IT IS ALL ABOUT TRADE

The much awaited speech from FRB Chair has come and gone.  In my view he said nothing new.  Powell commented that the economy is in a favorable place but faced “significant risks” as growth abroad slows amid trade uncertainty.

Powell further stated “trade policy uncertainty seems to paying a role in the global slowdown and in weak manufacturing and capital spending in the US….we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.”

The Fed Chair further stated recently there has been further evidence of a global slowdown, notably in Germany and China and there are other risks including Hong Kong, a hard Brexit and the dissolution of the Italian government.

Markets trimmed losses as it was interpreted as a possible rate cut next month but then came under pressure following a tweet from the President that the US will respond shortly (Friday afternoon) to the latest levies announced by China.  The President further tweeted that he is ordering companies to start looking for alternatives to producing in China.

Led by the technologies, equities sunk and Treasuries advanced.

Many times I have commented that we live in a “price is the only determinate of purchasing decision” environment.  This environment has been facilitated by offshore production facilities that pay their workers a fraction of the wages demanded in the US.  There is a massive trade off…inexpensive products and a decline in manufacturing jobs.

The FRB Chair has commented about tight labor markets.  Can I argue there could be a return of pricing power if production facilities are indeed moved out of China?  I think I can safely write these facilities will not return to the US given high wage demands of the American worker.  Is this not inflationary?

As the FRB Chair stated the domestic economy has not yet been overly impacted by the trade war.  The economy is still “robust.”  The academics are arguing it is only a matter of time.  Is this an accurate perception?

Forty years ago the US manufacturing sector was decimated by foreign competition where ultimately approximately 40% of Dow Jones Industrial members ceased to exist.  [Note: There was only one change in the Dow Jones from 1959-1979]

I rhetorically ask who remembers Bethlehem Steel, American Can, Johns-Manville, Navistar, Union Carbide and US Steel?  Then there were non-Dow members such as LTV, American Motors, and Reynolds Metals?  Who recall these names?

I vividly recall the 1979 Time Magazine cover declaring the end of American dominance as these marquee and blue chip companies were crushed, ushering an era of stagnation and stagflation that will last into infinity.

During the two last great economic booms [defined as annual GDP growth greater than 4%] of  the mid 1980s and from 1996-2000 90% of job and economic creation came from small companies defined as companies that employ less than 400 people.  The academics did not think such a boom was going to occur because of the obliteration of over 40% of Dow Jones members.

Today it is widely accepted it is the technology concerns that will be most impacted by the trade wars, the companies that provided the significant growth from 2010-2016.

Will history repeat itself?  Will Mom and Pop America again bail out the economy?  Is this a further extension of the massive transition of wealth back to Main Street from Wall Street?

By education I agree with the academics and the media that trade wars are detrimental and the President is perhaps driving the economy into a possible recession.  Intuitively however I question this view, using history to perhaps justify this opinion.

Wow!  This view is indeed controversial.

What will happen this week?

The economic calendar is crowded as numerous manufacturing statistics are released as are housing and sentiment indicators as well as revised second quarter GDP.

Last night the foreign markets were mixed.   London was down 0.47%, Paris up 0.73% and Frankfurt up 0.49%.  China was down 1.17%, Japan down 2.17% and Hang Sang down 1.91%.

The Dow should open moderately higher on a tweet that prospects for a trade deal are higher today than at time since talks began last year.  The 10-year is up 6/32 to yield 1.52%.

 

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.