February 10: Daily Contrarian Reads

Trumponomics And The End Of The Dollar Standard—–An Epochal Development

This was upended in 1971 when the US stopped settling its current account deficit in gold (Charles de Gaulle, on Rueff’s advice, catalyzed this shift by demanding that the US settle with a physical transfer of gold ingots). Subsequently, US dollars earned by Japanese firms have not been exchanged against gold, but rather “redeposited” at the Federal Reserve via a process of foreign exchange reserve accumulation. As a result, the US has not faced higher interest rates from its deficit with Japan and by extension from its habitual global current account deficit. It was this ability for credit to keep growing in both the US and its creditor nations that led Rueff to coin his double pyramid moniker. In the above example, both Japan and the US were able to sustain credit growth, although the ultimate source for both was “excess” US money supply…… Experience has shown that the US central bank has kept obsessively focused on consumer price inflation and disregarded events in asset markets, even if stocks were surging, the dollar exchange rate was plunging and property prices were going stratospheric. The Fed has proven willfully blind to effects from the double pyramid of credit by responding only to US price and growth data. In short, it may be the world’s central banker, but the Fed has resolutely only followed US rules.

This is How Out-Of-Whack US Trade Relationships Really Are

But the fact holds: exports add to the economy; imports subtract from the economy. And the new White House figured that out. Shipping jobs overseas hasn’t been helpful either. The new White House has figured this out too. And suddenly there’s a huge ruckus about something that should have caused a huge ruckus 25 years ago – before it got this far out of whack….Here are the countries with which the US has the largest trade imbalances in goods (services not included). The US has a trade deficit of $347 billion with China but a trade surplus of $27.5 billion with tiny Hong Kong. Since a lot of merchandise is transshipped via Hong Kong, I netted China’s and Hong Kong’s numbers in one line:

Forget Trump: The Reason For The Economic Boom Is Totally Different, And It Is About To End

Remember the G-20 “Shanghai Accord” from February 2016, a meeting where the world’s political and financial elites were rumored to sit down and unveil a plan how to boost the global economy? Well, according to a new research note out from Deutsche Bank, it was this event – together with the unprecedented credit expansion out of China that immediately followed – that catalyzed the ongoing global economic rebound, a recovery which has had nothing to do with confidence in Donald Trump policies. And, according to Deutsche analysts, it is time to get worried again because if China was indeed the catalyst for the global growth impulse into the end of 2016, and early 2017, then that impulse is about to roll over, as the Chinese-led growth is coming to an end as the following analysis suggests.

The Junk Is Piled High—–Record $1 Trillion In Junk Debt to Mature In Next Five Years

More than $1 trillion of junk-rated corporate debt is slated to mature over the next five years, creating a stiff challenge for heavily-indebted businesses if the market for riskier debt were to deteriorate, according to a new report from Moody’s Investors Service. The $1.063 trillion in maturing debt is the highest ever recorded by the ratings firm over a five-year period and also includes the highest single-year volume in 2021, when $402 billion of junk-rated corporate debt is scheduled to come due.

China’s Approaching Breaking Point—–Capital Flight Now Self-Fueling

We’ve discussed it for weeks. But today we have it on the highest authority, Bloomberg, that “China’s Currency Policy Approaches Breaking Point.” China announced yesterday that its foreign currency reserves have officially fallen below the $3 trillion mark — a psychological line in the sand…… they stand at $2.99 trillion — and falling. Many analysts estimate China needs a $2.6–2.8 trillion cushion to forestall a balance of payments crisis…..A worsening debt crisis and slowing growth have capital fleeing China as fast as its feet will allow. The Institute of International Finance reports that capital outflows swelled to a record $725 billion last year.

Why Deficit-Financed “Stimulus” Won’t Work in 2017

Considering the current public and private debt overhang, tax reductions are not likely to be as successful as the much larger tax cuts were for Presidents Ronald Reagan and George W. Bush. Gross federal debt now stands at 105.5% of GDP, compared with 31.7% and 57.0%, respectively, when the 1981 and 2002 tax laws were implemented. Additionally, tax reductions work slowly, with only 50% of the impact registering within a year and a half after the tax changes are enacted. Thus, while the economy is waiting for increased revenues from faster growth from the tax cuts, surging federal debt is likely to continue to drive U.S. aggregate indebtedness higher, further restraining economic growth.

There Baaack! Neocons Slithering Into Trump Administration

Less than three weeks into the presidency of Donald J. Trump, there are several troubling signs that the new administration is abandoning its foreign policy mandate and going off the rails.
First and foremost is the saber-rattling aimed at Iran. The ostensible reason for this is Tehran’s testing of mid-range ballistic missiles which, we are told, are “nuclear capable.” But of course any and all ballistic missile systems can be modified to carry nuclear warheads, and since Iran is complying with the JCPOA agreed to by Tehran and the Western powers, this is just rhetorical noise generated for home consumption. Accusations by the Trump administration that the tests violate a UN resolution are inaccurate: part of the Iran deal was a revision of an earlier UN resolution that forbade such tests to read that the international body merely “calls on” the Iranians to refrain from such activities. The Obama administration opposed this, but received no backing from our European “allies.” So the tests are “legal,” albeit considered provocative.

Housing Affordability—–Lowest In Seven Years

Rising mortgage rates, bigger jumps in home prices and still-moderate income growth are adding up to a triple threat for the housing market this spring. Home affordability fell to the lowest level in seven years at the end of 2016, and the ingredients for a reversal are not there anytime soon.

More Debt & Less Discipline Not the Cure For Pre-Existing Condition Characterized By Same

If enacted correctly, there are economic benefits to deregulation, tax reform and fiscal stimulus policies. However, we struggle to understand how higher interest rates for an economy so dependent upon ever-increasing amounts of leverage is not a major impediment to growth under any scenario. Also, consider that we have not mentioned additional structural forces such as demographics and stagnating productivity that will provide an increasingly brisk headwind to economic growth. Basing an investment thesis on campaign rhetoric without consideration for these structural obstacles is fraught with risk. The size of the debt overhang and dependency of economic growth on low interest rates means that policy will not work going forward as it has in the past. Although it has been revealed to otherwise intelligent human beings on many historical occasions, we retain a false belief that the future will be like the past. If the Great Recession and post-financial crisis era taught us nothing else, it should be that the cost of too much debt is far higher than we believe.  More debt and less discipline is not the solution to a pre-existing condition characterized by the same. The price tag for failing to acknowledge and address that reality rises exponentially over time.

Woe Unto The First Decade Of A New Century

On February 8, 2007, exactly one decade ago today, shares of New Century Financial, a former darling of not just Wall Street but the mainstream, plunged 37% in panicky trading. The day before, February 7, New Century reported expectations for loan production for 2007 to be 20% below 2006 levels. But the real bombshell was the reasoning for that guidance, as the company reported that early-payment defaults and loan repurchases had forced it to tighten up its underwriting guidelines……It was nothing like a bottom for New Century, of course, or, as it turned out, the whole global economy.