BLACK FRIDAY SALE!

You asked for it!

Every service I subscribe to for this blog is currently offering Thanksgiving discounts.

I shall do the same. After 16 years, here’s the second Edge and Odds Thanksgiving sale. Take advantage of it, it may never come back!

Here it is:

Any new or existing subscriber, any new reader or non-reader, even anybody with zero interest in the blog, will get 50% off the regular price which, remarkably, has not changed in 16 years!

This offer will remain valid until next Thanksgiving and will be retroactive to January 3rd, 2009, the original launch date, even for those who found me later, or even never found me.

And for my numerous non-American readers, for fairness sake, they will be allowed to apply the very same discount, no discrimination, during any other holiday period of their choice, valid until any other holiday period of their choice, and retroactive as far back as they wish.

To take advantage of this offer, simply do nothing. The discount will be automatically applied to your account, even if you don’t have one.

Please allow a reasonable number of days, weeks or months. We have been short-staffed here since day one.

The problem is that I only hire on a profit-sharing scheme and that has yet to appeal to anybody since I still refuse to “embellish” the blog with ads and pop-ups.

*****

My real Thanksgiving!

Sincere thanks are hereby given to all of you who have helped the blog with donations, large or small, occasional or regular.

I truly appreciate your marks of appreciation and altruistic generosity given that you are a minority helping all Edge and Odds readers.

Getting older, slower and sloppier, busy with 5 children and 11 grand-children, some in other biz with me (or rather me with them), and being short-staffed for reasons given or not above, I often cannot find the time/energy to send a thank you note. I apologize and I will try to improve on that even though I know I should not commit to that.

Rightly or wrongly, I always decide to work on the blog rather than use time to send thank you notes.

But here they are: Robert, Todd, Joseph, Curt, Bill, Pat, Marc, Daniel, Jeff, David, John, Richard, Brian, Larry, Rick, Patrick, Joseph, Denis, John, Massimo, Jack, “nseix”, Nick, Rajiv, Constantin, Eric, Steven, just to name some of the recent donators, I hereby sincerely thank you all and salute your generosity.

To all others, free riders, thank you for reading me, a very nice compliment in itself.

Denis

Fed’s Preferred Inflation Measure Remained Elevated in October

The core version of the Fed’s preferred 12-month inflation gauge ticked back up to 2.8% as expected last month—a sign that even though prices have decelerated, they are still rising stubbornly.

Prices as measured by the personal-consumption expenditures price index rose 0.2% in October, or 0.3% after excluding the food and energy categories. Looking back 12 months, the PCE price index is up 2.3%, or 2.8% on a core basis. (…)

Decimals can make a big difference: the PCE price index actually rose 0.24% MoM after +0.18%. Annualized, that’s +2.9% vs +2.2%.

Core PCE was unchanged at +0.27% after +0.26%.Still +3.3% annualized.

Goods are stiff deflating, –0.1% for the 3rd consecutive month.

But services are still problematic at +0.38% (+4.6% a.r.) after +0.31% (+3.7%).

Mr. Powell’s Supercore PCE (services ex-energy and housing) accelerated to +0.4% MoM (0.36%) after a +0.3% reading in September, the highest in seven months, and up 3.5% YoY after +3.2%. Where is that productivity?

The other “problem” is that Americans’ income is rising strongly in nominal dollars:

• Personal income: +0.6% for October after +0.3% In September and +0.26% on average in the previous 5 months.
• Employee compensation is still rising 0.45% per month, +5.5% annualized.
• Disposable income jumped 0.7% after +0.3%. That’s 6.1% annualized in the past 2 months.

Expenditures are keeping pace at +0.5% monthly on average since May (+0.4% in October after +0.6%).

Real expenditures rose only 0.1% in October but the 3.6% average annual pace since May is intact.

BTW, a November preview:

@neilksethi

Buy Now Before Tariffs Hit, Retailers Are Telling Shoppers

“Pre-Tariff Sale! This is not a drill,” declares a Facebook post from Finally Home Furnishings, urging customers to order now before prices “double.” 

