Trump’s misguided approach to trade ignores uncomfortable truths - and puts portfolios at great risk
David Rosenberg?
[url]https://www.theglobeandmail.com/investing/markets/inside-the-market/article-david-rosenberg-trumps-misguided-approach-to-trade-ignores/[/url]
President Donald Trump and his mercantilist economics team operate with a lens that the United States has been totally ripped off by the rest of the world for many decades. The view at the White House is that trade relationships are totally lopsided.
Reciprocal tariffs are one thing, but this goes way beyond that. For example, there now is chatter that the Administration will consider a proposal where select countries “will agree” to a restructuring of their U.S. Treasury note and bond holdings to century bonds offering no interest. Of course, this would have to be “agreed upon” voluntarily by the creditors with no coercion, which is ridiculous because the carrot will clearly be debt restructuring in return for U.S. payments to these other countries for their security.
Of course, this is always the gripe about how America pays for everyone’s security with no remuneration (even though the one country in the world that benefits the most from global stability and tranquility is the United States). China and Russia are geopolitical threats and have been for a long time, which is why it is in America’s interest to have military assets deployed in Europe, the Middle East, and the Far East. Not everything in life comes down to a ledger.
In any event, welcome to the new world of bean counting and transactional arrangements based solely on dollars and cents. There is plenty of griping over trade deficits. But because the U.S. economy is run on massive fiscal stimulus and mass consumerism, of course such a country with an enormous appetite for imports will be running trade deficits. Why is that so hard to understand? No other country on the planet measures economic success in terms of consumer spending as does the U.S. There is no tariff that is an effective antidote to this pattern of spending behavior. The simple reality is that as an economy, the U.S. spends more than it earns year in and year out. That is the story behind the trade deficits. Not too hard to figure out.
Then look at how America benefits from world trade arrangements — the same ones that are being vilified in Washington today. Because it is a necessity that the U.S. runs an equal surplus on its capital account, investment into American securities and assets has been massive and a huge counterweight to said trade and balance of payments deficits. If Donald Trump wants the trade deficit to be lower, then expect capital inflows into the United States to correspondingly subside.
That won’t be very good news for Treasury market yields or for the equity market. After all, what is the trade deficit? It is the U.S. exporting less than what it imports. What happens is the U.S. de facto borrows the money and writes a check to the rest of the world, which then takes these proceeds and invests them right back into America.
The idea that one deficit country can use “trade” as a weapon by other means will only end up corresponding to a reduction in capital inflow that is then offset in the balance-of-payments accounting identity — because the balance-of-payments must always balance by definition. This, in turn, means that interest rates in the U.S. will end up being higher than would otherwise be the case, and risk premia will be higher across the credit and equity markets because foreigners are massive holders of U.S. assets, both financial and real, right across the board.
It scares me to think that people like Scott Bessent, Howard Lutnick, and Stephen Miran are not aware of this.
Look at the facts: Foreign ownership of U.S. equities is US$17.6 trillion. Does anyone know that? Forget retaliatory tariffs — maybe other countries should start dumping these U.S. stock market holdings and send the S&P 500 into a full-fledged bear market. That would surely catch President Trump’s attention. It’s not as if the proceeds can’t be deployed in other geographies with more compelling valuations.
In addition to their equity holdings, investors abroad have exposure to over US$4 trillion of U.S. corporate bonds. Again, the flip side of these trade deficits that is never discussed at the political level is the corresponding support that global investors provide for funding the spending needs of the business sector. The foreign ownership of U.S. Treasury notes and bonds stands at US$8.5 trillion. Again, this is how the capital account surplus — the mirror image of the current account deficit — helps keep interest rates lower than they otherwise would be. This is why the President should stop listening to his economics team, because the approach they want to take on foreign trade issues will frustrate what seems to be a stated goal of bringing down long-term interest rates.
Total foreign direct plus portfolio investment in the U.S. including equity and debt is US$50 trillion! Ah… I see, this is how the rest of the world takes advantage of the United States. Sure thing. Imagine all the economic activity and jobs this investment supports. But nary a mention of this, ever.
U.S. total investment abroad is US$28.8 trillion or nearly half of what the rest of the world has placed into the United States in terms of exposure to stocks, bonds, and “bricks and mortar” direct investment. Foreign investors have plowed more than US$20 trillion into the U.S. versus what America has placed into international markets and economies.
But the reason why nobody abroad complains is because the rest of the world understands how the balance-of-payments actually works. It stuns me that someone like Stephen Miran, a PhD graduate from Harvard and disciple of Martin Feldstein, does not seem to have a grasp of the fact that all the balance-of-payments are is an accounting identity.
There is another fact that one should realize. For all the talk of how Canada “rips off” the United States over trade issues, consider that since the Free Trade Agreement was signed into law in 1989, real GDP growth in Canada has been the same, at a 2.2% annualized rate, and the industrial production comparable has grown at 1.3% over this time frame. There simply is no evidence that Canada has had the upper hand, no matter the economic metric chosen.
