Category: Finance

“Significant Winter Storm” Expected To Strike Northeast 

A “significant winter storm” will strike the Ohio Valley, Appalachians, and Mid-Atlantic Thursday and the Northeast this evening, according to the latest NWS Weather Prediction Center’s short-range forecast.

A potent upper-level low will push through the Ohio Valley Thursday, resulting in dangerous wintry conditions there to continue and move northeastward.

Models suggest that parts of the Ohio Valley could receive a few additional inches of snow and some freezing rain.

According to the forecast, a low-pressure surface system will gain strength over the Southeast coast and charge northward along the Eastern Seaboard on Thursday and Friday, resulting in freezing rain across the Southern and Central Appalachians as warm air collides with fridge air at ground level. NWS warns ice accumulations could be over a quarter of an inch there.

Later this evening, into the overnight hour, the upper-level and surface lows are expected to produce “a perfect storm” with heavy snowfall in the northern Mid-Atlantic and into the interior Northeast. Snow totals in interior Pennsylvania and New York could measure about one foot. State and local governments across the Northeast have already issued Winter Storm and Ice Warnings as well as Winter Weather Advisories.

Models show the heaviest of this wintry precipitation will remain slightly west of major cities DC, Baltimore, Philadelphia, and New York City, but a wintry mix is possible for those areas Thursday evening and could cause severe travel headaches. 

“A strong early season winter storm is impacting the central and eastern United States to end the week, spreading snow and ice into places like St. Louis, Indianapolis, and other portions of the Midwest early Thursday. Heavy snow and ice is anticipated to impact the suburbs of the I-95 corridor from Washington to Boston, with even some brief wintry precipitation into the major cities before a change to rain. However, strongest impacts will be felt from central Pennsylvania northeastward into the mountains of northern New England where locally up to 0.25” of icing and a foot of snow is expected. This storm is coming as a strong push of cold air coming down from Canada interacts with Gulf of Mexico moisture, resulting in early season wintry precipitation.

As the storm departs, more cold air will likely reinforce itself back into key natural gas consuming regions of the Great Lakes and Northeast next week, furthering the bout with sustained above normal heating demand in these regions,” reported Ed Vallee, head meteorologist at Vallee Weather Consulting.

Weather models show record low temperatures for some parts of the Northeast.

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As the cold weather pours into the Northeast, the US-Lower 48 heating degree day (HDD), GFS Operational, a measurement designed to quantify the demand for energy needed to heat a building, has abruptly moved higher.

And maybe the HDD surge was one of the triggers that blew up a fund’s short natgas book.

Yesterday morning, the price of the 1st month  natgas contract soared, spiked as much as 20% in minutes – the biggest intraday move higher since 2009 – with the price exploding higher once a barrier of stops at $4.40 was tripped, at which point furious short covering sent nat gas as high as $4.929 in just seconds, the highest since February 2014, when the US experienced its “polar vortex” winter.

Putting the move in its long-term context shows just how breathless the recent short squeeze has been.

What is social media saying about 2018’s first winter blast?

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Albert Edwards: “Time Has Run Out”

At the start of his latest note, SocGen’s Albert Edwards highlights a recent warning by the Chinese central bank that that financial risks associated with “grey rhino” events – highly obvious yet ignored threats – may surface next year, and reminds readers that going into the 2008 Global Financial Crisis, many of the massive macro imbalances and credit bubbles that ultimately sunk the global economy were all too apparent.

Yet, with his usual gloomy irony, Edwards notes that back then these “grey rhinos” were dismissed as serious threats by mainstream commentators – the same way they are being dismissed now – “in large part because they had been in plain sight for a long time, and yet the global economy had continued to go from strength to strength. Hence naysayers, such as myself – who had correctly identified the extent of the credit bubbles and global imbalances, and hence the likely depth of the coming crisis – were dismissed as stopped clocks (and I still am).”

The SocGen strategist takes this trip down memory lane for two reasons: first to point out that it is not angst about the unknown that gets traders killed – it is complacency about what is obvious to everyone that is the real danger:

I remember being told many years ago on a South African game reserve that the buffalo was the most dangerous of the big five game animals. In large part, this is because of the complacency shown towards them relative to the other, more obviously dangerous big five game animals (ie the lion, leopard, rhino and elephant). It’s also a fact that unlike the other big five, the buffalo gives no warning of an imminent charge (see link). It’s complacency that gets you killed, and the same goes for investors with the macro-risks. We all know what the big macro-imbalances are out there, caused by years of loose money, but investors continue to ignore them at their peril.

The second reason is to give the context for his report, in which Edwards shifts away from his usual observation subjects, to focus on what he believes may be two potential epicenters of the next crisis, to wit:

We spend most of our time on these pages focusing on the two biggest threats to the global economy – the US and China, but Japan, the eurozone and UK certainly have glaring macro imbalances and financial bubbles that might burst at any time. The UK probably has one of the worst and most obvious problems, caused by years of easy money, but Brexit has diverted attention from the slump in the saving ratio.

Looking at the collapse in the UK savings rate, a topic he has discussed previously, Edwards writes that despite the slump in savings, the UK economy has actually decelerated substantially below 2%, and while most mainstream market commentators have attributed this weakness to Brexit uncertainty, Edwards believes there is “a far simpler explanation”: namely fiscal tightening.

Two years of massive UK public sector fiscal tightening, in both 2016 and 2017, removed some 1¼% from both years’ GDP growth (see chart below). Without that savage fiscal tightening, UK GDP would have quite happily skipped along at a 3% rate, well in excess of the eurozone, where the fiscal impulse was neutral. Contrary to what most mainstream economists would have you believe, weak UK GDP had little to do with Brexit uncertainty.

Continuing his criticism of implicit austerity, Edwards notes another way to look at the fiscal tightening is to see it in relation to other sector financial balances. This can be seen from the UK Statistic Office chart below, in which the shrinkage of the public sector deficit (blue bars) has been offset by a swing in the household sector balance from surplus to deficit (yellow bars). Naturally, these sector imbalances must sum to zero for an economy for example if all the domestic sectors in aggregate are borrowers (as they are currently) then the rest of the world will be financing that deficit (ie the purple bar will be above the zero line). And similarly, that purple capital account surplus on the balance of payments is the mirror image of the current account deficit the UK is currently running.

Putting the UK in the context of other nations, Edwards laments that “currently the UK household sector deficit stands head and shoulders above many of the other macro sectoral imbalances that currently exist globally (the German current account surplus is the only other major sector imbalance on a similar scale).”

