Much More Than A Trade War

Authored by Daniel Lacalle,

In these weeks we have read a lot about the so-called trade war.  However, this is better described as a negotiation between the largest consumer and the largest supplier with important political and even moral ramifications. This is also a dispute between two economic models.

Nobody wins in a trade war, and tariffs are always a bad idea, but let’s not forget that they are just a weapon.

Why right now?

For many years China has been allowed to maintain a mercantilist dictatorship and protectionist model under the excuse that its high growth made it attractive.

Shortly before the US launched its set of tariffs, the Chinese government accelerated two dangerous policies that we cannot ignore: intensifying capital controls , limiting the outflow of dollars from the country, and increasing the list of banned companies and sites, two measures that proved that the Chinese government was unlikely to open  its economy, rather the opposite. These measures intensified in the last year and a half. Two other factors show China’s decision to halt the opening of its system. The “Made In China 2025 Plan” and the removal of the two-term limit on the presidency, effectively allowing Xi Jinping to remain in power for life.

Between 2004 and 2018, the United States filed 41 complaints against China at the World Trade Organization, focused on 27 different areas. The vast majority of these WTO resolutions are not enforced (” Paper Compliance: How China Implements WTO Decisions.” The previous strategy of looking the other way and expecting the Chinese economy to open up little by little met the reality of increased interventionism.

The experiment

A senior official of the US Administration explained to me several months ago that there were two opposing opinions in the White House. The first claimed that starting a trade war would sink the US dollar, make US bond yields soar and throw the economy into a recession. The second estimated that the risk to the US economy was small and manageable. These were proven right with the US 10-year bond at 2.13%, its demand (bid-to-cover) comfortably doubling supply despite the end of the Federal Reserve purchases, and the dollar (DXY Index) at a conveniently strong level, adding very solid employment level, wages, and economic growth. The US dollar strengthened its position as the world reserve currency at 88% share of transactions while the yuan was only 4%, according to the BIS.

Meanwhile, the proponents of a “gold-backed” yuan faced the reality of a Chinese central bank that injected and increased the money supply in a more aggressive way than the US Federal Reserve.  China is not following sound money policies. The PBOC is copying the same policies of the Fed and BOJ by the book. It is not even remotely close to a gold standard, as gold reserves are less than 0.25% of M2 money supply.

The gold-backed-yuan mirage faded with two consecutive devaluations, a currency that is used in less than 4% of global transactions and an extremely aggressive monetary policy.

“Firing blanks”

Many have mentioned that China could sell its US treasury holdings or threaten with its rare earth supply, essential for the manufacture of technological equipment.

China is not the largest holder of US bonds in the world, not even close. It’s the US. In fact, China has already reduced part of its holdings in US bonds and yields fell.

No, China could not weaponize its US debt holdings because it would run out of reserves and sink the economy and the yuan with it (read this excellent analysis ). China’s FX reserves have fallen by 21% from the highs and the vast majority of them cannot be used.

The only solution for China would be to eliminate its capital control and let the yuan float, but then it could face a huge devaluation that would lead the country to a spiral of bankruptcies which may, in turn, lead to more yuan printing, a yuan that is not used worldwide and with diminishing demand. Recession or financial crisis.

What about rare earths?

In a magnificent article called ” The False Monopoly “, the authors debunk the myth of the alleged US dependence on China, but there is an additional factor. None of the Chinese miners in this sector generate returns above the cost of capital. Either they are loss-making or losing relative to working capital costs. We know this because they already tried both blanks in the past and they did not work.

The confidence of the hawks in the United States administration was strengthened by the evidence that “the Chinese currency is not even wanted by the Chinese” given the evidence of capital outflows and a huge percentage of loans backed by copper and other commodities. China’s dependence on the US dollar turned out to be double: via FX reserves and via commodities. Their vast reserves are much smaller and less accessible than many thought.

The technological battle

There is a fourth factor added to the high trade surplus, capital controls, and lack of legal security and property rights. The technology battle.

70% of the software used in China is pirated from the US. The negative impact for the North American economy, only in the area of ​​intellectual property, is $600 billion (“China: Effect of Intellectual Property Infringement and Indigenous Innovation Policies on the US Economy “) a larger figure than the trade surplus that China has with the US.

It is not just a battle for control of technology, but security. The American technological giants are private companies and most of their leaders are critical of the White House Administration. The technological giants in China are either government-owned, semi-state owned or concessions to members of the communist party.

The wrongly-called trade war is much more than tariffs. There are many additional forms of protectionism, and capital controls, restrictions on currency, lack of separation of powers and respect for intellectual property are also forms of protectionism.

The United States has discovered the Achilles heel of China. The same one Japan had in the 80s when it seemed that it was going to invade the world. Its dependence on the US dollar to maintain its large domestic imbalances, a very fragile house of cards of excess capacity, real estate bubble and unproductive spending.

Does the United States have anything to lose? A lot, but much less than China. According to Oxford Economics, the impact on US GDP of a total and prolonged trade war would be between 50% and 70% higher in China than in the US, and we have to add the domino effect of bankruptcies in China  Global fund flows move to the US and out of emerging economies.

