Foreigners Dump US Treasuries As They Liquidate A Record Amount Of US Stocks

Earlier this week, DoubleLine's Jeff Gundlach held his latest webcast with investors in which he warned that as a result of rising hedging costs, US Treasury bonds have become increasingly unattractive to foreign buyers. This can be seen in the chart below which shows the yield on the 10Y US TSY unhedged, and also hedged into Yen and Euros. In the latter two cases, the yield went from over 3%, to negative as a result of the gaping rate differential between the Fed and ECB or BOJ.

This is also why, as the next chart from Gundlach showed, foreign holdings of US Treasurys have been declining in recent years, and dropped to just over 36% as a percentage of total holdings, the lowest in over a decade, as domestic holdings of US paper have risen to just shy of 50%, and near all time highs.

Which brings us to today's latest monthly TIC data which showed that, as Gundlach would expect, the holdings of the two largest foreign US creditors, China and Japan, declined to multi year low.

As shown in the chart below, China’s holdings of U.S. Treasuries fell to the lowest level since mid-2017 as the world’s second-largest economy sold US reserves to stabilize the yuan which has been depreciating in recent months due to the ongoing trade war.

Chinese holdings of U.S. Treasuries declined for a fourth month to $1.151 trillion in September, from $1.165 trillion in August, a $14 billion decline. Despite the drop, China remained the biggest foreign creditor to the U.S., followed by Japan whose Treasury holdings also dropped by $2 billion to $1.028 trillion, the lowest since 2011.

Investors have been searching for clues whether China is dumping its vast holding of U.S. Treasuries to retaliate against U.S. tariffs, though Beijing has given no indication it’s doing so; meanwhile while the TIC data is relatively accurate, it tends to be revised rather materially which is why it is certainly possible that China's real holdings, when adjusted for valuation and currency changes, are far lower.

Of course, instead of selling Treasurys, China may have decided to hold on to its reserves and allow the yuan to depreciate against the USD, but not too much: so far 7.00 has emerged as a "red line" for the PBOC. The Chinese currency has already depreciated more than 4 percent against the dollar in the past year amid signs of an economic slowdown and capital outflows. In September, China’s foreign-exchange reserves stockpile fell by $22 billion to touch the lowest level since July 2017, however much of that number was due to valuation adjustments.

Going down the list, while Russia's Treasury liquidation was well documented in June and July, two new aggressive sellers of US paper emerged in the latest data: France, whose Treasury holdings declined from $118.4BN to $97.7BN...

... and Ireland, which sold over $25BN Treasuries in September, bringing the total to $290BN.

Not everyone was a seller: the infamous Belgium, host of Euroclear, added $10 billion to $164.7BN, likely working on behalf of some unknown foreign entity, while Saudi Arabia added another $6.6BN, bringing its total to a record $176.1BN, perhaps in hopes of showing Trump just what a good friend of the US it is.

Finally, away from US Treasuries, and looking at total flows, foreigners added a total of $7.5BN in long-term US securities, led by nearly $30BN in Agencies.

What was perhaps more notable is that in September, foreigners sold another $16.9BN in US stocks, the 5th consecutive month of selling, matching a record long stretch of foreign sales of US equities, and one during which official and private foreign investors sold a total of $102 billion over the past 5 months, a record high.

The bottom line: Trump told the world he doesn't need its generosity to either fund the US deficit or prop up stocks, and according to recent data, the world has taken up Trump on his dare, and has been actively liquidating US securities.

Source: TIC

Fonte: qui

John Bolton Warns National Debt Is An "Economic Threat" To The US Security

In an incredibly obvious statement, National Security Advisor John Bolton has declared the high level of national debt an “economic threat” to the United States. Unless you have been living under a rock for the past ten years, you know that statement is not only true but obvious.

Bolton claimed that the national debt is a big problem and tackling it requires significant cuts to the government’s discretionary spending, while most other economic experts say entitlement spending is the biggest concern. According to Bloomberg, Bolton was quoted as saying:

 “It is a fact that when your national debt gets to the level ours is, that it constitutes an economic threat to the society. And that kind of threat ultimately has a national security consequence for it.”

Discretionary spending is set by Congress each year, while spending on entitlements is twice as large and more automatic, generally dictated by demand for the services. Many budget experts say entitlement spending presents a larger long-term threat to the U.S. economy because of both its magnitude and increasing demand from an aging population.

