What a Tantrum, Is 1998 in Play?

Bull scenario: the economy will hold up and avoid recession. Interest rates are rising and will remain elevated because there's no recession and core inflation will stay near 2 percent. The spike in volatility is the "equal and opposite" reaction of ultra-low volatility during QE, especially the final phase from June 2016 through January 2018. Investors expect low or even no volatility and an accomodative Fed. Investors were asking the Fed to stop hiking or even cut interest rates after a modest double-digit decline. They are behaving like coddled children throwing a tantrum and the Fed is the parent putting their foot down. Investors reacted by losing their minds, full blown on the floor kicking and screaming tantrum.

The Nasdaq fell 20 percent in 1998. Credit risk spiked in 1998, as it is spiking now. There are signs the global economy is weakening, but there were also clear signs in 1998 because that sell-off came at the tail end of the Asian Crisis. I remain bearish, but 1998 is the only non-bear scenario left. Even that scenario is not very bullish, since the top was 18 months after the 1998 correction.


Mortgage Interest Deduction Finally Arrives

Mortgage interest deduction was inevitable given widespread home ownership and expensive mortgages soaking up disposable income.

Xinhua: China unveils special individual income tax deductions
The State Council, China's cabinet, announced special individual income tax deductions on Saturday, in order to lower the tax burden for those who have certain expenditures.

Those expenditures cover six areas, including children's education, continuing education, health treatment for serious diseases, housing loan interests, rent and elderly care.

...Taxpayers or their spouses who have mortgage loans for a first home can have a deduction of 1,000 yuan per month from taxable income.

Housing rent deduction of up to 18,000 yuan each year will be granted to taxpayers owning no housing in the city where they work.
It doesn't sound like a lot, but China has relatively high thresholds for taxation.
An amount of up to 2,000 yuan every month will be deducted from an only-child taxpayer's taxable income for his or her parent who is over 60. Those who have siblings can share the 2,000-yuan deduction quota.

...For children's education, an amount of 1,000 yuan (about 145 U.S. dollars) will be deducted every month from the parents' taxable income for each child's education from preschool all the way to doctoral education, including technical education.
An only child with a home and a child could deduct 4,000 yuan per month. A renter 5,000 yuan. The standard deduction is 5,000 yuan. In the tax brackets where this matters most, it could turn into savings of between 350 yuan per month up to 1,000 yuan. That's not a lot of money in urban China these days, but considering some families have little left over after paying the mortgage, it could represent a translate into a significant bump in disposable income.

The Population Reshuffle

Study Finds: Third Of Americans Thinking About Leaving Country To Live Abroad
et while politics didn’t have a direct link, the authors found that one’s own national identity was an important underlying factor in one’s aspirations of living in another country. Specifically, those who didn’t respond that they had a very strong national identity were also more likely to leave.

“We asked respondents if they had a ‘very strong,’ ‘somewhat strong,’ ‘not very strong,’ or ‘not strong at all’ American national identity. Those who had anything other than ‘very strong’ national identity were more likely to aspire to live abroad,” Klekowski von Koppenfels tells StudyFinds. “It was, of course, a quantitative measure of a subjective belief measuring individuals’ self-identity.”

Other factors that played a role included knowing other Americans who’d lived abroad or having served in the military.
As nationalism rises, countries will take on a greater national identity. Assimilation pressures will increase. Those who want to become X are more likely to stay in country X. Many people who are loosely assimilated, who strongly lean on multiculturalism, could end up repatriating in the next generation or two. If nationalism intensifies, societies will turn the corner and begin rejecting (deporting) people because they are not X. It will not be possible to have dual loyalties. The hyphenated-American will disappear as a thing.

Nationalism will be very visible. Consider the LGBTQ movement in the United States. Many sports teams and organizations have LGBTQ Pride nights There are also various events for different minorities and religions, regional and sports team pride and so on. When this wave intensifies and assuming the country doesn't break apart politically (still more likely in my opinion) many of these "pride" events will be rolled into "American" pride. It will be far more intense because it will replace everything and be considered your basic identity. You can refuse to participate in LGBTQ events because of your religion, because sexual identity is one component of identity. When nationalism intensifies, if you don't go along, you won't be an American. Add another layer of intensity if there's a war. The various Twitter mobs that get people fired from their jobs for offending group X, Y or Z will all be unified in hunting down anti-Americans and non-Americans in their midst. Ditto for other nations around the world.

