Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Trump’s Trade War Is Paralyzing Business

Economics / Protectionism Jun 24, 2019 - 12:14 PM GMT

By: Patrick_Watson

Economics Last week the Business Roundtable, an organization of large company leaders, released its quarterly CEO Economic Outlook Index.

The index tracks what executives expect for sales, capital spending, and hiring over the next six months.

The good news is the index has been above its historic average for 10 consecutive quarters. The bad news is, it fell the last five of those quarters.

CEO optimism peaked in Q1 2018, following a climb that began in Q4 2016. Now in Q2 2019, much of the confidence is gone.


Tax Cuts Didn’t Help

While correlation isn’t causation, those dates coincide with some turning points.
  • Q4 2016: Donald Trump wins the US presidential election with a Republican-controlled House and Senate. This sparked hopes for tax cuts and deregulation, which CEOs tend to like.
  • Q1 2018: The expected corporate tax cut took effect, giving companies a windfall many used to buy back shares and elevate their stock prices. CEOs liked that too.

Under other conditions, confidence should have continued to grow as the tax cuts stimulated the economy. It didn’t. The tax bill’s passage marked peak confidence.

One reason: the tax changes really didn’t do much for the economy. A new Congressional Research Service study estimates they added only 0.3 percentage points to 2018 GDP growth. It’s nowhere near enough to offset the government’s revenue loss.

Meanwhile, Q1 2018 also marked the launch of President Trump’s trade war, which is now negating the already-small fiscal stimulus. CEOs are noticing it as well.

Costly Risks

Globalization obviously hasn’t worked as well as hoped. Too many people haven’t shared its benefits while still feeling its costs.

Nonetheless, decades of (relatively) free trade gave CEOs enough stability to make long-term business plans.

That stability is now disappearing. Trump isn’t the only reason, but he’s making it worse.

The president’s assorted tariff threats are often just threats—but sometimes they turn into reality, and it happens often enough to keep everyone guessing. CEOs can’t ignore him when he talks about things that affect their operations.

This is a problem, as Gavekal Research described in a recent note:

Corporations have been organized to maximize global resources. They must now reorganize to mitigate policy risks, which should come at a cost.

On the margin, this means less goods will be delivered at a higher cost. Some of this cost will be absorbed by reduced margins and some by higher consumer prices.

In its totality, the additional risk in the global trading system points to lower growth and a tougher profits outlook. This calls for reducing risk exposure, including in the US.

As Gavekal says, businesses can usually adapt to the trade war. They find alternate sources, reorganize their supply chains, or make other adjustments. But it takes time and money.

Coerced Cooperation

The time and money CEOs spend reorganizing is time and money they aren’t spending on other things.

Worse, Trump can change his mind faster than businesses can adapt. So at some point, their best alternative is to simply do nothing. Stop expanding, stop hiring, and just wait for normality to return.

The problem there: it could take some time.

Trump is in office until January 2020, at least. The legal power he is using to impose tariffs and other trade barriers will stay in his hands that whole time, unless Congress takes it back.

Which is unlikely because opponents would need a two-thirds majority in both House and Senate to override his veto of any changes.

Hence, we see Trump now using presidential trade powers to coerce cooperation on non-trade issues, like immigration with Mexico. He thinks it worked, so he will probably do it again.

Where will that end? “Hey, Europe. Spend more on defense or I put 50% tariffs on your auto imports to the US.”

In that scenario, Europe would retaliate against US exporters while European automakers might close their US plants, laying off American workers. It would escalate from there.

Would Trump back down? Maybe, maybe not. No one knows.

Again: Trump has this authority right now, and Congress doesn’t have the votes to take it back. There’s every reason to think he will keep using it.

The trade chaos is slowly but surely paralyzing business, both within and outside the US. Business paralysis will eventually induce recession.

The open question is when. Your guess is as good as mine, but the time is coming.

The Great Reset: The Collapse of the Biggest Bubble in History

 New York Times best-seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could trigger in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.

By Patrick_Watson

© 2019 Copyright Patrick_Watson - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules