Sentiment surveys reflect what people say, which may not match what they are actually doing. And, of course, people can change their minds quickly. Nonetheless, the economy is a function of consumer attitudes, so their current attitude matters. That makes the latest University of Michigan survey potentially troubling.

 

 

This month’s reading is the lowest since late 2011. Worse, it dropped very fast, plunging at a rate comparable to the March–April 2020 COVID collapse. That means consumer sentiment, at least as measured by this survey, just gave up over a year’s worth of progress. What could possibly explain consumer sentiment being lower now than in the initial pandemic panic? Rising inflation is one possibility—particularly home prices and rent. Those are a large part of most household budgets, and, in many places, they have been climbing even more than the inflation benchmarks suggest. A second factor may be the worsening COVID-19 outbreaks in parts of the US. Even people who aren’t directly affected may be questioning the post-pandemic economic recovery narrative. The approaching end of enhanced unemployment benefits and other support programs, with extensions presently looking unlikely, may also be discouraging to some. We’ll see if other surveys confirm this one in the next few weeks. If they do, it could mark an important shift.

 

US Economy

 

  • The U. Michigan’s consumer sentiment report was a shocker, with the composite index hitting the lowest level in a decade. Increased concerns about the resurgent pandemic and sharp price gains have taken a toll on household confidence. It was the worst negative surprise on record.

 

 

  • The Citi Economic Surprise Index declined further.
  • Households’ expectations of personal finances deteriorated sharply.

 

 

  • Buying conditions for household durables and vehicles deteriorated further, driven by concerns about rising prices.
  • Economists are downgrading their 2021 GDP estimates, with growth pushed into 2022.
  • Consumer inflation expectations remain elevated.
  • Economists continue to boost their inflation forecasts.
  • Nordea expects inflationary pressures to fade before a spike of rent-of-shelter prices forces the Fed to taper later this year.
  • The first regional Fed manufacturing survey of the month (from the NY Fed) showed some moderation in factory activity.
  • Supply-chain bottlenecks continue to bedevil the region’s manufacturers.
  • The share of the population aged 65 and higher is expected to rise, which will be a drag on labor force participation
  • July retail sales were weaker than expected.
  • Automobile sales declined for the third month in a row.
  • Homebuilder sentiment continues to ease as demand for new housing returns to the pre-COVID trend.
  • Single-family housing rents are surging.
  • The Citi G10 economic surprise index hit the lowest level in over a year.
  • Global economic momentum is starting to slow
  • Core CPI (the headline index less food and energy) is now at its highest level since the early 1990s.
  • July housing starts came in below market expectations. Nonetheless, residential construction activity remains at multi-year highs for this time of the year.
  • Homebuilder sentiment suggests that housing starts could moderate further.
  • The inventory of houses under construction continues to climb.
  • Existing housing inventories remain depressed.
  • Last week, we saw single-family (houses) rent increases quickening. Apartment rents are surging as well.
  • The HPS-CS consumer sentiment index confirmed the weakness we saw in the  Michigan report.
  • Dr Copper – Copper broke below the uptrend support.

 

 

  • The Philly Fed’s manufacturing index declined further in August, showing some loss of momentum.

 

 

  • Hiring accelerated further. The number of employeesindex hit a record high (going back to the late 1960s).
  • Price pressures persist.
  • Manufacturers are rapidly raising prices and plan to continue doing so in the months ahead.
  • Factories are drawing down inventories to meet demand for goods.
  • The Conference Board’s leading index climbed more than expected in July.
  • Initial jobless claims (excluding emergency programs) keep decreasing.
  • Continuing claims were also lower. If the trend keeps up, it will give the FOMC hawks further ammunition to argue for taper.
  • The Opportunity Insights high-frequency indicators point to a decline in job postings.
  • Mortgage delinquencies continue to fall.
  • Helped by forbearance programs, foreclosures dropped to the lowest level since the early 1980s.
  • Chase card spending activity is holding up well despite weaker consumer sentiment.
  • US financial conditions have been easing, with the St. Louis Fed Financial Stress Index hitting the lowest level since 2007.

