Trump's trade war with China is the biggest threat to the US economy in 2019, and it's making economists the most worried they've been in years

Release Date:  Friday, December 14, 2018

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Gold and Silver Prices

Gold fell to its lowest in more than a week on Friday as the U.S. dollar climbed following stronger-than-expected U.S. economic data before the Fed meeting next week.

"The dollar rose to a 19-month high after data showed U.S. consumer spending appeared to gather momentum while industrial production rebounded in November.

"'The strength of the dollar has weighed across the complex. The key driver in the next few sessions is going to be the markets expectations for the Fed,' said Suki Cooper, precious metals analyst at Standard Chartered Bank.

"'While gold extended its trading range to the $1,250 level (earlier this week), it has come off that level, and with the Fed rate hike next week, any gold price rise will be hampered by expected dollar strength,' said Ronan Manly, a precious metals analyst at Singapore-based dealer BullionStar.

"Gold prices rose to a five-month peak of $1,250.55 an ounce on Monday, but has given up all the gains as the dollar strengthened against a basket of major currencies.

"'With China's economy slowing, along with Germany and parts of the European Union, one would expect interest in the gold market,' Walter Pehowich, executive vice president of investment services at Dillon Gage Metals, wrote in a note." ("Gold dips to 1-week low as dollar bounces on strong data," Reuters, CNBC, 12/14/18.)

Gold ended the week down $9.40, closing at $1,247.50. Silver ended the week down $0.06, closing at $14.59.

Trump's trade war with China is the biggest threat to the US economy in 2019, and it's making economists the most worried they've been in years - Bryan

US economists cite the US and China trade as the top 2019 economic concern.

"Some of the US's top economists are the most worried they've been in years about the country's economy.

"According to The Wall Street Journal's monthly survey of economists, about 85% of those surveyed said the risks for the US economy were tilting to the downside - the most since at least the start of 2015.

"And their biggest fear? President Donald Trump's trade war with China:

  • Overall, 47.3% of the economists surveyed cited the back-and-forth tariff fight between the US and China as the top threat to the economy in 2019, the highest percentage of any single threat.
  • 20% cited financial-market disruptions as the largest threat.
  • 12.7% pointed to a slowdown in business investment.

"The recent spate of trade fears has been blamed for both the sell-off in US stock markets and businesses' slowing of capital expenditures.

"The Journal survey seems to align with what major economists on Wall Street have forecast for the year ahead.

conomists at JPMorgan, Bank of America Merrill Lynch, and Goldman Sachs agreed that US gross domestic product growth would slow in the second half of 2019, and they say the trade war could make such an economic slowdown even worse.

"The US and China have imposed tariffs on $360 billion worth of goods flowing between the two countries: The US slapped tariffs on$250 billion of Chinese goods, and China responded with duties on $110 billion worth of US goods.

"While the two sides have shown signs of agreement, the tariffs are still in place, and the negotiations are fraught with potential pitfalls.

"The fear is that keeping existing tariffs in place for a longer period of time, increasing those tariff rates, and imposing new tariffs will drive up prices of imported goods for US consumers and businesses. This would slow investment and consumer spending, harming GDP growth.

"While signs of consumer inflation from the tariffs has been limited to a few items, businesses are already reporting cost pressures and disruptions from the trade war. And the longer Trump's fight with China continues, the more likely it starts to reach the average American consumer." ("Trump's trade war with China is the biggest threat to the US economy in 2019, and it's making economists the most worried they've been in years," Bob Bryan, Business Insider, 12/13/18.)

Gold in 2019: Fed Pausing Could Mean Everything For Gold - Golubova

Both analysts and banks are bullish on gold in 2019.

"After a disappointing year, gold is looking to recover and make new gains in 2019, with the help of a dovish Federal Reserve, according to analysts, who are not ruling out a pause in the rate-hike cycle next year.

"Gold prices kicked off 2018 on a positive note, with futures nearing $1,400 an ounce back in January and hitting a yearly high of around $1,385. A few months after, however, the yellow metal began a prolonged decline, dropping around 14% from the peak.

"The end of the year has been gracious to gold, with the February Comex gold futures last trading at $1,250, up 0.22% on the day, but still down 7% on the year.

"The biggest obstacle for gold prices this year was the strong U.S. dollar, which has taken safe-haven attention away from the precious metals.

"'The stars haven't really been aligned for gold this year. For most of the year, you had this ongoing U.S. dollar strength playing through. We've had bouts of volatility, which I quite like for gold, but the U.S. dollar hasn't sold off,' Pepperston head of research Chris Weston told Kitco News.

