Blaine Rollins: One Foot on the Brake and One on the Gas

“U.S. markets are not in long-term equilibrium,” Greg Jensen, Bridgewater’s co-chief investment officer, said in a telephone interview this week. “We believe the next move is into cash, as we believe stocks and bonds are going to perform poorly over the next 18 months.”

Jensen, who helps oversee roughly $160 billion in assets, said his outlook follows a decade when central bank policies bolstering market liquidity and keeping interest rates low have driven investors to seek out higher returns where they could.

While prolonged easy money policies and economic expansion have bolstered returns from riskier assets, Jensen said they have resulted in lowered current total return prospects.
“It almost looks like in U.S. asset markets that the riskier the asset, the lower the expected return,” he said.

Jensen said cash, whose yield moves in sympathy with U.S. Federal Reserve interest rate hikes, looks attractive for the first time in years as the central bank pursues quantitative tightening.
“Cash has become a viable alternative to (financial) assets on an expected return basis,” he said. “While there is still a lot of cash globally, it is on corporate and bank balance sheets preventing a financial cascade, but U.S. investors have very low cash levels.”

(Reuters)

We are getting closer to a recession. When the curve goes flat from the two-year Treasury to the 10-year [meaning that the yields are identical], the recession risk is at least a year away. Recently, that spread was 28 basis points [hundredths of a percentage point], which is pretty close to being flat. It is flashing yellow. It needs to be respected. The other reason to think 2019 might be more problematic is that quantitative tightening has just started. The Fed has started to let bonds roll off its balance sheet [the central bank isn’t buying new bonds when many current holdings mature]. Several billion dollars of bonds per month are coming due, but by October the amount will be up to $50 billion per month.

At the same time, the Fed has said it intends to keep raising interest rates, probably twice more this year. That, together with the signal from the yield curve and perhaps $600 billion of quantitative tightening, and a budget deficit that is growing, is an issue. The strangest thing is that Congress passed a $280 billion tax cut and spending increases so late in the cycle, and with interest rates rising. It’s like a death wish. The U.S. is taking on hundreds of billions of dollars of debt while raising rates, which means our debt-service payments are going to be under serious pressure to the upside.

(Barron’s)

One gauge of recession risk with a “pretty good” track record over the last half century has just raised a cautionary signal, according to the Leuthold Group.

For the first time since just prior to the 2007-2009 recession, premiums on the lowest-rated tranche of investment-grade U.S. corporate bonds have risen to 2 percent after being below that level, according to data compiled by the Minneapolis-based research group. The analysis looks at the gap in yields between corporate debt rated Baa by Moody’s Investors Service and those on 10-year Treasuries.

(Bloomberg)

You cannot predict, but you can prepare. ~ Howard Marks

(@mjekm5)

Synchronized global growth is over. We all benefited from it last year. The German economy was growing by 2.3% in the fourth quarter. Now, growth has fallen to 1.6%. Germany is the economic linchpin of Europe. The U.S. is growing by an annualized 2.8% or so, but a real trade war between the U.S. and our trading partners could shave 100 basis points [one percentage point] off real gross domestic product next year. Trade issues should have been dealt with through quiet diplomacy, not a public spectacle.

(Barron’s)

As David Williams looked over the soybean fields of his 3,800-acre farm, he counted the ways he’s had to handle falling commodity prices in recent years: not purchasing new equipment, cutting costs, finding less expensive farming methods.And now that China has implemented 25 percent tit-for-tat tariffs on soybeans and other imports from the United States, the 67-year-old president of the Michigan Soybean Association wonders what that will mean for the future.

“Nobody wins in a trade war,” said Williams, a fifth-generation farmer. “We’re not going to win. China’s not going to win. In the meantime, soybean farmers are just hurting.”
With farm net incomes down nearly 60 percent since 2013, many farmers who supported the president in 2016 are feeling further strain as they face the repercussions of an intensifying trade war. The price of soybeans has plunged 17 percent in the past month. Williams has seen $2 less per bushel of soybeans, about a 20 percent decrease.

“I feel like agriculture has supported the current administration,” Williams said. “I don’t feel that support coming back to us.”

(Detroit News)

“We are already feeling the brunt of these tariffs in the form of a reduction in the purchase of products that historically we’ve been selling to China for many years now, soybean in particular,” he said on “Power Lunch.”

Last week, China slapped retaliatory tariffs on $34 billion worth of U.S. goods, including soybeans and pork, in response to U.S. duties on $34 billion worth of Chinese goods.
President Donald Trump responded earlier this week by unveiling a list of tariffs on $200 billion in Chinese goods. The duties will not go into effect immediately but will undergo a two-month review process. China then hit back with its own threat of tariffs on $200 billion of U.S. goods.

Naig said that Iowa predominantly produces corn and soybean, so farmers can’t try to come up with a “plan B” by shifting production.

