by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] The overnight news was less active than the weekend but there’s still a lot going on.  Here’s what we are watching:

Saudi Arabia: We see two items of note this morning.  First, the king has ordered banks to freeze the accounts of numerous Saudi nationals who are not formally under arrest.  We suspect this was done for two reasons.  First, the purge may be widening and the king wants to remove the capabilities of these people from leaving the country.  Second, it may be designed to prevent capital flight.  Although the people affected by the account freeze may not be involved in corruption, fears of political instability will lead people with assets to try to secure them outside the country.[1]  The drain can adversely affect local financial markets, so freezing the accounts prevents them or their money from fleeing.  Second, Saudi Arabia has accused Iran of an “act of war”[2] after a missile was launched from Yemen into Riyadh.  War would raise tensions and increase the odds of a supply disruption.  Oil prices jumped yesterday and are modestly lower this morning.  The kingdom also accused Lebanon of declaring war on Saudi Arabia due to the actions of Hezbollah.  Tensions in the region are clearly rising.  We note that in a series of tweets the president praised King Salman and his son for their actions.

Trump in South Korea: President Trump has left Japan for Seoul today.  In a speech, he struck a conciliatory tone with North Korea, imploring its leader to “make a deal.”  The president noted that there has been “a lot of progress” in negotiations with the Hermit Kingdom.[3]  He also noted that the U.S. has three carrier strike groups in the region and unexpectedly informed his audience that a nuclear-powered submarine is also in theater, which may have been a surprise to his guests.  The president has consistently downplayed the likelihood of a negotiated settlement to the North Korean situation, but these comments raise hopes that a diplomatic solution is possible.

Trump goes to China next: President Trump will meet with President and General Secretary Xi later this week.  We expect that China will offer a series of inconsequential trade concessions that will allow President Trump to gain a “win.”  Whether the president sees through the ruse will be the focus of our attention.

The return of Wang: Comments from former graft-buster Wang Qishan suggested that there are “plots to grab power” in China,[4] and vigilance against corruption is critical.  Wang recently stepped down from the Standing Committee of the Politburo due to age but there are rumors he may be selected for vice president,[5] a state office rather than a CPC office.  Wang is one of Xi’s most trusted associates so finding a place for him makes sense.

China’s debt ploy: It is no secret that leverage in China is excessive.  PBOC Governor Zhou Xiaochuan has been ranting on this problem for the past few months.  Bloomberg[6] reports that under Chinese law firms can swap debt for “perpetuals,” which appear to be similar to the old British consuls, which were bonds that paid interest but were never amortized nor returned principal.  By making this swap, firms can count perpetuals as equity and not debt, “instantly” reducing leverage.  Of course, they still must service at least the interest, which tends to be a bit higher for perpetuals.  Interestingly enough, Zhou has apparently discovered this tactic and has begun to criticize it as masking the degree of leverage in the Chinese financial system.

Quarles to speak: As noted below, Governor Quarles will talk today at The Clearing House’s annual conference in New York.  This looks like the first public speech since he was sworn in yesterday as governor and vice chair for supervision.  We will be looking to see if he gives any hint on policy.

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[1] This is one of the attractive features of cryptocurrencies—they facilitate capital flight.

[2] https://www.ft.com/content/eaf5b226-c38f-11e7-a1d2-6786f39ef675 (paywall)

[3] https://www.washingtonpost.com/news/post-politics/wp/2017/11/07/trump-arrives-in-seoul-tours-camp-humphreys-military-base-on-eve-of-north-korea-speech/?utm_term=.096975fcf465

[4] http://www.reuters.com/article/us-china-corruption/chinas-former-top-graft-buster-warns-of-plots-to-seize-power-idUSKBN1D70HR

[5] https://www.axios.com/potential-next-act-for-trusted-xi-adviser-2505606876.html

[6] https://www.bloomberg.com/news/articles/2017-11-06/china-s-firms-have-found-a-way-to-cut-debt-at-least-on-paper

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] Oh my, it was a very busy weekend for news.  Let’s dig in.

Saudi Arabia: The Kingdom of Saudi Arabia (KSA) was a hub of activity.  There were a few items of note.

