Month: August 2018

One of the cited reasons behind today’s market slide which started in Asia and promptly swept the rest of the globe, is a belated appreciation of Tuesday’s news that the Trump administration is now considering more than doubling proposed tariffs on a further $200 billion worth of Chinese goods to 25%, up from an original 10%.

But what exactly prompted Trump to push for the sharp reset in Chinese tariffs?

The answer was actually first given by Trump first, when in a candid CNBC interview the president said that he was not only watching the US trade deficit with China, but also its currency, which had dropped “like a rock” recently, suggesting that trade war was morphing into currency war after he berated the Fed for hiking rates and pushing the dollar higher.

Fast forward to today, when the WSJ gives some further color, noting that while “the administration didn’t spell out a particular rationale for increasing the tariff…. the reasons include anger over the Chinese government’s failure to approve the merger of U.S.-based Qualcomm Inc. and Dutch chip maker NXP Semiconductors, which forced the companies to scrap a deal aimed at boosting Qualcomm’s reach into new markets.”

The WSJ also cites “industry officials who have discussed the move with the White House” and who said that another, perhaps far more important reason for the tariff increase “is to compensate for the decline in the value of the yuan by about 6% over the past two months.“

“It’s important countries refrain from devaluing currencies for competitive purposes,” a senior administration official said, and although he didn’t accuse China of acting in that fashion, the implication was clear.

Yet another reason that forced Trump’s hand is that as several banks have recently pointed out, the Yuan devaluation to date has effectively offset the adverse impact to Beijing from the $34 billion in tariffs enacted on Chinese goods, mainly machinery and components (to which China retaliated with tariffs on the same amount of U.S. exports, especially farm products).

But whatever the reason, the longer the trade war continues, the more Trump will find himself in a bind: on one hand he wants lower rates and a weaker dollar, on the other he keeps escalating by enacting ever bigger (and higher) tariffs on China, which are sure to prompt a broad inflationary response in the US economy as we have already discussed. Here is the WSJ:

The proposed tariff increase poses big risks for both the U.S. and global economy. A 25% tariff would boost the cost of a range of U.S. imports at a time when inflation has begun to pick up. It would become another factor for the Federal Reserve to consider as it decides how quickly to raise interest rates.

“This gets you nothing,” said Fred Bergsten, founder of the Peterson Institute for International Economics, a Washington, D.C., free-trade think tank. “It adds to inflation pressure and interest rates and [would] strengthen the dollar, which makes trade situation even worse” for the U.S., he said.

Worse, not only are US farmers getting crushed by Trump’s tariffs, but domestic companies are starting to feel the burn:

Keith Weinberger, chief executive of Empire Today, a flooring company in Northlake, Ill., said he “might be able to offset” a 10% tariff on his purchases of Chinese vinyl flooring. “But there’s nothing you can do about 25.”

Meanwhile, in corporate America, it appears that there is just one thing executives are talking about: tariffs.

As for China’s response, there are two angles: what it says, what it does and what it could do.

Starting with the latter, and continuing the tit-for-tat retaliation in the trade/currency war, higher-than-anticipated tariffs will encourage Beijing to let the yuan slide even more, exacerbating the currency war and potentially making Trump dictate monetary policy to the Fed.

In fact, China can keep devaluing the Yuan until its capital controls “firewall” finally cracks: recall that this was the trigger that prompted a global bear market (from which the US was spared) in 2015/2016 when China lost a total of $1 trillion in reserves to defend its current against an onslaught of capital flight.

Then there is what China says and on Thursday, Beijing urged the United States to “calm down” and return to reason after news that Trump may hike the tariffs from 10% to 25%.

Wang Yi, the Chinese government’s top diplomat, said U.S. efforts to pressure China would be in vain, urging its trade policymakers to “calm down”.

