Why markets are ignoring the trade war
WHY MARKETS ARE IGNORING THE TRADE WAR— For the latest POLITICO Money podcast, I spoke with Richard Bernstein, former chief investment strategist at Merrill Lynch and now head of Richard Bernstein Advisors, about why markets are racing ahead even as President Trump executes a trade war with the Chinese.
His answer? The economy and corporate profits are strong and Wall Street won’t care about trade wars until it threatens either of those things. “I wouldn’t say that Wall Street doesn’t care, I think that’s a bit strong. I would say that for where they are right now, the trade wars are taking a back seat to the fundamentals of the US economy. The US is really hitting on all eight cylinders right now and I think that’s the more important story for the stock market.
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But he’s not convinced markets will shrug off trade wars for long, especially if tariffs between China and the U.S. run into the hundreds of billions (more on which below). “Now of course if we start exacerbating the situation on trade it could move to the front seat pretty quickly. If there’s a rational approach, I think the markets can digest that. If it’s real scattershot and emotional I think the stock market has a lot of trouble with that.
IT’S THE INFLATION, STUPID — One of the key points people are missing, according to Bernstein, is the impact the trade war could have on already rising inflation: “This is one of many policies right now that are very pro-inflation… I don’t think there has been any time in history where restricting the flow of goods and services has not been inflationary.”
SPEAKING OF THE TRADE WAR — Via POLITICO: “The Trump administration on Tuesday published a list of $200 billion worth of Chinese goods that it proposes to hit with an additional 10 percent tariff, escalating a mounting trade war between the two countries. ‘Rather than address our legitimate concerns, China has begun to retaliate against U.S. products,’ U.S. Trade Representative Robert Lighthizer said in a statement. ‘There is no justification for such action.
“USTR will hold a hearing on the proposed tariffs Aug. 20-23 as part of public comment that ends Aug. 30. A final decision will come at some point after that, administration officials said. The administration once again tried to target exports from Chinese high-tech industries that benefit from government subsidies under Beijing’s ‘Made in China 2025’ plan, the officials said. The new list also includes some items that private sector groups asked to be included during hearings on the initial $50 billion list, they said.” Read more.
REACT—Via the National Retail Federation: “The latest list of $200 billion of products to be subject to tariffs against China doubles down on a reckless strategy that will boomerang back to harm U.S. families and workers.”
Via the Nat’l Association of Manufacturers: “The last thing America’s manufacturing workers need is an escalating trade war. America has China’s attention, so instead of more tariffs, the U.S. and China should immediately begin working toward a fair, bilateral, enforceable, rules-based trade agreement to end China’s market-distorting activities. We can’t afford to wait any longer.
“China cheats, and manufacturers want to see China held accountable. But more tariffs like these will punish America’s manufacturing workers—and could undermine our hard-won gains thanks to tax and regulatory reform, which have increased our global competitiveness”
TOP TWEET — Sen. @JeffFlake: “FINALLY, Senate will push back on the President’s abuse of Section 232 to impose tariffs. We will vote Wednesday on a ‘Motion to Instruct,’ a first step toward reasserting Congress’s constitutional role on tariffs.” .. Yeah, that should do it.
HOUSE WAYS & MEANS CHAIR KEVIN BRADY: “With this announcement, it’s clear the escalating trade dispute with China will go one of two ways – a long, multi-year trade war between the two largest economies in the world that engulfs more and more of the globe, or a deliberate decision by President Trump and President XI to meet and begin crafting an agreement that levels the playing field between China and the U.S. for local farmers, workers and businesses.
“Despite the serious economic consequences of ever-increasing tariffs, today there are no serious trade discussions occurring between the U.S. and China, no plans for trade negotiations anytime soon, and seemingly little action toward a solution. It’s time to take the first step into a new era of fair and free trade. I strongly urge President Trump and President Xi to meet soon face-to-face to craft a solution to establish fair and lasting trade between our two countries.”
