(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.

(Washington)

If there is a core element to the debate going on over the SEC rule, it is whether the rule actually does anything new. Some argue that the SEC’s best interest rule is just a rehashing of the well-established FINRA suitability standard. For instance, the CFP has commented that “Our concern is that as introduced, the rule proposal may offer the appearance but not necessarily the reality of increased investor protection”. There are two areas of consternation about the rule, at least as far as consumer groups are concerned—the lack of a definition of “best interest”, and how the rule has differing standards for brokers versus fiduciaries.

FINSUM: While it does seem unconventional, the SEC’s lack of a definition of “best interest” means it may ultimately be more broadly applicable than defining it, and thus creating loopholes.

(Washington)

The SEC has been getting a grilling over its new best interest rule. The industry doesn’t like its proposed disclosure document (CSR) or its restriction on the use of titles, while consumer protection groups say the rule is not stringent enough. Yesterday, SEC chairman Clayton faced questions over the rule from the House Financial Services Committee. Answering questions on whether the rule went far enough and whether the rule should be harmonized between brokers and advisors, Clayton explained that brokers and fiduciaries have different relationships with clients and said “There is no conflict-free relationship … Disclosing [conflicts], mitigating them, making sure everybody understands what the motivations are ... that's what I want to do in this space”.

FINSUM: We think Clayton stood his ground quite well, and we particularly like that final quote, which was grounded in realism.

(New York)

Don’t be fooled by the “prophets of boom”, or the many Wall Street and economic leaders who are saying that the US economy is in great shape and will deliver strong growth for years to come. One well known strategist, David Rosenberg, who called the Great Recession before the Crisis, says that a recession is imminent and will arrive within the next 12 months. Rosenberg believes the January 26th high for the S&P 500 will be the peak of this bull market, and that it will ultimately be the Fed that sparks the recession. “Cycles die, and you know how they die? … Because the Fed puts a bullet in its forehead”.

FINSUM: There are a lot of late cycle indicators flashing in the US economy right now. A recession in the next year does seem plausible, if not overly likely.

(New York)

Corporate earnings are doing well and are forecasted to keep rising. Alongside those improvements in operating performance, one would expect stocks would likely keep rising. Not so fast, says Goldman Sachs, who says that earnings improvements will likely do little for stock prices. David Kostin, the firm’s chief US equity strategist, says that earnings’ influence on prices will be moderated by a number of factors. “The appreciation potential will be constrained by tightening monetary policy, a flattening yield curve, rising trade tensions, and the upcoming mid-term Congressional elections.”

FINSUM: In other words, stock market investors are dealing with much more than operating performance. We think the market will discount earnings even more than expected because a lot of the gains are being driven by the tax policy change, making the improvement temporary in nature.

(New York)

Well, the Dow might be about to suffer its longest losing streak in 40 years. The index has lost eight days in a row, and many of them were punishing. Now, if the Dow loses again today, making it nine days in row, it will be the longest streak since 1978. Since 1896, the Dow has only suffered ten losing streaks of nine days or more.

FINSUM: This seems like one of those stats that appears fairly meaningless when it is happening, but in hindsight might seem the start of a bear market/correction or recession.