Morgan Stanley: "We Can Already See The Writing On The Wall"

Last Sunday, just before the Facebook plunge opened the selling floodgates for tech stocks (as also previewed here last weekend in "FANG + Apple Now Account For A Quarter Of The Nasdaq, And Some Are Getting Worried") and the broader market, Morgan Stanley warned that "something was different this year", specifically pointing out that as a result of escalating trade tensions and a global economy that is rolling over, the market may be priced beyond perfection, and that "2018 earnings expectations may be too high", which however was good news for vol-starved hedge funds (which just suffered their worst month since January 2016).

When considering what that means for markets, it feels less like 'morning in America' than 'happy hour in America'. In that sense, we're pushing back on the notion that US policy actions have meaningfully extended the market cycle, instead arguing that markets have already largely reflected, and are currently pricing in, the benefits they delivered. Hence, we see more volatility to navigate as we work through the other side of the policy agenda. In US equities, for example, tax benefits are clear in their scale, but their use is murky. The nearly 8% move in 2018e EPS following the passage of tax reform aligns with our US equity colleagues' estimate for full potential earnings benefit for the S&P from tax reform (~7.6%), leading us to believe that estimates are baking in a full flow-through of tax reform.

Morgan Stanley doubled down on the bearishness the very next day, when on Monday its chief US equity strategist Mike Wilson said that it is likely that the highs for the year are now in, that "when we look at our internal data combined with industry flows and sentiment, we think there is a strong case that January was the melt-up, or at least the culmination of it", that "peak sentiment/positioning is behind us" ...

... even as profits - the primary driver behind the recent market rally - peak: "earnings expectations might need to come down if we start to see some evidence of lower margins since consensus forecasts assume no operating margin degradation. That is another reason why we think the S&P 500 makes its highs for the year."

What does Morgan Stanley think now? Below we present the latest take from Michael Wilson, who released the following Sunday Start report ahead of this week's trading, which appears set for more volatility if only on purely statistical grounds - as some have noted, since 1990 when the S&P has lost more than 1.5% on a Friday, Monday saw a lower low 97% of the time, or on 90 out of 93 occasions.

From Morgan Stanley's Michael Wilson:

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Cruel to Be Kind

Just two short weeks ago, investors were celebrating the remarkably strong US jobs data with few signs of inflation. It was, in fact, the ideal combination for risk markets with many proclaiming "Goldilocks is alive and well!" Indeed, on the day of the release, the S&P 500 was up 1.74%--the biggest single day increase since the day after the US Presidential election in November 2016. Global markets celebrated too with every regional equity market rallying sharply that Friday or the following Monday for those that were closed when the data were released.

But, that excitement was quickly met with disappointing price action over the following days.There was no follow through—a classic sign that the good news had exhausted rather than uncovered new buyers. It also coincided with the top end our 2650-2800 trading range in which we have been suggesting the S&P 500 would be stuck until the next positive catalyst could arrive—1Q corporate earnings.

We also pointed out in our Weekly Warm-up on March 12th that the market wasn't properly focused on two very visible risks over the coming weeks—The Fed's March meeting and the potential escalation of trade tensions initiated with the US administration's steel and aluminum tariffs. Fast forward to today, and the good news is that the market is now fixated on both—especially the higher risk for a potential escalation of trade tensions—and we have quickly fallen all the way back to the low end of our trading range.

Our nearly 30 years of experience often makes us wonder if markets are really designed to play with our emotions. At the same time, we can't help but think that our firm's 2018 outlook for a "Tricky Handoff" is playing out to a T. To recall, this was very different from our much more bullish view in 2017 and out of consensus at the time of publication. The reality is that many of the things we expected this year are happening—higher volatility across rates, FX and equity markets, tighter financial conditions, risk adjusted underperformance of credit relative to equities, contracting equity valuations in the US, narrower breadth, and a peak in economic leading indicators and data surprises.

We have yet to see some of the more inauspicious things we expect later this year—including a peak in operating margins and y/y EPS growth in the US and perhaps other regions as well.However, we can already see the writing on the wall and are highly confident this becomes obvious to the masses by the end of 3Q, or 4Q at the latest. This suggests more tough times for equity investors, but we doubt it will be that easy as market tops tend to be particularly exhausting.