It isn’t any wonder that a just-released Leger poll shows that 70% of Canadians support retaliation if the Trump tariffs go through. So, when the President says that tariffs are “beautiful,” he rightly never says that about a global trade war which benefits nobody. His assumption is that no one is going to hit back, but that likely is a misapprehension on his part.
For Canada, it will be two black eyes. For the U.S., it will be just one black eye, but I don’t recall during the election campaign that any voters south of the border were supporting even one black eye.
And there is something else. A false presumption that the foreign producer will bear the brunt of the tariff hikes — there is nothing in the historical record to suggest this has ever been the case. As difficult as it is to estimate just how much a hit the American consumer will take, rest assured that the squeeze on real incomes will be significant. With all that in mind, we see the latest Gallup poll showing that the President has just a 45% approval rating and a 51% disapproval rating. His ratings on the economy are not that good, either, with the Washington Post-Ipsos poll showing that 73% of Americans consider the macro backdrop to be either “poor” or “not so good.” Fully 53% are not in agreement with his trade policies and perhaps it is because the average Joe and Jane recognize the arithmetic I have just outlined.
To repeat, trade wars are a zero-sum game in which all parties come out as losers as the global GDP pie shrinks. We all need to remember that nothing in life is permanent. The United States is run on a two-year, not a four-year, political cycle. President Trump had a trifecta of domination in 2016 before the GOP got absolutely trounced in the House in the 2018 midterms. Few have been deemed a more transformational President than Barack Obama in 2008 (he beat John McCain by 7 percentage points and took in 365 electoral college votes!), and the House Democrats were simply crushed in the 2010 midterm election. Who in 2008, when Obama was feted and celebrated, could have ever thought that his legislative dominance would only last in his first two years in office? What seemed like an overwhelming mandate for change in 2008 had the grand total of a two-year shelf life.
Go back to Bill Clinton who ran on the Fleetwood Mac classic “Don’t Stop Thinking About Tomorrow” in the 1992 federal election, where he secured a whopping 370 electoral college votes and beat Bush 41 by nearly six percentage points (keep in mind that Trump beat Harris, despite her horrible record, by just 1.5% and took in 312 electoral college votes). Then the Democrats got destroyed in the 1994 midterms, not just in the Newt-led House but also in the Senate. That was the first midterm election since 1946 in which the Republicans ended unified Democratic control of Congress in a midterm election under a Democratic president. Only George W. Bush managed to see the GOP win in the midst of the first term for any recent President in the 2002 midterms when his support for the war on terror following 9/11 was overthe-top.
David Rosenberg?
[url]https://www.theglobeandmail.com/investing/markets/inside-the-market/article-david-rosenberg-trumps-misguided-approach-to-trade-ignores/[/url]
President Donald Trump and his mercantilist economics team operate with a lens that the United States has been totally ripped off by the rest of the world for many decades. The view at the White House is that trade relationships are totally lopsided.
Reciprocal tariffs are one thing, but this goes way beyond that. For example, there now is chatter that the Administration will consider a proposal where select countries “will agree” to a restructuring of their U.S. Treasury note and bond holdings to century bonds offering no interest. Of course, this would have to be “agreed upon” voluntarily by the creditors with no coercion, which is ridiculous because the carrot will clearly be debt restructuring in return for U.S. payments to these other countries for their security.
Of course, this is always the gripe about how America pays for everyone’s security with no remuneration (even though the one country in the world that benefits the most from global stability and tranquility is the United States). China and Russia are geopolitical threats and have been for a long time, which is why it is in America’s interest to have military assets deployed in Europe, the Middle East, and the Far East. Not everything in life comes down to a ledger.
In any event, welcome to the new world of bean counting and transactional arrangements based solely on dollars and cents. There is plenty of griping over trade deficits. But because the U.S. economy is run on massive fiscal stimulus and mass consumerism, of course such a country with an enormous appetite for imports will be running trade deficits. Why is that so hard to understand? No other country on the planet measures economic success in terms of consumer spending as does the U.S. There is no tariff that is an effective antidote to this pattern of spending behavior. The simple reality is that as an economy, the U.S. spends more than it earns year in and year out. That is the story behind the trade deficits. Not too hard to figure out.
Then look at how America benefits from world trade arrangements — the same ones that are being vilified in Washington today. Because it is a necessity that the U.S. runs an equal surplus on its capital account, investment into American securities and assets has been massive and a huge counterweight to said trade and balance of payments deficits. If Donald Trump wants the trade deficit to be lower, then expect capital inflows into the United States to correspondingly subside.
That won’t be very good news for Treasury market yields or for the equity market. After all, what is the trade deficit? It is the U.S. exporting less than what it imports. What happens is the U.S. de facto borrows the money and writes a check to the rest of the world, which then takes these proceeds and invests them right back into America.