“We hope that those directly involved in the United States’ trade policies can calm down, carefully listen to the voices of U.S. consumers…and hear the collective call of the international community,” Wang, a member of the country’s state council, or cabinet, said in Singapore. “The United States’ method of adding pressure will not, I’m afraid, have any effect,” Wang told reporters on the sidelines of a regional forum.

Finally, when it comes to what China does, look no further than the Yuan, whose sharp devaluation started in mid-June, when Trump formally launched the trade war, announcing that new tariffs on $50BN in Chinese products will come into effect, followed just days later with the launch of the next, $200BN round of tariffs.

This is how China has responded so far.

And with the Yuan hitting the lowest level against the dollar in a year overnight, the ball is now in Trump’s court. Any further escalation will only accelerate the Yuan devaluation, strengthen the dollar, and – eventually – breach China’s capital control firewall at which point 2018 will finally become 2015 all over again.

And the biggest irony: it Trump really wants to defeat China, instead of criticizing the Fed for hiking, he has to encourage Powell to do precisely what he has been doing so far, as Eric Peters explained over the weekend:

“The best way to bring Beijing to its knees is by running a tight monetary policy in the US. China has the world’s most overleveraged, fragile financial system.” In 2008, China’s total debt-to-GDP was 140%. It is now roughly 300%, while GDP is slowing.

“The economy is held together by capital controls. If those fail, the whole system fails.” The capital flight in 2015/16 cost the government $1trln in reserves, and that was with ultra-dove Yellen in charge. Imagine what would have happened with Volcker at the helm. “The Chinese are dying to get their money out.”

All Trump has to do, is help them do it and watch as China’s economy crumbles from the inside.

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Authored by Michael Snyder via The Economic Collapse blog,

Warren Buffett’s favorite indicator is telling us that stocks are more overvalued right now than they have ever been before in American history. 

That doesn’t mean that a stock market crash is imminent.  In fact, this indicator has been in the “danger zone” for quite some time.  But what it does tell us is that stock valuations are more bloated than we have ever seen and that a stock market crash would make perfect sense. 

So precisely what is the “Buffett Indicator”?  Well, it is actually very simple to calculate.  You just take the total market value of all stocks and divide it by the gross domestic product.  When that ratio is more than 100 percent, stocks are generally considered to be overvalued, and when that ratio is under 100 percent stocks are generally considered to be undervalued.  The following comes from MSN…

That being said, the Buffett Indicator, while it’s not a flawless indicator, does tend to peak during hot stock markets and bottom during weak markets. And as a general rule, if the indicator falls below 80%-90% or so, it has historically signaled that stocks are cheap. On the other hand, levels significantly higher than 100% can indicate stocks are expensive.

For context, the Buffett indicator peaked at about 145% right before the dot-com bubble burst and reached nearly 110% before the financial crisis.

So where are we today?

Source: Advisor Perspectives

Right now we are at almost 149 percent, which is the highest level ever recorded…

Where does the Buffett Indicator stand now? It may surprise you to learn that, at nearly 149%, the total market cap to GDP ratio has never been higher. It’s even higher than the 145% peak we saw during the dot-com bubble.

In recent days we have seen a “tech bloodbath”, but that was nothing compared to what is eventually coming.  Ultimately, the stock market would need to fall by at least one-third in order for prices to be properly balanced again.

And it appears that Warren Buffett is taking his own advice.  His company is currently sitting on more than 100 billion dollars in cash…

Having said that, it does seem like Buffett himself is paying attention and agrees that the market is generally expensive. After all, the lack of attractive investment opportunities has resulted in Berkshire Hathaway accumulating nearly $110 billion of cash and equivalents on its balance sheet. Plus, Buffett has specifically cited valuation when discussing the absence of major acquisitions lately.

Warren Buffett didn’t become one of the wealthiest men in America by being stupid.  He knows that valuations are absurd right now, and he is waiting to strike until valuations are not so absurd.

And he knows that another recession is inevitably coming.  I wrote about some of the trouble signs yesterday, and more trouble signs seem to pop up on a daily basis now.

