR and risk-off in JP, and not a reflection of broader USD weakness over the year. Of course, this overlooks the fact that in all the cases above USD has been far stronger than it is now: AUD was at 0.55 briefly, and many of the others were equivalently weaker too at one point. Does this really mean the USD is in trouble though? Hardly! We are just seeing some recent excess wound back – and the question is if it is temporary or not. And this USD weakness is alongside the Fed promising to buy everything that moves, or doesn’t, and with fiscal deficits as far as the eye can see.

As such, when we see that in Washington DC another USD1 trillion stimulus bill that will swap USD600 weekly extended unemployment benefits for one equivalent to 70% of salary is being prepared (presumably those in DC liked my lyrics to ‘Suicide is Painless’ from Friday?), then the short term pressure on USD may continue. Yet don’t think for a moment that there won’t then be a round of further mega stimulus needed everywhere else too – because it will. Jobs are gone and aren’t coming back. Many supply chains are moving and aren’t coming back. Some capital flows will soon shift and won’t come back either. All of this is going to lean positive for USD, and a time when the greenback is already doing well year-to-date vs. most of the globe, geographically.

And then we come to geopolitics. Forget about Chengdu: that’s done. Read the New York Times story from the weekend which recaps what has been going on and argues that the China hawks in the White House are, as I had suggested would happen, doing all they can to burn bridges to reach a point of no return in US-China relations to ensure there can be no détente-style backsliding under a potential Biden administration. On that note, I repeat the question: what do you do on China in your lame-duck period in office if you are Trump and you lose the election? Exactly.

And read the report in The Australian which notes that major defense strategists around the world last week undertook a “risk assessment” of potential military conflict between China and the US: they rate conflict in the next 12 months as “likely”; over the next two years as “highly likely”; and over the next three years as “almost certain”.

Do you really think now is the time to be selling USD, because a moving average says so, or for using this dip to buy them and hold them tightly? I guess it depends if you think nobody else will require another huge stimulus package they can’t afford relative to the US or not. And it depends on if you believe those in market-facing jobs in air-conditioned offices/at home have a better grasp of the likelihood of US-China conflict happening than the people who are involved with war professionally: your choice is PowerPoint vs. Power and ‘Death crosses’ vs. Crossings and Death.

Something to consider as the teenage scribblers who are filling in because they don’t need to go on holiday with their kids try to fill the market headlines while we wait for the Fed, for the new US stimulus package, and for the first look at Q2 GDP; and all that as we are now just 99 days to the US election.

In what Beijing has called a “legitimate and necessary response” to last Friday’s federal agent raid and forced closure of China’s consulate in Houston — slammed as “unreasonable actions” — the American consulate in Chengdu, capital of southwestern China’s Sichuan province, has officially been shuttered as of Monday morning.

“At 10am on July 27, according to the Chinese side’s request, the US Consulate General in Chengdu was closed,” the Chinese Foreign Ministry said.  

Tight security was seen around the complex throughout the weekend as moving vans pulled up to the facility. CGTN, the Chinese state broadcaster, announced that the American flag had been lowered at about 6:18am local time on Monday.

#US national flag lowered in #Chengdu consulate pic.twitter.com/nBuJIWGkXP

— CGTN (@CGTNOfficial) July 27, 2020

The Chinese Foreign Ministry has confirmed the departure of all American diplomatic and local staff.  

Chinese authorities “entered through the front entrance and took it over,” including what international reports described as security men in hazmat suits. 

Video: U.S. #consulate staff in SW China’s #Chengdu leave under high security pic.twitter.com/KZiYZJJXwD

— CGTN (@CGTNOfficial) July 27, 2020

Staff could be seen departing in the early morning hours amid tight security and a crowd of onlookers. 

While the Chinese consulate in Houston had been given 72 hours by the US government to vacate before it was seized by federal agents wielding crow bars and power tools to gain entry, it’s as yet unclear how much prior warning the Chengdu consulate had before closure. 