In the near term, we think global equity markets will eventually settle down about the Fed's slightly more hawkish path of tightening they signaled last week and the elevated risks of a broader trade dispute. Specifically, the dot plot is slightly steeper but not enough to upset the apple cart in the next few months/quarters. Our fixed income strategists have been highlighting rising funding costs—led by LIBOR—as a near term risk, but they also expect reduced supply in April and a subsequent fall in these rates. This should provide another positive catalyst along with corporate earnings.

As for the risk of a broader trade dispute, we think the odds here remain low as well. We note that so far, the size of the tariffs announced—25% on up to $50-60B—amounts to just $12-5-15B in actual tariffs. More importantly, Europe has been exempted much like the President exempted Canada and Mexico from the steel and aluminum tariffs a few weeks ago. This all suggests these shots across the bow are being used more as negotiating tactics. China's response, so far, is tepid with tariffs affecting just $3B of traded goods with the US.

While I acknowledge most disputes are typically started unintentionally, I also believe the tail event will be over discounted in the near term relative to the actual near term impact on earnings and growth. In addition, these kinds of events do tend to ebb and flow and right now it's ebbing sharply which means it's getting priced; and just like markets top on good news, they bottom on bad. There is also significant valuation support at current prices so we stick to our guns that higher price highs for the year are still likely in 2Q/3Q for US equity markets as forward earnings move higher; but it should continue to narrow, we expect leadership to get more defensive and the S&P 500 should likely end the year not far from current levels as earnings growth expectations decelerate from the evolution of the business cycle, tougher comparisons and tighter financial conditions. In the meantime, enjoy your Sunday!

PetroYuan Futures Open - Over 10 BillIon Notional Trades In First Hour

After all the preparation, all the expectation, cheerleading and doomsaying, China's Yuan-denominated crude oil futures contract began trading tonight and appears to be off a good start with well over 10 billion yuan notional traded within the first hour.

So far it has tracked WTI futures well, trading at around a $2 premium to WTI (when translated from yuan to USD)...

Additionally, well over 23,000 contracts have traded within the first hour for a notional trading volume of over 10 billion yuan - more than $1.5 billion notional... signaling significant demand.

Offshore Yuan is moving in sync with 'Petroyuan' futures - as WTI tends to track the USD.

As we most recently noted, after numerous "false starts" over the last decade,  the "petroyuan" is now real and China will set out to challenge the "petrodollar" for dominance. Adam Levinson, managing partner and chief investment officer at hedge fund manager Graticule Asset Management Asia (GAMA), already warned last year that China launching a yuan-denominated oil futures contract will shock those investors who have not been paying attention.

This could be a death blow for an already weakening U.S. dollar, and the rise of the yuan as the dominant world currency.

But this isn't just some slow, news day "fad" that will fizzle in a few days.

A Warning for Investors Since 2015

Back in 2015, the first of a number of strikes against the petrodollar was dealt by China.Gazprom Neft, the third-largest oil producer in Russia, decided to move away from the dollar and towards the yuan and other Asian currencies.

Iran followed suit the same year, using the yuan with a host of other foreign currencies in trade, including Iranian oil.

During the same year China also developed its Silk Road, while the yuan was beginning to establish more dominance in the European markets.

But the U.S. petrodollar still had a fighting chance in 2015 because China's oil imports were all over the place. Back then, Nick Cunningham of OilPrice.com wrote…

Despite accounting for much of the world's growth in demand in the 21st Century, China's oil imports have been all over the map in recent months. In April, China imported 7.4 million barrels per day, a record high and enough to make it the world's largest oil importer. But a month later, imports plummeted to just 5.5 million barrels per day.

That problem has since gone away, signaling China's rise to oil dominance…

The Slippery Slope to the Petroyuan Begins Here

The petrodollar is backed by Treasuries, so it can help fuel U.S. deficit spending. Take that away, and the U.S. is in trouble.

It looks like that time has come…

A death blow that began in 2015 hit again in 2017 when China became the world's largest consumer of imported crude…

Now that China is the world's leading consumer of oil, Beijing can exert some real leverage over Saudi Arabia to pay for crude in yuan. It's suspected that this is what's motivating Chinese officials to make a full-fledged effort to renegotiate their trade deal.

So fast-forward to now, and the final blow to the petrodollar could happen starting today. We hinted at this possibility back in September 2017…

With major oil exporters finally having a viable way to circumvent the petrodollar system, the U.S. economy could soon encounter severely troubled waters.

