In the last week of 2018 the Dow saw the worst-ever Christmas Eve selloff, followed by the greatest one day gain and then another drop. Needless to say, steep losses and extreme volatility reigned in the final quarter of 2018 and have continued in the first month of 2019. The WSJ summed it up 2018 as follows:
“Stocks rise on the year’s final trading day, but not enough to offset bruising last few weeks of selling. U.S. stocks drifted higher, but closed out 2018 with their steepest annual declines since the financial crisis, reflecting growing unease among investors about the health of the nearly decade-long bull run. For the year, the Dow industrials were down 5.6%, the S&P 500 off 6.2% and the Nasdaq down 3.9%. Stock markets elsewhere around the world fared even worse. The Stoxx Europe 600 shed 13% in 2018, while the U.K.’s FTSE 100 declined 13% and Japan’s Nikkei Stock Average fell 12%. The volatility spared few asset classes. Oil prices hit multiyear highs in October, only to tumble in the fourth quarter as investors grew increasingly worried about a potential supply glut.”
At the mid-January World Economic Forum in Davos, Switzerland, the investment experts seemed to uniformly agree that, globally, things are moving toward lower growth and an eventual recession. A coming recession would wreak much greater havoc on the EU and Japan, who still have negative interest rates and are printing money. The WSJ reported that “Europe seems stuck, its economic recovery running out of steam and its politics shaken by the growing strength of nationalist politicians in many European countries. The International Monetary Fund cut its 2019 global growth forecast by 3.5% based on weaker-than-expected economic performance in Europe, especially in Germany and Italy. Decision-making could be further hampered after EU elections in May. Anti-EU parties are widely expected to make headway in the European Parliament.”
On Jan 25th, a bill was passed that ended the partial US government shutdown, an event which had no tangible impact and few people even would have known was happening if media outlets with agendas had not sensationalized it. A short-term spending bill was passed, however this quick fix will only last until February when the issue will need to be addressed again.
Trump Signs Spending Bill, Ending Longest Government Shutdown in U.S. History (1.25.19)
Guggenheim’s Minerd Says a Recession Will Be Tough When It Gets Here (1.23.19) Bloomberg
Europe’s Political Funk Sets Back Its Economy (1.23.19) WSJ
U.S. Indexes Close With Worst Yearly Losses Since 2008 (12.31.18) WSJ
Volatile Stocks Test Investors Resolve (12.29.18) WSJ
Dow Industrials Fall to End Volatile Week (12.29.18) WSJ
Chinese Dumped $1B of U.S. Real Estate in Third Quarter, Extending Retreat (12.25.18) WSJ
Bloomberg reported: “The Nikkei 225 Stock Average skidded below the 20,000 level and was headed for bear market territory in the latest blow for Japanese equities experiencing their worst December on record. The Nikkei 225 fell 5.1 percent to 19,147.45 in Tokyo at the midday break Tuesday, with all members in the red. The blue-chip stock gauge dropped below 20,000 for the first time since September 2017.”
The WSJ reported: “U.S. stocks fell, notching their second straight session of losses, after downbeat Chinese economic data added to signs of slowing growth around the world. Major indexes began the day lower and never managed to break higher, weighed down by a report showing China’s exports unexpectedly slid in December. The data showed both slowing global growth and uncertainty over trade relations have started to take a toll on the world’s second-largest economy. Dimmer expectations for global growth and disappointing holiday sales have forced many U.S. companies to slash their forecasts, pushing the estimated earnings-growth rate for the quarter to around 11%, according to FactSet. Elsewhere, the Stoxx Europe 600 fell 0.5% following a downbeat session across Asian markets.”
The WSJ also reported: “China’s overall December exports unexpectedly fell 4.4 percent from last year. China’s December trade surplus with the U.S. fell to $29.87 billion from $35.54 billion in November. WATCH: Trump will win the trade war with China, says Gary Shilling | China’s economic expansion slowed to its slowest pace in nearly three decades last year, as a bruising trade fight with the U.S. exacerbated weakness in the world’s second-largest economy. The 6.6% growth rate for 2018 is the slowest annual pace China has recorded since 1990.” At the World forum in Davos, the IMF lowered its global growth forecasts, affirming what most of the global finance managers had already been forecasting as well.
IMF Lowers 2019 Global Growth Forecast (1.21.19) WSJ
China Annual Economic Growth Is Slowest Since 1990 (1.21.19) WSJ
The World Braces for Slower Economic Growth (1.21.19) WSJ
Stocks Slip on Signs of Slowing Growth (1.14.19) WSJ
US trade deficit with China grows to a record and it’s likely even worse than the data show (1.13.19) https://www.cnbc.com/2019/01/14/china-2018-full-year-december-trade-exports-imports-trade-balance.html?__source=newsletter%7Cmorningsquawk
Japanese Stock Rout Accelerates in Worst December for Almost 60 Years (12.24.18) https://www.bloomberg.com/news/articles/2018-12-25/nikkei-225-falls-below-20-000-as-japanese-stock-rout-accelerates?srnd=premium
Brexit & the EU
In December PM May brought back the Brexit deal she negotiated with the EU, which both the liberal and conservative parties said was DOA, nine of her cabinet ministers resigned and a no confidence vote was taken, however she retained enough votes to remain PM. Weeks later May’s agreement was officially voted down and another no confidence vote was taken, which May survived a second time. The plan has since been revamped and another vote is scheduled for next week, however prospects for acceptance by the EU and passage in Parliament are low. If the plan fails to pass again, May could resign or face a third no confidence vote which could remove her from office. Former British Foreign Minister and primary architect of the original Brexit vote, Boris Johnson, is being named as a likely successor, which would almost guarantee a hard Brexit and an ejection form the EU market. UK markets and the pound will initially take a hit, but once the trade deals the UK has negotiated with the rest of the world are revealed, they will ascend, just as they did after the initial Brexit vote. These trade deals will likely undercut EU trade deals, positioning UK markets and the pound to continue to outperform the EU, as the UK has outperformed the EU in almost every economic measurement, since its citizens voted to leave the EU three years ago.
Goldman Sachs Says Brexit May Help Sterling Shine (1.24.19) Bloomberg
Pound Heads for Best Week Against Euro Since 2017 (1.24.19) Bloomberg
U.K. Parliament Roundly Rejects May’s Brexit Plan (1.15.19) WSJ
Britons Most at Risk in a Messy Split from EU are Least Worried (1.10.19) WSJ
Central Banks & Currencies
Ever since the crisis of 2008, there has been a desire by many nations of the world to be less reliant on the US. Since that time, a new world bank, the AIIB, is now fully operational. Treaties have been signed to directly exchange currencies, bypassing the USD. Another global payment system is about to be launched which will be an option to the current SWIFT system. In the next global financial crisis, other nations won’t have to rely on the US if they don’t want to.
“The endgame is an alternative global payments system that will substitute for SWIFT and be controlled by Russia and China with participation by countries including Turkey, Iran, North Korea and possibly many others. This alternative system will exclude the U.S. and U.S. dollars, finally creating a way for nations to trade and settle balance of payments without using dollars and without relying on portals such as SWIFT and Fedwire that are controlled by the U.S. In turn, this means that U.S. economic sanctions will no longer be effective because countries will have an easy way around them using this new nondollar system. Putin is insistent on this new system and is close to achieving it. When the new system is rolled out, you won’t be able to say you weren’t warned “We are not setting the target of moving away from the dollar — the dollar is moving away from us…”- Vladimir Putin “…and those who take respective (sanctions) decisions are shooting themselves not just in the foot but slightly higher, as such instability in calculations in dollars creates a desire of many global economies to find alternative reserve currencies and create settlement systems independent of the dollar,” Putin added, speaking at an investment forum in Moscow, according to Russian TV network RT.” -Market Watch
The WSJ also reported, “the banks hit hardest by the financial crisis have retreated from overseas lending in the decade since the 2008 collapse of Lehman Brothers, marking a rare example of a sector in which leverage has been curtailed even as global debt has boomed. The total amount of cross-border bank debt has dropped from a peak of $35.453 trillion in the first quarter of 2008 to $29.456 trillion in the second quarter of this year, a fall of nearly 17%. The decline in interbank lending—the credit banks extend to other banks—has been particularly steep. Two of the top contenders to become the next European Central Bank president said they don’t know if the institution will be able to raise interest rates this year.”