CNN had described of Friday’s final raid and shutdown of the Chinese consulate in Houston as follows: “US federal agents and local law enforcement entered the Chinese consulate compound in Houston earlier Friday in a series of black SUVs, trucks, two white vans and a locksmith’s van as a crowd of observers and news cameras observed from the edge of the diplomatic compound.”

Somewhere, John Bolton just breathed a sigh of relief.

Because Robert O’Brien, the longtime defense industry executive who succeeded Bolton as Trump’s fourth National Security Advisor, has reportedly tested positive for COVID-19, making him the highest ranking Trump admin official to test positive so far.

BREAKING scoop: Trump’s National Security Advisor Robert O’Brien has tested positive for the coronavirus, sources tell me.

— Jennifer Jacobs (@JenniferJJacobs) July 27, 2020

So far, a handful of Congressmen, and roughly a dozen or so Trump Campaign aids have tested positive for the virus. However, neither President Trump nor Vice President Mike Pence have ever tested positive. Trump even took a 2-week course of hydroxychloroquine at one point a month or so ago after his physician prescribed it to him for its preventative qualities.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Despite the surging stock market from the March lows, trillions in liquidity support from the Fed, retirement confidence declined.

I have written on this subject previously regarding a 2018 Fox Business study. That study showed more Americans doubted they would be able to save enough for retirement than those confident of reaching their goals.

• 37% are NOT confident they can save enough to retire

• 32% ARE confident they can save enough. 

• 48%, however, don’t think their retirement savings will reach $1 million. 

Another study in 2018 from Northwestern Mutual showed equally depressing statistics.

“Americans feel under-prepared for the financial realities of retirement, according to new data from Northwestern Mutual. Nearly eight in 10 (78%) Americans are “extremely” or “somewhat” concerned about affording a comfortable retirement. At the same time, two-thirds believe there is some likelihood of outliving retirement savings.”

Again, that was 2018.

Two years later, and with the market 22.5% higher, have things improved?

The Index

According to a recent update of the SimplyWise Retirement Confidence Index, the answer is “no.”

“With the unemployment rate remaining above 10%, the rise in {virus] cases and updated policies threaten to make the coronavirus-related layoffs and furloughs permanent.

In a country where most people live paycheck to paycheck, this could be devastating. Most Americans lack the savings to last them for even three months. Of course, that savings gap is all the more dramatic when it comes to saving for retirement. And with the havoc the pandemic has wrought, that savings gap seems likely to worsen.”

According to the July 2020 SimplyWise Retirement Confidence Index, 62% of Americans are more concerned about retirement today than how they were feeling about it a year ago. Such is up from 56% in our May 2020 Index. The survey also found that 70% of people in their 50s—who are nearest to retirement—are more concerned about retirement today.

The Findings

Here are the key findings of the report:

• 62% of Americans more concerned about retirement today compared to a year ago. (This is up from 56% in the May 2020 Index.)

• Half of Americans believe they will outlive their retirement savings.  

• 1 in 5 could not last more than 2-weeks off their savings.

• 72% now plan to work in retirement. (Up from 67% in May.)

• Only 58% of those in the workforce are making what they were making before COVID-19. (67% for White Americans, 50% for Hispanic Americans, 45% for Black Americans.)

• One-in-five Americans in their 60’s have lost their jobs or were furloughed due to COVID-19.

• 24% are now planning to tap their 401(k), including 41% of those laid off due to COVID-19.

• 63% of Black Americans could not come up with $500 cash today (without selling something or taking out a loan)—compared to 35% of White Americans.

• 48% of Black Americans and 43% of Hispanic Americans could survive less than a month on savings (versus 33% of White Americans).

• Half of Americans say another stimulus check is very important to their finances.

• 72% (83% of Democrats vs. 60% of Republicans) believe a recession will continue into the next year.

