FIG Topics of Interest

 

02/15/19

The markets are braced for the likelihood that the Commerce Department today (i.e., before Sunday's deadline) will release its recommendations on whether the U.S. should impose a tariff of up to 25% on imported autos on national security grounds.  The President will then have 90 days to make a final decision.

The global stock markets will likely sell off sharply if President Trump ultimately goes ahead with auto tariffs on the EU, Japan and other countries since autos are a significant macroeconomic sector and since U.S. auto tariffs (and retaliatory tariffs) would hurt earnings for most global auto companies.  The EU has said that it already has a list of retaliatory tariffs on U.S. products that it will impose if President Trump goes ahead with tariffs on European autos.

Click here to download a pdf of this article, Missile.pdf
 
 

02/14/19

“Under present circumstances a further slowdown in global growth could meaningfully boost U.S. recession odds, but it would have to be fairly large,” the authors write.
https://www.bloomberg.com/
While slowdowns abroad haven’t caused a recession in the U.S. in the past century, Goldman economist David Mericle and his colleagues dug into whether global threats have become more important in an interconnected world. They concluded the danger posed by other countries is higher than before, though it would still take a major pullback to potentially tip America into a downturn -- roughly a 4 percentage-point slowdown in global growth excluding the U.S.
The economists say the base-case probability of a recession over the next year of 14 percent would rise to 20 percent if global growth slowed 1 percentage point more than expected. The risk of recession would surge to 46 percent in the event of a 3-point deceleration. A 4-point moderation ups the odds to 64 percent.

Click here to download a pdf of this article, Missile.pdf
 
 

02/13/19

"The economy's current account is in long-term decline and the future growth of the economy will be increasingly dependent on foreign capital," said the investment bank in a report on Tuesday.
https://www.cnbc.com/2019/02/13/china-economy-morgan-stanley-predicts-chinas-account-deficit-in-2019.html
China will likely become more reliant on foreign capital as the country looks set to enter into years of shortfall in its current account, Morgan Stanley predicted in a report.
The last time China had a current account deficit was in 1993. A country may need to operate on borrowed means when it runs into a deficit as the total value of goods, services and investments it imports exceeds the total value it exports.

Unlike 1993, however, the investment bank predicts that the shift toward a shortfall might be "sustained," setting the world's second biggest economy on a path to becoming more reliant on foreign capital from 2020 onward.

China's current account surplus has slipped from 10.3 percent of its GDP in the third quarter of 2017, to just 0.4 percent in the third quarter of 2018. This year, the current account deficit could be 0.3 percent of its GDP, and widen to 0.6 percent in 2020, the investment bank predicted.

That pales in comparison to its golden days more than a decade ago, when China had a huge current account surplus of $420 billion, or 9.9 percent of its GDP in 2007.

The report blamed the shrinking current account on China's aging population, and plateauing market share in goods exports, among other factors.

"We expect China to shift to an annual current account deficit from 2019 onwards due to a slipping national saving rate amid an aging population," said the bank.

Click here to download a pdf of this article, Missile.pdf
 
 

02/12/19

Republican Sen. Marco Rubio is backing a new proposal to tackle one of Democrats' favorite talking points: stock buybacks.

The plan, unveiled Tuesday, would raise taxes on capital gains to discourage companies from pursuing share repurchases. The goal is to reduce the difference between what investors pay on capital gains than on dividends, which are taxed at individual income tax rates.

The measure aligns Rubio with Democrats who have argued that the benefits of the GOP's tax law have primarily helped corporations rather than households.

https://www.cnbc.com/2019/02/12/rubio-backs-new-proposal-to-tackle-stock-buybacks.html
Rubio is the chairman of the Small Business Committee, which is releasing a report on the issue on Tuesday.
"Tax policy changes to end this preference might, on their own, increase investment by shifting shareholder appetite for capital return," the report says.

Instead, it suggests using the revenue from a higher capital gains tax to encourage capital investment. The current tax law — passed by Republicans in 2017 with Rubio's reluctant support — allows businesses to fully and immediately deduct their expenses, but the popular provision phases out after 2022. The new proposal would make that measure permanent and expand the types of investments eligible for the deduction.

The report calls the Tax Cuts and Jobs Act a "missed opportunity."

"The existence of non-productive alternatives to capital investment, as a result, makes the product of the firm's American workers less valuable while at the same time increasing profits, making possible a world of higher asset prices, lower investment in the economy, and lower worker pay," it says.

