Stocks are down about 7% since April following the failure of trade talks with China and the surprise addition of taxes on Mexico.
The S&P500 has dropped from 2,960 on the 22nd of April to now 2,754, with FTSE and the rest sharing the same story.
S&P500 on daily candles, May 2019
We can see the drop that started in October out of fear fed was going too fast in raising interest rates, but fed backtracked, so we have a recovery.
Except stocks couldn’t rise much above the high, turning downwards again in late April to the benefit of cryptos and gold who have been rising.
XAU/USD June 2019
We can see gold has been in a bull run since August last year, turning green recently too.
For this space, that’s really not much of a movement, but for gold, it’s some of the best months in close to a decade, since 2012.
Yields have fallen too. According to FT, people are willing to pay the German government to lend them money. That’s like the bank giving you monthly installments for taking out a mortgage. They say:
“A stark scorecard in bond land reveals Germany’s 10-year Bund yield has eclipsed its 2016 record low of minus 0.19 per cent, while large 10-year yield declines have registered for the likes of Canada, France, UK, Sweden and Australia among others.”
There may thus be some small flight to safety, but why is everyone worried when the economy is growing?
What’s the Problem?
Well, nationalism and a growing economy don’t mix very well. Immigrants, even the illegal ones, are necessary in a booming economy to fill all the vacancies.
With America and Britain effectively in full employment, new people are needed to perform all the necessary jobs, from doctors to street cleaner.
The wall therefore may sound nice from an emotional point of view for especially poor natives, but from a rational point of view, if you’re removing people from their jobs, people who even if they are illegals actually pay taxes, then the business is making less money, thus can’t expand, invest, and so on.
Tariffs too sound like a nice idea, but not on Mexican tomatoes. That’s basically a stealth tax and mainly on the poor Americans.
There are other ways of incentivizing US manufacturing. Removing 1933 restrictions on start-up investments is one such way because people can then fund engineers and so on.
The way the system works right now is basically complete concentration of money on some giant pension funds who primarily stick to public stocks (global corporations) who are too fat to care about really innovating.
The way the system should work is of course that of a free market. Instead of giving savings to giant corps, people should be free to give them to startups with a special agency set-up to tackle fraud and scams under criminal laws.
The other way of incentivizing US manufacturing is by setting up a special bank, by giving all sorts of incentives, but all that is a bit complex and requires doing new things and requires an agile government. This government, however, has pretty clearly said: “we are not going to innovate for you.”
So the easy way, and as with anything easy the damaging way, is to put up walls and kick out people in the hope that less employees supply means higher wages because economic books have not shown employers only pay enough to meet ordinary needs of employees, plus a bit of a surplus.
The other problem may well be the dollar. It’s far too strong and has been in a bull run since January 2018.
The dollar index, June 2019
Dollar strong may well be what a chest pumping monkey may shout with glee and pride, but a strong dollar means American goods are more expensive, so fewer people buy them.
If you’re not selling, then you’re not making money. It’s that simple. America is selling, but for Brits, for example, American goods are now a lot more expensive. That applies to Mexico too and many others.
You see, while 1 dollar may well be 1 dollar within USA, 1 peso is also 1 peso within Mexico. Just because the value of the peso falls against the dollar, it doesn’t mean people are getting more pesos. It just means they had a stealth tax on goods from USA, and in effect a subsidy on their own goods to USA.
That could mean an interest rate cut might be on the table with speculation rising fed might do just that.
That would be a small tax cut in a way because people would pay less on their mortgage, credit card and so on, while savers too would get almost nothing from their bank, so they’ll have to find their way to crypto or stocks or other appreciating assets.
On the other hand, what an interest rate cut would do to the dollar, is not very clear. You would think it would weaken it because people would be able to borrow more, which is effectively printing money, but on the other hand, banks would have less money to lend out. So it may well strengthen it.
Meaning some old fashioned printing could be a way to actually weaken it, however, doing so in good times leaves little medicine for bad ones.
US inflation rates, June 2019
The obvious solution is doing the hard, but good things, and rationally not emotionally.
That could mean giving proper documentation to immigrants, who then can demand full wages, rather than breaking up families and so depressing productivity and the economy.
It could mean having an open and well publicized US-China public forum where trade relations and much else can be discussed in the open so that we can hear what their position is and they ours.
At the end of the day, they are citizens of the world. Arguing is easy, debate to reach an understanding and an “objective” conclusion is harder.
It could also mean looking at these century old laws and perhaps breaking up the SEC completely or setting up a new regulatory agency.
Much of the above, however, is a bit too sensible for our entertainment politics where the aim is rarely to find a solution and usually more to portray the other as a bad guy so that you can beat them at the elections or in the case of humans so that you can more easily order your citizens around and in the case of nations so that you can order your companies around.
Meaning what America needs is a bit more freedom, not less. A bit of liberalism and rationalism to solve some of the problems of far too much government in many areas and way too little in a few areas, like monopolies.