Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 11 JULY 2019

Fed’s Powell Faces Senators After Rate Cut Signal Federal Reserve Chairman Jerome Powell will testify before the Senate Banking Committee after signaling to a House panel that the central bank is ready to cut interest rates later this month.

(…) “It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook,” Mr. Powell said Wednesday.

He noted that data from Europe and Asia have “continued to disappoint” and that manufacturing, trade and investment are weak “all around the world.” (…)

“I think it’s quite important that we fight…to keep inflation up to 2% and use our tools to achieve that.” (…)

Asked by Rep. Patrick McHenry (R., N.C.) on Wednesday if the Fed “has the capacity to make independent monetary policy decisions under law,” Mr. Powell answered affirmatively.

“We will always focus on doing the job you have assigned us, and we will always do it to the best of our ability and based on objective analysis and facts,” Mr. Powell said.

Chairman Powell’s testimony started with

Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective. However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.

(…) Officials didn’t see an imminent downturn and expected the economy to continue growing steadily, but the minutes said many officials “attached significant odds to scenarios with less favorable outcomes.”

Officials also ticked through a list of reasons why lower interest rates might help the economy. Some believed it could “help cushion the effects of possible future adverse shocks to the economy,” the minutes said. Others believed lower rates were warranted given weak inflation readings and a diminished prospect that low unemployment would give way to unsustainable price pressures.

(…) Fed officials recognized they could increase borrowing costs and send stock prices falling if officials didn’t cut interest rates, absent an improved economic outlook. (…)

The June meeting included a long discussion of growing signs of softness in the economy, including weak shipments and orders of new capital goods, lower profit growth forecasts from private-sector analysts, declines in manufacturing activity, weaker global growth, softer export sales and elevated policy uncertainty. (…)

Let’s admit it, gone is the “data dependent” Fed and gone is the notion of “transitory” weakness in inflation. The FOMC is very nervous about its baseline outlook in this “highly uncertain world” and has shifted to risk management very much in tune with what it believes financial markets are saying. Puppet Fed?

A 25 points cut in 2 weeks is now baked in. Fifty points could well scare everybody off…

Back to data, the Fed must have been relieved by the latest stat on consumer spending but two different data sets on retail trade keep the outlook very “uncertain”: if retail demand is improving, why are retailers not seeking more workers? Retail job openings are down 16% YoY in May.

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More data:

Wholesale inventories increased 0.4% (7.7% y/y) during May following an unrevised 0.8% April gain. (…) Wholesale sales rose 0.1% during May (-0.1% y/y) following a 0.4% decline. (…)

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And just when Powell says inflation remains “muted”:

CPI for all items rises 0.1% in June as shelter index rises, gasoline index falls The index for all items less food and energy rose 0.3 percent in June (SA); up 2.1 percent over the year (NSA).

Core CPI jumps 0.3% MoM as core Goods rise 0.4% following a long series of monthly declines. Apparel is up 1.1%.

Sources of uncertainty:

Mnuchin Urges Suppliers to Seek Huawei Exemptions Treasury Secretary Steven Mnuchin in recent days urged U.S. suppliers of Huawei Technologies to seek exemptions to resume sales to the blacklisted Chinese firm.

(…) Treasury Department spokeswoman Monica Crowley disputed assertions that Mr. Mnuchin was advocating action on the part of Huawei suppliers.

“Secretary Mnuchin speaks with CEOs in the private sector on a regular basis,” Ms. Crowley said. “At no point has the Secretary ‘urged’ any company to take any action with regard to Huawei.”

The actions are noteworthy as the Treasury Department isn’t directly involved in determining the parameters of the blacklist, a national-security process run by the Commerce Department. (…)

Trump Team Sends Defiant Signal to Beijing by Meeting Hong Kong Activist
U.S. Launches Probe of French Digital Tax French proposal will apply a 3% tax on revenue that big technology companies reap in France

U.S. Trade Representative Robert Lighthizer said Wednesday his office would launch a probe of the digital services tax, or DST, under the same broad law the Trump administration relied on for its trade conflict with China.

“The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies,” Mr. Lighthizer said in a statement. “The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce.”

The French proposal, likely the first in a wave of proposed digital-services taxes to take effect in Europe, will apply a 3% tax on revenue that companies like Alphabet Inc.’s Google or Amazon.com Inc. reap in France from such activities as undertaking targeted advertising or running a digital marketplace. (…)

Officials and business leaders in Washington have argued that the tax unfairly targets American companies and could lead to double taxation and multiple new overlapping tax regimes. (…)

(…) Trump has used this type of inquiry against China to attack it with unilateral tariffs. This isn’t about patiently waiting for a ruling from the WTO, this is the stuff of trade wars.

