* Italy is entrenched in running up the debt.  And why not, as Germany will subsidize it.

* Bolsonaro moves a step closer toward victory, and pushing Brazil to the right.

* The PBOC wants China to lever up, but wants their money back first.

* China Services PMI improved in September.

* If you think the trade war with China will end soon, you should read VP Pence’s speech.


We had hoped that by now rational thought would have prevailed in Italy.  However, remarks by Deputy PM, Matteo Salvini, suggest that rational thought isn’t something that is going to come quickly or easily in Italy.   Mr. Salvini said today, “The politics of austerity of the last few years have increased Italian debt and impoverished Italy…If I wanted to think badly I would say that behind the [bond] spread of recent days is a move by speculators like [George] Soros who are aiming for the failure of a country, to buy its remaining healthy businesses at a bargain price.”

Actually, Mr. Salvini, the reason why your bonds are selling off is because investors don’t think you’ll be able to pay them back.   And the reason your banks are selling off is because they OWN the bonds.   We have to ask the question, with Italy willing to run up debt to pay people to do nothing, and to lower the retirement age when the rest of the world is trying to raise it; is Italy suicidal, or is it really just this lazy?

The truth may be that Italy is neither suicidal nor lazy.  Rather, they know that they can continue to get cheap funding, backed by the ECB and Germany, and they might as well stimulate as much as they can.   This is the crux of why the Euro is a failure and why Europe remains uninvestable.   Europe is an economic union without economic unity.


It turns out that the stabbing of Jair Bolsonaro was merely just a flesh wound.  It only took Mr. Bolsonaro a 40% loss of blood in order to gain 46% of Brazil’s presidential vote.  Mr. Bolsonaro now faces a run-off with the latest Brazilian establishment candidate, Fernando Haddad.   We think Bolsonaro wins and his pro-growth policies could be a catalyst for a turnaround in Brazil   Mr. Bolsonaro talks tough on crime and drugs, and sees the current political establishment to be an extension of the criminality.   This sounds to us like a derivation of the “rigged system” championed by President Trump.    We will be watching Brazil closely.


The People’s Bank of China announced that it will lower the required reserve ratio for certain lenders by -100 basis points.  The PBOC expects this move will free up 1.2 trillion yuan, of which 450 billion yuan will be used to repay existing medium –term funding facility loans.   We are struck by the fact that the PBOC wants the banks to lever up but it wants the money it loaned out back before they do so.   Hmm.

We must assume things aren’t going quite as swimmingly as China’s stated 6.7% GDP growth rate might suggest.   Or possibly, China has become a bit spooked by this speech by U.S. Vice President, Mike Pence….


Excerpts below.   Full speech here:

“I come before you today because the American people deserve to know… as we speak, Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States…

“After the fall of the Soviet Union, we assumed that a free China was inevitable. Heady with optimism, at the turn of the 21st Century, America agreed to give Beijing open access to our economy, and bring China into the World Trade Organization.  Previous administrations made this choice in the hope that freedom in China would expand in all forms – not just economically, but politically, with a newfound respect for classical liberal principles, private property, religious freedom, and the entire family of human rights… but that hope has gone unfulfilled.  The dream of freedom remains distant for the Chinese people…”

“Now, through the “Made in China 2025” plan, the Communist Party has set its sights on controlling 90% of the world’s most advanced industries, including robotics, biotechnology, and artificial intelligence. To win the commanding heights of the 21st Century economy, Beijing has directed its bureaucrats and businesses to obtain American intellectual property – the foundation of our economic leadership – by any means necessary.”

“Beijing now requires many American businesses to hand over their trade secrets as the cost of doing business in China. … Worst of all, Chinese security agencies have masterminded the wholesale theft of American technology – including cutting-edge military blueprints.”

“China’s aggression was on display this week, when a Chinese naval vessel came within 45 yards of the USS Decatur as it conducted freedom-of-navigation operations in the South China Sea…”

“Today, China has built an unparalleled surveillance state, and it’s growing more expansive and intrusive – often with the help of U.S. technology. The “Great Firewall of China” likewise grows higher, drastically restricting the free flow of information to the Chinese people. And by 2020, China’s rulers aim to implement an Orwellian system premised on controlling virtually every facet of human life – the so-called “social credit score.” In the words of that program’s official blueprint, it will “allow the trustworthy to roam everywhere under heaven, while making it hard for the discredited to take a single step.””