And, as one would expect, there is a specific culprit for this gaping UK imbalance: the Bank of England: “This debauched UK household sector behavior only occurs because the central bank is too reluctant to remove the monetary punch bowl at the appropriate time.”

And since any such imbalance is by definition temporary, its unwind will result in economic devastation:

Sustaining an economic recovery by encouraging extremes of private sector borrowing inevitably ends up with asset bubbles bursting and sharp rises in the savings ratio, causing recession. The UK will be no different. And if (when?) the UK suffers another economic crisis who do you think a disillusioned public will turn to next? Desperate times will call for desperate measures.

Which brings us to the first “buffalo” that needs watching: “while the UK Tory government is congratulating itself on its fiscal rectitude and declaring that public sector austerity is over, the UK household saving ratio is the buffalo we need to watch. But unfortunately, just as in real life, we cannot predict quite when it will charge.”

It’s not just the UK, unfortunately, that is suffering from similar sectoral imbalances: Edwards writes that a similar heated debate among economists has exploded over the current battle between the Italian government and the European Commission (EC) about Italy’s proposed budget expansion.

The orthodox view is that the Italian government is pursuing a ruinous economic policy and an unfolding crisis of confidence will drive up Italian bond yields, threatening contagion and a repeat of the 2011/12 eurozone crisis. Hence the orthodox view is that the newly elected Italian government must sing to the EC’s fiscally austere song-sheet.

The SocGen strategist counters that many of the reasons for Italy’s low growth problems have nothing to do with being in the euro, and instead focuses on educational attainment and Italy’s moribund productivity. He explains:

Italy’s membership of the eurozone has got nothing to do with its educational attainment, university enrolment, corporate  governance, legal delays, or lastly and most crucially, red tape that binds Italian businesses as tight as an Egyptian mummy.

Italy’s position of 51 overall in the World Bank rankings should be a national embarrassment (see chart below, and note Italy is equally ranked 1 in ‘trading across borders’ only because it is in the EU)

In this context, Edwards proposes that the straitjacket of the single currency and hence Italy’s inability to devalue “have merely brought these chronic competitive issues to the fore. Indeed none of these problems are new. Yet the Italian economy managed to keep pace with other major industrialised nations quite happily though the 1970s, 1980s and 1990s.” And, as Edwards shows, it was not until the 2011 eurozone crisis that Italian GDP began to underperform Germany (see chart below).

This leads Edwards to a disturbing conclusion, namely that “the establishment consensus is engaged in wishful thinking if they believe Italy will ever be able to implement sufficient structural reforms to restore competitiveness (and remember that structural reforms are by their nature often deflationary, and need an expansionary fiscal policy to cushion the initial depressing effects on the economy  something the EC would never allow).”

Meanwhile with inferior productivity growth, Italy’s relative real exchange rate rises every year as unit labour costs deviate further and further from the rest of the eurozone (see chart below).

In Edwards’ view, without radical measures Italy will likely never ever grow inside the eurozone (Italian GDP is barely above where it was when they joined the euro). Instead, the SocGen strategist is convinced that “Italy will leave the eurozone during the next economic crisis as youth unemployment roars upwards from the current 30% towards 50%, increasing even further the majority support of young Italians to leave the EU (poll conducted by Benenson Strategy Group in October 2017 link.)”

Which goes back full circle to the austerity being imposed upon Italy by the EU: it is this fiscal straitjacket that the Italian government has been forced to wear over the last decade that has become intolerable to the Italian electorate (see chart below showing persistent large primary surpluses) according to Edwards, who notes that “it was only a matter of time before they broke free, but to be honest I am surprised it has taken so long for this confrontation with the EC to occur.

Alberts concludes with some observations on the timing of Europe’s inevitable unwind, in which he cites the French finance minister Bruno Le Maire, stating that he fully agrees with the Frenchman’s view:

Ambrose Evans-Pritchard of the UK’s Daily Telegraph reports that “France has launched a feverish campaign to shore up the euro before the next global downturn, warning that monetary union is not strong enough to withstand another crisis and the euro will face disintegration without fiscal union.

“Bruno Le Maire, the French finance minister, said there are just weeks left for Germany and the Dutch-led “Hanseatic League” to grasp the nettle on long-delayed reforms. “Either we get a eurozone budget or there will eventually be no euro at all,” he said. “If there was a new financial and economic crisis tomorrow, the eurozone could not respond. It is really urgent that we build up the eurozone’s defences. We have been talking for too long,” he told the Handelsblatt newspaper.

“Time is running out before the EU’s make-or-break summit on the future of the euro next month. The global expansion is looking tired and fragile. Mr Le Maire said Europe’s leaders had failed to learn the lessons of 2008 and the 2012 debt crisis. They had not completed the banking union, or broken the ‘bank-sovereign doom loop’ with full help from the bail-out fund (ESM). Nor had they completed the capital markets union, or established a fiscal entity to bind EU economies closer together. “I am not being  pessimistic, I am facing reality,” he said.

As noted above, while Edwards “totally agrees” with Bruno Le Maire’s realism, he doesn’t think time is running out, instead “I think time has run out.” In keeping with his structural bearishness, Albert claims that “the next global economic downturn is coming and it will throw the eurozone into another major crisis, but one in which Italy will elect politicians committed to leaving the eurozone (actually it might be the same politicians as we have today, but who will feel empowered to show their true anti-euro colours).

There is one thing Edwards disagrees with: as he says, Bruno Le Maire’s solution of an EU banking union and fiscal transfers to a perpetually stagnant Italy “is not the answer. These reforms are not throwing down a ladder to help Italy climb out of its hole and escape. Instead it will merely be throwing food down the hole to keep a trapped Italy from fiscal death.”

Which brings us to Edwards’ gloomy denouement: “make no mistake cometh the crisis, cometh the ECB Central Banker” says Edwards who remembers “the fabulous quote” from Vitas Vasiliauskas, governor of Lithuania’s central bank who several years ago claimed that central bankers are magic people!

His quote in full back in May 2016 was “Markets say the ECB is done, their box is empty, but we are magic people. Each time we take something and give to the markets – a rabbit out of the hat.

They are indeed magic people and a few other things besides. Will it be enough? I doubt it.

Assuming Edwards is correct, where does that leave us? Not surprisingly, in a very gloomy place:

Every major economy is close to falling into a deep hole from which they will struggle to emerge. The monetary and fiscal ladders thrust down into the 2008 pits of despair will no longer be as available next time around. It is difficult to identify who will fall furthest, but of one thing I am sure: the populists that will emerge to ‘save us’ will use fiscal and monetary stimulus in a way that can only be dreamed of. You ain’t seen nothing yet!