The online furniture retailer is one of many businesses urging customers to buy now before President-elect Donald Trump’s proposed tariffs potentially raise costs—and prices. Others banging the tariff drum include companies selling outdoor gear, stickers, beauty products and more. (…)

The outdoor and sporting-goods retailer Tarptent leveraged the looming threat of tariffs to boost its continuing sales promotion in mid-November. A recent Facebook post promoting its Black Friday sale, which offered up to 35% off some tents, said: “These are the best discounts we will likely offer until this time next year, and with potential tariffs looming, they might be the best prices for a lot longer than that.” (…)

Some influencers on TikTok are feeding into the tariff frenzy, urging people to buy their favorite products in bulk now. Others on the platform are doling out tips on how long everyday items such as makeup, shampoos and food can be stored, helping users strategize their stockpiling plans. 

Finally Home Furnishings, the furniture seller, delivered this warning on Facebook earlier this month: “The very same items you are seeing now will be double the price once the tariffs kick in.” The message prompted several customers to place orders sooner rather than later, said the owner, Sydney Arnold. The retailer plans to expand its efforts with email and traditional mailings to spread the word. 

“There is a misconception that the countries exporting goods will bear the cost of the tariffs, but that is simply not true,” Arnold said. Rather, she added, price increases will be passed on to consumers. (…)

AutoZone Chief Executive Philip Daniele has told analysts that the auto-parts retailer “will pass those tariff costs back to the consumer” if they come to fruition. Tariffs “certainly would add product costs,” Lowe’s Chief Financial Officer Brandon Sink said on the company’s recent earnings call. (…)

Goods deflation gone for good?

Trump’s tariff plans will likely boost US imports in the near-term. Anecdotes suggest that companies are already frontloading imports, statistical estimates from the last trade war suggest that each 1pp increase in tariff rates raised US imports by 1.7% in the months prior to implementation (implying a 5-6% boost under our baseline tariff assumptions), and port traffic in China has increased since the US election. Such stockpiling should have a negligible effect on GDP, however, since the import boost should be offset by inventory increases.

Second, elevated trade policy uncertainty will likely start to weigh on investment in early 2025. Statistical estimates suggest that investment-sensitive manufacturing activity responds to higher trade policy uncertainty within two quarters, while corporate capex generally pulled back one quarter following an increase in earnings call mentions of trade policy uncertainty. Combining these timing estimates with the rise in trade policy uncertainty thus far implies a sizable drag on Euro area growth in 2025H1 but only a modest drag in the US, consistent with our country teams’ forecasts. (GS)

China’s Local Governments Hold Back Wages in Desperate Scrape for Cash Beijing’s recent attempt to address the trillions in hidden debt held by local governments only scratches the surface

(…) The cash crunch threatens China’s economic growth, since local governments carry out much of China’s investments and indirectly impact household finances as employers of civil servants and contractors of private businesses. The stakes for China’s stagnating economy are even higher with President-elect Donald Trump promising to slap China with punitive tariffs on its exports to the U.S. 

About 1,200 worker protests over unpaid wages or other compensation-related grievances have occurred nationwide so far this year, following more than 1,600 such incidents last year, according to videos and posts on social media that are tracked by Hong Kong-based nonprofit China Labour Bulletin. That is up from about 700 in 2022 and around 900 in 2021.

For years, local governments used complex state-owned funding vehicles that borrowed on their behalf, often to finance projects with little economic benefit. Across China, there are railroads with too few commuters, industrial parks with no tenants and even a ski resort in an area with little snow. Meanwhile, the trillions of yuan in revenue that local governments collect from selling land has shrunk sharply since the collapse of China’s epic property boom.

Beijing has said local governments’ “hidden debt that needs digesting”—without elaborating on how they define that—stood at the equivalent of $2 trillion at the end of last year, but economists have put the total hidden debt at between $7 trillion and $11 trillion. As much as $800 billion of that debt is at a high risk of default, economists estimate.

Monthly debt repayment across provinces reached 125% of monthly revenue at some points last year, according to an analysis by Victor Shih, a professor at the University of California, San Diego, who researches China’s politics and financial system.

China this month attempted to address the problem with a $1.4 trillion package to swap local governments’ off-balance-sheet debt with new bonds aimed at easing their financial burden. The debt swaps push maturity dates into the future, but don’t pay down the money owed. (…)

“Local governments have a lot of fiscal burden, but not a lot of fiscal income,” said Zhiguo He, a financial economist at Stanford University’s business school. (…)

The recently announced debt-swap program may help local governments save money on interest payments, which could help them pay back owed wages and reduce unnecessary fines, according to economists. That could boost some households’ income and potentially stimulate much-needed consumer spending, though the direct effects are hard to measure.

