20 May IS MAD A CORNERSTONE OF TRADE POLICY?
Equities where whipsawed on trade. I rhetorically ask is MAD (Mutual Assured Destruction) a cornerstone of trade as it was for foreign policy?
Since around 1980 there was a symbiotic relationship between the US and China. China would produce cheap goods, sell them to the US and consumers and politicians alike embraced the concept of ”price is the only determinate of a purchasing decision” mantra that greatly aided the decline in inflation from the elevated levels of the 1970s.
China invested the funds from America’s unending penchant for inexpensive consumer goods into US Treasuries, the funding mechanism of the ever expanding US entitlement state.
China needed the US market to employee its vast population and US needed the Chinese to fund its debt through incessant consumer purchases of inexpensive manufactured Chinese goods.
It is believed if one challenged the other, MAD could occur.
While I believe any trade war will have a greater ramification upon the Chinese economy, the status quo is being upended. Billions have been invested to create today’s economic order. The markets hate uncertainty and there is no shortage of potential outcomes. Depending upon one’s preconceived bias, these outcomes range from extremely negative to greatly positive.
Radically changing topics, I have always argued that capital is the lifeblood of capitalism. Without such, growth and income generation would be anemic.
Several times I have opined a reason for anemic growth is the lack of IPOs. The reasons are varied but primarily rest upon regulatory fiat. The WSJ writes IPOs have plunged to about half as it was in the 1990s, the result of Sarbanes Oxley. The declines echo across the startup world; in 1996 70% of venture capital exits were to public markets. Today 85% go instead to acquisitions.
Meanwhile the size of the average listed company has double since 1994 thus suggesting only the biggest of the big go public.
Historically the pathway to riches to invest in a smaller company and profit as it grows.
Today it is the inverse. Today’s recognized growth companies are the largest companies in the known universe.
As stated above, I believe this lack of IPOs is a major reason for growing income inequality and the inability for the economy to consistently grow greater than 3%. All must remember during the late 1990s the economy grew at a 4% rate for almost four consecutive years and incomes surged.
Speaking of surging, consumer confidence is at the highest level since 2004. The entire growth was in the “future expectations index” which also rose to a 15 year high. The “current conditions” index also rose” and was higher than expected.
Wow! This is the inverse of the popular narrative. To write the obvious there is a massive disconnect. Who is correct? The narrative or the sentiment survey?
What will happen this week? The Minutes from the recent FOMC meeting are released, which at times have the ability to alter perceptions and impact markets. Also on tap this week are several housing indicators and manufacturing indices.
Last night the foreign markets were down. London was down 1.0%, Paris down 1.52% and Frankfurt down 1.53%. China was down 0.41%, Japan up 0.24% and Hang Sang down 0.57%.
The Dow should open moderately lower on trade. Oil advanced. The 10-year is unchanged at 2.39%.