 

 

  • The chip shortage hobbling the auto industry is worsening, with several of world’s largest automakers facing renewed shortages of silicon. The problem is being compounded by a wave of COVID cases sweeping across southeast Asia, where many of the semiconductors are made.

 

China

 

Xi Jinping – and you can read it in his speeches – thinks the first mission is to maintain control of the Communist Party within China. The second goal is to accelerate, to the extent possible, China becoming a world superpower. He mentions prosperity as like the seventh point. That’s not what he’s about. It’s about power for the Party and power for China.

We’ve had a really radical change in policy in Beijing, with Xi. And the policymakers in the West, including the private sector, haven’t figured that one out yet. They’re still grappling with it. But to the extent you continue to make a country rich, through your efforts, not theirs, and that country is out to dominate the world, you’re helping them dominate the world. Everyone in the West needs to think about the consequences of their interactions with China.

On the Yuan, one aspect of being the world superpower is that we have the world’s reserve currency. The rest of the world trusts the dollar more than they trust everybody else’s currency. And that really helps us out, because the U.S. is able to have foreigners cover a major portion of our debt. If you run a deficit, you can pass a good portion of the financing on to foreigners. And we’re better off because of that. If China is able to topple the position of the dollar, it’s not just a change in the marquee at the movie theater. It is a direct attack on our ability as a country to continue to finance ourselves. Xi Jinping knows that, and that’s one front in their war.

China and the U.S. have both been through cycles of having an asset-backed currency, being on the gold standard, and coming off and going back to a paper standard. China has learned from that lesson more than the U.S. – or their current regime is taking advantage of that and weaponizing the U.S.’s debt against it.

What stands behind any currency is credibility. The great thing about being able to print money is that you can buy goods and services at the cost of a little piece of paper.

If people don’t trust the paper you’re passing them, they’re not going to give you goods and services, or at least not at the same price. One of the early consequences of bad policy is you see prices going up. It says, “Ah, I don’t like your currency as much as I used to.” So that’s the stage we’re at now, and the Chinese are out there encouraging it.

The problem is, who is going to trust these guys making the paper? We all know in our hearts what they are. They’re thugs and they’re communists and – so, “Do I really want to trust the paper issued by a bunch of communists?” No. The U.S. is in great shape, as long as it doesn’t bungle it and people, at some point, decide, “Yeah, they’re communists, but the other guys are a bunch of money-printers, and so I’m going to go with the lesser of two evils.” And that’s the story of the threat that we’re talking about. Both countries end up making their currencies credible, and that establishes a new world order, in terms of currency.

Two weeks ago, Tencent’s stock price dropped about 10%, in part because they’re a big runner of online gambling, and in one of the state papers, there was an article about online gambling being the new opium. Guess what? This is the early warning shot of a coming crackdown, and Tencent took a hit as a result.

Before that, they went after the for-profit tutoring industry. Chinese parents, like parents everywhere, want their kids to get ahead through education. In China, lots of parents hire tutors to augment what the kids learned in school, in order to give them a leg up in school. There’s a lot of money to be made in that, and foreign hedge funds have poured money into companies in China that ran tutoring services. “Hmm, OK, we’ve got a problem here,” thinks President Xi. “I really don’t want China’s future, its youth, being told what to think by a bunch of folks in the private sector, much less the foreign finance private sector.”

So he put out a decree that there could be no more tutoring for profit in the country. “I don’t care if the kids don’t get smartest fast, but I’m not going to have them indoctrinated by anyone but state schools.” It’s all about a power grab. And we now have mass arrests of just about everyone in Hong Kong who stood up to China. Anyone who protests is now hauled off to China.

