For the past year the US has been essentially operating on an Obama-Yellen economy, at least as far as the big macroeconomic policies have been concerned in terms of fiscal and monetary policies. We saw basically a continuation of what had been seeing in previous years, steady growth with inflation under control. There was some uptick in wage growth, although that had already started in the previous year. He has supposedly engaged in a lot of deregulation, but most of it that has gotten a lot of attention has involved making it easier for firms to pollute in various ways, with squashing renewable energy projects while super encouraging fossil fuels and coal. Indeed, about 50% of the increase in capital investment in the US last year was in the energy sector.
One area where Trump’s policy, or expectation of it, has had a noticeable influence has been the expectation of his corporate tax cut on the stock market, ,which has risen a lot since his election, even after taking account of the declines in the past week (although the market rose more in percentage terms in Obama’s first year than it did in Trump’s first year). But, of course, stock markets are famous for buying on the rumor and selling on the news. Now the market continued to zoom after the tax cut passed for awhile, but now some realities may be kicking in regarding the full implications of it. The Obama fiscal policy is over, and Janet Yellen officially went out the door at the Fed at 9 AM this morning when her successor was sworn in as the new Fed Chair.
So why is the realization of the end of the Obama-Yellen economy downing the market so hard? One side item that has probably exacerbated things and has little to do with Trump or the rest has been the more dramatic collapse of the cryptocurrency markets, now down well over 50% from its November high. I shall not get into the details of that or where I think it is going, but I suspect the sharper plunging those markets were doing this past week have spilled over to some extent into the stock market.
That said, it has been noted by a wide range of people, with Robert Shiller perhaps the most prominent, that the US stock market appeared to have become somewhat overvalued, with Shiller claiming it has had the highest ratios of prices to recent trends of earnings of any major national stock market. Many have been warning of an impending correction, and it looks like it is here. If it does not go down too much more, it will not in the end be a big deal, a merely useful correction.
That said, and along with the caveat regarding the drag coming from the epiphenomenon of the crytpocurrency crash, there is reason to believe that this recent market drop may well reflect some realizations about the implications of Trump policies, along with perhaps jut a bit of confidence loss due to the departure of the incredibly calming and reliable Janet Yellen from the Fed. A lot of talk has been that with wage pressures rising, inflation expectations may be rising, and with that that interest rates may be pushed up by the Fed. On top of that there was the realization a week ago that Treasury borrowing is really up thanks to the Trump tax cut, estimated to be up 84%, and we have a debt ceiling increase needed in probably a month, not to mention another possible government shutdown looming this week (probably to be put off for another month). In any case the unexpectedly high increase in borrowing will put upward pressure on interest rates, irrespective of inflation or Fed policies affecting short term interest rates. I suspect this matter is what has really gotten the stock market spooked. They sent all last year capitalizing in their higher after tax profits, but had failed to capitalize in the higher interest rates to accompany the higher budget deficits.
I think the market is paying less attention to these, but Trump’s policies also have some negative implications for growth, although less upward pressure on growth might actually help right now (and the rest of the world economy is now officially growing well, thank you Obama-Yellen). So we have his anti-immigration policy, which most of his supporters do not understand will slow growth. There is also the threat of a trade war. Of course simply engaging in protectionism is a mixed bag, with import competing industries gaining as other parts of the economy lose. But the losses become more serious when foreigners retaliate against our exports, as China did today against US wheat exports in response to our tariffs on solar cells and air conditioners. Again, most Trump supporters are under the delusion that all this is just a big plus for the US economy.
I am not forecasting a near term recession for the US economy, although one could happen at any time. The general boom in the world economy will help prop us up, and some of the financial problems we are looking at may further depress the dollar, thus boosting US exports. But it wouldl seem that markets have now realized that we are in the Trump economy, and that means much higher budget deficits with likely upward pressure on interest rates, and those are indeed not good for the stock market, which even Trump knows. But given how much he has bragged about the stock market performance in the last year, he is in he situation where having lived by the stock market he can die by the stock market as well.
Barkley Rosser
From this post:
“But the losses become more serious when foreigners retaliate against our exports, as China did today against US wheat exports in response to our tariffs on solar cells and air conditioners.”
—————————————— Start from Bloomberg today ——————————————
“The president recently placed tariffs on imported solar panels and washing machines, sparking concern the U.S. may prompt trade wars.
With two of Trump’s main targets, China and Mexico, the imbalances worsened in 2017. America’s merchandise-trade gap with China, the world’s second-biggest economy, widened 8.1 percent in 2017 to a record $375.2 billion.”
—————————————— End from Bloomberg today ——————————————
https://www.bloomberg.com/news/articles/2018-02-06/u-s-trade-deficit-is-wider-than-any-month-or-year-since-2008
President Trump did not impose the referenced tariffs until 22 January 2018. If there is a trade war in our future, it will be because our trade partners provoked it.
