Trump could cause the next global recession: here's how

Wed, 07 Mar 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/trump-cause-next-global-recession-heres-233953884.html 

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Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.

As this realisation spread and data confirmed some upside inflation risks, markets buckled with a surge in volatility. This prompted further analysis from some of those previously enthused by President Trump’s economic policy agenda.
To be sure, this is still playing out with the tax cuts only just implemented and the infrastructure program yet to be formalised. But little did the market realise that the Trump policy Kool aid was only just starting to flow. With minimal consultation with advisors and no substance to frame how it would work, last week Trump announced the imposition of tariffs on steel and aluminium imports into the US.Markets were jolted and the incredulity quickly intensified when in the wake of the steel and aluminium announcement, Trump tweeted, “trade wars are good, and easy to win”.

Australia’s Trade Minister, Steve Ciobo, was at the forefront of the comments when he said that, “over time, if it [the trade war] got bad enough, we could see, for example, a recession – and we know the consequent impact of that.”

Over the weekend, Trump who was clearly energised by the prospect of a trade war and presumably having considered the number of European badged cars driving on the roads in the US tweeted, “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a Tax on their Cars which freely pour into the US They make it impossible for our cars (and more) to sell there. Big trade imbalance!” The markets have not yet been able to react fully to these threats. Over the next few days, they will be able to react to the potential implications of a broad-based hike in US tariffs and the obvious retaliation from other countries to the impact of those tariffs on their economies.

Should Australia put a tariff computers made in the US? US manufactured aircraft? I’m sure Qantas and Virgin would not be pleased. Pharmaceuticals and medical equipment?

Clearly the answer is no.

But if Trump’s trade war come to pass and as appears possible, if it escalates to a range of other products and to the countries, the fall out will be ugly.

Recession? Perhaps.

It depends on how wide the tariff barriers turn out to be, the extent of retaliation from other countries and how companies impacted negatively from the tariff increases perform. Some may be at risk of going bust. If this turns out to be the effect of Trump’s trade war, those who lose their jobs and have their wealth destroyed will have Trump to thank.

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THE LATEST FROM THE KOUK

The houe price bet is on! Tony Locantro takes the offer

Fri, 21 Sep 2018

While Martin North from DFA rejected my generous offer to have a wager based on his call for a 40 to 45 per cent fall in house prices, Tony Locantro, an Investment Manager with Alto Capital in Perth has decided to take up the offer on the same terms that I offered Mr North.

Specifically, we are wagering $15,000 to $2,500 that Sydney or Melbourne or national wide house prices will or will not fall by more than 35 per cent from their peak at any stage before and up to the December quarter 2021.

The measure will be based on the Australian Bureau of Statistics Residential Property Price Indexes, Eight Capital Cities, Catalogue No. 6416.0.

This means that if, at any stage the price index for any of Sydney, Melbourne or the aggregate eight capital cities prices is down 35.0 per cent or more, I will give Tony $15,000 cash. Conversely, if by the time the December quarter 2021 data are published and the peak to trough decline is 34.9 per cent or less in Sydney, Melbourne or the eight capital cities, Tony has to give me $2,500.

Who knows, it might be the start of a wonderful friendship. We have added a nice informal touch – when the cash is handed over, the winner will buy a dinner with a nice bottle of red to console the loser.

I will be providing regular updates as the numbers roll out.

Trump boosts US stocks with borrowed government money

Thu, 20 Sep 2018

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/trump-boosts-us-stocks-borrowed-government-money-011637215.html 

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Trump boosts US stocks with BORROWED government money

US stock prices continue to trade at near record highs and a lot of the recent rise has a lot to do with the policies of President Donald Trump.

The surge in the Dow Jones Industrial Average has been phenomenal. Since the November 2016 Presidential election, the Dow Jones is up around 50 per cent despite a few hiccups at the start of 2018 as the US Federal Reserve hiked interest rates and the threats of a US trade war turned into a reality.

The rise in US stocks, whilst impressive, is built on all the wrong things. ‘Wrong’, that is, in terms of sustainability.

As President, Donald Trump has delivered a range of tax cuts that have a total cost to the budget of around US$1.5 trillion. This one-off, impossible to replicate policy like any other policy that dumps cash into the economy has underpinned stronger economic growth and a temporary lift company profits. The tax changes has seen US companies engage in a record level of stock buy-backs which by design, has been a powerful driver behind rising share prices.

The problem with the Trump tax cuts is that every cent of the US$1.5 trillion has been funded with money borrowed by the government.

Such is the destruction to the US budget, that the US Congressional Budget Office is now estimating the US budget deficit to average a staggering 4.8 per cent of GDP in every year in the decade from 2018 to 2028. When Trump became President, the budget deficit had narrowed to just 2.5 per cent of GDP.