Earlier today, CNN published an article entitled “Two recession warning signs are here”…

Home sales have declined in four of the past five months as housing prices have grown — but paychecks have remained stagnant. Many people can’t afford to buy homes, and those who can are taking on a lot of debt to get into them.

I feel really bad for those that purchased a home in recent months, because those poor people are getting in right at the top of the bubble.  The housing bubble is about to burst in a major way, and there will be a tremendous amount of pain afterwards.

And we received more bad news about the housing market on Wednesday.  According to Redfin, housing demand plunged 9.6 percent in June…

The long list of housing headwinds is finally taking its toll on potential buyers. Housing demand fell 9.6 percent in June, compared with June 2017, according to a monthly index from Redfin. That is the largest decline since April 2016.

CNN’s second “warning sign” is the fact that the yield curve is about to invert…

The Federal Reserve, which is finishing up its two-day meeting Wednesday, is expected to raise its target rate two more times this year. Higher rates have boosted short-term US Treasury bond rates. But the longer-term bond rates haven’t risen along with the shorter-term rates, because investors are growing wary about the economy over the long haul.

With two more interest rate hikes planned, the Fed could boost short-term rates higher than long-term ones, inverting the so-called yield curve. An inverted yield curve has preceded every recession in modern history.

If you don’t understand the yield curve or you just want a deeper examination of this issue, please see my previous article entitled “Beware – The Last 7 Times The Yield Curve Inverted The U.S. Economy Was Hit By A Recession”.

In recent weeks, there has been renewed interest in my economics website as people begin to wake up and understand that a major economic crisis is looming.  Of course the truth is that we are way, way overdue for a stock market crash and another recession.  The only thing that is surprising is that it took us so long to get here.

Sadly, most people are still very much asleep.  Average Americans spend most of their waking hours staring at either a television or a computer screen, and the big media companies control almost all of the media that we are so voraciously consuming.  Instead of thinking for themselves, most people simply regurgitate what they have been fed by the media giants, and we are never going to turn things around if we continue to allow “the matrix” to tell us what to think.

The Buffett Indicator is very simple, but it is also very accurate.  If you want to do well in the stock market, you want to buy low and sell high, and right now we are in absurdly high territory.  Stock valuations always return to their long-term averages eventually, and many believe that the coming stock market crash is going to arrive sooner rather than later.

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It would appear that Turkish President Erdogan is not a fan of Kenny Rogers as he watches his nation’s currency collapse into worthlessness, he refuses to “fold ’em”, instead doubling down on retaliatory threats against the Trump administration.

The U.S. “move will likely only incense Erdogan and a commensurate response is already promised,” Timothy Ash, a strategist at BlueBay Asset Management in London, said in emailed comments.

Turkey remains particularly exposed to shifts in investor sentiment, given its large external financing needs, and the reaction is clear – another 5 handle collapse in the Lira to a new record low…

As The Telegraph reports, the Turkish foreign ministry warned that Washington’s sanctions move “will greatly damage constructive efforts” to solve outstanding issues and told Washington it would retaliate.

“Without delay, there will be a response to this aggressive attitude that will not serve any purpose,” it said.

Foreign Minister Mevlut Cavusoglu, who is set to meet US Secretary of State Mike Pompeo in the next few days, also warned that the move “will not go without response”.

“The market lurches from one negative event to another,” said Nigel Rendell, a senior analyst at Medley Global Advisors in London. “The net result being the erosion of foreign appetite for Turkish assets and an ever weaker lira.”

As Bloomberg notes, the one-year dollar-lira currency swap rate jumped to the biggest premium on record to the three-month contract after the central bank unexpectedly refrained from raising rates on July 24 — a sign that investors are demanding more compensation for longer-dated securities to protect themselves against an acceleration in price growth.

“It’s bad,” said Cristian Maggio, head of emerging-market research at TD Securities in London. “Diplomacy has never been that bad in many years, the economy is slowing and there’s a concrete risk of a hard landing; from a financial viewpoint, the central bank will be forced to hike again unless the upside dollar-lira move reverses, but I’m afraid it won’t.”