The strength of the United States is to have a safer, open economy where currency remains a global reserve, not because of military power, but because the rest of the currencies fall into the trap of carrying out the same monetary imbalances as the US but without  its free market, openness and real demand for currency.

China’s Achilles heel has been to try to be a reserve currency whilst maintaining capital controls and increasing state intervention, playing to be the US without its dynamism, openness and free market.  Its only card was a debt-fueled high-growth economy. Chinese officials knew it was impossible, but thought that being the “engine of world growth” would allow them to get away with it. They have met with a customer, the United States, which is the only one that supports its huge trade surplus ( China has a trade deficit with most of its other partners), and that does not depend so much on exports. The US exports less than 12% of its GDP.

The United States knows that this war has important negative internal economic consequences. Tariffs are not a solution, only a weapon, because if China does not begin to open its real economy, the problem will be greater in the long term.

China and its citizens would greatly benefit from eliminating barriers. Moreover, if it does and truly becomes a reserve currency by merit, it will be excellent for the US because the perverse incentive of the central banks will be counterbalanced. But China seems to prefer to fall into the same monetary, legal and commercial errors rather than reduce control. And that is a big problem, as tariffs serve as a justification to perpetuate dictatorial mercantilism, not to reduce it.

Protectionism is not solved with more protectionism, but when the opponent does not seek trade as a tool of mutual progress, but as a Trojan horse to take control, we find ourselves with much more than a trade war.  A fight between two models of society.

The United States and China will find a form of agreement, but it cannot come from closing our eyes to the totalitarian risks of the Chinese system. Both China and the US know that this battle is not to see who wins, but who loses less, and who drops the weapons first.

via ZeroHedge News http://bit.ly/2Wn3gGR Tyler Durden

Peso Spikes In Early Asia Trading After US-Mexico Migration Deal

The Mexican peso is up around 1.5% in early Asia trading, reacting to the after-hours news of a ‘deal’ between US and Mexico over the migration crisis.

For now, the post-Trump drop has not been entirely erased (while stocks have soared well above that dip)…

Perhaps, as Goldman warned, it is because the tariffs issues “not dead, just dormant” and could be resumed if Mexico doesn’t enforce the agreement, situation at the border changes or amid upcoming U.S. elections.

Goldman Sachs chief Latin America economist Alberto Ramos notes in a report this weekend that avoiding tariffs and an eventual escalation of frictions with the U.S. is a “net positive outcome for markets, but not a free lunch or risk-free proposition for Mexico,” as Mexico’s budget is “increasingly tight.”

Ramos adds that concessions made by the Mexican authorities “could also be politically costly for President Lopez Obrador, whose political support base is not particularly engaged on Central America asylum and migration to the U.S. issues.”

via ZeroHedge News http://bit.ly/2WXWnjM Tyler Durden

Wall Street’s Most Bearish Analyst: “The Risk That I Am Right Is Playing Out”

Morgan Stanley’s “Sunday Start”, authord by Dominic Wilson, the bank’s head of US equity research and the man who has been often called the most bearish analyst on Wall Street.

In last week’s Sunday Start, our Chief Economist and Global Head of Economics Chetan Ahya did a great job of laying out the case for not underestimating the potential impact of escalating trade tensions. While investors may be overly optimistic about a resolution, it’s not due to a lack of attention. The problem is that it’s hard to predict the outcome, given all the possible permutations.

I’ve been focused on another development that’s easier to analyze and may be more relevant for US equity and credit markets in the near term. The macro and micro economic data continue to deteriorate. Core durable goods orders for April remained weak. Capital spending has also disappointed, and our US economics team now forecasts 2Q investment to grow just 0.2%Q saar. April manufacturing PMI fell off sharply, led by new orders, with another fall in May in the headline number. US freight shipments have been soft all year, likely reflecting bloated inventories and weaker demand. To that point, 1Q retail company earnings came in weaker than feared, taking the average retail stock back near the December lows. Finally, as we discussed in our last Sunday Start, the key to any economic cycle is employment, and Thursday’s ADP results were very soft, as was Friday’s non-farm payroll number. This raises the risk of my core view playing out that companies will do whatever it takes to protect margins, and while labor is the last lever they pull, they will use it if they need to.

The capital spending slowdown doesn’t surprise me, given last year’s boom. It’s right in line with our call for 2019 to be a year of payback due to the excesses in capex and inventory build last year. Many investors seem eager to blame the aforementioned weaker data points on the re-escalation of US-China trade tensions. Unfortunately, most of them preceded the early May pick-up in trade tensions. The economy was already slowing, and escalation potentially makes things worse – witness some of the comments in the Fed’s most recent Beige Book.

Speaking of the Fed, investors are now getting excited about a Fed cut after several governors and Chair Powell hinted that they are considering it. While this would be welcome news, a rate cut after a long hiking cycle tends to be negative for stocks, in contrast to a pause like in January, which is typically positive.

I’ve been vocal about the likelihood of US earnings and the economic cycle disappointing this year. Specifically, I’ve argued that the second half recovery many companies have promised and investors expect is unlikely to materialize. 