Bolton made his comments while speaking Wednesday at an event hosted by the Alexander Hamilton Society in Washington. He also said he expects the United States’ defense spending “to flatten out” in the near term and that even though entitlement spending is the bigger chunk of government expenditures, he didn’t anticipate major cuts to entitlements such as Medicare and Social Security.

“In the near term, the budget deficit problem is in the discretionary spending,” Bolton said.

“The entitlements come in a few years and that problem’s going to have to be addressed. But right now, you can have significant impact on both the deficit and the national debt by cutting government spending on the discretionary programs.”

The non-partisan Congressional Budget Office forecasts the budget gap will reach $973 billion in fiscal 2019 and exceed $1 trillion the next year. Goldman Sachs Group Inc. predicts the deficit will reach $1 trillion and $1.125 trillion respectively. The national debt and household debt stand to be a very real threat to both the entire globe and the standard way of life in America.

Authored by Mac Slavo via SHTFplan.com

Who Really Built America's Massive Pyramid Of Debt?

Ernest Hemingway once wrote, “How did you go bankrupt? Two ways. Gradually, then suddenly." 

Howmuch.net, a website that provides visualizations about money, recently published a new report that shows a unique perspective, breaking down debt into the deficits of each U.S. President has added throughout history.

Hemingway’s warning looks strikingly similar when it comes to the U.S. national debt, which now stands at a whopping $21 trillion.

When President Trump was elected, the National Debt Clock at 1133 Sixth Ave., New York, NY, where it has flashed sobering stats on America's indebtedness from the Durst Organization-owned office tower since 2004, was quickly removed.

Now, one must check Twitter @NationalDebt for daily sobering tweets about the debt. And, as of October 29, the U.S. national debt officially stood at $21,694,906,926,249.

$21,694,906,926,249.19 (-) #NationalDebt

— National Debt Tweets (@NationalDebt) October 29, 2018

Before the Reagan administration, the combined cumulative U.S. debt stood at $750 billion, which Reagan almost tripled over eight years, said Howmuch.net.

After Reagan, his successors did not slow down, with George H.W. Bush adding $1.55 trillion in a single term, followed by Clinton at $1.4 trillion, Bush at $5.85 trillion, and Obama at $8.59 trillion.

Estimates already show that Trump is expected to add a total $4.78 trillion during his first term.

So the trajectory of the deficit is out of control. Reagan inherited a national debt of $750 billion, and Trump added almost $779 billion in fiscal 2018 alone.

What does all this mean? Is the country ever going to change course?... The answer: Not until something breaks, as we addressed this sensitive topic a few weeks back:

And more bad news: in order to finance the soaring budget gap, the US Treasury will aggressively increase the pace of debt issuance, borrowing $769 billion in the second half of the current calendar year. That would be the most since 2008. The full year number for 2019 is expected to be well over $1 trillion, and has been cited by some as the reason behind the recent blow out in interest rates.

Cited by Bloomberg, Trump’s top economist, Kevin Hassett, said this month the president will unveil measures soon to address the shortfall, although he did not provide specifics.

"The deficit is absolutely higher than anyone would like,” Hassett said. And, looking ahead, it's set to keep rising indefinitely until finally, something breaks.

"Delinquency Is At Crisis Levels" - Student Loan Bubble Is About To Pop

According to a new Bloomberg Report, the student debt crisis is about to take a turn for the worse, as the next generation of millennial graduates could be trapped in insurmountable debts. 

Over the last decade, the federal student loan segment experienced an explosion in growth. 

As the cost of college soars, the result is a widening default crisis that even Fed Chairman Jerome Powell recently warned: Burgeoning levels of student loan debt could slow down economic growth over time. 

Millennials have frantically tapped into student loans, up almost 157% in cumulative growth over the decade. By comparison, Bloomberg notes that auto debt has grown by 52% while mortgage and credit card debt fell by 1%. Student Loans Owned and Securitized, Outstanding has breached the $1.5 trillion level under the Trump administration, making it the second largest household debt segment among all Americans, after mortgages. 

Analysts warn that a perfect storm in the student loan bubble is brewing. They say student loans are being issued at unprecedented rates as millennials are conditioned to believe that higher education is the only way to get ahead. This comes at a time when tuition at both private and public institutions is at record levels, and interest rates on loans are surging to fresh cycle highs. 

As the storm clouds gather, the next generation of graduates could default on their loans at even higher rates than today, which would ultimately form a turning point in the bubble and usher in a winter cycle. 

