Daily Comment (September 10, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Monday!  Here is what we are watching today:

Trade: There’s nothing new on NAFTA but President Trump increased the threat against China, calling for even more Chinese goods to come under tariff barriers.  China is holding a meeting with U.S. financial services executives,[1] perhaps in a bid to figure out what it will take to prevent a trade conflict.  Our take hasn’t changed; it appears the U.S. is working out new trade arrangements with most regions and nations except China.  To some extent, this was the goal of TPP/TTIP, which were designed to create trading platforms with Asia and Europe with the U.S. as the keystone, the only common element between the two trading zones.  However, those deals were in the spirit of the postwar trading arrangement, where the U.S. was the benevolent “importer of last resort.”  The TPP/TTIP deals would have favored capital over labor.  President Trump’s goal appears to be more about increasing U.S. jobs; what isn’t clear about the new program is if other nations will have any incentive to participate.  However, Chinese isolation was common to both TPP/TTIP.  China views the current trade conflict’s overarching goal as the suppression of Chinese power projection.  And, that belief is probably correct.

So, if we are correct, what should we see?  We would expect trade deals with current partners on terms that will favor moving production back to the U.S., which will boost U.S. growth at the cost of higher inflation.  Over time, nations will have less incentive to trade with the U.S. and will attempt to form regional trading blocs, an effort that will likely fail.  In the end, we will have a world with less trade, less efficiency and higher inflation but probably higher U.S. employment.  Another potential fallout will be shorter business cycles.  The big unknown is how China reacts over time.  China may try to create a trading bloc through the “one belt, one road” program.  However, we doubt that plan will succeed because, as we are seeing, nations targeted by China are beginning to realize the program is nothing more than 19th century imperialism.[2]

Russian protests: Reuters[3] is reporting that Russia has detained more than 800 people who protested against the government’s decision to raise the retirement age.  Putin’s decision to support legislation to reduce pension spending has been unpopular.  His popularity has dipped 15% points.  The government’s plan is to raise the retirement age for men to 65 from 60, and for women to 60 from 55.  Life expectancy for men is 66 and women is 77.

Brexit optimism: The EU has given its chief negotiator, Michel Barnier, a mandate[4] to close a deal.  The fear among EU leaders, primarily Chancellor Merkel, is that if they don’t support the plan for a soft Brexit then hardliners within the Tories will press for a hard Brexit.  Over the weekend, Boris Johnson, formerly a member of PM May’s cabinet, offered scathing comments against May’s plan.  In our read, the country remains closely divided on Brexit, although a vote held today would probably yield a narrow “remain” outcome.

Swedish elections: The Swedish vote yielded a hung parliament.  The center-left coalition took 144 seats, the center right 143 and the populist Sweden Democrats 62.  Neither of the traditional coalitions can form a majority government, nor will they consider joining a government with the Sweden Democrats.  Although some sort of “grand coalition” of centrists is possible, such an arrangement will take months to form.

Here are some other interesting developments from the election.  Exit polling showed that 41% of voters switched party allegiance from 2014 to now.[5]  That is a remarkable degree of political fluidity and suggests a dissatisfied electorate.  The Social Democrats, the dominant party in Sweden since 1917, only took 28% of the vote, the lowest total since 1908.  In this election, 54% were repeat supporters of the Sweden Democrats.  This populist party captured 19% from the Social Democrats (center-left) and 18% from the Moderates (center-right).  Simply put, the populists pulled votes from across the political spectrum.[6]  As we noted last week, growing opposition to immigration is leading the support for populism.

Anti-trust rethink: The NYT Sunday Business section has a profile of Lina Khan,[7] an attorney who has written extensively on the problems associated with current anti-trust enforcement.  Until the mid-1980s, the position of anti-trust was that size, by itself, was a problem and could trigger an enforcement action.  In the mid-1980s, Robert Bork suggested that the standard for enforcement should not be size but consumer welfare.  Simply put, we shouldn’t worry about size as long as consumers are better off.  So, companies adapted, getting bigger but clearly making consumers better off.  Large companies have, for the most part, treated consumers well but have a tendency to make workers miserable.[8]  As we have noted before, economics tends to separate production from consumption; this is largely because one of the most important concepts of economics, supply and demand, is based on such a separation.  In reality, consumers, labor and capital are in the same boat.  Throughout history, it tends to be a “two on one” game.  If labor and capital are favored, consumers lose out; products are bad, prices are high and service is lacking.  This condition was common in the U.S. from 1945 to 1978.  If capital and consumers are favored, products are good, inflation is low but workers suffer low wages and difficult working conditions.  That condition is similar to now.  In a capitalist economy, it is rare that consumers and labor are favored but it is very common in socialist/communist economies.  That situation usually leads to a bad outcome because if no one owns capital then you have the “tragedy of the commons.”[9]  We believe we are in the early stages of a flip from capital and consumers to capital and labor (although capital will be less favored at some point).  This article is further evidence of this shift.

Lina Khan’s argument is that very powerful companies can undermine democracy.  This concern underlies populism.

Florence: As we note below, Hurricane Florence[10] is bearing toward the Carolinas and is developing into a massive storm, likely reaching Category 4 by landfall on Wednesday.  This storm is looking like an extreme event, perhaps another Harvey.  Stay tuned…

View the complete PDF

[1] https://www.ft.com/content/c0034cba-b2ca-11e8-99ca-68cf89602132

[2] https://www.ft.com/content/d4a3e7f8-b282-11e8-99ca-68cf89602132 and https://www.ft.com/content/06a71510-b24a-11e8-99ca-68cf89602132

[3] https://www.reuters.com/article/us-russia-politics/russian-police-detain-hundreds-protesting-against-pension-reform-idUSKCN1LP05A

[4] https://www.ft.com/content/477ac3e4-b433-11e8-bbc3-ccd7de085ffe?emailId=5b95eea45fc4ca0004c47401&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22



[7] https://www.nytimes.com/2018/09/07/technology/monopoly-antitrust-lina-khan-amazon.html

[8] https://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html

[9] http://science.sciencemag.org/content/162/3859/1243

[10] https://www.washingtonpost.com/amphtml/news/capital-weather-gang/wp/2018/09/09/florence-strengthens-to-hurricane-and-poses-extreme-threat-to-southeast-and-mid-atlantic/?__twitter_impression=true