Leading semiconductor and industrial companies have started to acknowledge this reality in their guidance while our economics team is now forecasting a meaningful 2H deceleration in US GDP to 1.6%Q annualized and flat global GDP at
3.2%Y. The good news is that markets aren’t completely impervious to the idea of slowing growth. All year, defensive and high-quality stocks have outpaced the broader indices. Finally, 10-year Treasuries and other government bonds have been making new highs all year, as investors seemed to be hunkering down for slower growth well before trade tensions re-escalated. If you listen to what the markets have really been saying this year, they seem to agree with our view that growth will disappoint whether there is a trade deal or not.

Therefore, we continue to recommend investors stay defensively positioned within their US equity portfolios, with  overweights in areas like utilities and consumer staples. We also like the risk/reward of financials, given the low  valuations, as a play on an eventual re-steepening of the yield curve as the Fed cuts rates. High-quality growth stocks should continue to do well, but you need to be more selective now because if growth slows further, many of them will struggle to deliver on high growth expectations, especially if this slowdown is the precursor to a recession. Defensive stocks should be less vulnerable because growth expectations are low and they trade more like bonds. We suspect that some technology stocks could be particularly vulnerable, given the slowdown in capital spending and high valuations that don’t reflect this risk.

Once expectations become more realistic and/or the stocks correct, we will get more constructive on US equity markets, including technology stocks, but not until then.

via ZeroHedge News http://bit.ly/2WUsssx Tyler Durden

Why Some Americans Won’t Move, Even For A Higher Salary

Authored by Richard Florida via NextGov.com,

A new study identifies powerful psychological factors that connect people to places, and mean more to them than money…

Mobility in the United States has fallen to record lows. In 1985, nearly 20 percent of Americans had changed their residence within the preceding 12 months, but by 2018, fewer than ten percent had. That’s the lowest level since 1948, when the Census Bureau first started tracking mobility.

The decline in Americans’ mobility has been staggering, as the chart below shows. Mobility rates have fallen for nearly every group, across age, gender, income, homeownership status, and marital status.

Declining mobility contributes to a host of economic and social issues: less economic dynamism, lower rates of innovation, and lower productivity. By locking people into place, it exacerbates inequality by limiting the economic opportunities for workers.

Long-run trends in geographic migration in the United States

Federal Reserve Bank of New York. Data from US Census Bureau Current Population Survey (CPS). Mover rate measures share of U.S. residents age 1 and older whose place of residence in March was different from their place of residence one year earlier.

A wide range of explanations have been offered to account for these substantial declines in mobility. Many consider the culprit to be the economic crisis, which locked people into declining-value homes; others attribute it to the huge differential in the housing prices in expensive cities. Some economists contend that job opportunities have become similar across places, meaning people are less likely to move for work; others see rising student debt as a key factor that has kept young Americans in their parents’ basements.

Now, a new study from the Federal Reserve Bank of New York suggests that other, more emotional and psychological factors may be at work. The study uses data from the bank’s Survey of Consumer Expectations to examine the degree to which people’s attachment to their communities affects their willingness and ability to move. To get at this, they use data from the survey (which covers a monthly panel of 1,300 respondents and is nationally representative) to group Americans into the three mobility classes I identified in my book Who’s Your City: “the mobile” who have the means, education, and capability to move to spaces of opportunity; “the stuck” who lack the resources to relocate; and “the rooted” who have the resources to move, but prefer to stay where they are.

The survey identifies respondents’ most recent move, their probability of moving in the next two years, and other data related to moving including job opportunities and income prospects, housing costs, the distance from current home, costs of moving to various locations, crime rates, taxes, community values and norms, and proximity to family and friends. The researchers use these data to estimate the overall costs—what they call the “willingness to pay” or WTP—for people to move different locations. They then use statistical models to examine the importance of these psychological factors compared to other mostly financial explanations.

A significant reason for the decline in mobility is that many of us are highly attached to our towns. Nearly half of those in the survey (47 percent) identify as rooted. The rooted are disproportionately white, older, married, homeowners, and rural. Their reasons for not moving are more psychological than economic: proximity to family and friends, and their involvement in the local community or church.

Another 15 percent identify as stuck, lacking the resources or ability to move. The stuck have less formal education, are in worse health, and are less satisfied with their jobs, the survey finds. In addition, they are more likely to live in cities and live relatively close to family members. Their reasons for not moving are mainly economic: the costs of moving, the affordability of housing in other locations, the difficulty of qualifying for a new mortgage, and the perception that there is less opportunity for them elsewhere.

Taken together, the stuck and the rooted make up a huge fraction of the population, more than 60 percent. Indeed, the average chance of moving in the next two years is 25 percent as reported by survey respondents, while the median person reports an even lower 10 percent chance of moving. And, nearly a quarter of respondents say there is zero percent chance they will move the next two years. As the study notes: “The average respondent has much stronger views about reasons not to move than about reasons to move.”

Just 38 percent of respondents say they are mobile with the resources, ability, and inclination to make a move. In fact, 5 percent of respondents say there is a 100 percent chance of their moving. The mobile are most likely to live in cities, though the income and educational background of the mobile and the rooted are similar.