"Students aren't only facing increasing costs of college tuition; they're facing increasing costs of borrowing to afford that degree," said John Hupalo, founder and chief executive of Invite Education. "That double whammy doesn't bode well for students paying off loans." 

Bloomberg Global data analysis of federal loans shows student debt has the highest 90+ day delinquency rate of all household debt. 

Americans who attended for-profit universities and community colleges make up 70% of all defaults, said Judith Scott-Clayton, a Columbia University associate professor of economics. She said that poor working class folk were suckered into worthless degrees, with the promise of a better job, but it only left them with high debt loads. 

Scott-Clayton notes that delinquencies skyrocketed in 2011 to 2012 academic year, reaching almost 12%. This year, the rate remains near cycle highs, which she attributes to social and institutional factors rather than average debt levels. "Delinquency is at crisis levels for borrowers, particular for borrowers of color, borrowers who have gone to a for-profit and borrowers who didn't ultimately obtain a degree." 

Hupalo said: "There's a systemic problem in the student loan market that doesn't exist in the other asset classes...Students need to get a job that allows them to pay off their debt. The delinquency rate will rise as long as students aren't graduating with degrees that pay back that cost." Those most at risk of delinquency tend to be, college dropouts and for-profit graduates, who struggle to find good jobs that allow them to pay off their balance. 

To make matters worse, the Federal Reserve continues to reduce its balance sheet, known as quantitative tightening, along with hiking the federal funds rate, now at 2.25%, which has forced borrowing costs higher in the last several years. 

Undergraduates have seen interest on direct subsidized, and unsubsidized loans breach 5% in 2018 -- this is the highest rate in almost a decade, according to the US Department of Education. 

"If you're in an interest-based plan, you can see costs go up, which worries me for students who are in school and have seen debt go up before they've even finished," Scott-Clayton said.

In the next economic downturn, which could be late 2019 or sometime in 2020, the student debt bubble could experience a surge in delinquencies.  

Earlier this year, Powell warned Congress of the bubble risks: 

"You do stand to see longer-term negative effects on people who can't pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life," Powell testified before the Senate Banking Committee in March. "As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth."

2018 has been a rough year for millennials, as they struggle to pay back their debt obligations. Student debt has prevented some from having children, owning a home, or even believing in the American dream. 16% of millennials age 25 to 35 lived with their parents in 2017, up 4% from a decade prior, according to Bloomberg Intelligence. 

"You have a whole generation of people that have a significant amount of student loans and its crimping demand for other goods and services," said Ira Jersey, the chief US interest rate strategist for Bloomberg Intelligence. "As people live with their parents or cohabit with a non-partner, millions of houses and apartments aren't being purchased. Neither is WiFi or that extra sofa. We think this is having a significant impact on the economy."

While Wall Street and the Trump administration tout news of a roaring economy and low unemployment, the risks of the student loan bubble imploding in the next economic downturn could start in the second half of 2019. 

A real economic barometer of millennials' financial health is to monitor the student loan delinquency rate, which, as of today, shows it is near cycle highs. A sign that storm clouds are gathering. 

***

Heavily indebted millennials might have a shot at paying off their student debt via a new game show on TruTV called “Paid Off.” Contestants must have lots of student loans and could have the chance to answer trivia questions – and if they win, the game show will pay off their student debt. Fonte: Z.H.

Saudi Stocks Crash Most Since 2016 As Riyadh Threatens US With "Very Strong" Retaliation

Saudi Arabia warned on Sunday it would respond to any "threats" against it as its stock market crashed the most since 2016 after President Trump's warning of "severe punishment" over the disappearance of Washington Post contributor Jamal Khashoggi.

On Saturday, Trump said the U.S. could take “very, very powerful, very strong, strong measures” against the country if its leaders are found responsible for the Saudi citizen’s fate. The kingdom, which denies its involvement in Khashoggi’s disappearance, announced it would retaliate against any punitive measures with an even “stronger” response, the Saudi Press Agency reported, citing an official it didn’t identify.

"The kingdom affirms its total rejection of any threats and attempts to undermine it, whether through economic sanctions, political pressure or repeating false accusations," the kingdom's statement said. "The kingdom also affirms that if it is (targeted by) any action, it will respond with greater action."

Saudi Arabia has traditionally been one of Trump's closest foreign allies, the US president made a point of visiting the kingdom on his first overseas trip as president and has touted arms sales to Saudi Arabia. But both the White House and the kingdom are under mounting pressure as concern grows over the fate of the veteran journalist, who hasn't been seen since he entered the Saudi Consulate in Istanbul on Oct. 2.