First of all, the dollar's value depends massively on its use as an oil trade vehicle. When that goes away, we will likely see a strong and steady decline in the dollar's value.

Once the oil markets are upended, the yuan has an opportunity to become the dominant world currency overall. This will further weaken the dollar.

The Petrodollar's Downfall Could be a Lift for Gold

Amongst all the trouble ahead for the dollar, there are some good news too. The U.S. might have ditched the gold standard in the 1970's, but with gold making a return to world headlines… we could see a resurgence.

For the first time since our nation abandoned the gold standard decades ago, physical gold is being reintroduced to the global monetary system in a major way. That alone is incredibly good news for gold owners.

A reintroduction of gold to the global economy could result in a notable rise in gold prices. It's safe to assume exporters are more likely to choose a gold-backed financial instrument over one created out of thin air any day of the week.

Soon after, we could see more and more nations jump on the bandwagon, resulting in a substantial rise in gold prices.

Hedge Fund CIO: "The Market Generals Are Dead"

"Every market has its generals," said the CIO, atop the hill, surveying the battlefield. "Bull markets march onward, upward until their leaders die," he said, lowering his binoculars, smoke rising from the valley floor.

Banks led the last great bull market. Fueled by reckless lending and leverage, loose regulation, moral hazard, and the wondrous illusion of boundless riches that accompany all reflexive markets, these generals charged ever upward, looting, pillaging. Leading the troops. Until they didn't.

The S&P 500 peaked in October 2007, then fell 58%. When it bottomed seventeen months later in March 2009, Citigroup stock lay in the dust, trampled, mangled, mutilated beyond all recognition.

Citi's stock price had collapsed 98.3% from its 2007 highs. It never really recovered. Bank of America plunged 95%. Morgan Stanley fell 91%. Goldman 82%. JP Morgan 72%.

"I suspected that regulation would be the death of the current market's technology generals," he said, turning to his table, unrolling a map. "I was right."

From the 2009 lows through the recent highs, the S&P 500 advanced 331%. In that drive, Facebook rallied 413% (from its 2013 IPO), Amazon surged 2102%, Apple 1123%, Netflix 5349%, and Google 586%.

"The generals are dead." From recent highs, Facebook has stumbled 18%, Amazon 8%, Apple 10%, Netflix 10%, Google 14%.

"Trading market tops is difficult," he explained, "That's where we are now." With his finger, he traced the advances and retreats of the S&P 500 since WWII. Nearly every top was a volatile series of skirmishes lasting 6-18mths, before the real decline. The notable exception being 1987.

"The generals are dead, but the economy remains strong." Employment, wages, profits too. "The bull case is all backward looking. It describes why it makes sense to stay invested. But it's intellectually bankrupt," he said, repositioning his troops on the map. "You get paid for the future, not the past."

The Fed just took away the punch bowl

Trump's new Federal Reserve chair just increased interest rates in a sign the economy is doing well.

The Federal Reserve raised interest rates on Wednesday by a quarter of a percentage point to a 1.5 to 1.75 percent range — the highest level in a decade and a signal of continuing economic strength. 

Fed officials said in a statement that the "economic outlook has strengthened in recent months" and increased their growth estimate for this year to 2.7 percent from 2.5 percent, when they last put out projections in December. Officials estimate the economy will grow by 2.4 percent in 2019 and 2 percent in 2020. They also forecast lower unemployment and an increase in inflation to their target in the "coming months."

The interest rate move was widely expected — in December 2015, the Fed raised rates for the first time since 2006, by 0.25 percentage points, and it has been slowly raising them ever since. (It slashed rates to essentially zero in 2008 in the midst of the financial crisis recession in an attempt to jump-start the economy.) 

But Wednesday's rate increase is a bit different. For one, it is new Fed Chair Jerome Powell's first big move after taking over from Janet Yellen in February, as well as his first policy meeting and news conference. 

Onlookers are eager to get any signs or signals about what the Fed might do moving forward. It was expected to increase interest rates by a quarter of a point three times this year, but there was some chatter it could raise them four times instead, given the recent economic stimulus from Congress with December's $1.5 trillion tax cut and federal spending increases. On Wednesday, officials stuck to the three-rate-hike plan for 2018 but indicated they will increase the pace of rate increases in 2019.