Macquarie estimates the plan could save 600 billion yuan in interest payments over the next five years, or less than 0.1% of gross-domestic product each year. Economists at Goldman Sachs estimate that the debt-swap program could boost China’s real GDP by 0.55 percentage points.  

The fact that the package covers a fraction of estimated hidden debt suggests that Beijing isn’t letting local governments and the funding vehicles they use completely off the hook. Authorities are likely concerned with moral hazard, the idea that rescuing an entity could lead to even more risk-taking. (…)

Goldman Sachs research finds that China’s house prices have yet to bottom out, a prerequisite to a sustainable turnaround in consumption.

China’s EV Boom Threatens to Push Gasoline Demand Off a Cliff Sales of new energy vehicles have reached a tipping point

(…) Now, according to official statistics, China’s sales of electric vehicles and hybrids have in fact reached a tipping point. They’ve accounted for more than half of retail passenger vehicle sales in the four months from July, according to the China Passenger Car Association, a trend that’s poised to send appetite for transport fuels into a decline that will have a major impact on the oil market.

The more rapid-than-expected uptake of EVs has shifted views among oil forecasters at energy majors, banks and academics in recent months. Unlike in the US and Europe – where peaks in consumption were followed by long plateaus — the drop in demand in the world’s top crude importer is expected to be more pronounced. Brokerage CITIC Futures Co. sees Chinese gasoline consumption dropping by 4% to 5% a year through 2030. (…)

“What we’re seeing now is the medium-term expectations coming ahead of schedule, and that has implications for the shape of Chinese and global demand growth through the rest of the decade.” (…)

[China] accounts for almost a fifth of worldwide oil demand, and gasoline makes up about a quarter of that. The prospect of a sharp drop from transport is also coming on top of tepid industrial consumption due to slowing economic growth.

The growing popularity of electric trucks, as well as those that run on liquefied natural gas, is also weighing on demand for diesel. Chinese consumption of the fuel peaked in 2019 and will drop by 3% to 5% a year through 2030, UBS Securities Co. said in a note this month. (…)

The IEA sees “rampant, mass-market electrification” potentially pushing Chinese gasoline demand into decline from 2025. That will result in an average annual drop of 2.1% from 2023 through 2030. Others, like CITIC, see a more rapid retreat. Improvements in fuel efficiency and a peak in car ownership would help drive the declines, along with the uptake of EVs, the brokerage said in a note in late October.

This year may be a “turning point for China’s refined oil market, with gasoline consumption peaking before declining rapidly,” Luo Yantuo, a senior engineer with the PetroChina Planning & Engineering Institute, part of China’s biggest oil company, wrote this month in an analysis piece on PetroChina’s website. The amount of gasoline-powered cars on the road would peak as early as next year, she said. (…)

New energy vehicles make up about 10% of all cars on the road now, and that’s expected to exceed 20% by 2027 and could approach 100% by the 2040s, said Anders Hove, a China researcher at the Oxford Institute for Energy Studies. The country’s oil demand from light vehicles will fall from around 3.5 million barrels a day at the moment to 1 million by 2040, he said. (…)

In the US, EV’s still represent only about 10% of total car sales, and BloombergNEF sharply scaled back its forecasts for growth after the Republican election sweep. (…)

Gasoline consumption there has fallen just 12% from a peak in 2004 through last year, according to IEA data. In Europe, where cars running on gasoline and diesel are common, transport sector consumption is down only 6% from a high in 2007. (…)

This is liberating discretionary income, fueling U.S. overall consumption:

Gas prices at the pump continue to decline, which is another tailwind to consumer spending, see chart below. The decline in oil prices is driven by significant supply and production in the US and lower growth in China.

Source: AMA, Bloomberg, Apollo Chief Economist

Note: Travelling week.

Fed Minutes Signal More Caution on Cuts if Inflation Progress Stalls The meeting summary showed that all 19 officials approved this month’s quarter-point cut

(…) The Fed’s next meeting is Dec. 17-18. Officials have said the decision to cut rates at that meeting could be a close call, though they have left the door open to one last rate reduction this year.

Separately, the Fed’s staff revised up its assessment of the economy’s capacity to produce goods and services, or what economists refer to as “potential output,” due to recent gains in productivity. Higher potential growth driven by improvements in productivity, if sustained, could allow for an increase in output without resulting pressure on prices.