The Saudi response came after Saudi Arabian stocks slumped the most since 2016 amid a broad selloff over collapsing relations with the US, with the Tadawul All Share Index, or TASI, plunging by 7% at one point during the week's first day of trading, the most since December 2014, with all but seven of the gauge’s 186 members fell, led by Saudi Telecom, which declined 6.2%, Jabal Omar lost 6% and Saudi Basic Industries Corp. retreated 1.9%. Selling volume soared, with the number of shares traded more than double the 30-day average.

At one point, the index fell more than 10% in four days and was virtually unchanged on the year at the close of trading.

The market clawed back some of the losses, closing down just over 4% later on. The Saudi benchmark fell 3.9% on Oct. 11, when the MSCI Emerging Markets Index plunged 3.2% following last week's S&P rout. While the MSCI EM index recovered part of that loss on Friday, when it gained 2.7%, the Saudi selloff has re-accelerated as a result of the latest threat from Trump.

The escalation in tension between the two allies, and growing calls for Saudi Arabia to explain what happened to the missing writer, have raised concerns whether the kingdom can attract foreign investors needed to overhaul its economy according to Bloomberg. The diplomatic spat comes as the nation has been reforming its financial markets and has won inclusion in FTSE Russell and MSCI Inc. indexes for emerging markets.

"You are talking about a geopolitical situation becoming even worse and Saudi Arabia is going to show its stubborn attitude again," said Naeem Aslam, chief market analyst at Think Markets UK. "This is not going to sit well with foreign investors. From where we sit, we don’t see any demand for Saudi equities at all."

Neighboring markets were not spared either, with stock markets in Kuwait and Dubai dropping 1.9% and 1.5%, respectively; the Abu Dhabi’s ADX General Index dropped 0.7%. In Kuwait, all but one of the 16 members of the Boursa Kuwait Premier Market Price Return Index fall, dragging the measure down the most in almost a year. In Dubai, Emaar Properties and Dubai Islamic Bank are the biggest drag on the index, which closes at the lowest level since January 2016.

* * *

Foreign capital is key to Saudi Arabia’s plans to diversify its economy beyond oil and cut a 12.9% jobless rate among its citizens.

But in response to Khashoggi’s disappearance, media firms and some technology executives have pulled out of a major Riyadh investment conference scheduled for next week. As we reported yesterday, numerous company leaders backed away from the “Davos in the Desert” event later this month intended to showcase Prince Mohammed bin Salman’s modernization plan for his nation. Still, Trump said the U.S. would be “foolish” to cancel large arms deals with the Gulf state.

“This is happening at a time when Saudi Arabia is preparing for a big investment event and they don’t need people suspending or pulling out investments,” said Nadi Barghouti, head of asset management at Emirates Investment Bank in Dubai.

"Saudi is one of the world’s top oil producers, so one can’t sanction Saudi in the same way that one could sanction Iran,” Richard Sneller, the head of emerging-market equities at Baillie Gifford & Co. in Edinburgh, said last week. “Having said that, there are aspects of the Saudi regime that some people find less palatable and there are competing interests within Saudi as well. This is a very complicated country."

* * *

While Trump has not described what punishment Saudi Arabia might face, he did indicate that Washington does not want to harm close defence ties, saying the United States would be punishing itself if it halted sales of military equipment to Riyadh. But U.S. senators have triggered a provision of the Global Magnitsky Human Rights Accountability Act requiring the president to determine whether a foreign person is responsible for a gross human rights violation. The act has in the past imposed visa bans and asset freezes on Russian officials.

Also, anti-Saudi sentiment in the U.S. Congress could conceivably raise pressure to pass the so-called No Oil Producing and Exporting Cartels Act, which would end sovereign immunity shielding OPEC members from U.S. legal action. Past U.S. presidents have opposed the bill but the chances of it being passed may have increased because of Trump’s frequent criticism of OPEC, which he accuses of driving up oil prices.

Meanwhile, as Reuters notes, there is concern Khashoggi’s disappearance could add to a sense that Saudi policy has become more unpredictable and uninvestible under Crown Prince Mohammed bin Salman, who is pushing social reforms to modernize the kingdom but has also presided over a rise in tensions between Riyadh and several other countries.

