by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s a major risk-off day so far.  The key issues are an arrest and its impact on trade and a difficult OPEC meeting.  Here are the details and other items we are watching:

The arrest of Meng Wanzhou: Yesterday evening, Canadian[1] officials announced they had apprehended[2] the CFO of the Chinese telecom firm Huawei (002502, CNY 4.71), Meng Wanzhou, in Vancouver.  She is the daughter of Ren Zhengfei, the founder of the company, and one of the four chairpersons of the company.  The arrest is tied to an investigation that her company attempted to sell U.S.-made equipment to Iran, a violation of American sanctions on the Iranian regime.  There is suspicion that the company has violated U.S. trade controls on Cuba, Sudan and Syria as well.[3]  The U.S. is seeking and will likely get extradition of Meng.   Western intelligence agencies have viewed Huawei as a security risk, fearing the company is a tool of the PRC to penetrate Western telecommunications networks.  U.S. telecom networks are banned from using Huawei equipment; Canada, the U.K., Australia and New Zealand have also placed restrictions on Huawei equipment.[4]

This arrest is certainly justifiable.  Huawei appears to be a “bad actor,” acquiring U.S. technology and allegedly selling it to nations unfriendly to the U.S. after agreeing it wouldn’t do such things.[5]  However, as any law enforcement official will tell you, the decision to arrest is never automatic.  Just because someone is breaking the law doesn’t necessarily mean an arrest automatically follows.  Instead, the decision to arrest is just that—a decision.  We suspect the decision to arrest Meng was made at the highest levels of the U.S. government.  Although the arrest was certainly legitimate, the timing must also be seen as deliberate.

Since Buenos Aires, both China and the U.S. have sent mixed messages on what was decided.  Given that a joint statement wasn’t released, each side has issued its own statement and, as we noted on Monday, they don’t line up all that closely.  The president added to confusion with a series of tweets where he called himself “tariff man,”[6] suggesting the truce he negotiated with Xi wasn’t going to change things all that much.  The president has attempted to walk back some of those comments[7] but financial markets are in “Missouri mode” and are saying “show me.”

So, how will the arrest of such a high-profile Chinese executive affect trade negotiations?  It is possible that the White House thinks it can use Meng for leverage, promising to release her for concessions.  That is a very dangerous precedent; every Western executive in China would be put at risk.[8]  The most likely outcome is that the arrest will make negotiations difficult, if not impossible.  This outcome is clearly being reflected in the financial markets.

A key issue we are wrestling with is the nature of the U.S./China relationship going forward.  The two nations have had something of a symbiotic relationship for nearly three decades.  China has been willing to provide cheap goods produced by compliant labor, while America has provided investment, intellectual property and a steady source of consumption.  This has led to a flood of cheap goods into the U.S., which has kept prices low and contained labor costs.  The relationship allowed the Chinese economy to grow rapidly and has led to widening income inequality in the U.S.  We have been noting, for some time, that strains in this relationship have been developing.  For China, it has reached the economic moment where it has created too much industrial capacity and needs to reduce that excess capacity; if growth is going to continue, it needs to make major adjustments.

Every nation that has reached this point struggles with it.  When European economies reached this point, they turned to imperialism and, sadly, mass industrialization war.  The U.S. dealt with this moment with the Great Depression.  When Japan and Germany made a second turn at this problem after WWII, Germany addressed it by moving up the value chain and 21^st century imperialism, otherwise known as the Eurozone.  Japan has adjusted with three decades of economic stagnation.  Chinese leaders know where they are and are trying to adjust.  They are attempting to move up the value chain by “acquiring” American technology and through imperialism with the “one belt, one road” project.  In the meantime, they need trade with the U.S. to maintain growth.  Although trade policy is getting all the attention, the real issue is technology.  If China is forced to develop indigenously it may take too long and could follow the path of Japan, which will put the Communist Party of China (CPC) at risk.  In addition, if the U.S. really “pivots” toward Asia, imperialism won’t work either.  Much can go wrong.

At the same time, nothing described above is a secret.  It has been generally acknowledged since 2010 that China needs to adjust.  However, its leaders were always fearful that moving full bore into adjustment would lead to a collapse in growth and undermine the CPC’s legitimacy.  So, leaders been putting off the adjustment in a sort of “stop/go” cycle that financial markets have gotten used to.  It is hard to know when the adjustment can no longer be avoided.  If we are at that point, then risks to the global economy are much more elevated than they have been.  There is some evidence that financial markets are starting to fear this outcome.

Will trade negotiators be able to overcome Meng’s arrest and stabilize the situation?  Perhaps, but the long-run path for the U.S. and China appears to be headed toward persistent confrontation.  What we don’t know is how close we are to this long-run outcome.

OPEC: Oil prices are plunging this morning as the cartel continues to struggle with the mechanics of production cuts.  The group has agreed, in principle, to reduce output.  But, how much and the allocation of reductions remain unresolved.[9]  OPEC probably needs a cut of 1.3 mbpd to bring prices back toward $55 per barrel (WTI) and the Saudis will likely need to represent 1.0 mbpd of that cut for the proposal to have any credibility.  In addition, Russia has to make promises to reduce output as well.  And, it will take a while before the recent decline in oil prices reduces American output, which has been surging.

Complicating matters is the Khashoggi affair.  Congressional leaders heard the CIA’s take on events yesterday and were scathing in their criticism of the White House over this issue.  There is concern that the Trump administration is using this event as leverage over MbS to keep Saudi output high and lower oil prices further.  Although this is possible, as we have noted, lower oil prices aren’t as much of an unalloyed benefit for the American economy as they used to be.  While it will make consumers happy, it will harm oil and gas activity and reduce investment.  In addition, lower oil prices will do nothing good for the Saudi economy.  At some point, the Saudi royal family may conclude that MbS is bad for business and sack him; we doubt he goes quietly.  If so, the geopolitical risk for oil is probably being underestimated.

Brexit: With everything else going on, this issue has sort of slid to the backburner.  As it stands now, PM May’s plan looks DOA; it will almost certainly be voted down next Tuesday and then we will see if (a) the vote is close enough to try to renegotiate with the EU, or (b) the vote is an overwhelming rejection which would lead to either the fall of May’s government and new elections or a new referendum.  The fact that the GBP is holding up suggests the financial markets believe a hard Brexit will be avoided.

