(Washington)

In what seems to be a perfect study in the law of untended consequences, the government’s new focus on tariffs are driving US manufacturers out of the country. American motorcycle maker Harley-Davidson (side note: can you think of a company more American than Harley-Davidson) has announced it will move some production off-shore because of retaliatory EU tariffs on American motorcycles. Europe is one of the biggest consumers of US products, including for Harley, and the company does not want to lose market share by raising prices for European consumers.

FINSUM: This is the downside of a trade war. Trump wants to have more US manufacturing jobs at home, but retaliations can cause perverse economic incentives to move manufacturing overseas.

(New York)

The Dow had a very ugly day yesterday, as did the Nasdaq and S&P 500. However, that might just be the beginning, argues Barron’s. Markets plunged as Trump escalated the trade stand-off with China and other US trading partners, including limiting Chinese investment in American technology companies. And while markets have been looking at a possible trade war for months, it seems as though they have not fully priced in one of the magnitude which now looks to be emerging. According to one analyst, “Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet”.

FINSUM: This is a very ugly, but realistic, prediction. We are increasingly worried about the direction of the international dispute on trade.

(Houston)

OPEC is going to raise output by 1m barrels per day in a Saudi-led decision. But what will that mean for prices and oil-related companies? One might assume that higher output would be bad for prices, but in this instance, likely not. The reason why is that the high output is offsetting lost production from OPEC members like Venezuela and Iran. Libya is also experiencing lower production. All told, the three countries may combine for a 1.5mbd to 2.3mbd drop by the end of the year.

FINSUM: This hike is really just a partial offset to a much larger decline that is going on. It seems like it would be wise to stay bullish on prices.

(New York)

Many investors are worried about rising yields, which could wreak havoc on everything from the economy, to income stocks, to all manner of bonds. Well, for what it is worth, Morgan Stanley has just put out a piece arguing that the 3.12% yield seen on the ten-year Treasury recently is it, the peak. Morgan Stanley says that yields will stop rising and they are advising clients to go long Treasury bonds at current yields. The argument stands in contrast to Pimco and JP Morgan, who both see yields moving towards 4%. The one caveat to the call is if trade tensions get settled quickly, as turmoil on that front is one of the bullish drivers they see for Treasuries.

FINSUM: If trade tensions keep flaring we agree that Treasury yields are likely to stay flat or fall as investors flee to safety.

(New York)

As if there were not enough worrying indicators out there, Market Watch has featured a new worrisome measure. The paper interviewed a famous Wall Street quant who says that algorithms which track broad social media sentiment are showing significant risks of a serious decline in equities. The big worries on the public’s mind revolve around the escalating trade war between China and the US. The indicator also informs sector picks, to which strategist Yin Luo said “With U.S. stocks, we are bullish consumer discretionary, technology, and industrials over the medium horizon, and are negative on consumer staples and telecom services, where fundamentals remain relatively weak and momentum has been negative”.

FINSUM: We are always skeptical of these kinds of views because what people say on social media is not a very good reflection of what they are doing in their investment account. Further, there are likely mountains of people being assessed by the algorithms that have no trading/investment account, so their impact is nearly non existent.

(Washington)

The trade war between the US and China is intensifying. Investors will already be aware of the tit-for-tat $50 bn tariff packages the US and China have placed on each other, as well as Trump’s plan for a further $200 bn to be applied. However, the news is that Trump is now also preparing a comprehensive package of blockages to Chinese direct investment into the US. The amount of Chinese overseas investment flowing into the US has already plummeted to $1.8 bn in the first half of 2018, down from nearly $50 in 2016.

FINSUM: This trade spat just keeps escalating. The big risk is if China decides to sell US Treasuries and agency bonds as a payback, but we think that is still a few steps away.

(New York)

A big wave of buybacks is about to hit markets, and in an area where they haven’t showed up for a long time. The Federal Reserve is expected to give the green light to banks this week to rain buybacks down on investors. Furthermore, dividends are expected to grow considerably. Banks are expected to return 100% of their earnings over the next 12 months. JP Morgan is expected to hike dividends to 3%, and Citi looks poised to buy back 10% of its stock.

FINSUM: Goldman Sachs and Morgan Stanley might be the odd banks out in this forthcoming frenzy, but otherwise it should be very bullish for investors.

(Washington)

Last week was a brutal one for markets. The Dow fell about 2% over the week as the index approached its longest losing streak since 1978. However, the reality, according to Barron’s, is that the US is winning the trade war, at least so far. Trump has already imposed $50 of tariffs, which China responded to in kind. However, Trump is planning another $200 bn, while China only imports a total of $130 bn of goods, meaning they have much less room to retaliate. Further, US financial markets are much more broad and deep, meaning there are more places for investors to safely stash their money.

FINSUM: China does not have too many options to retaliate. If they devalue the yuan it will really hurt their markets; if they sell Treasury bonds they will either find no buyers (if they sell a lot at once) or the market will just absorb it in smaller bits.

(New York)

For the first time since WWII, Americans are retiring in worse financial condition than the generations that preceded them. Those aged 55 to 70 are preparing to retire with the biggest financial burdens and lowest benefits since Truman was in office. Many have high debt, including paying off children’s tuitions and for aging parents. Their 401(k)s are in poor shape, with a median income of just $8,000 per year for a household of two. According to the study, which was conducted by the Wall Street Journal, more than 40% of American households headed to retirement lack the resources to maintain their current lifestyles. That is about 15m households.

FINSUM: We are having a hard time reconciling this with all the reports of how wealthy the Baby Boomer generation is, yet this comes from quite a reputable source. It must ultimately come down to wealth inequality within that generation.

(Beijing)

All our readers will be aware of the intensifying trade war between the US and China. And while the US seems to have a strong position on trade (with less to lose than its partners), that is not the whole picture. The reality is that the US makes up much of what it loses on trade through massive overseas investment Dollars that flow into US assets. While much of the public’s awareness of this centers on Treasury bonds, one other big area of foreign participation is in MBS, or mortgage bonds. What is much less known is that more recently, foreign buyers, including China, have been much bigger consumers of US mortgage agency bonds (e.g. Fannie and Freddie).

FINSUM: China has the power to simply turn off the spigot on the mortgage market, which could lead to a surge in interest rates and a resulting collapse in prices. That would put US politicians in more hot water than tariffs ever could.