Trade continues to rumble as a background threat to the global financial markets.
The uncertainties caused by a trade crisis could grow to be a recession-inducing policy error. Alternatively, they could prove to be a temper tantrum in the trading system that allows stabilization of global growth.
It is hardly surprising that financial markets are reacting strongly as to any hint to the direction of the trade situation, particularly as the future direction seems to be very dependent upon the decisions of individuals rather than the transparent process of collective decision making.
President Donald Trump has granted a 3-month delay to bans on U.S. corporates doing business with the Chinese Huawei Technologies Co. The Chinese government has warned of “unwavering resolve” to fight U.S. bullying, the Straits Times reported.
So, the situation could be described as “mixed.”
Financial markets do seem biased to focus on the President Donald Trump Twitter feed rather than the news from Beijing, but that may be an unbalanced view driven by investor bias rather than political reality.
Besides that, 173 U.S. footwear manufacturers have written on Monday in an open letter to President Donald Trump warning of the “catastrophe” that will befall the American economy if tariffs/taxes are imposed on U.S. consumers of footwear.
What is interesting about this letter is the fact that the Footwear Distributors & Retailers of America is directly describing trade tariffs as being taxes on U.S. consumers, which of course they are.
The letter reads, among other things: “On behalf of our hundreds of millions of footwear consumers and hundreds of thousands of employees, we ask that you immediately stop this action to increase their tax burden. Your proposal to add tariffs on all imports from China is asking the American consumer to foot the bill. It is time to bring this trade war to an end.”
With the tax induced slowdown a distinct risk, Fed Chair Jerome Powell has been opining on “corporate debt” in a prepared speech he gave on Monday evening suggesting that more debt would not be desirable, and stating the obvious, that debt would be more of a problem in a slowdown.
Powell has been downplaying financial systemic risks, in particular.
Powell also warned against looking back to the 2008 – 2010 financial crisis for guidance.
There is a risk here for financial markets because 2008 – 2010 was such a traumatic event, it became a dominant narrative. Investors tend to look over their shoulders all the time, worrying about when it’s going to be repeated, which means too much attention is given to past causes of the crisis and not enough attention is given to new and different risks.
Aside from the debt comments, Powell’s remarks were not very interesting with regard to Fed policy, essentially presenting a neutral outlook for now.
Powell’s speech he gave on Monday evening in Florida at a conference is titled “Business Debt and Our Dynamic Financial System.”
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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