“But as history attests, a country that oppresses its own people rarely stops there. Beijing also aims to extend its reach across the wider world… Within our own hemisphere, Beijing has extended a lifeline to the corrupt and incompetent Maduro regime in Venezuela, pledging $5 billion in questionable loans that can be repaid with oil.”

“The American people deserve to know that, in response to the strong stand that President Trump has taken, Beijing is pursuing a comprehensive and coordinated campaign to undermine support for the President, our agenda, and our nation’s most cherished ideals.”

 “In June, Beijing circulated a sensitive document, entitled “Propaganda and Censorship Notice,” that laid out its strategy. It states that China must “strike accurately and carefully, splitting apart different domestic groups” in the United States.”

“Beijing now requires American joint ventures that operate in China to establish “party organizations” within their company, giving the Communist Party a voice – and perhaps a veto – in hiring and investment decisions. … It also pressured Marriott to fire a U.S. employee who liked a tweet about Tibet.”

We continue to ask this important question … do you fully understand the China exposures within your portfolios and investments?


Overnight, it was reported that the Caixin China Services PMI rebounded +1.6 points to 53.1 in the month of September.  This is the highest level since June.  This read on the services sector is consistent with the ‘Official’ Non-Manufacturing PMI, which increased +0.7 points to 54.9 in September.  Note that it was previously reported that the Caixin Manufacturing PMI slipped -0.6 points to 50.0.  Nonetheless, the Composite PMI increased +0.1 points to 52.1, which indicates slightly faster growth in China




According to Destatis, German Industrial Production declined for the third consecutive month, down -0.3% M/M in August Furthermore, the prior month was revised lower to -1.3% M/M versus -1.1% previously reported; therefore, German Industrial Production is now down -0.4% Y/Y (versus +1.6% Y/Y previously).  In the month, Manufacturing output fell -0.1% M/M and Construction output fell -1.8% M/M; however, Energy output increased +1.3% M/M.




On Friday, the Federal Reserve released its report on consumer credit for the month of August, showing overall consumer credit increased a seasonally-adjusted +$20.08 billion to a record $3.935 trillion.  This is the 32nd consecutive monthly gain and total credit increased +4.7% Y/Y (+4.5% Y/Y prior).  In the month, Non-revolving credit increased +$15.242 billion to $2.894 trillion (+5.1% Y/Y vs. +5.1% prior) and Revolving credit increased +$4.836 billion M/M to a record high $1.042 trillion (+4.9% Y/Y versus +4.6% prior).



Furthermore, on a not-seasonally adjusted basis, consumer credit increased +$38.884 billion in August to $3.857 trillion.  In the month, government loans (student loans) increased for the 78th consecutive month (+$19.843 billion to a record $1.247 trillion).  Also, non-government loans increased for the fifth consecutive month (+$19.041 billion), led by significant increases in loans from Depository Institutions and Credit Unions.




U.S. GDP:  Our GDP model sees 3%+ Real GDP growth through Q1 2019, but as higher oil and interest rates flow through the system, our model sees slower growth thereafter.   Note that our model doesn’t factor in the stimulus from the recent tax cut, so the reversal in 2019 could be more pronounced than our model appreciates (it is presumed that 2018 will be better than our model due to the tax cut, whereas the delta for 2019 would be worse than our model predicts).

U.S. Inflation:  U.S. inflation remains in an upward trend (although inflation slowed last month), and we continue to believe that wage inflation should continue to rise as labor slack (particularly in prime working age groups) continues to decline.

U.S. Federal Reserve:  The Fed is signaling that rates will be 100 bps higher by the end of 2019, and right now, there’s little reason to dispute that claim.  We believe the U.S. Dollar will continue to strengthen given interest rate parity and overall relative economic strength in the U.S.   At some point that will be a headwind for inflation and may cause the Fed to pause.   Just not yet.

