WorldoutofWhack

Ambit has explained well in the graphic below about the drivers for lower GDP and their outlook going forward

My two cents

Buying consumer facing companies has been a winner strategy in India and this might continue in near future as Indian consumer is now willing to get leveraged to fund his consumption but these companies are not cheap and are overowned. Any further Liquidity tightness makes these companies vulnerable.

U.S. tariffs aren’t exactly having their intended effect. On Friday, the Wall Street Journal reported that U.S. steel imports grew 7 percent in October month on month, despite the 25 percent tariff President Donald Trump’s administration imposed on the product in the spring. U.S. steel workers are still benefiting from the tariffs; a 5 percent jump in domestic production this year has led to a 3 percent increase in steel manufacturing payrolls. But since U.S. producers still don’t make enough steel to meet domestic demand, steel prices in the United States have surged as well. The benchmark price for hot-rolled coiled sheet steel, for example, has climbed 22 percent in the past year, hurting U.S. industries that rely heavily on the commodity, such as the auto manufacturing industry. The report came a day after the Department of Commerce released new figures showing that the U.S. trade deficit reached its widest point in a decade in October – the fifth consecutive month of deficit growth – at $55.5 billion.
Official figures from Beijing released Saturday, meanwhile, showed that Chinese exports to the U.S. surged by nearly 10 percent in November, hitting $35.6 billion, while imports from the U.S. dropped by around a quarter. Bloomberg reported Thursday that Chinese solar panel exports also rose 66 percent in the third quarter year on year in spite of the 30 percent U.S. tariff implemented in January, thanks primarily to cuts to utility subsidies in China. The widening bilateral deficit between the U.S. and China is the result partly of robust consumer demand in the U.S. and front-loaded orders ahead of anticipated tariff increases, and partly of a 25 percent decline in U.S. exports to China, including an $800 million drop in soybean shipments. Bottom line: The fallout from a trade war is hard to predict because countless forces – from currency fluctuations to regulatory changes to macroeconomic trends – will have their say.
The U.S.-China tech war is going to get ugly. The arrest last week in Canada of Sabrina Meng Wanzhou, chief financial officer of Chinese tech giant Huawei, on a U.S. extradition request is rattling nerves in both countries. Meng is accused of helping her firm, the world’s largest supplier of telecommunications equipment, violate U.S. sanctions on Iran. But the legal merits of the U.S. case are largely beside the point. The U.S. is starting to take dead aim at China’s tech ambitions, and as U.S. national security adviser John Bolton hinted in an interview Thursday, the arrest was meant to signal that Washington won’t fight with kid gloves. As a result, according to South China Morning Post, Chinese corporate executives fear that they, too, could get locked up. U.S. executives with operations in China, in turn, are worried about retaliation – and for good reason. It’s not hard to imagine Chinese authorities targeting, say, an executive with a U.S. arms manufacturer for helping export arms to Taiwan in violation of Chinese law. For now, China appears to be trying to defuse the situation rather than strike back. Its Foreign Ministry tried Friday to reassure foreign businesses that Beijing would not resort to Washington’s tactics, and the Chinese government also said the issue would not complicate its fragile trade truce with the U.S. (On Saturday, however, China did warn Canada of unspecified consequences if Meng isn’t released.) Beijing’s response speaks to the tricky balancing act it must undertake to manage domestic nationalist sentiment and counter U.S. pressure on the one hand while, on the other, wooing wary foreign investors and keeping the slim possibility of a lasting deal to end a trade war open.
Either way, darker days are ahead for China’s tech sector. Japan – following the lead of Australia, New Zealand and the U.K. – is reportedly mulling a ban on government purchases of products made by Huawei and ZTE Corp., another Chinese telecom firm that ran afoul of U.S. sanctions on Iran.
Israel takes matters into its own hands. Since Tuesday, the Israeli Defense Force has been working to destroy cross-border tunnels allegedly dug by Hezbollah – with backing from Iran – in preparation for a potential new war on the Lebanese militant group. Israel called on the Lebanese military and U.N. peacekeepers in the region on Thursday to destroy one such tunnel, whose existence the U.N. force confirmed, saying it held “the Lebanese government, the Lebanese Armed Forces and United Nations Interim Force in Lebanon responsible for all events transpiring in and emanating from Lebanon.” Israel’s intelligence minister said Friday that the IDF may expand its tunnel-smashing operation into Lebanon if others don’t act on its behalf. And on Saturday, Israeli Prime Minister Benjamin Netanyahu tried to win support for the effort from Russian President Vladimir Putin during a phone call. Israel is in a position where it must act pre-emptively to eliminate potential threats. Clearly, it is already laying out a casus belli against Hezbollah.
Honorable Mentions
Germany’s Christian Democratic Union elected Chancellor Angela Merkel’s protege, Annegret Kramp-Karrenbauer, to replace her as head of the German ruling party.
Japan’s parliament passed a contentious bill paving the way for tens of thousands of foreign workers to come to the country, and its new defense plan calls for a record $240 billion in new military spending over the next five years.
The Philippines says it will buy 16 Black Hawk helicopters from the U.S., abandoning earlier plans to buy cheaper helicopters from Russia because of U.S. sanctions on Russian military exports.
The chief negotiator for the Iran-backed Houthi rebels in Yemen called for the country’s main port city, Hodeida, to become a neutral zone overseen by the U.N.

