What German stimulus? There is no German stimulus

Outlook:

We get inversion, we get uninverted. Rinse and repeat. First it was the 3-month against longer tenors, and most recently, the 2-year against the 10-year. Reuters has a long and painfully thorough story on all the recent inversions going back to 1988. Sure enough, not every inversion delivers a recession. Some deliver a stunning blow.

We surmised yesterday that the sensible next action is to make concessions to China to get a trade deal before the Sept 1 deadline. This would ensure a happier stock market, which is the same thing as a high TV show rating. Besides, Trump will want to steal the spotlight from Boris, who thinks he should be the star of the show; but Trump is the one with the actual TV show experience and can almost certainly upstage Boris. A trade deal is the fastest and easiest way to get traders to dump dollars, something Trump longs for. 

Trump is reported to be rattled by so many economists saying the probability of recession is very high, while complaining it’s a media conspiracy against him personally and there’s nothing wrong with the economy. Well, he also said there was no danger to the US in the tariffs that Trump removed just in case they might harm Christmas shopping. Trump caves, even when asserting the thing he is caving from doesn’t exist. Huh?

On Sunday he said “I think our economy is very, very good. If it slowed down, it is because I have to take on China and some other countries.” Then the next day he said the Fed needs to cut by a full percentage point. Trump maybe doesn’t connect the dots, but the rest of us can. Huawei is a third case of backtracking and allowing suspensions/postponements. 

It seems ridiculous to make forecasts on what an unstable fat man might be thinking, but we run into this kind of screwball thinking in markets all the time. Example: Reuters reports the yield relief yesterday arising from a drop in risk aversion “was boosted … by the prospect of Germany ditching its balanced budget rule to boost spending and China’s interest rate reform plan, which is expected to lower corporate borrowing costs.” A Daiwa Security analyst is quoted: “The dollar is higher across the board, tracking the rebound in yields. The prospect of Germany embarking on stimulus was the turning point and the dollar has regained momentum since.”

Wait a minute. What German stimulus? There is no German stimulus. As we reported yesterday, FinMin Scholz said on Sunday that Germany had the money if needed, even up to the €50 billion lost in 2008-09, but there is no plan to embrace stimulus, let alone engage in deficit spending. So how could a fictitious German stimulus plan be a turning point? When the headline writer at Bloomberg comes up with this one: “Germany Readying Stimulus Plan as Contingency for Deep Recession.” The story came out around 7 am ET. The euro had spiked during the 6 am hour, but proceeded to fall all day from 7 am until late afternoon. It’s a perfectly reasonable story, talking about the Bundesbank forecasts and various benchmarks, but there is absolutely nothing hard about a stimulus plan.

Do you get a dollar effect without a corresponding euro effect when the story is about Europe? Evidently you do, because of the perceived drop in risk aversion. To be fair, sometimes authentic news stories develop this way. It starts with an idea presented as fact. The next step is the leak of secret plans from unnamed sources. Then a source or two gets named, and finally a plan emerges. In a situation as serious as recession in the EU’s biggest and most important economy, it’s hard to imagine no plan at all.

But until we get at least unnamed sources, this kind of outcome is just as nuts as noting that 74% of economists polled by the National Association for Business Economics foresee a recession by end 2021. Except that’s not really what they say. To unpack the survey: 34% see recession in 2021 (up from 25% in Feb). Another 38% see recession in 2021, down from 42% in the Feb survey. And 2% expect recession this year, meaning both Q3 and Q4 will be negative (which we think is statistically impossible). Only 2% of those polled expect a recession to begin this year. Okay, that adds up to 74%.

But in the Feb survey, more economists—77%--expected recession this year or next. The headline should read “fewer economists expect recession.”

For background, the survey covers 226 economists and was conducted July 14-Aug 1—before the extra tariffs, the yuan breaking 7, and the market crash. And they are basing the recession forecast mostly on the US-China trade war. Almost 25% expect no deal, 64% expect a second-rate deal, and only 5% see a real deal. But this neglects that the second-rate (“superficial”) deal, which the majority expect, will be interpreted by markets as reducing risk aversion and the need for safe-havens. Well, the poor dears are economists, not market psychologists.

We get two of Rocky’s Rules here: first, be careful what you read. Second, data is not sentiment and sentiment is not always based on data.

As the yield differential between the US and the rest of the world contracts, the dollar should fall out of favor. But that’s not happening this time, because of two things: first, the dollar is favored in the first place because of risk aversion and secondly, positive is always better than negative when it comes to return on capital. You may have to pay to store gold, but you shouldn’t pay a storage fee for money. That this is happening means there is too much money and doesn’t deserve a return.

We imagine that the key factors at play today are the trade war and potential US retreat, and the extent of the Fed’s accommodation. Trump loses on both points, or so we imagine. When Trump is losing, we need to expect something else. It can’t be good. Our expectation of a day of comeuppance for the too-strong dollar gets pushed further out.

Tidbit: Front page news in the Wall Street Journal—sales of recreational vehicles are a better barometer of a slowdown/recession than other economic data. Some 65% of RV’s are made in and around Elkhart, Indiana, and sales are down about 20% so far this year. Employment is still okay but in 2009, the unemployment rate hit 20%. Manufacturers are starting to pull back, noting that 523 components from China will get hit by tariffs. A snazzy RV costs $350,000 but RV’s are still considering lower to middle class, and a luxury.

 

---

 

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a free trial, please write to [email protected] and you will be added to the mailing list..