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Italian Yields Spike After Salvini Advisor Warns Italy Will Exit Eurozone If League Wins Majority

As if there wasn’t enough non-stop chaos out of the UK as the fate of Brexit and Theresa May is being decided on twitter, between flashing red Bloomberg headlines, and media speculation and rumors, moments ago Italy decided to remind everyone just how unstable its own political situation is, when Claudio Borghi, chief economic advisor to Italy’s de facto leader Salvini, said that the EU has used “made-up numbers” in judging Italy’s budget (the EU has effectively accused Italy of doing the same), and then asked if the EU would have the “courage” to sanction Italy.

As a reminder, the last time a populist European played chicken with the EU, the ECB promptly caused Greek banks to be shuttered indefinitely and Varoufakis’ political career was promptly over. Maybe this time it will be different.

But what really spooked markets, and caught traders’ attention, was the following headline from Reuters:

  • BORGHI, CHIEF ECONOMIC ADVISOR TO SALVINI: IF THE LEAGUE GETS A MAJORITY IN THE NEXT ELECTIONS ITALY WILL EXIT THE EUROZONE

In kneejerk reaction, yields on 10Y BTPs spiked to session highs, hitting 3.54%..

… and sending “lo spread” between German and Italian bonds to 315bps, creeping ever closer to the 400bps red line beyond which the Italian bank runs will likely begin.

Amid this chaos out of Italy, Europe’s Stoxx 600 Index has fallen 1%, hitting its lowest intraday level since Oct. 31, dragged not only by the sell-off in U.K. stocks due to Brexit risks, but fresh concerns about “Italeave” as Europe suddenly finds itself defending its integrity on two fronts.


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Soros Responds To “Alarming” Facebook Exposé; Demands “Thorough Investigation”

Following a shocking exposé in the New York Times revealing how Facebook resorted to guerilla tactics to deflect blame amid their various scandals, including hiring Republican PR firm Definers which cast liberal critics as operatives for liberal financier George Soros, top representatives for the Hungarian-American billionaire have demanded answers. 

While Facebook was under fire on Capitol Hill for allowing Russians to purchase advertising during and after the 2016 US election, liberal critics blamed the company for Hillary Clinton’s loss – including activist protesters who put a public face on liberal opposition to the social media giant.

Defenders sought to discredit the activists by linking them to Soros

A research document circulated by Definers to reporters this summer, just a month after the House hearing, cast Mr. Soros as the unacknowledged force behind what appeared to be a broad anti-Facebook movement.

He was a natural target. In a speech at the World Economic Forum in January, he had attacked Facebook and Google, describing them as a monopolist “menace” with “neither the will nor the inclination to protect society against the consequences of their actions.”

Definers pressed reporters to explore the financial connections between Mr. Soros’s family or philanthropies and groups that were members of Freedom from Facebook, such as Color of Change, an online racial justice organization, as well as a progressive group founded by Mr. Soros’s son. (An official at Mr. Soros’s Open Society Foundations said the philanthropy had supported both member groups, but not Freedom from Facebook, and had made no grants to support campaigns against Facebook.) –NYT

Responding to the Times report, Soros adviser Michael Vachon responded Thursday, stating “It is alarming that Facebook would engage in these unsavory tactics, apparently in response to George’s public criticism in Davos earlier this year of the company’s handling of hate speech and propaganda on its platform.

The Times’ story raises the question of whether Facebook has used similar methods to go after other critics or public officials who have tried to hold Facebook accountable. Zuckerberg and Sandberg’s claim that they were unaware of what the company was doing is more alarming than reassuring. What else is Facebook up to?
 
The company should hire an outside expert to do a thorough investigation of its lobbying and PR work and make the results public. 

Until then, this episode further demonstrates that Facebook continues to pursue its narrow corporate interests at the expense of the public interest. -Michael Vachon

Patrick Gaspard, president of Soros’s Open Society Foundations wrote to Sandberg: “I was shocked to learn from the New York Times that you and your colleagues at Facebook hired a Republican opposition research firm to stir up animus toward George Soros,” adding: “As you know, there is a concerted right-wing effort the world over to demonize Mr. Soros and his foundations, which I lead—an effort which has contributed to death threats and the delivery of a pipe bomb to Mr. Soros’ home. You are no doubt also aware that much of this hateful and blatantly false and anti-Semitic information is spread via Facebook.”

The notion that your company, at your direction, actively engaged in the same behavior to try to discredit people exercising their First Amendment rights to protest Facebook’s role in disseminating vile propaganda is frankly astonishing to me. 
 
It’s been disappointing to see how you have failed to monitor hate and misinformation on Facebook’s platform. To now learn that you are active in promoting these distortions is beyond the pale.

These efforts appear to have been part of a deliberate strategy to distract from the very real accountability problems your company continues to grapple with. This is reprehensible, and an offense to the core values Open Society seeks to advance. But at bottom, this is not about George Soros or the foundations. Your methods threaten the very values underpinning our democracy.  -Patrick Gaspard

 Which PR firm will Facebook call now?


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Oil Prices Are Confirming Global Reflation Is Over

Authored by Lance Roberts via RealInvestmentAdvice.com,

In Tuesday’s technical update, I discussed the breakdown in the major markets both internationally as well as domestically. Of note, was the massive bear market in China which is currently down nearly 50% from its peak.

What is important about China, besides being a major trading partner of the U.S., is that their economy has been a massive debt-driven experiment from building massive infrastructure projects that no one uses; to entire cities that no one lives in. However, the credit-driven impulse has maintained the illusion of economic growth over the last several years as China remained a major consumer of commodities. Yet despite the Government headlines of economic prosperity, the markets have been signaling a very different story.

In the U.S., the story is much the same. Near-term economic growth has been driven by artificial stimulus, government spending, and fiscal policy which provides an illusion of prosperity. For example, the chart below shows raw corporate profits (NIPA) both before, and after, tax.

Importantly, note that corporate profits, pre-tax, are at the same level as in 2012.  In other words, corporate profits have not grown over the last 6-years, yet it was the decline in the effective tax rate which pushed after-tax corporate profits to a record in the second quarter. Since consumption makes up roughly 70% of the economy, then corporate profits pre-tax profits should be growing if the economy was indeed growing substantially above 2%.

Corporate profitability is a lagging indicator of the economy as it is reported “after the fact.” As discussed previously, given that economic data in particular is subject to heavy backward revisions, the stock market tends to be a strong leading indicator of recessionary downturns.