Facebook (FB, 137.93): The company continues to marinate in hot water and its woes are raising questions for all of social media.  In Scott Galloway’s book, The Four, he notes that the only real business risks to the large tech companies come from government.  And, when he wrote his book, he suggested that the threat wasn’t all that strong because the companies had mostly co-opted regulators.  That condition has changed.  European regulators are leading the charge against Facebook directly but other tech firms as well.[10]  The Europeans are accusing Facebook and others of anti-competitive behavior and the companies have few allies on the continent since the industry is mostly centered in the U.S.  The fear of regulation is clearly hurting equity performance of these companies.  Interestingly enough, relations between the White House and the tech firms have been improving; they may realize they need friends.[11]

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[1] https://www.theglobeandmail.com/canada/article-canada-has-arrested-huaweis-global-chief-financial-officer-in/

[2] https://www.ft.com/content/10065056-f8e2-11e8-af46-2022a0b02a6c

[3] https://www.nytimes.com/2018/12/05/business/huawei-cfo-arrest-canada-extradition.html?emc=edit_mbe_20181206&nl=morning-briefing-europe&nlid=567726720181206&te=1

[4] These nations comprise the “Five-Eyes” network of Western intelligence agencies.

[5] Op. cit., NYT article above

[6] https://www.nytimes.com/2018/12/04/business/yield-curve-recession-stock-market.html

[7] https://www.politico.com/story/2018/12/05/trump-china-trade-deal-1045367

[8] Although, realistically, they are already at risk.  But, this action likely means the risks are elevated.  https://www.axios.com/huawei-arrest-china-retaliation-73f847b7-4dbb-4987-926a-d9ac915b2285.html

[9] https://www.wsj.com/articles/a-weakened-opec-convenes-with-market-dominance-in-doubt-1544087560

[10] https://www.axios.com/zuckerberg-at-war-with-european-regulators-fa6e0376-4894-42f7-a0a3-c130882e2471.html  and https://www.bloomberg.com/news/articles/2018-05-23/facebook-loses-eu-friends-as-bloc-s-lawmakers-weigh-break-up?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top

[11] https://www.axios.com/white-house-tech-meeting-silicon-valley-trump-stabilized-6403b20f-5376-46cc-9a3e-71063d72c391.html

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

(NB: Due to tomorrow’s National Day of Mourning and the closure of financial markets and the government, we will not publish the Daily Comment tomorrow.  We will return to our regular schedule on Thursday.)

Good morning!  The euphoria of yesterday has dissipated to some degree.  Here is what we are watching today:

Trade skepticism: As we noted yesterday, the lack of a unified communique after the Trump-Xi meeting led to both sides reporting different results.  President Trump has added to uncertainty with a tweet indicating that China has agreed to eliminate tariffs on U.S. autos.[1]  There isn’t any evidence (at least, not yet) that such a deal was made.  In addition, the White House has appointed Robert Lighthizer to lead upcoming talks with China.[2]  He is a hardliner on trade and his appointment to lead the talks, instead of Kudlow or Mnuchin, is a sign that the president intends to keep pressure on China.

As mentioned yesterday, the clock is working against President Trump, assuming he does want to be reelected.  If a recession is triggered next year, it will deeply weaken his chances of winning reelection in 2020.  It is obvious that trade worries are dampening the financial markets; the effects on the economy are still at the anecdotal level, but even this evidence suggests that the sluggish level of investment may be tied to trade uncertainty.[3]  The political calculation that the president might be making is whether the value of being hard on China is enough to offset a much weaker economy.  History suggests that a recession would be a death knell for reelection, but the situation with China is somewhat unique.  Our position is that the president should avoid recession at all costs, thus tamping down the trade issue for the next year or so would be prudent.  Appointing Lighthizer suggests that probably isn’t the president’s thinking.[4]

The chart below shows the election cycle with the current government.  To build this data, we take weekly data for the S&P 500 beginning in 1928 and index each four-year period to 100.  The blue line shows the average market performance.  The midterms occur near the end of the second full year.  Note that, on average, the market rises nearly 20% from late October of the midterm year into summer of the year before the election year.  This pattern isn’t an accident; presidents tend to “pump prime” the economy going into that year to help the reelection process.  President Trump has actually done the pump priming early, but that doesn’t mean he won’t continue the process.  We would not be at all surprised to see an infrastructure deal made to boost growth.  However, if the trade situation becomes a depressant on the economy, it could hurt his election chances.  That’s why it would be logical to ease up on trade, but just because it’s logical doesn’t mean it will happen.

The yield curve: There have been some ominous developments in the interest rate markets in the past 72 hours.  First, the two-year/10-year T-note spread has dipped under 15 bps, nearing inversion.

Note that the two-year yield has been rising much faster than the 10-year yield.  This is consistent with policy tightening.  Second, the three-year/five-year T-note spread, which is much less monitored, has actually inverted.  The chart below shows a history of that data.

Although this spread gave a couple of false positives (e.g., 1965, 1998), it is generally reliable.  The FOMC is treading into difficult waters.

Given the reliability of the yield curve in predicting the business cycle, the financial media will enter a “hair on fire” moment with every pundit suggesting trouble ahead.  That isn’t to say that we won’t be concerned as well.  But, we offer a couple of caveats.  First, as we discussed in the June 29^th Asset Allocation Weekly,[5] yield curve inversion doesn’t mean the equity markets immediately go negative.  In fact, using the 2/10 spread from the late 1960s, equities rise for about nine months on average after inversion and, in some cases, equities remain above the level at inversion for at least two years.  Thus, inversion is a real concern but may not be immediately negative.  Second, the general public’s increased focus on the yield curve may lead policymakers afoul of Goodhart’s Law, which states, “Any observed statistical regularity will tend to collapse once pressure is placed on it for control purposes.”[6]  We could very easily see the FOMC use the yield curve to guide policy and thus take the necessary steps to avoid inversion, upending the predictive value of the relationship.

