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Trump's Bilateral Approach to Making Free Trade Fairer May Be Working

Trump's Bilateral Approach to Making Free Trade Fairer May Be Working
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Wednesday, 11 April 2018 02:47 PM Current | Bio | Archive

“Suppose They Gave a War and Nobody Came” is a 1970 feature film. The title is derived from an American antiwar slogan from the hippie subculture during the Vietnam War era, popularized by Charlotte E. Keyes in her 1966 article for McCall’s magazine titled “Suppose They Gave a War and No One Came.”

President Donald Trump recently declared a trade war on China. Stock prices bounced around as the Trump administration threatened to impose tariffs on Chinese goods but gave the Chinese government 60 days to surrender to Trump’s demands.

Yesterday, Chinese President Xi Jinping seemed to make peace with the US. In a speech at the Boao Forum for Asia, an annual summit (dubbed the “Asian Davos”), Xi said China will “work hard” to import more. He said: “China does not seek [a] trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account.” He sounded like a perfectly reasonable world leader saying:

“We must refrain from seeking dominance and reject the zero-sum game, we must refrain from ‘beggar thy neighbor’ and reject power politics or hegemony while the strong bully the weak.” Furthermore, countries should “stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks. We should promote trade and investment liberalization and facilitation, support the multilateral trading system. This way, we will make economic globalization, more open, inclusive, balanced and beneficial to all.”

Spoken like a true champion of globalization. I have argued that Trump might actually save globalization by promoting fairer trade on a bilateral basis. That approach makes more sense than the multilateral approach, which takes too much time to negotiate and resolve trade frictions.

Xi is clearly confirming that he prefers this approach to a trade war with the US. Xi announced plans to open up China’s economy, including lowering tariffs for autos and other products. He pledged to enforce the legal intellectual property of foreign firms: “We encourage normal technological exchanges and cooperation between Chinese and foreign enterprises and protect the lawful [intellectual property] owned by foreign enterprises in China.” He seems like a really nice emperor for life.

Strategy: Is Panic Attack #60 Over? If the trade war is over before it even began, then the stock market should be set up for yet another relief rally that will take stock prices to new record highs. The S&P 500 peaked at a record 2872.87 on January 26 (Fig. 1, Fig. 2, and Fig. 3). It plunged 10.2% to a low of 2581.00 on February 8. It then rebounded only to retest the year’s low by falling to 2581.88 on April 2. It was back up to 2656.87 yesterday.

Joe and I are counting the 10.2% plunge from late January through early February as the fifth correction of the current bull market. We are counting the selloff through Friday of last week as the 60th panic attack.

Hopefully, Xi’s speech will allow Trump to declare victory in his short trade war with China. He probably needs to spend more time focusing on the humanitarian atrocities in Syria—not to mention his own legal issues at home following the FBI’s raid on the home, office, and hotel room of his personal lawyer. We doubt that Trump’s legal woes will trigger the 61st panic attack for the market. If not, then investors can go back to focusing on the fundamentals.

The Q1-2018 earnings season has just started. Industry analysts are expecting S&P 500 earnings to be up 17.0% y/y (Fig. 4). Joe and I wouldn’t be surprised if earnings growth is closer to 20.0%. This would be an extraordinary occurrence at this late stage of the economic expansion. Then again, we’ve never seen the corporate tax rate slashed as radically as it has been as a result of the Tax Cut and Jobs Act passed on December 22, 2017.

Meanwhile, as Joe noted yesterday, forward revenues for the S&P 500/400/600 continue rising into record-high territory (Fig. 5). Forward earnings for the three indexes all rose to fresh record highs during the first week of April (Fig. 6). Our Blue Angels analysis shows that with forward earnings moving to record highs, a rebound in forward P/Es to January’s highs would certainly mean new highs for the stock indexes (Fig. 7).

US Economy: Still Trucking Along. There’s a shortage of truck drivers in the US. Yet somehow, the truck freight index compiled by the American Trucking Associations (ATA) continues to make new highs. A 2/9 Bloomberg article titled “The U.S. Is Running Out of Truckers” warns that “for a variety of reasons, it’s truck drivers that represent the most worrisome constraint on U.S. economic growth at the moment.” Consider the following:

(1) Lifeblood. The Bloomberg article adds, “The trucking industry is unique because it’s the lifeblood of moving goods around the country, representing 70 percent of the nation’s freight volume by weight. Without enough trucks and drivers on the road, some combination of things is going to happen: Shipments will be delayed, and producers will have to pay higher prices to get goods to market.”

The ATA corroborates the importance of their industry to the economy: “The trucking industry is the lifeblood of the U.S. economy. Nearly 71% of all the freight tonnage moved in the U.S. goes on trucks. Without the industry and our truck drivers, the economy would come to a standstill.”

(2) Employment. The Bloomberg article also reports the following about the number of truck drivers: “The level of employment in the truck transportation industry, the category broken out in the Bureau of Labor Statistics’ employment report, is essentially unchanged since the middle of 2015. This level happens to coincide with the peak attained in the last economic cycle in 2006” (Fig. 8).

(3) Tons of freight. Meanwhile, the ATA Truck Tonnage Index edged down in February from its record high the previous month (Fig. 9). It is up 7.9% y/y through February using the less volatile three-month moving average (Fig. 10). That matches its highest readings since the end of 2013. This growth rate tends to be a coincident indicator of real GDP growth on a y/y basis.

(4) “Productivity.” We can divide the ATA index by payroll employment in the trucking industry (Fig. 11). It has gone vertical over the past year. That’s not really a measure of productivity. Instead, it probably reflects longer hours worked by truck drivers to meet demand. So it might be a measure of fatigue rather than productivity.

Effective April 1, truckers must switch from logging their hours on paper to doing it electronically or face fines. That may reduce driver capacity by no longer allowing drivers to fudge their hours on paper to stay on the road longer.

(5) Driverless trucks. What about self-driving trucks? They probably are still a ways off from replacing truck drivers. One major accident could set back their implementation for some time. Meantime, the Bloomberg article laments that the prospect of technological disruption in the trucking industry is “hardly giving prospective workers the incentive to commit to multi-week classes to attain a commercial driver’s license for an industry that might be going away.”

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

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EdwardYardeni
Spoken like a true champion of globalization. I have argued that Trump might actually save globalization by promoting fairer trade on a bilateral basis. That approach makes more sense than the multilateral approach, which takes too much time to negotiate and resolve trade frictions.
trump, bilateral, approach, free, trade, fairer
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Wednesday, 11 April 2018 02:47 PM
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