Prior to 1980, the NBER did not officially date recession starting and ending points, but the market turned lower prior to previous recessions.

Besides the stock market, economically sensitive commodities also have a tendency to signal changes to the overall trend of the economy given their direct input into both the production and demand sides of the economic equation.

Oil is a highly sensitive indicator relative to the expansion or contraction of the economy. Given that oil is consumed in virtually every aspect of our lives, from the food we eat to the products and services we buy, the demand side of the equation is a tell-tale sign of economic strength or weakness. This is shown in the chart below which shows oil prices relative to economic growth, inflation, and interest rates.

All this data is noisy, so the next chart combines rates, inflation, and GDP into one composite indicator to provide a clearer comparison. One important note is that oil tends to trade along a pretty defined trend…until it doesn’t. Given that the oil industry is very manufacturing and production intensive, breaks of price trends tend to be liquidation events which have a negative impact on the manufacturing and CapEx spending inputs into the GDP calculation.

As such, it is not surprising that sharp declines in oil prices have been coincident with downturns in economic activity, a drop in inflation, and a subsequent decline in interest rates. The drop in oil prices is also confirming the message being sent by the broader market as well.

Again, given the massive input that oil has on the overall economy, declines in oil prices have a much broader impact on the overall economy than just the energy sector. But the decline in oil isn’t the only issue weighing on our outlook for the markets.

A look at Baltic Dry Index, which is just a representation of the demand to ship dry goods, shows weakness has begun to spread globally. The Baltic Dry Index, which is a non-traded index, bounced from the lows in 2016 as global central banks infused massive amounts of liquidity into the system to offset “Brexit” risks. However, the index also suggests the “reflationary” surge has now ended.

The same goes for copper which is highly correlated to overall economic strength due to its massive use throughout the production cycle both domestically and globally. The surge in liquidity in early-2016 was reflected with the “reflation” in a global economy which now appears to have ended.

Investment Implications

There are numerous signs suggesting a more pervasive economic weakness is spreading globally.

This is coming at a time where Central Banks globally are trying to remove “emergency measures” and reduce “accommodative” policies in order to rebuild their “toolkits” for the next economic downturn when it comes.

Unfortunately, the Federal Reserve’s insistence on increasing interest rates has likely accelerated the onset of the next recession. As I stated previously:

“The chart below shows nominal GDP versus the 24-month rate of change (ROC) of the 10-year Treasury yield. Not surprisingly, since 1959, every single spike in rates killed the economic growth narrative.”

The markets, oil, copper, and the Baltic dry index are all suggesting that economic growth has peaked.

Furthermore, the rise in the dollar over the last several weeks already suggests that foreign capital is flowing into the U.S. dollar for safety as the rest of globe slows. This will ultimately accelerate as global markets decline as foreign capital seeks “safety” in U.S. Treasuries (the global storehouse for reserve currencies). 

As I have stated many times previously, as the economy slips into the next recession, interest rates will fall, and bonds will outperform equities as the reversion to the mean occurs.

From the equity perspective, this is a time to seriously consider reducing risk. While there is currently a rotation to more defensive areas of the market such as Staples, Utilities and Health Care currently, if a more negative overall trend develops in the markets these sectors will lose ground as well.

One of the big concerns remains overall valuations which are elevated in traditionally “more defensive” areas of the market due to the “yield chase” over the last decade. If there is a recessionary drag which causes a repricing of “value” in the market, there could be significant risk to these areas.

When there is uncertainty, particularly during a market topping process where trends are beginning to change direction, cash is the best option. It provides safety, liquidity, and opportunity. This particularly the case as the 2-year Treasury yields more than the S&P 500 index which provide an “alternative” to excessive risk.

The evidence continues to mount that “something has changed.” 

The only problem with waiting for absolute confirmation is the potential for significant capital destruction. As investors, our job is simply to weigh the risk and reward of each investment opportunity. Currently, there are significant “warnings” that suggest “risk” continues to outweigh “reward.”

That outlook will eventually change, When it does, and real opportunity presents itself, having liquid cash on hand provides the ability to be a “strong buyer from weak hands.”

 


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Import, Export Prices Rebound In October

US Import Prices jumped more than expected in October (rising 0.5% MoM vs +0.1% exp) and export prices rose 0.4% (after no change in Sept).

 

Import prices ex-food/fuels actually shrank for the 5th month in a row.

On a YoY basis, import and export prices ticked up in October…

Nothing here to spook The Fed from their path of enlightened rate hikes.


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‘Core’ Retail Sales Growth Slowest In 6 Months

Following China’s gravely disappointing retail sales growth (as shadow banking credit contracts), US retail sales growth spiked 0.8% MoM (after a revised 0.1% drop in September)

However, core retail sales rose only 0.3% MoM (below expectations).

Everything rose except furniture and home furnishings -0.3%, and food service and retail places -0.2%

Finally, the YoY growth in Control Group Retail Sales was 4.5% – the weakest since April…

 


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Yes, We Are In Another Tech Bubble

Authored by David Robertson via RealInvestmentAdvice.com,

Technology has touched our lives in so many ways, and especially so for investors. Not only has technology provided ever-better tools by which to research and monitor investments, but tech stocks have also provided outsized opportunities to grow portfolios. It’s no wonder that so many investors develop a strong affinity for tech.

Just as glorious as tech can be on the way up, however, it can be absolutely crushing on the way down. Now that tech stocks have become such large positions in major US stock indexes as well as in many individual portfolios, it is especially important to consider what lies ahead. Does tech still have room to run or has it turned down? What should you do with tech?

For starters, recent earnings reports indicate that something has changed that deserves attention. Bellwethers such as Amazon, Alphabet and Apple all beat earnings estimates by a wide margin. All reported strong revenue growth. And yet all three stocks fell in the high single digits after they reported. At minimum, it has become clear that technology stocks no longer provide an uninterrupted ride up.

These are the kinds of earnings reports that can leave investors befuddled as to what is driving the stocks. Michael MacKenzie gave his take in the Financial Times late in October [here]:

“The latest fright came from US technology giants Amazon and Alphabet after their revenue misses last week. Both are highly successful companies but the immediate market reaction to their results suggested how wary investors are of any sign that their growth trajectories might be flattening.”

Flattening growth trajectories may not seem like such a big deal, but they do provide a peak into the often-tenuous association between perception and reality for technology. Indeed, this relationship has puzzled economists as much as investors. A famous example arose out of the environment of slowing productivity growth in the 1970s and 1980s [here] which happened despite the rapid development of information technology at the time. The seeming paradox prompted economist Robert Solow to quip [here],

You can see the computer age everywhere but in the productivity statistics.”