Still, the near inversion is a worry.  The FOMC should pay attention to this and tread carefully.[7]

Brexit: In exactly one week, Parliament will vote on PM May’s Brexit deal.  The odds of passage appear slim; in fact, most observers now say the key is the level of defeat.  If the loss is close (< 30 votes), she may be able to go to the EU for adjustments to her deal to improve its odds in a second vote.  On the other hand, if the loss is overwhelming (>50 votes), then her plan is doomed as is her government.  We then enter a world of binary outcomes—we either get a hard Brexit with catastrophic losses for the GBP and British financial assets or a second referendum that may lead to no Brexit at all, which would trigger a large rally in the aforementioned assets.  Interestingly, the European Court of Justice ruled yesterday that the U.K. could unilaterally end Brexit, which increased the attractiveness of another referendum.[8]  We are leaning toward another vote; between a hard Brexit and a new vote the odds are probably leaning a bit toward the latter.

Macron backs down: The French government has suspended its fuel tax increase in the face of rising unrest.[9]  The FT has an interesting report on the incidence of Macron’s taxes.[10]  The report shows that the bulk of Macron’s tax benefits has gone to the richest segment of the income distribution, while the poorest have suffered significantly.  This outcome should not have been a shock; this is the essence of neoliberalism, the policies of Thatcher and Reagan.  The goal of such policies is to expand the supply side of the economy by rewarding entrepreneurship; it is implemented to contain inflation, not necessarily to spur growth.  Why Macron would seek to implement such changes now, nearly four decades after the inflation crisis has passed, is inexplicable.

At the same time, it should come as no surprise that unrest has developed.

OPEC: The Saudi oil minister indicated this morning that a deal is not in place yet.[11]  That news has taken oil off its highs.  We still expect a deal to be made but talks continue.

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[1] https://www.bloomberg.com/news/articles/2018-12-03/trump-s-advisers-struggle-to-explain-deal-he-says-he-cut-with-xi

[2] https://www.politico.com/story/2018/12/03/trump-china-relations-trade-pact-1037425

[3] https://www.nytimes.com/2018/11/28/magazine/trade-war-tariffs-small-business.html

[4] https://www.wsj.com/articles/lighthizerhas-long-seen-chinese-trade-policy-as-unfair-to-u-s-1543860249

[5] See Asset Allocation Weekly (6/29/18)

[6] https://en.wikipedia.org/wiki/Goodhart’s_law

[7] https://www.reuters.com/article/us-usa-fed/as-fed-says-on-track-narrowing-yield-curve-could-complicate-debate-idUSKBN1O22MK

[8] https://www.ft.com/content/a17f134a-f79f-11e8-af46-2022a0b02a6c

[9] https://www.ft.com/content/b7ee911c-f79c-11e8-8b7c-6fa24bd5409c

[10] https://www.ft.com/content/b6297b3a-f4bd-11e8-9623-d7f9881e729f

[11] https://uk.reuters.com/article/us-oil-opec/opec-works-on-deal-to-cut-output-still-needs-russia-on-board-idUKKBN1O30Y6

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning!  There is great joy in the financial and commodity markets this morning.  Here is what we are watching today:

The G-20 and China talks: To some extent, we got the deal we were expecting.  Presidents Trump and Xi essentially agreed to a 90-day truce.[1]  The U.S. will delay applying an additional 15% to the existing 10% tariffs on $200 bn of Chinese exports to the U.S.  China vaguely agreed to buy more U.S. goods.  Talks are said to be forthcoming.  However, they failed to issue a joint communique on the agreement.  The indications from either side were quite different:

Our take on this deal is that both Xi and Trump needed a win.  As we noted last week, the Chinese economy is slowing and a weakening equity market in the U.S. was becoming a daily signal of trouble.  At the same time, the underlying issues have not been resolved.

Here is a quick sketch of the underlying problems.  China is rapidly entering the period in its development where it is facing industrial overcapacity.  There are essentially four ways that this issue gets addressed.  The first is a massive revaluation of the excess capacity through a debt crisis.  That is how the U.S. addressed this issue; we refer to it as the Great Depression.  Japan addressed the same problem by slowly adjusting debt (and the underlying asset values) and has endured over three decades of stagnation.  The second method is mass war; this either utilizes the excess capacity or sees it destroyed.  The third is value chain improvement.  In this method, the economy shifts to higher value products, which allows the higher value new capacity to keep the economy intact while the lower value capacity is either closed or rebuilt.  Germany did this from the mid-1960s into the mid-1980s (think Volkswagens to Mercedes).  The fourth way is through imperialism, where the nation acquires colonies which allows it to force its excess production on a conquered client state.  This was the preferred method in the 19^th century; examples today include the Eurozone (Germany colonizing the rest of Europe) or China’s “one belt, one road” project.

China, under no shape or form, wants to use the first method, and likely wants to avoid the second.  It is trying to move up the value chain (the “China 2025” project), thus deploying the third method, and is clearly also trying to use the fourth approach.  The U.S. is attempting to thwart both efforts by preventing China from acquiring U.S. technology (likely necessary to move up the value chain) and by offering alternatives to the “one belt, one road” program.  China needs the U.S. to allow it to move up the value chain, which would, of course, put the U.S. and China at trade competition in areas the U.S. currently dominates, such as high tech, aerospace, etc.  China also needs the U.S. to allow it to dominate its region so it can utilize its excess industrial capacity through forced exports to the weaker nations in the Far East and Middle East, forcing America to cede its influence in the Pacific.  The U.S. isn’t going to allow this to happen willingly.  If China isn’t allowed to implement options three and four, it will be forced into option one or two, neither of which looks attractive.

But, the deal does buy time for both sides.[2]  For China, this gives its negotiators breathing room to try to cobble together some sort of deal.  For the U.S., promises from China to buy soybeans will ease pressure on that sector and, at the same time, the rally in equities will appease the establishment wing of the Trump administration.  But, we would not expect the issues mentioned above to be resolved anytime soon.[3]

However, it is premature to suggest this agreement is inconsequential.  China may be hoping that a divided U.S. legislature and perhaps the Mueller investigation will become enough of a distraction to the White House that the trade issue might fade next year.  In addition, we are already seeing the early stages of the 2020 presidential campaign and thus the White House won’t want to take trade actions that could trigger a recession.  Thus, we may have already seen the most aggressive trade actions; from here, the president will likely be leery of doing anything to upset the financial markets and, as we have seen this year, trade wars can do that.  In addition, we are watching the establishment wing of the GOP to see if they use the aforementioned distractions to curtail the president’s power on trade.[4]  After all, the GOP establishment doesn’t want to see free trade curtailed.