A “COVID” Infection

As noted, the disruption caused by the “economic shutdown” has permanently impaired the retirement plan of many. Those over the age of 65 and still working, have been steadily increasing over the years due to better health and longevity, the need for medical insurance, and underfunded retirement accounts. However, post-COVID, many have been displaced, as shown by the sharp drop in the employment-to-population of that demographic.

Such is even more problematic for 72% of those surveyed who are planning on working into retirement.

Importantly, this “age-group” are some of the highest income earners. Those job losses put a damper on hopes for a recovery in consumption. While 49% of those surveyed could only live off savings for one-year, the burden on pension and welfare funds will increase markedly.

Roadblocks To Saving

These are pretty depressing statistics when you think about it. However, for the bottom-80% of income earners whose income growth has been stagnant over the last two decades, the roadblocks to saving money shouldn’t be surprising.

In a survey from Kiplinger and Personal Capital, Americans said the biggest roadblocks to saving for retirement were:

• The high cost of health insurance. “From 1999 to 2017, the cost of family health insurance coverage has more than doubled the amount of take-home pay it consumes.”

• Disappointing investment performance. “Just under 30% of all respondents (29.4%) said that disappointing investment performance had stopped them from saving as much as they would have liked to for retirement.” 

• The amount of consumer debt they carried. “21.3% of Americans said that debt, not including student loans, kept them from saving for retirement combined with the increased costs of living.”

Filling The Gap

I showed the following chart recently, which illustrates the gap between income, savings, and the cost of living.

“The continued increases in debt, which was used to fill the gap between income and the cost of living, contributed to the retardation of economic growth.”

It’s hard to reduce debt when it is required just to “make ends meet.” 

Pension Crisis Looms Large

Currently, 75.4 million Baby Boomers in America—about 26% of the U.S. population—have reached or will reach retirement age between 2011 and 2030. Many of them are public-sector employees. In a 2015 study of public-sector organizations, nearly 50% of the responding organizations stated they could lose 20% or more of their employees to retirement within the next five years.

Local governments are particularly vulnerable: a full 37% of local-government employees are at least 50-years of age in 2015.

That was 5-years and one-economic shutdown ago. Today, the roughly $6-trillion under-funding of pensions has now come home to roost. As noted previously:

“Moody’s investor’s service estimated that state and local pension funds had lost $1 trillion in the market sell-off that began in February 2020. The exact damage is hard to determine, though, because pension funds do not issue quarterly reports.

At the end of the year, we will find out the true extent of the damage. However, this is not, and has not been, a real plan to fix the underfunded problem. ‘Hope’ for higher rates of sustained returns continues to be the only palatable option. However, targeted returns have continuously fallen short of the projected goals.”

Can’t Catch Up

The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations. Liabilities of major U.S. public pensions are up 64% since 2007, while assets are up 30%, according to the most recent data from Boston College’s Center for Retirement Research.

If the numbers above are right, pension funds must set aside the unfunded obligations of approximately $5-$6 trillion today. Without doing so, the principal and interest won’t cover the program’s shortfall between tax revenues and payouts over the next 75 years.

With boomers forced to retire sooner than planned due to the economic shutdown, the window of opportunity to fix pensions has closed.

“Demography, however, is destiny for entitlements, so arithmetic will do the meddling.” – George Will

Social Welfare Strains

It isn’t just “public pensions” that are in trouble. The collapse in economic growth has resulted in a collapse in Federal Tax revenue needed to pay for the massive social welfare schemes in the U.S.

It now requires in excess of 100% of tax receipts just to meet the mandatory spending of social welfare and interest on the debt. In other words, we are now going into debt more just to provide social assistance.

How bad is it?

Social Security will be insolvent and unable to pay the full value of promised benefits by 2035. Social Security’s costs will exceed its income by 2020, according to a new report published Monday by the program’s trustees.