What Trump’s New Tariff Threats Mean for the U.S. Economy If president-elect follows through, consumers and businesses are likely to see prices rise on everything from fresh fruit to electronics

(…) Import-reliant businesses—especially automobile manufacturers—could face significantly higher costs that they would then pass on to consumers. Farmers and other exporters could face retaliatory tariffs. (…)

Tariffs of 25% on Canada and Mexico, and 10 percentage points added to existing tariffs on China, with those countries imposing retaliatory tariffs, would raise U.S. consumer prices by 0.75% next year, according to the Budget Lab. That estimate drops to 0.65% if households substitute purchases toward domestically produced or lower-tariff imported options. That would amount to more than $1000 in lost purchasing power per household, in 2023 dollars.

If the tariffs against Chinese goods were layered on top of the 60% Trump has already threatened, versus existing tariffs, the estimated inflationary effect would be higher. Beyond raising the prices that Americans pay for goods, higher inflation could lead the Federal Reserve to cut interest rates less than expected in the year ahead. That would keep rates on credit card balances and other loans higher than they otherwise might have been. (…)

Domestic industries that compete with lower-cost foreign manufacturers can experience greater demand for their products, while the government takes in additional revenues.

But consumers and other purchasers of imported goods aren’t able to buy as much, and both economic theory and the historical record show that they tend to lose more than the winners gain. Moreover, when a country imposes tariffs against another country, the other country often responds with tariffs of its own. (…)

American consumers will feel price increases not only after the tariffs are imposed but also in the run up, as stores and businesses rush to preorder nonperishable goods, said Kimberly Clausing, an economist at UCLA School of Law.  Lumber from Canada is an example of how that would play out. (…)

The Peterson Institute for International Economics, a think tank in Washington, D.C.,  estimates that under Trump’s new possible tariffs, prices would rise by 1%. It additionally estimates that by 2026 gross domestic product would be 0.6% lower than it otherwise would have been, and that total U.S. employment would be 1% lower. (…)

Employment in agriculture would be hard hit, too, according to the analysis, coming in 3.1% below where it would have otherwise been. Employment in durable manufacturing—the building of cars and other long-lasting goods—would be 5.4% lower.

Automakers, in particular, might be at risk. They have become reliant on a network of factories and parts suppliers that span the U.S., Mexico and Canda since the North American Free Trade Agreement came into effect 30 years ago, followed by its successor, the United States-Mexico-Canada Agreement.

Tariffs of 25% on imports from Mexico and Canada could add $3,000 on average to the price of a car, according to analysts at Wolfe Research. The firm estimates that about $97 billion worth of auto parts are imported to the U.S. from the two countries each year, and four million vehicles are shipped in—about three million from Mexico and one million from Canada.

Added costs from the potential levies also would hammer the bottom lines of General Motors, Ford Motor and Jeep-maker Stellantis, which all produce vehicles south of the border and rely on parts shipments from there. Evercore ISI estimates a 50% reduction in earnings per share for GM and Stellantis, and 25% for Ford. Shares of all three companies fell on Tuesday, with GM’s stock shedding about 9%.

The National Retail Federation said the timing of the proposed tariffs in January would have an outsize impact on fresh fruits and vegetables, of which the U.S. sources less at that time. U.S. importers will pay 25% more on $10 billion worth of Mexican avocados, tomatoes, raspberries, strawberries and peppers alone; and a 25% tax on $10 billion worth of Mexican beer, tequila and mescal imports, said David French, senior vice president for government relations at the industry group. (…)

Trump’s Trade Chief Advocates ‘Strategic Decoupling’ From China Jamieson Greer has been nominated as US Trade Representative

Jamieson Greer, who’s been nominated as the US Trade Representative, played a key role in imposing tariffs on China during Trump’s first term. As former chief of staff to Robert Lighthizer, who was Trump’s trade representative then, Greer shares a tough stance on Beijing. (…)

Greer recommends that Congress pass laws to protect US companies from economic coercion or retaliation by China. This could include allocating tariff revenue to support affected workers and firms, as well as giving the president the authority to take action against foreign companies that take advantage of Chinese retaliation by backfilling into the Chinese market.

This means if China blocked an American firm from selling in its market, the US might compensate that company. It could also lead to Washington taking action against firms from Brazil or elsewhere if they start selling more soybeans or other goods to Beijing to replace US sellers who have been shut out.