The committee's proposal is part of a much broader report on U.S. and Chinese competitiveness, and critical questions — such as how high the tax on capital gains should be — remain unanswered.

The message against stock buybacks has become a central theme for the early Democratic presidential contenders for 2020 — and a narrative that Republicans have fiercely resisted. But Rubio was a GOP outlier during the debate over the tax law, arguing for a higher corporate tax rate to offset the cost of a bigger child tax credit. Since then, he has repeatedly highlighted the relatively slow growth in wages compared with the massive jump in share repurchases.

"When [a] corporation uses profits for stock buyback, it's deciding that returning capital to shareholders is better for business than investing in their products or workers," he tweeted in December. "Tax code encourages this."

Click here to download a pdf of this article, Missile.pdf
 
 

02/11/19

“I’ll say 50/50 we’ll get a deal,” Senate Appropriations Chairman Richard Shelby said on “Fox News Sunday.” “I hope and pray we do.”
https://www.bloomberg.com/news/articles/2019-02-10/mulvaney-says-can-t-rule-out-another-shutdown-over-wall-funding?srnd=premium-europe
Without a funding deal, nine federal departments and related agencies would shut down again.
The sticking point is over the number and purpose of immigration detention beds. Democrats are seeking a cap to force U.S. Immigration and Customs Enforcement, or ICE, to detain criminals rather than undocumented immigrants with no criminal history. Republicans are resisting a limit on grounds that criminals shouldn’t count toward it and ICE should have discretion.
There are currently 40,520 ICE immigration detention beds funded by Congress. Heading into the talks, the White House sought to increase the number to 52,000, while Democrats wanted a reduction to 35,520. Democrats have proposed a 16,500 cap on beds to be used for interior enforcement, with the rest to be used for those captured at the border, according to people familiar with the talks.
Lawmakers could resort to a resolution with funding through Sept. 30 if they can’t get a deal, but acting White House Chief of Staff Mick Mulvaney said on “Fox News Sunday” that Trump “cannot sign everything they put in front of him. There’ll be some things that simply we couldn’t agree to.”
Democrats are also demanding language in the bill aimed at blocking Trump from shifting funds to pay for the wall, according to a person familiar with the negotiations. The language could stymie executive actions to build the barriers and has become another hitch in the negotiations, the person said.
“He’s going to do whatever he legally can to secure the border,” Mulvaney said on NBC’s “Meet the Press,” one of two appearances on Sunday talk shows.
As of Saturday, it seemed that negotiators were focused on a proposal with border barrier funding of between $1.3 billion and $2 billion, said a person familiar with the talks. Details about where the fencing would go and a Democratic request to eliminate previously funded fencing in the National Butterfly Center, a conservation area close to the border in Mission, Texas, were still being negotiated.

Click here to download a pdf of this article, Missile.pdf
 
 

02/08/19

Low U.S. unemployment and rising wages should point to a healthy consumer, but worries about global growth, domestic U.S. politics and a U.S.-China trade war have been wearing on consumer and investor moods.
https://www.reuters.com/article/us-usa-stocks-weekahead/u-s-fund-managers-brace-for-consumer-slowdown-idUSKCN1PX19B

Wall Street expects fourth-quarter earnings growth of 14.5 percent for the S&P 500’s consumer discretionary index - below the 17.8 percent consensus from October at the beginning of the fourth quarter, according to data from Refinitiv.

And for the first quarter, analysts expect discretionary earnings to fall 1.4 percent, compared with expectations for 6 percent growth on Oct. 1.

For consumer staples, fourth-quarter earnings are expected to grow 4.5 percent, down from the 6.7 percent consensus in October, and are expected to shrink to 0.9 percent growth for the first quarter.

Click here to download a pdf of this article, 34882.pdf
 
 

02/07/19

In June, the High Seas tanker ship loaded up on ethanol in Texas and set off for Asia.
https://www.reuters.com/article/us-usa-trade-ethanol-insight/long-strange-trip-how-u-s-ethanol-reaches-china-tariff-free-idUSKCN1PW0BR
Two months later - after a circuitous journey that included a ship-to-ship transfer and a stop in Malaysia - its cargo arrived in China, according to shipping data analyzed by Reuters and interviews with Malaysian and Chinese port officials.

At the time, the roundabout route puzzled global ethanol traders and ship brokers, who called it a convoluted and costly way to get U.S. fuel to China. But the journey reflects a broader shift in global ethanol flows since U.S. President Donald Trump ignited a trade war with China last spring.

