with Brent D. Griffiths


The problem isn’t so much that stocks keep falling. It’s why they keep falling. 

The Dow Jones industrial average dropped another 1.5 percent on Monday to close down 5 percent off its all-time high of a month ago. 

That retreat on its own should be too meager to stir serious concern among investors. But Wall Street economists increasingly say the U.S.-China trade war driving the sell-off poses a more serious risk than they have given it credit for. Some are now downgrading their projections for economic growth at home as a result and even raising their projections for the likelihood of a recession. 

“Fears that the trade war will trigger a recession are growing,” Goldman Sachs chief economist Jan Hatzius wrote in a Sunday note. 

His team estimates the conflict will shave 0.6 percent off U.S. economic growth, and it just downgraded its estimate for fourth-quarter GDP growth to 1.8 percent, well below the 3 percent rate of expansion President Trump has promised. 

Goldman isn’t alone. UBS economists now see growth stalling at 2 percent for the rest of this year before slowing further to 1.5 percent in the first half of next year. The firm also sees joblessness rising by nearly a half-point to 4 percent by the end of next year. 

And while the economic brains at the big banks still put long odds on the U.S. slipping into a recession in the near-term — in part because they expect the drag from the trade war will force the Federal Reserve to further cut interest rates and shore up growth — it suddenly looks less remote of a possibility. Bank of America, for example, just hiked its projected chance of a recession in the next year from one in five to one in three. “We are worried,” Bank of America’s team wrote in a Friday note. “We now have a number of early indicators starting to signal heightened risk of recession.” 

Stocks on Wall Street dropped more than 1% as tensions spooked equity investors while the U.S.-China trade war stoked fears of an impending recession. (Reuters)

One of those warning signals, the yield on long-term government debt, continued flashing red on Monday. Investors are piling into those bonds as a haven from the escalating trade war and a deteriorating global outlook. The yield on the benchmark 10-year Treasury — which drops as the price of the bond rises — finished the day at 1.64 percent, its lowest close in nearly three years. It now looks primed to edge below that of the 2-year note, a so-called yield curve inversion considered a strong indication of a looming recession (the curve is at its flattest since 2007.) “If [yields] keep edging down, the equity market is clearly wrong because the bond market will be telling you we have one mother of a recession coming,” Neil Dwane, global strategist at Allianz Global Investors, told the Wall Street Journal’s Avantika Chilkoti and Akane Otani. 

And a wider survey of economists revealed an even more bearish economic view than those on Wall Street are articulating. Per Reuters, “Despite expectations for further [interest rate] easing, the Aug 6-8 poll gave a median 45% probability of the U.S. economy slipping into a recession in the next two years, up from 35% in the previous poll and the highest since that question was first asked in May 2018.” 

Nearly 70 percent of the economists that Reuters surveyed said the newest hostilities between the U.S. and China — with Trump pledging to impose 10 percent tariffs on $300 billion of Chinese imports and threatening to cancel September negotiations, while Beijing allows its currency to weaken — have brought the next recession closer. 

In a Monday note, David Kostn, Goldman Sachs’s chief U.S. equity strategist, wrote the “outlook for US-China trade has collapsed… During the past week, the ongoing trade dispute between the US and China appears to have escalated into a full-blown economic conflict.”

Kostin noted that investors are circling Aug. 19 as the next deadline for potential intensification of the U.S.-China conflict. That’s when the Commerce Department’s grace period allowing Google to update Huawei phone software expires. “A further extension appears unlikely,” and absent one, China could retaliate.

In the meantime, another Chinese-related threat is spooking investors as unrest in Hong Kong worsens. Carrie Lam, the leader of the financial hub, warned Tuesday it could fall into "an abyss," as anti-government protestors there crowding the airport forced a second straight day of flight cancelations. 

To readers: The Finance 202 is on an abbreviated schedule for August. It will return to regular, every weekday delivery in September. We hope you're enjoying your summer.


Argentina on verge of financial crisis. Bloomberg's Sydney Maki and Aline Oyamada: "Argentina is once again on the cusp of a full-blown financial crisis. In the wake of President Mauricio Macri’s stunning rout in primary elections over the weekend, investors dumped its stocks, bonds and currency en masse, leaving much of Wall Street wondering whether the country was headed for yet another default.

"The upset, widely seen as a preview of October’s presidential vote, threw the doors open to the very real possibility a more protectionist government will take power come December and unravel the hard-won gains that Macri made to regain the trust of the international markets. It deepened worries his populist opponent, Alberto Fernandez, and running mate, former president Cristina Fernandez de Kirchner, will try to renegotiate its debts as well as its agreements with the International Monetary Fund. The country has billions in foreign-currency debt due over the coming year."

