What I Learned at (Economics) Summer Camp
John Mauldin
What I Learned at (Economics) Summer Camp
The China Growth Slowdown Has Arrived
Economic data showed investment and industrial growth weakening sharply
By Nathaniel Taplin
STEELY DETERMINATION
China Industrial Output, change from a year early (Tons)
Tone Defcon
Donald Trump threatens North Korea with “fire and fury”
As usual, it’s not quite clear whether he meant it
THE Korean Central News Agency (KCNA), the mouthpiece of Kim Jong Un’s bloodthirsty regime in North Korea, is not known for nuance. Its propagandists were kept busier than usual last week, hammering out tirades against economic sanctions imposed by the UN in response to Mr Kim’s unrelenting missile tests. Reports threatened America with “nuclear weapons of justice”. A typical article warned that: “It is a daydream for the US to think that its mainland is an invulnerable Heavenly kingdom.”
American presidents used to brush off such bombast. Not so Donald Trump. Speaking off-the-cuff at one of his golf clubs, he chided North Korea for its threats, pledging to meet further provocations “with fire and fury like the world has never seen”. Even the hyperbole-prone hacks of the KCNA seemed to think this was a little strong. They accused America of “war hysteria” and ticked off the president for being “reckless”. Just hours later, the Korean People’s Army claimed to be “carefully examining” a strike on Guam, a Pacific island that hosts a large American military base.
North Korea’s neighbours are jittery. Moon Jae-in, South Korea’s president, called for a “complete” overhaul of his country’s armed forces. Japan’s defence ministry published a 563-page report charting how the threat from the North reached a “new stage”. A day after Mr Trump’s outburst, China appealed for calm.
The sanctions that sparked this exchange of rhetorical fire were a rare example of co-operation between China, America and Russia. The UN Security Council unanimously endorsed the crackdown a week after North Korea’s second test of an intercontinental ballistic missile (ICBM), which could soon enable Mr Kim to order a nuclear strike on an American city.
The new restrictions ban purchases of North Korean coal, iron, lead and seafood (the country’s main exports). According to some estimates, this will deprive the regime of $1bn a year—a third of its foreign earnings. The sanctions also prohibit governments around the world from admitting any more North Korean workers, as the regime pockets most of their wages.
Seventh time lucky
Yet sanctions have not brought the Kim family to heel in the past. This is the sixth tightening of them since the UN first imposed them in 2006, after Mr Kim’s father, Kim Jong Il, conducted a nuclear test. North Korea has since carried out four more tests. The regime has grown adept at dodging the restrictions, using illicit slush funds in China to finance business partnerships, says John Park of Harvard’s Kennedy School of Government. The higher commissions on offer for such risky transactions simply attract more capable middlemen, he adds. Enforcement has been patchy: of the UN’s 193 members, only 77 have reported on their implementation of the previous round of sanctions, adopted in November.
China, which accounts for more than 90% of North Korea’s trade, has promised to apply the new restrictions “fully and strictly”. But they do not include the one measure thought likely to cause Mr Kim real difficulty: a curb on the North’s imports of oil. They are unlikely, therefore, to convince Mr Kim to give up his weapons, but some Korea-watchers hope they may inflict enough pain to bring him to the negotiating table at least.
Sanctions will only work if they are part of a “cohesive, clearer strategy”, argues a report by the Brookings Institution, an American think-tank. But analysts accuse the Trump administration of sending mixed messages. Only a week before Mr Trump’s inflammatory remarks, Rex Tillerson, his secretary of state, had reassured North Korea, calling for talks and insisting, “We are not your enemy, we are not your threat.” Mark Fitzpatrick of the International Institute for Strategic Studies, another think-tank, says a response to the nuclear threat requires “carefulness and co-ordination”, which are “not Trump hallmarks”.
Far from talking the regime down, Mr Trump’s bombastic (indeed, Kim-like) rhetoric risks making allies nervous while doing nothing to persuade the North Korean leader to take his foot off the missile-testing accelerator. His statement appears to suggest that America is prepared to retaliate against North Korean threats, not just hostile actions, such as an attack on Seoul, points out Evans Revere, a former American diplomat who took part in the most recent negotiations with North Korea. “If we’re going to respond with nuclear weapons every time the North Koreans say something outrageous, there are going to be a lot of nuclear weapons flying through the air,” he says.
