Those trade deals are just not happening

Today we get German retail sales and CPI, UK GDP, and reports from the Chicago and Dallas Fed. US data tends to overshadow everyone else’s data as we await the presumably disastrous consequences of Trump policies.

So far disaster is not much in evidence. This week it will be nonfarm payrolls on Thursday, since the first Friday is a holiday. See the chart from Reuters. A reading of 129,000 (after 139,000 in May) doesn’t make the case, either. A different forecast is for a drop to 116,000 and the rate  ticking up to 4.3% from 4.2%, but still, no pants on fire. The one bit of data that does sets embers glowing is continuing unemployment claims.

Those trade deals are just not happening. Trump promised 90 deals in 90 days and that was on April 2 *which we refuse to call “Liberation Day”). So far we have an agreement with the UK and something-or-other with China on rare earths, but  it’s obvious we won’t have 90 deals by this week. The pause will no doubt be extended, which is a failure on the face of it but no one will dare to say so. Actually, some countries think they are on the brink of a deal, including Japan, Indonesia, Taiwan, and S. Korea.

As noted above, the EU hopes that higher defense spending by NATO countries will cool the water, but consider how Trump compartmentalizes—they always owed that extra spending, so it doesn’t count toward Trade.

Last week ECB chief Lagarde said this is Europe’s moment to take the baton from the US. Much as we would like to see Trump get a comeuppance, this is not really likely. These are the countries that squabble over every little thing and have some weird nearly medieval way of looking at status and power. They also have been at war with one another for over a 1000 years, not to mention two world wars in the last 100 years. So, we judge “not gonna happen.” That doesn’t mean Europe will not take some of the US safe haven status—safe from Trump.

Forecast

This week is the usual month-end, quarter-end and half-year end. We haven’t see the usual profit-taking and squaring up but surely we will get it this week---won’t we? It’s not inconceivable that if the deficit-raising budget bill gets passed this week, the consolidation will get called off and we are in for another few weeks of hand-wringing over what deficits do to leading countries throughout history. Dalio says this is how countries fail and he is not wrong. Look at Spain.

The normal course of price movement would be a mild correction by no more than 25-33% and then resumption of the dollar downtrend. We will resist going long dollars for the now well-known reasons, including tigers and stripes.

Tidbit: We keep complaining that US equity markets are not acknowledging the high probability of really bad conditions ahead. Okay, earnings seem okay but with a huge proportion of S&P company revenues coming from overseas, how can earnings forecasts be even remotely correct, given the long list of unknowns? And with the consumer pulling back so hard, as the GDP numbers showed last week, earnings outlooks need to be revised.

Perhaps we are underestimating the short-sightedness of the equity gang. Of course they see all these issues. But “go with the flow” rules, and in some part due to the use of technical rules applied using AI. Until it doesn’t say “okay to buy.” Depending on what rules the auto systems are using, it might not take much to set off a cascade of selling. This would start with speculative funds, dig down and grab the more sober funds, and eventually reach the retail crowd, which is always last to see what’s going on.

If we are going to get a really big stock market correction, two points: it will go very, very fast, faster than Lehman or perhaps any other correction we have ever seen—simply due to the far faster speed of communications these days. And second, it will need a trigger. Those with their finger poised over the sell button are waiting for that trigger. Last time it was the Trump tariff announcement. What will it be this time? How can it be worse than April 2?

Don’t forget the S&P recovered fully from April 2. We can’t know it wouldn’t recover again from the next one. But then, tigers and stripes. It can be worse.

Note to Readers: There will be no reports this week on Thursday, July 3, and Friday, July 4. It’s a national holiday in the US and markets will be thin (Thursday) and closed (Friday).

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