Monday, August 6, 2018

In Terms of The "Trade War" and U.S. vs China Stocks, If We Must Go There, Both Sides Are Just Now On Equal Footing

Given the passion many folks have for their politics, I find myself prefacing more blog posts these days with the blunt reminder that we do not play politics at PWA. If, therefore, we strike a nerve, know that that's never our intent. That said, we're willing to run the risk, for if we weren't this investment/economic blog would be of little use to anyone, except perhaps for those only interested in commentary that jibes with their political ideology. We'll assume that's not you, or you'd have unsubscribed long ago. 

For our investment client readers, our willingness to remove our political biases from the business of economic research and portfolio management has to be utter music to your ears, for obvious reasons!


In a recent CNBC interview the President said "we're playing with the bank's money", then followed with a proclamation that the market is up 40% since his election. Over the weekend he boasted that the U.S. market is "stronger than ever" and that Chinese stocks are "down 27%". The U.S. is therefore "winning the trade war."

Well, as for the 40% gain as of the day of the interview, the correct number was +31%. As for the U.S. market being "stronger than ever", the S&P 500 still hasn't made it back to its January 26 high (although it's getting close). And Chinese stocks (MSCI China Index) are down just under 20% from their January peak, not quite 27% (although the President may be referencing a different index). 

So, sure, one could make the case, based on stock market results of late, that the U.S. has the upper hand. If, however, as the President did in his CNBC interview, we go back to the date of the U.S. general election, it turns out that China has just as much of "the bank's money" to play with as does the U.S.. That's right, after the nearly 20% decline from January highs, Chinese stocks are still up 32.72% since Trump's victory in November 2016:   click to enlarge...

Again, using the President's time frame -- and presuming that the stock market is indeed a legitimate indicator of who's winning a war that history suggests can't have a winner -- looks like the combatants are on essentially equal footing.

Or, if we consider fundamental analysis, we could actually argue that Chinese stocks, trading at 12 times forward earnings, versus U.S. stocks at 17, may be ultimately sitting prettier.

A couple more points I'd like to make:

1. To suggest that the U.S. is winning while the stock market of the second largest economy, which houses a huge number of buyers of U.S. (and the rest of the world's) products and services (GM sells more cars in China than it does in the U.S., China is a huge market for U.S. technology, etc.) has recently careened into bear market territory loses sight of the global nature of today's world, and of how closely correlated the world's equity markets are. 

In the following chart I tried to catch all of the notable selloffs in Chinese stocks (peak to trough) since just before the 2008 recession. The red rectangles highlight those times when U.S. stocks ultimately followed China lower, green highlights where they bucked the trend, yellow highlights present circumstances:   click to enlarge

My point, clearly investors should be rooting for Chinese stocks right about now! As 60% of the time since the 2007 peak U.S. stocks have declined in sympathy with selloffs in Chinese stocks.

2. The President stated the following this weekend:
"Because of Tariffs we will be able to start paying down large amounts of the $21 Trillion in debt that has been accumulated, much by the Obama Administration, while at the same time reducing taxes for our people. At minimum, we will make much better Trade Deals for our country!"
If he means it, that's really really scary! Taxing U.S. imports is by definition taxing U.S. consumers. Stating that "at the same time reducing taxes for our people" is nothing more than the old bate and switch. The scary part about this form of bate and switch is the monster risk it imposes on the economy.

Economist Arnold Kling in his excellent book Learning Economics plain and simply spells it out (this is from 2004 by the way):   emphasis mine

"With the political season upon us, you will hear that we are losing manufacturing jobs to China. The new Commerce bureaucrat will be tasked with looking into this. I wonder how the assistant secretary will decide what is the “correct” number of manufacturing jobs that belongs in the United States. I wonder how he or she will decide which of those jobs China ought to give back. It used to be that China had central planners who would do that sort of analysis. But they did away with central planning in their manufacturing export sector, and that is what enabled them to begin to compete.
I doubt that we have anything to gain by turning to central planning—or to any form of government management of trade. When other countries, including China, try to manipulate trade, they mostly hurt themselves. We should not follow suit."
So this China fear mongering has proven to be politically expedient in the past. In fact I recall Obama going there big time as well. You certainly heard a ton of it during the last campaign, equally from both sides of the aisle (there was virtually no distinguishing Sanders form Trump on the topic of trade). It's just that President Trump is now taking it to a whole new level.

No comments:

Post a Comment