U.S. Treasuries:  Although recent inflation data has been cooling, the job market remains tight and Real GDP trending is still trending well above +3.0%.  With that in mind, we still believe the yield on the 10-year U.S. Treasury will trend higher.  We expect to see yields approach 3.50% by year end 2018. 

U.S. Equities and Earnings:  S&P 500 operating earnings are rising materially, but the question remains, will the market put a 20 P/E multiple on forward earnings?  We think a 20 forward multiple is aggressive, but 18.5 may not be.   Our SPX target is for an 18.5x P/E on 2019 forward earnings of $165, bringing our new 2018 SPX target to 3,050).  We prefer financials given expectations for economic growth and an improving (steepening) yield curve.   We also have a positive bias on the Technology and Health Care sectors.

Argentina:  The macro looks abysmal in Argentina, and they are rumored to have already asked for MORE money from the IMF, but there is a silver lining here in that Q2 GDP was so bad that it might be hard for Q3 to be negative!  Overall, Argentina’s economic condition appears to have weakened in 2018.   Inflation is at a lofty 34%, Industrial Production is down -5.7% Y/Y, Consumer Confidence has deteriorated since January, the Economic Activity Index collapsed in May, and Unemployment jumped to 9.6% in Q2 (7.2% in Q4 2017). Meanwhile, Argentina’s bonds have collapsed since late June.

Brazil:  Overall, Brazil’s data has weakened in 2018, but the political situation has now moved a step toward economic liberalization, and we are encouraged.   We are watching Bolsonaro’s candidacy closely as a result.   Currently, GDP is up just 1% Y/Y.  Note that Unemployment continues to be elevated (12.1% in August, which is an improvement), Retail Sales are now down -1.0% Y/Y, and the Composite PMI hooked back into negative territory in August.

Canada: Canada’s housing market has been weak, as building starts and permits have gone negative and home prices are slowing (Toronto area is now negative).  But hey, NAFTA has been replaced with USMCA!  Note that Canada’s monthly Real GDP has been in a slowing trend since October (3.5% in October, but now down to 2.4%), while monthly Nominal GDP has slowed from +6.5% in June 2017 to +4.1% Y/Y in Q2 … remember, nominal pays the bills.

Mexico: Overall, Mexico’s macro data looks to be improving.  Despite negative GDP in Q2, GDP actually accelerated to +2.6% Y/Y (from +1.4%).  Retail Sales accelerated to +4.2% Y/Y, PMI’s have been steady, and Consumer Confidence jumped in July.

Venezuela: Remains uninvestable.


United Kingdom:  We’re no longer sure that anyone can handicap BREXIT in any meaningful way, but the E.U.’s Barnier claims that a deal is reachable within weeks (6-8 weeks according to European time, which we would say is probably more like 6-8 months in actual time).  We are GBP bullish because we believe the BREXIT bark is way worse than the bite (there’s no incentive for these politicians to do anything other than talk tough and otherwise blabber about)  But if we take a step back, we can make a case that BREXIT doesn’t even matter at this time.   The U.K. economy has been reasonably resilient throughout the BREXIT process.  Unemployment continues to improve, PMI’s have been strong (but slipped a little in July), and Economic Sentiment hit its highest level since February this month.  This gives the BOE room to be a bit more hawkish.

European Union:  Although Unemployment continues to trend lower and Retail Sales are now up +1.8% Y/Y, Economic Sentiment is turning lower, Industrial Production is down -0.1% Y/Y, and PMI’s have turned back from recent highs.  The events in Italy foreshadow possible macro risks for Europe, as monetary accommodation is removed.  

European Central Banks:  The ECB is slowly removing accommodation and will end its bond buying in December (it will cut bond purchases in half to 15B a month in September and then stop all buying next year).  But Mario Draghi has given no indication about raising rates and the recent decline in CPI will give them even further pause for doing so With that in mind, there are now rumors that the ECB isn’t going to remove accommodation, rather they will reinvest their bond portfolios into long duration bonds, similar to the U.S. Fed’s Operation Twist in 2011.

Eastern Europe: As we saw earlier in the year with Italy, nations with high debt levels can rapidly become front-burner macro items.  The same can be said for Eastern Europe, given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   Yet, economic data have been robust this year across most of Eastern Europe.