Although China slapped retaliatory tariffs up to 70 percent on U.S. ethanol shipments, the fuel can still legally enter China tariff-free if it arrives blended with at least 40 percent Asian-produced fuel, according to trade rules established between China and the Association of Southeast Asian Nations (ASEAN), the regional economic and political body.

Click here to download a pdf of this article, Missile.pdf
 
 

02/06/19

 “My analysis is that we are really heading for the abyss,” said one senior EU figure handling Brexit. “We may extend to June. But it is coming. The risk of no-deal is huge.” The drumbeat of planning helps those, like German chancellor Angela Merkel, who see the Brexit brinkmanship as potentially helping shift support in favor of a deal in Westminster.
https://www.ft.com/content/dddd1d26-295b-11e9-a5ab-ff8ef2b976c7
But the EU is also adjusting its thinking and energy, with an emphasis on three priorities: making sure voters do not find their leaders at fault for the costs of a hard Brexit; mitigating the worst effects of such a crash-out, even if it temporarily bends some EU principles; and, finally, working out how to pick up the pieces afterwards. “A three months extension is likely,” said Rem Korteweg, a research fellow at Clingendael, the Netherlands Institute of International Relations. “But it is not to give the UK a shot at another agreement. It is to give the EU more time to prepare itself for no-deal. They will not say this out loud, but this is the calculus.”
Two of the most difficult challenges of a no-deal Brexit — the Northern Ireland border and the hole left in the EU budget from missing UK contributions — are still largely sidestepped in public EU preparations.
The issues are so important and potentially so divisive they will be the last to be publicly addressed in contingency planning — and probably the first to be reopened with the UK in the wake of a no-deal exit.

Click here to download a pdf of this article, Missile.pdf
 
 

02/05/19

Financial types have long had a preoccupation: What will the Federal Reserve do with all the fixed income securities it purchased to help the U.S. economy recover from the last recession? The Fed’s efforts to shrink its holdings have been blamed for various ills, including December’s stock-market swoon. And any new nuance of policy — such as last week’s statement on “balance sheet normalization” — is seen as a really big deal.
I’m amazed and baffled by this. It gets much more attention than it deserves.

https://www.bloomberg.com/opinion/articles/2019-02-05/stop-worrying-about-the-fed-s-balance-sheet?srnd=premium
The run-off of the Fed’s balance sheet had a smaller-than-expected impact on the yields of those securities. Longer-term Treasury yields remained low, and the spread between them and the yields on agency mortgage-backed securities didn’t change much. It’s hard to see how the normalization of the Fed’s balance sheet tightened financial conditions in a way that would have weighed significantly on stock prices.
Better explanations for this fall’s weakness in the equity market abound. For one, economic growth and corporate profits looked set to falter in 2019, as the effects of corporate tax cuts waned and the labor market tightened. Demand for scarce labor should increase its share of income, crimping profits. And if the economy didn’t slow enough on its own, the Fed was likely to raise interest rates to make sure that happened. These developments weren’t good for an equity market that had been accustomed to strong earnings growth and an accommodative central bank.
The concept of using the balance sheet as a monetary-policy tool isn’t new, either. It has always been part of the Fed’s toolkit. The shift is merely in emphasis. When the Fed was clearly on a tightening path, the attention was on interest rates. The Fed has made it clear that this is the primary tool of monetary policy and that hasn’t changed a whit. However, now that the balance sheet is getting more attention and the direction of short-term interest rates is less certain, the Fed is simply reminding people that the balance sheet is still available in circumstances where its primary tool might be insufficient. 

Click here to download a pdf of this article, Missile.pdf
 
 

02/04/19

Huawei Sting Offers Rare Glimpse of the U.S. Targeting a Chinese Giant
https://www.bloomberg.com/news/features/2019-02-04/huawei-sting-offers-rare-glimpse-of-u-s-targeting-chinese-giant?srnd=premium
The sample looked like an ordinary piece of glass, 4 inches square and transparent on both sides. It’d been packed like the precious specimen its inventor, Adam Khan, believed it to be—placed on wax paper, nestled in a tray lined with silicon gel, enclosed in a plastic case, surrounded by air bags, sealed in a cardboard box—and then sent for testing to a laboratory in San Diego owned by Huawei Technologies Co. But when the sample came back last August, months late and badly damaged, Khan knew something was terribly wrong. 

Click here to download a pdf of this article, Missile.pdf