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Trade Wars Would Wipe Out Tax Cut Benefit For S&P 500 EPS
This headline from Bloomberg's lead Saturday story pretty much sums it up: "A Horror Week for the Dow Has Investors Begging for Trump Respite".
That reminds me of something we wrote last Sunday in our week ahead preview. Recall this:
Again, I guess what I would say here is that if something goes “wrong” with all of that and we get too much President Dennison over the course of the week, it could be a toxic brew.
"Too much Dennison." If you're looking to place blame for this week, that's the
Just stumbled upon your H site … love it. Heard on CNBC this week (don’t recall the source CEO of something) in response to question “What’s the most threatening thing to the Stock Market stability in the near future?” response “The change in control of the House from R to D would cause ‘chaos’ in both political and economic systems.” I wonder how inevitabile that is? To heck with tariffs. r.
Current polling is giving a “generic democrat” an over 10% advantage over a “generic republican” heading into the midterms. We’ve also seen democrats win a number of special elections in the house and senate in states/districts that went to Trump by large margins. Also, a significant number of republican incumbents have announced their retirement ahead of the midterms. Finally, we’ve historically seen a newly elected President’s party lose seats in the next midterms. This would all suggest that there is a significant chance of the democrats picking up enough seats in the House to take control after the midterms.
As far as the likelihood of political and market chaos goes, I think that ship has sailed. This is arguably the most dysfunctional administration in modern history and the market has certainly become increasingly chaotic over the last few months. In 2018, we’ve gone from being in one of the longest periods without a 5% drawdown, and having historically low market volatility, to having two 5+% drawdowns in the last several weeks. Currently, the S&P is down 10% from January’s high, I think that would qualify as a little bit of chaos as compared to the last 9 years of this market cycle.
The risk not even being factored is China stopping buying UST. Their Commerce Secretary made it clear the counter tariffs were the tip of the iceberg. What do I think is underwater? The UST support China has provided – they could single handedly destroy the debt auctions if they chose by unloading UST, and stopping buying. At a time when $1.8 T is being issued – who would think that may provide a bit of a drag on earnings?
China has already stopped; they have been in a stall pattern since 2012 if you look at the data. The most interesting part of the China UST holdings is that they bought $0.8T from 2008 through 2010, essentially in their mind bailing the US out of the financial crisis. Think about that for a moment. China, which with all due respect is a lesser economic power than the US, believes it bailed the US out of the financial crisis (of course in exchange to get Apple to produce I-Phones in China so they could steal the intellectual property). Or maybe they caused the crisis? and, are about to cause the next one so Americans will preserve the warped trade deficit driven economy that has been put in place over the last 30 years for the purpose of spreading capitalism throughout the emerging markets in the word. The insanity of the plan, however, was that we are now indebted to China instead of the other way around, and the American financial system, not its people, is addicted to the process..
The problem needs to be fixed. If you follow the fair weather Wall Street crowd, it never will be before it is F’d up beyond repair. All that is needed is trade balance and the American economy will begin to grow again.
From what I’ve seen they were net buyers in 2017, getting back up to 2010 levels, or close anyway. Still holding $1.2 trillion. If they simply stop buying it would not have a material effect, but if they started selling, it could. Fed selling, US Gov’t selling, China selling – who’s buying?
China increased its holdings of US treasuries by 126.5 billion in 2017.
https://www.bloomberg.com/news/articles/2018-02-15/china-2017-holdings-of-u-s-treasuries-rise-most-in-seven-years
IIRC they cannot stop buying treasuries if they want to continue to be a net exporter to this country. Balance of payments and all.