"The question about what the Fed is predicting is all about its trajectory of interest rates now," Mark Hamrick, a senior economic analyst at Bankrate.com, told me. "It's a widely held assumption that rates will be rising; the question is how much and when."

The Fed uses interest rates to influence employment, inflation, and the economy

To zoom out a little bit: The Federal Reserve is the central bank of the United States. One of its main responsibilities is managing interest rates and influencing the availability and cost of credit in the American economy. It sets the "federal funds rate" — the interest rate banks charge each other for overnight loans — and can adjust the rate to sway the economy.

When the Fed fears the economy might be overheating or sees inflation on the rise, it can raise interest rates to slow the whole thing down. That raises the cost of borrowing for banks and, in turn, for consumers, which eventually affects spending across the economy. 

William McChesney Martin, who led the Federal Reserve for nearly two decades, famously joked that the Fed's job is to "take away the punch bowl just as the party gets going." To continue the metaphor, like how some bars set the clock a bit fast to get everyone out the door before closing time, the Fed's job is to cool down the economy just as things start getting fun. 

The bank has a "dual mandate," a set of goals it is supposed to achieve: maximizing employment and stabilizing prices for goods and services. In practice, that means the Fed needs to try to keep the unemployment rate low — the idea being that if borrowing costs are low, businesses will have more money to invest and expand and ultimately hire more workers — and target an inflation rate of 2 percent, because a higher inflation rate is costlier than a lower one. 

During the Great Recession, the Fed slashed interest rates to zero and kept them there for years in an effort to help boost America's economy. The theory is that low interest rates boost both investment and consumption because it's cheaper to borrow and therefore there's less incentive to save.

If the Fed does raise interest rates three times this year, as expected, they would end up in the 2 to 2.25 percent range. That's still low — prior to the financial crisis in 2006, they were at more than 5 percent. In the early 1980s, the Fed hiked rates to as much as 20 percent to fight inflation. 

What the Fed's interest rate means for you

The Fed's interest rate hike means different things for different people — depending on where they've got their money parked, their future expectations, and whether they have a lot of debt.

Generally, if you're saving money, a rate hike will help you (at least a bit). If you have debt with variable rates, or you expect to, it could hurt you (again, at least a bit). If you have stocks, you're probably fine, as long as the Fed doesn't do something unexpected.

Rate hikes generally modestly benefit savers, because when the Fed rate rises, rates on vehicles such as savings accounts tend to go up as well. Fed rate hikes are reflected in CDs — certificates of deposit — to some degree, and as the Fed continues to increase rates in the months and years to come, savings rates are likely to follow as well.

"As savers of all kinds, including those who are saving or retirement, look for more conservative ways of saving their money, certainly these savings accounts will become more generous with their concerns, but they won't be lottery jackpots by any means," Hamrick, of Bankrate.com, said. 

The St. Louis Fed points out that the interest rate on one-year Treasury bonds tends to track the Fed's rate pretty closely, while the interest rate on 10-year Treasury bonds does not. There is, however, some "co-movement."

For people or companies with a lot of debt — or looking to take on more debt — rising interest rates can be problematic. As the Fed raises rates on banks, banks in turn increase interest rates on credit cards, car loans, small business loans, and mortgages. In other words, if you owe money, expect to pay higher interest rates on it.

Borrowing rates in a number of arenas are already fairly high. Mortgage interest rates increased for nine straight weeks this year before dropping in March. They are still at their highest level in four years. The average credit card interest rate is about 16 percent, and increasing interest rates are likely to drive that higher too.

Rates also go up for corporations, many of which have loaded up on debt since the Fed cut interest rates to zero in 2008 in the midst of a recession. An estimated $4.4 trillion is expected to come due from corporate America by 2022, and as interest rates go up, so will the amounts companies owe to pay back that money.

"Anyone who has variable-rate debt is going to see their costs rising," Hamrick said. "A debt does come at a cost."

Rising interest rates can also make the stock market nervous, though the Fed has been careful to keep Wall Street calm and clearly signal what sort of interest rate increases it's planning and when. Zero and super-low interest rates have made stocks the only place for investors to make money in recent years, and the fear is that if the Fed raises interest rates, investors will start to look elsewhere. Higher rates make borrowing more expensive and slow down credit flows to companies and individuals, which could be a drag on stocks. 

