The market has just completed the best 1st half performance since 1997. This is quite a rebound the downswing in December 2018.
https://markets.on.nytimes.com/research/markets/overview/overview.asp
The Fed has undergone a big reversal in posture and interest rate cuts are anticipated as trade conflicts are expected to begin slowing the US and global economies. With 30 year mortgages under 4% it is questionable how much room rates actually have to decrease or what impact these potential reductions can actually have. The primary question of how long cheap money can continue as central banks continue to pump money around the globe.
We are all witness to the hyper polarized political environment as we enter a new presidential election cycle. Political feelings seem very edgy as people carry very aggressive or defensive postures about their views. Stories of family members not speaking with one another because of policy are not uncommon. A strange dynamic where people feel compelled to aggressively defend their world view / candidate is not optimal for developing an informed perspective and healthy debate.
Zeynep Tufekci professor at the University of North Carolina at Chapel Hill wrote an exceedingly insightful essay for Wired Magazine. You can find it at https://www.wired.com/story/internet-made-dupes-cynics-of-us-all/
From the commentary: At some point, the typical response to this onslaught of falsehood is to say, lol, nothing matters. But when so many of us are reaching this point, it really does matter. Social scientists distinguish high-trust societies (ones where you can expect most interactions to work) from low-trust societies (ones where you have to be on your guard at all times). People break rules in high-trust societies, of course, but laws, regulations, and norms help to keep most abuses in check; if you have to go to court, you expect a reasonable process. In low-trust societies, you never know. You expect to be cheated, often without recourse. You expect things not to be what they seem and for promises to be broken, and you don’t expect a reasonable and transparent process for recourse. It’s harder for markets to function and economies to develop in low-trust societies. It’s harder to find or extend credit, and it’s risky to pay in advance.
Investors and citizens of the world are fodder to this perpetual struggle between trust and betrayal in our domestic and global politics. Greens VS deniers, Dems VS Republicans, Rich VS Poor, Red States VS Blue and so many more. Globalist VS Isolationist may be of the greatest current threat to the markets and investors as the progress of the post WWII era is being cast aside for new uncharted slogans and concepts – see the New NAFTA, Brexit and US disregard for NATO / traditional allies as prime examples.
Much of this has the damaging consequence of fanning distrust and cynicism. These trends are eventually going put a drag on economic growth as uncertainty slows decision-making and investment. The irony of tariffs or trade threats as a tool to help domestic industry and jobs is that these actions are economically disruptive and likely hurt workers, consumers and commerce in general. The slogan for nationalist trade and tariff actions could be “less for everyone”.
There was recently a small controversy regarding nominations to the Federal Reserve. The Fed Board is a key component in the process of formulating US monetary policy – the price of money. In a continuation of unconventional appointments to governmental positions, the nomination was for long time cable news commentator and “pundit” Stephen Moore.
His current title is Distinguished Visiting Fellow, Project for Economic Growth, Institute for Economic Freedom and Opportunity at the Heritage Foundation. Steve is effectively an operative for ideological messaging and his own personal brand. Once the appointment was announced, significant skepticism was expressed by observers of the Federal Reserve, as these appointees are generally economists and academics of high credential.
The fascinating element was in the accounting of all the outlandish commentaries Mr. Moore had delivered over a long media career. In addition to multiple denigrating comments towards women, it was demonstrated that Mr. Moore was exceedingly inconsistent in his public statements. His positions were dictated by the political winds rather than any philosophical or academic consistency.
Mr. Moore was shown to be an operative for a very specific political agenda. These issues along with troubling personal embarrassments forced the withdrawal of the appointment. It is striking to view a delineation and accounting for what a long-time media pundit has said. Investors need to beware that many of the voices in news media (television in particular) are simply marketing ideas along with their personal brand rather than performing the arduous work of journalism. They are rarely experts, messengers of truth, insight or any other source of knowledge that should be granted credence. Once again, we are reminded that television is a very inefficient medium for the transmission of knowledge, investigative journalism, or expertise.
“Every lie we tell incurs a debt to the truth, that is how an RBMK nuclear reactor explodes. Lies.”
Valery Legasov quote in final (fictionalized) monologue from HBO recent limited series, Chernobyl.
HBO has been praised for its recent limited series about the catastrophic nuclear accident in 1986.
The show is difficult yet important to watch. The human misery, suffering and death unleashed by this tragic accident is heart wrenching. The debacle of poor design and central planning mismanagement led to disaster beyond imagination.
It is perplexing to contemplate the fundamental cause of the collapse of the Soviet Union. A strong argument can be made in favor of the dysfunction of communism, central planning and bureaucratic control as the root cause. The arms race of the Cold War certainly extracted a massive price on the USSR. But it is tempting to wonder about all of things the United States could’ve abstained from doing in Southeast Asia, Latin America and other proxy battles that extracted terrible human costs.