The global boom may be over, but this doesn’t mean the world is about to stumble into a recession. Labor markets, in particular remain quite strong, businesses may be reluctant to invest, but not to hire. Nonetheless, central banks need to proceed carefully, “in a low-growth world, a little bit of monetary tightening can go a long, and painful, way.” – WSJ
Fed Weighs Earlier End to Bond Portfolio Runoff (1.25.19) WSJ
The Global Boom, Barely Begun, May Be Over (1.23.19) WSJ
ECB Presidential Contenders Wary on Chance of 2019 Rate Hike (1.25.19) Bloomberg
Great Retreat from Global Bank Lending Continues (12.31.18) WSJ
Putin Says U.S. Actions Driving The World Away From The Dollar (11.29.18) https://www.marketwatch.com/discover?url=https%253A%252F%252Fwww.marketwatch.com%252Famp%252Fstory%252Fguid%252F47e23128-f3df-11e8-ad71-a9fa5576a6ef&link=sfmw_tw#https://www.marketwatch.com/amp/story/guid/47e23128-f3df-11e8-ad71-a9fa5576a6ef?mod=dist_amp_social
Debt, Downturns & Recessions
The US economy is still strong; growth is good, unemployment is at historical lows and will probably remain so in the first half of this year, but the signs of recession are appearing and there are great concerns on the horizon. While interest rates were low, all the Fannie Mae & Freddie Mac bonds that were purchased by the Federal Reserve with 3% and 4% coupon rates easily paid the debt service attached to them. Last year the US prime rate began the year at 1.5% and treasuries had a 3% over all interest rate, but in 2019 our prime rate is now 2% and treasuries are starting with a 4% or more rate. If interest rates are raised two more times, as they are slated to be, our debt service will rise to 5%, which means most of the bonds that were purchased will no longer be able to pay the debt maintenance on what the US owes.
According to the WSJ: “In the aftermath of the financial crisis, a swath of individuals and families began a long and painful deleveraging process. Businesses, meanwhile, quickly moved in the opposite direction—loading up on cheap debt to the point where many observers now worry that highly leveraged companies pose a threat to the global economy. U.S. corporate debt has climbed to roughly 46% of gross domestic product, the highest on record, according to data from the Federal Reserve and Commerce Department. Businesses in emerging markets, such as China, have gone on an even bigger borrowing binge, taking advantage of ultralow interest rates and, in some cases, state-driven policies designed to propel economies forward.”
There is a pension crisis brewing in the private sector, but even more so in the government sector. Simon Black wrote, “The World Economic Forum reported that in 2015, worldwide pensions were underfunded by $70 TRILLION. That is larger than the top 20 economies in the world, combined. In the US alone, federal, state, and local government pensions are $7 trillion short on the funding they need to pay what they have promised. And none of this includes Social Security’s almost $50 trillion of unfunded obligations. And the private sector isn’t in great shape, either. US corporate pensions are a combined $553 billion in the hole. And one quarter of those funds are expected to go broke within a decade.”
The WSJ also reported that: “Los Angeles officials are socking away money for the next recession. The nation’s second-largest city has set aside close to $500 million across several funds to help weather emergencies. States commonly use rainy-day funds to smooth the jolt from recessions, which can come quickly when sales- and income-tax revenue plummets. Thirty-one states boosted rainy-day fund balances in the last fiscal year, and 26 have projected increases this year, according to the National Association of State Budget Officers.” The article goes on to list many other cites beginning to prepare for the next recession. The coming recession has been a major focus in the first month of 2019 by US cities, major investment analysts, as well as at the World Financial Forum in Davos, Switzerland. It would probably be wise for the average investor to be paying attention as well.
Los Angeles and Other Cities Stash Money to Prepare for a Recession (1.24.19) WSJ
Debt, Dope & Casinos Chicago is Circling the Drain (1.8.19) SMC
Your Tax Dollars at Work Govt Officially Forgiving Student Debt (12.31.18) SMC https://www.sovereignman.com/trends/your-tax-dollars-at-work-govt-officially-forgiving-student-debt-24388/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=20181231_student_debt
Corporate Debt Hitting Record Levels (12.29.18) WSJ https://www.wsj.com/articles/corporate-debt-is-reaching-record-levels-11546099201
Congress Quietly Formed a Committee to Bail out 200 Pension Funds (12.26.18) SMC https://www.sovereignman.com/trends/congress-quietly-formed-a-committee-to-bail-out-200-pension-funds-23169/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=20181226_end_year
Chinese Dumped $1B of U.S. Real Estate in Third Quarter, Extending Retreat (12.25.18) WSJ
The Biggest Emerging Market Debt Problem Is in America (12.20.18) https://www.project-syndicate.org/commentary/collateralized-corporate-loans-possible-crisis-by-carmen-reinhart-2018-12?utm_source=Project+Syndicate+Newsletter&utm_campaign=c2eb3b265f-sunday_newsletter_23_12_2018&utm_medium=email&utm_term=0_73bad5b7d8-c2eb3b265f-93489681
I Thought This Deal Was Absurd, But Pensions Are Piling In (12.8.18) SMC
Time to Worry (11.30.18) Weekly Standard https://www.weeklystandard.com/james-grant/congress-is-plenty-bipartisan-when-it-comes-to-ignoring-the-national-debt
There is much political turmoil across the world; the battle between globalism and nationalism is on center stage and nationalism has clearly gained the upper hand. There are many internal and international conflicts going on at the same time, and even more agendas.
