How the Trump trade turned upside down
When president Trump was elected the markets rejoiced in the fact that there was a business-friendly administration.
A year later, the attack on Amazon coupled with the tense trade relationship with China has many of us asking, "Is this any way to grow the economy?"
Comment by Jack Bouroudjian
When president Trump was elected the markets rejoiced in the fact that there was a business-friendly administration which would help nurture the American corporate landscape by doing all the things needed for solid economic growth.
After eight years of an anti-business climate in Washington, things were changing. And they did change. Unnecessary, restricting regulations were rolled back and taxes were cut dramatically. But the recent attack on Amazon coupled with the tense trade relationship with China has many of us asking, "Is this any way to grow the economy?"
"Trade wars are easy to win," at least that's what the president told us when he announced tariffs on steel and aluminum a couple weeks ago. But as we have witnessed over the last few days of market action, the ancillary effects of a 'trade war' can leave serious collateral damage.
The reality is that protectionism, in every form, must be resisted at all cost or we run the risk of a severe meltdown in the capital markets.
Black swan lurking
Roughly a year ago, I wrote an Op-Ed which described what I thought could be the 'Black Swan' for the Trump administration: protectionism.
At that time the lawmakers were struggling with the idea of a border adjusted tax which is a tariff. My conclusion was simple—protectionism is a prosperity killer which must be avoided. But here we sit, watching the global markets in turmoil as the Trump trade unravels. The tariff tantrum has led to tariff terror. Retaliation can be severe and in the case of the Chinese, financially painful.
Aside from the obvious loss of revenue from trade, one of the biggest reasons to be worried is the growing power of the Sovereign Wealth Funds. According to SWFI, who track Sovereign Wealth Funds, of the top ten SVF's, four are Chinese with assets totaling over $2 trillion: China Investment Corp $900 billion, HK Monetary Authority $450 billion, SAFE Investment Co. $440 billion, and National Social Security $300 billion.
With over a reported 40 percent of assets invested in the US, it wouldn't take much for these funds to make an impact on our markets. In fact, a simple rebalancing of these massive funds would leave a huge footprint on the markets and would be much like turning an aircraft carrier around in a tiny bay, it leaves a huge wake! Never in the history of the world have we witnessed a trade war in the age of Sovereign Wealth Funds.
It isn't all bad news. With the selloff comes the opportunity to buy stocks at great valuations. The price to earnings ratio for the S&P 500 is now 16.5 for forward earnings, much better than the 18 P/E we saw earlier in the February. This is the dip we have all been waiting to use to our advantage. The only question is, how deep will the selloff be?
Business-friendly administration no more
Remember, the tax reform package has yet to kick into high gear. And of course there is repatriation of trillions of dollars sitting abroad. All of which is fundamentally bullish. A 20 percent drop into bear territory is not out of the question, but any serious drop in stocks should be bought.
Yet the recent tone out of Washington has been dramatically different than that of the past year. The business-friendly environment which helped propel the stock market to new all-time highs has turned ugly. The attack on Amazon has left CEO's scared. Who's next? Yes, Trump's attacks are political with Jeff Bezos' purchase of the Washington Post that attacks the president daily, but this is not the way to grow the economy. This is not the way a business-friendly administration should act.
It's not only the stock market which is worried. The bond market and the flattening yield curve would suggest that the bond community is also concerned. Even with the recent actions by the Federal Reserve to raise rates on the short end, the long end of the curve hasn't reacted. Yield curves flatten out when the market senses a slowdown, it inverts when it expects a recession.
This entire tariff debate reminds me of the lesson taught by the late great Nobel Laureate, Milton Friedman. When asked in the mid '70's about the possibility of dumping by communist subsidized industries. "Let them dump it all on us" he said, "We'll take all they want to dump and help them deplete their resources and use it for our benefit…It'll make us stronger"
Wisdom never ages, it just gets better over time like a fine red wine. I miss Doctor Friedman!