The idea that one deficit country can use “trade” as a weapon by other means will only end up corresponding to a reduction in capital inflow that is then offset in the balance-of-payments accounting identity — because the balance-of-payments must always balance by definition. This, in turn, means that interest rates in the U.S. will end up being higher than would otherwise be the case, and risk premia will be higher across the credit and equity markets because foreigners are massive holders of U.S. assets, both financial and real, right across the board.
It scares me to think that people like Scott Bessent, Howard Lutnick, and Stephen Miran are not aware of this.
Look at the facts: Foreign ownership of U.S. equities is US$17.6 trillion. Does anyone know that? Forget retaliatory tariffs — maybe other countries should start dumping these U.S. stock market holdings and send the S&P 500 into a full-fledged bear market. That would surely catch President Trump’s attention. It’s not as if the proceeds can’t be deployed in other geographies with more compelling valuations.
In addition to their equity holdings, investors abroad have exposure to over US$4 trillion of U.S. corporate bonds. Again, the flip side of these trade deficits that is never discussed at the political level is the corresponding support that global investors provide for funding the spending needs of the business sector. The foreign ownership of U.S. Treasury notes and bonds stands at US$8.5 trillion. Again, this is how the capital account surplus — the mirror image of the current account deficit — helps keep interest rates lower than they otherwise would be. This is why the President should stop listening to his economics team, because the approach they want to take on foreign trade issues will frustrate what seems to be a stated goal of bringing down long-term interest rates.
Total foreign direct plus portfolio investment in the U.S. including equity and debt is US$50 trillion! Ah… I see, this is how the rest of the world takes advantage of the United States. Sure thing. Imagine all the economic activity and jobs this investment supports. But nary a mention of this, ever.
U.S. total investment abroad is US$28.8 trillion or nearly half of what the rest of the world has placed into the United States in terms of exposure to stocks, bonds, and “bricks and mortar” direct investment. Foreign investors have plowed more than US$20 trillion into the U.S. versus what America has placed into international markets and economies.
But the reason why nobody abroad complains is because the rest of the world understands how the balance-of-payments actually works. It stuns me that someone like Stephen Miran, a PhD graduate from Harvard and disciple of Martin Feldstein, does not seem to have a grasp of the fact that all the balance-of-payments are is an accounting identity.
There is another fact that one should realize. For all the talk of how Canada “rips off” the United States over trade issues, consider that since the Free Trade Agreement was signed into law in 1989, real GDP growth in Canada has been the same, at a 2.2% annualized rate, and the industrial production comparable has grown at 1.3% over this time frame. There simply is no evidence that Canada has had the upper hand, no matter the economic metric chosen.
It isn’t any wonder that a just-released Leger poll shows that 70% of Canadians support retaliation if the Trump tariffs go through. So, when the President says that tariffs are “beautiful,” he rightly never says that about a global trade war which benefits nobody. His assumption is that no one is going to hit back, but that likely is a misapprehension on his part.
For Canada, it will be two black eyes. For the U.S., it will be just one black eye, but I don’t recall during the election campaign that any voters south of the border were supporting even one black eye.
And there is something else. A false presumption that the foreign producer will bear the brunt of the tariff hikes — there is nothing in the historical record to suggest this has ever been the case. As difficult as it is to estimate just how much a hit the American consumer will take, rest assured that the squeeze on real incomes will be significant. With all that in mind, we see the latest Gallup poll showing that the President has just a 45% approval rating and a 51% disapproval rating. His ratings on the economy are not that good, either, with the Washington Post-Ipsos poll showing that 73% of Americans consider the macro backdrop to be either “poor” or “not so good.” Fully 53% are not in agreement with his trade policies and perhaps it is because the average Joe and Jane recognize the arithmetic I have just outlined.
To repeat, trade wars are a zero-sum game in which all parties come out as losers as the global GDP pie shrinks. We all need to remember that nothing in life is permanent. The United States is run on a two-year, not a four-year, political cycle. President Trump had a trifecta of domination in 2016 before the GOP got absolutely trounced in the House in the 2018 midterms. Few have been deemed a more transformational President than Barack Obama in 2008 (he beat John McCain by 7 percentage points and took in 365 electoral college votes!), and the House Democrats were simply crushed in the 2010 midterm election. Who in 2008, when Obama was feted and celebrated, could have ever thought that his legislative dominance would only last in his first two years in office? What seemed like an overwhelming mandate for change in 2008 had the grand total of a two-year shelf life.
Go back to Bill Clinton who ran on the Fleetwood Mac classic “Don’t Stop Thinking About Tomorrow” in the 1992 federal election, where he secured a whopping 370 electoral college votes and beat Bush 41 by nearly six percentage points (keep in mind that Trump beat Harris, despite her horrible record, by just 1.5% and took in 312 electoral college votes). Then the Democrats got destroyed in the 1994 midterms, not just in the Newt-led House but also in the Senate. That was the first midterm election since 1946 in which the Republicans ended unified Democratic control of Congress in a midterm election under a Democratic president. Only George W. Bush managed to see the GOP win in the midst of the first term for any recent President in the 2002 midterms when his support for the war on terror following 9/11 was overthe-top.
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