Tuesday, November 5, 2019

The Fed has been flooding the world with money ever since QE

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Monday, August 19, 2019

Why the US China trade war is happening

China has been making serious progress to becoming a world class economy financially and militarily. Donald Trump appears to recognize this and has launched a Trade War against China. Gary Shilling explains this dynamic in his new post on bloomberg.

The escalating trade war between the U.S. and China has reached a fever pitch, with financial markets seeming to lurch on every new development no matter how insignificant. That’s understandable, but what investors need to know is that in a world of surplus goods and services, the buyer has the upper hand.

Sure, both sides are under considerable pressure to reach a deal. President Donald Trump faces re-election next year, and the longer the trade disruptions drag on, the bigger the potential for a steep stock market selloff and the deeper the recession I think the U.S. economy has already entered. Xi Jinping, China’s de facto president-for-life, is strapped with a slowing economy, with the 6.2% rate of expansion reported for the second quarter probably double the truth. Also, some Communist party elite fret over Xi’s power and his provoking the U.S. and other countries with aggressive military expansion and the heavy-handed Belt and Road program.

Nevertheless, the basic issue is China’s challenge to the U.S. for global supremacy and the importance of technology in this struggle. China’s growth has depended on Western equipment and cheap local labor to produce inexpensive goods that could be freely exported to North America and Europe. With slower growth in the West and muted demand for everything, including imports, that game is over. So, too, is Chinese growth through infrastructure spending. The result has been excess capacity, ghost cities and a huge increase in debts.

So China must turn to domestic growth, but with the earlier one child-per-couple policy, the labor force will be shrinking for decades. Hence the need for technology-driven productivity. But China is only starting on domestic technology development and therefore desperately needs help from the West. For years it has been demanding the transfer of technology as the price of Western firms doing business in China. Trump seems well aware of China’s long-run game plan and determined to retard it.

Meanwhile, the slide in China’s economy will intensify as Chinese and foreign producers accelerate their shift to even-lower-cost Asian countries that are out of the line of the U.S.-China trade war fire. These include Vietnam, India, Malaysia, Taiwan and Thailand. Already, the direct and indirect effects of the trade spat have dropped China from being America’s largest trading partner to third place behind Mexico and Canada. U.S. bilateral trade with China fell 14% in the first half of 2019.

Declining imports from China have been offset by purchases elsewhere. U.S. imports from Vietnam leaped 33% in the first half. In June, exports to the U.S. from South Korea, Taiwan, Japan and Singapore rose by a combined 9% from a year earlier, using a three-month moving average, while their exports to China fell 9%. Singapore’s shipments to China plunged 23% in May from a year earlier, the fourth drop in five months. Much of those imports are components that China assembles for final export to the West.

But despite Trump’s hopes, manufacturing is not returning to the high-cost U.S. Manufacturing output dropped 1.1% in June from its December peak, and the Institute for Supply Management’s manufacturing index fell again in July, this time to its lowest level since 2016.

Rising costs in China have encouraged manufacturers of apparel, footwear and other low margin consumer items out of China in recent years, but now the departure of electronics and other high margin products are troubling Beijing. And Chinese leaders are aware that once these operations leave and labor is trained and supply chains established elsewhere, they are unlikely to return.

Foxconn, which assembles Apple’s iPhones and iPads, mostly in China, is considering shifting production elsewhere. It has plants in Brazil, Mexico, Japan, Vietnam, Indonesia, the Czech Republic, the U.S., Australia and other countries. Only 25% of its manufacturing is outside China, but Young-Way Liu, the head of Foxconn’s semi-conductor business group, recently said the company’s manufacturing capacity outside China is adequate to supply Apple and other customers with products for the U.S. market, and that production could be expanded at facilities worldwide “according to the needs of our clients.”

Meanwhile, Apple is asking suppliers to consider moving final assembly of some products out of China. This would involve a third of production for some devices, including iPhones, iPads and MacBooks, and destinations under consideration include other Southeast Asian countries. Nintendo is shifting some output of its Switch video game console to Southeast Asia from China. Japan’s Sharp, which is controlled by Foxconn, said in June that it planned to move personal computer production to Taiwan and Vietnam from China.

So, while China suffers from the departure of high margin production, the U.S. will still enjoy low-cost imports from other Asian countries—and emerge from the trade war on top.  But the long-term gain to American consumers that follows the short-term pain of the trade war may be limited by China’s determined challenge for world domination.

Thursday, July 11, 2019

The US Dollar is a Safe Haven | Gary Shilling interview with ThinkAdvisor

Gary Shilling interview with ThinkAdvisor 

THINKADVISOR: How deep a recession do you predict?