Reasons for moving, 1999-2018

Federal Reserve Bank of New York. Data from US Census Bureau Current Population Survey (CPS).

It turns out that the personal costs of moving—and leaving family members, loved ones, and friends behind—are quite high. According to the study, the average American perceives not moving as worth a sacrifice of more than 100 percent of income. The psychological cost of leaving family and friends alone equates to 30 percent. As the study reads: “The median person in our sample will forego 30 percent of his or her income in order to stay close to family.”

The worth of not moving is higher for those who own their homes (137 percent of current income for owners vs. 62 percent for renters), for those who did not graduate from college (137 percent for non-graduates vs. 97 percent for graduates), and for older residents (270 percent for people over 50 years of age vs. 57 percent for people under 50). Ultimately, the study estimates that the mobile perceive a cost of 33 percent of income to move. And this “willingness to pay” rises far higher for the rooted; as the authors put it: “Our finding of strong preferences for family and local cultural norms suggest that these factors may be acting as migration multipliers.”

The study uses the example of a move of 1,000 miles, to a community where housing costs 20 percent more and with a tax rate that is 5 percent higher, with less agreeable values and norms, and leaving behind family and friends. For the median person, that move would be perceived as worth a sacrifice of 187 percent of annual income. For the median member of the mobile, it adds up to just under 100 percent of income. But for the median member of the rooted, the cost would be even higher—“infinite” is how the study puts it.

America is not just split between expensive cities of opportunity and “the rest.” Moving is about more than finding a job or a more affordable home; it’s a highly personal decision with deep psychological costs. Nearly half of Americans are rooted in the communities, willing to sacrifice substantial income and opportunity to be around people and places they love. It is of no use to tell them to abandon their community ties when the costs to their well-being are so high. This is a critical, and all too often overlooked, dimension of our geographic divide.

CityLab editorial fellow Claire Tran contributed research and editorial assistance to this article.

via ZeroHedge News http://bit.ly/2XBsGBV Tyler Durden

Ginsburg Predicts Sharp Division Within Supreme Court

A very alive Justice Ruth Bader Ginsburg suggested on Friday that while the Supreme Court has had a relatively low rate of divisions among Supreme Court justices will hold, and that more than a quarter of the court’s remaining 27 rules will be decided by a single vote, according to Bloomberg

Speaking before the annual conference of federal judges in New York, Ginsburg suggested that more than a quarter of the court’s remaining 27 rulings will be decided by a single vote. Of the 43 argued cases settled so far, 11 were by a vote of either 5-4 or 5-3, she said. –Bloomberg

“Given the number of most-watched cases still unannounced, I cannot predict that the relatively low sharp divisions ratio will hold,” said the 86-year-old justice, according to copies of her remarks provided by the USSC on Friday. 

The highest court in the land is scheduled to finish its nine-month session at the end of this month – the first since conservative Justice Brett Kavanaugh joined the court. 

Ginsberg referred to both the census and gerrymandering cases in her remarks – the former of which will determine whether Commerce Secretary Wilbur Ross can include a citizenship question on the 2020 census. She likened it to the court’s decision last year to uphold President Trump’s travel ban. 

The travel ban ruling “granted great deference to the executive,” Ginsburg said. Opponents of the citizenship question “have argued that a ruling in Secretary Ross’s favor would stretch deference beyond the breaking point.” –Bloomberg

As for the gerrymandering cases, they will resolve whether voting maps can be challenged as so partisan that they violate the constitution, according to the report. 

“However one comes out on the legal issues, partisan gerrymandering unsettles the fundamental premise that people elect their representatives, not vice versa,” said Ginsburg. 

via ZeroHedge News http://bit.ly/2Ixo1KZ Tyler Durden

Hedge Fund CIO: “This Bubble’s Gonna Be A Big One… Real Big”

Last Friday, when discussing the potential consequences of what would happen if the Fed cuts rates, and why BofA believes that such an act would represent a huge risk to the market and economy, is that following the May slump, the foundations for the S&P rising to 3,000 in the summer – which is BofA’s base case – are already there. Which is why, the risk is that the Fed does precisely what the market now expects with certainty, that it cuts rates as soon as July.

This is shown in the chart below, when in the aftermath of the Asian crisis of 1998, the Fed cut rates only to cause the dot com bubble… and its subsequent bursting and the plunge in rates from 6%+ to just 1% as the first 21st century bubble popped.

It is this risk that, according to BofA, threatens markets now as well: an overly easy Fed cutting rates, only to create a historic meltup just ahead of the 2020 election, and eventually bursting the biggest asset bubble in history. There’s more: the Fed could cut and join the ECB and BOJ among those central banks that are losing credibility, as a result of it “patiently” flipping from hikes to cuts “with no material change in macro.”

* * *

Today,  in his latest weekly note, One River Asset Management CIO, Eric Peters – in his traditionally whimsical voice – picks up where BofA’s assessment left off, and reaches a virtually identical conclusion: “the Fed’s going to cut rates when it shouldn’t” which will be “the start of the dollar collapse” and “the start of inflation — that’s what gold and emerging markets are trying to tell us.” 