The computer age eventually did show up in the productivity statistics, but it took a protracted and circuitous route there. The technologist and futurist, Roy Amara, captured the essence of that route with a fairly simple statement [here]:

“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” Although that assertion seems innocuous enough, it has powerful implications. Science writer Matt Ridley [here] went so far as to call it the “only one really clever thing” that stands out among “a great many foolish things that have been said about the future.”

Gartner elaborated on the concept by describing what they called “the hype cycle” (shown below).

The cycle is “characterized by the ‘peak of inflated expectations’ followed by the ‘trough of disillusionment’.” It shows how the effects of technology get overestimated in the short run because of inflated expectations and underestimated in the long run because of disillusionment.

Amara’s law/ the hype cycle

Source: Wikipedia [here]

Ridley provides a useful depiction of the cycle:

“Along comes an invention or a discovery and soon we are wildly excited about the imminent possibilities that it opens up for flying to the stars or tuning our children’s piano-playing genes. Then, about ten years go by and nothing much seems to happen. Soon the “whatever happened to …” cynics are starting to say the whole thing was hype and we’ve been duped. Which turns out to be just the inflexion point when the technology turns ubiquitous and disruptive.”

Amara’s law describes the dotcom boom and bust of the late 1990s and early 2000s to a tee. It all started with user-friendly web browsers and growing internet access that showed great promise. That promise lent itself to progressively greater expectations which led to progressively greater speculation. When things turned down in early 2000, however, it was a long way down with many companies such as the e-tailer Pets.com and the communications company Worldcom actually going under. When it was all said and done, the internet did prove to be a massively disruptive force, but not without a lot of busted stocks along the way.

How do expectations routinely become so inflated? Part of the answer is that we have a natural tendency to adhere to simple stories rather than do the hard work of analyzing situations. Time constraints often exacerbate this tendency. But part of the answer is also that many management teams are essentially tasked with the effort of inflating expectations. A recent Harvard Business Review article [here] (h/t Grants Interest Rate Observer, November 2, 2018) provides revealing insights from interviews with CFOs and senior investment banking analysts of leading technology companies.

For example, one of the key insights is that “Financial capital is assumed to be virtually unlimited.” While this defies finance and economics theory and probably sounds ludicrous to most any industrial company executive, it passes as conventional wisdom for tech companies. For the last several years anyway, it has also largely proven to be true for both public tech-oriented companies like Netflix and Tesla as well as private companies like Uber and WeWork.

According to the findings, tech executives,

“…believe that they can always raise financial capital to meet their funding shortfall or use company stock or options to pay for acquisitions and employee wages.”

An important implication of this capital availability is,

“The CEO’s principal aim therefore is not necessarily to judiciously allocate financial capital but to allocate precious scientific and human resources to the most promising projects …”

Another key insight is, “Risk is now considered a feature, not a bug.” Again, this defies academic theory and empirical evidence for most industrial company managers. Tech executives, however, prefer to, “chase risky projects that have lottery-like payoffs. An idea with uncertain prospects but with at least some conceivable chance of reaching a billion dollars in revenue is considered far more valuable than a project with net present value of few hundred million dollars but no chance of massive upside.”

Finally, because technology stocks provide a significant valuation challenge, many tech CFOs view it as an excuse to abdicate responsibility for providing useful financial information. “[C]ompanies see little value in disclosing the details of their current and planned projects in their financial disclosures.” Worse, “accounting is no longer considered a value-added function.” One CFO went so far as to note “that the CPA certification is considered a disqualification for a top finance position [in their company].”

While some of this way of thinking seems to be endemic to the tech industry, there is also evidence that an environment of persistently low rates is a contributing factor. As the FT mentions [here], “When money is constantly cheap and available everything seems straightforward. Markets go up whatever happens, leaving investors free to tell any story they like about why. It is easy to believe that tech companies with profits in the low millions are worth many billions.”

John Hussman also describes the impact of low rates [here]:

“The heart of the matter, and the key to navigating this brave new world of extraordinary monetary and fiscal interventions, is to recognize that while 1) valuations still inform us about long-term and full-cycle market prospects, and; 2) market internals still inform us about the inclination of investors toward speculation or risk-aversion, the fact is that; 3) we can no longer rely on well-defined limits to speculation, as we could in previous market cycles across history.”

In other words, low rates unleash natural limits to speculation and pave the way for inflated expectations to become even more so. This means that the hype cycle gets amplified, but it also means that the cycle gets extended. After all, for as long as executives do not care about “judiciously allocating capital”, it takes longer for technology to sustainably find its place in the real economy. This may help explain why the profusion of technology the last several years has also coincided with declining productivity growth.

One important implication of Amara’s law is that there are two distinctly different ways to make money in tech stocks.

One is to identify promising technology ideas or stocks or platforms relatively early on and to ride the wave of ever-inflating expectations. This is a high risk but high reward proposition.

Another way is to apply a traditional value approach that seeks to buy securities at a low enough price relative to intrinsic value to ensure a margin of safety. This can be done when disillusionment with the technology or the stock is so great as to overshoot realistic expectations on the downside.

Applying value investing to tech stocks comes with its own hazards, however. For one, several factors can obscure sustainable levels of demand for new technologies. Most technologies are ultimately also affected by cyclical forces, incentives to inflate expectations can promote unsustainable activity such as vendor financing, and debt can be used to boost revenue growth through acquisitions.

Further, once a tech stock turns decidedly down, the corporate culture can change substantially. The company can lose its cachet with its most valuable resource — its employees. Some may become disillusioned and even embarrassed to be associated with the company. When the stock stops going up, the wealth creation machine of employee stock options also turns off. Those who have already made their fortunes no longer have a good reason to hang around and often set off on their own. It can be a long way down to the bottom.

As a result, many investors opt for riding the wave of ever-inflating expectations. The key to succeeding with this approach is to identify, at least approximately, the inflection point between peak inflated expectations and the transition to disillusionment.

Rusty Guinn from Second Foundation Partners provides an excellent case study of this process with the example of Tesla Motors [here]. From late 2016 through May 2017 the narrative surrounding Tesla was all about growth and other issues were perceived as being in service to that goal. Guinn captures the essence of the narrative:

“We need capital, but we need it to launch our exciting new product, to grow our factory production, to expand into exciting Semi and Solar brands.” In this narrative, “there were threats, but always on the periphery.”

