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%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.