"But, the good news for gold is that things look very different next year, analysts pointed out, commenting that the U.S. dollar has likely peaked in 2018 and the yellow metal is expected to trade north of the critical $1,300-an-ounce resistance level next year.

"From the bullish perspective, Weston said that for gold to surge beyond the $1,300 level, the market must see a 'holy trinity' of catalysts come together - weaker U.S. dollar, lower U.S. inflation-adjusted real yields, and volatility in the equity space. 'If we get that, gold is going to have a very nice place to be in 2019,' he said.

"Gold is 'the-best-of-the-rest' type of investment for Weston, who highlighted that all G10 currencies could look unattractive next year. 'There's nothing that really stands out as your go-to safe-haven place. And that suggests that gold could do well,' Weston said.

"Pepperston's bullish outlook is a surge to $1,500 an ounce, the base-case scenario is a climb to $1,350 an ounce by the fourth quarter of next year, and the bear case is gold trading between $1,250 and $1,200.

"Somewhere in the middle of the bullish scale is London Capital Group head of research Jasper Lawler's forecast, which calls for gold to rise back up over the $1,300 level by mid-2019 and then climb higher and break through the $1,375 level.

"'More generally risk-off environment, a pullback in the dollar, and solid physical demand for gold should all be enough to keep it going,' Lawler said.

"The majority of the analysts Kitco News spoke to were not optimistic when talking about the U.S. economy and stocks in 2019, which means more good news for gold.

"'In 2019, we'll be seeing a slowdown in U.S. economy, a slowdown in the equity market, and continued geopolitical risk,' noted Refinitiv director of metals demand Cameron Alexander. 'We've been through a period of such bullish equity growth that it probably can't continue to go on at that level. There will likely be more apprehension and a bit more risk-off sentiment, with people starting to re-direct to other asset classes that offer more protection.' Refinitiv's projection for next year is much more subtle, with gold averaging $1,285 an ounce.

"Out of all the bank forecasts Kitco News has reviewed, the most bullish one comes from the Bank of America Merrill Lynch, which projects a rise in gold prices to $1,400 in 2019. Meanwhile, the most bearish forecast, penned by BNP Paribas, calls for gold to fall below $1,200 an ounce." ("Gold In 2019: Fed Pausing Could Mean Everything For Gold," Anna Golubova, Kitco News, 12/14/18.)

The S&P 500 could drop another 20% in 6 to 18 months, says Leuthold's CIO - Belvedere

If this CIO's historic valuation comparison becomes reality, there's much more downfall for the stock market.

"There could be a lot more pain for the stock market if Leuthold Group's Doug Ramsey's historical valuation comparison becomes a reality.

"'If we were to mark down the S&P 500 to the same P/E on trailing earnings that existed ... back in October 2007, the market would have to go down to 2,250,' the Leuthold chief investment officer told CNBC on Friday.

"'If you marked it down to the same price-to-sales ratio that existed in October of '07, the market would need to go down to 2,050,' he added in a "Squawk Box" interview.

"Based on Thursday's S&P 500 close of 2,650, Ramsey's price-to-earnings comparison would be a 15 percent decline. His price-to-sales comparison would be a 22 percent drop. Ramsey said he could see declines of those magnitudes 'over the next six to 18 months.'

"'I think it's very likely.' he said. 'And again, it's the point that I don't need to give you a draconian assumption to get that much down side.'

"The Dow Jones Industrial Average dropped more than 200 points on Friday, with weak economic data from China to blame. The S&P 500 opened back in a correction, measured by a decline of 10 percent or more from its most most recent high.

"Shortly after its all-time intraday high of 2,940 on Sept. 21, the S&P 500 tanked 6.9 percent in October, its biggest one-month slide since September 2011. It bounced 1.8 percent in November, but went right back into the soup in December, losing about 4 percent so far this month.

"Many Wall Street strategists remain cautious or even bearish like Ramsey, including Morgan Stanley's Michael Wilson, who sees a stagnant performance from stocks and the risk of an 'earnings recession.'" ("The S&P 500 could drop another 20% in 6 to 18 months, says Leuthold's CIO," Matthew J. Belvedere, CNBC, 12/14/18.)

Opinion: Stock investors, you have been warned for the last time - Henrich

One strategist points to six warning signs that the U.S. stock bull market will soon be over.

"This year many technical and macro warning signs were ignored by investors and Wall Street alike.

"Long gone is the record optimism that permeated the landscape not only in January but even as late as August and September. Wall Street analysts kept raising price targets on key stocks such as Apple AAPL, -2.42%  and telling investors to buy every dip. Only now are they downgrading those same stocks by 20%-25% from where they were in September.