South AfricaWe remain highly negative on South Africa, but we have noticed recent efforts by the ANF to walk back some of the rhetoric.   The ANF is now trying to reengage with foreign capital and wants to liberalize some of the rules around mining investment.   Politics aside, the macro picture is getting bleaker by the day as Business Confidence is rolling over, GDP is negative, Inflation has turned up, Retail Sales are barely positive, and PMI’s are bouncing around the ‘50’ level.  None of this will help unemployment (27.2% in Q2).   In our view, the mere risk of having assets appropriated will grind foreign capital commitments and new business investment to a screeching halt, and more time is going to need to pass in order for foreign investors to feel any degree of confidence.  Our best guess is that more downside exists for South Africa’s economy and we believe the currency and equity market will suffer as a result.

Turkey:  Remains uninvestable – and we regret not putting the short on here.


Australia:  The Australian data remain mixed.  So far, the Unemployment Rate appears to be ticking lower (to +5.3% in August), Real GDP accelerated to +3.8% Y/Y in August, Exports are up +15.3% Y/Y, Wages are up +2.1% Y/Y, Retail Sales accelerated to +2.9% Y/Y in July, and Consumer Sentiment has ticked slightly higher recently.  However, consumer credit remains elevated and the value and number of home loan approvals and permits have turned negative, which is a bad sign as home prices have turned negative as well.  We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.

China:   It’s officially a trade war and Jack Ma things we’ve got 20 more years to go.  We have the under on 20 years, but the over on 1 year as China isn’t even interested in meeting with the Trump Administration at this time.

We continue to believe that trade talks aren’t going to get better for quite some time and China will use every tool in its arsenal, which includes Renminbi depreciation.  With China cracking down on shadow banking, pollution, industrial overcapacity, and removing migrant workers from its cities, we expect China GDP to continue to trend lower (although, they may never actually report it).  It is notable that China is already working to stimulate its banking sector by lowering reserve requirements and encouraging banks to do “debt for equity’ swaps and now China’s sovereign wealth fund wants to buy Chinese domestic equities.  Note that PMI’s continue to indicate slow growth and now China may have an inflation problem.  However, unemployment remains low, Retail Sales accelerated to +9.0% Y/Y in August, Industrial Production accelerated slightly to +6.1% Y/Y, and Home Prices are up +8.0% Y/Y in August (+6.6% Y/Y prior).

India:  Indian economic activity appears to have recovered nicely since the new Goods and Services Tax (GST) was implemented as Commercial Credit accelerated to +13.5% Y/Y and Exports accelerated to +19.2% Y/Y.  However, Industrial Production slowed to +6.6% Y/Y in July, CPI slowed to +3.7% Y/Y in August, and PMI’s slowed once again in September.

Indonesia:  Indonesia had gone four years without raising rates, but now rates have been hiked +125bps since Mid-April.   Indonesia’s GDP and Private Consumption Expenditures are up over +5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI had been stable in the 49-51 range for a year and came in at 51.9 in August, Industrial Production rebounded +9.0% Y/Y.  However, Retail Sales slowed slightly to +2.8% Y/Y and Exports slowed to +4.1%.  If there’s one emerging market that we’d be inclined to be bullish, this would be it, but we’d need to see the free-fall in the currency come to an end first. 

Japan:  Overall, the economic data have been mixed but we are encouraged by Prime Minister Abe’s promise to fix social security, immigration, and workforce participation.   We are slowly becoming positively biased.

Russia: As we stated recently, the sanctions are beginning to have an impact on Russia.  And it is never a good thing when officials talk about their ability to cushion “crashes”.   We find Russia uninvestible at this time.

South KoreaOverall, the economic data have been mixed.  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China, which increased +20.8% Y/Y in August.   Also, GDP increased +2.8% Y/Y in Q2, Income is up +4.2% Y/Y, Industrial Production increased +0.9% Y/Y, and Retail Sales accelerated to +7.4% Y/Y.  Conversely, the Unemployment Rate increased to 4.2% in August and the Nikkei South Korea Manufacturing PMI has been below ‘50’ for six months in a row.





























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