And then it gets worse: “This bubble’s gonna be a big one, not a long one, but a big one…real big,” Peters writes (as usual, in the third person), and concludes “Then the Fed will go one step too far, spreads will blow out, and POP!”

All this, and more in the selected excerpt from Peters’ latest letter blow:

“The bubble is beginning,” bellowed Biggie Too, chief global strategist for one of Wall Street’s Too-Big-To-Fail affairs. “The Fed’s going to cut rates when it shouldn’t,” he barked. Global Trade War thumped in Biggie’s headphones. The beat rhymed with that 1998 tune, Long Term Capital.

“This is the start of the dollar collapse,” said Too. “This is the start of inflation — that’s what gold and emerging markets are trying to tell us.” Biggie closed his eyes and saw flashes of this week’s historic inflows into government bond funds, investors rushing to hedge their stocks just as they exploded higher.

“This bubble’s gonna be a big one, not a long one, but a big one…real big,” hummed Too. “Then the Fed will go one step too far, spreads will blow out, and POP!”

And since besides the Fed, there are only two other relevant topics in the world of finance these days, here are Peters’ latest observations on China…

Negotiators

“To negotiate successfully with foreign states you need to look at things from their perspective,” said the former ambassador and national security council member. “So when negotiating with China over North Korea – where we denied Pyongyang 90% of aid and 30% of oil – we tried to look at it through China’s eyes. They don’t want a Korean war, a flood of refugees,” she said. “So you take that negotiation approach. And if all else fails, I’d could always say: Okay…but you never know what President Trump will do. You just never know.”

“China is our #1 long term threat,” continued the same former national security council member. “They’re building their military. They’re investing around the world and smothering nations in debt, so that they can put in a military installation, or take control of their ports. We helped China get into the WTO. They’ve done nothing but cheat ever since. They’re stealing IP and we’re letting them. The #1 point that stopped the trade talks was IP theft. China was unwilling to be held accountable on IP theft. And that’s one issue we have to get.”

… and Trump:

Politicos

“There are so few restraints around Donald Trump,” said the politico, his decades-long career spent in DC. “You might love him you might hate him, but in terms of talent around him and people who have juice, who will tell him not to do what he wants to do, it’s a different world than it was 18mths ago,” he added. “There’s no Mattis, there’s no McMaster, there’s no Gary Cohen – all those forces of restraint. They’re not just gone, they’ve been replaced by design by people who are much more about letting Trump be Trump. Just look at Mulvaney.”
 
“As Chief of Staff, Mulvaney is now there to let Trump be Trump, let him say what he wants to say, then build a policy and message around it,” continued the politico. “No one left is going to try and control him or control the information flow to him. And that can work fine in a non-crisis situation. But every presidency is defined by the unexpected.” Sept 11th, Katrina, a cyber-attack. “By some crisis we can’t predict. It’s then that you want the right people in the right seats to help make the right decision. But they can no longer get the best talent.”
 
“You don’t have a normal planning process in this administration,” added the politico. “They entered office without a plan. They’re in constant survival mode. The White House is simply a reaction to his impulse, instinct and mood,” he said. “Trump moves then things move around him. That’s the opposite of any other White House in memory.” Administration’s typically think themselves into slowness. “Trump threatens tariffs on Mexico, then the White House moves around it to explain it, try to give it coherence, then create policy.”

Some parting thoughts:

China published a government white paper June 2nd titled: China’s Position on the China-U.S. Economic and Trade Consultations. Their Vice Minister of Commerce held a press conference to discuss the matter. The paper’s position will make it hard for Beijing to stand down on a variety of issues that the US insists are vital.

The white paper was 5,000 words. Here are the 250 that most matter: It is only natural for China and the US, the world’s two largest economies and trading nations, to experience some differences over trade and economic cooperation. What truly matters is how to enhance mutual trust, promote cooperation and manage differences. Historical records confirm that China’s scientific achievements and technological innovation are not things we stole or forcibly took from others; they were earned through self-reliance and hard work. Accusing China of stealing intellectual property to support its own development is an unfounded fabrication. Accusations of forced technology transfer are baseless and untenable. Every country has its own matters of principle. On major issues of principle, China will not back down. During consultations, a country’s sovereignty and dignity must be respected, and any agreement reached by the two sides must be based on equality and mutual benefit. Both China and the US should see and recognize their countries’ differences in national development and respect each other’s development path and basic institutions. China strongly opposes the recent US move to increase tariffs and must respond to safeguard its lawful rights and interests. China has been consistent and clear on its position that it hopes to resolve issues through dialogue rather than tariff measures. China will act rationally in the interests of the Chinese people, the American people, and all other peoples around the world. However, China will not bow under pressure and will rise to any challenge coming its way. China is open to negotiation but will also fight to the end if needed.

via ZeroHedge News http://bit.ly/2XwlvuS Tyler Durden

Bill Maher Slams Social Justice Warriors: “They’re Only Interest In Clicks, Not Justice”

On his Friday episode of “Real Time”, HBO’s liberal host Bill Maher took a shot at “social justice warriors”, arguing that many of them were not motivated by social change, but rather by a need to increase their audience on social media. 

