Anatomy Of The US Slowdown: “You Are Here”

Authored by Mark Orsley of PrismFP.com

Back after some time on the beach and while the data deterioration/stagflation theme was neither solidified nor nullified while I was gone, there were two major events that transpired:

  1. Powell’s Jackson Hole folly
  2. Further escalation in China/US trade wars

Regarding #1, Powell gave the nod to significant geopolitical risks abroad but his error came in continuing his intellectually dishonest comments about the “strength” of the US economy. His entire thesis hinges on:

  1. A strong labor market – Yes, the Unemployment Rate remains at historic lows (lagging indicator) but job growth has undeniably already slowed. Note the NFP chart does not include the enormous 500k of downward revisions that are coming soon…

     
  2. Rising wages – certainly not a disaster but the uptrend has been broken…

In effect, Powell double downed on his “mid-cycle adjustment” rhetoric which as I showed on August 13th is economically inaccurate. All indicators point to the US being in late cycle with early warning signals of recession. The market verified this error by further inverting 3m10y another 12bps since Jackson Hole.

All told, since Powell’s now infamous “mid-cycle adjustment” misstep on July FOMC day, he has flattened 3m10y by 45bps which is only working to exasperate recession fears. As most of us know, recessions can become self-fulfilling prophecies and the Fed does not seem to get this yet.

Until Powell cleans up that mid-cycle language or the data worsens enough where the market will assume Powell will clean up the language imminently; curves will continue to invert.

* * *

Powell’s folly then forced a frustrated Trump to further increase tariffs (with some China retaliation). In effect, POTUS is working to slow the economy to force the Fed to cut but at the same time tweeting positive headlines to keep equity markets up.

We will see if the increase goes into effect this weekend but ignore the smoke and mirror “things have never been better” tweets that are designed to prop up the equity market. Instead focus on this analysis from Axios that was not picked up by financial media:

“U.S. intelligence officials are worried about Hong Kong further deteriorating, and about the risk of the Chinese military overreaching in Hong Kong — and perhaps even in Taiwan.

Lots of members of Congress care about the U.S. protecting Taiwan from Chinese aggression, and Trump has enraged Beijing by increasing military sales to the Taiwanese from the Obama era.

And national security adviser John Bolton is a strong advocate for Taiwan.

Trump had been resisting chastising Chinese President Xi Jinping over his human rights abuses and his treatment of Hong Kong protesters. But he’s inched further toward criticizing the Chinese than he normally would in recent days.

Trump even hinted the Chinese wouldn’t get their trade deal unless they peacefully resolved the situation in Hong Kong — a move that pleasantly surprised China hawks.

When Secretary of State Mike Pompeo and Defense Secretary Mark Esper visited Australia earlier this month, they delivered an unequivocal message to senior Australian officials: The U.S. plans to forcefully push back against China’s destabilizing behavior in the Asia-Pacific.

Some left those meetings with the impression that the U.S. was serious about confronting China militarily.”

That all means the likelihood of a trade deal with China in the next, let’s say, 6 months is highly improbable. Trade wars were hard enough to settle with issues like IP and enforcement, but now national security and sovereignty issues have also been twisted into the negotiations.

It will be interesting to see what transpires in Hong Kong this weekend with a major protest planned at the same time China has increased its military presence in the area. Hong Kong has already arrested a few protest leaders in front of the weekend protests.

* * *

Therefore, the roadmap that has been in place for the US economy for the last year is almost certainly going to continue. That means a recessionary or stagflationary state.

The anatomy of a US slowdown…

As you can see, we are at the point where curves have inverted signaling a coming recession, the Manufacturing sector is likely already in a recession (Markit says it is, ISM to follow) which is bleeding into the Service sector, and in the early stages of the labor market weakening. I showed the 6m average of ADP and NFP rolling over above and here are more signs of a coming labor market slowdown. First, in the regional Fed surveys, business are indicating they are going to hire less:

Small businesses are also showing they are hiring less and will pay less:

How about some solid empirical evidence of the weakening labor market. Paychex, using their payroll data, created a small business index that tracks the change in employment…

Therefore, seeing NFP getting revised down by 500k should not surprise us. There should now be a clear weakening trend in the labor data going forward.

The labor market slowdown will be significant because it will lead to the final domino to fall; the consumer. The most consensus comment I get from clients and that I hear around the street is “there will be no recession because the consumer is strong.”

Consumer data has certainly been firm, but folks, the consumer is always the last to know when the economy is headed towards a recession. When will they know? When they lose their jobs or fear losing their jobs. That is why these labor indicators are going to become so important over the next few months – they will tell us if the “strong consumer” theory is about to be invalidated.

Are there any early warning signals that says the US is in the early stages of consumer retrenchment? A few:

Consumer Discretionary/Consumer Staples ratio (black) and S&P’s (blue) – rotation out of discretionary and into safety which is something you would not expect if consumer expectations were strong…

Amazon – I can understand why brick and mortar companies are under pressure and going bankrupt, but how is the disruptor causing all of that breaking down? It is implying that the best of times for the consumer is behind us as it has broken its uptrend from December…

Real Average Hourly Earnings – I showed how AHE is not rising as Powell stated they were, but to make matters worse, when adjusting for inflation (which will be a major problem if tariffs lead to even higher inflation), the consumer is only seeing a meager 1.3% YoY wage increase and falling…

Personal Income continuous to decline

UMich Consumer Expectations

Now Consumer Confidence just came in at a robust level this week. I would just caution that the consumer eventually follows the economic data. For instance, you can see here that there have been times when consumer confidence was making highs while the ISM Manufacturing PMI was declining. All those times, the consumer data eventually caught up. In other words, the consumer is a lagging indicator.

