Deal Or No Deal — 4 Signs Of Economic Trouble Ahead

By Albert Lu

Deal or No Deal (CNBC)

Howie Mandel’s hit game show is back. “Deal or No Deal” may capture viewers’ attention, but the deal investors are most concerned with has everything to do with the world’s two largest economies and Donald Trump — and nothing to do with the Canadian comedian.

Progress on U.S.-China trade appeared to be moving well immediately following the post-G20 meeting between the two countries’ presidents. Yet in merely a few days the tone shifted from one of optimism to caution — and finally contention.

Talk of an extraordinary deal soon gave way to accusations of wealth raiding and retaliatory tariffs worth billions of dollars.

My meeting in Argentina with President Xi of China was an extraordinary one. Relations with China have taken a BIG leap forward! Very good things will happen. We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!

— Donald J. Trump (@realDonaldTrump) December 3, 2018

….I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN

— Donald J. Trump (@realDonaldTrump) December 4, 2018

And, with U.S. stocks plunging on Thursday for another session, Trump, the self-declared “Tariff Man,” may have his work cut out for him.

CHINA TRADE WAR ESCALATING

Despite some optimistic talk and a 90-day reprieve on scheduled tariff escalation, the two sides have a long way to go to seal an official deal.

At the same time, existing tariffs have already taken a toll on both sides.

U.S. tariffs on Chinese imports currently exceed $250 billion, with another $256 billion threatened if talks break down. The tariffs cover a wide array of consumer and industrial goods ranging from handbags to chemicals and railway equipment.

China has responded with $60 billion in additional tariffs on U.S. goods, bringing their total to $130 billion.

While tariffs may seem to create conditions favorable to domestic producers, the predictable tit-for-tat response often negates any perceived benefit. The U.S. agricultural sector, particularly soybean producers, has been hit hard. The auto sector, which shipped roughly 250,000 vehicles to China last year, has also been affected. Volvo Cars CEO Hakan Samuelsson has stated the company is considering plans to shift some production from South Carolina to China as a result.

Furthermore, news of Meng Wanzhou’s recent arrest while transiting through Canada are of no help. The CFO of Chinese technology company Huawei (and daughter of Huawei founder Ren Zhengfei) is expected to be extradited to the U.S. on charges of Iran sanction violations. The move may signal or trigger escalation of the trade war to a new level.

CRUDE OIL AND COPPER

Prices of crude oil and copper may reveal the market’s perception of economic health, at times functioning as investment proxies for global economic growth itself. Hence, the decline in both commodities is cause for some concern.

Oil prices have crashed nearly 30% over the last two months. Meanwhile, copper prices, which climbed briefly on Monday following the G20 summit, are down significantly from their highs. The trends may be harbingers of the dreaded but arguably unavoidable global slowdown many are predicting.

OPEC’s commitment to cut oil production is more bad news, because the cuts, if implemented, will negate the primary benefit of low oil prices — i.e., cheap fuel — hence, leaving us with the worst of both worlds: slow economic growth and high oil prices.

The 15-member cartel met with Russia and other oil-producing allies (collectively, with OPEC, referred to as OPEC+) on Friday. And although production cuts are always a touchy subject, if beaming smiles and high fives are any indication, Saudi and Russian representatives had little trouble finding common ground. The deal announced Friday takes 1.2 million barrels per day off the market for the first half of 2019.

TREASURY-RATE INVERSION

The yield on the two-year Treasury surpassed that of the similar five-year instrument on Tuesday, creating a minor panic in investors.

The Dow Jones Industrial Average lost almost 800 points on Tuesday, a move corresponding to 3.1%, on fears of an approaching economic recession — an “inverted yield curve” has historically signaled a higher risk of recession.

“The yield curve inversion means the economy is poised to weaken,” was DoubleLine Capital’s Jeff Gundlach’s succinct assessment.

Jeffrey Gundlach, ceo of doubleline capital, says yield curve inversion on short end signaling that 'economy is poised to weaken' @Reuters

— Jennifer Ablan (@jennablan) December 4, 2018

And although the inversion carries technical significance for chart traders, there are also fundamental concerns, particularly for banks who rely on the positive spread between long- and short-term interest rates.

When the spread turns negative, these banks stop lending — not a good scenario for an economy addicted to cheap credit or bank stocks, which swiftly fell into bear market territory.

HOUSING SLOWDOWN

Tuesday was also a bad day for the housing sector. Home builder Toll Brothers reported weaker-than-expected guidance for the first quarter, citing a softening housing market and negative media reports as the cause.

“In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown,” read the statement from Toll Brothers Chairman and CEO Douglas Yearley.

True, it’s no surprise that rising rates, which impact affordability, and negative reports, which influence buyer sentiment, have taken their toll (no pun intended). However, new data suggests the situation may be even worse than Yearley indicates.

October housing data revealed that sales of newly built homes fell 12% from the prior year, even as new home prices dropped.

The bottom line: The housing market, which was already in steady decline, is now showing signs of serious trouble.

REVIVING THE DEAL

As Mandel and Trump begin the journey of reviving their respective “Deals,” we can only watch and hope for the best. And, with millions and billions of dollars at stake, we have a lot to lose.

But unlike the game show contestants, who often don’t know what to do with their winnings, the rest of us, if we’re so lucky as to be spared this nasty trade war, will have no such problem.