The deal was clearly welcomed by financial markets.  Equities and commodities are higher, although the dollar, curiously, is holding on rather well.  On the commodity front, soybeans are up on expected Chinese buying and oil is higher as well (see below).  U.S. interest rates jumped despite recent Fed dovishness.  Although we have doubts that the long-term issues are any closer to resolution, the pause could very well be longer than 90 days; in fact, it could stretch into the November 2020 elections.  If so, Chairman Xi may have done just enough to improve China’s situation.

OPEC+: OPEC has determined that the cartel needs to cut production by 1.3 mbpd.[5]  After a rousing greeting between President Putin and Crown Prince Salman, Russia has indicated its cooperation with OPEC will continue, raising hopes of Russian cooperation with price support.[6]  But, the real shocker came from Canada, where the provincial government of Alberta has imposed production cuts of 8.7%.[7]  We rarely see G-7 nations agree to production restrictions.  Although the Canadian action is in response to logistical bottlenecks, the announcement is supportive for oil prices.  In related news, Qatar will exit the cartel in January; its production is now centered on natural gas and it is in conflict with Saudi Arabia and thus likely wants to avoid cooperating with the kingdom.[8]  Although other nations have left before (and, for that matter, rejoined…see Ecuador), this is the first nation from the Gulf region to leave OPEC.

Shutdown averted?  Over the weekend, President Bush (#41) passed away.  President Trump has ordered a national day of mourning on Wednesday, which will close the government (and the NYSE).  The day of respect for the former president will delay a potential government shutdown and may end up precluding any such action.[9]

Caixin PMI: The November Caixin PMI, the one believed to be more reliable than the official index (it has a broader survey, including smaller firms), came in modestly better than forecast at 50.2, up from 50.1 in October.  New orders ticked higher; export orders fell but may lift due to the aforementioned truce.

Macron in trouble: Civil unrest in France continued over the weekend and the scope and persistence is becoming a crisis for President Macron.  We are seeing two developments.  First, elements of French society, probably best described as anarchists, appear to be participating in the protests as well, increasing their violence.  Second, political opponents of Macron are sensing weakness and are mobilizing to use the protests to undermine the government.[10]  Macron held emergency meetings with his advisors after he arrived in Paris from Argentina and is considering a crackdown on the protests.[11]  The current unrest is being called the worst in a decade.[12]  Macron’s election was something of a protest vote; his party was new and he promised to make major changes.  However, his policies were akin to the reforms of the 1980s, the supply side revolution of Reagan and Thatcher.  These protests suggest that this outcome wasn’t what these voters were looking for.  Thus, France avoided a populist outcome in the last election that may not be true in the next election.

Watching Italy: We found the Italian elections to be the most interesting because it brought a government formed almost entirely of left- and right-wing populists.  One of the failures of populism has been the inability of both variants to form a coalition based on economic interests.  This coalition we dub the “Nader coalition,” who proposed such an arrangement in his book Unstoppable.[13]  In practice, in most circumstances, the identity differences have been simply too wide to overcome.  Thus, what happened in Italy was notable.  However, pro-business elements of the League, the right-wing side of the coalition, are starting to rebel against the party leadership.[14]  This development bears watching because it may undermine the right-wing side of the coalition, which, to date, has dominated the government.

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[1] https://www.wsj.com/articles/meeting-between-trump-and-xi-went-very-well-adviser-says-1543711542 and https://www.economist.com/finance-and-economics/2018/12/02/the-us-china-trade-war-is-on-hold

[2] https://www.ft.com/content/4c60cec2-f60e-11e8-af46-2022a0b02a6c?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56

[3] https://www.wsj.com/articles/u-s-china-face-thorny-obstacles-to-lasting-trade-peace-1543785395

[4] https://www.axios.com/chuck-grassley-trump-tariffs-section-232-national-security-613bb759-acac-4a36-9703-9a2ee1958f28.html

[5] https://www.wsj.com/articles/opec-economic-panel-recommends-output-cut-from-october-levels-1543603319

[6] https://www.ft.com/content/7c6d6fa0-f69d-11e8-af46-2022a0b02a6c

[7] https://www.washingtonpost.com/world/the_americas/alberta-government-imposes-oil-production-cuts-for-province/2018/12/02/40acd566-f69b-11e8-8642-c9718a256cbd_story.html?utm_term=.4bce34a6bf12

[8] https://www.ft.com/content/66cc3bee-f6c6-11e8-af46-2022a0b02a6c

[9] https://www.politico.com/story/2018/12/02/trump-assents-to-shutdown-delay-1037152 and https://www.ft.com/content/e58fd762-f660-11e8-8b7c-6fa24bd5409c?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56

[10] https://www.ft.com/content/222bdc0a-f631-11e8-af46-2022a0b02a6c?emailId=5c04b7e19b0ba30004415a75&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[11] https://www.ft.com/content/3c448d04-f61c-11e8-8b7c-6fa24bd5409c

[12] https://www.washingtonpost.com/world/europe/protest-riot-shocks-paris-leaves-133-injured-412-arrested/2018/12/02/b131eb88-f60e-11e8-99c2-cfca6fcf610c_story.html?utm_term=.901773d5d341&wpisrc=nl_todayworld&wpmm=1

[13] Nader, R. (2014). Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State. New York, NY: Nation Books.

[14] https://www.ft.com/content/eda609a6-f2f2-11e8-ae55-df4bf40f9d0d?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning!  It’s a very quiet market this morning.  Equities continue to consolidate in front of this weekend’s G-20 meeting.  Here is what we are watching today:

The G-20 and China talks: We expect some sort of short-term accommodation at this weekend’s meeting.  We look for the U.S. to delay implementing the tariff hike on China and postpone expanding tariffs on the rest of Chinese imports.  China will offer to buy some American goods in return.  However, the key issues, such as technology transfers and intellectual property theft, won’t be resolved.  Although we do expect some modest agreement, we note that Peter Navarro, the president’s hardline trade advisor, has now been invited to the Saturday dinner with Xi.  This may be signaling a harder line on China because he was initially kept off the seating chart.  In our view, China and the U.S. see each other as strategic competitors.  So, we may see a truce, which the financial markets generally expect, but a long-term resolution isn’t likely because it isn’t really possible.  U.S. and China hegemonic competition is now in the open and will be a major issue for the foreseeable future.  At the same time, as we detail below, Chairman Xi probably needs an agreement more than President Trump does, at least in the immediate term.