Mr Trump should follow up the sanctions with an offer of talks, even though the former goal of denuclearisation is now vanishingly remote. On the campaign trail last year, he said he would be willing to chat with Mr Kim over a hamburger. Now that blood-curdling barbs are flying across the Pacific, Mr Fitzpatrick believes, “It’s time to have that hamburger.”
A crypto-currency civil war
Making Bitcoin work better
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Getting Technical
Consider This a Wakeup Call
Last week’s volatile market is a reminder that the bull run won’t last forever.
By Michael Kahn
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Chart 1
Last week, when stocks gave back 1.4%—the Standard & Poor’s 500’s worst week since November 2016—analysts picked up on the relatively large number of new 52-week lows on both the Nasdaq and New York Stock Exchange. Considering that both indexes were just a few percent off all-time highs, this was a concern.
After all, if so many stocks were reaching new lows, it meant that the indexes were driven by only a small number of large stocks. This is called a narrow market, and it usually cannot continue climbing for long.
Even worse, the number of new lows on each index was close to 5% of all issues traded. That conjures up thoughts of the infamous Hindenburg Omen, which looks for very large percentages of new highs and new lows at the same time. The theory is that when this happens the market is unstable and prone to a big selloff.
Unfortunately for the bears, the number of new highs backed down to a very small number—which rules out a Hindenburg. Yet it still should be of concern that so many stocks are trading at such low levels when the major indexes are doing so well.
With Monday’s rebound, the number of new lows dissipated, leaving the market in a bruised condition but still in a rising trend. Both indexes are back above their 50-day moving averages, too.
In defense of the Nasdaq and the dominance by large tech stocks within, the First Trust Nasdaq-100 Equal Weighted Index exchange-traded fund (ticker: QQEW) bounced off short-term support from its recent trading range (see Chart 2). This ETF gives all of its components an equal voice in its performance, unlike the capitalization-weighted version that is dominated by the likes of Alphabet GOOGLGOOGL in Your Value Your Change Short position (GOOGL) and a few others.
Chart 2
Chart 3
Last week’s volatility was indeed a wakeup call that stocks can and eventually will decline. So far, though, there is no solid technical evidence that is about to happen other than the fact that it has not happened in quite some time. The wild card is the North Korean regime.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
IMF Warns Against Global Trade Imbalances
But the fund criticizes protectionism as a solution, saying it could derail the global economy
By Ian Talley
Asset Managers: Spending Money to Make Money
Investment giants need to spend money now to stay on top of trends that threaten their future
By Aaron Back
Prominent asset managers fell back to earth last week as the fundamental challenges they face resurfaced.
Investors had grown newly optimistic on the sector over the first half of the year amid ever-higher equity markets and even signs that active managers were outperforming their benchmarks for the first time in years.
That came to an end when five of the biggest publicly listed investment managers—AllianceBernstein, Invesco, Legg Mason , T. Rowe Price and Franklin Resources BEN -2.64%▲ —all reported earnings last week.
From the start of the year through Wednesday, they were up an average 19%, a remarkable performance for a sector that has struggled in recent years. But these five stocks fell by an average of 4.5% over two days.
Second-quarter results were mixed when it came to flows. AllianceBernstein, which suffered major outflows last year, saw a surprising $4.7 billion net inflow for the quarter. Invesco, which has lately enjoyed inflows thanks largely to its strong suite of exchange-traded funds, saw a $600 million outflow, largely due to a redemption by a sovereign-wealth fund.
The bigger factor was expenses. Invesco appears to have sparked the sector selloff with its warning that costs would be elevated in the coming year. The company cited investments in new growth areas, including its robo-advisory service and the acquisition of a European ETF company.
On Friday Franklin Resources Chief Financial Officer Ken Lewis told investors he is “leaving no stone unturned” looking for cost cuts. But he added it would still be a challenge to achieve lower expenses next year given the need to fund new strategic initiatives.
These kinds of investments make complete sense. Faced with changes in investor behavior favoring passive, low-cost alternatives, traditional asset managers can’t just stand still. It is urgent for them to develop new online distribution methods such as robo advisers, and to offer more low-cost products like ETFs.
Based on their reaction this week, investors in these companies needed a reminder that these investments cost money.
This points to a key distinction between asset managers: Some can better afford to spend money on future technologies than others. Invesco, which attracted a net $13 billion of inflows in 2016, is in a much better place than Franklin, which saw a whopping $68 billion of outflows.
It can be hard to plan for the future when you are busy trying to close an open wound.
A China Card for the Middle East
Dominique Moisi