The United States has been lucky to avoid the economic collapse seen in countries such as Indonesia in the 1990s, but luck eventually runs out. Policies designed to fracture society will not survive the stress. The oppressive assimilation forces that follow will be far more intense because concepts such as diversity and multiculturalism have sowed doubt and reduced social cohesion. For every action there is a reaction. The worse the action, the worse the reaction. I don't know what odds to put on it, but I will bet that at some point in the next 20 years, some countries in the West such as Germany and France will see net emigration for a few years. Even the U.S. could see net emigration.


One Chinese City Lifts Housing Transfer Restriction

A city in Shandong has lifted transfer restrictions on new housing. Over the past couple of years, many cities restricted the ability of homeowners to flip properties. Some have taken extreme measures, banning sales out to 10 years.

iFeng: 全国首现解除住房限售城市 还有至少95城继续限购
On the evening of December 18, the Housing and Urban-Rural Development Bureau of Heze City, Shandong Province issued the “Notice on Promoting the Renovation of the City's Shanty Towns and Promoting the Stable and Healthy Development of the Real Estate Market” (He Jian [2018] No. 7). The Article 6 clearly states: Cancellation of new purchase restrictions on transfer of housing.

The notice stated that the “Notice of the Office of the People’s Government of Heze City on Further Strengthening the Regulation and Control of the Real Estate Market” (Hin Zheng Ban Fa [2017] No. 42) was cancelled in the “County District with high turnover in the main city and housing and high pressure on housing prices”. The new purchase of housing restrictions transfer measures, that is, the purchase of new commercial housing and second-hand housing to obtain property certificates for at least 2 years before listing transactions, non-local residents to purchase restrictions on the transfer of not less than 3 years.

...According to incomplete statistics, as of January this year, at least 85 cities across the country have implemented “restricted sales”, including Beijing, Xiamen, Hangzhou, Fuzhou, Guangzhou, Hainan Province, Shanghai, Chongqing, Zhuhai, Huizhou, Dongguan, Foshan, Nanchang, Guiyang, Changsha, Nanning, Guilin, Beihai, Minhou County, Changle, Fuqing, Shijiazhuang, Chengde, Baoding, Zhangjiakou, Xi'an, Shenyang, Chengdu, Jinan, Qingdao, Weihai, Dongying, Liaocheng, Heze, Binzhou, Dezhou, Zhengzhou, Kaifeng, Fuyang, Ezhou, Nanjing, Changzhou, Yangzhou, Wuxi, Start, Xuzhou, Zhangjiagang, Kunshan, Hangzhou, Jiaxing, Ningbo, Shaoxing, Wuhu, Lu'an, Taiyuan, Kunming, Changchun, etc.

Subsequently, 10 cities including Dalian, Shenyang, Qingdao, Hainan, Changchun, Harbin, Dandong, Chengdu, Sanming and Ningbo have successively issued sales restriction policies for different years.

Among them, Baoding and Foshan have a limited sales period of ten years, Haikou and Shijiazhuang have a limited sales period of five years, and Xiamen, Hangzhou and Fuzhou are generally two to three years old.
Not all cities have these restrictions:
It is worth mentioning that in November 2016, the media reported that the Ministry of Housing and Urban-Rural Development held a national conference on the macro-control of real estate in some cities in Beijing, clarifying Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin, Nanjing, Suzhou, Hangzhou, Hefei, 16 key cities such as Xiamen, Zhengzhou, Wuhan, Jinan, Wuxi, Fuzhou and Chengdu should stabilize their prices at the current level. Subsequently, the list of key cities and towns has increased to increase the number of cities with rapid housing prices in Shijiazhuang, Nanchang, Changsha and Qingdao.

Looking at the above 20 cities, only Hefei and Tianjin have not implemented the “restricted sales” policy.

According to a research report by Guosen Securities, the policy of “restricted sales” (individual cities are more than 5 years) after the introduction of housing purchases is not to eliminate the investment demand of real estate, but to curb “short-term speculation”. If the market is full of short-term speculators, it will not only be difficult to play a role in value discovery, but it will inevitably increase volatility. From the perspective of property investment, it is a reasonable investment period to hold the sale after 2-3 years. Suppressing short-term trading is conducive to making the property market run healthier and longer.