These dilemmas of history are crucial to contemplate as investors are faced with another global conflict, this time between the US and China.
In the May 16, 2019 issue of the Economist, it is noted:
Fighting over trade is not the half of it. The United States and China are contesting every domain, from semiconductors to submarines and from blockbuster films to lunar exploration. The two superpowers used to seek a win-win world. Today winning seems to involve the other lot’s defeat—a collapse that permanently subordinates China to the American order; or a humbled America that retreats from the western Pacific. It is a new kind of cold war that could leave no winners at all.
https://www.economist.com/leaders/2019/05/16/a-new-kind-of-cold-war
On December 1, 2018 from the Economist:
Yet the trade conflict that matters most between America and China is a 21st-century fight over technology. It covers everything from artificial intelligence (ai) to network equipment. The fundamental battleground is in semiconductors. The chip industry is where America’s industrial leadership and China’s superpower ambitions clash most directly. And whatever Messrs Trump and Xi say at the g20, this conflict will outlast them both.
https://www.economist.com/leaders/2018/12/01/chip-wars-china-america-and-silicon-supremacy
In 2005, Senator Charles Schumer threatened a 27.5% tariff on Chinese goods in retaliation for concerns about the value of the Chinese currency (yuan). The accusations about unequal trade and currency manipulation have been an ongoing theme from the right and the left in American politics. Foreign industry and immigrants have been used as scapegoats since the invention of politics.
1978 was the birth year of capitalist China, when Deng Xiaoping decreed that, henceforth, economic construction would take precedence over class struggle. The result has been the largest mass-reduction in poverty the world has ever seen.
The rise of China was not an isolated or zero-sum event. We have all made great progress since the Nixon era. During this time living standards, productivity and GDP have all made massive gains in the USA. American GDP has grown nearly 10-fold from $2351 trillion in 1978 to $20494 trillion in 2018.
https://fred.stlouisfed.org/series/GDP#0
41 years of economic change has wrought destruction on the American Midwest as heavy manufacturing has been relentlessly diminished by automation and globalized away to the lowest cost producers in Asia. That shift has destroyed the landscape of economic opportunity for low and mid skill workers in the USA and brought the hardships of the rust belt that claim a growing cohort of displaced workers.
The populism of 2019 would suggest that we can keep growing and help the displaced by challenging our trading partners to make “deals”. Brexit and tariffs are cut from the same cloth of denial of this era of economic growth. The last 40 years have been a period of expansion of opportunity for skilled work. This growth is likely to greatly outweigh the loss in low and mid skill endeavor, but that is of no interest to populist demagogues.
The real challenge is in education, skills development and innovation. Unfortunately, it is much easier to blame the boogieman of China than to explain to people that they will need to obtain the higher skillsets that are being rewarded by the tech driven economy of 2019.
This is a serious threat for investors. Trade conflict is understood by the vast majority of economists and money managers to be a losing proposition. Competition yields more for workers who adapt and expand their skills along with consumers and investors. The gains from free markets are preferred over the idea of a managed global economy that is manipulated by the heavy hand of government wielding tariffs. Protectionism is nothing new, nor is there much evidence that it has preserved many jobs. Additionally, efforts to shape the world in favor of domestic industry have little success stories to recommend them.
Examples of trade follies of the past are plentiful. On page 55 of the NYT 6-26-1969 issue was an article with the heading “Nixon Nominee Makes a Pledge Of Protection for US industry”.
https://timesmachine.nytimes.com/timesmachine/1969/06/26/78353927.html?pageNumber=55
The article mentions “the controversial question of textile quotas” as this was a time where there was actually US jobs in domestic textile production. These jobs were effectively wiped out by low cost overseas production and automation. Meanwhile, jobs and profits abound in American fashion players like Nike, Ralph Lauren, The North Face and numerous others. There is massive opportunity in design, marketing and sales of these products.
Textile production has gone to low cost regions like Bangladesh and Pakistan. The economic loss is impossible to quantify but other activities have filled in the space of lost textile manufacturing. The majority of earnings is not in the commodity textile production. It is certain that most of those textile factory jobs are difficult and mind-numbing positions that few workers with any other option would desire. The aspiration for that industry participant would be to obtain a higher skillset of designer or digital marketing consultant.
On 6-26-19 the Wall Street Journal noted: American Tariffs on China Are Being Blunted by Trade Cheats
The article notes: Billions of dollars worth of China-made goods subject to tariffs by the Trump administration in its trade fight with Beijing are dodging the China levies by entering the U.S. via other countries in Asia, especially Vietnam, according to trade data and overseas officials.
The practice of transshipment is widespread enough that it has spawned port infrastructure to support it, trade professionals say. “Many buildings called factories are set up in Vietnam which are really storage structures to hold goods being sent here, but are really made in China,” said Jeffrey Newman, founder of Jeffrey Newman Law, a Boston-based firm that handles tariff-evasion cases.