While the French initiative certainly has flaws, Paris is also being singled out for political and tactical reasons. Several other countries are introducing a digital tax too, and France would happily ditch its levy in favor of an OECD solution. What’s really motivating Trump’s team is the chance to drive a wedge between the French president Emmanuel Macron and his euro zone partners. Germany has held back from introducing a tech tax of its own, no doubt fearful of U.S. retaliation, while Ireland – whose low corporate tax rates are a magnet for tech giants – has fought hard against the idea. 

Remember too that Macron makes a virtue of opposing Trump. He was the only European leader to openly object to starting trade talks with the U.S., and he’s fighting to keep the Iran nuclear deal alive. The tech tax is just another way for Trump to apply counter-measures. (…)

The U.S. president is showing no signs of easing his tariff barrage and the trade-dependent EU economy is stuttering, making it easier for him to apply pressure. Trump is a true test of European unity, and Europe hasn’t passed it yet.

‘Reshoring’ Report Finds Factory Work Not Returning to U.S. Despite escalating tariffs between the U.S. and China, American imports of manufactured goods from China and 13 other Asian countries rose 9% in 2018 to $816 billion, the largest annual increase in nearly a decade and outpacing a 6% increase in domestic manufacturing gross output, according to consulting firm A.T. Kearney Inc.

(…) “What we do see is a sort of China diversification,” he said, as companies look to reduce their exposure to trade tensions, rising Chinese labor costs and other risks.

Some American companies have halted or delayed plans to expand domestic plants as tariffs on Chinese imports increase the cost of products from bicycle parts to the components used to assemble loudspeakers.

Others are reshaping their supply chains, moving some production to Vietnam, the Philippines, Cambodia and India. Such shifts can take months and sometimes lead to logistics bottlenecks and other complications. Although labor tends to be cheaper in other parts of Southeast Asia, logistics infrastructure and factory capacity often aren’t as well-developed as in China. (…)

Although some companies are looking at bringing manufacturing back to the U.S., Mr. Sutherland said those efforts tend to focus on precision manufacturing and operations, where automation and technology help reduce the higher cost of domestic labor.

U.K. Warship Blocks Iranian Vessels From Intercepting Tanker Three Iranian vessels attempted to impede the passage of a commercial tanker, the British government said, a move that threatens to escalate already high tensions in the region.

President Trump made fresh threats to ramp up U.S. sanctions against Iran for stepping up its enrichment of uranium, tweeting that America’s response “will soon be increased, substantially.” (…)

Yet the U.S. faces an uphill challenge to recruit other countries to isolate Iran. While the IAEA’s 35-member board includes U.S. allies who may be open to increasing pressure on Iran, many countries view the Trump administration’s maximum-pressure campaign against Tehran as the primary cause of Tehran’s decision to expand its nuclear work.

Russia’s ambassador to the IAEA, Mikhail Ulyanov, on Wednesday slammed what he called the “destructive U.S. policy” toward Iran and said by refusing to fulfill its own obligations under the deal, Washington had “lost any right to demand this from others.” (…)

Mark Fitzpatrick, a former U.S. nonproliferation official and an associate fellow with the International Institute for Strategic Studies in Washington, said the U.S. would struggle to win backing in the IAEA for stepped-up action against Iran, as it did a decade ago.

“Unlike in the past, when the world was largely united against Iran, now nearly every other member of the Board of Governors blames the U.S. for instigating the crisis,” he said.

Call me We invite you to join us today for the Blackstone Webcast:

“The Case Against a Melt-Up (or Meltdown),” featuring
Joe Zidle, Chief Investment Strategist, Private Wealth Solutions
Byron Wien, Vice Chairman, Private Wealth Solutions

Byron and Joe will discuss the “muddle-through” outlook for the U.S. economy, the challenges to global growth, and the pivotal role that trade will play in the months ahead.

To access the webcast, visit www.blackstone.com/2019/july-webcast on July 11 at 11am ET.
This webcast is pre-recorded. No registration is required. Slides will be available at the above link at 11am ET.

THE DAILY EDGE: 10 JULY 2019

Fed chair cements case for cut in interest rates

Chair Jerome H. Powell

(…) Since our May meeting, however, these crosscurrents have reemerged, creating greater uncertainty. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data.

In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted. (…)

  • Small-business selling prices continue to point to higher core CPI ahead. This trend also makes it hard to justify deep rate cuts.