Guinn also shows how the narrative evolved, however, by describing a phase that he calls “Transitioning Tesla”. Guinn notes how the stories about Tesla started changing in the summer of 2017:

“But gone was the center of gravity around management guidance and growth capital. In its place, the cluster of topics permeating most stories about Tesla was now about vehicle deliveries.”

This meant the narrative shifted to something like, “The Model 3 launch is exciting AND the performance of these cars is amazing, BUT Tesla is having delivery problems AND can they actually make them AND what does Wall Street think about all this?” As Guinn describes, “The narrative was still positive, but it was no longer stable.” More importantly, he warns, “This is what it looks like when the narrative breaks.”

The third phase of Tesla’s narrative, “Broken Tesla”, started around August 2017 and has continued through to the present. Guinn describes,

“The growing concern about production and vehicle deliveries entered the nucleus of the narrative about Tesla Motors in late summer 2017 and propagated. The stories about production shortfalls now began to mention canceled reservations. The efforts to increase production also resulted in some quality control issues and employee complaints, all of which started to make their way into those same articles.”

Finally, Guinn concludes, “Once that happened, a new narrative formed: Tesla is a visionary company, sure, but one that doesn’t seem to have any idea how to (1) make cars, (2) sell cars or (3) run a real company that can make money doing either.” Once this happens, there is very little to inhibit the downward path of disillusionment.

Taken together, these analyses can be used by investors and advisors alike to help make difficult decisions about tech positions. Several parts of the market depend on the fragile foundations of growth narratives including many of the largest tech companies, over one-third of Russell 2000 index constituents that don’t make money, and some of the most over-hyped technologies such as artificial intelligence and cryptocurrencies.

One common mistake that should be avoided is to react to changing conditions by modifying the investment thesis. For example, a stock that has been owned for its growth potential starts slowing down. Rather than recognizing the evidence as potentially indicative of a critical inflection point, investors often react by rationalizing in order to avoid selling. Growth is still good. The technology is disruptive. It’s a great company. All these things may be true, but it won’t matter. Growth is about narrative and not numbers. If the narrative is broken and you don’t sell, you can lose a lot of money. Don’t get distracted.

In addition, it is important to recognize that any company-specific considerations will also be exacerbated by an elemental change in the overall investment landscape. As the FT also noted, “But this month [October] can be recognised as the point at which the market shifts from being driven by liquidity to being driven by fundamentals.” This turning point has significant implications for the hype cycle: “Turn off the liquidity taps at the world’s central banks and so does the ability of the market to believe seven impossible things before breakfast.”

Yet another important challenge in dealing with tech stocks that have appreciated substantially is dealing with the tax consequences. Huge gains can mean huge tax bills. In the effort to avoid a potentially complicated and painful tax situation, it is all-too-easy to forego the sale of stocks that have run the course of inflated expectations.

As Eric Cinnamond highlights [here], this is just as big of a problem for fiduciaries as for individuals:

“The recent market decline is putting a growing number of portfolio managers in a difficult situation. The further the market falls, the greater the pressure on managers to avoid sending clients a tax bill.”

Don’t let tax considerations supersede investment decisions.

So how do the original examples of Amazon, Alphabet and Apple fit into this? What, if anything, should investors infer from their quarterly earnings and the subsequent market reactions?

There are good reasons to be cautious. For one, all the above considerations apply. Further, growth has been an important part of the narrative of each of these companies and any transition to lower growth does fundamentally affect the investment thesis. In addition, successful companies bear the burden of ever-increasing hurdles to growth as John Hussman describes [here]:

“But as companies become dominant players in mature sectors, their growth slows enormously.”

“Specifically,” he elaborates, “growth rates are always a declining function of market penetration.” Finally, he warns,

“Investors should, but rarely do, anticipate the enormous growth deceleration that occurs once tiny companies in emerging industries become behemoths in mature industries.”

For the big tech stocks, wobbles from the earnings reports look like important warning signs.

In sum, tech stocks create unique opportunities and risks for investors. Due to the prominent role of inflated expectations in so many technology investments, however, tech also poses special challenges for long term investors. Whether exposure exists in the form of individual stocks or by way of major indexes, it is important to know that many technology stocks are run more like lottery tickets than as a sustainable streams of cash flows. Risk may be perceived as a feature by some tech CFOs, but it is a bug for long term investment portfolios.

Finally, tech presents such an interesting analytical challenge because the hype cycle can cause perceptions to deviate substantially from the reality of development, adoption and diffusion. Ridley describes a useful general approach: “The only sensible course is to be wary of the initial hype but wary too of the later scepticism.” Long term investors won’t mind a winding road but they need to make sure it can get them to where they are going.


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Yes, We Are In Another Tech Bubble

Authored by David Robertson via RealInvestmentAdvice.com,

Technology has touched our lives in so many ways, and especially so for investors. Not only has technology provided ever-better tools by which to research and monitor investments, but tech stocks have also provided outsized opportunities to grow portfolios. It’s no wonder that so many investors develop a strong affinity for tech.

Just as glorious as tech can be on the way up, however, it can be absolutely crushing on the way down. Now that tech stocks have become such large positions in major US stock indexes as well as in many individual portfolios, it is especially important to consider what lies ahead. Does tech still have room to run or has it turned down? What should you do with tech?

For starters, recent earnings reports indicate that something has changed that deserves attention. Bellwethers such as Amazon, Alphabet and Apple all beat earnings estimates by a wide margin. All reported strong revenue growth. And yet all three stocks fell in the high single digits after they reported. At minimum, it has become clear that technology stocks no longer provide an uninterrupted ride up.

These are the kinds of earnings reports that can leave investors befuddled as to what is driving the stocks. Michael MacKenzie gave his take in the Financial Times late in October [here]:

“The latest fright came from US technology giants Amazon and Alphabet after their revenue misses last week. Both are highly successful companies but the immediate market reaction to their results suggested how wary investors are of any sign that their growth trajectories might be flattening.”

Flattening growth trajectories may not seem like such a big deal, but they do provide a peak into the often-tenuous association between perception and reality for technology. Indeed, this relationship has puzzled economists as much as investors. A famous example arose out of the environment of slowing productivity growth in the 1970s and 1980s [here] which happened despite the rapid development of information technology at the time. The seeming paradox prompted economist Robert Solow to quip [here],

You can see the computer age everywhere but in the productivity statistics.”