If the Fed gets more aggressive than anticipated about rate hikes, that could put the brakes on the economy and, in turn, spook investors. A slowed economy translates to weaker earnings growth for companies, and that translates to bad news for stocks. 

The Fed's Wednesday announcement suggested that more rate hikes than expected won't be in store for 2018 but may be for 2019. Officials had previously forecast two rate increases in 2019 but on Wednesday penciled in three. 

"The Federal Reserve's actions are essentially a punctuation point affirming to all of us that interest rates are on the rise and expected to rise further," Hamrick said. 

Too-fast rate hikes could put Powell on a collision course with Trump

During his presidential campaign, Donald Trump often criticized the Fed, alleging it was keeping interest rates artificially low in an effort to prop up the Obama economy. 

But since taking office, the blustery billionaire has taken a liking to keeping rates down. "I do like a low-interest rate policy, I must be honest with you," Trump said in an April interview with the Wall Street Journal. The president reportedly told former Fed Chair Yellen that he considered her, like himself, a "low-interest-rate" person. 

Thus far, the Fed appears to be moving with caution when it comes to interest rates, but if it starts to move aggressively, it could put itself and Powell — Trump's Fed appointee — on a collision course with the president. The White House has championed the December tax cuts as an effort to juice the economy and has focused on boosting economic growth. If it succeeds, that's exactly when the Fed will step in to slow things down. 

Powell on Wednesday stuck to the program on interest rates, but he may have gone afoul in another arena: tariffs. When asked about the administration's moves to implement tariffs on steel and aluminum imports at a press conference, Powell acknowledged the matter had come up in the Fed's policy meeting and there are some concerns. "On tariffs, a number of participants in this FOMC did bring up the issue of tariffs," he said. "If I could summarize what came out of that, it was, first, that there's no thought that changes in trade policy should have any effect on the current outlook."

He added that in meetings with business leaders, "trade policy has become a concern growing for the group."

JPMorgan: "We See Risk Of Institutional Capitulation"

One week ago, JPMorgan - which at the start of March warned that based on the recent "erratic behavior of retail investors" the idea that retail investors will serve as the marginal buyer of equities in the current environment was in jeopardy - found some solace in that week's record equity ETF inflows of over $40 billion, which suggested to the bank that retail investors are once again the "marginal buyer of equities" even as institutional investors continued to quietly sell their equity holdings.

However, being a fickle, momentum-chasing bunch, it did not take long for mom and pop retail investor to pull a 180 and for record inflows to turn into near-record outflows, because as reported yesterday using the latest EPFR data, last week saw $20 billion in equity fund outflows, the second highest on record, and only smaller compared to the record outflows observed in the February 5 VIXplosion week when countless retail vol-sellers were crucified instantly when XIV experienced an "acceleration event."

Meanwhile, more ominously, JPM had noted that no matter what retail investors did, institutions appeared to have no interest in re-entering the market, on the contrary, they appeared to be quietly liquidating to retail investors, a trend which incidentally started around the time of the last market peak in 2007, and hasn't changed since.

Well, it's only logical that if institutions didn't like the market last week when it was levitating on no volume back to all time high, then they certainly would not like it this week, when the Dow Jones reentered a correction, down over 10% from the January 26 high.

And, as JPM's NIck Panigirtzoglou wrote late on Friday in his latest "Flows and Liquidity" report, "Institutional investors continued to act as a drag for the equity market and if anything they appear to have turned even more cautious over the past week." This is shown in the table below which lays out the equity beta for various institutional investors, from Equity L/S, to Macro, to CTA, to risk parity and concludes with balanced (60/40 equity bond) mutual funds.

Wrapper for Investing Channel, generated on 2017-11-29T16:13:20-05:00

The table shows that all betas declined in the most recent period between March 13th to March 21st, indicating ongoing equity unwinds and deleveraging. More notably, Risk Parity funds saw a sharp decline in their beta over the past week in response to the rise in volatility, while both Macro and CTA funds now appear to have taken an outright net short position as their betas turned negative in the last week. 

Here JPMorgan asks what has made institutional investors so cautious over the past month, and responds that "there are three main reasons cited by clients in our conversations": 

Macro forces have turned less supportive. The cyclical momentum of the global economy appears to be downshifting as suggested by this week's flash PMIs. And an apparent escalation of trade wars is increasing macro downside risks. 