Along with Shandong Heze's first policy of lifting housing restrictions, whether there is any follow-up by local governments has become one of the concerns.


Correction or Bear Market? Find Out Soon

Earlier this year, I posted 2018: The Pivot Year. Coming into the year, many markets were poised for bullish breakouts if they weren't already breaking out. Massive inverse head-and-shoulders patterns on coal, steel and various emerging markets pointed to a potential inflationary breakout. Long-term bond charts signaled confirmation of higher inflation. On the other side of the argument, macro forces were arguing for a downturn. I favored the macro argument for deflation/disinflation and a downturn, but I had to respect the signal the charts were throwing off. Wrong or right, the year 2018 was going to shut the door on one of these scenarios.
One way or another, I expect action on trade in 2018.

Finally, the overall trend in social mood remains negative. I believe this is a higher order decline as in the 1930s, and thus dollar positive (deflation) rather than a correction and inflationary (1970s).

As I said above, I could be wrong. And the best case for my being wrong is still the commodities markets. Several funds such as steel, copper and coal (and related emerging market countries reliant on natural resource exports) are on the verge of breakouts. I expect China to slow, but FXI recently broke out above its resistance again and opened up 3 percent on Tuesday.
Macro proved correct. Slowing credit growth, slower economic growth, a stronger U.S. dollar and tumbling asset prices turned breakouts into failed breakouts.

Many are convinced this is only a correction and not a bear market. The reason is 2016, 2011, 2010 and 2009. Global central banks stopped a deflationary panic 4 times before and they'll do it again goes the bullish argument. Bears were burned each time, including in 2016 when it looked like a bigger decline was underway. In December 2015, I posted 1937 Redux: Deflationary Wave Has Returned. I was wrong then because I was focused more on the Fed and not global central bankers.

For the same reason I was mistaken about a large move in 2016, I believe this time is either a monster correction that will be aborted by central bank panic, or a bear market. Here's the global credit impulse from Saxo Bank.
Aggregate credit growth slumped in 2014 and into 2015 before turning up. Asset prices started wobbling in 2014. Oil plunged in November 2014. The yuan was allowed to devalue in August 2015. Global asset prices bottomed in January and February 2016.

Credit growth is a slow-moving leading indicator and bear market (correction) phases are short and brutal. It's always possible markets respond to other factors, but if credit growth is a key driver of global asset prices, it has yet to bottom, indicating global markets may not bottom until Q3 2019 at the earliest. That's assuming a central bank reverses policy. The Federal Reserve could signal a slower pace of rate hikes this week, but that doesn't do much for the market over the long-term. The ECB ended QE in December, as the Fed did at the end of 2013. Chinese credit growth is still slowing.

Back in August 2015, the month China allowed the yuan to depreciate, I posted: Shenzhen Home Prices Rise 20% in Three Months, Some Beijing Developers Hiked 10-20%, Each New Project Opens 5% Higher. I thought home prices were rising nominally ahead of a breakdown in the yuan, but it turned out it was a major burst of credit growth. In early 2016, China would layer on more stimulus to drive the market higher. A few months after global markets bottomed, I was posting articles such as Reform Can Wait: 4 Trillion Stimulus All Over Again as SOEs Pour into Land Market and Flour More Expensive Than Bread: Second Tier Land Prices Soar 180 pc and Ministry of Finance Owned Cinda Real Estate Becomes Land King. The seeds of a credit bubble were sown in mid-2015 and they were in full bloom by mid-2016. Starting in October 2017, China kicked off another major deleveraging effort. The last one started in 2013.

As that prior deleveraging wave was kicking off, I posted China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China. In October of this year I posted: Real Estate Rage Spreading As Developers Grab Golden Week Opportunity, Will 2019 Be the Year of Defending Rights?

How do things look today in China?

iFeng: 专家:明年经济增速目标或下调 预计增速为6.2%至6.3%
Xu Hongcai, deputy chief economist of China International Economic Exchange Center, said that from the accumulated data, the economic operation is still stable. Judging from the figures in November, the current downward pressure on the economy is high. The economic growth slowed down in the fourth quarter, and this trend may continue into the first and second quarters of next year. The economic growth rate for the whole year is expected to be 6.2-6.3%.
That doesn't sound very pessimistic, but that's because it's translated through a propaganda filter.