The computer age eventually did show up in the productivity statistics, but it took a protracted and circuitous route there. The technologist and futurist, Roy Amara, captured the essence of that route with a fairly simple statement [here]:

“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” Although that assertion seems innocuous enough, it has powerful implications. Science writer Matt Ridley [here] went so far as to call it the “only one really clever thing” that stands out among “a great many foolish things that have been said about the future.”

Gartner elaborated on the concept by describing what they called “the hype cycle” (shown below).

The cycle is “characterized by the ‘peak of inflated expectations’ followed by the ‘trough of disillusionment’.” It shows how the effects of technology get overestimated in the short run because of inflated expectations and underestimated in the long run because of disillusionment.

Amara’s law/ the hype cycle

Source: Wikipedia [here]

Ridley provides a useful depiction of the cycle:

“Along comes an invention or a discovery and soon we are wildly excited about the imminent possibilities that it opens up for flying to the stars or tuning our children’s piano-playing genes. Then, about ten years go by and nothing much seems to happen. Soon the “whatever happened to …” cynics are starting to say the whole thing was hype and we’ve been duped. Which turns out to be just the inflexion point when the technology turns ubiquitous and disruptive.”

Amara’s law describes the dotcom boom and bust of the late 1990s and early 2000s to a tee. It all started with user-friendly web browsers and growing internet access that showed great promise. That promise lent itself to progressively greater expectations which led to progressively greater speculation. When things turned down in early 2000, however, it was a long way down with many companies such as the e-tailer Pets.com and the communications company Worldcom actually going under. When it was all said and done, the internet did prove to be a massively disruptive force, but not without a lot of busted stocks along the way.

How do expectations routinely become so inflated? Part of the answer is that we have a natural tendency to adhere to simple stories rather than do the hard work of analyzing situations. Time constraints often exacerbate this tendency. But part of the answer is also that many management teams are essentially tasked with the effort of inflating expectations. A recent Harvard Business Review article [here] (h/t Grants Interest Rate Observer, November 2, 2018) provides revealing insights from interviews with CFOs and senior investment banking analysts of leading technology companies.

For example, one of the key insights is that “Financial capital is assumed to be virtually unlimited.” While this defies finance and economics theory and probably sounds ludicrous to most any industrial company executive, it passes as conventional wisdom for tech companies. For the last several years anyway, it has also largely proven to be true for both public tech-oriented companies like Netflix and Tesla as well as private companies like Uber and WeWork.

According to the findings, tech executives,

“…believe that they can always raise financial capital to meet their funding shortfall or use company stock or options to pay for acquisitions and employee wages.”

An important implication of this capital availability is,

“The CEO’s principal aim therefore is not necessarily to judiciously allocate financial capital but to allocate precious scientific and human resources to the most promising projects …”

Another key insight is, “Risk is now considered a feature, not a bug.” Again, this defies academic theory and empirical evidence for most industrial company managers. Tech executives, however, prefer to, “chase risky projects that have lottery-like payoffs. An idea with uncertain prospects but with at least some conceivable chance of reaching a billion dollars in revenue is considered far more valuable than a project with net present value of few hundred million dollars but no chance of massive upside.”

Finally, because technology stocks provide a significant valuation challenge, many tech CFOs view it as an excuse to abdicate responsibility for providing useful financial information. “[C]ompanies see little value in disclosing the details of their current and planned projects in their financial disclosures.” Worse, “accounting is no longer considered a value-added function.” One CFO went so far as to note “that the CPA certification is considered a disqualification for a top finance position [in their company].”

While some of this way of thinking seems to be endemic to the tech industry, there is also evidence that an environment of persistently low rates is a contributing factor. As the FT mentions [here], “When money is constantly cheap and available everything seems straightforward. Markets go up whatever happens, leaving investors free to tell any story they like about why. It is easy to believe that tech companies with profits in the low millions are worth many billions.”

John Hussman also describes the impact of low rates [here]:

“The heart of the matter, and the key to navigating this brave new world of extraordinary monetary and fiscal interventions, is to recognize that while 1) valuations still inform us about long-term and full-cycle market prospects, and; 2) market internals still inform us about the inclination of investors toward speculation or risk-aversion, the fact is that; 3) we can no longer rely on well-defined limits to speculation, as we could in previous market cycles across history.”

In other words, low rates unleash natural limits to speculation and pave the way for inflated expectations to become even more so. This means that the hype cycle gets amplified, but it also means that the cycle gets extended. After all, for as long as executives do not care about “judiciously allocating capital”, it takes longer for technology to sustainably find its place in the real economy. This may help explain why the profusion of technology the last several years has also coincided with declining productivity growth.

One important implication of Amara’s law is that there are two distinctly different ways to make money in tech stocks.

One is to identify promising technology ideas or stocks or platforms relatively early on and to ride the wave of ever-inflating expectations. This is a high risk but high reward proposition.

Another way is to apply a traditional value approach that seeks to buy securities at a low enough price relative to intrinsic value to ensure a margin of safety. This can be done when disillusionment with the technology or the stock is so great as to overshoot realistic expectations on the downside.

Applying value investing to tech stocks comes with its own hazards, however. For one, several factors can obscure sustainable levels of demand for new technologies. Most technologies are ultimately also affected by cyclical forces, incentives to inflate expectations can promote unsustainable activity such as vendor financing, and debt can be used to boost revenue growth through acquisitions.

Further, once a tech stock turns decidedly down, the corporate culture can change substantially. The company can lose its cachet with its most valuable resource — its employees. Some may become disillusioned and even embarrassed to be associated with the company. When the stock stops going up, the wealth creation machine of employee stock options also turns off. Those who have already made their fortunes no longer have a good reason to hang around and often set off on their own. It can be a long way down to the bottom.

As a result, many investors opt for riding the wave of ever-inflating expectations. The key to succeeding with this approach is to identify, at least approximately, the inflection point between peak inflated expectations and the transition to disillusionment.

Rusty Guinn from Second Foundation Partners provides an excellent case study of this process with the example of Tesla Motors [here]. From late 2016 through May 2017 the narrative surrounding Tesla was all about growth and other issues were perceived as being in service to that goal. Guinn captures the essence of the narrative:

“We need capital, but we need it to launch our exciting new product, to grow our factory production, to expand into exciting Semi and Solar brands.” In this narrative, “there were threats, but always on the periphery.”

Guinn also shows how the narrative evolved, however, by describing a phase that he calls “Transitioning Tesla”. Guinn notes how the stories about Tesla started changing in the summer of 2017:

“But gone was the center of gravity around management guidance and growth capital. In its place, the cluster of topics permeating most stories about Tesla was now about vehicle deliveries.”