Greer calls for expanding export controls on China to cover a wider range of critical industries, such as aircraft, transportation equipment and legacy semiconductor manufacturing equipment.

This would be a step up from current US export controls, which mainly focus on advanced semiconductors. (…)

Greer calls for Congress to allow the US government to review outbound investment into China across a wide range of sectors with economic and strategic significance. He says the executive branch should have the authority to block such investments if they pose a threat to US economic or national security.

Greer suggests that Congress should consider expanding incentives for critical sectors, similar to those in the CHIPS and Science Act or the Inflation Reduction Act. The targeted industries include pharmaceuticals, robotics, medical devices, aircraft, automotive, energy products, telecommunications and electronics. (…)

Greer also advocates for strengthening restrictions to prevent Chinese firms from selling products to the US government, and recommends that Congress direct the Treasury to set up a China-specific sanctions regime focused on issues such as international security and human rights.

Trump Wields a Tariff Bludgeon The threat of a tax on imports will be his all-purpose lever in foreign and even domestic policy.

The WSJ Editorial Board:

(…) The first political point to note is that Mr. Trump’s tariff justification isn’t economic or based on the traditional claims about cheating or “dumping” products in the U.S. That would typically require studies that find economic harm or a national-security threat.

The tariff here is in service of Trump’s campaign promise to reduce illegal migration and fentanyl smuggling. He vows to take unilateral executive action without any explicit legal rationale. Mr. Trump is threatening the countries, including two neighbors and allies, with economic harm if they don’t help him solve a domestic U.S. problem.

This is an extraordinary use of tariffs, but Mr. Trump is going to use this threat often in his second term. He tried a version of this in his first term to coerce Mexico into assisting him in better policing the border, and he liked the result. Mexico went along with the Remain in Mexico program that held migrants on the Mexican side of the Rio Grande while they awaited asylum rulings.

The hopeful interpretation now is that Mr. Trump is merely using tariffs again as a negotiating strategy to get these countries to help. If they act to reduce the flow of drugs and people, he’ll lift the tariff threat and claim political victory at home.

The problem is that this strategy isn’t cost free and there can be collateral damage. Start with the U.S. auto industry, which depends on cross-border trade to remain competitive. Vehicle components and raw materials move back and forth across North American borders as cars are assembled. A 25% tariff on each border pass would raise prices and cost American jobs. It’s no accident that shares of Ford Motor (-2.6%) and General Motors (-9%) fell sharply on Tuesday on the tariff news. Mr. Trump may not care about stock prices, but what about his new working-class coalition?

There is also the potential risk of retaliation. Mexican President Claudia Sheinbaum on Tuesday offered to talk to Mr. Trump about fentanyl and migration. But she also said she is prepared to respond with tariffs on U.S. exports. Mexico has shown in the past that it can be politically shrewd choosing the American goods and areas it targets with tariffs. Think swing Congressional districts and states.

“One tariff would be followed by another in response, and so on until we put at risk common businesses,” Ms. Sheinbaum said. She has her own economic nationalists to please.

There’s also the not-so-small matter that Mr. Trump’s tariffs, if imposed, would shatter the U.S.-Mexico-Canada Agreement that he negotiated and signed in his first term. The pact’s terms say it can’t be reviewed until 2026, and then the parties have another decade to negotiate new terms or abandon it.

In 2019 Mr. Trump said the USMCA would be “the best and most important trade deal ever made by the USA.” If he blows it up based on his own short-term political needs, he’ll send a message around the world that his—and America’s—treaty word can’t be trusted. U.S. trading partners and allies everywhere will get the message, and China will be courting them with promises of a more reliable export market. Using trade to punish allies is especially short-sighted if you want their help against Chinese mercantilism.

***

It’s also possible that Mr. Trump views tariffs not merely as a tool for ad hoc negotiation but as a lever to remake the entire global trading system. In that case he’ll try to build high tariff walls in an attempt to force U.S. and foreign companies to build nearly everything in America. The economic and political harm from that strategy is for another day, but investors can’t rule it out and members of Congress would be wise not to give him that power.

As we wrote during the campaign, tariffs were the main economic risk of his candidacy. Mr. Trump campaigned as the Tariff Man, and he aims to impose them early and often. Get ready for what could be a wild ride.