GARY SHILLING: An average recession. I don’t see a big financial crisis like the subprime mortgage collapse, the dot-com blowup or the 1973-1975 recession, which was the second deepest since the 1930s. But this one would probably be a substantial decline from Christmas Eve 2018, when the market declined almost 20% from its peak in early October.

Are President Trump’s chaotic White House and his other challenges a cause of the recession that you perceive?

Those are contributing to a recession. Uncertainty seems to be his strategy. It seems he wants to keep everybody off balance. We see that particularly in the trade area. It holds back spending and investing. And, of course, there’s the prospect of an all-out trade war with China. The issue isn’t [just] a trade imbalance. It’s got a lot to do with China’s hopes of becoming an even more powerful country than the U.S. Trump realizes that the way they’re trying to do that is by using Western technology, and he doesn’t want to see that happen.

But you’re saying that a recession has probably started.

Yes, and for incumbents in Congress or in the White House to get re-elected in the midst of a recession, or even early in the aftermath, is very difficult.

Still, uncertainty isn’t good for the stock market, right?

It isn’t. But, apparently, Trump isn’t yet concerned enough that the stock market is going to sink and kill his chances of re-election next year.

Please discuss corporate earnings’ role in your recession scenario.

They’re already weakening, as you know. The earnings’ estimates are for declines of 5% year over year. But that’s from Wall Street analysts who are paid to be bullish. So you can well imagine that earnings are going to be weaker than that. But this hasn’t hit home yet.

What do you mean?

Investors are preoccupied with the Fed. People think if the Fed eases, it’s a wonderful world.


Because the Fed fueled the long bull stock market. Investors are therefore conditioned to believe that the Fed is the only game in town, and you don’t give a damn [about other indicators]. Why is the Fed talking about cutting rates? Because they’re worried about the economy. But people don’t see that. They just say, “Oh, the Fed cuts rates, and everything is dandy.”

What’s your forecast, then, for interest rates?

We’re looking at lower inflation, which is very favorable to Treasuries. So I think we’re going to see distinctly lower rates for Treasuries and investment-grade corporate [bonds]. We’re headed for 1% on the 10-year Treasury and 2% on the 30-year within a year. A recession makes Treasuries a safe haven, and it means that credit demand elsewhere dries up. We’ve had a wholesale rush of individual investors into Treasuries.

What are the main indicators telling you that a recession has likely already begun?

You’re getting a host of indicators that, while they don’t guarantee a recession, when you put them on top of the Fed’s earlier tightening, probably makes it an odds-on bet. [They include] weakness in housing; decline in industrial production; the New York Fed’s recession indicator now up to 30, which is the level that past recessions have started; declines in durable goods orders and capital spending. Also, surveys show that jobs aren’t as plentiful as they were.

If you’d written your July Insight analysis after the Labor Department issued its favorable June employment report last Friday, instead of before, would you still have said that a recession is probably underway?

Yes. You can make a case that the economy peaked back in late winter or early spring. There are so many indicators we’ve been talking about in recent months that are pointing to recession. June [jobs number] was a rebound from the very low number in May; but March, April and May were revised down, after January and February were revised up. Downward revisions are very strong indicators of weakness.

Did the June employment report show any weak areas?

One of the few was retail. The number 1 reason is that consumer spending is slowing: People had been reducing their saving rate to fund their spending. But starting about two quarters ago, they certainly shifted gears by apparently deciding they’ve had enough debt and didn’t have the funds to continue heavy spending. So the saving rate has picked up. But they were living on borrowed time because when spending is growing faster than income, that cannot continue indefinitely. Secondly, [the retail number was weak] because of the Amazon [online purchasing] effect.

Investors seem to be quite fearful and worried about the stock market now.

They should be. It’s very expensive.

How should they proceed to invest?

Do what they’re doing: Be very cautious on stocks. The portfolios we manage don’t have many equities. You need an anchor to windward: so we’re invested in defensive stocks — consumer staples, utilities, health care.

And of course you own Treasury bonds. What’s your strategy?

They still make sense. People say, “Oh, the yield is low.” But I’ve never, never, never bought Treasuries for a yield. I couldn’t care less what the yield is as long as it’s going down. I buy them for the same reason most people buy stocks: appreciation.

Do you continue to have a big cash position?

Yes, but not as large as it was because we’ve increased our Treasury position, particularly; and we’re also long the dollar. The dollar is a safe haven.

Can anything be done now to avoid the recession that you see from deepening?

At this point, I don’t think so.

via thinkadvisor.com/2019/07/10/gary-shilling-recession-may-be-starting-as-trump-fans-the-flames/