ISM Manufacturing PMI (black) vs. Consumer Confidence (purple) – red lines denote instances when Consumer Confidence was spiking while PMI data was falling substantially – every time the consumer corrects lower…

* * *

One thing that could extend the cycle a bit is the brewing mortgage refi wave.

MBA Refinancing Index…

This is what cutting rates is supposed to do. Lower mortgage payments is good news and as I am sure you saw in the Black Knight data, people have a record amount of home equity to draw from:

A cash out refi wave will likely give the economy a much needed jolt so it is no wonder Home Depot stock is making new highs as folks extract equity and spend it improving their home.

The only concern is if consumers go on a cash out refi binge; that will only add to their overleverage problem. Said another way, taking out additional loans at the end of an economic cycle with the labor market staring to roll over and house prices sagging is risky to say the least.

Therefore, this refi wave should be short-term positive, but long-term increases the risk to the consumer. The consumer is getting sucked into more debt at the worse time.

* * *

While the refi wave is going to be a little boon for the consumer, it’s a problem for the market. In this world where the saturation of Treasury supply is sapping up liquidity, how will the market handle MBS origination coming in at a daily pace of say $5 billion?

More MBS supply means dealers will have to take down more paper which means reserves continue to decline which creates funding issues. You are already starting to see that in the year-end FRA-OIS spread which is approaching YTD highs.

December FRA-OIS spread starting to show year-end funding stress…

Which brings us to the US Dollar. The Dollar is bid and it appears to be non-economic driven. For example, if you looked at USD/SEK cross which is leading the Dollar rally, you would assume things are going poorly in Sweden. But over the last month, the data in Sweden has actually be pretty good. They had a blowout retail sales, an inflation surprise to the upside, and a huge bounce in Industrial Orders. Yet SEK is depreciating.

Therefore, more likely is the Dollar “shortage”/funding issues are starting to make its way into the currency market. That means the DXY is likely to continue its ascent inside its bull channel

That Dollar rally could put an end to the rally in Gold. I have been bullish Gold for a couple months now but its time to take profits. It is extended, the Fed is behind the curve, the Dollar looks set to rally more, and the technicals have fully played out.

The bullish inverse head and shoulder pattern targeted 1550 which has now been hit. Take profits…

 

As you can see by the length of this note, there is a lot going on. To succinctly summarize:

  • The long term economic data deterioration theme for the US has not changed and there are now signs the labor market could be the next part of the economy to turn
  • In the near term, the cycle can get extended a bit due to the coming mortgage refi wave that will make the consumer feel economically better (along with gas prices still pretty low)
  • That refi wave adds to the supply glut the Treasury market is already causing as there will now be a flood of MBS supply
  • That MBS supply on top of UST supply will increase funding concerns
  • Those funding concerns will keep the Dollar bid
  • The Dollar bid will weigh on gold which is extended and reached its upside target

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Documentary About Harvey Weinstein More Unsettling Than Any Horror Movie

Untouchable. Available Monday, September 2, on Hulu.

When the career of megaproducer Harvey Weinstein collapsed into a heap of #MeToo rubble a couple of years ago, there was a certain sensation of tumbling through a crack in time.

Anybody with even a passing acquaintance with Hollywood remembered the casting couches of the old studio strongmen like MGM’s Louis B. Mayer, whose sexual proprietorship of his contract actresses extended even to ordering a teenaged Judy Garland to take her meetings with him while sitting on his lap. (That made it easier for him to cup her left breast when he told her he loved the way she sang from the heart.) But really? In 2017?

It was a feeling familiar to many of Weinstein’s employees. “I remember meeting him,” says one former (male) minion during an interview for the documentary Untouchable, “and thinking, ‘This person can’t exist.’ He is just such a caricature of a Hollywood mogul that hasn’t been around for decades.”

As it turned out, the moguls were, if anything, more numerous and more voracious than their predecessors. Everybody from Dustin Hoffman to Louis C.K.—more than 250 men, by one count—was accused of behavior toward women ranging from grotesquely porcine to flatly rapacious. In many cases, the charges came from multiple women.

There are so many questions raised by all this, even beyond the snarky ones. (Such as: When the CBS human resources office posted openings for the job of being on call to perform oral sex on CEO Les Moonves, how much experience was required?)

One that’s at once among the most important and most intriguing: Is this sort of sexual buccaneering by bosses common in workplaces outside Hollywood? Are the hallways at Microsoft and AT&T also playgrounds for predators? And if it’s strictly a show-biz phenomenon, why? Is there some peculiar sexual pathology that’s attracted to, or bred by, dressing people in costumes and ordering them around a stage?

There aren’t really any answers to these questions to be found in Untouchable, an unremittingly harsh account (that’s not a complaint but a compliment) of the Weinstein scandal that, after briefly appearing on the festival circuit early this year, gets its first real exposure this week on Hulu.

