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The Trade War Shows No Sign Of Easing

Trade War

The following is my recent argument with yet one more market analyst who can’t see straight, even when his article overall was admitting it was time to bail out of stocks. Correcting the market mantras that dominate the bullheaded is partly why I am here.

I’m not going to call this one out of the herd by name because sometimes his writing is sensible. It is the group-think herd mentality of the bulls, which he expresses, that I am challenging. His writing is in quotes and my responses to his way of thinking follow each quote.

I lay it out here because somehow it still surprises me to see how vapid the wasteland of popular thought can be even when analysts finally reach the point of giving up on stocks. I actually sometimes enjoy reading this author, but this article demonstrates the typical delirious thinking that pervades market commentary everywhere all the time in what is a virtual desert of economic analysis. So, I’m going to dissect it for you as an example of just how full of denial so much market commentary is:

"Just when we thought all the pieces of puzzle were coming together to take the S&P 500 … significantly higher, a crucial element of the puzzle fell out of place. Yes, I’m talking about the escalation of the U.S./China Trade War…."

I don’t know who the “we” is, but it certainly wasn’t me. I cannot even imagine how anyone thought the US/China Trade War — or, as I call it, the Trump Trade War — was ever coming together. It could not possibly have “fallen out of place,” because it has never for one second been in place. It has been astounding to watch how people can month-after-month for over a year continue to chase the belief that the Trump Trade War is starting to fall into place (let alone “has fallen into place”) in a way that will let stock markets now prosper (after eighteen months of going almost nowhere).

Those who think that piece is about to fall into place are chasing a mirage. Just look at today’s news:

Dow falls more than 200 points as Trump says China trade talks in September may be cancelled

Really? Who could have seen that one coming? China trade war not so easy to win after more than a year? The end not so imminent as even September’s talks may be cancelled? And, yet, here was one more analyst who actually thought that piece had actually just fallen into place and who was surprised a week ago when it fell back out of a place it was never in to begin with! And here is the market falling, as if surprised by this news that it should have baked into its prices months ago! The mass stupidity is alarming!

"In my previous macro article … I outlined that for the SPX to melt up to 3,100 and beyond several key factors needed to align."

Dream on.

"U.S. economic indicators needed to remain stable to indicate support of an expanding economy in the U.S. with appropriate GDP growth (roughly 2% YoY)."

Remain stable? Surely, you jest. US economic indicators were already ENORMOUSLY unstable, so why would anyone think this piece of the puzzle was even remotely close to being in place?

Let me reiterate a few examples of how unstable economic indicators are right now:

- The line showing the average trend for new jobs has been falling every single month for the entire year, and unemployment has ever-so-slightly turned upward, indicating it is forming a trough. One-third of the months of this year have had only 75,000 new jobs, which is an extremely recessionary number. Anything less than 150,000 is recessionary as that is below the workforce growth rate due to population growth.

- Housing has been in decline for an entire year.

- Retail stores are closing all over the US at the greatest speed in history, and the closure of brick-and-mortar stores has a huge knock-on effect to smaller stores that do not have much online business and to restaurants, and to mall rentals, and to gasoline stations that online retail does not support.

- Auto factories are closing because US auto sales are tanking (and have been for two years) as badly as they did at the start of the Great Recession.

Related: How Long Will Stock Market Euphoria Last?

- GDP has been declining, rather than “expanding,” under the massive Trump tax cuts, which are breaking the nation in terms of debt. Trump’s average GDP is almost the same as Obama’s during his final term. We are back down to Obama’s typical 2% GDP growth rate. So, Trump got a one-quarter jump, but it has been essentially back downhill hill from there with just one more bump in the first quarter of this year and then back down again. The largest benefits in his tax plan were all front loaded into the first year or two; so, it’s downhill from here. Moreover, 2% GDP growth was during most of my life considered almost recessionary, not “appropriate.” Growth that slow was considered a warning sign … a yellow light. So, it is bizarre to hear people now talking about it as “an expanding economy with appropriate GDP growth.” My, how we have dumbed down our standards of what we expect out of our economy!

- The Chinese trade war has been going for an entire year and looks WORSE, not better; nothing much has improved in the European trade war, which has also been going on for a year; and we are not making progress it appears in getting the US-Mexico-Canada agreement approved by congress. Trump is talking about opening up a trade war with India. So, the trade war is expanding, not shrinking.

"The Fed needed to continue to cut rates, and end its QT program to support markets and improve sentiment."

Continue rate cuts? You mean GO BACK TO rate cuts. (Perhaps he just meant continue on from the one they just initiated, but there is a distinction here between this rate cut and all the ones during the Great Recession that needs to be made because people keep thinking a return to rate cuts will be a panacea for a recovery that has failed and can never live without them.)

There is a huge difference between continuing and starting again. When the Fed “continues” rate cuts, it has been on a path of easing for some time, so you can expect there might be some improvement. When the Fed GOES BACK TO rate cuts, after months of stopping rate cuts, it means only that their recovery failed, the economy is moving back toward recession, and the Fed sees a need to go back to stimulus measures because the economic recovery was not sustainable on its own.

It means the patient is in need of perpetual life support to stay alive, and that is HORRIBLE news. Truly abysmally horrible, as it is the end of hope for the US economy if the Fed, by going to the zero bound for years and creating the largest heap of new money ever created FOR YEARS, could not create a recovery that can sustain itself but has to go right back on to emergency life support.

It also demonstrates how utterly dependent on the Fed this market has become, which is miserably unhealthy.