China’s economy: China’s official manufacturing PMI data came in weaker than expected, coming in at 50.0 in November, down from 50.2 in October.  The official data is generally considered less reliable than the Caixin PMI report, which comes out on Monday.  The fact that the report is now resting on the expansion line shows that the Chinese economy is under pressure.  Although American trade policy is partly to blame, deleveraging is probably playing a larger role.

This chart shows China’s annual M1 growth along with the yearly growth of outstanding credit.  Up until 2011, the two measures tended to follow each other closely.  However, the response to increased money supply growth in 2016 was modest at best, suggesting the PBOC’s ability to stimulate is weakening.  Further evidence is seen when comparing money growth to industrial production.

Why is this happening?  One potential reason is that as China’s economy matures, it can no longer rely on investment spending to boost growth.  In other words, until a few years ago, China’s economy could absorb new investment even if it wasn’t necessarily needed.  But, if we have reached a point of saturation then monetary policy is essentially “pushing on a string.”  This is why China’s trade issues with the U.S. are so important.  After the Great Financial Crisis, China offset the loss of exports with an investment boom.  If that isn’t working and consumption hasn’t improved, about the only sector left to support growth is the export sector and the Trump administration is essentially closing off that avenue.

Perhaps the biggest issue is uncertainty.  A group of U.S. professors[1] have created a basket of uncertainty indicators that are constructed by scanning articles about policy, economics, etc.  They have created these indices for a variety of countries, including China.  The index, which uses the South China Morning Post out of Hong Kong as its principal source, suggests that economic uncertainty is sharply elevated.

This data suggests the Xi government is facing a serious sentiment problem and needs to show that it can stabilize the economy.  Unfortunately, it isn’t obvious what can be done if the credit impulse isn’t working; therefore, Xi may be more inclined to make a deal with President Trump, at least to support the economy in the near term.

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[1] http://www.policyuncertainty.com/about.html

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

Good morning!  Equities are consolidating this morning after a strong rally yesterday.  Here is what we are watching today:

Powell:  After spooking the financial markets in October, Fed Chair Powell gave a much more dovish speech yesterday.  There were two elements of this talk that boosted market sentiment.  First, he suggested that the current fed funds target was close to neutral[1], implying that the FOMC may be close to ending its tightening cycle or at least considering a pause.  In fact, a pause would be consistent with the notion of data dependence.  One element that Powell has brought to the Fed is the idea that even the best economic models are approximations and thus it’s wise not to be overly reliant on such models in making policy.  It is likely that only a non-economist, or perhaps a non-academic economist, could come to such a conclusion.  One could argue that Alan Greenspan conducted policy in a similar fashion.  Although Greenspan was a trained economist, he worked in the private sector and was never a professor.  His decision in the late 1990s to not raise rates when unemployment was low turned out to be correct.  However, we would argue he was right for the wrong reasons.  His argument for not raising rates was expectations of a productivity boom. Although productivity did rise, it was probably due more to fully utilizing capacity and not any “miracle.” Instead, inflation stayed low because of long-running trends in globalization and deregulation.  However, it is interesting that the primary proponent of raising rates was Janet Yellen, who was likely working off of Phillips Curve models.  So, having Powell in this position means the risk of policy overtightening due to adhering to an academic model has lessened.  The risk has been replaced with data dependence.  Operating policy on data dependence means, by definition, that policy will be reactive.  That’s not necessarily a bad thing but it’s important to know what risks one is taking.

The second supportive comment from Powell was that he didn’t see evidence of financial excess in the financial markets at this time.  We would agree with this perspective in most markets.  High yield is the one major sector where we would disagree.  Spreads remain very narrow; although they can remain at such levels for a long time, the risk/reward isn’t all that attractive.  Other areas, such as private equity, are frothy as well.  But, the major broad markets, stocks and bonds, are, if anything, a bit cheap.

Where do we go from here?  Although the financial markets appear to be holding that the Fed is now less of an issue, we do note that the official range of the potential neutral rate is between 2.50% to 3.50%.  That information is simply useless, because it implies one to five more hikes.  Our Mankiw Rule estimates of neutral range from 1.85% to 3.93%.  These model ranges are worthless by themselves.  Instead, these models all have independent variables that reflect potential measures of slack.  If you think the economy is running at full employment, fed funds should be closer to 4.00%.  If you think slack exists, the policy rate is probably already at neutral.  Our belief is that there is slack in the economy, which accounts for the continued low level of inflation.  Thus, we see little danger in at least pausing the pace of rate hikes.  The key point here, however, is that the Fed is making decisions under conditions of uncertainty.  When making such decisions, one must be aware that the potential for making mistakes is high and thus caution is warranted.  Powell seems to understand this better than the last two Chairs, which is probably a plus.

Further gains in equities in the short run will be dependent on this weekend’s G-20 meeting.  We do note that there will be a number of Fed speakers in the coming days and some dissent might be expressed.  But, for the most part, the focus will now shift to trade.

The G-20 and China talks: We expect some sort of short-term accommodation at this weekend’s meeting.  We look for the U.S. to delay implementing the tariff hike on China and postpone expanding tariffs on the rest of Chinese imports.  China will offer to buy some American goods—look for soybeans, oil and LNG purchases to resume.  But, this outcome is merely a reprieve.  It has become evident that the president (a) holds that trade is a mercantilist exercise, meaning that trade surpluses are good, deficits bad, and (b) China is a strategic competitor.  Simply put, the president views tariffs as a core position.[2]

Apparently, the president is returning to auto tariffs[3], specifically targeting Chinese vehicles.[4]   The U.S. is warning European nations to be wary of using Chinese 5G technology for security reasons.[5]   The strategic goals of the U.S. and China have diverged and are probably not reconcilable.[6]  We note that elite opinion is turning on China, meaning it isn’t just the White House that is viewing China as a strategic threat.[7]  We will likely see a deal this weekend, but it should only be seen as a truce; U.S. and China policy is likely to become increasingly hostile going forward.

