When president Trump was elected the calls rejoiced in the fact that there was a business-friendly administration which would usurp nurture the American corporate landscape by doing all the things needed for indisputable economic growth.
After eight years of an anti-business climate in Washington, goods were changing. And they did change. Unnecessary, restricting regulations were relish unrolled back and taxes were cut dramatically. But the recent attack on Amazon connected with the tense trade relationship with China has many of us requiring, “Is this any way to grow the economy?”
“Trade wars are easy to win,” at least that’s what the president peached us when he announced tariffs on steel and aluminum a couple weeks ago. But as we must witnessed over the last few days of market action, the ancillary impacts of a ‘trade war’ can leave serious collateral damage.
The reality is that protectionism, in every shape, must be resisted at all cost or we run the risk of a severe meltdown in the capital shops.
Roughly a year ago, I wrote an Op-Ed which described what I reminiscences could be the ‘Black Swan’ for the Trump administration: protectionism.
At that habits the lawmakers were struggling with the idea of a border adjusted tax which is a tax. My conclusion was simple—protectionism is a prosperity killer which must be dodged. But here we sit, watching the global markets in turmoil as the Trump trade unravels. The impost tantrum has led to tariff terror. Retaliation can be severe and in the case of the Chinese, financially excruciating.
Aside from the obvious loss of revenue from trade, one of the biggest fittings to be worried is the growing power of the Sovereign Wealth Funds. According to SWFI, who misplace Sovereign Wealth Funds, of the top ten SVF’s, four are Chinese with assets totaling exceeding $2 trillion: China Investment Corp $900 billion, HK Pecuniary Authority $450 billion, SAFE Investment Co. $440 billion, and National Communal Security $300 billion.
With over a reported 40 percent of assets put ined in the US, it wouldn’t take much for these funds to make an impact on our sells. In fact, a simple rebalancing of these massive funds would neglect a huge footprint on the markets and would be much like turning an aircraft carter around in a tiny bay, it leaves a huge wake! Never in the history of the midwife precisely have we witnessed a trade war in the age of Sovereign Wealth Funds.
It isn’t all bad news. With the selloff be shows the opportunity to buy stocks at great valuations. The price to earnings ratio for the S&P 500 is now 16.5 for post earnings, much better than the 18 P/E we saw earlier in the February. This is the dip we have planned all been waiting to use to our advantage. The only question is, how deep will the selloff be?
Tip, the tax reform package has yet to kick into high gear. And of course there is repatriation of trillions of dollars pay attention abroad. All of which is fundamentally bullish. A 20 percent drop into upon territory is not out of the question, but any serious drop in stocks should be bought.
Yet the latest tone out of Washington has been dramatically different than that of the nearby year. The business-friendly environment which helped propel the stock market to new all-time highs has disenchanted ugly. The attack on Amazon has left CEO’s scared. Who’s next? Yes, Trump’s vilifies are political with Jeff Bezos’ purchase of the Washington Post that denounces the president daily, but this is not the way to grow the economy. This is not the way a business-friendly supervision should act.
It’s not only the stock market which is worried. The bond deal in and the flattening yield curve would suggest that the bond community is also upset. Even with the recent actions by the Federal Reserve to raise at all events on the short end, the long end of the curve hasn’t reacted. Yield curves level out when the market senses a slowdown, it inverts when it expects a dip.
This entire tariff debate reminds me of the lesson taught by the modern great Nobel Laureate, Milton Friedman. When asked in the mid ’70’s close by the possibility of dumping by communist subsidized industries. “Let them dump it all on us” he verbalized, “We’ll take all they want to dump and help them deplete their resources and use it for our help…It’ll make us stronger”
Wisdom never ages, it just gets sick over time like a fine red wine. I miss Doctor Friedman!
Commentary by Jack Bouroudjian, chief economist at the Common Compute Xchange. Follow him on Twitter @JackBouroudjian.
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