This meant the narrative shifted to something like, “The Model 3 launch is exciting AND the performance of these cars is amazing, BUT Tesla is having delivery problems AND can they actually make them AND what does Wall Street think about all this?” As Guinn describes, “The narrative was still positive, but it was no longer stable.” More importantly, he warns, “This is what it looks like when the narrative breaks.”

The third phase of Tesla’s narrative, “Broken Tesla”, started around August 2017 and has continued through to the present. Guinn describes,

“The growing concern about production and vehicle deliveries entered the nucleus of the narrative about Tesla Motors in late summer 2017 and propagated. The stories about production shortfalls now began to mention canceled reservations. The efforts to increase production also resulted in some quality control issues and employee complaints, all of which started to make their way into those same articles.”

Finally, Guinn concludes, “Once that happened, a new narrative formed: Tesla is a visionary company, sure, but one that doesn’t seem to have any idea how to (1) make cars, (2) sell cars or (3) run a real company that can make money doing either.” Once this happens, there is very little to inhibit the downward path of disillusionment.

Taken together, these analyses can be used by investors and advisors alike to help make difficult decisions about tech positions. Several parts of the market depend on the fragile foundations of growth narratives including many of the largest tech companies, over one-third of Russell 2000 index constituents that don’t make money, and some of the most over-hyped technologies such as artificial intelligence and cryptocurrencies.

One common mistake that should be avoided is to react to changing conditions by modifying the investment thesis. For example, a stock that has been owned for its growth potential starts slowing down. Rather than recognizing the evidence as potentially indicative of a critical inflection point, investors often react by rationalizing in order to avoid selling. Growth is still good. The technology is disruptive. It’s a great company. All these things may be true, but it won’t matter. Growth is about narrative and not numbers. If the narrative is broken and you don’t sell, you can lose a lot of money. Don’t get distracted.

In addition, it is important to recognize that any company-specific considerations will also be exacerbated by an elemental change in the overall investment landscape. As the FT also noted, “But this month [October] can be recognised as the point at which the market shifts from being driven by liquidity to being driven by fundamentals.” This turning point has significant implications for the hype cycle: “Turn off the liquidity taps at the world’s central banks and so does the ability of the market to believe seven impossible things before breakfast.”

Yet another important challenge in dealing with tech stocks that have appreciated substantially is dealing with the tax consequences. Huge gains can mean huge tax bills. In the effort to avoid a potentially complicated and painful tax situation, it is all-too-easy to forego the sale of stocks that have run the course of inflated expectations.

As Eric Cinnamond highlights [here], this is just as big of a problem for fiduciaries as for individuals:

“The recent market decline is putting a growing number of portfolio managers in a difficult situation. The further the market falls, the greater the pressure on managers to avoid sending clients a tax bill.”

Don’t let tax considerations supersede investment decisions.

So how do the original examples of Amazon, Alphabet and Apple fit into this? What, if anything, should investors infer from their quarterly earnings and the subsequent market reactions?

There are good reasons to be cautious. For one, all the above considerations apply. Further, growth has been an important part of the narrative of each of these companies and any transition to lower growth does fundamentally affect the investment thesis. In addition, successful companies bear the burden of ever-increasing hurdles to growth as John Hussman describes [here]:

“But as companies become dominant players in mature sectors, their growth slows enormously.”

“Specifically,” he elaborates, “growth rates are always a declining function of market penetration.” Finally, he warns,

“Investors should, but rarely do, anticipate the enormous growth deceleration that occurs once tiny companies in emerging industries become behemoths in mature industries.”

For the big tech stocks, wobbles from the earnings reports look like important warning signs.

In sum, tech stocks create unique opportunities and risks for investors. Due to the prominent role of inflated expectations in so many technology investments, however, tech also poses special challenges for long term investors. Whether exposure exists in the form of individual stocks or by way of major indexes, it is important to know that many technology stocks are run more like lottery tickets than as a sustainable streams of cash flows. Risk may be perceived as a feature by some tech CFOs, but it is a bug for long term investment portfolios.

Finally, tech presents such an interesting analytical challenge because the hype cycle can cause perceptions to deviate substantially from the reality of development, adoption and diffusion. Ridley describes a useful general approach: “The only sensible course is to be wary of the initial hype but wary too of the later scepticism.” Long term investors won’t mind a winding road but they need to make sure it can get them to where they are going.


via RSS Read More Here..

World’s Largest Shipper Warns Of Early 2019 Slowdown 

The world’s largest shipper A.P. Moller-Maersk sounded the alarm on Wednesday by announcing there would be a tremendous “price to be paid” for President Trump’s trade war as global demand has now plummeted to its lowest level in more than two years.

Chief Executive Soren Skou told the Financial Times that it expected global container trade to decline by .5% to 2% in 2019 and 2020 due to increased tariffs between the US and China.

“The impact right now on US-China trade is that Chinese imports to the US have gone up and US exports to China have gone down...Obviously, there will be a price to be paid sometime in the first quarter . . . There will be no real impact until after Chinese new year [in February],” Skou said in an interview.

The demand outlook for 2019 looks rather gloomy, as top US importers have been quickly stocking up on Chinese goods before new import tariffs take effect on January 01, this could mean that container demand plummets sometime between January and March 2019 – something that Skou warned about above.

The US has introduced tariffs of 10% to 25% on $250 billion worth of Chinese imports, prompting Beijing to retaliate with tariffs of their own. Trump has threatened China with a full-blown trade war in 2019, a move that would crush the global economy. 

In August, we first reported that freight data via Goldman identified global trade momentum was slowing since late 2017, and that July readings suggested an alarming continuation, and in some cases acceleration, of this trend.

The deceleration in shipping rates has closely tracked a tightening in global financial conditions, particularly evident in EM data, which in turn has largely been a manifestation of the ongoing escalation in the trade war.

Earlier this month, we outlined even more evidence from Reuters shows the cost of chartering commercial ships has collapsed even further. More specific, rates for container ships have sunk 27% from a multi-year peak while raw material vessel rates have fallen 10% from a five-year high, adding to the mounting evidence that slowing global trade could soon usher in a worldwide recession around 2020.

The Harper Petersen Charter Rate Index, which is published on a weekly basis, tracks rate levels in US Dollars of container ships, had dropped well over 27% from June when it was at a seven-year high to 499.

As shown below, the S&P500 usually has a tantrum when container rates collapse…

And there you have it, the world’s largest shipping company has proof that Trump’s trade war with China could lead to economic turbulence in early 2019. 


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