Tuesday, June 19, 2018

"Make Globalization Implode Again"

In accordance with their zero sum way of thinking, Trumptopia believes they're "winning" the global trade war. Unfortunately, it doesn't work that way...

Overnight, Trump escalated the trade war with China by threatening tariffs on an additional $200 billion of imports, if China doesn't back down. China immediately retaliated, putting that fantasy to rest. Contrary to popular belief, there IS a downside to having a dunce for president, yet somehow, 87% of Republicans haven't figured that out yet. Trump's base won't let him back down, because ignorance has been rewarded for far too long. What we are watching in real-time is idiot death spiral:

The fantasy narratives are reaching a crescendo of hope and delusion. The Trump administration's total lack of understanding of how Globalization works, across trade and capital flows, is their imminent undoing. There's a special place in dunce class for Peter Navarro:

Unfortunately for the "America First" brigade, under the current terms of Globalization with its attendant asset bubble, "America First" is wholly impossible. That is without crashing the asset bubble. Which is ok too. 

First off, supply chains cross borders more so now than ever before. NAFTA exists as a three nation supply chain - sourcing materials from Canada, labour from Mexico, and management/marketing/final sales in the U.S. The U.S./China relationship with its massive one-sided trade deficit - orders of magnitude greater than NAFTA's - is equally intractible without bringing about massive dislocation. Subsequent to the year 2000 and China's ascension to the WTO, corporate profits soared on the back of outsourcing to China. Bringing that all back to the U.S. would shrink profit margins commensurately. Not to say it shouldn't happen. Only to say it will not sustain an asset bubble. 

However, that all speaks to the long-term economic impacts. Where Trump's view of global trade is even more stunted is on the capital side. Whereas economies still retain a "local" characteristic, albeit less than before, capital is entirely global now. There is no such thing as local capital anymore. Which means that slapping tariffs on foreign countries is essentially slapping tariffs on the S&P 500. Any higher costs of goods from a foreign country will directly impact U.S. corporate profit. Which again is not conducive to sustaining record profit margins. 

But the even more imminent question becomes, who owns these foreign-based companies that would be instantly affected by tariffs? Leaving aside the S&P 500, global investors from all over the world now have massive stakes in Emerging Market stocks, bonds, and real estate. Even Trump himself is known to have some overseas investments. 

Which means that the first order dislocation is to mark down those investments to where they should be relative to trade barriers. And then the imminently proceeding order of dislocation is to mark down the debts tied to those investments. All of that doesn't wait for the ink to dry, that happens overnight. 


impossible to disentangle or separate.

What this society needs to learn more than any other lesson, is that people who are proven idiots and con men should not be in charge of anything. 

These iPhone suppliers cut across many different countries: U.S., Asia, Europe:

These China mega caps are all cross-listed in the U.S.

And the next question becomes who can afford to pay their debts when the asset bubble implodes? And which global financial entities have exposure to that debt?

In summary, contrary to popular belief, technology stocks are not a "safe haven":

What every investment advisor is telling their clients this morning:

"Just keep bidding up your own assets, everything will be fine"

"The Trump administration's history with trade has been volatile for stocks, usually sending them lower at first, but investors who have bought equities on those dips have been rewarded."