Saturday, April 21, 2018

The Global Sugar High Is Wearing Off

Supply-Side Trumpflation visualized:

First off, I must give full credit to Trump for pursuing peaceful overtures with North Korea. By this time in his administration, Bush had pretty much already dismantled the Middle East. After all, war and war manufactures are the only "things" still Made In America...

And on that note, Defense was the only sector that made a new all time high this week. Meaning that the ultimate recession trade is no longer a safe place for gamblers to hide...

And, asinine tax cut and Obamacare demolition aside, I also have to agree with Trump putting the economy ahead of the stock market for the first time in forty years. Nevertheless, if I were a stock market gambler I would be highly paranoid that the wrecking-ball-in-chief is out to tank the market. Whereas 2017 was the year of cheerleading stocks higher, by contrast 2018 has been one shot after another aimed at the stock market. From the tax cut pounding high yield junk bonds and dividend stocks, to the trade wars pounding Industrials, tweets against tech firms and tech mergers, and yesterday tweeting against oil. Now he inadvertently just took out Defense stocks. 

But per the title of this blog post, this has all been a case of willful self-delusion. A sugar high fueled by unfounded optimism and reckless spending by all sectors of the economy at the end of the cycle. 

"U.S. President Donald Trump’s tax cuts at the end of 2017 and the plans this year to boost federal spending by hundreds of millions of dollars are responsible for half of the upgrade in the fund’s outlook for this year and next."

You could argue that we all owe Trump a favour: his decision to hit the accelerator might finally propel us out of the mire left by the 2008 financial crisis. But he may also have created the conditions for the next recession." 

In other words, half of global growth is predicated upon the U.S. And yet, we already know that the sugar high is wearing off.

ZH: 2007 Deja Vu. Credit Cycle Indicators Flashing Code Red 

"We continue to see evidence that argues in favour of a very late-cycle environment"

Here is the problem, this is not 2007. Policy-makers, Wall Street, and investors have completely mis-timed this end-of-cycle for a variety of reasons. Fake optimism over Supply Side tax cuts was first and foremost. 

However, the other erroneous assumption was that this cycle would end like all of the others. Everyone was looking for the yield curve to fully invert before they called recession. 

Per the above article:
"An inverted US yield curve has preceded ISM index dropping below 50 (i.e. economic contraction) 7 out of 7 times since 1977 with 12-month lag."

But there won't be a one year lag this time. Why? Because the sugar high pulled forward consumption and now the drop-off is far faster than what we've seen previously. Moreover, the tax cut, Fed balance sheet rolloff, fake reflation, AND record Treasury short positions, has kept long-term yields artificially bid, thus preventing inversion.  

Here is what happened: Last Fall, giddy "consumers" went on a consumption binge. And what did they buy?

"Americans are opting for pickups and SUVs over cars at a record rate, as those larger vehicles now comprise over 60 percent of the market for new vehicles in the U.S."

It’s no secret why Americans are choosing trucks and SUVs more often. The job market is strong; unemployment stood at 4.1 percent in October. And gas has been relatively cheap, hanging below $2.30 a gallon for most of the last year."

Fast forward five months later:

"April 20 (UPI) -- The surge in gas prices coming from higher crude oil prices means OPEC is cancelling out the gains of U.S. consumers from a tax break, GasBuddy said Friday."

Which is why we know where we are in this cycle.

"Credit card debt is only a problem if it becomes unaffordable. Unfortunately, there are signs pointing to that being the case. Major credit card issuers—including Capital One and Discover—are reporting increasing charge-off rates"

Late late.