Monday, June 18, 2018

This Week's Message: Good Time For A War? Well, That's What Pyrrhus Once Thought....

Three of the world's major central banks held their policy meetings last week and issued statements in line with what we anticipated and  expressed herein. Asset prices responded as we suggested they would as well; that is until the threat of a global trade war was thrust back onto the scene in a big way.

Dow's down 250ish as I type this morning. Of course this should come as no surprise to regular readers/listeners, given the latest on trade: Friday, the U.S. announced tariffs on ultimately $50 billion worth of Chinese goods, China immediately announced a dollar for dollar response and abandoned agreements made during weeks of negotiation to this point. The U.S. promised that if China retaliates, as they did, that you ain't seen nothing yet. The Administration has been eerily silent on the topic since.

The President says that "trade wars are good, and easy to win." He continues to make the case that given our trade deficit we have been taken advantage of for far too long by the rest of the world. This, by the way, comes at a time when the U.S. is outperforming every other developed economy on the planet.

Well, I guess it's how you define "win." King Pyrrhus of Epirus won the infamous battles of Heraclea and Asculum against the Romans, then confessed that the toll left him virtually helpless in the aftermath:

"The armies separated; and, it is said, Pyrrhus replied to one that gave him joy of his victory that one other such victory would utterly undo him. For he had lost a great part of the forces he brought with him, and almost all his particular friends and principal commanders; there were no others there to make recruits..."
      — Plutarch, Life of Pyrrhus
The thing about the Romans was that while they suffered a great number of casualties at the hands of King Pyrrhus's forces, they had plenty of replacements. I.e., given the Roman army's size, the battles did not leave it virtually helpless, as they did Pyrrhus's. Hence the term "Pyrrhic victory" is used to describe the "wins" that weaken us.

The thing about the U.S.'s protectionist ambitions is that they're being imposed on virtually all of our major trading partners at the very same time. In essence, we are doing "battle" with a number of armies, none of whom are battling among themselves. In fact, our recent actions are sowing a newfound kinship among our now trade adversaries and a great deal of global deal making (that excludes us) in the process. And, as the Roman army of 280 BC was to King Pyrrhus's troupes, our trading partners combined are a much greater force than we are all by ourselves.

Back to the "taking advantage of us" part: Let me ask you, if I buy from you something that you make, and you don't buy something from me, but instead stick the proceeds in a bank in my hometown (or anywhere else for that matter), have I been taken advantage of in any way shape or form? Well, the simple fact that Chinese citizens, for example, save much more of their incomes than do Americans helps explain why the "trade deficit" exists.

As the financial wherewithal of Chinese citizens grows they too will avail themselves of more of the goods and services the rest of the world has to offer. In fact, their purchases of U.S. exports have been trending notably higher for years:

Click here for a deeper dive into the trade deficit phenomenon...

Back to the challenge at hand:

In an interview with CNBC this morning White House Council of Economic Advisers Chairman Kevin Hassett spoke to what we preach incessantly here on the blog; that general conditions should always be the main focus of our attention:
“If right in the middle of a financial crisis we added some uncertainty over exactly how are these negotiations going to work out, then it would be pretty harmful then. But right now the economy has got a lot of forward momentum.”
Beyond that, however, I'm afraid he's encouraging the Administration to continue playing with fire, or he's telling it what it wants to hear:
"Now is the right time to pressure China on its trade policies because the U.S. economy is strong enough to absorb uncertainty arising from bilateral tensions."
If he's implying that applying tariffs is the answer to any of China's alleged abuses, I believe he's dead wrong, great economic setup or not.

He completely went off the rails with:
“We’re going from an old world to a new world. We’re going to get to that new world -- that’s a big, positive change in trade policy.”
Say what? Reverting to failed old-world tactics to deal with perceived new-world challenges is the definition of insanity: Doing the same things over and over again and expecting different results.

I'll close with Bill Bonner's explanation of Mr. Market at work:
“He’s got a ‘Capitalism at Work’ T-shirt on and a sledgehammer in his hand.”
(HT Steven Pinker
I believe it's Mr. Market who'll ultimately inspire a peaceful outcome to present trade disputes; i.e., expect high volatility for the time being...

Have a nice week!

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