“They’ve spent a lot of time and energy to build this market, particularly China and soybean, and we’d like to see that effort pay dividends, not be wasted,” he said.

China buys about half of the U.S. soybean exports, and roughly one in three rows of soybeans grown on the nation’s farms goes to the world’s second-largest economy, according to the American Soybean Association. Nearly $20 billion in U.S. agricultural exports went to China last year, with more than half of that amount coming from soybeans.

(CNBC)

Randy Richards considers himself an optimist. After all, the farmer lives near the town of Hope in eastern North Dakota.

But a flurry of trade news in recent months has Richards worried. It reached a crescendo last week, when China imposed retaliatory tariffs on a range of U.S. products, including 25 percent on soybeans, one of the crops Richards grows.

On the other end, the cost of equipment is going up because of previous tariffs President Donald Trump’s administration imposed on steel and aluminum imports, he said. And amid those fights, the Trump administration is renegotiating the 24-year-old trade agreement linking the U.S. with Canada and Mexico.

“I’ve been doing this for 46 years,” said Richards, the Steele County president for the North Dakota Farmers Union. “Right now, I am the most scared I’ve ever been as to where the future of farming is going.”

(Bismark Tribune)

Soybean futures hit record lows on Friday, as the US Department of Agriculture (USDA) slashed its outlook for American farmers in an updated forecast for the year ahead.

According to Xinhua, November soybean futures on the Chicago Board of Trade plunged 60.25 cents weekly, or 6.74 percent.

The data came as the USDA released its latest forecast on the sector, predicting a record boost for Brazilian soybean farmers at the expense of the US agricultural sector.

Taking into account the effects of the latest round of US trade tariffs, the USDA in its report expects US soybean exports to fall by 11 percent over the next 12 months, dropping from 62.3 million tons to 55.5 million tons.

The forecast suggests Chinese soybean imports will fall from 103 million to 95 million tons, while Brazilian exports will hit a record high of 75 million tons.

After the US slapped 25 percent tariffs on 34 billion US dollars’ worth of Chinese imports, China responded in kind, in a move that increased duties on US soybean imports by 25 percent…

With demand from China set to drop, US farmers will be forced to stockpile soybean crops. The USDA forecast suggested that stockpiles will increase from 10.5 million tons to 15.8 million tons by the end of the 2018-19 marketing year.

(CGTN)

Still, what’s been a boon for carnivores is hurting American farmers.

Tariffs from China and Mexico mean “40 percent of total American pork exports now are under retaliatory tariffs, threatening the livelihoods of thousands of U.S. pig farmers,” the National Pork Producers Council said in an emailed statement on July 6. “We now face large financial losses and contraction because of escalating trade disputes.”

That spells trouble for Maschhoff Family Foods, a pig producer in Carlyle, Illinois. The hog unit could post a loss of $100 million in the year that stared on July 1, according to Ken Maschhoff, chairman of the company. That would be a record loss in a 12-month period for the operation, which sells about 5.5 million hogs a year from 550 farms across nine states.

Rather than expand domestically, the company may invest in hog production in Europe or South America if trade tensions persist, he said.

“We had anticipated kind of a decent 2018 year, with a break-even 2019 year, and now both years will be in the red for us,” Maschhoff said.

(Bloomberg)

“The automotive industry is a global industry,” said Michael O’Kronley, a top executive at A123 Systems, an electric vehicle battery maker purchased out of bankruptcy by the Chinese company Wanxiang in 2013. “If you’re going to supply products into that, you need to be global.”

General Motors now sells many more cars in China than it does in the United States, and the largest exporter of cars from the United States by value is not an American brand, but BMW. By some calculations, the car with the highest proportion of United States and Canadian-made content is the Honda Odyssey — and even that includes roughly a quarter of foreign-made parts. Companies — and their workers — say they recognize there are certain risks from sharing their technological secrets with Chinese competitors, but they say it is no longer a choice whether Michigan, the automotive capital of North America, should engage with China, the world’s largest auto market.

“You can’t separate the two,” Jerry Xu, former president of the Detroit Chinese Business Association, said of China and Michigan. “You’re going to kill the industry if you try.”

(NY Times)

2018 YTD Equity Indexes:
Saudi Arabia +15.7% priced in US dollars (+15.7% in riyals),
NASDAQ +13.4% in dollars (+13.4% in dollars),
Russia +2.4% in dollars (+11.2% in rubles),
Portugal +7.2% (+10.4%),
Russell +9.9% (+9.9%),
Norway +9.5% (+8.8%),
New Zealand +2.4% (+7.5%),
Colombia +11.6% (+6.8%),
UAE +6.6% (+6.6%),
Finland +2.9% (+5.9%),
S&P 500 +4.8% (+4.8%)

(Erik Peters)

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