Brexit update:  Both the government and the BOE gave their economic assessments of Brexit yesterday.  In all cases, leaving the EU is expected to harm the British economy, with a “hard Brexit” causing serious economic damage.[8]  Market reaction to these studies was barely noticeable, suggesting the financial markets expect policymakers to avoid the worst outcomes.  We tend to agree with this assessment, but worry that policymakers, seeing the lack of market turmoil, may misinterpret the reaction and think they don’t have to worry about a hard Brexit.  We do expect the May Brexit plan to fail in Parliament; it may pass with a second vote after May resigns, or we could have another referendum.  Hard Brexit, exiting without a deal, is still the least likely outcome, but that isn’t to say that outcome is impossible.

A sober note:U.S. life expectancy from birth fell a tenth of a year; it peaked at 78.9 years in 2014 and is now down to 78.6 years.[9]  Rapidly rising suicide rates[10] and drug overdoses are the primary culprits for the stalling of life expectancy.[11]  It is highly unusual for life expectancy to decline in an industrialized nation and what we are seeing in the U.S. may also reflect the economic fallout from the Great Financial Crisis.

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[1] https://www.ft.com/content/221b509e-f32d-11e8-ae55-df4bf40f9d0d?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56

[2] https://www.wsj.com/articles/bring-me-tariffshow-trump-and-xi-drove-their-countries-to-the-brink-of-a-trade-war-1543420440

[3] https://www.cnbc.com/2018/11/28/trump-says-auto-tariffs-being-studied-after-gm-restructuring-announcement.html and https://www.ft.com/content/571cd042-f32d-11e8-ae55-df4bf40f9d0d?segmentId=a7371401-027d-d8bf-8a7f-2a746e767d56

[4] https://www.reuters.com/article/us-usa-trade-china-autos/trump-administration-to-study-tools-to-raise-u-s-tariffs-on-chinese-autos-idUSKCN1NX2XL  Note China only exported 53k of cars to the U.S. last year.

[5] https://www.ft.com/content/6719b6b2-f33d-11e8-9623-d7f9881e729f

[6] https://www.ft.com/content/be50582a-f2e6-11e8-ae55-df4bf40f9d0d

[7] https://www.washingtonpost.com/opinions/chinas-ominous-plan-to-penetrate-and-sway-the-united-states/2018/11/28/bc245ece-f34b-11e8-aeea-b85fd44449f5_story.html?utm_term=.493f55b33445

[8] https://www.politico.eu/article/best-case-brexit-scenario-means-2-5-percent-hit-to-uk-growth-over-15-years/?utm_source=POLITICO.EU&utm_campaign=d371e174d1-EMAIL_CAMPAIGN_2018_11_29_05_34&utm_medium=email&utm_term=0_10959edeb5-d371e174d1-190334489 and https://www.nytimes.com/2018/11/28/world/europe/uk-brexit-economy.html?emc=edit_mbe_20181129&nl=morning-briefing-europe&nlid=567726720181129&te=1

[9] https://www.wsj.com/articles/u-s-life-expectancy-falls-further-1543467660

[10] https://www.wsj.com/articles/cdc-finds-rise-in-suicide-rates-across-the-u-s-1528417378

[11] https://www.wsj.com/articles/cocaine-meth-opioids-all-fuel-rise-in-drug-overdose-deaths-1537466455

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning!  Equities are ticking higher in front of Chair Powell’s speech this morning.  Here is what we are watching today:

The Fed: Chair Powell speaks in NY at 12:00 EST.  We don’t expect anything groundbreaking but we will be watching to see if he follows the path laid out by Vice Chair Clarida yesterday.  Clarida didn’t give up much on the direction of policy (he stuck to “data dependent”) but there is one change he did signal, which is that forward guidance is dead, at least in terms of FOMC comments.[1]  Forward guidance became a policy tool under ZIRP; once the Fed reached 0% fed funds, Chair Bernanke shifted his comments to say, in effect, that “rates are low and going to stay that way.”  That was done to enhance whatever benefit the economy would get from low rates by indicating borrowers and investors could rely on rates staying low for a long time.  The policy was always controversial; Stanley Fischer didn’t care for it at all because he feared it locked the bank into a policy that it may need to adjust in case of a sudden change in conditions.  We view the discontinuation of forward guidance as evidence of policy normalization.  Once rates lifted off zero, the value of forward guidance as a way to enhance the value of zero rates was removed.  However, policymakers did keep guidance policy as rates rose, using the informal policy of only raising rates at meetings with a press conference, for example.  However, as the Fed approaches neutrality, forward guidance becomes a problem because it could lead market participants to overestimate how much tightening is in the pipeline, leading policy to be tighter than the Fed intends.  Instead, the FOMC does appear to be trying to create as much flexibility as possible so it can act appropriately if the economy slumps or accelerates and not be “straightjacketed” into a policy path.

The other Fed news of note is the president’s continued bashing of the central bank.[2]  The persistence of the criticism, in some sense, reduces its effectiveness.  The lambasting has become so frequent that it has become part of the background and, so far, has had no obvious impact on changing FOMC behavior.  However, it may someday; if policy is designed to reflate the economy, and we think that is the underlying policy trend, then curtailing central bank independence is part of that goal.  When you want low inflation, you implement central bank independence.  We would not expect a formal return to the pre-1951 era Fed which was forced, by regulation, to facilitate Treasury borrowing.  But, the White House can accomplish the same thing by emasculating the Fed chair, as Nixon did with Arthur Burns.  The undermining of Fed independence hasn’t happened yet, but we do expect that to occur at some point and President Trump has started the process by breaking the Clinton-era “Rubin truce.”

The G-20 and China talks: It is getting increasingly difficult to figure out how much of the administration’s rhetoric is posturing for negotiations and how much is the indication of actual positions.  For example, Larry Kudlow suggested yesterday that a deal might occur but his tone was not as optimistic as he usually projects.[3]  Kudlow did admit that pre-meeting talks have apparently stalled.[4]  At the same time, the NYT[5] suggests that, despite Kudlow’s attempt to reduce expectations, the president really wants a deal.  Since we view the NYT as more of a signaling channel for elite opinion and less of a news organization, this could either be an attempt from elements within the administration to nudge the president or it really does reflect the position of the White House.  The financial markets have generally discounted a truce of sorts.  Although the sides appear too far apart to make a significant agreement, the promises of substantial talks in return for a delay of additional tariffs might be doable.  If discussions end badly, look for global equities to sell off.