Source: Pantheon Macroeconomics (via The Daily Shot)

U.S. JOLTS: Job Openings Rate Dips; Hiring Weakens

The Bureau of Labor Statistics reported that the total job openings rate eased to 4.6% during May from an unrevised 4.7% in April. It was unchanged from twelve months earlier. The job openings rate is the job openings level as a percent of total employment plus the job openings level. The ability to find workers to fill openings also weakened. The hiring rate slipped to 3.8% from the record 3.9% in April. Employers let people go at a steady rate as shown by the layoff & discharge rate which held m/m at 1.2%, up from the record low of 1.1% in March. Individuals remained ready to find new work. The quits rate held steady at a near-record 2.3% where it’s been since June of last year. (…)

The level of job openings declined 0.7% (+2.8% y/y) to 7.323 million after falling 1.4% in April. Job availability was plentiful. Private-sector openings rose 1.8% y/y while government sector job openings jumped 13.8% y/y. (…)

Total hiring declined 4.4% (-2.3% y/y) to 5.725 million. Hiring in the private sector fell 2.9% y/y while government sector hiring gained 6.0% y/y.

Private job openings peaked last November and have declined 4.6% since.

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Private openings were up 1.8% YoY in May. Private hires are down 2.9%. Openings in Professional and Business Services, about 25% of total private openings, are down 10% from their January peak and Hires are off 4.3% YoY.

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What can Japan’s machine tool orders tell us about world industrial production?

Source: Pantheon Macroeconomics (via The Daily Shot)

Euro zone cuts growth and inflation forecasts as U.S. trade uncertainty looms

The commission confirmed its prediction that economic growth in the euro zone would slow this year to 1.2 per cent from 1.9 per cent in 2018. It also revised down its estimate for next year’s growth, which is now seen at 1.4 per cent instead of the 1.5 per cent forecast in May.

Risks for the bloc have increased, the commission said, and mostly come from “the elevated uncertainty” around United States’ trade policy, as Washington keeps threatening punitive tariffs on a broad range of EU products.

Fears of increased trade tensions “could also trigger a shift in global risk sentiment at times when valuations appear stretched across many asset classes,” the EU economics commissioner Pierre Moscovici told a news conference

“This could lead to rapid tightening of global financial conditions,” he added. (…)

The Case for Cancelling Student Debt

In this editorial for Fortune, Democratic presidential candidate Bernie Sanders argues canceling all $1.6 trillion of student debt would boost the economy by around $1 trillion over the next decade, creating jobs and giving graduates the financial space to buy homes, cars, and open businesses. Sanders argues the generation that graduated after the financial crisis is still grappling with crippling debt, and that the years after WWII can provide a guide for making education affordable again. Fortune

China Producer Prices Stall, Adding to Industry Woes Index continues a slide toward deflation as sluggish demand, falling commodities prices eat into company profits

A gauge of factory-gate prices in June was unchanged from a year earlier, official data showed Wednesday—the first stall since September 2016, when an upswing began after a prolonged deflation. That followed May’s 0.6% rise in the producer-price index and was below economists’ expectations. (…)

Consumer inflation held steady last month, as slower gains in nonfood prices offset faster increases in food. The June consumer-price index was up 2.7% from a year earlier, matching May’s pace, the statistics bureau said. The core CPI, which excludes volatile energy and food prices, also maintained its May pace, at 1.6%. (…)

Food prices in June were up 8.3%, accelerating from May’s 7.7%. Combined, the gains in fruit and pork prices boosted the headline index by 1.16 percentage points, the statistics bureau said.

Nonfood prices increased 1.4%, moderating from May’s 1.6%. Lower gasoline and diesel prices together cut the headline CPI reading by about 0.07 percentage point, said Dong Yaxiu, an economist with the statistics bureau.

  

Pointing up Walmart’s Supplier Says Chinese Factories in ‘Desperate’ State

The world’s largest supplier of consumer goods says China’s factories are getting “urgent and desperate” as worried U.S. retailers accelerate a move out of the country amid heightened trade tensions.

China will see more factory shutdowns as the trade war that’s roiled the global supply chain exacerbates an exodus, said Spencer Fung, chief executive officer of Li & Fung Ltd. The company, which designs, sources and transports consumer goods from Asia for some of the world’s biggest retailers including Walmart and Nike, is being pushed by American clients to shift production out of China.