More importantly, housing shows no sign of the reversal seen in 2015. Not only that, but prices have only plateaued. A decline in prices is ahead, not behind. China's NBS published November price data and it shows new home prices rose 1 percent nationally, with 63 cities reporting rising prices. Existing home prices fell in 17 cities.
iFeng: 楼市现拐点?连续两月超10城二手房价下跌
In November, the prices of second-hand houses in as many as 17 cities were down month-on-month, with Xiamen, Beijing and Wuxi falling by the top three, down 0.7%, 0.6% and 0.6% respectively.

In addition, the prices of second-hand houses in Hangzhou, Ningbo, Fuzhou, Zhengzhou, Tianjin, Guangzhou, Wenzhou, Jinhua, Shijiazhuang, Shenzhen, Quanzhou, Shanghai, Hefei and Haikou also fell to varying degrees.
Existing home prices rose 0.54 percent nationally, but those first- and second-tier cities are the leading indicator.

I've seen some arguing emerging markets will lead a bullish turn. The U.S. market has underperformed in the past couple of months, but that looks more like the U.S. catching-down to emerging markets.
If I can only have one chart and one asset, then it's all about the U.S. dollar. The broad trade-weighted U.S. dollar is less than 1 percent from its all-time high. The U.S. Dollar Index (DXY) is about 6 percent away. Long before DXY hits a new high for this bull market, the dollar will be at an all-time high versus global fiat currencies thanks to the rising share of EM currencies. Layer on my forecast for USDCNY to blast through 7 and its a recipe for financial market turmoil.
Given my poor timing ability, I would not be surprised to see a rally unfold into the New Year. Longer term, I expect Chinese economic data will worsen in early 2019, around the time of Spring Festival.

Here's one more chart that argues the decline is in the early stages: high-yield credit spreads. Investment grade spreads show a similar pattern. The only time a credit spread breakout failed to terminate at much higher levels was in 2005, when it was driven by an accounting rule change. Stories such as Leveraged Loans Are Looking ‘Scary’ to These Money Managers are reminiscent of the 2014-2016 correction's final stage, but spreads were far higher when funds such as Third Avenue Focused Credit shuttered.
If the "super bulls" are right and this is 2016 all over again, credit spreads and the U.S. Dollar Index (which hit a new 52-week on Friday) will turn down. Chinese credit and economic growth will pick up. Commodity prices will turn higher along with U.S. GDP growth, and interest rates will breakout to new multi-year highs. If the "central-bankers will save us" bulls are right, I'd wager the S&P 500 Index will have to fall another ~10 percent in the first half of 2019. A slow and orderly decline with low VIX and GDP growth above 2 percent won't spur the Fed. If the bears are right, the U.S. Dollar Index is heading above 100, possibly terminating at 120 or higher. The real pain for emerging markets and China hasn't begun yet.

A look at social mood points to either a short-term peak in negative mood or something much greater. The Yellow Vest protests in France continue and have spread as far as Canada.

Express UK : Macron's 'yellow vest protests' set to SPREAD WORLDWIDE - Egypt fear riots and CHAOS
CTV: Yellow vest protests spread to Canada, criticizing illegal immigration, taxes
BI: 70 yellow vest protesters detained after rallies spread to Belgium and the Netherlands

Brexit and Trump came at the tail-end of the prior downturn. Many of these protests (Egypt aside) have begun with major indexes only slightly off multi-year, decade-plus or all-time highs.

Finally, here's the S&P 500 Index and the Federal Reserve balance sheet, percentage change since the end of 2008 on the same axis. The S&P 500 tracked the rise in the Fed's balance sheet. It was in a trading range from the end of QE in December 2013 until the November 2016 U.S. Presidential Election. This time QT is underway. Since it began in October 2017, the S&P 500 Index has again seen virtually no gain (25 points, ~1% since October 31, 2017). In the absence of QE, stimulative fiscal policy and foreign central bank QE, stocks will at best tread water.


SEC Puts Out Timely Reminder on Remedial Actions for U.S.-Listed Chinese Companies

SEC: Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally—Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China
The inability to date to achieve this level of regulatory cooperation with Chinese authorities raises a number of investor protection and general oversight issues.

