I cannot remember the last time that Bloomberg criticized the president of the U.S. but it did so late on Thursday under the heading “The Trump recession label is going to stick”. In a long article, the writer stated “Trump came into office in the midst of a robust economic recovery” where, under Obama, 16.1m jobs had been created, unemployment had been cut from 10% to 4.7% and stock markets had risen 236%. The writer observed that “In other words, Trump inherited an accelerating post-credit-crisis recovery” and all he had to do was to avoid disrupting it. The writer concluded that “What occurred instead is a litany of unforced errors and misguided decisions” and so on, in which he criticized not only Trump but also his political appointees. Navarro came in for named criticism and so did Powell but the real criticism was directed at Trump for appointing them. I never thought I’d see such an article broadcast by Bloomberg. 

Last week I wrote about a possible U.S. recession but said it was too early to talk of one. I also attributed the fears about recession to the pessimism of analysts and economists and not to the actual economy which was still growing at a QoQ rate of 2.1% per annum even though its fallen over 50% from 3.5%p.a. Q1/18 after Trump’s tax cuts rocketed growth (but plunged the U.S. further into debt).

This week, the specter of recession featured heavily in the minds investors, economists, bankers and the media. It has become so developed that even Trump’s concessionary reversal of some tariffs on Tuesday had no lasting effect. The day after Trump’s concessions and the resultant stock market rally, U.S. markets declined by about 3% (the DJ shed 800 points – the biggest fall this year) when the 2 & 10 year treasury rates briefly became inverted for the first time since 2007 (this is usually an early warning of a recession – although not immediate). Trump then reverted to blaming the Fed for the woes affecting the U.S. economy. But then, in a tweet and during an election rally in New Hampshire, Trump said that the U.S. economy was fine, the largest and strongest in the world and he boasted to have made it so. He also said that tariffs were having the desired effect and weakening China whilst strengthening US manufacturing.

Whether or not Trump is right about the Fed (i.e. the “blame game“), should not be an issue. Focus should be directed at what can be done now to stave off a recession. But Trump says the economy is fine (and never been better) and tariffs are working? Late Thursday, a White House spokesperson (Ross) said that Trump’s concessions on tariffs were for the benefit of the U.S. public and not a sign of weakness in the trade war with China. 

Critics of Trump have provided facts and figures to show that Trump’s boasts are false and, if continued, will only make things much worse than they are now.

I believe that a 25 point Fed interest rate cut in September will not stem recession fears. According to reports, such a rate cut is already priced into markets as is another 25 point cut later in the year. 

The U.S. national debt has ballooned to US$22.3trillion. If Trump is elected for a 2nd term, and the debt continues to grow at the extant rate, it will be over US$30trillion by 2024. Student debts are huge, mortgage lending is at an all-time high, most states are bankrupt, farmers are heavily in debt, farming subsidies are US$20bn+ per annum and credit card debt is out of control. The U.S.’s finances are not healthy. 

On the bright side (yes there are positives), the latest retail sales were higher than the previous month (forget the forecast – it was hopelessly pessimistic). Another welcome relief was the robust stock market rally seen on Friday probably caused by rumours that further stimulus is being considered.

Now to other countries/regions.

The ECB has no solution to the EEC’s weakening economy which is on the verge of recession as clearly evident by shrinking German GDP stats. In the past, more negativity in interest rates, a collapsing euro, and more bond buying have all failed to provide lasting growth or boost investment. At least the ECB and EEC do not deny there is a big problem. The EEC’s savior is a positive balance of payments on trade and services.

China is also suffering with lower industrial production, lower retail sales and lower economic growth but its export/import balance is robustly healthy. It has been “fire fighting” adverse economic issues for months and is becoming adept at it. The economic stats are weak except for the trade figures which are healthy.

There are few economies in the world which are prospering (Australia seems to be doing ok).