1. It appears that Crown Prince Muhammad bin Salman (MbS) has engineered a massive purge, arresting at least 17 prominent members of the Saudi security apparatus and important business figures.[1]  Among the most important is Prince Miteb bin Abdullah, the son of the late King Abdullah and, until yesterday, the head of the Saudi National Guard.  There are three major military/security agencies in the KSA.  The regular military, the interior ministry and the National Guard.  King Salman is generally in control of the first two, but the latter was under the authority of Prince Miteb.  The National Guard has been in the Abdullah family for years; arresting Abdullah, along with other military leaders, consolidates MbS’s power in the kingdom.  Prince Waleed bin Ibrahim al-Ibrahim was also detained; a major global investor, he is often referred to as the “Buffett of Saudi Arabia.”  Major media leaders were arrested as were numerous military figures.  This is a major action by MbS to consolidate power.  The unknown here is whether this was a purge or a counter-coup.  MbS has been moving quickly to consolidate power and this action is threatening lots of powerful people in the KSA.  It would not be a surprise if there are plots to overthrow the king.  However, whether there was nothing afoot or something brewing, the outcome is the same—King Salman has eliminated most of his rivals and can now smoothly abdicate for his son and crown prince, MbS.  The official discussion was that the arrests were over “corruption” and were the actions of a newly created anti-corruption body.  However, the fact that they could react this quickly does suggest that it’s a cover for a purge.  That’s not to say there isn’t corruption in the KSA; Transparency International[2] ranks the KSA at 62^nd on its corruption scale out of 176 nations.  That’s in the “neighborhood” of Italy and Montenegro, meaning it’s fairly corrupt but not all that bad for the region.  Still, as we noted above, this appears to be more of a purge and anti-corruption is a tool.
2. A missile reportedly launched from Yemen was aimed at the Saudi Airport but was shot down by an anti-missile defense system, a Patriot.  At first glance, this isn’t a story that would be a huge shock.  After all, the KSA is involved in a conflict in Yemen.  On the other hand, it does appear to be a significant upgrade to the Houthi’s arsenal.  However, in light of the rest of the news, there is some speculation that this may have been a “false flag” operation.  In other words, given that the Houthis are thought to be aligned with Iran, this launch could be casus belli for a conflict with Iran.
3. Lebanon’s PM, Saad al-Hariri, abruptly resigned while visiting the KSA.  Lebanon’s political system is delicately balanced.  There have always been constant tensions between Sunni, Shiites and Christians.  As populations have changed, the country has been forced to adjust.  The long civil war during the 1970s was in part due to the difficulties in adjusting to changes in socio-ethnic-religious allocations of power.  At present, the Shiites are the most dominant group and Hezbollah the most potent military force.  For the past few years, Hezbollah has been focused on the war in Syria.  This has given Hariri political space to pass important legislation, including rules on oil and gas exploration.  The fact that Hariri resigned in Riyadh (apparently after an assassination attempt) suggests the Saudis want a leader in Lebanon who will more strongly oppose Hezbollah.  We note that Hezbollah’s leader, Hassan Nasrallah, indicated that his group did not push for Hariri’s removal and that the decision had been imposed by Riyadh.  Hariri’s departure will likely increase instability in Lebanon; Israel has, for the most part, been able to avoid the regional turmoil as Syria and Iraq deal with devolution.  However, if tensions in Lebanon rise and Hezbollah tries to dominate, Israel may find itself pulled into a widening conflict.
4. There was a helicopter crash that reportedly killed Prince Mansour bin Muqrin, the deputy governor of the Asir province.  He was the son of former Crown Prince Muqrin bin Abdulaziz, the last “king worthy” son of Ibn Saud, the founder of the KSA.  According to reports, Prince Mansour was returning from an inspection tour of his province when his helicopter crashed.  The cause of the crash has not been determined.[3]

