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 (13 April 2018)

Pointing up Posted yesterday p.m.: SCARY FED
White House Plans to Escalate Trade Pressure on China The White House, confident that its hard-line strategy is succeeding, is planning to ratchet up the pressure on China by focusing on new tariffs and threatening to block Chinese technology investment in the U.S.

The additional moves come as President Donald Trump has told his senior aides to investigate the possibility of joining the Trans-Pacific Partnership, a move that would reverse a Trump campaign promise and further challenge China, which isn’t part of the trade pact.

For its part, China is looking to line up other countries against the U.S., Chinese officials said—especially in Europe, whose companies could benefit should China react to the stepped up pressure by retaliating against the U.S. Beijing has already responded to early volleys from Washington in the trade conflict with retaliatory tariffs of its own.

Administration officials familiar with the U.S. strategy say that the U.S. trade representative, as early as next week, will detail which products are on the list of $100 billion in Chinese goods subject to 25% import tariffs. The initial hit list of $50 billion in Chinese imports didn’t include some consumer staples such as clothing, mobile phones or shoes, to minimize consumer impact and limit domestic criticism. But trade experts say the sheer size of the expansion of the hit list makes the inclusion of consumer goods inevitable.

At the same time, the Treasury Department is crafting sharp prohibitions on Chinese investment in advanced U.S. technology, whether by acquisition, joint ventures, licensing or any other arrangement, according to a senior administration official. The agency is targeting China’s subsidization of domestic industries to turn them into so-called technology national champions, the official said.

The administration is debating whether to make the investment restrictions permanent, even if China changes its industrial policies, the official said. (…)

“China basically surrendered [with the Xi speech] and he [Trump] is probably going to put even more pressure on them before he accepts whatever their bottom line becomes,” said a person familiar with White House views. (…)

To try to limit domestic opposition to its tough line, the administration now is working on a program, which could cost billions of dollars, to compensate farmers suffering from Chinese retaliatory tariffs on U.S. crops. (…)

Here’s one via the WSJ:

The brewing U.S.-China trade war is compounding problems for companies that peddleused paper, milk jugs and metal. China is the top customer for the vast quantities of recyclable waste generated by the U.S., but the WSJ’s Bob Tita reports a 25% tariff on U.S. scrap aluminum and other recent Chinese restrictions on imported waste are sending the recycling industry into a tailspin. U.S exports of scrap plastic to China dropped 80% from October to January, and prices for mixed aluminum scrap dropped by about 15% over the past month, crumbling profit margins for processors and brokers that sell the material to China. Analysts say Chinese companies may end up buying more scrap aluminum from cheaper sources in Europe. In the U.S., some worry that trash collectors may simply toss recyclables in landfills if they can’t find other buyers.

U.S. Import Prices Are Unchanged

Nonpetroleum import prices ticked 0.1% higher (2.1% y/y) after two months of firm increase. Last 3 months: +4.4% annualized.

large image

image

TECHNICALS WATCH

Lowry’s Research warns of the low volume during the recent highly volatile sessions. “The market will likely need to show signs of significantly stronger Demand if a breakout from the recent trading range is to be sustained.”

spy

SCARY FED

David Rosenberg convincingly argues that the Fed has embarked us all in a completely new regime and that the Powell-led FOMC will prove very different to the Bernanke-Yellen led Fed. Importantly, gone is the Fed put as the minutes of the first Powell FOMC meeting reveal:

In fact the Fed, at the margin, took up its growth forecast and is far more confident over inflation heading back to 2% and staying there. The Fed staff also sees the prospect of the tight labor market getting even tighter.

f1a18f47-be28-411b-9278-e3ffebb8abfa_thumb[1]

The March meeting minutes tell us that participants (i.e. FOMC members) consider that everything is well balanced in this economy:

  • As in December, most participants judged the risks around their projections for real GDP growth, the unemployment rate, and inflation to be broadly balanced.
  • participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric.

Same with the FOMC staff:

  • The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced.
  • Risks to the inflation projection also were seen as balanced.

In effect, the Fed is comfortably positive on the economy, the labor market and inflation but has no clue as to how things might evolve if their balanced economy proves to be not so balanced. Yet, they all agree that the economy will remain strong enough to warrant 2 or 3 additional rate hikes in 2018 and another 3 in 2019 right when we are only 2 hikes away from an inverted yield curve. This while the U.S. and world economies are more indebted than ever.

Participants

expected that the first-quarter softness would be transitory, pointing to a variety of factors, including delayed payment of some personal tax refunds, residual seasonality in the data, and more generally to strong economic fundamentals. Among the fundamentals that participants cited were high levels of consumer and business sentiment, supportive financial conditions, improved economic conditions abroad, and recent changes in fiscal policy.

Amazingly, all eight FOMC participants at the meeting agreed on the outlook. All of them! They all agreed that the apparent Q1 weakness was “transitory”, even though the tax refund delays were very minor and that there was actually no “residual seasonality in the data” as the FOMC staff clearly stated:

(…) the incoming spending data were a bit softer than the staff had expected, and the staff judged that the softness was not associated with residual seasonality in the data.

None of the participants expressed any discomfort with the fact that consumer credit exploded $72 billion in Q4 2017, seasonally adjusted, and another $26B in January and February, and that consumer credit has grown at twice the rate of growth in disposable income since 2016, dropping the savings rate from a comfortable 5.9% in January 2016 to a truly uncomfortable historical low of 2.4% in December 2017. There was zero discussion on the possibility that Americans might decide to bring their debt/savings level to a more comfortable range. Zero thoughts that recent and upcoming interest rate increases could impact credit and spending.

And yet, weak spending in Q1 had nothing to do with delayed payment of some personal tax refunds and residual seasonality in the data. It was all because the savings rate rose to 3.4% in February, a huge 1.0% jump in 2 months to a still low level. Looking at the chart below, how much would you bet that the savings rate will remain at its current low level over the next 18 months? Would you say that the risks are balanced and that your confidence interval around your projection are approximately symmetric?

image_thumb[1]

We are discussing 70% of the U.S. economy here and all eight FOMC voters saw no reason to even discuss the risk that consumer spending might be weak because of historically low savings and excessively high debt. All eight penciled higher interest rates through 2019.

So much for the first Powell Fed meeting!

Yes, this is a new regime, brought by a lawyer chairman with very little experience and one of the most inexperienced FOMC committee ever. Scary!