Finally, as a reminder, these are one-for-all, all-for-one NATO allies… food for thought eh?

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In 2015, at the peak of the commodity-crush induced wave of energy defaults, a high-yield bond fund at Third Avenue in froze withdrawals to avoid having to divest holdings at fire-sale prices. That set off a chain of events that rattled credit markets and deepened one of the worst selloffs in years.

Fast forward to today, when Swiss multi-billion asset manager, GAM Holdings announced it has frozen withdrawals at some of its bond funds after a surge in redemptions from clients who sought withdraw their money following the suspension of manager Tim Haywood, the latest in a series of setbacks that sent the company’s shares into a tailspin. 

GAM’s troubles started last month, when as we reported at the time there was market speculation that a market neutral quant fund it had purchased in October 2017, Cantab Capital Partners, was in trouble, with some pointing fingers at AQR. Perhaps, but it turns out that GAM was also involved when the fund warned of a writedown due to losses at one of its quant hedge funds. The announcement launched a slide in its shares that only accelerated after this week’s suspension of Haywood, who headed the firm’s second-largest strategy, and a warning by CEO Alex Friedman that clients may allocate less money to the firm because of volatile market conditions, accelerated the slump.

Quoted by Bloomberg, Chairman Hugh Scott-Barrett sought to soothe investor fears, saying he’s open to all ways to strengthen the stock price.

“The board of directors and the management team are committed to considering all avenues to optimize shareholder value as we continue to build on the many achievements to date,” he said in a statement Thursday.

It only made things worse, and as Zuercher Kantonalbank analyst Michael Kunz wrote in a note to clients, the fund freeze “actually brings GAM out of the frying pan and into the fire.” The first was certainly raging in GAM’s stock price today, which plunged 12% in Zurich trading, wiping out a third of the company’s value in the past month.

On Thursday, GAM announced that the redemption halt came into effect on July 31, Bloomberg reports. That day, an investigation into Haywood raised issues with his risk management procedures and record keeping, and GAm said that it had suspended the manager. Trying to prevent fears of a Madoff-style fraud, the asset manager said at the time that the probe had not raised concerns about Haywood’s honesty and that there had so far not been a material impact on investors.

However, while it remains to be determined if Haywood was a criminal, the bigger problem now facing GAM is how to ringfence his losses: the boards of the investment pools “are now considering all future steps, including liquidations, for 7.3 billion Swiss francs of assets managed in the strategy Haywood oversaw.“

There is a word for this: firesale.

Although there is enough liquidity to pay investors back, the firm said “such actions would lead to a disproportional shift in their portfolio composition, which could compromise the interests of remaining investors.”

Making matters worse, the assets in the bond strategy are spread over different funds and share classes, making an effective cleanse all but impossible. What is more embarrassing, is that despite the alleged impropriety, the GAM Multibond Absolute Return Bond Fund, which has about €2 billion in assets, still could not outperform the market and according to Bloomberg trailed 92% of peers over the past five years.

Another problem is that Haywood’s bond fund was not a “pure play” but was unconstrained, which basically gave Haywood permission to invest in anything and everything that he felt could deliver returns within the broad category of fixed income. And as Bloomberg’s Mark Gilbert writes, “GAM, for its part, recognized that the more esoteric the products it offered, the higher the fees it could charge.”

And speaking of complexity, Kunz, the analyst at Zuercher Kantonalbank, wrote that Friedman a year ago explained that bond funds Haywood headed had “integrated additional strategies like trade financing into the products.” Haywood also oversaw 2.9 billion francs in trade finance funds and 653 million francs in other fixed-income portfolios.

“All this is reminiscent of the equity funds that in the wake of increased outflows during the financial crisis of 2008 were suddenly sitting on private equity positions that had become entirely too large,” Kunz wrote.