So, what do we make of all this?  The context of these events goes back to the end of WWII, when Franklin Roosevelt and Ibn Saud created a friendship agreement between the U.S. and the KSA.  The U.S. didn’t want Saudi oil falling into the hands of the British or the Soviets, and thus established relations with what is essentially a medieval kingdom.  American policymakers knew that the states created by colonial powers in the Middle East were inherently unstable, where minority groups were given power in many cases to force the local leaders to rely on the colonial powers for support.  When the colonialists departed, these nations devolved into authoritarian states often run by despots; although such leaders were antithetical to America’s views on government, the U.S. maintained the borders in the region to prevent instability.  That’s why President George H.W. Bush built a coalition to remove Iraqi forces from Kuwait but didn’t pursue these forces back to Baghdad or attempt to overthrow the Hussein regime.  However, every president after Bush has undermined stability.  President Clinton implemented harsh sanctions on Iraq and steadily weakened its economy.  President George W. Bush invaded Iraq and removed its leader, but was unable to build a working government to replace the tyrant.  President Obama wanted to “pivot to Asia” which implied a “pivot from the Middle East.”  Adding to tensions was his support for the “Arab Spring” which has proven, in almost all cases, to lead to chaos.  Because Obama wanted to reduce U.S. influence in the Middle East, he had to elevate a new regional hegemon.  He chose Iran; the Iranian nuclear deal was, in part, a starting point to Iranian ascendency.[4]  That decision, while defensible, was destined to be politically unpopular and President Obama lacked the political finesse to execute what would have been a difficult political feat.  President Trump has returned to the American position of hostility toward Iran that occurred after the 1979 Iranian Revolution and hostage crisis.  Current U.S. policy appears to support the ascendency of Saudi Arabia as the regional hegemon.  And so, the events of this weekend should be seen in the context of the KSA taking steps to assume the regional hegemonic role.  We doubt the KSA has the ability to execute this role but consolidating power, reforming the economy and modernizing social life in Saudi Arabia are probably necessary if MbS can transform the KSA into the dominant regional power.

The problem is that if the KSA can’t perform the role, Iran, which views itself as the regional dominant power, will aggressively take steps to undermine the KSA in the region.  The U.S. will need to decide if it will commit resources to the region when it faces a rapidly rising China in the Far East and a devolving EU in Europe.  We fear the U.S. doesn’t have the resources or the will to deal with a three-front world.  The most likely outcome is that the U.S. allows the Middle East to devolve and focuses on Europe and the Far East (the Obama pivot).  That means, at some point, a disruption of Middle East oil supplies and higher oil prices.  In the past, fears of this outcome would have determined U.S. policy.  However, shale oil and improving efficiency can allow the U.S. to focus outside the region.

Paradise Papers: We have links to the enormous data dump that exposed governments and individuals who have used offshore accounts to shelter wealth and income from taxes.[5]  But, the key takeaway from the breadth of those revealed (the Queen? Really?! And Bono?) is that the populists have a point.  Leaders across the establishment, whether center-left or center-right, have availed themselves of questionable to illegal means to avoid taxes.  It smacks of Leona Helmsley’s infamous line, “We don’t pay taxes; only the little people pay taxes.”  Populist leaders around the world now have new fodder with which to attack the establishment.

Dudley to retire: NY FRB President Bill Dudley announced he plans to retire about mid-year 2018; he was scheduled to leave at year-end.  The NY FRB president has unique powers on the FOMC.  As true of all regional bank presidents, he is appointed by the board of directors of said bank.  However, unlike other regional FRB presidents, the NY FRB president is a permanent voter on the FOMC.  In other words, he has the voting power of a governor without the Congressional appointment.  This power is given to the NY FRB because of New York’s predominant role in the U.S. financial system.  Although Dudley has historically been a moderate (we rate him a “3” on our hawk/dove scale), he has evolved into a “Minskyist.”  We break the FOMC into three groups—Phillips Curve Disciples, Phillips Curve Heretics, and Minskyists.  The disciples believe in the Phillips Curve and believe that tight labor markets require higher rates.  The heretics believe the curve is no longer functional and believe the FOMC shouldn’t raise rates until inflation exceeds the target.  The Minskyists believe that lower rates trigger financial market distortions and thus call for higher rates to prevent asset bubbles.  Thus, Dudley has become rather hawkish recently.  The odds favor that Dudley will be replaced by a disciple simply because there are more of them around.  That outcome may mean a somewhat less hawkish stance from the NY FRB.

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[1] https://en.wikipedia.org/wiki/2017_Saudi_Arabian_anti-corruption_arrests

[2] https://www.transparency.org/news/feature/corruption_perceptions_index_2016

[3] http://www.geographicguide.com/asia/maps/saudi-arabia.htm

[4] Although Iran remains wildly unpopular in the U.S., there are regional specialists who have argued that Iran is best suited for this role.  The strongest argument is expressed by Robert Baer. Baer, R. (2008). The Devil We Know:  Dealing with the New Iranian Superpower. New York, NY: Crown Publishers.

