Don’t Bet on a Trade Deal
China 'backtracks'... Don't bet on a trade deal... Prepare for more tariffs... And more volatility... Here comes Uber... New signs of trouble in credit...
On Monday, we noted that 'trade war' tensions were flaring again...
For weeks, the White House had been reassuring markets that the U.S. and China were moving closer to a trade deal.
But that all changed on Sunday, when President Donald Trump unexpectedly threatened to raise new tariffs on Chinese imports as early as this Friday.
This morning, we found out why...
According to an exclusive report from news service Reuters, China had suddenly "backtracked" on virtually every important concession it had made in negotiations to date. From the report...
The diplomatic cable from Beijing arrived in Washington late on Friday night, with systematic edits to a nearly 150-page draft trade agreement that would blow up months of negotiations between the world's two largest economies, according to three U.S. government sources and three private sector sources briefed on the talks.
The document was riddled with reversals by China that undermined core U.S. demands, the sources told Reuters.
In each of the seven chapters of the draft trade deal, China had deleted its commitments to change laws to resolve core complaints that caused the United States to launch a trade war: Theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation.
In other words, the president's tweets were not merely a negotiation tactic as we had hoped...
It now appears likely the White House will follow through on its threat to enact additional tariffs, effective this Friday at midnight.
And as we've seen several times since the trade war began last year, China has already promised to respond with "countermeasures" if it does.
In short, barring a last-minute resolution, the trade war could be set to escalate quickly. If it does, this week's stock-market volatility could be just the beginning.
Of course, regular Digest readers know this isn't the only reason for caution today...
As our colleague Alan Gula explained yesterday, sky-high investor sentiment – best illustrated by the sudden "frenzy" surrounding initial public offerings ("IPOs") – is a clear sign that this bull market is getting long in the tooth.
Investors have been pushing up the prices of these absurdly expensive – and in most cases, unprofitable – companies at the fastest pace since the dot-com bubble 20 years ago.
Like that time, we expect this mania will end in tears for most folks...
But there are already signs that things could get even more extreme before it finally does.
For example, ride-hailing service Uber is planning to price its IPO tomorrow night, with shares set to begin trading on Friday.
According to the latest reports this afternoon, the company is planning to sell roughly 180 million shares at a price between $44 and $50, which would value the full company at $80 billion to $90 billion.
However, Bloomberg reported yesterday that investor demand could total 540 million shares or more... roughly three times more than the company is offering.
If these figures are even remotely true, Uber's IPO "pop" could be among the biggest yet.
On the other hand, if Uber's widely anticipated IPO falls flat, it could mark the beginning of the end of this boom.
In the meantime, regular readers know we've also been keeping a close eye on the credit markets...
In short, a huge swath of U.S. companies and consumers alike have become hopelessly buried in debt.
And as our colleague Bill McGilton reminded readers in March, it's simply a matter of time before this recklessness blows up. When it does, it could trigger huge consequences for both stocks and the economy.
Here, too, the bubble could become even bigger before it bursts...
The most important credit market indicators we follow are not yet signaling danger. But we are beginning to see clear signs of stress in some corners of the market.
For example, credit-card companies are reporting more and more borrowers are falling behind. As Bloomberg reported late last month...
Red flags are flying in the credit-card industry after a key gauge of bad debt jumped to the highest level in almost seven years.
The charge-off rate – the percentage of loans companies have decided they'll never collect – rose to 3.82 percent in the first three months of 2019, the highest since the second quarter of 2012, according to data compiled by Bloomberg Intelligence. And loans 30 days past due, a harbinger of future write-offs, increased at all seven of the largest U.S. card issuers.
In particular, Capital One Financial (COF) – one of the country's biggest card issuers to subprime borrowers – reported its charge-off rate rose above 5% in the first quarter.
We're also seeing some early signs of weakness in the auto industry...
U.S. auto sales fell 3.2% in the first quarter of 2019. As a result, close to 4.2 million unsold cars and trucks filled the country's dealership lots entering April, according to industry publication Automotive News.
This is more than half a million more vehicles than dealers were holding at the previous peak in the auto market in early 2007. And it's just 114,300 vehicles less than the modern-day record set in May 2004.
Our colleague Bryan Beach – who watches the auto-loan market closely – believes this trend is a clear indicator that U.S. consumers are "tapped out." As he explained in a private note...
There are a ton of moving parts to consider, including rental car inventories and used car prices. But debt definitely plays into this situation.
Auto dealers have spent the last ten years funneling billions of dollars to folks who buy cars they can't afford.
Almost all of these people are "underwater" on these loans. The new car smell wore off years ago, and these buyers owe far more on their loans than the cars are worth.
The tens of thousands of people who signed up for these bad loans in the mid-2010's are simply not going to be in the market for new cars any time soon.
A significant rise in dealer inventories was almost inevitable.
Again, this doesn't mean the bull market can't continue a while longer...
Most Stansberry Research analysts still expect to see a final "Melt Up" like Steve Sjuggerud has been predicting.
But as Alan noted yesterday, we're already seeing the unmistakable signs of a late stage bull market. It's time to start preparing for what comes next.
Next Wednesday, May 15 at 8 p.m. Eastern time, Porter and investing legend Jim Rogers will be sitting down to show you exactly how to do that.
If you've not yet registered for our free Bear Market Survival Event, click here to reserve your spot now.
New 52-week highs (as of 5/7/19): none.
The feedback on Porter's latest Friday Digest is still rolling in. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
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May 8, 2019