So there’s an example, again, of exerting power. In Xi’s mind, Hong Kong is part of China, and he’s going to make sure nobody in Hong Kong is able to express any real dissent. They also changed the election system. People don’t control the elections anymore.

China wants to dominate global technology, and they’re trying to play rapid catchup to the U.S. and Europe, and semiconductors is one of the big prizes there. And Xi Jinping has expressed intentions for Taiwan to become part of the mainland.

Taiwan produces the bulk of the world’s semiconductors. Do you think what Xi’s saying with regards to Taiwan is populist rhetoric? Or do you think this is Beijing’s intention?

There’s no question that one of Xi’s policies is that Taiwan be reunited with mainland China. Now, let’s be a little bit nice to them: Why is that? Well, if you look at Xi’s speeches, he talks about the deep humiliation that China suffered following the Opium War. Step one of his goals of “overcoming that humiliation” is to reunite China. Since 1895, Taiwan has been part of mainland China for a total of four years, out of 125.

Xi is going to reunite China. Taiwan is going to be brought into the Chinese orbit. Pure and simple. The voters of Taiwan do not want that. They like what they have. Their GDP per capita is probably four times GDP per capita in the mainland. And just think of it this way: Do you really want to have your 1.4 billion poor cousins in the same family with you? I would bet that at some point during the current administration, Beijing will make a play for Taiwan.

They’ll camouflage it as much as possible, but it’ll be a de facto military seizure of Taiwan. And then they will be controlling the semiconductor industry.

All of the things we’ve just discussed fit into a basic pattern of history. The French phrase for it is fin de siècle, the end of the cycle – countries rise, countries fall. I don’t think our future is preordained, but you have to think about what happens to real people when social order dissolves, when the country is threatened from abroad, when there’s widespread inflation – they all tend to go together, by the way – and that governments do whatever it takes at the end. And so societies tend to end with a combination of three things: inflation, taxation, and confiscation. The government has to finance itself, to keep itself in power, to defend the territory, all these things. Nobody trusts their money printing anymore, nobody really wants to buy their bonds.

So the financing comes from inflation, meaning printing the money, making people take it, taxation, or simply taking the property. If that is one of your concerns, you say to yourself, “What assets are least subject to inflation, taxation, and confiscation?”

Gold and Silver!

This just in…

China approved a strict data privacy law, triggering fresh concerns over the intensity of Beijing’s recent regulatory onslaught. The Personal Information Protection Law was passed at a meeting in Beijing of the nation’s top legislative body, the Standing Committee of the National People’s Congress. Alibaba (NYSE:BABA) dropped 3% in Hong Kong on the news, while the Hang Seng TECH Index – which includes Tencent (OTCPK:TCEHY) – fell as much as 4.5%.

What’s in the bill? While the full text of the final version hasn’t been released, it’s being aimed at online fraud, information theft and data collection by domestic technology giants. Remember that Beijing is expected to maintain broad access to data despite the sweeping legislation, which will take effect on November 1. Over the past year, China has cracked down heavily on its tech sector in areas including data security and anti-competitive practices, as well as gaming and fintech.

Analysts at Morgan Stanley are worried about the latest developments, issuing a warning about accelerating redemptions in Chinese equity funds. The recent falls for domestic tech groups could worsen if investors pick up the pace of their withdrawals, “causing additional difficulties in recapturing substantial inflows in the short term.”

Earlier this week China’s market regulator issued fresh draft rules at stopping unfair competition on the Internet, while DiDi Global (DIDI) plunged Thursday on potential regulations that would ensure the rights of ride-hailing and trucking platform drivers. Separately, healthcare stocks tumbled on Friday after the People’s Daily called for greater regulation of prescriptions filled using online platforms, while liquor makers sold off as well. Local news outlet Caijing reported on a regulatory meeting about policing the industry due to a culture of heavy post-work drinking.

The Hang Seng Tech Index drawdown is approaching 50%.