[5] https://www.bloomberg.com/news/articles/2017-11-05/panama-papers-redux-may-show-how-firms-wealthy-skirt-taxes ; http://www.bbc.com/news/uk-41876942?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top-stories ; https://www.icij.org/investigations/paradise-papers/explore-politicians-paradise-papers/ ; https://www.nytimes.com/2017/11/05/world/paradise-papers.html?emc=edit_mbe_20171106&nl=morning-briefing-europe&nlid=5677267&te=1

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy employment data day!  We cover the release in detail below but the quick read is that the report is relatively weak; payrolls rebounded sharply but below expectations, the unemployment rate fell largely due to a drop in the labor force and wages remained unchanged.  Weather events did affect the data.  The dollar and Treasury yields fell on the news.  Here is what we are watching this morning:

Tax roll-out reception: The GOP tax proposal, also referred to as the “Tax Cuts and Jobs Act,” received mixed reviews following its release yesterday.  As is typically the case with all first iterations of a new tax bill, there are many proponents and detractors alike.  The bill is considered to be generally business-friendly but some notable lobbyist groups have expressed their opposition to it.  The most prominent opponents are small business lobbyists and realtors.  Common critiques of the bill are that it does not do enough to repatriate offshore earnings, hurts real estate prices and does not provide enough help for small businesses.  It is generally perceived to have broad support among the House GOP, but there are some rumblings within the Senate GOP about possible changes to the bill.  Senator Marco Rubio tweeted yesterday that the child tax credits included in the bill are not enough to support middle-class families, while Senator Susan Collins has expressed opposition to the proposed elimination of the estate tax.[1]  We will continue to monitor this issue closely.

Traveling in the Indo-Pacific: Today, the president will start his 10-day trip across Asia, with his first stop in Japan.  While on this tour, the president is expected to discuss matters relating to trade and North Korea’s missile program, the latter being the primary focus.

During the trip, the president will refer to the area as the “Indo-Pacific” as opposed to “Asia-Pacific.”  The term was used by National Security Advisor H.R. McMaster during yesterday’s White House press briefing, during which he previewed the president’s agenda for his trip to Asia.  The term is meant to emphasize that the U.S. commitment stretches beyond the economies of China and East Asia in order to include economies along the Indian Ocean as well.

Japan will likely ask the president for more assurances regarding his commitment to deterring North Korea from Japan and South Korea.  Tensions between the U.S. and North Korea continue to build as Pyongyang accused the U.S. of running a “nuclear strike drill” along the Korean peninsula.  Although the Pentagon has denied the accusation, claiming that the drills were routine, McMaster urged during the White House press briefing that time is running out to address the North Korean situation.

Venezuela debt restructure: Yesterday, Venezuelan President Nicholas Maduro stated that the country will seek to restructure and refinance its debt following a $1.1 billion principal payment to bondholders on Friday.  This move will likely make bondholders anxious as the country has recently struggled to make good on some of its ongoing debts.  Earlier this year, the United States imposed financial sanctions on Venezuela in response to its crackdown protests, which have made it harder for the country to seek other forms of financing.

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[1] https://www.axios.com/child-tax-credit-new-tax-plan-2505451140.html

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] The overnight news was relatively light, but here are the events we’re keeping an eye on today:

Changes at the Fed: Yesterday, the FOMC decided to maintain interest rates at their current levels but hinted at a possible rate increase in December.  The Federal Reserve cited strong economic growth as the reason for further monetary tightening.  Currently, the upper bound fed funds rate is 1.25%, which is relatively low compared to the neutral rate of 3.0%.  As a result, we expect rate increases to continue into 2018.

In other Fed news, President Trump is expected to nominate Jerome Powell, a Federal Reserve governor, for the Federal Reserve chairman position.  If confirmed, Powell would be replacing Janet Yellen after her term ends in February.  He is not expected to have a tough time getting confirmed in the Senate as he has a good relationship with Republicans and Democrats alike.  In 2011, Powell made a name for himself for his contribution in brokering a deal between the Obama administration and Congressional Republicans to raise the debt ceiling.  Trump’s selection of Powell would be considered a relatively safe choice as Powell has close ties with the Republican establishment.  Powell’s colleagues describe him as being neither dovish nor hawkish, but moderate.  That being said, there are some Senate Republicans, including Vice President Mike Pence, who would prefer that President Trump select John Taylor, who is known to be hawkish.  Accordingly, it is widely believed that he would maintain Yellen’s approach of gradual interest rate rises.