At the end of 2018, Social Security was providing income to about 67 million Americans. About 47 million of them were over age 65, and the majority of the rest were disabled. If nothing changes, the Social Security Trust Fund will be fully depleted by 2035. If such occurs, the program would impose across-the-board cuts of 20 percent to all beneficiaries.”

Getting Worse

That report, dire in its warning already, was issued before the “Pandemic” and “economic shutdown.”

Meanwhile, demographics are blowing up the basic premise of how Social Security is funded. There were 2.8 workers for every Social Security recipient in 2017. That’s down from 3.3 in 2007, and that’s way down from the 5.1 workers per beneficiary that existed in 1960.

Furthermore, the two programs function mostly as a giant conveyor belt to transfer wealth from the young and relatively poor to the old and relatively rich. Such allows the average person (who now lives to be 78) more than a decade of taxpayer-funded retirement.

Welfare now makes up the highest percentage of disposable personal incomes in history despite record low unemployment, rising wage growth, and the longest economic expansion in U.S. history.

During the “Great Depression,” the economically devastated masses would form “breadlines.” Today, those “breadlines” form at the mailbox. Today, without government largesse, many individuals would be living on the street. The chart above shows all the government “welfare” programs and current levels to date. The black line represents the sum of the underlying sub-components. Since the onset of the “pandemic,” unemployment insurance and “other benefits” have surged by $3 trillion along with continued rises in all other benefits, like social security, Medicaid, and Veterans’ benefits.

Importantly, for the average person, these social benefits are critical to their survival. Government assistance now makes up ~38% of real disposable personal incomes. With more than 1/3rd of incomes dependent on Federal assistance, it should not be surprising the economy continues to struggle. Recycled tax dollars used for consumptive purposes, has virtually no impact on increasing economic activity.

Bull Markets Aren’t The Answer

While the Fed keeps inflating stock markets, the “trickle-down” effect has yet to occur. Even as noted in the SimplyWise survey, “disappointing investment returns” have stunted retirees saving plans.

However, after 4-decades of transferring wealth from the middle-class to the rich, it is the top-10% of income earners, who own 88% of the stock market, such isn’t surprising. For the rest, two major bear markets, lack of wage growth, and surging costs of living have eroded any ability to build savings for retirement. Such is why most retirees will depend on social welfare for 50%, or more, of their retirement income. 

“At the age of 63, ‘baby boomers’ are staring retirement in the face. Yet, because of the devastation of two major bear markets, they are no closer to their retirement goals than they were 13-years earlier.” – RIA

Despite a massive surge in the markets from the “Pandemic” lows, trillions in market support from the Fed, and household support from the Government, “retirement confidence” continues to erode.

The mirage of consumer wealth has not been a function of a broad-based increase in Americans’ net worth. Instead, it has been a division in the country between the Top 20% who have the wealth and the Bottom 80% dependent on increasing debt levels to sustain their current standard of living.

With the vast amount of individuals already vastly under-saved and dependent on social welfare, the current economic devastation will reveal the full extent of the “retirement crisis.” 

Of course, this is also why the calls for more socialistic policies continue to rise.

Durable Goods Orders rebounded strongly in May – as expected – but that rebound was expected to slow in preliminary June data, pouring cold water on the ‘soft’ survey data’s resurgence back to “normal”.

The flash June data beat expectations with a 7.3% MoM rise in headline orders (against +6.9% exp) against a downwardly revised 15.1% rise in May but year-over-year remains notably weaker…

Source: Bloomberg

The core (ex-Transports) number disappointed (+3.3% vs 3.6% exp) as auto production exploded higher in June…

Source: Bloomberg

If you build it – they better come or this is a major problem!

Additionally, non-defense aircraft new orders was down $10.3BN again due to Boeing:

Not quite the “V” that everyone has been calling for… “Hard” orders data not keeping pace with “soft” survey hope…

Source: Bloomberg

The question is, given the relapse in the reopenings, is this the best the rebound gets?