But if you want a crash course in Weinstein’s thoroughgoing and possibly criminal loutishness (his trial on sexual assault charges is scheduled early next year), you couldn’t possibly do better than this report from British television documentarian Ursula Macfarlane.

With an impressive—and often gut-wrenching—array of interviews with Weinstein’s victims, former employees and journalists who dragged it all out in the open, Macfarlane traces Weinstein’s managerial misdeeds all the way back the 1970s, when he was a concert promoter in Buffalo.

As he graduated from small-fry local promoter to big-time movie producer (Miramax, the company he formed with his brother Bob, churned out artistic and critical successes like Sex, Lies and Videotape, Shakespeare in Love and Pulp Fiction as if it were an assembly line), Harvey Weinstein’s sexual skullduggery kept pace.

Relatively unimaginative ploys like, “Oh, the hotel forgot to book your room, wanna stay in mine?” turned into demands for topless massages and masturbation in front of mirrors and finally Caligulan depravity resulting in shattered toilets stained with blood.

None of this was any secret to Miramax employees. One resigned after a friend she had recommended for a job as Weinstein’s assistant reported being raped on her first day of work.  A secretary to Bob Weinstein was so horrified after opening and reading a detailed letter from an attorney representing one of Harvey’s victims that she quit on the spot—and shouted “Your brother is a fucking pig!” on her way out the door.

In some ways, the grimmest interviews in Untouchable are those who didn’t quit, who stayed on what some of them called “the Harvey train” even though they at least suspected what was going on.

“When you were with Harvey, you were going out to dinner with Sean Connery and Leonardo DiCaprio,” explains one, looking into the camera but with obvious difficulty. “He created an energy around him that made you feel like you were at the center of the universe.”

For many women, however, the center of the Weinstein universe felt more like the bottom circle of Hell. And their nightmarish, broken accounts make it clear that the definition of sexual assault can be hazy when the assailant is a boss and the victim an underling.

“When you read about rape, you read, ‘Okay, well, the girl screams “no!” and kicks and screams,'” recalls actress Paz de la Huerta of her encounter with Weinstein. “But that’s not exactly right. The way in which he overpowered me left me with no way out.”

Not that women were Weinstein’s only victims. As Untouchable makes clear, he abused everybody, sexually or otherwise. “In a lot of ways,” remembers one female ex-employee, “he was tougher on the guys.” Favorite tactic with the guys: hurling five-pound ashtrays at their heads.”

And in the end, both his hubris and temper had both grown so much that they could be contained neither by the walls of Weinstein’s office or even any sense of public propriety.

When a female reporter at a Manhattan book party asked him what he thought was an impertinent question about a Miramax film, Weinstein shouted, “Who let this cunt in here?”, then put a headlock on her boyfriend (also a reporter) and dragged him out onto the sidewalk. “I’m glad I’m the sheriff of this shit-ass fucking town,” Weinstein bellowed. Wear that badge with honor, sir.

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“It’s All The Same Trade!” – Cross-Asset-Class Correlations Reach Record Highs

It’s (relatively) different this time.

That phrase has sunk a thousand trade theses and more than one massively-levered hedge fund. But, as The Wall Street Journal notes, there is something very unusual about what has happened in recent weeks.

Seemingly unrelated areas of the market are trading in the same direction more frequently than normal, a trend that some investors say is contributing to recent volatility and could drive more gyrations in the future.

The S&P 500’s 11 sectors have either risen or fallen together during 11 trading sessions in August, the highest monthly incidence of such alignment since January 2016.

“It really is almost like an ongoing, rolling bet on the odds of recession,” said Dave Donabedian, chief investment officer at CIBC Private Wealth Management.

“If you’re a stock picker, that’s frustrating.”

This relationship is also very well highlighted by the so-called ‘implied correlation’ of the S&P 500. This indicator measures the relative demand for individual members of the index vs the index itself. The higher the index, the more driven by systemic index moves and not idiosyncratic company moves. The current level is the most systemically-driven since the collapse in stocks in December…

Source: Bloomberg

Other risky investments such as commodities and global stocks have generally been tracking moves in U.S. stocks, and as The Wall Street Journal notes, that is worrying investors who fear there will be few places to hide if risky investments fall suddenly, as they have following recent escalations in the U.S.-China trade war.

Oil prices, international stocks, and bond yields have traded in the same direction as U.S. stocks several times this month.

But lockstep market moves add to other warning signals that are causing some investors to protect against a bigger downturn. Those include a recent yield-curve inversion in which shorter-term Treasury yields eclipsed longer-term ones – a shift that has preceded past recessions – and a pullback in consumer confidence.

Source: Bloomberg

And it’s not just stocks that are correlating aggressively, the relationship between bonds and stocks is at its most negative (lower yields and higher stock prices or vice versa) since 2006…

Source: Bloomberg

Picture another way, something has snapped (or is this a yuuge QE anticipation trade)

Source: Bloomberg

In light of this, former fund manager and FX trader Richard Breslow warns, equities can be, but certainly aren’t always, the arbiter of the state of things. Go back and read what was being written about them as late as the fourth quarter of 2007.

“It’s very difficult to gauge where things are going,” said Candice Bangsund, a portfolio manager at Fiera Capital.

“Sentiment remains extremely fragile.”