We have had over 20 years of this experiment and it has failed to significantly benefit the majority of Americans. It has enriched oligarchs around the globe and left the working class behind.
During that time US trade deficits have gotten larger and larger. And in every major facet of the US economy, debt has gotten larger and larger. And now I have read that we have increasing drug overdose, and increasing suicide of older Americans, both of which would seem to be signs of increasing desperation.
How much longer do you suppose this can go on?
When the US economy went into recession in 2008, did the rest of the world prop us up? Or did the rest of the world suffer a calamity when US consumer demand plummeted?
Jim:
What did that article say about trade with Mexico?
JimH,
The increased deficits with China and Mexico last year were not “provoked” by any action on the part of either nation. They were largely due to the relatively high growth rate of the US economy. It is a well known fact, even if somehow you are unaware of it, that imports tend to ise when national income rises. So a surge of growth from domestic sources tends to move the trade balance towards deficit, and the US economy has not run a trade surplus since the early 1980s.
So, sorry, JimH. If we have a trade war it will have been provoked by Trump’s recent protectionist moves, unless you want to blame the Obama-Yellen economy for providing us with such a high growth rate last year.
And, sorry, but while a few sectors have been hurt, overall NAFTA has been good for the US economy and the vast majority of the American people, if not as much so as some of its propagandists promised before it came into effect. But the loud mouthed criticism of it from both right and left has been seriously off. The big joke is that the nation that might have the most grounds for complaining that it failed to deliver the widely advertised goods is Mexico, not the US, although it looks like Mexico and Canada will be hurt more than the US by a complete end to NAFTA, although all three will take a hit. Ending NAFTA would be a very stupid thing to do, although there would be some sectors and indviduals who would gain from such a move.
Barkley Rosser,
So you believe that the 10 years since the beginning of the Great Recession have been a period of a completely successful trade policy.
And that we can look forward to many more years just like those, if only the politicians will continue those trade policies.
You are a brave soul!
Now that you’ve figured out the stock market will you be starting a hedge fund soon?
Run75441,
“What did that article say about trade with Mexico?”
The article says that US goods exports to China and Mexico in 2017 were both record highs, as were imports from them. And the trade imbalances with both China and Mexico worsened in 2017.
Bloomberg’s information seems to be coming from the US Census Bureau’s foreign trade data for goods. Here is some data from that website:
See here for Mexico: https://www.census.gov/foreign-trade/balance/c2010.html
Goods in US Dollars in millions:
________ Year ___ Exports ____ Imports ____ Balance
Mexico___2016___229,701.7___294,055.9___ -64,354.1
Mexico___2017___242,988.7___314,045.2 ___ -71,056.5
Increase________ 13,287 _____ 19,989.3 ___ -6,702.4
Percent Increase ___ 5.78% _____ 6.8% ______ 10.4%
Note: The increases are my calculations.
A 10% increase in the trade deficit in one year is awful.
The data would probably look a little better if services were included. But services data was only available for 3rd quarter 2017.
Little John,
If you read my post carefully you will see that I made no forecast regarding exactly what will happen to the market in the near or distant future. Rather I attempted an explanation of the recent drop, nothing more. So, no, sorry, not starting a hedge fund.
Jimh,
Oh gag, you are going all silly and hysterical here. Sorry, but a 10% increase in a trade deficit, either in aggregate or with any specific other country is not “awful.” Focusing on bilateral trade balances with an eye that they are a zero-sum game is simply the worst sort of degraded Trump garbage.
Such an increase in trade deficits might be bad, but that would be if it were due to some outbreak of protectionist policies in the trading partner(s) that led to lower US exports and thus to reduced US employment. That is most definitely not what happened last year, when, as your linked article noted, US exports rose to both China and Mexico. They were not engaging in new protectionist policies. Rather the greater increase in imports was due to high growth of our economy last year. with people spending some of their higher incomes on imports. Not remotely “awful” at all, just the opposite, JimH.
Now we have had at least one episode where increased trade relations with another country apparently did hurt out employment. That is the case studied by David Autor et al that has received a lot of attention.which you can easily find by googling. It involved the entry of China into the WTO around 2001. But that has nothing to do with NAFTA, and basically the adjustment to that shock was completed long ago. Bashing China today over that is just plain stupid.
Another thing that can happen is trade balance shifts due to exchange rate changes. So the shift to a permanent trade deficit happened in the mid-1980s with a large appreciation of the value of the US dollar, making our exports uncompetitive and aiding imports. However, since Trump came in the dollar has mostly declined, which should tend to increase exports, which have indeed risen.
Trade policy may not be perfect, but it had nothing to do with the Great Recession and nearly nothing to do with the nature of the recovery (might have added slightly to trends to inequality). I am sorry, but if you are of the view that the main problems of the US economy are due to its trade policies, you are seriously mistaken. A change in trade policies might help some people, but it is also going to hurt others. Changing trade policies is frankly more likely to hurt us in the aggregate than to help us, even as some may be pointed to as gaining.