Trump’s failing trade strategy

Trump sped up the industrial job decline

According to Bloomberg and the Wall Street Journal, domestic jobs in the US industrial sector have dried up at a higher pace during the Trump administration, pre-covid, than during Obama’s. The US trade deficit is expanding, as well, not contracting, as Trump claimed it would. In other words, Trump’s central economic effort, to compel pre-computer age manual labor jobs that started leaving the OECD for lower labor-cost destinations forty years ago to return to the US–and to shrink the trade deficit by doing so–isn’t working. In fact, according to portandterminal.com and Bloomberg, even an industrial controlled by Wilbur Ross, Trump’s Commerce Secretary, is in the process of pulling up stakes and relocating to Mexico.

a win for China

The composition of the trade deficit has changed, however, as Trump tariffs have pushed firms to exit China for Vietnam and other similar destinations. This is an unexpected gift for China. US levies are forcing Chinese businesses to make higher value-added products, a result Beijing had keenly desired for years but had been unable to achieve without Trump’s tariff assistance.

not a surprise, except maybe to Trump

None of this should be a surprise to anyone involved in international economics. It’s the textbook outcome. It’s also a big reason why the NASDAQ (dominated by large multinationals) is +105% since last inauguration day and the Russell 2000 (mid-cap domestic firms) is up only a fifth of that, at +21%. For 2020 to date, the figures are: Nasdaq +21%, R2000 -3.5%.

the stock market knew

Actually, the stock market has been expressing this skeptical view of Trumponomics from the beginning.

2017 2018 2019 2020, to date

NASDAQ +28% -4% +35% +21%

R2000 +14% -11% +23% -3.5%

Looking at a chart back to 2000, NASDAQ, S&P 500 and R2000 were more or less neck-and-neck until deep into the recovery from the 2008-09 financial crisis. During the final two years of Obama, the R2000 begins to lag–but nothing comparable with the persistent, and large degree of underperformance so far under Trump.

Three points:

–the most important for us as investors is whether/how trade policy will change if Biden becomes president–and the implications that would have for NASDAQ vs. R2000. Although just ending the current idiocy must be good for the R2000, the negative effect on the economy of Trump’s continuing coronavirus containment failure will likely be hard to counter and the effort may last a long time. This is a question of when the R2000 will perk up, not if, though.

–no news source seems that interested in this story

–it has been reported in the Wall Street Journal, however, even though that newspaper is a member of the Rupert Murdoch media stable that stars Fox News and the New York Post, both highly partisan Trump boosters. Just as strange as Mark Zuckerberg’s sudden realization that legitimizing QAnon and anti-vaxxers might not be such a great idea.

Facebook (FB) as the new News Corp?

My first full-time portfolio management job was investing $100 million for TIAA in Australia in the mid-1980s. Doesn’t sound like much in today’s terms but back then that made me the largest foreign investor in Australia after the Kuwaiti Investment Office.

That’s where I heard for the first time about Keith Murdock, who had created a nationwide newspaper chain in Australia. In its simplest form, the Murdock strategy was to provide favorable coverage to right-of-center politicians in return for help in getting regulatory approval for his company’s expansion. It worked very well.

At that time, Keith’s son, Rupert, was in the early stages of applying the same formula abroad–first in the UK and then in the US. Here, Murdock maintained his right-wing focus, but supported politicians of all stripes in his regional newspapers so they would assist his drive to build Fox, a third national television network with a film studio.

The original News Corp no longer exists. The Fox studio was sold to Disney and the newspapers separated from the tv network, presumably as part of Murdoch’s succession planning.

All in all, News Corp seemed to me to be an unsavory nineteenth-century approach to the news that, surprisingly, worked very well in the last half of the twentieth. As a stock, though, after some initial success on listing in the US, News Corp was never anything to write home about. Part of the weak performance was due to the deeply partisan political nature of the Murdoch business, part to the large amount of financial leverage News would at times employ, part to missteps like its involvement in book publishing.

The other day I was thinking about FB, a stock I don’t own, and wondering if Mark Zuckerberg is quietly following the Rupert Murdoch playbook. FB’s curious tolerance (until just recently) of harmful conspiracy theories, from QAnon to anti-vaxxers, suggests this is so.