August marks the first month since September 2011 that the S&P 500 has fallen at least 2.5% on three separate days, according to Bespoke Investment Group. On each one, bond yields, global stocks and oil also fell, another sign that investors believe few corners of the market will be spared if the tariffs do indeed lead to a world-wide recession.

However, as Bloomberg’s Robert Fullem notes, for traders looking for a reason to bet against the epic run in Treasuries might want to consider that the rolling 30-day correlation between 10-year Treasury futures and the MOVE Index, a gauge of underlying volatility, rose to a record this week.

Source: Bloomberg

Market theorists say a surge in volatility may mark an end to a trend, suggesting it could be best to avoid Treasuries at these levels. The price-volatility correlation, which has generally been negative, rose above the prior peak seen in the run-up to the financial crisis of 2008.

The demand for safe-havens has been dramatic nevertheless as illustrated by the record high correlation between gold and US Treasury prices…

Source: Bloomberg

But gold appears to be moving in lockstep with a proxy for policy-maker pandemonium as the almost perfect correlation between the precious metal and global negative-yielding debt is extreme to say the least…

Source: Bloomberg

As WSJ concludes, investors have long pointed to lockstep market movements and the prevalence of crowded trades, like betting on popular technology stocks, as signals that the long-running bull market is vulnerable to a pullback. When momentum flips, an unwinding of those positions can swiftly drag down markets, these analysts say. That trend contributed to sharp market downturns in early 2018 and again late last year.

“It’s a lot for investors to digest,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.

“Our suggestion has been that investors probably need to adapt to this type of macro volatility and do what they can to not get whipsawed by these shifts that we’ve seen.”

However, there is at least one uncorrelated asset class that could provide cover in the event of a major market move. Markets and Bitcoin have dramatically decoupled after almost perfect correlation earlier in the month…

Source: Bloomberg

As one veteran trader warned, “it’s all the same trade… recession on-recession off, trade deal on-trade deal off… and the algos exaggerate the swings in either direction.”

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New Orleans Magistrates Get a Cut of Fines and Bail Money, and That’s a Problem

New Orleans magistrates who fund their own courts using a cut of the fines and bail they order defendants to pay have a financial conflict of interest and violate defendants’ due process rights, the 5th U.S. Circuit Court of Appeals ruled in not one, but two federal court cases. These decisions follow a pair of federal rulings from a year ago in which two judges for the U.S. District Court for the Eastern District of Louisiana ordered New Orleans magistrates to stop jailing defendants who couldn’t afford to pay fees or up-front bail costs.

Orleans Parish Magistrate Henry Cantrell was accused of typically setting a minimum bail of $2,500 for defendants and threatening defense attorneys who sought bail reductions. One defendant sat in jail for two weeks trying to collect the money. A second defendant was unable to pay bail and stayed in jail for more than a month before being freed. It just so happened that Cantrell’s court got a chunk of any fines and bail money it collected. The court used that money to fund its operations.

Last year, Cantrell told the federal courts he had changed these practices and was no longer simply demanding large bail amounts that defendants couldn’t pay. But he also appealed last year’s rulings, asking the 5th U.S. Circuit Court of Appeals to rule that setting the bail amounts and also funding the court with bail proceeds did not violate the due process rights of defendants.

On Thursday, a three-judge panel on the 5th U.S. Circuit Court of Appeals flatly rejected Cantrell’s request. In a 14-page ruling, the judges explained that if a magistrate needs bail money to fund court systems, he is incentivized to extract bail money from defendants. While Cantrell didn’t pocket the money himself, these bail bonds paid for up to a quarter of some courts’ budgets. Judge Gregg Costa wrote Thursday’s decision affirming the lower court’s ruling on bail: “Judge Cantrell has a direct and personal interest in the fiscal health of the public institution that benefits from the fees his court generates and that he also helps allocate.”

This ruling focused specifically on the magistrates’ demands of cash bail and their financial stake in making people pay. Last Friday, a separate 5th Circuit panel ruled that these same magistrates also have a conflict of interest when determining whether a defendant can afford to pay the fines and fees. That decision noted that when the collection of fines and fees goes down, it directly impacts the courts’ operations, causing cuts in services and salaries. The magistrates then respond by trying to increase the collection of fines and fees to keep the courts operating.

Essentially, New Orleans funding its courts on the backs of the defendants that appear before that court is a huge problem. If the courts don’t get money from the defendants, it won’t be able to function. Costa bluntly notes toward the end of his ruling that the obvious solution to the conflict of interest is to not send these fees directly to the Judicial Expense Fund. Louisiana state law does not require the courts to be funded in this fashion. He concludes:

“[I]t may well turn out that the only way to eliminate the unconstitutional temptation is to sever the direct link between the money the criminal court generates and the Judicial Expense Fund that supports its operations.”

Read yesterday’s ruling here and last week’s ruling here. Read more here about the financial struggles facing the New Orleans courts due to their dependence on fines and fees to pay for operations.

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New Orleans Magistrates Get a Cut of Fines and Bail Money, and That’s a Problem

New Orleans magistrates who fund their own courts using a cut of the fines and bail they order defendants to pay have a financial conflict of interest and violate defendants’ due process rights, the 5th U.S. Circuit Court of Appeals ruled in not one, but two federal court cases. These decisions follow a pair of federal rulings from a year ago in which two judges for the U.S. District Court for the Eastern District of Louisiana ordered New Orleans magistrates to stop jailing defendants who couldn’t afford to pay fees or up-front bail costs.