Macron’s woes continue: The French president gave a speech yesterday[6] offering his long-term vision for France.  The talk was widely panned with the primary criticism being that Macron seems far too focused on long-term goals and is ignoring the plight of the bottom 90%.  The recent hike in gasoline taxes appears to be the trigger; middle and lower class citizens found themselves priced out of the cities due to rising rents and were forced to move to the distant suburbs.  Now, with the hike in taxes, they can’t afford to drive to work in the cities.  Macron appears tone deaf to the concerns of the “yellow jackets” (protestors are wearing the yellow vests that road crews wear), and the longer these protests go on the greater the odds are that a left- or right-wing populist will see increasing popularity.

Brexit update: PM May’s plan continues to take harsh criticism; there is growing support for the U.K. to instead join the European Free Trade Association (EFTA),[7] which is what Norway operates under.  This alternative does take the U.K. out from under the jurisdiction of the EU courts but still requires it to allow for the free movement of peoples.  EFTA is a solution for the elites; the Euroskeptics won’t like it but such a program might be able to garner enough support from all the parties to pass.  However, PM May is likely a goner if this option becomes “Plan B.”  PM May has been something of a political Houdini; her political obituary has been written often.  However, this issue might bring her down.  On the other hand, the Tories don’t want new elections and so we would not expect her resignation to trigger a successful no-confidence vote.  Instead, we would expect another compromise PM that will finally bring Brexit to a close.

OPEC: Although we may not get an official cut in quotas, we do expect the cartel to informally reduce output.[8]  Russia has indicated it would support Brent at $60, which implies policies to at least stabilize prices, but we expect the Saudis to try to boost prices by at least $10 per barrel.

Don’t sleep on a government shutdown: It appears the president is hardening his position on the border wall[9] and lawmakers are struggling to develop a compromise.[10]  Given the relative frequency with which such events occur, under normal circumstances we would expect the market to mostly ignore a shutdown, assuming it will be resolved soon.  But, with market sentiment fragile, a shutdown could be seen as a “last straw” and trigger a selloff.

One more housing chart: We received a number of comments about our charts in yesterday’s report, most expressing surprise that cash-out refinancing has returned.  We want to add one more chart which highlights that, even with the surge, current conditions are different than 2005.

This chart uses the level of cash taken from cash-out refinancing and compares it to overall household saving.  At the peak of the housing bubble, cash-out refinancing represented over 30% of total household saving; simply put, households were truly using their homes as a source of saving.  Currently, the percentage is 1.5%.  Although cash-out refinancing is rising, it is dwarfed by the overall increase in household saving.  Thus, in this regard, the reliance on refinancing for cash is probably a localized issue, a factor in housing markets that have seen sharp appreciation.

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[1] We expect the dots, a form of forward guidance, to remain for now.

[2] https://www.washingtonpost.com/politics/trump-slams-fed-chair-questions-climate-change-and-threatens-to-cancel-putin-meeting-in-wide-ranging-interview-with-the-post/2018/11/27/4362fae8-f26c-11e8-aeea-b85fd44449f5_story.html?utm_term=.6c200bd81c76&wpisrc=nl_politics&wpmm=1

[3] https://www.politico.com/story/2018/11/27/trump-trade-china-xi-meeting-1018195

[4] https://www.ft.com/content/27d7948c-f26c-11e8-ae55-df4bf40f9d0d?emailId=5bfe1af9fe2cdd0004198877&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[5] https://www.nytimes.com/2018/11/27/us/politics/trump-xi-trade-g-20.html?emc=edit_mbe_20181128&nl=morning-briefing-europe&nlid=567726720181128&te=1

[6] https://www.nytimes.com/2018/11/27/world/europe/macron-france-nuclear-yellow-vests.html?emc=edit_mbe_20181128&nl=morning-briefing-europe&nlid=567726720181128&te=1

[7] https://www.ft.com/content/833dd0b6-f168-11e8-938a-543765795f99

[8] https://www.wsj.com/articles/opec-open-to-risking-trumps-ire-prompted-by-budgets-and-shale-1543333651

[9] https://www.politico.com/story/2018/11/28/trump-politico-interview-1023306

[10] https://www.wsj.com/articles/lawmakers-gridlocked-over-wall-funding-as-deadline-nears-1543361830

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning!  Risk markets are under pressure this morning after the president maintained a hard line on Chinese tariffs.  Here is what we are watching today:

Chinese tariffs: In an interview with the WSJ,[1] President Trump indicated that he expects to lift existing tariffs on $200 bn of Chinese imports to 25% from 10%, suggesting it is “highly unlikely” he would delay their implementation.  He also said that if talks with Chairman Xi don’t bear fruit, he would likely apply tariffs to the rest of China’s imports.  That would be another $267 bn in goods; it is not clear if the rate on the proposed new tariffs would be 10% or 25%.  One of the key points the president made offers an insight into his thinking—he had a message to companies wondering how to cope with tariffs.

“What I’d advise is for them to build factories in the United States and to make the product here,” Mr. Trump said in the interview. “And they have a lot of other alternatives.”[2]

President Trump’s vision for America is a pre-1978 version where the economy is deglobalized and most production is performed in the U.S. by highly paid American workers.  Although this would be better for U.S. labor it will (a) almost certainly contract profit margins, and (b) lead to higher inflation.  We have been warning our readers for some time that we are likely moving into an equality cycle and leaving an efficiency cycle.  That quote adds to evidence that this shift is underway.  The eventual outcome will likely be less inequality but higher inflation.

GM (36.75, +1.72): As a reminder, we don’t discuss individual companies in this report unless the news surrounding them have macro implications.  Yesterday, Mary Barra, the CEO of General Motors, announced sweeping plant closures and layoffs.[3]  In total, seven production plants will close and 14,000 workers will lose their jobs.  The layoffs represent 4.8% of the firm’s North American workforce.  The company is reacting to a weakening global auto sales market (China rescinded a tax break in January; the cut in 2016 led to a jump in car sales in that year but since then sales have been weak[4]) and excess capacity.  GM, much like Ford (F, 9.40, 0.27), is abandoning the sedan market to foreign nameplates and focusing on trucks and SUVs.  GM is also trying to divert revenue to future auto technology.