The last major fund freezes in Europe came in the wake of the Brexit vote when investors pulled money from U.K. property funds, fearing real estate values could plummet. That led asset managers to halt redemptions of funds with about 18 billion pounds ($23.6 billion) of assets.

What happens next and do we get a rerun of 2015 when redemption halts snowballed, leading to a sharp drop in the bond market, which then quickly spilled over into other asset classes? Here is what Gilbert thinks happens:

For now, this is a GAM problem rather than one for the broader market. And it’s entirely proper that it should halt redemptions rather than sacrifice values by dumping assets at whatever prices it can get. But it’s a reminder to investors everywhere that – as the financial crisis a decade ago proved – when everyone rushes for the exit at once, values can get trampled swiftly and irredeemably.

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Will the war in Yemen become the next battleground in the ongoing Iran-Israel proxy war for the Middle East?

The past year has witnessed a more out in the open proxy war between the two grow in Syria, but the role of both in Yemen has been more obscured: Israel has echoed US charges that Iran supplies Yemen’s Shia Houthi rebels with ballistic missiles capable of hitting Riyadh, while the Shia rebels have accused the “Zionist” Saudis of massacring the civilian population as the kingdom’s covert intelligence sharing alliance with Israel has become public knowledge of late. 

While the two have waged what is largely up to this point a war of words in Yemen, trading accusations of operating in the shadows, Israel has now openly threatened to intervene off the coast of Yemen if Houthi forces block the vital waterway through which cargo ships bound for Israel pass from Asia. 

According to a breaking Reuters story, “Israel would deploy its military if Iran were to try to block the Bab al-Mandeb strait that links the Red Sea to the Gulf of Aden, Prime Minister Benjamin Netanyahu said on Wednesday.”

This is the first significant threat of deploying military force issued from Tel Aviv in the Yemeni theater, and comes after the temporary halt in shipments through the strategic Bab el Mandeb strait which began a week ago. The halt followed a Saudi accusation that Iran-backed Houthi rebels in Yemen had attacked two Saudi oil tankers traversing the waterway, driving home the threat that the conflict poses to a key chokepoint in international trade and the flow of Gulf oil to world markets. The Houthis for their part claimed they had actually attacked a Saudi warship rather than oil tankers.

Saudis have in previous months accused the Houthis of attacking Saudi commercial ships passing through the strait with surface-to-surface missiles supplied by Iran. In early April, for example, the coalition said a Saudi oil tanker in the Red Sea was hit in a Houthi attack off Yemen’s main port city of Hodeidah, and escaped with minor damage after another coalition ship intervened. 

An estimated 4.8 million barrels of oil are shipped daily through Bab al Mandeb that connects the Red Sea with the Arabian Sea off the coast of Yemen, Djibouti, and Eritrea.

Meanwhile major Western media have largely ignored the devastating Saudi military intervention in Yemen, now in its third year, which has resulted in possibly up to 70,000 deaths, according to some humanitarian and activists group accounts. 

Yemen’s Houthis have on several occasions threatened to block the vital Bab al-Mandeb strait along with last week announcing naval capabilities of striking Saudi ports. 

Simultaneously, there’s a growing standoff in another major oil transit point, the Strait of Hormuz in the Persian Gulf, where Iranian military leadership (specifically the elite IRGC) and the Pentagon have exchanged threats over oil tankers’ safe passage. Though Iran has issued veiled threats of blocking the Hormuz strait, it’s not directly addressed fighting near Bab al-Mandeb, possibly playing a much more behind the scenes and reserved role in Yemen. 

On Wednesday, Netanyahu announced the following at a military parade in Haifa: “If Iran will try to block the straits of Bab al-Mandeb, I am certain that it will find itself confronting an international coalition that will be determined to prevent this, and this coalition will also include all of Israel’s military branches.”

Israel’s defence minister, Avigdor Lieberman, in a separate speech echoed the prime minister’s charge at the same event, saying he had “recently heard of threats to harm Israeli ships in the Red Sea” while giving no further specifics to back the claim.

