Just a few hours earlier I had drifted off, content that the NY Mets had pulled out a crucial victory against the rival Washington Nationals (they did not), while reading up on the basic, yet universal laws of growth, and scale. More on that later. I woke from that slumber shortly after 03 (that's 3 am for most of you), to find that global equity markets were in serious risk-on mode, led by of all regions, Hong Kong. Will this sudden euphoria last "straight on till morning?" Will markets even notice "the second star to the right", or will the broader indices hit a brick wall at their respective 50 SMAs as they have repeatedly now for a month's time?
The Hang Seng closed nearly 4% higher, as news broke first in the South China Morning Post that HK's Chief Executive, Carrie Lam, would formally withdraw the extradition bill that had sparked all this summer of broad protest across the former British possession. What looks at least on the surface to be a surprise concession made by the Chinese government, meets one of and perhaps the key demand of the five made by protesters, and might be seen as an attempt to return the region to some sense of normalcy ahead of the important October 1st anniversary for the communists. This also might be seen, if the protest does subside, as the removal of a significant distraction where as working toward any kind of trade agreement with the United States might be concerned. Is this meaningful? (Psst... the IMF now reports that China is experiencing the nation's first series of annual current account deficits in 25 years.) Let's dodge a direct answer right now, and simply call this move "potentially constructive."
In addition to what appears to transpire in real-time in Hong Kong, a slow motion train wreck continues in the UK, as the House of Commons voted to take the first step toward putting a halt to current Prime Minister Boris Johnson's power to push a no-deal Brexit through by the end of October. What this does for U.S. investors at this point is allow for some overnight appreciation for both the Pound as well as the Euro, finally allowing U.S. dollar valuations to take a breather. The moves together have allowed the U.S. yield curve to at least partially un-invert in early Wednesday trade.
In a speech on Tuesday evening, Boston Fed President Eric Rosengren indicated that at this point, he (a voting member of the FOMC) is not quite ready for further reduction in short term U.S. interest rates. Rosengren incredibly said, "It is clearly reasonable to make the assessment that risks are elevated, should those risks become a reality, the appropriate monetary policy would be to ease aggressively. However, to date, these elevated risks have not become reality, at least for the U.S. economy." Hmmm.
Gang, this is precisely the kind of drivel that I have repeatedly cautioned against. Never mind a badly mangled yield curve that required technical correction. I explained that over and over. My warnings went largely unheeded. Now, the need becomes less technical and more data-driven, unfortunately.
Never mind a manufacturing sector already overtly in recession. Oh, one headline ISM report of 49.1 isn't so bad, they might say. How about multiple months below 50 for inventory building? How about New orders at 47.2? How about Employment at 47.4? The ISM's report is even worse below the headline level.
The consumer is strong... manufacturing only makes up 12% of the economy... what can go wrong? 12% of the economy in a state of labor market contraction. Think about it. You think those folks might just be middle class type people who participate in middle class type localized economies? I'm talking to you, Eric... well... do you? I know, you want to see significant national deterioration before you "ease aggressively." What rubbish. Defend the American people. Or don't.
The Empty Box
Have you ever seen your neighbor, who may have purchased a home appliance, leave an empty cardboard box at the curb? For days? The wind pushes that box across the street. The rain at first forces the box to warp, and then collapse. See where I'm going here yet?
What's the area of a square? A square two feet long, by two feet high would have an area of four feet, right? In other words, 2 squared. A larger square, say three feet by three feet would have an area of nine feet, or 3 squared. Now, what if our square is a cube, or a cardboard box. Size would then be determined by volume, not area. A box, two feet long, by two feet high, by two feet deep would have a volume of Eight feet. I want you to think of this box as the economy. I want you to think of the volume of this box as the net result of all economic activity to most importantly include net velocity of transaction or simply the velocity of money.
Now, let's grow this cube. Our box has grown to three feet long by three feet high by three feet deep. The volume of our box is now 27 feet. Three cubed, not squared. In other words, to sustain growth that appears at the surface to grow to the second power, activity and the speed of transaction must grow to the third power. Terribly simplified? That's intentional. We're trying to teach, here. What happens if something were to alter increasing transaction-based velocity as the economy tries to grow? What happened to that wet box left in the street? At first, the shape of the box changed, and then the box collapsed.
Twas The Beast That Killed Beauty
The beautiful thing about debt driven growth is that economic growth that is brought forward. There certainly is a place for debt in a robust economy, and through the wonders of fractional banking, much growth has indeed been brought forward. What if in the end, debt really is a zero sum game? What if in the end, the only healthy debt is debt drawn on available credit created through surplus... and not on simply reducing the need for held reserves to a nanoscopic point?
Manageable in the short to medium term future is debt service. Loner-term, this manageability becomes an unknown beast with horrific potential. At some point, for consumers, for businesses, for local up to sovereign economies this becomes expensive, and will divert cash flow. At some point, the growth that was brought forward dissipates. The debt has not, and then becomes a drag on growth.
This happens slowly at first. Is this happening now? Not with rates this low, but, it's on the radar, and allowing the yield curve to remain flat to inverted for much longer will bring about a loss of confidence at the business level. We can explain that until the cows come home. Too many "learned" folks seem in well beyond their depth here. The highly indebted can put the inevitable off for quite some time through expanding deficit driven spending at very low interest rates. There will for them come a time where there is no lender on the supply side of that market. Why should they lend for free? Demand for credit will not halt at that point, and the only form of lending then becomes the expansion of money supply itself. A money supply backed only by the good faith of the very people who will have by then be harmed. Oh joy. Can no one else see the eventual end of the debt super-cycle?
1) U.S. federal debt to GDP ratio: 105% (don't listen to what you hear, do the math).
2) U.S. total (household, business, all levels of government) debt to GDP ratio: 347%.
3) Fed Balance Sheet: $3.8 trillion.
4) ECB Balance Sheet: E4.7 trillion ($5.17 trillion)... Policy decision in one week.
5) The BOJ Balance Sheet has been larger than Japan's GDP since last year.
Economics (All Times Eastern)
All Day - Total Vehicle Sales (Aug): Expecting 16.9M, Last 16.8M annualized.
08:30 - Balance of Trade (July): Expecting $-53.9B, Last $-55.2B.
08:55 - Redbook (Weekly): Last 5.7% y/y.
16:30 - API Oil Inventories (Weekly): Last -11.1M.
The Fed (All Times Eastern)
09:30 - Speaker: New York Fed Pres. John Williams.
12:30 - Speaker: St. Louis Fed Pres. James Bullard.
12:30 - Speaker: Federal Reserve Gov. Michelle Bowman.
13:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
14:00 - Beige Book.
15:15 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AEO) (.32)