Extending the equality and efficiency theme, we note that both President Trump[5] and Senator Sherrod Brown (D-OH)[6] have criticized the move.  The juxtaposition of a GOP president and a hard-left Democrat senator holding the same position is notable.  To be fair, Ohio was a key state in the president’s capture of the Electoral College and plant closures in the state would likely trigger a response from its senators.  But, the real key is that we may be entering a world in which firms will be less able to freely allocate capital where costs are most favorable.  Again, we are not saying that company pursuit of profit is the highest value.  But, we think it does show that worries have diminished about triggering inflation by restricting supply.  We describe this process as “intergenerational forgetfulness.”  Simply put, it means that the memory of the 1970s inflation is steadily aging out and this memory is being replaced by low inflation and increasing concern about inequality.

This chart shows the adult experience of inflation for Americans by age.  We start adulthood at 16 years old.  Although the thought of such an early start to adulthood is somewhat humorous in the present day, for the population at the right end of the chart adult responsibilities were taken on at a much earlier age.  Note that the baby boom has the highest lifetime experience of inflation, an average of 3.9%.  The aggressive anti-inflation policies that began in 1978 successfully lowered inflation, so successfully, in fact, that now a large contingent of Americans see no issue with inflation.  For adult Americans under the age of 50, the average inflation rate is 2.1%; older than 50, it is 3.7%.  Thus, it makes sense that there is less fear of causing inflation by undermining supply-favoring policies as there are simply fewer Americans that have experience of high inflation.

While we think we are early in this process, the direction appears rather clear.  However, that doesn’t mean that inflation is necessarily imminent.  A new study from the San Francisco FRB makes a strong case that the recent lift in core PCE was due to factors unrelated to the cyclical trends in the economy.  Instead, the article indicates that the recent rise was due to one-off events and core inflation is likely to fall below target as these factors wane.  This report would argue for a cautious approach to policy tightening.[7]

Trouble on the farm: Two items of note here.  The Minneapolis FRB reports[8] a rise in Chapter 12 bankruptcy filings.  This part of the bankruptcy code is mostly constructed for farmers and combines the corporate features of Chapter 11 with the filing simplicity of the household Chapter 13 structure.  The weakness in the farm belt is mostly due to weak commodity prices which is forcing consolidation.  Thus, smaller farms are facing trouble and being forced to either restructure or sell out.  The report notes an increase in non-performing agriculture loans in the Ninth Fed District.  The second item relates to soybeans.  It is no secret that China has retaliated against U.S. tariffs by applying tariffs to U.S. soybeans.  China is buying its supplies from other sources, mostly South America.  Although the logistics are not seamless, U.S. farmers have been picking up sales from former customers of South America who are now focusing on China.  At the same time, China has been experimenting with feed mixes for its hogs to use less protein, which would reduce demand altogether.  However, a new fear has emerged—African swine fever is apparently spreading through China’s hog herds.  The disease is usually fatal for hogs and the spread of the fever is starting to affect overall Chinese soybean imports.[9]  This news will add increased pressure on grain prices and add to farmer woes.

Update on the Kerch Strait: As we reported yesterday, Russia used a tanker to block a bridge arch on the Kerch Strait, a narrow waterway that links the Black Sea to the Sea of Azov.  Three Ukrainian naval vessels were attacked and taken by the Russians.  The Ukraine parliament declared a month of martial law.[10]  Although there is some concern that conditions could deteriorate, neither side likely wants an escalation.  The fact that this occurred just before the G-20 meeting may be an indication that both sides want to remind the world that the Ukraine situation has not been resolved.  But, we would not expect a hot war to emerge from this event.

A couple of housing charts: We are seeing a rise in household refinancing, with the majority of borrowers taking cash out of the transaction.[11]

The above chart shows that 80% of new loans are for more than 5% of the previous loan amount; since the data began in 1985, a reading over 80% occurs about 18.5% of the time.  However, what is surprising is that these refinancing loans are clearly occurring with the express purpose of equity withdrawal as these borrowers are giving up lower mortgage rates.

A ratio of one would indicate a swap at the same rate.  The current ratio is now the highest on record.  As the referenced WSJ article suggests, homeowners are returning to cash-out refinancing because they have not been able to generate enough income to pay down other debt or make other purchases.  As these charts show, however, activity at these levels has become problematic in the past.  This is an area we will continue to watch closely.

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[1] https://www.wsj.com/articles/trump-expects-to-move-ahead-with-boost-on-china-tariffs-1543266545

[2] Ibid.

[3] https://www.ft.com/content/0ef6a0bc-f1ad-11e8-ae55-df4bf40f9d0d?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top

[4] https://www.reuters.com/article/us-china-autos-dealers-exclusive/exclusive-reverse-gear-china-car-dealers-push-for-tax-cut-as-auto-growth-stalls-idUSKCN1ML100

[5] https://www.wsj.com/articles/gm-says-it-will-cut-15-of-salaried-workforce-in-north-america-1543246232

[6] https://thehill.com/homenews/senate/418240-sherrod-brown-ohio-taxpayers-rescued-gm-yet-company-doesnt-respect-workers

[7] https://www.frbsf.org/economic-research/publications/economic-letter/2018/november/has-inflation-sustainably-reached-target/

[8] https://www.minneapolisfed.org/publications/fedgazette/chapter-12-bankruptcies-on-the-rise-in-the-ninth-district

[9] https://www.reuters.com/article/us-china-soybean-demand/crop-drop-china-swine-fever-outbreak-to-curb-its-soybean-imports-idUSKCN1NW0PH

[10] https://www.politico.eu/article/ukraine-martial-law-imposed-by-parliament-kiev/?utm_source=POLITICO.EU&utm_campaign=d75247bdb7-EMAIL_CAMPAIGN_2018_11_27_05_28&utm_medium=email&utm_term=0_10959edeb5-d75247bdb7-190334489

[11] https://www.wsj.com/articles/borrowers-are-tapping-their-homes-for-cash-even-as-rates-rise-1543159864