In Murdoch’s case, he was ultimately able to find enough like-minded journalists to run his enterprise. They were content to do work of dubious merit, and that the relatively low price earnings multiple Wall Street assigned to News Corp would make their stock options–if reporters and editors had any–much less valuable.

If Zuckerberg is in fact mirroring Murdoch and has tied FB to Trump’s star, it would be reasonable to figure that this would be a negative for the stock. In Murdoch’s case, he could not find enough American reporters to carry out his strategy. He had to import writers from his businesses in the UK. Could FB do likewise? Another question might be that with stock options less valuable could he attract any skilled tech workers?

if we take economic competition with China seriously

The population of the Peoples Republic of China is about 1.4 billion. The population of the US is around 330 million. So China is about 4.2x our size. If we assume that brainpower is distributed more or less evenly around the world (I’m not sure why we’d assume otherwise), China has over 4x the really smart people that the US does.

How can the US overcome this disadvantage in numbers? Two ways:

–persuade really smart foreigners that the US is a land of opportunity and induce them to emigrate, and

–ensure that everyone in the country has an opportunity to get a good education, so they can contribute to economic growth afterward graduation.

To my mind, the poster child for how not to do things is Japan. There, a hidebound, traditionally pro-business, right-of-center party has controlled national politics for decades. It’s basic agenda: anti-women, anti-minority, anti-immigration (gaijin = human-like things that emerge from the darkness), protection for the politically powerful heavy manufacturing industries whose prime was in the 1970s-1980s. The result for Japan has been thirty years and counting of economic stagnation, a now massive national debt and a substantial decline in living standards due in part to a 30% depreciation of the national currency.

The plan that spawned this epic disaster is remarkably similar to the Trump agenda. Several exceptions: the industries Trump favors had their heyday in the 1950s; Trump’s white racism is overt; he advocates violence against domestic political opponents as well as foreigners and minorities; his incompetence as a businessman, so his 1930s-style tariff “protection” has ended up hurting the industries he favors as well as the rest of the country.

An ugly picture–made worse by his insinuations that he will use right-wing extremist militias to overturn the election result if he loses.

What is perhaps most surprising is that until the pandemic struck a majority of Americans approved of Trump’s orchestration of this incipient economic train wreck.

A major source of Trump’s appeal, I think, has been his promise to improve the lot of chronically economically depressed areas of the country still suffering from the demise of heavy industry that began over a quarter-century ago. The US has been unique among world powers in its failure to provide economic assistance to these regions, with both Democrats and Republicans complicit. As has been the case throughout his career, Trump’s promises have been empty. In fact, he has made the situation worse–although the harm he’s done has been offset somewhat by belated arrival of recovery from the 2008-09 downturn in these areas in 2016-17. Two implications: if we are to keep pace with China we can’t allow this large fraction of the population to remain unproductive; and continuing the abandonment of the rust belt keeps the door open for the next poleznyy idiot who comes along.





Pew Research Center: Global Attitudes

The Pew Research Center just published the latest iteration of an ongoing survey program that reports world perception of the economic strength of countries and the quality of their leaders. Due to pandemic concerns, the current surveys were not done in face-to-face interviews, which had been the previous practice. One might argue that this makes the current results suspect, although I don’t really see why. On the other hand, changes in this year’s assessment of countries and leaders seem to me to be closely linked to views on how a given country has handled the coronavirus. So I wonder how much the emotions of the moment are at play.

In any event, the results are interesting, I think:

–the focus of the Pew report is the battering the reputation of Chinese leader Xi Jinping has taken this year, He has dropped below Vladimir Putin to second-worst in the world as a leader. Donald Trump is the only leader Xi remains ahead of

–most respondents think their own country, the World Health Organization and the EU have done good jobs dealing with the coronavirus. In contrast, 61% believe China has done poorly. This verdict compares favorably only against the US, which a whopping 84% think has done a poor job

–consistently through last year most respondents picked the US as the strongest world economic power. This year the world ranks China ahead of the US. Only South Korea strongly disagrees, with slightly above half in Japan and the US selecting the US as still #1.

Two things jump out at me from this study:

–the IMF estimates that China’s GDP will be 40% higher than that of the US in 2020. This estimate uses the Purchasing Power Parity technique, which factors in the prices of domestically produced and consumed goods in addition to the internationally traded items that form the basis for traditional GDP figures.

