This letter should find you buckled in for the turbulence I described last week. If not, I hope this one convinces you. The storm is seven days closer now. There are times when normality slips out of reach, and I believe we are approaching such a time.
I have lived through recessions and bear markets; I know what they look like. I wish I could forget what they feel like. They don’t come out of nowhere; there are always warning signs. Many investors choose to ignore those signs; I choose not to. I hope you make the same choice.
The monster can come from different directions. Imagine the horror movie where the doomed victim knows the creature is out there. He hears its growls and desperately looks all around for their source. Then the camera pans left and you see the darned thing sneaking up on him from behind. [Cut, add scream, fade to black.]
Over the next few letters we will consider the various monsters that may set upon us. Any one on its own might be manageable, but we’ll be out of luck when several hit us in rapid succession. We’ll start with this big bad boy: Trade War.
For the last 20 years, the biggest monster in my worry closet has been protectionism and trade wars. Last year both presidential campaigns voiced ideas about protectionism and trade that reflected appalling economic ignorance about the importance of trade to global prosperity, and particularly to the prosperity of the US. As I explained in “The Trouble with Trade,” I hoped then that the talk was all just campaign rhetoric and political pandering. No such luck.
Trade is the global economy’s bloodstream. The more freely it flows, the better for all. As David Ricardo explained 200 years ago, different peoples have unique characteristics that enable them to produce certain goods at lower opportunity costs than other can. Free trade gives consumers access to the best goods and services at the lowest prices.
However, what we now call “free trade” is not what Ricardo had in mind. We have instead managed trade designed to benefit certain favored parties and to disadvantage others. You can’t blame free trade for our problems, because we haven’t got it.
Those who have seen their interests short-changed in the managed-trade game have had enough. That’s one reason Donald Trump is now president and anti-globalization movements are active in so many countries.
Candidate Trump talked about renegotiating trade agreements to help American workers. I support that goal. The problem is that President Trump seems intent on starting a trade war that will hurt those same workers. We are on a very dangerous course. Worse, if a report I saw last week is accurate, that course is already locked in.
The report comes from Axios, a Washington-based news site recently launched by some Politico veterans who want to disrupt the mainstream media. This is what Axios reported June 30, based on the input of anonymous Trump-administration sources:
With the political world distracted by President Trump’s media wars, one of the most consequential and contentious internal debates of his presidency unfolded during a tense meeting Monday in the Roosevelt Room of the White House, administration sources tell Axios....
With more than 20 top officials present, including Trump and Vice President Pence, the president and a small band of America First advisers made it clear they’re hell-bent on imposing tariffs – potentially in the 20% range – on steel, and likely other imports....
One official estimated the sentiment in the room as 22 against and 3 in favor – but since one of the three is named Donald Trump, it was case closed.
No decision has been made, but the President is leaning towards imposing tariffs, despite opposition from nearly all his Cabinet.
The following Sunday, July 2, the Wall Street Journal’s William Mauldin (no relation to me) filed this:
The Trump administration missed a self-imposed Friday deadline for concluding a major probe of steel imports, a delay officials said was driven by unanticipated complexities in engineering such a big shift in U.S. trade policy.
The administration has faced challenges in implementing its “America First” policy amid resistance from lawmakers and many business groups who worry that new curbs on steel imports could drive up costs for American manufacturers and spark retaliation from trading partners.
That report suggests that the June 26 meeting was less conclusive than Axios opined – but the trade hawks have not given up. The “America First” side is probably headed by presidential advisor Steve Bannon and Peter Navarro, director of Trump’s National Trade Council (a new office created by Trump), along with Trump himself.
Navarro, a former University of California, Irvine economics professor, was already a well-known protectionist when Trump hired him as a campaign advisor last year. Author of a book called Death By China, he is opposed to trade deficits and has accused China and Germany of currency manipulation. Very few academic economists share Navarro’s views. The simple fact is that Navarro embraces fallacious economics ideas. Kevin Williamson in the National Review takes his measure:
Professor Navarro, among other things, makes economics errors that would be obvious to an undergraduate. This has been commented on at some length elsewhere, most prominently after he published a review of the Trump economic plan (a review co-authored with Wilbur Ross, who is not an economist but is now Secretary of Commerce) in which he proffered the schoolboy argument that, because GDP is defined as the sum of consumption, investment, government spending, and net exports, eliminating our trade deficit with China would add substantially to GDP. In economics terms, he has mistaken an accounting identity for real-world causality; in layman’s terms, this is horsepucky, “a mistake that an econ professor like him really shouldn’t be making,” as Noah Smith of Bloomberg put it.
This is an appalling mistake for anyone, but for an economics professor to do this? And one that is actually in a position to influence trade policy?
In his books and writings, Navarro peddles analogies he pulls out of thin air as “facts,” without a shred of evidence to back them. For instance, as Williamson notes,
His sloppiness with sources is general. Navarro cites a Rand Corporation report suggesting that China is behind Iran’s nuclear program without mentioning that the report is a quarter-century old, that it identifies China as a “moderate threat to U.S. interests,” or that subsequent Rand analysis suggests that Chinese involvement with Iranian nuclear ambitions seems to have ended around 1997. He does not even cite any particular Rand report, simply attributing a long quotation to “the Rand Corporation.”
Navarro makes up stories about a future where poorly made Chinese cars are crashing and killing US citizens (even though a few extraordinarily well-made Volvos are the only cars made in China that are driven in the US). He claims that the Chinese keep unemployment high so that wages can remain low, even though their wages have been rising significantly for the last 15 years.