Orleans Parish Magistrate Henry Cantrell was accused of typically setting a minimum bail of $2,500 for defendants and threatening defense attorneys who sought bail reductions. One defendant sat in jail for two weeks trying to collect the money. A second defendant was unable to pay bail and stayed in jail for more than a month before being freed. It just so happened that Cantrell’s court got a chunk of any fines and bail money it collected. The court used that money to fund its operations.

Last year, Cantrell told the federal courts he had changed these practices and was no longer simply demanding large bail amounts that defendants couldn’t pay. But he also appealed last year’s rulings, asking the 5th U.S. Circuit Court of Appeals to rule that setting the bail amounts and also funding the court with bail proceeds did not violate the due process rights of defendants.

On Thursday, a three-judge panel on the 5th U.S. Circuit Court of Appeals flatly rejected Cantrell’s request. In a 14-page ruling, the judges explained that if a magistrate needs bail money to fund court systems, he is incentivized to extract bail money from defendants. While Cantrell didn’t pocket the money himself, these bail bonds paid for up to a quarter of some courts’ budgets. Judge Gregg Costa wrote Thursday’s decision affirming the lower court’s ruling on bail: “Judge Cantrell has a direct and personal interest in the fiscal health of the public institution that benefits from the fees his court generates and that he also helps allocate.”

This ruling focused specifically on the magistrates’ demands of cash bail and their financial stake in making people pay. Last Friday, a separate 5th Circuit panel ruled that these same magistrates also have a conflict of interest when determining whether a defendant can afford to pay the fines and fees. That decision noted that when the collection of fines and fees goes down, it directly impacts the courts’ operations, causing cuts in services and salaries. The magistrates then respond by trying to increase the collection of fines and fees to keep the courts operating.

Essentially, New Orleans funding its courts on the backs of the defendants that appear before that court is a huge problem. If the courts don’t get money from the defendants, it won’t be able to function. Costa bluntly notes toward the end of his ruling that the obvious solution to the conflict of interest is to not send these fees directly to the Judicial Expense Fund. Louisiana state law does not require the courts to be funded in this fashion. He concludes:

“[I]t may well turn out that the only way to eliminate the unconstitutional temptation is to sever the direct link between the money the criminal court generates and the Judicial Expense Fund that supports its operations.”

Read yesterday’s ruling here and last week’s ruling here. Read more here about the financial struggles facing the New Orleans courts due to their dependence on fines and fees to pay for operations.

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The Global Credit Impulse Is Giving Signs Of Life

Submitted by Christopher Dembik, head of macro analysis at Saxo Bank

Based on preliminary data, global credit impulse – the second derivative of global credit growth and a major driver of economic activity – is giving signs of life. It is still in contraction, at minus 3.8% of GDP, but slowly moving upwards. Currently, more than half of the countries in our sample, representing 69.4% of global GDP, have experienced an acceleration in credit impulse over the past quarter.

The improvement in global credit impulse is mostly due to slightly better China credit impulse and strong credit push in the United States.

  • China is trying to reverse measures taken over previous years that reduced liquidity and credit flow, especially from small banks. China credit impulse, which is the main contributor to global credit impulse (1/3 of the total pulse), is still in contraction at minus 3.8% of GDP but moving upwards. We expect the trend will continue in coming quarters to offset economic deceleration due to weak demand and impact of trade war.

  • The new easing cycle starts to have an impact in DM countries. The United States has opened the credit tap again with credit impulse standing at 1.2% of GDP, the highest level since early 2018. The positive trend is also visible in demand for C&I loans which has been solid over the past quarters, reaching a peak at 9.3% YoY in Q1 2019.

  • Global credit impulse leads the real economy by 9 to 12 months. If our model is correct, we should see a rebound in global growth in Q1-Q2 2020 after reaching a low point in H2 2019. Countries that should benefit the most from improved credit pulse are those with strong trade links with China, especially South Korea, Japan and Australia. We also expect that the effect of credit pulse will be amplified by fiscal pulse in many countries. Upcoming debates over 2020 budget should path the way for demand-oriented stimulus and infrastructure investments.

  • Currently, there are nine major economies in recession or on the verge of it: Argentina, Brazil, Germany, Italy, Mexico, Russia, Singapore, South Korea and the United Kingdom. Interestingly, out of the nine, five went through a sharp and often prolonged contraction in credit impulse. Along with China’s importing less, trade war friction and, in some cases, bad domestic policies, negative credit impulse appears as one of the key drivers behind poor economic performance in these countries.

  • This is particularly the case for the United Kingdom that has experienced seven consecutive quarters of contraction, with credit impulse running at minus 4.4% of GDP. The lack of new credit growth fueling the economy substantially increases the risk of recession in highly indebted countries like the United Kingdom. Despite Q2 GDP contraction, we think the likelihood of a technical recession is remote in Q3 2019 due to the combination of stockpiling and positive consumer sentiment ahead of Brexit deadline. However, everything is already in place for recession. It is only a matter of time before it happens, more probably in early 2020 if no-deal Brexit prevails.

