Business and Economics

More market volatility likely 3-31-18

Source: Buckle up   

Based on news from the Trump White House, the stock market has reacted with much volatility. In February stocks sank on promises of American tariffs on imported steel. Then, the news of possible future tariffs against a range of Chinese goods caused a further drop on March 22nd. Then reports that China and America were making progress in trade talks caused the S&P 500 index to rise by 2.7% on March 26th, its best day since August 2015. It promptly fell again by 1.7% the next day.

From this article: "...this year has seen a number of worries come to the fore. “The entire complexion of this stock market is changing before our eyes,” says David Rosenberg, a strategist at Gluskin Sheff, a Canadian wealth-management firm. Central banks are withdrawing some of the monetary stimulus that has supported the market rally since 2009. And economic data have not been as positive as before. Citigroup’s “surprise” index, which is based on whether actual numbers turn out to be better or worse than forecast ones, has dropped back from the high levels reached at the end of last year. The price of copper, a commodity that is particularly sensitive to economic conditions, has fallen by 9% so far this year. The prospect of further interest-rate increases has taken its toll on bank stocks, with America’s KBW NASDAQ Bank index dropping by 8% in the week to March 23rd. Led by the FAANGs (Facebook, Apple, Amazon, Netflix and Google), the S&P 500 Information Technology index managed a five-year annualised return of 18.5%. But controversy over the use of Facebook data in the 2016 presidential election prompted a reversal. Fears of extra regulation caused more losses on March 27th. The index has dropped by 5.2% so far in March."

Other indicators: The ten-year Treasury-bond yield has already risen from 2.4% at the start of the year to 2.79%, in part because the market expects America’s tax cuts to lead to a lot more debt being issued. As a sign of tightening liquidity conditions, the real growth rate of the global M1money-supply measure has slowed sharply, from more than 9% to less than 4%, in recent months. Another warning sign is that the gap between short-term and long-term interest rates has shrunk. In the past, a flatter yield curve has signalled an impending economic slowdown. 

US-China trade: Tumbling down 3-31-18

Source: "War games - U.S.and China trade"  

US SuicideThe US under Trump wants to reduce the US-China balance of trade, now titled about $300 billion a year in favor of China. Also, Trump is citing intellectual property theft as a concern. "...by pressing American companies to hand over their technology when they form partnerships with Chinese ones (this is often a condition of operating in China), and by making it hard to enforce intellectual-property rights once a technology-related contract ends, the Chinese state has rigged the system against American companies."

Blocking Chinese investment in US companies would reduce the threat of intellectual property theft. One action..."would be tighter rules on investment between the two countries. The details are unclear. The president can already block investment on national-security grounds, using the Committee on Foreign Investment in the United States (CFIUS)."

Regarding the trade imbalance, it is caused by multiple factors. In fact,a high imbalance is a sign of a prosperous economy on our end. From the article: "Another risk stems from Mr Trump’s obsession with the bilateral trade deficit. No deal can guarantee to bring it down. Whatever the two sides agree to, the fact is that trade is devilishly difficult to manage. Factors beyond China’s control could easily overwhelm the impact of any deal on the bilateral trade deficit. Mr Trump’s cuts to income and corporate taxes mean that America’s economy is about to receive a large stimulus. All else equal, this will suck in imported goods."

"As for Chinese investment in America, the CFIUS committee was already toughening its oversight. According to Rhodium Group, a research firm, this was part of the reason Chinese investment in America fell by 35% from 2016 to 2017 (a Chinese clampdown on outbound capital was the main factor). New rules that give wide discretion to the president, or block investment on economic rather than national-security grounds, could easily be abused."

 

Tough lessons on steel tariffs 3-24-18

Source: Economist: 24 Mar 18 "Steel banned"         

Steel Production Versus Steel Intensive JobsIn 1982, the US put restrictions on cheap steel being imported from Europe. Soon, steel-hungry industries in the US increased imports from non-European nations. End result: steel imports actually increased after the restrictions. Trade is like water, if you try to block its flow in one direction, it merely flows in from somewhere else. Example: under Obama, imports of cheap Chinese steel were restricted. In response, steel imports from nearby Vietnam increased.

More problems with steel tariffs: everyone involved will try and apply for an exemption. It is estimated that the Trump administration will spend 24,000 work-hours evaluating the merits of 4,000 applications for exemptions to the new steel tariff. More importantly, as you can see by the graphic, in the US our steel production sector is far smaller than our steel producing sector. Steel tariffs will harm more workers than they help.

The digitization of trade’s paper trail may be at hand 3-24-18

Source: "Pulp Friction"       

The World Economics Forum estimates that 20% of the cost of transporting trade goods goes towards administratuve and paperwork expenses. Simplifying administrative procedures and reducing paperework could save more money in international trade than eliminating all tariffs. The UN says full digitization of trade paperwork could increase trade by $250 billion in the Asia-Pacific region alone. Sadly, not much progress has been made in this area prior to this year. A 2008 UN convention on the standardization of electronic trade documents only had 4 countries sign on. One source of resistance might be major banks, who currently employ thousands (and charge millions) to review paper documents looking for errors or discrepancies. Technology has also been a problem - how to update and share digital documents in a safe, secure way is a significant challenge.

IBM and Maersk are partnering on a paperless trade document system that will be open-source and based on blockchain technology. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a coded version of the previous block, a timestamp and transaction data. By design, a blockchain is inherently resistant to modification of the data. It is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. For trade documents, it means that each party in the process could access all the relevant paperwork and update it in real time.