Updates on tax reform: The tax reform package is expected to be revealed later today.  Reports suggest that the House is struggling to come up with legislation that is palatable to all factions of the GOP and the White House.  Recent attempts at proposal changes to make the bill more appealing have been complicated by the president’s doggedness over key reforms.  Trump has tweeted his disapproval of a possible phase-in period for corporate tax cuts, increased taxes on 401(k)s and retention of the Obamacare individual mandate.  There are fears that Congress might replicate the failure of their Obamacare repeal if they insist on meeting all of Trumps demands.  That being said, there have been a few concessions made as of late—it is believed the corporate tax rate will likely be temporary, the top individual tax rate will remain unchanged and mortgage rate deductions will be capped at $500,000.  As of right now, we are not confident that tax reform will be complete before the end of the year.  We will continue to monitor this situation.

Rate hikes in the U.K.: Today, in a 7-2 vote, the Bank of England decided to raise its benchmark interest rate for the first time in a decade, while still maintaining its asset-buying program.  The move is likely in response to elevated levels of inflation.  Core CPI is 2.5%, which is higher than the 2.0% target set by the central bank.  In addition, the BOE has signaled that it will likely raise interest rates two times before the year 2020.  Even though the rate rise was expected, BOE policymakers have expressed concern as to the effect it might have on GDP, which has been relatively weak compared to some of its European peers.

Energy recap: U.S. crude oil inventories fell 2.4 mb compared to market expectations of a 2.1 mb draw.

This chart shows current crude oil inventories, both over the long term and the last decade.  We have added the estimated level of lease stocks to maintain the consistency of the data.  As the chart shows, inventories remain historically high but have been declining.  In fact, inventories are now at their lowest level since mid-2015.  We also note that the SPR fell 0.8 mb, meaning total oil supplies fell 3.2 mb.

As the seasonal chart below shows, inventories are well into the autumn inventory build season but, so far, inventories have mostly been stable.  As refinery runs pick up, further declines are likely.  The real test will be in Q1 2018.  As the chart below shows, inventories usually rise.  Thus, oil prices could be well supported if inventories fail to increase.

Based on inventories alone, oil prices are overvalued with the fair value price of $54.23.  Meanwhile, the EUR/WTI model generates a fair value of $62.89.  Together (which is a more sound methodology), fair value is $59.60, meaning that current prices are below fair value.  Recent oil price strength has narrowed the degree of undervaluation.

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by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equity markets have been fairly strong following relatively strong earnings and expectations surrounding the FOMC meeting today.  The overnight news was relatively light, but below are a few topics that we are keeping an eye on today:

Return of the ban? Yesterday, a driver in a pickup truck hit and killed several pedestrians along a bike path near the Hudson River in Lower Manhattan.  Mayor Bill DiBlasio has since declared the event an act of terror.  Although there was a written letter in Arabic pledging allegiance to ISIS, authorities are not convinced that the driver had any affiliation with the terrorist group.  President Trump condemned the terrorist attack and pledged to take more action to deter further attacks from happening.  The president has not yet specified what measures he plans to take but, since the driver was from Uzbekistan, the president may revise his travel ban list to include more countries.  This event has not had an adverse effect on markets which suggests no perceived threat to U.S. national security.

Tax reform: Last night, the House GOP decided to delay the rollout of their much-anticipated tax reform bill.  It is currently being held in the House Ways and Means Committee.  It is believed that the bill as it is currently written still does not have enough support.  Yesterday, Bloomberg reported there was a proposal to let the corporate tax rate gradually decline over a five-year period, which would put the corporate tax rate at 20% in 2022.  The president has since come out against that proposal.[1]  In addition, there is growing speculation as to whether the Senate GOP will be able to form a coalition without seeking the help of Democrats; the GOP can only afford to lose two votes in the Senate, and Senators Rand Paul[2] and Susan Collins[3] have expressed their hesitancy for the bill as it is currently constructed.  There is growing speculation that the GOP will not be able to pass tax reform before President Trumps’ Christmas deadline.