Institutional investors think upward momentum in equity markets appears broken. As a result, chasing long-term equity momentum no longer looks as attractive as an investment strategy. 

Equity valuations are still frothy, and therefore the 9% correction so far since the Jan 26th peak appears not enough to trigger "buy the dip" flows. 

Whatever the reasons for this stubbornly cautious stance by institutional investors, Panigirtzoglou warns that it is emerging as a headwind for equity markets. Here JPM's flows expert picks up where JPM's chief technical analyst, Jason Hunter, left off yesterday, when as a reminder Hunter cautioned that should the S&P slide below 2,610, that clients should reduce exposure to the S&P (the S&P closed Friday at 2,588, just above the 200DMA of 2,585).

So what happens next according?

According to the JPM strategist "the biggest near-term risk for equity markets is a breach of the lows we saw on Thursday, Feb 8th" and adds that "anecdotally, during that Thursday, fundamental equity investors came close to capitulation, so revisiting these lows raises the risk of capitulation, in our view, and thus of a more serious correction beyond the 10% decline seen between January 26th and February 8th."

As the chart below shows, we are nearly there.

What about retail investors: could they again step in and provide an offset to the "cautious" stance of institutional investors? Unlikely: according to JPM, when looking through the volatility of weekly equity ETF flows, the big picture is that following an interruption in February, retail investors have resumed their equity ETF buying in March. However as we noted up top, March's buying pace is not only increasingly extreme in both directions, but also "looks too weak to propel the equity market, especially compared to previous months before the February correction" according to JPM.

As such, with both institutions and retail investors out, and corporate bond yields jumping making buybacks increasingly expensive, suddenly the question of who will buy as everyone else sells has no satisfactory answer.

To summarize, JPM is becoming increasingly worried that "the stubbornly cautious stance by institutional investors is emerging as an important headwind for equity markets in the near term", and what's worse, should the S&P drop another 1-2%, and take out not only the 200DMA but also the early Feb lows, it looks virtually certain that institutions, which refused to liquidate during the vol explosion last month, will not show similar patience this time around.

"Baked In The Cake" - Why LIBOR's Blowout Has Already Done Its Damage

The global funding market crisis is getting worse and its contagion is starting to show up in assets that 'mom and pop' care about. Bank stocks are being battered...

Following bank credit risk's spike...

And European High Yield risk has exploded to one-year highs...

European stress is worse than US for now, as Charlie Diebel, head of rates at Aviva Investors, notes:

"The longer it [LIBOR-OIS increase] goes on, the more pronounced the effects are going to be...

It complicates the efforts of policymakers because in Europe we still have QE (quantitative easing), but we have some sort of tightening coming at the same time."

And Investment Grade credit risk is soaring to six-month wides in EU and US...

Simply put, LIBOR doesn't need to blow out any more for the pain to emerge...

As one veteran credit-trader exclaimed: the bank credit pain "is baked in the cake" as the lagged reaction to short-term funding needs (and soaring costs) creeps into those so-called fortress balance sheets.

TREND CHANGE EVIDENT, STOCKS HAVE PEAKED

Precious metals expert David Morgan tells: "The stock market has peaked, and the gold market is starting the next leg up."

In this week's SD Metals & Markets:

The Federal Reserve raised interest rates by a quarter percent, leading to the Dow and S&P500 breaking their trend line supports. Internet and social media stocks continue to lead the technology sector lower.

Precious metals market has started its next leg up, Morgan says, with gold leading.

Morgan also comments on the latest trade war with China. It's only going to get worse from here, he says. "This is just the beginning."

By purchasing gold, China and Russia are well prepared for a currency reset, says co-host Eric Dubin.

Here It Comes: China About To Launch "Tens Of Billions" More In Tariffs

This morning the market has been on edge over, and traders are obssessed with just one question: how will China retaliate to Trump's trade war and tariffs... further. After all, the initial response of a modest 15-25% tariff on $3 billion in 128, mostly agricultural, products, seemed laughably small and appeared to be more of a warning shot than a real response to Trump's $50BN in Section 301 tariffs.

One answer was revealed moments ago when as we reported that China's ambassador to the US Cui Tiankai did not rule out the possibility of scaling back purchases of Treasuries in response to Trump's tariffs.