“U.S. clients are definitely very, very worried,” Fung said in an interview with Bloomberg. “Everyone is making razor-thin margins already and most people have a huge percentage in China. So if the biggest source increases the price by 25%, they are worried,” he said, referring to the scale of tariffs threatened on all Chinese imports to the U.S. by President Donald Trump. (…)

“Nobody’s investing, nobody’s buying. The trade war is causing people to stop investment because they don’t know where to put the money,” the Silicon Valley-trained CEO said. “Many people put the money into Vietnam with one tweet,” he said, referring to Trump’s habit of announcing American trade policy over the social media tool.

The Hong Kong-based supply chain and logistics provider, which relies heavily on trade between the world’s two biggest economies to make its fortune, will see China’s contribution to its total sourcing fall from 59% in 2015 to less than half this year for the first time.

While Chinese factories suffer, manufacturers in other Asian hubs become beneficiaries — up to a point. American retailers have already taken up all the manufacturing capacity in Vietnam in their rush out of China, said Fung, highlighting the lack of scale that prevents other destinations from fully substituting for China’s manufacturing might.

“Vietnam, for example, is full, completely full,” he said. “There’s no extra capacity for the U.S. companies to get in.”

Pointing up Pointing up Chinese factories, meanwhile, are lowering asking prices in their desperation, creating an opportunity for European and Japanese consumer brands. Li & Fung is advising its non-U.S. clients to move in and take advantage of the mature supply chain and lower costs.

“It is a buying opportunity for European and non-U.S. retailers,” Fung said, “In China, there are a lot of factories with less and less orders. They’re offering actually pretty good prices to anybody.” (…)

Ross Spells Out Reprieve for Huawei Commerce Secretary Wilbur Ross said the U.S. would grant licenses to American companies that want to sell technology to Huawei Technologies as long as the sales wouldn’t put national security at risk, expanding on a pledge made last month by President Trump to Chinese President Xi.

(…) Huawei will remain, however, on the Commerce Department’s “entity list,” Mr. Ross said Tuesday, meaning that companies that want to sell U.S.-sourced technology to Huawei must first apply for a license. The department will continue to review such licenses with a “presumption of denial,” he said. (…)

Anything very different than before Osaka?

Big Tech’s Buyback Spree Nears Its Limits Surge in sector’s share repurchases is outpacing its ability to fund them

The 20 most active tech companies on the buyback scene spent a little over $261 billion over the 12-month period ended with their most recent fiscal quarter reports, according to data from S&P Capital IQ. That comprised about 40% of the total dollars spent by the 100 largest buyers in the S&P 500 over that time. The largest few accounted for the lion’s share;Apple Inc., Oracle , Qualcomm , Cisco Systems and Microsoft spent a combined $175 billion over the past 12 months—triple their combined spending over the same period two years ago.

Much of the recent surge can be traced to the tax overhaul enacted in late 2017, which effectively freed up the enormous piles of cash many tech companies had stockpiled offshore. The accelerated repurchase activity also may have helped offset concerns about slowing growth at many of these companies.

Apple alone has spent a little over $75 billion buying back shares over the past four quarters, accounting for about 4% of cumulative shares traded during a time that the company’s iPhone business has slowed dramatically. Oracle spent an unprecedented $36 billion buying back shares in its fiscal year that ended May 31. The software giant’s overall revenue grew less than 1% for the period.

But while most giant tech companies are hardly short of cash, the recent pace of buybacks seems unsustainable for many. Oracle’s buybacks over the past year have reached the equivalent of nearly three times the company’s free cash flow for the period. The company’s buybacks did cool a bit in its most recent quarter, and only $5.8 billion remains on its current plan. But S&P Global still lowered its credit rating on Oracle last week, saying its leverage ratio could climb to around 2 times if the current pace continues in the current fiscal year. (…)

Japan Inc. Breaks Buybacks Record as Investor Pressure Pays Off A record wave of share buybacks by companies such as Sony, SoftBank and Nomura Holdings has cheered stockholders who say Japan’s bosses are finally warming to their interests.

Japanese companies announced an unprecedented ¥6.059 trillion ($55.6 billion) of share repurchases in 2018, I-N Information Systems Ltd said.

That was 4% higher than the previous record set two years earlier, according to I-N’s data, which goes back to 2004. In the first half of 2019, announced buybacks have totaled 5.825 trillion yen, more than double the tally from the first six months of last year, I-N research shows. (…)

Last year, companies in Japan’s Topix index spent an equivalent of 0.8% of the index’s end-2017 market value buying back stock, Goldman research shows.

In contrast, S&P Dow Jones Indices data shows companies in the S&P 500 spent $806 billion last year on buybacks. On the same basis, that works out to 3.5% of the index’s market value at the end of 2017. (…)