“Sometimes they go too far,” Maher said, leading his guests into a debate about the movie “Black Panther” and why he felt it couldn’t be criticized. 

Maher said: “Here’s what’s wrong with social justice warriors: They’re not interested in justice. They’re interested in clicks. They’re interested in getting clicks. Oh please, you don’t think so?”

Naturally, New York Times columnist Charles Blow pushed back on Maher, defending social justice warriors and claiming they had genuine interests in improving society. 

Maher then continued, criticizing Golden State Warriors player Draymond Green for stating that NBA owners shouldn’t be called “owners” anymore. “But, people own things…” Maher argues exasperatedly. 

(Video via Breitbart)

via ZeroHedge News http://bit.ly/2QZuClo Tyler Durden

A “Gusher Of Red Ink” For US Shale

Authored by Nick Cunningham via OilPrice.com,

Oil prices are off more about 20 percent in the last two weeks on growing fears of a brewing economic recession. Commodities of all types have been hammered by the pessimism.

“Fear of global economic growth slowing,” said Peter Kiernan, lead energy analyst at the Economist Intelligence Unit (EIU), according to Reuters, “afflicting the entire energy complex with worries that demand growth will be bearish this year.” Prices for coal, natural gas and LNG, and crude oil have plunged.

“The continued escalation in trade tensions and broad-based fall in manufacturing…suggest that the downside risks to growth are becoming more prominent,” Morgan Stanley analysts said in a note.

Yet another downturn could not come at a worse time for U.S. shale drillers, who have struggled to turn a profit. Time and again, shale executives have promised that profitability is right around the corner. Years of budget-busting drilling has succeeded in bringing a tidal wave of oil online, but a corresponding wave of profits has never materialized.

Heading into 2019, the industry promised to stake out a renewed focus on capital discipline and shareholder returns. But that vow is now in danger of becoming yet another in a long line of unmet goals.

“Another quarter, another gusher of red ink,” the Institute for Energy Economics and Financial Analysis, along with the Sightline Institute, wrote in a joint report on the first quarter earnings of the shale industry.

The report studied 29 North American shale companies and found a combined $2.5 billion in negative free cash flow in the first quarter. That was a deterioration from the $2.1 billion in negative cash flow from the fourth quarter of 2018. “This dismal cash flow performance came despite a 16 percent quarter-over-quarter decline in capital expenditures,” the report’s authors concluded.

They argue that the consistent failure for the sector as a whole to generate positive free cash flow amounts to an indictment of the entire business model. Sure, a few companies here and there are profitable, but more broadly the industry is falling short. The “sector as a whole consistently fails to produce enough cash to satisfy its voracious appetite for capital,” the report said. The 29 companies surveyed by IEEFA and Sightline Institute burned through a combined $184 billion more than they generated between 2010 and 2019, “hemorrhaging cash every single year.”

Rystad Energy put it somewhat differently, although came to the same general conclusion.

“Nine in ten US shale oil companies are burning cash,” the Norwegian consultancy said late last month. Rystad studied 40 U.S. shale companies and found that only four had positive cash flow in the first quarter. In fact, the numbers were particularly bad in the first three months of this year, with the companies posting a combined $4.7 billion in negative cash flow. “That is the lowest [cash flow from operating activities] we have seen since the fourth quarter of 2017,” Rystad’s Alisa Lukash said in a statement.

“Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. “While shale operators continue to focus on improving capital efficiency, investors are putting the industry under extreme pressure, leaving no room for undisciplined spending in 2019.”

More than 170 U.S. shale companies have declared bankruptcy since 2015, affecting nearly $100 billion in debt, according to Haynes and Boone. There have been an estimated 8 bankruptcies already this year, with some $3 billion in debt restructured.

“Frackers’ persistent inability to produce positive cash flows should be of grave concern to investors,” authors from IEEFA and the Sightline Institute wrote.

“Until fracking companies can demonstrate that they can produce cash as well as hydrocarbons, cautious investors would be wise to view the fracking sector as a speculative enterprise with a weak outlook and an unproven business model.”

The industry kept humming along over the past few years, riding out multiple downturns due to periodic reinjections of capital from Wall Street. But, investors are beginning to sour on shale drillers. Very little fresh capital has been raised by shale companies, either from new equity or bond issuance, since late last year, according to IEEFA and Sightline.

The industry now finds itself at a cross roads. With capital markets beginning to shun shale drillers, consolidation is likely the direction the industry will take. The best bet for struggling companies now is to find a willing buyer.

But several oil majors have recently said that shale drillers are fooling themselves with their asking prices. “Most of the things we see tend to look overpriced, and we have tried to maintain cool heads,” Royal Dutch Shell’s CFO Jessica Uhl said on Tuesday, according to Argus Media. Exxon’s CEO Darren Woods echoed that, saying last week that there is “not always alignment among buyers and sellers.” ConocoPhillips’ chief executive Ryan Lance said there are “a lot of bid-ask issues in the market today,” adding that an “expectations change” will be needed before more M&A can occur.