https://mailchi.mp/87998f8f7cde/daily-memo-tariff-trouble-casualties-of-the-us-china-tech-war-tunnels-into-israel?e=[UNIQID]

Weekly Commentary: Q3 2018 Z.1 and THE Cycle Peak

Some important Pointers

Evidence of tighter financial conditions, Total Business borrowings slowed markedly. After Q2’s 6.9% rate (strongest since Q1 ’16), Total Business debt growth slowed to 3.9%. The expansion of Corporate borrowings slowed markedly, from 7.2% to 4.1%. State & Local government debt contracted at a 1.4% pace (Q2 -0.38%). Winning the Piggy Borrower contest, perennially, was our federal government. Federal borrowings expanded at a 6.8% pace, down slightly from Q2.

Yet percentage growth rates don’t do justice late in a Credit Cycle. Outstanding Treasuries expanded $1.187 TN over the past four quarters (7.3%) and $1.774 TN over eight quarters (11.3%). On a seasonally-adjusted and annualized rate basis (SAAR), federal borrowings expanded $1.180 TN, almost the same as Q2.

So far in 2018, federal debt has expanded the most since 2010.( they are the ones sucking LIQUIDITY)

Total (Debt and Equities) Securities increased nominal $2.701 TN during Q3, and $7.344 TN in four quarters, to a record $95.057 TN. Total Securities ended the quarter at a record 460% of GDP. This compares to previous cycle peaks 379% (Q3 ’07) and 359% (Q1 ’00).

Securities market inflation continued to inflate Household Assets during the quarter, while the Bubble in Household Net Worth remains fundamental to the U.S. Bubble Economy.

Household Net Worth ended the quarter at a record 528% of GDP, up from the year ago 514% and Q3 2016’s 498%. Household Net Worth to GDP set previous cycle peaks at 484% (Q1 ‘07) and 435% (Q4 ‘99). (NOW YOU KNOW WHERE SPENDING IS COMING FROM)

Still, most would dismissively ask, where’s the Bubble? Well, Household Net Worth has inflated $50 TN (85%) since the end of 2008, which certainly has supported elevated confidence, spending and economic activity. And it’s clear that booming securities markets have been integral to the record expansion in Household perceived wealth. So, what have been the driving forces behind bubbling markets?

Rest of World (ROW) holdings of U.S. Financial Assets jumped nominal $558 billion during Q3 to a record $28.087 TN. ROW holdings were up $1.598 TN over the past year and $3.830 TN over seven quarters. ROW holdings increased to a record 136% of GDP, up from 100% ($14.646 TN) to end 2007 and 57% ($5.639 TN) to conclude 1999. Where in the world has all this “money” been coming from? Sustainable? Reversible?

The jump in Equities holdings masks a pivotal slowdown in ROW purchases of U.S. Debt Securities. Though purchases were positive during Q3, ROW holdings of U.S. Debt Securities actually contracted nominal $190 billion during the first three quarters of 2018. This contraction in ROW U.S. Debt Securities holdings ( corporate bonds) is in stark contrast to 2017’s gain of $747 billion and the $324 billion increase in 2016.

I would posit that tightening global finance – in particular, the de-risking/deleveraging dynamic that took hold in the speculator community – contributed to waning international demand for U.S. Corporate Bonds. At the same time, EM outflows and pressure on EM central banks to support faltering currencies led to sharply lower international demand for Treasuries (not to mention geopolitical frictions). Overall, it points to an important inflection point in international financial flows into U.S. securities markets. For much of the year, major flows into outperforming U.S. equities helped to conceal adverse repercussions. With U.S. equities succumbing to de-risking/deleveraging, markets generally will now confront momentous changes in the liquidity backdrop.

