I’m old enough to remember when President Trump boasted about the stock market. No more. As of this writing, the Dow Jones industrial average is sharply down, again, the fall triggered this time by the arrest in Canada of Huawei Technologies’ chief financial officer, Meng Wanzhou. While this isolated incident triggered renewed fears of trade wars, the stock market had already plunged about 800 points (3 percent) on Tuesday.
Investor angst was fueled by the arrest of a Chinese executive that further threatened progress on trade, coupled with omens of a recession in the bond market and a steep drop in oil prices.In morning trading, the Dow Jones industrial average fell more than 750 points, or 3.1 percent. ...“Trump administration claim that there would be short-term pain associated with the tariffs to correct the wrongs now looks like it might be more of a long-term drag on investor and business confidence,” Chris Rupkey, chief financial economist of MUFG Union Bank wrote in a note to investors Thursday morning. “The odds of recession the next two years have risen dramatically, and if one does occur, it will be the Trump recession.”
Understand that Trump inherited a very strong economy. He has had a Republican-controlled House and Senate. And he got his tax plan, a mammoth supply-side cut that disproportionately benefited the rich and corporations. Oh, and he has been on a protectionist tear since his first day in office, and already has inflicted pain on U.S. consumers and farmers. His promised resurgence of manufacturing and of coal (the latter quite laughable considering the alternative sources of energy) have not panned out.
Put differently, the Obama recovery is wearing down and huge debt, trade wars, rising interest rates and a slowdown in China’s economy are pushing us toward a setback, if not a full-blown recession.
Magnifying the market freakout is the inversion of the yield curve (when short-term bond rates exceed long-term rates, sometimes considered a precursor to a recession). It’s not clear if this is the flashing red light for a recession or a result of “other factors, such as a recent reversal of large speculative bets on declining bond prices and the Federal Reserve’s large holdings of Treasuries," according to Reuters.
This is not 1929, and as bad as Trump’s trade policies may be, he has not brought back the Smoot-Hawley Tariff Act (which raised average tariffs on thousands of imported goods to 48 percent). However, there is a reason that credible economists who may disagree on other matters almost uniformly oppose protectionism.
There is reason to be skeptical that a negotiated settlement will conclude within the 90 days China and the United States decided upon, and even less reason to think Robert E. Lighthizer, the hard-liner U.S. trade representative who will head the U.S. bargaining team, has the ability to close a deal. “He will be taking the reins from [Treasury Secretary Steven] Mnuchin, who led previous rounds of negotiations with the Chinese but could not close a deal that satisfied the president,” the New York Times reported. “That choice could rattle the Chinese, who have cozied up to Mr. Mnuchin, viewing him as more moderate.”
Even under the best of circumstances with a president who could take “yes” for an answer and a unified administration position, reaching a deal would be hard. With neither of those going for us, it may be entirely unrealistic to think we can reach a comprehensive resolution on this in three months. Economist Tyler Cowen explains:
The basic problem with any U.S.-China trade conflict is that there is not very much the Chinese are interested in offering, and their intransigence is more than just a bargaining stance. They are willing to buy more American soybeans and manufactured goods (and probably wish to anyway), and they might give U.S. financial institutions freer rein within China. But they won’t dismantle their system of state-owned enterprises, as those companies are among China’s most powerful special interest groups. Nor will China give the major U.S. tech companies free rein in China, if only for reasons of national security and China’s desire to build a surveillance state based on data controlled by China.
If these very problematic talks do not succeed, the 10 percent tariffs will certainly remain and Trump is likely to proceed to push ahead to 25 percent, a move that was delayed when the parties reached an agreement on a negotiating structure.
In sum, we are in uncertain economic ties. It’s the sort of situation in which you dearly wish you had a respected, credible and stable U.S. president. But we don’t. So maybe investors' freakout is a perfectly rational response to chaos, chaos brought on in large part by Trump.