  •  Argentine stock market tanks. Bloomberg's Sarah Ponczek: "The surprise outcome in Argentina’s primary vote roiled the nation’s financial markets, sending the S&P Merval Index plunging 48% in dollar terms. That marked the second-biggest one-day rout on any of the 94 stock exchanges tracked by Bloomberg going back to 1950. Sri Lanka’s bourse tumbled more than 60% in June 1989 as the nation was engulfed in a civil war."

U.S. budget deficit keeps growing. Bloomberg's Sarah McGregor: "The U.S. fiscal deficit has already exceeded the full-year figure for last year, as spending growth outpaces revenue. The gap grew to $866.8 billion in the first 10 months of the fiscal year, up 27% from the same period a year earlier, the Treasury Department said in its monthly budget report on Monday. That’s wider than last fiscal year’s shortfall of $779 billion -- which was the largest federal deficit since 2012."



— Businesses chafe at 25 percent tariffs: “When the Trump administration first imposed 10% tariffs on many Chinese goods about a year ago, suppliers, importers, distributors and retailers worked together to defray the cost and try to avoid passing it on to consumers for fear of losing sales,” the Wall Street Journal’s Chao Deng reports. “Tariffs at the 25% level are quite another matter. They are upending cost projections and business models and straining relationships built up over decades.”

Bolton: U.S. would strongly back no-deal Brexit. WSJ's Vivian Salama: "Trump’s national security adviser said he told British Prime Minister Boris Johnson the administration would strongly support the U.K.’s exit from the European Union in late October—deal or no deal. John Bolton was the highest level U.S. official to meet with Mr. Johnson during a visit Monday to London. Mr. Bolton held meetings with the country’s new government looking to kick-start trade and defense talks and convey the administration’s support amid uncertainty about what Britain’s exit from the EU would look like."

— South Korea escalates trade war against Japan: " South Korea said Monday that it has decided to remove Japan from a list of nations receiving preferential treatment in trade in what was seen as a tit-for-tat move following Tokyo’s recent decision to downgrade Seoul’s trade status amid a diplomatic row," the Associated Press's Kim Tong-Hyung reports.

"It wasn’t immediately clear how South Korea’s tightened export controls would impact bilateral trade. Seoul said some South Korean companies exporting to Japan will be able to receive exceptions from case-by-case inspections that are normally applied on sensitive shipments to nations with lower trade status and go through the same fast-track approval process that they currently enjoy."

— Mooch: Replace Trump on the ticket. The Post's John Wagner and Josh Dawsey: "Former short-lived White House communications director Anthony Scaramucci said Monday that President Trump is “giving people a license to hate” and called on Republicans to consider replacing him on the top of the ticket next year.

'How are we all tolerating this?' Scaramucci said during an interview on CNN. 'The rhetoric is so charged and so divisive that we all have to just take a step back now and say, "What are we doing actually?" In an interview with The Washington Post later Monday, Scaramucci said he wanted to recruit other former Trump aides and prominent Republicans to come forward with critical opinions of the president — views he said that many had shared with him privately."

Mooch's call came after the president attacked him on Twitter over the weekend for criticisms the Skybridge Capital co-founder lodged against him on HBO’s “Real Time With Bill Maher" on Friday night. The tweet spat continued into Monday, with Trump lashing out at Scaramucci again:  

And the Mooch firing right back: 


— Companies can’t avoid political pressure: “Business leaders hoping late summer would offer a break from mounting political and social pressures have had a rude awakening,” Bloomberg News’s Jeff Green reports.

“Two lethal shootings and a third attempt at Walmart stores put the retailer back into the spotlight on gun rights. Exercise companies SoulCycle and Equinox worked to fend off a boycott triggered by investor Steve Ross’ support for [Trump]. Les Wexner, CEO of Victoria’s Secret parent company L Brands Inc., tried again to distance the company from alleged sex trafficker Jeffrey Epstein, as well as models’ complaints of harassment … Calls for action have become a quagmire for executives, and there’s no clear consensus on how to respond.”

That pressure extends abroad: “As tensions in Hong Kong continue to escalate after months of political unrest, China has sought to rein in international brands that have mistakenly identified the semiautonomous territory — and other Chinese-claimed lands — as independent countries,” my colleagues Jennifer Hassan and Anna Fifield report.

“From Versace to Givenchy, brands have swiftly offered apologies to China over their references to Hong Kong, Taiwan and Macao on their websites and on items of clothing. The online backlash and calls to boycott the brands come at a highly sensitive time for China, with Hong Kong rocked by protests — which kicked off in June — over concerns that Beijing is encroaching on the territory’s autonomy.”

— Top automakers split over hybrids: “Auto makers for two decades have leaned on hybrid vehicles to help them comply with regulations on fuel consumption and give customers greener options in the showroom,” WSJ’s Mike Colias reports. “Now, two of the world’s largest car manufacturers say they see no future for hybrids in their U.S. lineups.”

“General Motors Co. and Volkswagen AG are concentrating their investment on fully electric cars, viewing hybrids — which save fuel by combining a gasoline engine with an electric motor — as only a bridge to meeting tougher tailpipe-emissions requirements, particularly in China and Europe.”

