Daily Comment (April 10, 2017)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EDT] Global markets are generally quiet this morning as investors try to discern how to handle President Trump’s new muscular exercise of foreign policy.  After reading and reflecting over the weekend, we offer our take on the missile strike against Syria.  First, this is a president that eschews consistency; although a number of analysts are trying to figure out if these attacks signal a “Trump Doctrine,” we suspect not.  Instead, it shows that personal issues matter.  It appears that the president was truly moved by video of the aftereffects of the sarin attack and reacted based on that feeling.  This sort of behavior is consistent with a Jacksonian view of the world.  Trump seemed to view the Assad gassing as a matter of honor and reacted accordingly.  Second, the military appointees are clearly influencing policy.  The strikes were designed to warn, not escalate.  Military leaders try to avoid “mission creep,” where a military intervention keeps expanding as civilian leaders try to accomplish ever larger goals.  The military prefers discrete events and this missile strike is a classic example.

We do note that the U.S. is sending a carrier group toward North Korea.  We doubt this is little more than a signaling exercise but that doesn’t mean it won’t be effective.  The U.S. doesn’t want war with North Korea but no president wants the Hermit Kingdom to acquire a nuke on their watch.  Thus, sending a signal to the Kim regime that there could be costs to its current policy is prudent.

The Trump/Xi meetings ended with little drama.  China did offer some modest concessions on finance and beef, and they set a plan to discuss trade over the next 100 days that may create conditions for a bilateral trade agreement.  In the meantime, China will likely adjust higher its allowed percentage of foreign ownership of financial firms and lift the ban on U.S. beef imports.  It also promised to buy more agricultural products.  China will want to avoid a trade war until the October CPC meetings.  After that, we will get a better look at China’s real trade policy.

The French polls have tightened, with the center-right Fillon and the hard-left Melenchon gaining ground.  There is a high number of undecided voters going into the first round of elections later this month and the surge of these two candidates show how divided the French electorate has become.  This election still holds the potential to upset Europe.  We also note that Greece and the EU have reached an agreement on its bailout program.  Now we will see if the Greek legislature will actually pass further unpopular reforms or bring down the government.

After the election, we argued that the fate of the Trump presidency rested on the poles of “Bannon v. Ryan.”  That is morphing into “Bannon v. Kushner” but the battle is the same.  The former represents the new isolationism, an attempt to return to a less globalized world.  The latter in both cases represent a world that is globalized and deregulated.  This is going to be a long war because even if the personalities are vanquished, the sides of the debate remain.  At present, Bannon is losing power; the establishment is steadily marginalizing him.  For investors, this is a good outcome because it means that inflation remains under control and margins should continue to be robust.  However, the forces of populism remain and even if the right-wing version gets quashed by the right-wing establishment, the left-wing version remains in the background.

In Sunday’s NYT,[1] Louis Hyman, a professor of economic history at Cornell, published an op-ed arguing that Main Street is mostly dead because it’s inefficient and so its return is not a likely outcome.  Although he makes some good points, we believe he is being a bit naïve.  Since the late 1970s, policymakers have bought into a “cult of efficiency” that Marx obliquely discussed.  Marx’s assertion was that, at some point, capitalism becomes so efficient and income inequality so profound that there isn’t enough consumption to absorb all the productive capacity the efficient capitalists create.  Marx thought that scenario would create a crisis for capitalism that would result in its collapse.  So far, that hasn’t been the case.  Nevertheless, that doesn’t mean that changes haven’t occurred.  Both the Roosevelts took steps to retard the efficiency of capitalism through regulation.  Hyman noted that we used to have “fair trade” laws that set minimum prices; a retailer could not put a price below a certain level meaning that the chain and the small independent business didn’t compete on price.[2]

Some of us represent capital, most labor, but all of us are consumers.  The economic model that Hyman says can’t return was actually good for capital and labor but bad for consumers.  The high inflation of the late 1960s and 1970s was a result of this model.  As consumers, we cheer foreign trade because it keeps prices low, but foreign trade is mixed for capital and labor.  We are less sure that Hyman is right; a return to a model that is less friendly for consumers is ultimately the goal of populism based on the idea that globalization and deregulation have been worse for labor.  Although we could argue the case, that is the perception and thus a return to an earlier model cannot be so easily dismissed.

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[1] https://www.nytimes.com/2017/04/08/opinion/sunday/the-myth-of-main-street.html (paywall)

[2] This is one of the reasons Sears (SHLD, 11.34) developed in-house brands like Kenmore and Craftsman; because these weren’t national brands, it allowed Sears the ability to undercut the national branded competition.