Global Macro Monitor

Party on, Garth!

The Dow crossed 20k as the market perceives accelerated future profit growth from the “Good Trump” policies – deregulation, etc. – and traders surf the Keystone pipeline to higher prices.   The momentum will continue until it doesn’t.

Not a lot of supply,  a dearth of sellers and money will almost certainly move in and start chasing.   Not cheap, but enjoy the ride.

We have deep concerns about the lurking “Bad Trump” policies, however.

The “buy American” rhetoric we heard yesterday around the pipeline plays well in Peoria but if it becomes law or is required in certain deals,  it can be labeled a non-tariff barrier to free trade.

The Rules of Origin Agreement requires WTO members to ensure that their rules of origin are transparent; that they do not have restricting, distorting or disruptive effects on international trade; that they are administered in a consistent, uniform, impartial and reasonable manner; and that they are based on a positive standard (in other words, they should state what does confer origin rather than what does not).
–  WTO

China does it but we would hate to see them expand it in retaliation, which they certainly will, if President Trump follows through with his tough trade and China policy rhetoric.

Imagine if Mr.Xi retaliates with a “buy China” cell phone policy, for example.   That would take a big byte out of Apple.   The company derived almost 2o percent of last quarter’s revenues from China and that was after a 3o percent year-on-year decline.

Then there is the real income impact on consumers of restricted trade.  The jobs lost in retail, restaurants, etc. as Americans’ real incomes decline due to higher prices will almost certainly more than offset the jobs saved through restrictions on trade.

We have failed miserably as a government to assist those who have lost from the country’s free trade policies.  Cheap prices at Costco and WalMart do have a cost in the form of a lost job for someone.

What the federal government spent on Trade Adjustment Assitance in 2014 was absurd.  Around $600 million or about one-half the cost of a B1 bomber!  Can you spell B-A-C-K-L-A-S-H?   Hillary certainly can.

Free trade, globalization, and significant, rather than trivial,  adjustment assistance to those hurt by this policy is the way to go and the road to building real wealth for all nations,  in our book.

Here is Stephen Roach on the President Trump’s hardline China policy,

This strategy will backfire. It is based on the mistaken belief that a newly muscular United States has all the leverage in dealing with its presumed adversary, and that any Chinese response is hardly worth considering. Nothing could be further from the truth.

…But the greatest tragedy for the US may well be the toll all of this takes on the American consumer. “America first” – whether it comes at the expense of China or via the so-called border-tax equalization that appears to be a central feature of proposed corporate tax reforms – will unwind many of the efficiencies of global supply chains that hold down consumer-goods prices in the US (think Wal-Mart).

With their incomes and jobs under long and sustained pressure, American consumers count on low prices for their economic survival. If Trump’s China policy causes those prices to rise, the middle class will be the biggest loser of all. – Project Syndicate

So enjoy the ride.   Don’t fight the tape.

But keep in mind there are some very nasty policy proposals lurking out there and, if realized,  will cause a world of hurt for the global markets and economy.

Stay tuned.