— Uber investor slams new CEO: “Dara Khosrowshahi, who was brought in as Uber CEO to clean-up co-founder Travis Kalanick’s mess, needs to prove the company can still innovate, early Uber investor Bradley Tusk told CNBC on Monday,” CNBC’s Jessica Bursztynsky reports.

Since its New York Stock Exchange debut in May, Uber has more than 10% from its initial public offering price of $45 per share … Last week on CNBC, Khosrowshahi pushed back against the notion that the company has lost its ‘founder mentality.’ ”

— Oregon joins suit against T-Mobile, Sprint merger: “Oregon has joined a multistate lawsuit to block the merger of U.S. wireless carriers T-Mobile US Inc and Sprint Corp, the New York attorney general’s office, which is leading the lawsuit along with California, said on Monday,” Reuters’s Sheila Dang reports.

“Fifteen states and the District of Columbia are now seeking to stop the merger, which the states argue is anticompetitive and will cost their residents more than $4.5 billion annually. The lawsuit most recently added Texas, whose attorney general is the first Republican to join the effort.”

  • Oregon may also join California in going after Trump’s taxes: “Oregon Gov. Kate Brown (D) said she would easily sign a law requiring presidential candidates to release their tax returns if they want to appear on the state’s primary ballot in 2020, a direct challenge to [Trump’s] yearslong effort to keep his financial dealings hidden from the public.” The state’s lawmakers won’t be back in session until next year though,” HuffPost’s Jennifer Bendery reports.

— Wexner is working with investigators: “L Brands founder Les Wexner and his legal team have been providing documents to federal investigators that they believe show Jeffrey Epstein misappropriated funds while the child predator was Wexner’s money manager,” CNBC’s Brian Schwartz reports. “Wexner believes the evidence demonstrates ‘all sorts of irregularities and theft,’ one person with direct knowledge of the matter said.”

The FBI is searching Esptein’s Virgin Islands home: “FBI agents on Monday were searching the Virgin Islands residence of Jeffrey Epstein, an accused child sex trafficker, a bureau spokesman told NBC News, CNBC’s Dan Mangan and Kevin Breuninger report.

Epstein claimed dirt on long list of powerful people. NYT's James Stewart: "Almost exactly a year ago, on Aug. 16, 2018, I visited Jeffrey Epstein at his cavernous Manhattan mansion. The overriding impression I took away from our roughly 90-minute conversation was that Mr. Epstein knew an astonishing number of rich, famous and powerful people, and had photos to prove it. He also claimed to know a great deal about these people, some of it potentially damaging or embarrassing, including details about their supposed sexual proclivities and recreational drug use."


— McConnell warns China over Hong Kong: “[Senate Majority Leader] Mitch McConnell warned China on Monday that any violent crackdown on protests in Hong Kong would be ‘completely unacceptable,’ while Trump administration officials urged all sides to refrain from violence,” Reuters’s David Brunnstrom and Jeff Mason report.

  • McConnell’s statement is just part of the pushback from lawmakers on both sides of the aisle. 

Volcker Rule overhaul is imminent. Bloomberg's Jesse Hamilton and Benjamin Bain: "Wall Street watchdogs are poised to take a major step toward overhauling Volcker Rule limits on banks’ ability to trade with their own funds, according to four people familiar with the effort, moving to ease post-crisis safeguards reviled by the industry. Regulators responsible for the Dodd-Frank Act rule could complete work as soon as next week on revisions that include loosening restrictions on banks investing their own money in private equity and hedge funds, according to the people, who requested anonymity because the process isn’t public."

FDIC chief has person experience with financial crisis. Matt Egan of CNN Business: "Financial regulator Jelena McWilliams, the head of the FDIC, knows firsthand the devastation that can happen when the public loses confidence in the banking system. Her family was the victim of a run on the banks in the former Yugoslavia in the early 1990s, a time when the country was being torn apart by a civil war.

"McWilliams' father, dressed in a three-piece suit, waited 11 hours in line on a drizzly day to get money out of a bank in Belgrade. But he was too late... Her father, then 68 years old, lost his entire life savings and was left little choice but to work as a day laborer earning just $5 a day, McWilliams said... Today, McWilliams leads the Federal Deposit Insurance Corporation, the US regulator formed during the Great Depression and charged with protecting depositors from bank runs."



  • Advanced Auto Parts and Tilray are among the notable companies reporting their earnings, per Kiplinger.


  • Cisco Systems, Macy's, Agilent, Canopy Growth and IHeartMedia are among the notable companies reporting their earnings on Wednesday, per Kiplinger.
  • Walmart, Alibaba and JCPenney are among the notable companies reporting their earnings on Thursday, per Kiplinger.
When pressed on issues he wants to avoid, White House economic adviser Larry Kudlow has a go-to dodge at the ready: “That’s not in my lane.” (The Washington Post)