Friday, July 27, 2018

Market Stalls – Trump and Tariffs

The disruptive policies of President Trump’s trade wars have finally caused the administration to react. A $12 billion bailout of farmers, which is being criticized as an admission of failure and 18 months of rhetoric, but no deals helped produce the at least minimal promise of more negotiations with the EU and less talk of it being a foe.

The 2018 Dow and Trump have been remarkably resilient given the political disruption. Good earnings reports have helped hold the Dow, with some wide swing in a range from 24000 to the low 25000 off the bottom of the year on March 22 of 23957, but well below the all-time Dow high of 26616 on January 26.

Tariffs and trade wars haven’t caused panic, but are currently keeping a lid on investor confidence. But warning lights are flashing that inflation is looming, the expansion is nearing its end and a worldwide slowdown has begun. The U.S. Dow is up 1.4 points for the year, but the global Dow is down 1.6.

The U.S. economy appears strong and remains at full capacity, but D.C. politics is volatile. The developing trade wars with most U.S. trading partners has only produced anecdotal stories of lost business and jobs, but the first appearance of data will clarify its cost. The President said: “Trade wars are good and easy to win” (3-8-18). Jamie Dimon doesn’t agree. In a CNN interview, he pointed out that the President’s team said: “There would be no retaliation. They’ve already been wrong.” Dimon believes another round of tariffs could reverse “some of the benefits you’ve seen in the economy.” He also said the business community wants NAFTA done.

With tariffs getting labeled “job killers,” Trump revived his old argument that the Fed is the problem. During the 2016 campaign, he blamed Fed Chair Janet Yeller for low interest rates, which he claimed hurt savers (and helped Obama/Clinton have a strong economy), now he argues modest interest rate increases will cause bigger trade deficits and slow the economy (and hurt him in the midterm elections). There has been six quarter-point rate increases since Trump won in November 2016 from .75 percent to 2 percent now. Two percent is a low interest rate in the modern era. Although, the Fed rate was zero from 2008 to 2014, it averaged 3 percent the previous 8 years and from 1990 to 1999 averaged 5 percent.

Having an independent Fed has been judged better for the long-term economy since before the Nixon presidency. This Fed is approaching a more normal interest rate that will constrain inflation and leave some room for stimulus if a recession develops.

The Dow for now is holding, but Trump knows he’s in trouble as tariffs are producing more criticism than good news.

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