"Corporate profits needed to come in in-line (preferably better) than analysts’ consensus estimates."

Analysts estimates have been abysmal. So, beating them sets the bar so low you could trip over it. Corporate profits have been FAR from coming in line with what they ought to be for two years now! The only thing that has saved corporate earnings from looking like a nightmare in the face of dying profits is the tax cuts because earnings are reported after taxes. So, that gave huge face saving all of last year to corporations for profits that have long been lagging.

There is no hope of profits going up because who is going to increase their buying? Certainly not our trading partners! Certainly not the US citizen whose wages have been stagnant for years to where the present wage nudges are a joke. Certainly not that slightly upwardly turning number of unemployed people now that job growth has gone fully recessionary (averaging below 150,000 new jobs per month)! Certainly not those over-indebted US citizens who have now pushed their total indebtedness much higher than it was just before the last financial crisis! Certainly not companies that have spent nothing on capital improvements and product development and market development out of their huge tax savings but have given it all back to stockholders. Those are not going to increase their Capex purchases now. They have done almost nothing to use the huge firepower they gained from those tax cuts to improve their production or product lines. (I have always said they would not.)

The China syndrome causes me to melt down

"Progress needed to be made regarding China/U.S. trade deal relations."

NO progress has been made at any point along the line! So, again, why would anyone think that is going to happen? There has not been one single PERMANENT thing Trump has asked for from China that has been agreed to that we know of. All we have seen are piecemeal temporary measures agreed to that have been poorly followed through.

Related: Chinese Tech Giant Tencent Completes Asia’s Largest Bond Sale

There has never been any reason to believe Trump when he has said a deal was imminent — not any reason based in hard facts. There are NO pieces in place here. We are sitting on the cusp of another market collapse on the edge of the abyss of another Great Recession.

It is stunning to me that people cannot see how close this peril is, which as been building relentlessly and visibly now for the past two years (and which was always baked in to the Fed’s unsustainable recovery. Not only has the Fed proven my statements that it has no end game, but the Trump Trade Wars have been an accelerant on the burnout of this fake economy. It is seeing the certainty of trade impacts coinciding with the certainty of the Fed’s failed recovery that cause me to think we would be starting into recession this summer.

"China has been taking advantage of unfair trade practices for a very long time. This may have been fine 20-30 years ago when the Chinese economy desperately needed to grow and got a lot of its growth due to favorable (for China) trade deals with the U.S. Where did all the manufacturing jobs go?"

This was NEVER fine! It was ALWAYS obvious that NAFTA and other so-called free-trade agreements were going to strip massive numbers of vital high-paying, high-benefit manufacturing jobs out of the US. Ross Perot built his campaign on the “huge sucking sound to the south” we were all going to hear due to NAFTA as jobs fled the country.

Oh, my gosh, it hurst my head that people can be so beguiled. I was beyond certain (outraged) that jobs would be fleeing the US to Mexico under NAFTA. That was precisely George Bush’s globalist agenda. All he wanted was much cheaper labor for his corporate cronies. It was always all about making the top 1% vastly richer by cutting their production costs. 

Who could not easily see twenty years ago that Chinese are copy cats and idea thieves. I have a Taiwanese investor friend who ridiculed Boeing fifteen years ago for partnering with the Chinese in airplane production, saying “These executives are too stupid to see that all the Chinese want to do is learn everything they can from Boeing, and then they will dump them and move on their own.” He thought US CEO’s were incredibly stupid in their greed not to see how they were selling their companies down the river by partnering for production in China.

Anyone who was not looking at the world through rose-colored trade glasses could have seen this all coming. I’ve been consistently saying for years that this is where we would wind up — that free trade was all about exporting jobs to get cheap labor, given how it was being structured, and that it would wipe out the middle class in America in order to create wealthier markets in other countries.

I argued against NAFTA every chance I got, but greedy fools wouldn’t listen. Same thing with China, and now here this writer is saying, “this may have been fine back then.” No, IT WAS NOT FINE back then. It was EXACTLY what was certain to get us right where we are now with a huge disparity between the top 1% and all the rest, with lower job benefits for most, broken unions, stagnant or declining wages, more workers who have to work two jobs just to maintain their standard of living, more contract workers who get no benefits at all, etc.

This was a plan that would devastate America from the time George Bush senior first started talking about the American economy needing to become the world’s brain trust while other countries took over manufacturing. This globalist agenda has been obviously horrible for the middle-class American since Bush’s “new world order” was first expressed. That it would end up right here was always obvious … or should have been. It has certainly been obvious to me most of my life.

With all that said about the wrongfulness of existing trade deals, it doesn’t make trade wars easy by any stretch of the imagination, nor does it keep them from becoming excruciating for both sides before there is any breakthrough. The following is from a different article, published this morning, that lays out the pain ahead:

"The longer the trade war continues, the more concessions that country will have to win in order to compensate for the damage caused. So, after nearly 18 months of escalating disputes between the U.S. and China, where are we? Is either side winning, and can any concessions justify the economic harm that both sides have already experienced…? It has become increasingly clear that the trade war is hurting the economies of both countries. Neither will emerge from this conflict unscathed."

I recommend it as a balanced article on the costs and pains to each side, the leverage on each side, and on the lack of any progress being made.

As the article concludes, “In other words: No end in sight.”

The Chinese trade hope is a mirage. We are on the far side of the Gobi Desert from any prospect of “the pieces of the economy falling together.”

By David Haggith

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