(New York)

As the ten-year anniversary of the last crisis has arrived this month, it is a fitting time to be thinking about what might cause the next one. In fact, many investors, professional and retail alike, are fairly obsessed with calling the next big blow up. But what might cause it? While trade war and political strife grab a lot of headlines, the real driver of the next crisis will be the Fed. The two big worries on that front are rising rates, but perhaps even more worryingly, its shrinking balance sheet. Crises have historically happened when money supply grew tighter, and that is what is occurring right now.

FINSUM: The markets have never been through the winding down of a major QE program, so it is hard to foresee how this may playout. Logic says that the next big blowout will probably be tied to the end of easing.

(Beijing)

The pain rippling through emerging markets has spread from Turkey and Argentina to Indonesia, the Philippines, and South Africa. Some are calling the major selloffs a full blown crisis. Now, a big threat looms as the trouble may spread to the big one: China. The major worry is that the pressure on EMs, coupled with rising US sanctions on China, could conspire to drive the Yuan down as much as 15%. Other EMs would be forced to weaken their currencies, and the pandemonium could hit the global economy and markets in a way it hasn’t so far.

FINSUM: China’s weight looms large not just in an economic sense, but in the market’s psychology. If real trouble started to flare up there, it would quickly spread to western markets.

(New York)

Retail stocks have had a very good run over the last year. The first half of 2017 was about as bleak as it could get for retail, which is in the midst of a major disruption caused by ecommerce. However, stocks posed a big rebound over the last twelve months on the back of consumer spending and tightened business models. However, the sector might be set for more trouble as Wall Street analysts have just downgraded about 60% of the S&P’s retail index, giving profit warnings despite good consumer spending. One analyst summed it up this way, saying “The pendulum swung too far: retail never died, but it’s likely not as healthy as people think, either … After a very strong first half, it would seem management teams feel the need to reset the bar, to bring hype back to reality”.

FINSUM: The truth is that the disruption of the industry is far from over and there is likely to be a lot more turmoil, perhaps especially in the next recession, when price competition gets even more fierce.

(New York)

A big bank has just gone on the record warning investors that a bear market is likely to start by the end of the year. So long as the Fed hikes twice more this year, which it is widely expected to do, a key bear market indicator will have been tripped. That indicator is the so-called “neutral level for interest rates”. The indicator preceded both the 2000 and 2007 bear markets. The idea is that the Fed will raise interest rates above their “neutral” level—the level at which they neither stimulate nor hold back the economy—and in doing so, will bring on a recession and bear market. The observation comes from bank Stifel, which summarized their view as “Weighing stability versus mandate, we believe the Fed has no realistic option other than to follow its projected dot-plot path, eventually revealing the speculative excesses created in the past decade”.

FINSUM: When you combine this indicator with the near yield curve inversion, it paints a very bleak picture indeed.

(New York)

There is a lot of turmoil going on in emerging markets right now. So much so that many are now considering it a full crisis. So far, though, the problems have yet to materially impact US markets. However, Barron’s explains that there is a mechanism through which EMs could cause trouble for the US and the rest of western markets. Because the trade war with China continues to escalate, the country’s yuan may devalue significantly, hurting all EMs. If this happens, the ripple effects through the global economy might be very strong. India and Mexico seem to be the safest EM destinations at present.

FINSUM: China is big enough to bring down the whole world economy, so the real threat here is the trade war first, and then how EMs compound that problem.