Asylum for Catalan separatists? In Spain, Spanish authorities have threatened to issue a European arrest warrant if ousted Catalan President Carles Puigdemont fails to show up to his court hearing.  Earlier this week, Carles Puigdemont and several of his advisers fled to Belgium in order to avoid charges related to the October 1st referendum.  Puigdemont has since stated that he will not return to Spain until he receives “guarantee of a fair trial.”  It has been widely speculated that Puigdemont and his advisers could seek political asylum in Belgium.  In order for Belgium to grant political asylum, it would need to start judicial proceedings to denounce the Spanish government’s crackdown of the referendum, which could be politically tricky given Belgium’s separatist past.  Belgium Prime Minister Charles Michel has claimed that he did not invite the former Catalan leader and would treat him as any other EU citizen.  If Spain were to issue the arrest warrant, Belgium would have up to 60 days after the warrant issuance date to grant asylum.  We will continue to monitor this situation.

FOMC rate decision: The Federal Reserve is expected to maintain current interest rate levels, although there is growing speculation that the Fed could raise rates in December.  Despite weakening inflation, the Fed is likely to point to strong GDP growth numbers as a reason to continue monetary tightening.  Fed chair front-runner Jerome Powell, a supporter of Yellen’s gradual interest rate approach, is expected to adopt a similar interest rate policy if chosen to become the next Fed chair.

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[1] http://www.reuters.com/article/us-usa-tax-trump/trump-says-he-is-not-looking-to-phase-in-corporate-tax-cut-idUSKBN1D02AC

[2] https://www.cnbc.com/2017/10/18/trump-tax-plan-hits-bump-in-senate-as-rand-paul-weighs-no-vote.html

[3] https://www.axios.com/collins-opposes-estate-tax-repeal-cut-to-top-tax-rate-2504006556.html?xrs=RebelMouse_fb&utm_source=facebook&utm_medium=fbsocialshare&utm_campaign=organic

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Halloween!

Financial and commodity markets are quiet this morning, awaiting the president’s pick for Fed chair (Powell is the consensus selection), the president’s trip to Asia and Friday’s employment report.  Here is what we are watching this morning:

The indictments: Although the indictments dominated the news flow yesterday, we still view this as a long process.  The primary concern is that the issue will become a larger distraction for the White House and make tax cuts more difficult.  The tax changes are already quite difficult.  Yesterday, we saw a trial balloon of phasing in corporate tax changes over five years.  That landed with a “thud” and was probably behind the Treasury rally seen yesterday.  Tax writers are fiddling with such ideas because it is becoming difficult to even come close to neutrality.  If the president moves to fire Mueller, it may trigger a constitutional crisis and that could have a detrimental impact on equity markets.  We don’t expect that outcome but the odds are rising from a low level.  The House is expected to offer a tax bill perhaps as early as tomorrow.

South Korea and China make up: When the U.S. put the THAAD anti-missile system in South Korea, China went “ballistic”[1] and pulled diplomats from Seoul.  Apparently, China has decided that the system isn’t that big of a threat after all.  We suspect that the threat has nothing to do with it.  Instead, China is probably trying to woo South Korea away from the U.S. by giving in on this missile system.  If a conflict is going to occur in North Korea, the U.S. will base some operations in South Korea.  If the Moon government, who leans dovish anyway, wants to avoid war on the peninsula, getting China to pressure Pyongyang makes sense.  And, if China wants to reduce the chances of war, influencing South Korea to oppose U.S. military actions would make sense.  We note that the U.S. will have three carrier strike groups in the area soon and, for the first time, has sent a squadron of 12 F-35A fighters to the Kadena AFB in Japan.  Although we haven’t seen the strongest precursor for war (removing American civilians from South Korea would be the clearest signal of an imminent attack), the U.S. is clearly moving military assets into place for a conflict.

A couple of thoughts about the PCE data: In reviewing the personal consumption data, a couple of concerns emerged.  First, the saving rate is rolling over.

We have also seen a stall in deleveraging at the household level.  This is a “good news, bad news” situation.  The good news is that, at least in the short run, households are feeling more confident and are willing to spend down saving to make purchases.  We may be reaching the limits on how much more saving can fund consumption, and if consumption is going to rise in the absence of wage growth then debt will need to rise.  Taking on leverage with debt at current levels is probably self-limiting as well.

Second, we are seeing inflation-adjusted per capita income stall.

This chart shows real per capita income against trend.  It peaked in May and fell below trend in August.  The downtrend accelerated in September.  Although this number isn’t necessarily a good indicator of the business cycle, it should affect consumption.  Both these numbers suggest that the 3% GDP growth we are seeing is probably not sustainable.

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[1] See what we did there?