Ambrose Evans-Pritchard: Trump Effect Won’t Stop Credit Crunch
Courtesy of Yves Smith, Naked Capitalism
Yves here. With an unpopular incoming president who has promised radical change…and sent conflicting messages on what that change will amount to, it’s not hard to believe that Mr. Market’s enthusiasm is overdone.
Trump’s economic program rests heavily on pet Republican ideas that are good for the rich, often at the expense of the growth, such as privatization and tax cuts for the wealthy. And while Trump almost certainly favors deficit spending, which give the economy a boost (even though he’s copped a more fiscally conservative posture of late), he’s not likely to get far with Republican deficit hawks.
So as we’ve indicated, Trump’s plans to deliver, or at least appear to deliver, for his base means he needs to follow through with his promises to “reform” immigration and reverse the offshoring of jobs. On the immigration front, I’ve heard of grocery stores that relied on undocumented workers getting rid of them all shortly after the election. The INS has apparently already started telling employers that they are going to be more stringent about enforcement.
Will Trump go further with trying to bring manufacturing jobs back than merely jawboning some high profile employers? Mind you, I’m not a fan of the facile “those jobs are never coming back” thesis. The tacit assumption in the “the jobs won’t return” argument is that the offshoring was a plus for efficiency.
In reality:
1. Direct factory labor is typically 10-15% of wholesale product cost
2. Lowering direct factory labor cost via offshoring is offset by:
- Higher managerial/coordination costs
- Greater financing costs
- Higher transport costs
- Greater inventory obsolescence risk
- Greater fuckup risk (longer supply chain with more vendors = more points of failure)
- Greater business system rigidity
There are tons of cases where you are shipping raw materials to Asia (furniture manufacture) where the case for offshoring was pretty much non-existant. It doesn’t even pan out in mid-range shoes.
3. There are also industries where the Chinese (and sometimes other countries) have been dumping for over a decade, like coated paper. The economics of domestic manufactures would improve, reducing efforts to crush unions and cut wages.
4. However, US execs are very unwilling to give up their higher incomes. But Asian manufacturers haven’t yet institutionalized a yawning gap between senior management and factory worker pay. And they don’t have our quarterly earnings neurosis either. Taiwanese manufacturers are already looking at locating in the US if Trump imposes tariffs. I similarly saw Japanese invest in manufacturing facilities in the US at projected ROIs that Americans would not consider.
But even if Trump were to impose tariffs and foreign manufactures were to move production into the US as a result, the shift would take at least a couple of years and would be deemed a failure in the meantime.
By Damien Klassen, a research analyst at Schroders. Originally published at MacroBusiness
Ambrose Evans-Pritchard is back in the Fairfax press and the UK Telegraph talking up the prospect of a 2017 crunch:
Trump’s reflation rally will short-circuit. Rising borrowing costs will blow fuses across the world before fiscal stimulus arrives, if it arrives.
By the end of 2017 it will be clear that little has changed. Powerful deflationary forces retain an invisible grip over the global economy. Bond yields will ratchet up further and then come clattering down – ultimately driving 10-year US yields below zero before the decade is over.
I worry about the extreme nature of Evans-Pritchard’s calls and the timing more than I worry about the general direction.
I’m on board with the thought that the Trump effect will be transient. Will everything come crashing down in 2017? Maybe, but if the Trump tax cuts get passed in the first 100 days and implemented as soon as possible, the tax cuts are unlikely to be in much before the middle of the year. So, as poorly targeted and regressive as the tax cuts are, they are large, so I’m struggling to understand how the effect will have faded by the end of the year.
Will Trump clamp down on spending (as Evans-Pritchard suggests) hard enough to crash the US economy? Maybe, but that seems to be a large logical leap when we are really not sure what Trump is going to do.
More from Evans-Pritchard on the Trump effect:
Once markets accept that Trump is not bluffing – that he means to smash globalism – euphoria will give way to alarm, but for now Wall Street remains intoxicated on wishful thinking.
This may be true. Then again Trump may be taking an extreme position with China/Mexico/Canada to negotiate back to a more reasonable one. I don’t know which is true. Evans-Pritchard doesn’t know. I am not even 100% confident that Trump knows.
If we are in for a trade war in 2017, then Ambrose is right about the effect on the stock market and bond rates. But, I struggle to understand what Trump will and won’t do (as does most of the market), and trade wars are not a natural Republican policy whereas tax cuts are.
So, I’m not saying that a credit crunch won’t happen in 2017. And I do worry markets have gotten ahead of themselves in the Trump reflation rally. But, I’m wondering about the wisdom of basing your expectations on being certain about what Trump will and won’t do.
Now is the time for flexibility in your investment outlook.