  • The case for recession in Q3 is stronger for Germany. Germany’s credit impulse has been decelerating since Q1 2018, only running at 0.4% of GDP according to the latest estimate. On the top of that, the manufacturing sector is in disarray and we start to see a contagion of weakness from manufacturing to services. The latest German PMI Services was out a solid 54.4 in August but lower from its highest annual point of 55.8. The gap observed between the manufacturing sector and the service sector is doomed to be reduced in coming months, with the service sector going down. Technical recession is our central scenario for Q2-Q3 2019.

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Pro-Democracy Activists Joshua Wong and Agnes Chow Arrested in Hong Kong

Two prominent Hong Kong activists, Joshua Wong and Agnes Chow, were arrested Friday for participating in unauthorized assembly and inciting other protesters to do the same. Both have been released on bail. Hong Kong police have also denied organizers permission to hold a march planned for Saturday.

The two 22-year-olds are leaders of Demosisto, an organization that backs greater autonomy and self-government for Hong Kong. (Wong serves as secretary-general while Chow is on the standing committee.) Wong first entered protest politics during Hong Kong’s “umbrella movement” of 2014. Those roughly three months of demonstrations called for giving the semi-autonomous Chinese city’s residents the right to elect their chief executive directly, without the Communist Party pre-screening the candidates. Currently, citizens “elect” the chief executive, but have no options aside from candidates who have earned Beijing’s stamp of approval.

The current round of protests was set off by a bill, introduced in early June and suspended shortly thereafter, that would have allowed Hong Kong to extradite accused criminals to both Taiwan and mainland China. While the marchers are glad the legislation was suspended, they want it fully pulled—and they have broader demands too.

“The chief executive of Hong Kong should be elected by Hong Kong’s people instead of picked by Beijing,” Wong tells Reason. “We urge the government to terminate the bill, stop police brutality, and respond to our calls for free elections.”

Though Hong Kong is technically a part of China, it operates under a “one country, two systems” policy that allows Hongkongers to enjoy basic democratic norms and due process. In 2047, though, Hong Kong’s quasi-independent government will be dissolved and it will become fully absorbed into mainland China. The protesters fear China is speeding up this timeline.

“‘One country, two systems’ has already eroded,” says Wong. “It’s one country, one and a half systems.” He adds that “Mainland Chinese people also deserve democracy.”

Tensions between the protesters and the authorities have escalated in recent weeks. In mid-August, police beat up community organizers and shot a woman in the eye with a non-lethal bean bag round. Days later, airport protesters attacked some men they believed to be undercover Chinese infiltrators. (Their suspicions turned out to be right—one was a cop from Shenzhen, the other a reporter for state-owned media.) About a week after that, Chinese authorities disappeared a staffer at the British consulate in Hong Kong. The Washington Post reports that police have arrested more than 800 people in connection with the protests over the past few months.

“I was really shocked by the threat of police to us people on the fifth of August, the day we had the general strike,” Wong says. “I joined the assembly outside of the government headquarters, and a sniper from the riot police fired tear gas from 40 floors” up. Wong says police have fired more than 2,000 tear gas shells over the course of the protests.

Now the cops are cracking down on protesters’ ability to assemble in public places. The Associated Press reports:

The organizers of Saturday’s march, the fifth anniversary of a decision by China against allowing fully democratic elections for the leader of Hong Kong, said they were calling it off after an appeals board denied permission. It was unclear whether some protesters would still demonstrate on their own.

The police commander of Hong Kong island, Kwok Pak Chung, appealed to people to stay away from any non-authorized rallies, warning that those caught could face a five-year jail term.

“In the past five years,” Wong says, “activists were jailed, lawmakers were kicked out of office, foreign correspondents were expelled from Hong Kong, and book publishers were kidnapped to China. It’s not only saying that Hong Kong is a place far away from democracy—it’s also saying that Hong Kong is a place without basic political and economic freedom.”

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Recession Alarm: Crude Processing At US Refiners Falls The Most Since Financial Crisis

There are more signs the US economy is rapidly deteriorating. This time it’s coming from the energy sector.

A new report from Reuters’ Senior Market Analyst John Kemp reveals how US refiners have cut the volume of crude processed this year to levels not seen in a decade as fuel stockpiles remain at elevated levels, suggesting a manufacturing and freight recession could be materializing.

US refineries slashed an average of 247,000 barrels per day since January 2019 compared with the same period in 2018, according to data from the US Energy Information Administration (EIA).

In the latest EIA report titled “Weekly petroleum status report,” Kemp said YTD processing rates have fallen for the first time since 2011, and by the most since the recession of 2008/09.

Refinery crude consumption has dropped by 56 million barrels so far compared with the same period in 2018.

Kemp noted that refiners cut processing volumes during the regular maintenance season in March and April and have never recovered since.

And here’s evidence that the consumer could be weakening even though fuel prices and interest rates remain low:

“Processing has remained at or below prior-year rates throughout the summer driving season, normally the highest demand of the year,” Kemp said.

This could suggest that manufacturing and freight slowdowns are starting to have spillover effects on consumer spending habits.

Kemp said:

“Philadelphia Energy Solutions’ 335,000 bpd refinery on the East Coast has been shut since a fire and explosion on June 21, which may have contributed to the loss of crude processing.