"We are looking at all options," he said, when asked whether China would consider reduced purchases of Treasuries. "That's why we believe any unilateral and protectionist move would hurt everybody, including the United States itself. It would certainly hurt the daily life of American middle-class people, and the American companies, and the financial markets."

But the more likely reaction is that China will simply escalate with a "brute force" tit-for-tat retaliation, and as Citi notes, the editor-in-chief of the state-controlled Chinese newspaper Global Times, Hu Xijin, confirmed precisely that when he tweeted: "I learned that Chinese govt is determined to strike back."

More importantly, he explained the confusion over the "disproportionate" $3 billion response, noting that "Friday's plan to impose $3b tariffs is simply to retaliate to tariffs on steel and aluminum products", i.e. a response to the previous, Section 232 round of tariffs, and has nothing to do with the latest round of $50 billion in Section 301 tariffs.

Instead, Hu warns that "China's retaliation lists against the 301 investigation will target US products worth $ tens of billions. It is in the making."


Hu Xijin 胡锡进@HuXijin_GT


I learned that Chinese govt is determined to strike back. Friday's plan to impose $3b tariffs is to retaliate tariffs on steel and aluminum products. China's retaliation lists against the 301 investigation will target US products worth $ tens of billions. It is in the making.

4:49 PM - Mar 23, 2018
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Or, in other words, China's real retaliation - one which is guaranteed to infuriate Trump with its proportionality and lead to further tit-for-tat responses - is about to hit.

As a reminder, here is a list of the main US exports to China, which - if this warning is accurate - are about to be crushed.

Peter Schiff: There's A Big Problem With The Economy, "Americans Are Broke"

Financial analyst Peter Schiff says there's a big problem with the economy even though the mainstream media is reporting that rising interest rates are a good thing. The problem, however, is that Americans are broke, and those interest rates could have a major impact on some of our wallets.

"The bad news is, we are going to live through another Great Depression and it's going to be very different. This will be in many ways, much much worse, than what people had to endure during the Great Depression," Schiff says.

"This is going to be a dollar crisis."

"When you are talking about the magnitude of the debt we have, that extra money [raising interest rates] is big. That's going to be a big drain on the economy to the extent that we have to pay higher interest to international creditors...

...a lot of this phony GDP is coming from consumption, while the average American who is consuming is deeply in debt and they are going to impacted dramatically in the increase in the cost of servicing that debt...

...given how much debt we have, and how much debt is going to be marketed the massive increase in supply will argue for interest rates that are higher." –Peter Schiff

Retail sales "unexpectedly" fell again in February even though most media outlets are touting a booming economy that can support raising the interest rates. It was the third straight monthly drop and the first time the US economy has seen three straight months of declining retail sales since 2012.

Sales fell 0.1% in February even though analysts had expected an uptick of 0.3%. According to CNBC, households cut back on purchases of motor vehicles and other big-ticket items, pointing to a slowdown in economic growth in the first quarter. But Peter Schiff won't sugarcoat this one for us: Americans are broke.

And the worse things get, the less investors seem to notice.

What makes matters even worse is two Fridays ago, we got the "too good to be true" and "just what the doctor ordered" Goldilocks jobs report that said 1 million people got jobs. Schiff said this "good news" report doesn't make any sense, actually.

"So why didn't any of those million people take their paychecks and spend them at a retailer? I mean, Trump is talking about all the great jobs, and all the raises that people have, and all the tax cuts. Why are retail sales down for three months in a row?" –Peter Schiff

Unfortunately, we also saw Americans running up record high levels of debt at the same time that the government is running massive deficits.

Last month, the New York Fed released the latest data on US household debt, revealing it has grown to a record $13 trillion. So yes, Americans have been spending, but they've been putting a lot of it on plastic. Credit card balances grew by $24 billion in the last quarter of 2017 alone. Could it be that Americans have maxed out the plastic?

At some point, a house of credit cards will collapse.

Schiff is hard on Donald Trump too, and rightfully so. Lower taxes are always a good thing, the lower the better, in fact. But Republicans refused to cut any government spending while instead, increasing it to the point of running massive deficits, making them worse than Democrats when it comes to being fiscally conservative.

The cold truth is that a backup plan is needed, and most Americans don't have that. Many would be in some serious trouble during a financial downturn, and the country is most definitely headed that way.