In a sense this is old news. China pulled ahead of the US into first place in 2016. But it is not well-understood, even now, I think. Nor is the issue that Trump’s economic incompetence and racism, plus the “raw plunder” attitude of his camp in influencing policy, have all retarded domestic growth and thus substantially increased China’s lead

–it doesn’t seem to me that US citizens realize how genuinely awful Trump’s handling of the coronavirus has been, in the way that observers outside the US have. I don’t know why. Part of this is certainly Rupert Murdoch’s longstanding placement of his media empire at the service of the Republican party in return for political favors. Part may be Mark Zuckerberg following Murdoch’s lead. I read a commentator recently who blamed it all on the French postmodernists.

A mystery, yes. On the other hand, some people still live in a world where GE and IBM are growth stocks and AMZN is a wild speculation.

Trump and federal government finances

income tax cuts

Perhaps Trump’s signature piece of legislation has been the Tax Cuts and Jobs Act, passed in 2017.

TCJA has two elements:

–a reduction in the top federal tax bracket for corporations from 35% to 21%. This brought highest-in-the-developed-world tax rate down to around average. This was necessary to stop the bleeding from full-rate taxpayers, like big pharma leaving for other countries–a move that would up their after-tax profits (and presumably the stock price) by about a quarter.

The lost tax income was supposed to be made back by elimination of sweetheart tax breaks, none of which happened.

–a big tax cut for the ultra-wealthy.

Estimates are that TCJA will add about $1.5 trillion to the national debt over its first ten years.

GDP growth suppression

Trump’s decision to severely restrict immigration into the US and his economic war with China, bizarrely framed in a way that benefits China while harming the US, have very quickly negated any short-term momentum his deficit spending might have achieved.

This suggests that federal debt projections are probably too low.

the pandemic

With Trump’s blessing, Washington passed legislation earlier this year authorizing $4 trillion in spending to combat the coronavirus. At the same time, Trump went out of his way to flaunt medical measures designed to check its spread and continuously urged his supporters to do likewise.

One consequence of this last is that deaths in the US so far are 40% higher than in the EU, despite Europe having 36% more people and being an older population than here.

A corollary is that some portion of that $4 trillion has had less effect in states that have followed Trump’s lead. $1 trillion wasted? …more?

ballooning federal debt

According to the Nation Debt Clock, the current national debt, which was about $20 trillion when Trump took office, is now just north of $27 trillion. This compares with federal tax revenue, from all sources, of about $3 trillion a year. Debt is now 128% of pre-pandemic GDP, which puts us within striking distance of Italy among the world’s most indebted countries. If Washington devoted all of its income to repaying this debt, it would take nine years to do so.

In short, the burgeoning debt is a potential mess. This is not all Trump’s doing. Bipartisan bungling that led to the 2008 financial crisis played a big role. He’s made things a lot worse, though, both by reducing revenue through TCJA and his general incompetence at running any sort of enterprise.

why this is a problem: general

–at some point, bond buyers begin to worry that the debtor nation is going to be unable to repay existing borrowings. So they become hesitant to add to their holdings, and at some point even to roll over their existing exposure. This happened in the US during the Carter administration.

–the debtor nation may begin to signal that it is unwilling to repay borrowings in full. It does so by creating domestic inflation in order to reduce the real (meaning adjusted for inflation) value of outstanding obligations.

–a byproduct of either is typically devaluation of the local currency. This can be either involuntary or a deliberate political strategy to wriggle out from under debt whose repayment in full would require fiscal austerity/higher taxes for a long time.

why this is a problem: here and now

The Republicans started out as the party of Lincoln, “dedicated to the proposition that all men are created equal.” and the party of financial responsibility. Under Trump they don’t appear to stand for either. And that is presumably eroding their traditional base of support.

The worst hit by devaluation would be the ultra-wealthy, the powerful political donors for whom the TCJA was tailor-made. I presume these donors and their financial concerns are behind the Senate’s opposition to further pandemic aid.

Also, it’s hard to know whether their opposition is a matter of principle or a worry that an increasingly erratic Trump would fritter a large part of any new money away, too.

For most countries, the main result of profligate spending and a subsequent devaluation is a deep loss of national wealth. For the US, there would be the additional negatives of damage to the leading positions of US banks in the world financial system as well as of the US$ as the de facto world currency. Both would be reasons to look to China for new leadership.