But processing was already running below prior-year rates before the plant exploded and has been below 2018 rates for 13 out of the last 16 weeks since the start of May.

Refiners on the East Coast have cut processing by an average of almost 120,000 bpd so far this year (mostly due to the Philadelphia explosion).

But they have also reduced processing by 87,000 bpd in the Midwest, 15,000 bpd along the Gulf Coast and 45,000 bpd on the West Coast.” 

Despite refiners limiting crude processing this year, gasoline and distillate fuel stocks remain at high levels.

Consumer fuel consumption is stagnating, unchanged compared with last year, hinting that the consumer has been weak for all of 2019. Distillate demand is down slightly on the year as the freight industry stumbles into a possible recession.

Kemp also said:

“Forward refining margins for gasoline and distillates delivered at the end of the year do not provide refiners with any significant incentive to boost processing compared with normal seasonal patterns.”

And with the US possibly sliding into a mild recession before election day. Refiners will likely continue limiting crude processing, a direct result of a fragile consumer.

via ZeroHedge News https://ift.tt/2L8M0Tm Tyler Durden

Pro-Democracy Activists Joshua Wong and Agnes Chow Arrested in Hong Kong

Two prominent Hong Kong activists, Joshua Wong and Agnes Chow, were arrested Friday for participating in unauthorized assembly and inciting other protesters to do the same. Both have been released on bail. Hong Kong police have also denied organizers permission to hold a march planned for Saturday.

The two 22-year-olds are leaders of Demosisto, an organization that backs greater autonomy and self-government for Hong Kong. (Wong serves as secretary-general while Chow is on the standing committee.) Wong first entered protest politics during Hong Kong’s “umbrella movement” of 2014. Those roughly three months of demonstrations called for giving the semi-autonomous Chinese city’s residents the right to elect their chief executive directly, without the Communist Party pre-screening the candidates. Currently, citizens “elect” the chief executive, but have no options aside from candidates who have earned Beijing’s stamp of approval.

The current round of protests was set off by a bill, introduced in early June and suspended shortly thereafter, that would have allowed Hong Kong to extradite accused criminals to both Taiwan and mainland China. While the marchers are glad the legislation was suspended, they want it fully pulled—and they have broader demands too.

“The chief executive of Hong Kong should be elected by Hong Kong’s people instead of picked by Beijing,” Wong tells Reason. “We urge the government to terminate the bill, stop police brutality, and respond to our calls for free elections.”

Though Hong Kong is technically a part of China, it operates under a “one country, two systems” policy that allows Hongkongers to enjoy basic democratic norms and due process. In 2047, though, Hong Kong’s quasi-independent government will be dissolved and it will become fully absorbed into mainland China. The protesters fear China is speeding up this timeline.

“‘One country, two systems’ has already eroded,” says Wong. “It’s one country, one and a half systems.” He adds that “Mainland Chinese people also deserve democracy.”

Tensions between the protesters and the authorities have escalated in recent weeks. In mid-August, police beat up community organizers and shot a woman in the eye with a non-lethal bean bag round. Days later, airport protesters attacked some men they believed to be undercover Chinese infiltrators. (Their suspicions turned out to be right—one was a cop from Shenzhen, the other a reporter for state-owned media.) About a week after that, Chinese authorities disappeared a staffer at the British consulate in Hong Kong. The Washington Post reports that police have arrested more than 800 people in connection with the protests over the past few months.

“I was really shocked by the threat of police to us people on the fifth of August, the day we had the general strike,” Wong says. “I joined the assembly outside of the government headquarters, and a sniper from the riot police fired tear gas from 40 floors” up. Wong says police have fired more than 2,000 tear gas shells over the course of the protests.

Now the cops are cracking down on protesters’ ability to assemble in public places. The Associated Press reports:

The organizers of Saturday’s march, the fifth anniversary of a decision by China against allowing fully democratic elections for the leader of Hong Kong, said they were calling it off after an appeals board denied permission. It was unclear whether some protesters would still demonstrate on their own.

The police commander of Hong Kong island, Kwok Pak Chung, appealed to people to stay away from any non-authorized rallies, warning that those caught could face a five-year jail term.

“In the past five years,” Wong says, “activists were jailed, lawmakers were kicked out of office, foreign correspondents were expelled from Hong Kong, and book publishers were kidnapped to China. It’s not only saying that Hong Kong is a place far away from democracy—it’s also saying that Hong Kong is a place without basic political and economic freedom.”

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Is the Surgeon General Right About the Risks of Marijuana Use During Pregnancy?

Surgeon General Jerome Adams yesterday issued an advisory about the “health risks” posed by marijuana use during pregnancy. He considers it “alarming” that “many retail dispensaries recommend marijuana to pregnant women for morning sickness.” During a press conference explaining the advisory, Secretary of Health and Human Services Alex Azar declared that “no amount of marijuana use during pregnancy or adolescence is safe.”

Azar’s formulation is weirdly categorical, since it’s widely accepted that the use of potentially hazardous medications during pregnancy may be appropriate when the benefits outweigh the risks. And while there are legitimate reasons to be concerned about the danger that cannabis may pose to fetuses, the evidence is more ambiguous than Adams and Azaar imply. The relevant question is not whether marijuana use during pregnancy is completely “safe” but whether the evidence against it is strong enough to conclude that it should always be avoided, even when it provides relief to women who would otherwise be incapacitated by nausea.