The confluence of the powerful global tightening of financial conditions, a significant decline in ROW debt purchases, the slowdown in bank lending and the now tenuous backdrop in the equities marketplace creates an extraordinarily fragile backdrop. Moreover, the current quarter has experienced a sharp slowdown in junk bond issuance and leveraged lending. What’s more, significant deleveraging has commenced in U.S. equities. Overall, it points to a troubling liquidity backdrop for both the markets and the U.S. economy, more generally.

I’ll add that “Periphery to Core Crisis Dynamics” are coming home to roost. Keep in mind that the initial faltering Global Bubble phase – de-risking/deleveraging at the “Periphery” – worked to exacerbated flows to – and speculative excess at – the “Core.” The huge increase in ROW Equities holdings is emblematic of speculative “blow-off” dynamics right in the face of rapidly deteriorating fundamental prospects. It recalls heightened systemic fragilities created by dysfunctional market dynamics in early-2000 and, even more so, in the second-half of 2007.

At this point, I’ll posit a (not unlikely) possible scenario. De-risking/deleveraging exposes problematic underlying speculative leverage in both equities and corporate Credit. A sharp tightening of corporate Credit conditions weighs on debt issuance and business borrowing more generally. Tighter finance and sinking equities prices engender some reassessment regarding the rationale for aggressive stock buyback programs. Further weighing on inflated market valuations, the rapidly deteriorating backdrop will also provoke some overdue rethink on the M&A front.

Meanwhile, the vast chasm between elevated consumer confidence and fading economic prospects will have to narrow. Household Net Worth has inflated $20 TN, or about 100% of GDP, in just the past three years ($50 TN since the end of ’08!). This surge in perceived wealth spurred consumption and boosted auto and home purchases (along with boats, campers, timeshares, cruises, etc.) After stoking discretionary and luxury spending, it’s reasonable to begin anticipating a problematic change in spending patterns.

There are many aspects of the unfolding downturn that go unappreciated. I worry about deep economic structural maladjustment. How many thousands of uneconomic enterprises have propagated from all the easy finance and surging asset prices? I have deep concern for Silicon Valley. If the unfolding trade and cold war with China wasn’t enough, they’re about to get the rug pulled out from under them by the financial markets. How much perceived wealth could be lost in a bursting Bubble of inflated technology shares and private business equity, compounded by a deflating Bubble in wildly inflated real estate prices surrounding the tech hubs? I fear a complete lack of understanding and preparation.

It’s difficult not to see the arrest of a top Huawei executive on the same day as the Trump/Xi summit as an ominous development. The CFO and daughter of the founder of one of China’s most powerful international technology conglomerates faces fraud charges and possible extradition to the U.S. In China, outrage. Sure, there was a weird level of ambiguity regarding the true gains from Saturday’s U.S./China trade meeting. But to see global markets convulse on the arrest of a Chinese executive rather starkly illuminates the acute fragilities the world now confronts.

Ten-year Treasury yields dropped 14 bps this week to 2.85%. German bund yields fell six bps to 0.25%. Not to be outdone, 10-year Japanese JGB yields declined three bps to 0.06%. No signs of confidence in the soundness of the global financial system from those three. Safe havens showed a pulse this week. Gold jumped $26 to an almost five-month high $1,248. The Japanese yen gained 0.8% and the Swiss franc increased 0.6%.

It was curious to see the U.S. dollar under some selling pressure (dollar index down 0.7% this week). But, then again… If our asset markets (i.e. stocks, fixed-income, real estate…) are as vulnerable as I believe and the American economy as maladjusted, there’s a credible bear case against the U.S. currency to ponder. We’ve certainly done our level best to swamp the world with dollars over recent decades.

A dollar break would really catch the speculator community (and investors) positioned poorly. It’s reached the point that NOTHING can be taken for granted in these chaotic financial markets. Which portends something really important: ongoing pressure to de-risk and deleverage. Why do I have the feeling I’ll be using Q3 2018 Z.1 data for Household Net Worth (along with both Equities and Total Securities to GDP, etc.) as THE Cycle Peak for years (decades?) to come?

http://creditbubblebulletin.blogspot.com/