Tags: Trump Administration | Trump | America First | Winning Strategy | World

'America First' Might Be a Winning Strategy for the World

'America First' Might Be a Winning Strategy for the World

 (Getty/AFP Rhona Wise)

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Tuesday, 07 February 2017 02:14 PM Current | Bio | Archive

Global Economy: In Second Place

Coming in second in the Super Bowl isn’t the same as winning it. The Patriots returned home covered in glory as the winners. The Falcons came close to winning it during the first half of the game, then abysmally lost it completely during the second half. The Super Bowl is all about coming in first, not second. This also seems to be the attitude of President Donald Trump, who favored the Patriots and also favors an “America First” approach to running the country.


When our team at YRI reassessed our outlook for 2017 and beyond following Election Day, among our initial reactions to Trump’s victory was that his approach must be good for our “Stay Home” investment posture, and all the more reason not to “Go Global.”

However, we are having second thoughts, or at least thinking some more about this all-too-obvious conclusion.

It’s very possible that countries in the rest of the world will rise to the challenge posed by Trump’s America First policies by concluding that they can no longer count on the US.

They can’t assume that the US market will remain wide open to their exports. The US has been running a large merchandise trade deficit, which amounts to the rest of the world’s trade surplus (Fig. 1). Over the past 12 months through December, it totaled $731 billion. The main beneficiaries of this surplus over this period have been the following countries and regions: China ($347bn), European Union ($148bn), Japan ($69bn), Mexico ($63bn), and Canada ($11bn) (Fig. 2).

Trump’s protectionist sentiments and pledge to renegotiate trade agreements on a bilateral, rather than a multilateral, basis is the immediate uncertainty confronting America’s biggest trade partners, i.e., all those countries that have enjoyed a wide open market for their exports in the US. They won’t have much choice but to negotiate the best deal they can get from the Trump administration, which isn’t likely to be as good as what they have now.

They are also likely to respond by seeking to do more business with one another and to develop more domestic demand to stimulate their economic growth, as exports to the US may be a less dependable source of growth going forward. If so, such responses to America First by other countries could have big positive consequences for the rest of the world. The Second and Third Worlds could finally break their reliance on the US and contribute more to global growth.

The latest data and market actions suggest that they may be on that path. Consider the following:

(1) Commodities. The CRB raw industrials stock price index continues to recover from its freefall during the second half of 2014 and 2015 (Fig. 3). It’s really quite a remarkable comeback. It is up 28% since it bottomed on November 23, 2015 to the highest level since October 2014.

When it was plunging, Debbie and I concluded that it confirmed that the commodity super-cycle bubble, which inflated after China joined the World Trade Organization at the end of 2001, had burst. Commodity producers scrambled to reduce their capacity and debt. The rebound in commodity prices so soon after the bubble burst suggests that it wasn’t just a bubble. There is fundamental demand out there for the stuff. That’s good.

(2) Currencies. The rebound in commodity prices since late 2015 is even more impressive considering that the J.P. Morgan trade-weighted dollar remained strong last year and early this year (Fig. 4). Since the mid-1990s through 2015, a strong (weak) dollar has been associated with weak (strong) commodity prices.

Another interesting development since last year is that most of the strength in the dollar is attributable to weakness in the currencies of developed world countries based on the composite MSCI currency index for them (Fig. 5). What’s surprising is how well the Emerging Markets MSCI currency index has performed (Fig. 6). It is up 6.9% since it bottomed on January 20, 2016. That may not seem like much, but it is impressive in the face of the Fed’s rate hikes at the end of 2015 and again at the end of 2016, with widespread expectations of two or three more hikes this year.

(3) Emerging Markets. In other words, emerging economies may be emerging from their hyper-sensitivity to US monetary policy. That’s confirmed by the relative strength of the Emerging Markets MSCI stock price index in both local currencies and in dollars (Fig. 7). The former is up 24.9% since January 21, 2016, while the latter is up 33.5%.

From 2001 through 2012, there was a strong inverse correlation between the Emerging Markets MSCI stock price index (in local currencies) and the trade-weighted dollar (Fig. 8). They’ve diverged since then as the former has traded in a volatile range, while the latter has soared.

While the relationship between emerging markets stocks and the dollar isn’t what it used to be, the Emerging Markets MSCI stock price index in both local currencies and in dollars is still highly correlated with commodity prices (Fig. 9 and Fig. 10). This suggests that they still depend too much on commodity exports, and that their middle-class consumers haven’t emerged enough to drive their economies.

(4) PMIs. As Debbie reports below, January’s composite PMIs confirm the better tone of global economic activity. The C-PMI for advanced economies rose to 54.6, the best reading since November 2015 (Fig. 11). The M-PMI for them rose to 54.2, the highest since February 2014, while the NM-PMI rose to 54.5, the best level since November 2015.

For emerging economies, the C-PMI edged up to 51.9, the highest since February 2015 (Fig. 12). Interestingly, their M-PMI edged down to 50.8, but their NM-PMI jumped to 52.1, the best reading since December 2014. Seeing relative strength in service-producing industries is an encouraging sign that more middle-class consumers may be emerging in the emerging economies. If this continues to be the case, they should be less dependent on exporting commodities as their domestic economies prosper.

In other words, Trump’s World isn’t necessarily going to be a bad one for the rest of the world. It would be a welcome development if more of the “developing” world loses that adjective and becomes part of the “developed” world. A world in which every nation pursues its own interests first and foremost--including free, but fair, trade--could be a happier one if national leaders focus on promoting more prosperity for their countries. That can only happen in a world of free, but fair, trade. To paraphrase John Lennon, “All we are saying is give fair trade a chance.”

 

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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It’s very possible that countries in the rest of the world will rise to the challenge posed by Trump’s America First policies by concluding that they can no longer count on the US.
Trump, America First, Winning Strategy, World
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2017-14-07
Tuesday, 07 February 2017 02:14 PM
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