On January, 23 the US declared its support of the Venezuelan opposition leader who, along with the Venezuelan parliament, declared the current leader Maurado a usurper and himself to be the legal and rightful leader of the country. Greece is edging toward political uncertainty with the Macedonia agreement which is being rejected by various factions and is resulting in many internal conflicts. French citizens have been demonstrating in mass for the last nine weeks and the government has capitulated to their demands. Italy ignored the EU and passed a budget which the EU condemned. The US is sanctioning Iran, Israel has been carrying out military strikes on Iranian targets, and there is mass public unrest and demonstrations against the Iranian government. China has declared war on both its Christian & Islamic populations, attempting to eradicate these faiths, and if they deem it necessary, even the citizens who hold them.
The Chinese technology company Huawei and the Chinese government have been universally condemned, their business executives arrested in many nations for espionage, and the use of their services declared illegal. Forbes wrote: “The arrest of Huawei CFO Meng Wanzhou in Canada last month for breaking U.S. sanctions law, followed by the firing of Huawei sales executive Wang Weijing in Poland last week shows China can be a bad actor, exactly as Washington believes. The Poland story centers around spying allegations, where Wang allegedly sought trade secrets from the government.’ China is losing the PR battle, for years, U.S. companies have been complaining that China does not honor intellectual property rights. Washington believes tech powerhouses like Huawei owe much of their growth to IP theft.”
China’s growth estimates don’t look good and are getting worse. They are clearly losing the trade war and its about to get a lot worse for them. Quite simply, 90% of China’s GDP comes from exports, so the US is affecting 90% of their trade with us, but exports account for only 15% of US GDP, thus China is only affecting 15% of our trade with them. No matter how you look at it, the US easily wins any trade war between China and the US.
The Russians and the Chinese have been pushed together into an uneasy alliance, something the US has always tried to strategically prevent. The US has always attempted to work with China against Russia or Russia against China. President Trump tried to do this with Russia to prevent an ever aggressive China from gaining more ground, but was prevented from doing so by Congress and the inept Mueller investigation.
U.S. Recognizes Venezuelan Opposition Leader as Interim President (1.23.19) WSJ
China Is Losing The Trade War In Nearly Every Way (1.14.19) Forbes https://www.forbes.com/sites/kenrapoza/2019/01/14/china-is-losing-the-trade-war-in-nearly-every-way/#6b083b927f03
French Antigovernment Protesters March for Ninth Straight Weekend (1.13.19) WSJ
Greece Edges Toward Political Uncertainty Over Macedonia Deal (1.10.19) WSJ
Huawei Targeted in U.S. Criminal Probe for Alleged Theft of Trade Secrets (1.16.19) WSJ https://www.wsj.com/articles/federal-prosecutors-pursuing-criminal-case-against-huawei-for-alleged-theft-of-trade-secrets-11547670341?mod=hp_lista_pos1
Venezuela’s Congress Declares President Nicolas Maduro a Usurper as Opposition Leader Rises (1.15.19) https://www.theblaze.com/news/venezuela-congress-maduro-usurper?utm_source=Sailthru&utm_medium=email&utm_campaign=Daily-Newsletter__PM-Final%202019-01-15&utm_term=TheBlaze%20Daily%20PM%20-%20last%20270%20days
China Applies Xinjiang’s Policing Lessons to Other Muslim Areas (12.23.18) WSJ https://www.wsj.com/articles/china-applies-xinjiangs-policing-lessons-to-other-muslim-areas-11545566403
China and Russia Inch Closer Together (12.13.18)
In First for Europe, Brussels Rejects Italy’s Budget (10.23.18) WSJ
Five Eyes Intelligence Alliance Builds Coalition to Counter China (10.28.18) Reuters
Antiestablishment Candidate Wins Brazil’s Presidential Race (10.29.18) WSJ