Marinol, an anti-nausea medication that the Food and Drug Administration (FDA) approved in 1985, is an instructive example. The FDA has placed Marinol, a.k.a dronabinol, in Pregnancy Category C, which means “animal reproduction studies have shown an adverse effect on the fetus and there are no adequate and well-controlled studies in humans, but potential benefits may warrant use of the drug in pregnant women despite potential risks.” That category also includes commonly prescribed drugs such as the asthma medication albuterol and the antidepressants Prozac (fluoxetine) and Zoloft (sertraline). Marinol’s classification is especially relevant in this context, since it is a capsule containing THC, the main active ingredient in marijuana and the cannabinoid that worries Adams in connection with developing fetuses.

While Marinol’s manufacturer, AbbVie, says pregnant women should not take it, the advice from the companies that make Prozac, Zoloft, and Proventil (an albuterol inhaler) is notably different. Eli Lilly says Prozac “should be used during pregnancy only if the potential benefit justifies the potential risks to the fetus.” Similarly, Pfizer says, “Women who are pregnant, plan to become pregnant, or who are breastfeeding should not take ZOLOFT without consulting their physician.” Merck says, “If you are pregnant or nursing, contact your physician about use of PROVENTIL HFA Inhalation Aerosol.”

Marinol, which contains only THC and is taken orally, is not quite the same as marijuana, which contains lots of other compounds and can be smoked, vaped, or absorbed in the mouth via sprays or drops as well as swallowed in the form of beverages or edibles. What does research show specifically about the effects of marijuana use during pregnancy?

Adams cites The Health Effects of Cannabis and Cannabinoids, a 2017 report from the National Academies of Sciences, Engineering, and Medicine, so let’s start there. “There is limited evidence of a statistical association between maternal cannabis smoking and pregnancy complications for the mother,” the report says. “There is substantial evidence of a statistical association between maternal cannabis smoking and lower birth weight of the offspring….There is limited evidence of a statistical association between maternal cannabis smoking and admission of the infant to the neonatal intensive care unit….There is insufficient evidence to support or refute a statistical association between maternal cannabis smoking and later outcomes in the offspring (e.g., sudden infant death syndrome, cognition/academic achievement, and later substance use).”

The meaning of these “statistical association[s]” remains unclear, as a 2018 report from the American Academy of Pediatrics (AAP) explains. “The evidence for independent, adverse effects of marijuana on human neonatal outcomes and prenatal development is limited,” the AAP notes, “and inconsistency in findings may be the result of the potential confounding caused by the high correlation between marijuana use and use of other substances such as cigarettes and alcohol, as well as sociodemographic risk factors. However, the evidence from the available research studies indicate reason for concern, particularly in fetal growth and early neonatal behaviors.”

Given the uncertainty, the AAP, like the American College of Obstetricians and Gynecologists, recommends abstinence during pregnancy and breastfeeding. The American Medical Association, meanwhile, has proposed a milder warning for cannabis products: “Marijuana use during pregnancy and breastfeeding poses potential harms.”

The AAP and the ob-gyn group prefer that pregnant women err on the side of abstinence, which also seems to be what Adams is recommending. But prospective mothers may reach different conclusions, especially if they suffer from severe nausea and find that marijuana relieves it more effectively than other medications.

The National Institute on Drug Abuse (NIDA) is sponsoring four studies aimed at more definitively measuring the risks of marijuana use during pregnancy. “I don’t want us to cry wolf,” NIDA Executive Director Nora Volkow told the Associated Press this month. “We have to do these studies in a way that can identify risks.”

A NIDA-sponsored study by researchers at the University of Washington, for example, is enrolling pregnant women in their first trimester who are already using marijuana for morning sickness. “Infants will undergo brain scans at 6 months and will be compared with babies whose mothers didn’t use marijuana while pregnant,” A.P. reports. The researchers will not supply marijuana to the subjects, and the study is limited to women who have already decided that the benefits of using cannabis during pregnancy outweigh the risks.

“They’re making a choice that people might not agree with,” said the lead researcher, Natalia Kleinhans. “But it’s not out of desperation. It’s an informed choice.”

The very attempt to verify marijuana’s risks has aroused the ire of physicians who think the issue is already settled. “We should be encouraging women who are pregnant to not use marijuana instead of incentivizing them to continue,” a critic of the study, Washington ob-gyn Pat Marmion, told A.P.

That position is hard to fathom given the unsettled state of the science and the fact that many women are already using marijuana to relieve pregnancy-related nausea. Virginia ob-gyn Mishka Terplan perceives a double standard, noting that drugs commonly prescribed for morning sickness may also have unknown risks. (My wife, for example, was prescribed compazine, a Pregnancy Category C drug, for morning sickness.) “We shouldn’t assume that because we classify something as illegal that it is shameful,” Terplan said, “and that because something is legal and prescribed, it’s helpful.”

Susan Weiss, who directs NIDA’s Division of Extramural Research, firmly rejects the suggestion that the existing evidence is adequate. “One of the big arguments about why this is unethical is that we already know the answers,” she told A.P. “That is not true….We’re living in this very large social experiment and we need to learn from it.”

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