The ultimate result of trade conflict is likely to be a global wack-a-mole game where bureaucrats chase companies and goods around the world, manufacturers waste resources in cheating and compliance and few if any jobs are actually saved.
The 1990s were a period of post-Cold War times that experienced significant productivity and output gains. Here is hope that policy makers will recognize the perils of antagonistic foreign policy towards traditional allies and “Trade War” tactics.
The early 1990s saw the demise of the Soviet Union and the beginning of the post-Cold War era. The FDIC website offers an interesting historical economic timeline that summarizes the 1990s:
The economy displays less volatility in growth, unemployment, and inflation than in previous decades. This volatility leads some economists to prematurely hail the end of the business cycle.
The unemployment rate declines, reaching a 30-year low of 3.9 percent in early 2000.
Inflation averages 2.5 percent annually, compared with 5 percent in the 1980s and more than 6 percent in the 1970s.
The stock market yields more than 25 percent annually in the last half of the decade and supports consumer spending. The 1990s is the longest bull market in history. Investors believe that the market and the economy have entered a new age, which is attributed to advances in technology. NASDAQ experiences a 795 percent cumulative 10-year return.
Growth is driven by increases in labor productivity, which is fueled by information and communications technology. In the mid-1980s, 18 percent of U.S. adults use a computer. In the mid-1990s, 50 percent use a computer. People and businesses around the world communicate by email and cellular phones. The Internet will change the face of banking and commerce.
https://www.fdic.gov/about/history/timeline/1990s.html
The face of commerce has most certainly been shaped by tech over the last thirty years.
America Online went from 1 million members in 1995 to 5 million in 1996. The connectivity of the World Wide Web has obviously exploded since that time with Facebook now boasting over 2.3 billion users.
The economic and social forces unleashed by technology over the last 30 years are shaping our world in ways that no one can predict. The promise of connectivity that began with AOL has morphed into a social media landscape that is being blamed for a broad spectrum of social and political ills. Most notably the integrity of democracy itself.
The dark forces of social media were not contemplated in 1993 when Americans were inundated with the ubiquitous AOL installation CD that was distributed via mass mail, magazine inserts and at every computer retailer.
The fertile soil of YouTube, Twitter and Facebook has proven to be a veritable incubator for the wave of populist and extreme views washing over voters and political movements globally. The fear of waves of nationalist isolation have recently shown a few modest signs of moderation with new trade agreements between the EU and South America, mass protests in Hong Kong and Prague along with elections in Turkey. Here is hoping that we soon see this ugly phenomenon of right wing and anti-democratic trends reverse.
The best-case scenario will be a convergence of education expansion along with recognition that more traditional approaches to global trade have produced great gains in living standards. This will require a clear view of the economic advances of the last 40 years along with leaders who can communicate rational policies versus the demagogic populism that we are currently subject to.
The price of money remains historically low. The equities markets have become fixated about potential reductions in interest rates by the Federal Reserve. The reasoning centers on trade conflict instability and persistently low inflation. Consider the irony of monetary history from fifty years ago when the page 59 headline on 6-19-69 NYT business section declared “Reserve Says Market Losses Won’t Deter Fight on Inflation”. That fight led to mortgage rates rising above 15% and coincided with the brutal bear market of 1973-74.
Market turmoil of the 1970’s was impacted by a convergence of oil shocks and the accelerating impacts of global competition in heavy manufacturing, autos and steel production. The Federal Reserve at that time fought inflation through years of interest rate increases. This took mortgages from around 7% in 1971 to as high as 16% in 1982.
Since 1982, interest rates have consistently moved down. The Federal Reserve had been on a gradual course of rate increases since keeping the crisis driven Fed Funds Rate at zero from December 2008 through December 2015. These increases from 0 to a modest 2.5% were an effort to avoid overheating the economy and also to give room for cuts when the next slowdown may arrive.
In December 2018, the market reacted with a historic downswing as Fed Chairman Jerome Powell emphasized the forecast of continuing to raise rates as a prudent path for monetary policy. The president began making public statements regarding what the Fed should do (cut rates and pump money into the system) and why cheap money was an important weapon in the “Trade War”.
As I have stated recently, our central bank and entire financial system is built on the notion of monetary integrity, not political whims or election cycles. This is foundational to the credibility that allows the dollar and US bonds to be the elite global mechanisms and provide a vast structural advantage that is valuable beyond calculation. The political considerations seem to be much more brazen as witnessed 8-11-1991 in a cover story from the NYT noted:
“A weak recovery, running into the 1992 Presidential election year, would work against President Bush in his bid for re-election. Administration officials applauded the Federal Reserve’s decision last week to reduce a key short-term interest rate”.
https://timesmachine.nytimes.com/timesmachine/1991/08/11/issue.html
The hope would be to go back to the integrity and decorum of George HW Bush…he lost his re-election bid, but investors won as the 90s proved to be a great decade for investors.