What can be done to avert a recession? The only answer must be to reverse the primary causes. A coordinated worldwide effort is needed involving the U.S., Europe, China and Japan. But as Trump says that tariffs are working and the U.S. economy is fine (never been better), there’s little chance of tariffs being scrapped. 

Trump also blamed Democrats for causing distress to the U.S. economy. That’s nonsense, the Democrats are so ineffective its farcical. I have only read of one Democrat who openly criticized Trump’s tariff policy – Betto O’Rourke and that was months ago.

Trump’s torrent of tweets late on Wednesday in which he congratulated Xi as a great leader and said that the U.S. wanted a deal (the first time he’s said this in months) was a good start to conciliation. China responded saying that it “hoped” the U.S. could meet China half way (the White House did not reply positively to this offer, in fact, Ross’s comments seemed to reject it). No more has been said on the offer.

Remember the Lehman’s crash, the U.S. government refused to acknowledge that anything was wrong right up until the proverbial hit the fan and everyone got splattered. The whole U.S. economy then imploded. Under the guise of helping business, many of the safeguards put in place after Lehman’s have been cancelled reducing that carefully built protection to limit the effects of recession.  

If a recession occurs, then many millions of normal folk will suffer as we all saw after Lehman’s crashed.

Now to another issue in the headlines again this week – Hong Kong riots.

The people of Hong Kong did not know when they were well off. They have never had autonomy or “democracy“, apart from a few years of meddling by Paton, which achieved 0. So the reason for mass riots, violence, beating up passers-by, closing the airport, ruining business, inciting a run on banks and ruining the reputation so richly deserved on the guise of wanting less interference from Beijing and more autonomy is hard to understand. In the 80’s many HK Chinese welcomed the idea of HK becoming part of China. Those that didn’t, emigrated, but many returned because it was a great place to be. Chinese mainlanders rushed to buy real estate which made HK even more prosperous. As part of China, it was obvious that, after 1997, the territory would move further towards China but China wished to retain HK’s excellent worldwide contacts and respect. That reputation has now largely been destroyed. I will not be surprised if Shanghai and Shenzhen take over many of HK’s financial dealings as companies turn their backs on the territory. Rioters contend that the police force acted too violently in using tear gas and pepper spray to disburse crowds. I think that this is nonsense. Peaceful assembly does not extend to blocking the public’s right of way, closing MTR stations, closing the airport, wanton destruction, spray painting and preventing businesses from earning a living. The police had no alternative when crowds would not disburse after being asked to do so. Those involved are supposed to be responsible adults, they should act as such not as a rebellious lawless force hell-bent on disrupting society. It will only get worse if riots continue.

Thailand has been hit hard in the highly productive northern farmlands where there is the worst drought in 10 years with starch dry rice paddies and declining agricultural production. If the situation worsens, then rice prices may be forced still higher and the economy will weaken.

This week, the best performing index was Shenzhen (up 3.04%). 2nd. best was the CSI300 (up 2.12%). The best performing sub-index was utilities (up 1.27%).

Gold and oil prices edged higher. The strongest major currency was sterling and the euro was the weakest.

As a side issue, my thoughts on the U.S. Trump/Fed “blame game” are that the Fed did its best. I think Yellen delayed the first increase for too long and Powell did ok with the possibly exception of the last rate rise in 12/18 when markets had declined for 3 months. But, at that time, U.S. growth was over 3% p.a. and, afterwards, markets gained with the strongest ever start to a year. So, at the time, the rate increase in 12/18 was not an obvious error of judgement. In the autumn of 2018, it was equity markets which were out of step with economic growth due to forecasts of earnings declines which never materialized. The market decline in 05/19 was due to Trump increasing tariffs, which the Fed partly offset with a rate cut in 07/19. After the initial disappointment with a 25 point cut, markets were gaining strongly thereby verifying the Fed’s action but then Trump announced the new 10% tariffs it sent stock prices plummeting and caused further worldwide economic distress.  

 

 

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