The renewed plunge in oil prices may inject a dose of reality into the shale sector. With WTI back in the low-$50s, the pressure on struggling drillers may intensify.

via ZeroHedge News http://bit.ly/2MLOlGy Tyler Durden

“Last Fight For Hong Kong”: Over 1 Million March In Protests Against China Extradition Bill

Over 1 million Hong-kongers (according to the organizers; 240K according to the police), or one in seven, flooded Hong Kong’s streets on Sunday to oppose a proposed extradition bill that would allow Beijing to take people from Hong Kong to stand trial in mainland China.

According to the SCMP, it was the most unified protest march in the city in more than a decade, with some calling it the ultimate showdown over the bill, which goes to a vote on June 12 and if passed would allow the transfer of fugitives to jurisdictions.

If turnout numbers are accurate, it would represent the biggest protest since 2003, when 500,000 people demonstrated against national security legislation that was later withdrawn by the government.  The sea of marchers set off from Victoria Park just before 3pm and streets in nearby Causeway Bay were soon brought to a standstill as protesters clad in white chanted and sang songs as they walked in the oppressive heat, according to the SCMP.

Tensions escalated in recent weeks as Hongkongers from all walks of life have spoken out against the proposal. Petitions against the bill have circulated, thousands of lawyers staged a silent march and several chambers of commerce have voiced concerns. The bill’s proponents, mostly the city’s administration, see it as vital tool to fight transnational crime and maintain the rule of law.

“This is the last fight for Hong Kong,” the WSJ quoted Martin Lee, a veteran opposition leader who founded the city’s Democratic Party. “The proposal is the most dangerous threat to our freedoms and way of life since the handover” of sovereignty, he said.

The massive turnout, with crowds filling public parks and roads up to six lanes wide for more than a mile and a half, heaps pressure on the city’s leaders and their political masters in Beijing to shelve the law, although unlike 2003, China’s ruling Communist Party under President Xi Jinping has in recent years taken a much stronger line against dissent in the former British colony.

The Special Tactical Squad has been deployed because of a perceived increase in threat to public safety

Crowds were so massive that some train stations across the city were temporarily closed and protesters had to line up in sweltering heat to enter a local park, chanting slogans to oppose the law and cheering each other on taking to the streets to express their discontent.

The proposed law, which would allow suspects to be extradited to mainland China for trial, has sparked anger in an unusually wide swath of the population, from teachers to lawyers and business leaders. The uniting fear is that the law, if passed, would expose citizens to the mainland’s more opaque legal system, where detainees could be subject to torture and other abuses of human rights. It would also remind the local population that HK is merely a Chinese colony now, and its own unique laws could be subverted overnight.

It is the latter that is the biggest concern for foreign business groups and diplomats, who have warned the proposal poses a threat to the rule of law that has helped Hong Kong prosper for decades as an international financial center, and which was guaranteed by China when it resumed sovereignty over the city from Britain in 1997. As the WSJ notes, opposition has grown even after the city’s leader, Carrie Lam watered down the bill slightly by removing offense categories liable to extradition from 46 to 37.

Lam’s government has said fears about the law are unfounded and stressed that only those suspected of the most serious crimes would be subject to extradition. The government says there will be safeguards against abuse and that the law won’t damage the city’s business environment or relate to offenses of a political nature. China’s Foreign Ministry didn’t immediately respond to a request for comment on the protests and their potential impact on the proposed extradition law. Phone and fax lines to China’s Hong Kong and Macau Affairs Office, which oversees Beijing’s policies to those territories, rang unanswered Sunday.

Anger over the extradition helped revive an opposition movement that dwindled after street protests in 2014 paralyzed parts of the city for 79 days, but ended without achieving their goal of obtaining more democracy. Meanwhile, Beijing’s influence over the city has grown since, while room for dissent has shrunk as the government has jailed protesters, declaring a pro-independence political party illegal and expelling a foreign journalist.

While the protests were mostly peaceful, there were occasional reports of scuffles between protesters and police, seven arrests and a fire in Central – but no major violence. Police gave the protesters a midnight deadline to disperse from government headquarters.

“I needed to let my voice be heard,” said Kitty Wong, a 38-year-old teacher who joined a protest for the first time. Gesturing to her two children, ages 8 and 9, she said: “We need to defend our home for the next generation.”

via ZeroHedge News http://bit.ly/2wLDVfv Tyler Durden

Is The “Sellable Rally” Done?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Is The Sellable Rally Done?

In last weeks missive, I noted the oversold condition of the market and the likelihood of a bounce:

“This week we are going to look at the recent sell-off and the potential for a short-term ‘sellable’ rally to rebalance portfolio risks into.

The markets only need some mildly positive news at this point to spur a ‘short-covering’ rally. I would encourage you to use it to reduce risk, rebalance holdings, and raise cash until the ‘trade war smoke’ clears.” 

The market did indeed rally last week. While the initial sell-off in the market was attributed to potential tariffs on Mexico, which were indefinitely suspended on Friday, the real reason was the dismal employment report of just 75,000 jobs. 