A Gulf banker told Reuters that the Khashoggi case, combined with other events, had become a significant factor for some potential investors in Saudi Arabia and that her bank was receiving many queries from foreign clients on how to interpret it.

“It’s cumulative – the Yemen war, the dispute with Qatar, the tensions with Canada and Germany, the arrests of women activists. They add up to an impression of impulsive policy-making, and that worries investors,” the banker said.

10/14/2018

Fonte: qui

US Retailers Warn Trade Wars Will Unleash "Unavoidable" Price Hikes Before Holidays

While it seems that trade disputes between the US, Mexico, and Canada are de-escalating, the trade conflict with China is not. President Trump ramped up the trade war on Monday as $200 billion in Chinese imports took effect. This is the third round of US tariffs on Chinese imports, a significant escalation of the conflict between the world's two largest economies.

And caught in the middle of the crossfire are US retailers, who have spent a great deal of time on investor conference calls warning about imminent price hikes during the upcoming holiday season, which could send shock waves through the wallets of American consumers.

The chief executives from Walmart, Target, Gap Inc. and Best Buy, among others, have been some of the most vocal companies warning about "unavoidable" price hikes.

According to a letter from Robert Lighthizer, the US Trade Representative, tariffs on some $200 billion worth of Chinese imports took effect Monday. There are several hundred items on the list, including electronics, kitchenware, tools, and food. The taxes are set around 10 percent but will jump to 25 percent at the beginning of 2019.

The resulting margin compression will force retailers to either eat the cost of the tariffs or pass it along to consumers, right before the critical holiday season: "The new tariffs are bad news for the retail sector, especially as the latest round seems to extend the tax to a vast array of consumer goods," GlobalData Retail Managing Director Neil Saunders said in comments emailed to Retail Dive.

"Many retailers will now be faced with a difficult choice of whether to pass the cost increases across to consumers or to take a hit on their margins. The exact response will vary from retailer to retailer but, both strategies are likely to be used."

In a late cycle economic environment, tariffs are especially dangerous for retailers because it could exacerbate the effects of other rising costs, "including more spending on technology, elevated logistics costs, higher gas prices, and rising labor expenses. In short, additional tariffs are the last thing the retail sector wants," according to Saunders.

The new duties are across a wide assortment of goods, from apparel to appliances, mainly covering consumer products. Retail Dive said some retailers are working with suppliers on how to respond to their impact, while others look to shift their manufacturing bases.

Reshifting supply chains takes time and are very costly. Some small and medium-sized companies could face financial hardship due to the disruptions.

"Of course, it’s also related to the ability of our vendors to observe the tariffs, and of course we are having negotiations, or over time, usually not in the short term but over time, to diversify the supply base," Best Buy CEO Hubert Joly told investors last month, according to a conference call transcript. "So, it’s a complex undertaking."

Before the holidays, low-margin consumer goods, price hikes are inevitable. "As we said many times, as a guest-focused retailer, we're concerned about tariffs because they would increase prices on everyday products for American families," Target CEO Brian Cornell said last month, according to a conference call transcript.

"In addition, a prolonged deterioration in global trade relationships could damage economic growth and vitality in the United States. Given these risks, we have been expressing our concerns to our leaders in Washington, both on our own and along with other retailers and trade association partners," Cornell said.

Last week, Walmart sent a letter to the Office of the United States Trade Representative, warning that the trade war impact will soon lead to price hikes.

The result of $200 billion in new tariffs "will be to raise prices on consumers and tax American business and manufacturers," Walmart said in the letter. "As the largest retailer in the United States and a major buyer of U.S. manufactured goods, we are very concerned about the impacts these tariffs would have on our business, our customers, our suppliers and the U.S. economy as a whole."

In an interview last Thursday, Gap Inc. CEO Art Peck told Bloomberg's Emily Chang, the company is watching the trade situation closely, but implications are not as great for Gap because apparel is not on the list. The company has spent years diversifying its manufacturing plants across many countries. But Peck said a jump in prices would eventually hit the consumer's wallet as a result of President Trump's trade wars.

So from now until the rest of the year, retailers will factor in about 10% tariffs. But when 2019 comes around, the tariffs are set to rise to 25%. "Should an agreement between China and the U.S. not be found before the New Year, retailers could well start 2019 on a gloomy note," Saunders warned.

An all-out trade war between the US and China is emerging as the most plausible scenario for 2019 and beyond, a risk that could severely impact US retailers and the American consumer.

Fonte: qui