The US can still deliver happy surprises

Outlook:

Newspaper reports have it that the Trump administration is expected to announce a $30 billion package of "punitive" import tariffs and other measures against China any day now. Unlike the steel and aluminum tariffs, which were imposed within 10 days, the new China measures will be open-ended to allow US companies to respond. China complains, according to the WSJ, that the US has not delivered a list of demands so it is going to be blind-sided. Yes, precisely.

As noted above, you had to look on page 87 to find the Nafta story yesterday, if you could find it at all. The US agreed to drop the 50% US-content demand for imported autos, which are 21% of Canadian exports to the US. If you were seeking a news-based reason for the CAD rally, you were out of luck. We think the failure to report this development displays two things—trade is deadly boring even to reporters assigned to it, and nobody wants to credit the Trumpies with anything resembling reasonableness. After months of reporting that the auto-content issue was central to the survival of Nafta, it wasn't "news" when the US backed off.

But it is news. Either the US trade negotiating team is acting on its own, or Trump has given it a long leash and didn't really care about the exact terms, just that the US could bully and frighten its neighbors and make headlines doing it. Since this a reality TV show to Trump and not proper government management, we are getting the message that it's only the headlines that count, not the shape of the final deal. Keep that in mind when you read terrifying stories about the trade war with China. These have already gone far overboard into predictions of calamity. The FT has a good one today about the pending Trump trade war with China that asserts Trump has no real strategy. Well, no. Trump is not smart enough or hard-working enough to have anything resembling a strategy.

"If the conflict in the offing was a military one, Washington would be awash now with people warning the president to pay heed to the so-called Powell Doctrine. Born from the lessons of Vietnam, it holds that you do not start a conflict that you do not know how to get out of. Put in those terms, Mr Trump's trade war with China could be like invading Afghanistan, a quagmire through the ages. Even if Mr Trump believes he is delivering the trade protections he promised to his base ahead of November's midterm elections, a policy focused on short-term political gains could cause long-term disruption to the world's two largest economies."

The White House "is expected to announce shortly the findings of a ‘Section 301' investigation into Beijing's intellectual property practices. People familiar with its findings say it will accuse China of forcing the transfer of technology worth $30bn a year from US companies trying to do business in China. It will point to billions more lost by American firms either to state-backed Chinese hackers stealing IP or via lost licensing fees. Altogether, Washington is considering new tariffs on Chinese imports worth $60bn a year. At the same time, the US is expected to impose restrictions on investment from China and possibly even new limits on visas for Chinese nationals."

The FT goes on to say that the Trumpies don't really want to talk with China, noting that previous administrations got mired down in endless fruitless talks and get duped in the end. Promises of reform are never kept. So there's no point in having a strategic plan—and economists make almost as many plans as the military and intelligence guys. Just start firing and wait to see responses. We must confess that while it's reckless and careless for Trump to take this approach, the conventional methods have not worked and maybe the Crazy Act will. To all those who disapprove of Trump for all the many reasons that are so obvious, when it comes to trade, see that the Trump base is going to love it. It's not only macho, it might get results when civilized behavior does not.

Teddy Roosevelt's most famous saying was "Walk softly and carry a big stick." Trump turns it around to "Talk loudly and to hell with the stick." Actually, Trump is acquiring some very big sticks. A Reader sent us a LA Times story about the new B21 stealth bomber being built in California at vast expense. The plane can fly forever and deliver atomic bombs anywhere in the world. The LA Times reports "The B-21 so far is slamming through the political system with few obstacles with a projected cost of $550 million per plane, translating to production costs alone of $55 billion, according to staff at the House Armed Services Committee. The dollar amount for research and development is highly classified, Under Secretary of the Air Force Matthew Donovan said in an in interview."

Economists and political commentators hardly ever look at where the crazy overboard federal defense spending goes. Often a Republican White House gives more money to the Pentagon than the Pentagon asks for. This time the US is building a tremendous air capability—the B52 may have some autonomous features—that is not going unnoticed in places like Russia. Buy Northrup.

This is not to say we approve of Trump's reckless, no-plan behavior. Wars get started over the dumbest small things. But Trump cares about his "place in history" and surely doesn't want to be the guy who started WW III. Probably the most important thing about both the tariff and military stories is that the press is neglecting them in favor of porn star lawsuits and finding collusion/obstruction of justice. Both things can be true and useful. And much as we hate to admit it, the Trump administration is not all bad for the US economy. Especially if you work for Northrup in California. Stupid, but not bad. If we see the dollar persist climbing higher, we will have to stop saying "despite Trump" and start saying "in part because of Trump." Aargh.

Finally, Bloomberg notes that the Atlanta wage-growth tracker—see the chart—is not all that promising for wage-driven inflation. The tracker is adjusted for demographics.

It does not show an economy that is overheating and deserves a high number of Fed rate hikes. But we do want to rebut the ever-more often stated observation that we are in the late stages of a cycle. Cycles do exist but they overlap and contradict and interact in weird ways. We once spent nearly a year reading up on cycles and playing with data, and had to give up. We found that most cycle analysts have to use so many qualifiers as to amount to their giving up, too.

Bloomberg offers the survey results showing 74% of participants see the global economy in a "late" stage of the cycle. We guess this is like a majority predicting buggy whip sales will go up on horse population growth in 1910. In practice, any decent economist can make the case for a renewed boom or for stagflation. The data is conflicting. You will see what your bias leads you to see (confirmation effect). Be careful what you read.

We don't know from which corner Change will come. The Saudi crown prince is forcing change on a country whose population majority is under 30 (and addicted to social media). Good luck switching from a socialist state to one where people actually perform work. What's going on in the US and in Europe that we are not seeing? One idea—the re-birth of the labor union as a counterweight to income inequality (and populist political parties). And something may emerge from the China One-Belt initiative. What's going on in the emerging market world that we are not following? We see the failed state of Venezuela about to go pop, but there are hundreds of others. Where is India? What else is out there aside from crypto-currencies?

Bottom line: the glass is half full. The country with the best history and chance of true Change is the US. Anti-dollar sentiment arising from the repulsive president aside, the US can still deliver happy sur-prises. We bet the FOMC data and statements today are so chock-full of optimism that the dollar thrives. At least until the orange monster or his sycophants express a preference for a weak dollar.

 

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