“The economy added only 75,000 jobs in May, about 100,000 fewer than expected, a sign that the slowing that is showing up in other parts of the economy is now affecting the job market.” – CNBC

A couple of months ago, I warned of the potential for weaker employment as the “household” survey had already dropped sharply. It is likely, that without some major natural disasters which spurred a temporary bump in hiring in 2018, that official employment rates are going to play catchup. 

If we just use a simple 12-month moving average of the non-seasonally adjusted data, we get a better picture about what is actually happening in the economy. (NOTE: the official BLS measure consistently OVERSTATES employment during expansions and plays catchup during recessions.)

“So, why are the markets rallying?” 

Two words – Rate. Cuts.

With employment weakening, along with a wide swath of economic data, stocks rallied sharply on Friday as the bond market priced in a certainty of a rate cut by the Federal Reserve. 

“Stocks initially sold off on the report but then moved higher as the market took the news as a sign the Fed would cut interest rates. In the Treasury market, yields, already in steep decline this week, fell further. The 2-year yield closely reflects expectations for Fed policy, and it fell to 1.77% from an intraday high of 1.89%. The 10-year yield, which influences mortgages and other loans, fell to a low of 2.059%.” – CNBC

There is a very important misconception at play here. 

What the report implies is that the “economy” is just a reflection of whatever the stock market does. However, that is inaccurate. Given that corporate profits are driven by the products they sell, and the price of stocks is based upon future expectations of the cash flows and earnings, ultimately the price of the market is slave to the direction of the economy. 

Interest rates are the best predictor of the economic strength, and the yield curve has been screaming both “deflation” and “economic weakness” for months. (We have repeatedly warned on this issue – see here)

But more importantly, is the inversion of the Fed Funds rate to the 10-year Treasury. 

Here is the MOST important point of both charts above. Recessions don’t kick in until these inversions are reversed. 

This is why David Rosenberg was absolutely correct last week when he stated:

“You don’t go long the first rate cut, you go long on the last one.”

This is because by the time the Fed quits cutting rates, the recession will be near its trough and the corresponding bear market in equities is almost complete.

As I stated, the rally this past week was expected. In fact, we alerted our RIA PRO subscribers (FREE 30-day trial) to a “trading opportunity” in the market on Monday. To wit:

  • SPY has corrected the overbought condition and is testing the 200-dma.
  • The “buy” signal in the lower panel was massively extended, as noted several weeks ago, which as we stated, suggested the reversal we have seen was coming.
  • The correction last week has set up a tradeable opportunity into June.
  • Short-Term Positioning: Bullish
    • Add 1/2 position with a target of $290.
    • Stop-loss remains at $275

The question to answer this week, is whether there is more left to this rally before the next decline?

More To Go

I think the answer to that question is “yes.”

I recently interviewed Charles Nenner who is a practitioner/forecaster of long-term stock market cycles. As he correctly predicted in our discussion, this current rally would start at the end of May and last into July before the next more serious decline begins. (Forecast begins around 1:30)

His comments align much with ours from last week:

“In the very short-term the markets are oversold on many different measures. This is an ideal setup for a reflexive rally back to overhead resistance.”

Chart updated through Friday’s close:

The have only reversed about half of the previously oversold condition which leaves some “fuel in the tank” for a continuation of the rally this coming week. 

However, that doesn’t mean the “bull is back” and you should be complacent about your portfolio. The market remains on an important SELL signal as shown below. The last two times the S&P 500 has triggered a similar sell signal, there were sharp, aggressive, rallies which were fully reversed just a few weeks later. The current market action is extremely similar to those previous events. 

The difference this time, is that many of the supports which drove the recoveries previously are either a) not present, or b) have already been priced in. As I said, while I think there is more to go in the short-term, it is highly likely the current rally will fail.

  • While it’s good that “potential” tariffs on Mexico were delayed, there were only a threat. Tariffs are still in play with China and there has been NO progress on a trade deal.

  • Earnings estimates are still far too high going into the end of 2019 and 2020. Read This

  • Economic data has turned markedly weaker both globally and domestically. 

  • Expectations for a positive effect from more QE and rates cuts are likely misplacedRead This.

  • At the end of September, Congress will face a debt ceiling and potential Government shutdown. The subsequent $4 Trillion continuing resolution will likely undermine confidence in economic sustainability as the deficit surges will past $1.5 Trillion. 

  • There are no current supportive tailwinds (disaster recovery, tax cuts, etc.) to support economic growth. 

We remain primarily long-biased in our portfolios, but are also slightly overweight in cash, and portfolio weight in fixed income. We are also carrying some hedge by having overweighted “defensive” stocks a couple of months ago which have continued to provide outperformance. 

There is a very good possibility this rally will continue next week as momentum and short-covering levels have been breached. However, if the market fails to set a new high and turns lower, the risk of a downside break will grow as we progress into summer. The weekly chart below, is also suggestive the recent rally is likely unsustainable as with a “sell signal” in place, and our volume signal back at extremely low levels, suggesting a lack of commitment from traders, and volatility still at elevated levels and rising, have marked the last two tops.

Remain cautious for now. The market is still at the same level as it was 18-months ago, and it is quite likely it will be at these levels, or lower, by the end of the summer. 

via ZeroHedge News http://bit.ly/2XyyXyx Tyler Durden