BROWN REACT — Responding remarks from Sen. Sherrod Brown (D-Ohio) in yesterday’s MM one reader emails: “In what appears to have been a call for nationalizing the largest U.S. banks, Senator Brown criticized the Federal Reserve for permitting those banks to pay dividends rather than redirecting the money to higher employee pay or price reductions for customers or greater taxpayer protection.”
SO MUCH FOR THE TAX CUT JOLT? — Market Watch’s Greg Robb: “Expectations of a strong jolt to the economy from the $1.5 trillion Trump tax cut ‘may be overly optimistic,’ according to new research from the San Francisco Fed.
… Daniel Wilson, a vice president in the San Francisco Fed’s research department, and Tim Mahedy, a former associate economist at the regional bank, said these expectations may not be met.
“In essence, the Trump tax cut plan is ‘a large, mostly temporary tax cut hitting a hot economy,’ the researchers said. There is not a lot of research on procyclical tax cuts. But what studies there are suggest the effects of fiscal stimulus is smaller during expansions than during recessions. For one thing, individuals won’t feel an urgent need to spend any tax windfall in good times that they do in downturns.” Read more.
SO MUCH FOR RESHORING? — A.T. Kearney’s 4th Annual U.S. Reshoring Index “found that reshoring, contrary to popular thinking, is not happening (and likely won’t be, even amid trade policy volatility).” Read more.
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THIS MORNING ON POLITICO PRO FINANCIAL SERVICES — Zachary Warmbrodt on the House’s passage of legislation intended to shield U.S. insurers from international regulatory standards. To get Morning Money every day before 6 a.m., please contact Pro Services at (703) 341-4600 [email protected]
DRIVING THE DAY— President Trump attends meetings and events at the NATO meeting in Brussels… House Financial Services marks up multiple bills at 10:00 a.m. … House Small Business Committee has hearing at 11:00 a.m. on “Innovation Nation: How Small Businesses in the Digital Technology Industry Use Intellectual Property” …
Senate Environment and Public Works Committee has a hearing at 10:00 a.m. on “The Long-term Value to U.S. Taxpayers of Low-cost Federal Infrastructure Loans” … Senate Finance Committee has a hearing at 3:00 p.m. on paid family leave … Producer Prices at 8:30 a.m. expected to rise 0.2 percent headline and core …
ALSO TODAY: TECH EVENT — POLITICO Live hosts a conversation, moderated by Nancy Scola, at 8:15 a.m. about the government’s role in regulating artificial intelligence. Live stream will be here.
PFIZER TO LOWER PRICES — POLITICO’s Dan Diamond: “Trump … announced Pfizer would lower drug prices, although the pharma giant later clarified it would only temporarily roll back price hikes that went into effect July 1. ‘Just talked with Pfizer CEO and @SecAzar on our drug pricing blueprint,’ Trump tweeted at 6:37 p.m. ‘Pfizer is rolling back price hikes, so American patients don’t pay more. We applaud Pfizer for this decision and hope other companies do the same. Great news for the American people!’
“Pfizer, in a statement released after the president’s tweet, said its Chairman and CEO Ian Read discussed drug prices with Trump on Tuesday, about a week after price hikes on dozens of the company’s drugs took effect. According to Pfizer, the company will cancel those price increases to give the president an opportunity to work on his administration’s broader effort to overhaul drug prices.” Read more.
TRUMP CLAMPS DOWN ON REGULATORY JUDGES — POLITICO’s Andrew Hanna: “Trump moved to tighten control over the in-house judges that implement much of the federal government’s regulatory agenda — his latest step to consolidate political power throughout the sprawling bureaucracy.
“An executive order signed Tuesday gives agency heads greater discretion over the selection of so-called administrative law judges. These judges, typically promoted out of the federal civil service, make legal rulings that drive regulatory actions across the federal government.” Read more.