I See a Perfect Storm Plus One (not Stormy)

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Reminder: a perfect storm is the result of three strong weather fronts colliding together and delivering havoc on land or sea. I think I see one beginning to form on the economic horizon. But worse, there is a fourth weather front converging with the other three.

First, the so-called “tariff wars” will end up with who saves face. Trump’s bombastic negotiating strategy based on some ridiculous numbers that 24/7 media spreads across the globe in real time, puts the whole world on edge. Nobody knows what his end game will be (I’m sure he doesn’t either). He also scares the hell out of our exporting industries as well as industries that need to import and consume the goods he threatens to slap tariffs on. These consuming industries, in turn, fear they will need to increase prices that will not be accepted. And if Trump and his team of “yes men” think tariffs will revive our lost manufacturing industries, they are all smoking something. As for yes men, I point to Larry Kudlow, Trump’s new economic advisor. Talk about hypocrisy, Kudlow was one of the most outspoken free traders against tariffs. Now, since invited into Trump’s “house of cards,” he’s right behind the pied piper as the edge of the cliff looms ahead.

The second front is made up of our consumers, who comprise 70 percent of GDP growth. Ever since the Great Recession, free money has been tossed into the economy to theoretically spark growth. It didn’t. A measly 1.5 to 2.5 percent growth YOY was coined by famed economist Lawrence Summers as a sign of “secular stagnation,” which he predicted would be with us for years. The free money was not used by our corporations to invest in growth, new plants, more workers and higher wages, because they realized there was not enough consumer demand for more of their goods and services. Or, another way of looking at it, is that there is more supply than demand to consume it all. So why make more? Ironically, they didn’t need the free money anyway because they have been sitting on $2 trillion of cash for the same reason, lack of demand. So, all of the free capital that wasn’t, and still isn’t, being invested in growth, is being invested in more capital (read: the stock market). When capital is invested in capital, the income gap widens putting an additional barrier on consumption because the poor are not getting the money, the wealthy are. And the wealthy don’t consume as much as they save or invest in more capital. Consumer-facing industries and main street (without a middle class) are keeping the economy in secular stagnation because there is not enough demand to warrant more supply. Thus, the slogging economy continues to slog.

On top of this, Trump serves up the “tax cut and jobs” act which he trumpets will shower money on the poor (who will spend it), and the huge tax cuts for corporate America will incentivize them to invest in growth: more plants and equipment, more workers and higher wages. Wait a second!! Didn’t I just mention that corporate America has been sitting on $2 trillion of cash for a decade and has not invested it in growth — why? Once again, because there is not enough demand or there is already too much supply. So why would they invest the tax cut windfall in growth? The answer is they will not. They will invest it in more capital, like stock buybacks. Oh, maybe there will be a little bump in growth, but nothing to write home about.

Okay, are you ready for the third storm? The Fed, I believe, is acting as if nothing I have previously said makes any sense. They are projecting inflation (due to growth), while economists like Summers see a continuance of secular stagnation. So, they are putting the damper on our New Year’s party of freely flowing money. They are raising interest rates. And I believe the hangover will be horrendous.

Worse, if what I believe the perfect storm plus one will result in — another recession — the Fed, having held rates so low for so long, will have no safety net to save the economy from a deeper recession then the last one.

There are economists, much smarter than I who have made the perfect storm case with credible quantification. And there are just as many smart economists who believe the opposite, that everything is hunky dory and our growth is going to take off like a rocket when all of Trump team’s initiatives are put to work.
But the wildcard at the end of the day is the wild man himself. There is no calculus of what will happen. But one thing that is fairly obvious by his actions is that he hates to lose and he will “punch back ten times harder” on anyone who punches him. Therefore, saving face is supremely important to him. We also know that saving face is supremely important to the Asian leaders as well, including, by the way, the dear leader in North Korea. And with the glaring global media coverage of everything, all the time, as it reports on each step of the game of “chicken” being played by Trump and the Asian leaders, how will either side be able to find a hiding place where they can negotiate a reasonable agreement by each losing a little face?

It’s a bit scary when one thinks about the fate of the world depending on the eeggshells of a few egos.

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