 

 

Market Data

 

  • Share buyback activity is running at a near-record pace.

 

 

  • SPAC issuance cooled in the second quarter.
  • Should investors be concerned about a negative Marshallian K?

 

 

  • Investor sentiment has diverged from consumer sentiment.

 

 

  • As the Nasdaq Composite hangs near a 52-week high, there has been a lot of internal turmoil. Its Summation Index is deeply negative, with more 52-week lows than highs. That has triggered a cluster of technical warning signs.
  • S&P 500 drawdowns continue to get smaller as dip-buying becomes a habit. It works until it doesn’t.
  • Scotiabank sees the S&P 500 finishing the year up 22%, but next year’s gains will be much smaller.
  • We are now within 2% of their target
  • The most crowded trade (according to fund managers):

 

 

  • What do fund managers see as the biggest tail risk?

 

 

  • Stock futures are heavy after the FOMC minutes
  • The FANG+ stocks are testing support.
  • Investor sentiment has been turning more cautious.
  • An increase in fund managers’ cash balances:
  • Defensive positioning by fund managers:
  • Defensive positioning by ETF investors:
  • Friday, we have a possible “upside exhaustion climax.” We didn’t get confirmation of the climax because Total Volume was so low today. This is a problem. Today was options expiration — we should have seen more volume. Additionally, it was a strong rally day and Total Volume wasn’t behind that either.

 

The Fed

 

The Taylor Rule suggests that the current monetary policy is too accommodative.

 

 

The Fed minutes showed increasing disagreements about the timing and the pace of tapering securities purchases. How close is the labor market to what the central bank officials called “substantial further progress”? Several FOMC members want to see a couple of additional employment reports, but it appears that the Fed may be ready to begin taper in the fourth quarter.

FOMC: – Most participants judged that the Committee’s standard of “substantial further progress” toward the maximum-employment goal had not yet been met. At the same time, most participants remarked that this standard had been achieved with respect to the price-stability goal. A few participants noted, however, that the transitory nature of this year’s rise in inflation, as well as the recent declines in longer-term yields and in market-based measures of inflation compensation, cast doubt on the degree of progress that had been made toward the price-stability goal since December. Looking ahead,  most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal. Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s “substantial further progress” standard or because of uncertainty about the degree of progress toward the price-stability goal. Participants agreed that the Committee would provide advance notice before making changes to its balance sheet policy.

Powell stated that as the emergency has receded, the central bank needs to put its “crisis tools” away.

The implication is there are two key crisis tools left… Interest rates and $120 billion worth of monthly bond purchases. So, as the economy overtakes pre-pandemic levels of activity, those are the next tools to go.

This just in on the Fed topic….and probabaly why the markets didn’t drop 20% right away;

Minutes from the Fed’s July policy meeting seem to suggest it will begin reducing asset purchases before year-end. But that was July, and Guggenheim’s economics team points to a significant weakening in consumer behavior since then. They think it will be enough to delay the Fed’s normalization plan.

  • After unexpectedly weak July retail sales, spending in COVID-sensitive activities like restaurants and travel weakened further in August.
  • Sentiment surveys show consumers now expect more negative impact from COVID than they have for several months.
  • The Michigan consumer survey, which plunged last week, has a strong historic relationship with consumption.
  • The recovery is unlikely to fully reverse since there is no political will for stricter lockdown measures, but progress wil likely slow.
  • The Fed’s 7% 2021 real GDP growth projection is probably out of reach now.

The Fed minutes leave the committee plenty of wiggle room. If consumer activity continues to weaken, they can backtrack and defer tapering, which in turn would keep Treasury yields low.

 

Thought of the Week

 

If sending checks and debit cards to everyone and keeping other benefits flowing was supposed to help the poor the most, it looks like the opposite has happened. – Stansberry

 

Pictures of the Week

 

 

 

 

All content is the opinion of Brian J. Decker