The U.S. stock markets have long been attractive to foreign companies because of their efficiency and liquidity as well as the potential benefits offered in the form of brand-name enhancement and increased visibility. Many China-based companies, and companies that have significant operations in China, have sought these benefits. The factors driving these benefits include the application of U.S. disclosure requirements as well as regulatory oversight and enforcement.[23]

However, the barriers to information access discussed above may adversely affect investors in the U.S. markets and the interests they own in companies that are China-based or have significant operations in China, including because they reduce the certainty provided by U.S. law and oversight. We note that this risk is present for a company and its investors even if the company’s financial statements are complete and accurate and the audit was appropriately conducted. For example, when faced with increased uncertainty about the reliability of financial reports, investors may “price protect” that risk by increasing the companies’ cost of capital.[24]

While a reduction in oversight, and a related increase in uncertainty, may have broad market confidence-related effects, constraints on oversight also raise company-specific risk. For example, information barriers that inhibit oversight may allow bad actors to more effectively hide fraud. In addition, as we know all too well from our experiences with Enron, WorldCom, Adelphia and others, fraud in one company, or just a few companies, can undermine confidence more broadly.[25]

We believe it also is important to recognize that PCAOB inspections and SEC regulatory activities not only help to improve audit quality for the inspected foreign auditors’ U.S. listed clients,[26] but also provide benefits that may spread to these auditors’ non-U.S.-listed foreign public clients.[27] Said another way, the PCAOB inspection process that focuses on audits of U.S.-listed companies may drive the subject audit firm to improve its work in respect of companies that are not U.S.-listed.

Finally, we note that, depending on various facts and circumstances, including company-specific considerations, if significant information barriers persist, remedial actions involving U.S.-listed companies may be necessary or appropriate. In the past, remedial measures have included, as examples, requiring affected companies to make additional disclosures and placing additional restrictions on new securities issuances.
And delisting...

The list of all companies, not only Chinese, is at PCAOB: Issuers that are Audit Clients of PCAOB-Registered Firms from Non-U.S. Jurisdictions where the PCAOB is Denied Access to Conduct Inspections


France Gives Warning of Inflation Riots to Come

The French stock market peaked in 2000. The 19th year of a bear market has recently begun as the market likely achieved its second bear market rally peak. Mood is turning down again within this overall negative trend.

Evening Standard: Paris riots: 133 people injured in France and over 400 arrested as protesters rage at rising cost of living
In the United States, President Trump was elected to reverse falling living standards falling life expectancy, porous borders, and low employment. He is not succeeding on any of these issues. Most of his challengers (in both parties) want to make these problems worse by doubling-down on existing policies that created the mess. Even if the establishment unleashes a major reform effort to solve these issues, the situation hitting France is coming anyway because the U.S. dollar will eventually succumb to revaluation along with all the fiat before it.

Another lesson from France: even regime opponents are lumped in with the establishment. Le Pen is as likely to go the way of the dodo as the establishment of France because they go together like yin and yang. The collapse of the GOP establishment along with the Democrat establishment in 2016 was a small taste of what is brewing.

Macron was the poster boy for the globalist establishment. He was a sign in 2017 that populism could be stopped. Instead, he has ignited a more violent response to globalist, establishment thinking. It is better to have reform come early and be successful than to deny "populists" power. If Trump fails in the U.S., the result will not be pretty. Parties shut out of power in Europe are more likely to win total control over political power when the public finally revolts. Those in power, such as 5-star and the League, are as likely to be tossed as anyone unless they take bold steps to change course.

If the central bankers of the world hadn't convinced enough people that they'd solved the crisis, right now we'd all be calling this The Greater Depression. Social mood is very negative and the establishment is still pushing more extreme versions of the very policies that ignite public rage. Immigration should have been restricted after the year 2000, but politicians are calling for open borders and mass migration. Banking should have been reformed after 2008, not rebooted. In the U.S., healthcare should have been reformed, instead Obamacare was a giveaway to insurance companies and made the IRS their enforcers.

Finally, a key to the French riots is they are leaderless. It's a genuine mass movement. There's no one to negotiate with. When this comes to the U.S., there will be completely different groups and ideologies rioting in the cities and rural areas. These groups will have 180 degree opposite demands. The center is already collapsing, but when the riots hit, it will be gone. If establishment centrists hold power at that time with a puppet like Macron, they will be powerless.