Morning Report: Hong Kong extradition bill withdrawn

Vital Statistics:

 

Last Change
S&P futures 2932 23.5
Oil (WTI) 55.12 1.74
10 year government bond yield 1.49%
30 year fixed rate mortgage 3.78%

 

Stocks are higher after the Hong Kong government backed down on its extradition bill that drew massive protests in the Chinese-controlled city. Bonds and MBS are flat.

 

Mortgage applications fell 3.1% last week as purchases increased 4% and refis fell 7%. This was despite the lowest rates since late 2016. MBA Associate Vice President of Economic and Industry Forecasting Joel Kan said “Despite lower borrowing costs, refinances were down from its recent peak two weeks ago, but still remained over 150 percent higher than last August, when rates were almost a percentage point higher.”

 

The trade deficit decreased in July, however the deficit with China increased. Exports rose slightly, while imports were down.

 

The Fed’s balance sheet could be set to increase in size by the end of the year. The NY Fed is forecasting the balance sheet could swell to $4.7 trillion by the end of 2025. They had been edging towards normalcy, however they halted the run off in July when they cut rates by 25 basis points. Note the ECB is probably going to start QE as well, adding fuel to the global sovereign debt bubble.

 

Ray Dalio of Bridgewater lays out his theory about the political and economic landscape and compares it to the Great Depression era.

 

The most important forces that now exist are:

1) The End of the Long-Term Debt Cycle (When Central Banks Are No Longer Effective)

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2) The Large Wealth Gap and Political Polarity

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3) A Rising Work Power Challenging an Existing World Power

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The Bond Blow-Off, Rising Gold Prices, and the Late 1930s Analogue

In other words now 1) central banks have limited ability to stimulate, 2) there is large wealth and political polarity and 3) there is a conflict between China as a rising power and the U.S. as an existing world power. If/when there is an economic downturn, that will produce serious problems in ways that are analogous to the ways that the confluence of those three influences produced serious problems in the late 1930s.

 

It is an interesting read, and certainly standard gold-bug fodder. I suspect going from an edge-of-deflation environment to hyperinflation is going to take a long time, as in decades. But it is interesting to play through scenarios in this unprecedented government bond bubble.

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