The halt of oil shipments could provoke an escalation of the conflict with external powers intervening in a bid to assist Saudi Arabia and the UAE in defeating the Houthis and dealing a blow to Iran’s alleged regional presence.

By the same token, the halt potentially offers Saudi Arabia and the United Arab Emirates an opportunity to focus international attention on resolving a civil war aggravated and turned into a regional conflict by the two Gulf states’ military intervention in March 2015.

Rather than proving to be a swift campaign that would have subdued the Houthis, the intervention has turned into a quagmire and a public relations fiasco for Saudi Arabia and the UAE.

International criticism of their conduct of the war is mounting as a result of its devastating human cost. Voices in the US Congress, the British parliament and other Western legislatures as well as human rights groups calling for a halt of arms sales to Saudi Arabia are growing ever louder.

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Papa John’s is going to extreme measures to erase all evidence founder John Schnatter ever existed from its 5,212 location pizza chain, sending detailed instructions its store owners on how to remove every shred of the former Chairman. 

Store owners should remove Schnatter’s signature from the wooden paddles used to take pizzas out of the oven — and replace it with images of vegetables or cheese — and swap out window signs featuring a smiling Schnatter with online ordering signage, according to the seven-page email, a copy of which was obtained by The Post.

A total of 10 items to be removed include a wall poster of Schnatter and NFL great Peyton Manning and even signage on Papa John’s pickup trucks. –NY Post

Also to be removed are plaques hanging on the walls with Schnatter describing how their pizzas are made – replaced with photos of a dough maker with the caption “our FRESH DOUGH story.” 

Franchisees are told they can replace the photos of Schnatter’s beloved gold Camaro with one of two options featuring a Garden Special veggie pie or one called The Works.

“In most cases the Camaro plaque can be unscrewed and the plaque screwed back in,” the company helpfully advises.

Franchisees are instructed to remove the cutouts of Schnatter and Manning, which include a “Welcome to our Stores” banner, but are told that “there is no replacement for this item.” –NY Post

Meanwhile, the board has also enacted a poison pill which prevents Schnatter – who already owns 29% of the company, from increasing his stake by more than 15%. 

Schnatter has in turn hired a high-powered LA attorney and has sued the chain to obtain documents he claims will cast his racially charged comments in a new light.

Schnatter resigned from the company in July following Forbes alleging he made racially insensitive comments during a “diversity media training” conference call with marketing firm Laundry Service. During the call, Schnatter was asked how he would distance himself from racist groups. “Colonel Sanders called blacks n—–s,” Schnatter allegedly said, before complaining that Sanders never faced public backlash.

He also reflected on his early life in Indiana, where, he said, people used to drag African-Americans from trucks until they died. He apparently intended for the remarks to convey his antipathy to racism, but multiple individuals on the call found them to be offensive, the source said.

Following the Forbes report, Schnatter wrote to the board of directors, claiming that Laundry Service tried to blackmail the pizza chain for $6 million to keep quiet about his use of the N-word during an answer to a question over whether he’s a racist. He also says that he refused to work with Kanye West over the artist’s use of the N-word. 

Schnatter resigned his post last week at the behest of Papa John’s board after confirming the Forbes’ report. However, he said the comments were taken out of context and that he was provoked into using the N-word after Laundry Service executives on the call suggested the pizza chain bring on performer Kanye West as a co-spokesman for television spots and promotions.

Schnatter said he refused to work with West because “he uses the ‘N’ word in his lyrics,” according to the letter. It was later on the call that Schnatter said he used the actual word when pressed whether or not he was a racist. –CNBC

“I then said something on the order of, Colonel Sanders used the word ‘N,’ (I actually used the word,) that I would never use that word and Papa John’s doesn’t use that word,” Schnatter told the board. “Let me be very clear: I never used the ‘N’ word in that meeting as a racial epithet, nor would I ever.”

And now Schnatter is being erased from his own company. 

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