"With a record 90% of asset classes down for the year and almost half of S&P 500 Index SPX, -1.52%  components in a bear market, hopes are for a Santa Claus rally to save what's left of a terrible investment year. And while markets may still see sizable rallies, the warning signs are still all around us, and they send a clear message: The 10-year bull market will come to an end, and the investing and trading climate is changing dramatically, possibly, for years to come.

"I'm outlining several of these key technical and macro warning signs as they are important to understanding what investors and traders have to contend with into 2019.

First, let's be clear what happened in 2018: After liquidity infusions of $5 trillion in record global central bank intervention between 2016 and 2017 and the U.S. tax cut that followed, we witnessed a global blow-off top in January and then a 10% correction off historic overbought levels. The recovery that followed produced new all-time highs on select U.S. indices and stocks, while the rest of the world floundered amid slowing growth. These new highs on U.S. indices then triggered a familiar script.

Warning Sign No. 1: New highs on negative divergences

"Not only did we witness new highs on negative divergences on many indices, but the banking sector never made new highs and is currently down 15% on the year, drawing eerie similarities to the 2007 topping pattern. Something's not right with the banking sector, and that raises the possibility that market highs are over for this cycle.

Warning Sign No. 2: Volatility expansion

"The year 2017 had record volatility compression. While the CBOE Volatility IndexVIX, +5.91% returned to a quiet period this summer amid low volume and record buyback activity, volatility has broken free of its compression pattern. It's a trend shift we can't ignore, and it highlights an important point: Volatility is here to stay. While it will ebb and flow, 2019 will offer wild market moves in both directions, offering the prospect for a great trading year. Still, it is likely to dissuade investors from a long-held fantasy: That stock prices will go up forever.

Warning Sign No. 3: Technical extensions

"The Nasdaq 100 Index NDX, -1.86% up 10 years in a row, reached its limits in 2018 as it disconnected too far above its yearly 5 EMA (exponential moving average).

"As FAANG stocks were printing new market-cap records (while underlying participation was thinning), those stocks reached unsustainable extensions above their historic moving averages. Reconnects are a normal part of markets, and excessive deviations do not last.

"A reconnect is coming, and with it a rather dramatic and important realization: The bull-market trend will break.

Warning Sign No. 4: The 2009 bull-market trend line

"Offering support multiple times this year, the 2009 trend is on the cusp of breaking on multiple indices... The message: Once this trend line breaks, the bull trend is over.

"The other big warning sign comes from the very Federal Reserve that is faced with a critical policy failure: Its attempts to normalize rates have run into a predictable wall: lower highs. After all, this has been the trend for decades now:

"Rate-increase prospects for 2019 have plummeted following the slowest rate-hike cycle in history, with still real negative rates in place.

Warning sign No. 5: Central bankers are concerned

"Just a few weeks ago Janet Yellen was warning of the economy overheating, and the former Fed chair who famously predicted no 'financial crisis in our lifetime' is now out warning of such a crisis to come:'I think things have improved, but then I think there are gigantic holes in the system. The tools that are available to deal with emerging problems are not great in the United States... I do worry that we could have another financial crisis.'

"And don't be quick to dismiss her warnings because she is no longer on the Fed. It is the Fed itself that recently issued a similar warning:

"'An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,' the report said. 'The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.' (Emphasis added.)

"And the Fed has a significant problem: Because it was so cautious and slow to raise rates while fueling another bubble, they now have, historically, much less ammunition to deal with a coming downturn, as former Dallas Fed Gov. Fischer has pointed out.

"And that's the global risk here. Central banks such as the European Central Bank and the Bank of Japan have never stopped intervening, yet growth has been slowing markedly as asset prices have declined significantly, with many global indices already in bear-market territory. This year saw a yield scare, as the 10-year Treasury note TMUBMUSD10Y, -0.69%  pushed up toward 3.2%. But it's actually the retreat of yields from that particular level that serves as an additional warning sign.

Warning sign No. 6: Yields retreating off of a multi-decade trend line

"For decades, central banks have reacted with lower rates to combat slowing growth. And each time, their efforts to raise rates again came to a halt as the next business cycle ended. The unemployment rate is at 3.7% while recession risks have been rising and many economists and CFOs are now expecting one to arrive in 2019 or 2020.

"The message: The bull-market trend will break. You have been warned." (Opinion: Stock investors, you have now been warned for the last time," Sven Henrich, MarketWatch, 12/14/18.)