Another day, another disturbing story about the Trump administration’s internal deliberations on trade.
Markets have shrugged off reports that Donald Trump continues to express consternation about the WTO, but it’s difficult to disentangle quarter-end price action and the risk-on sentiment engendered by the EU migration agreement from the WTO “rumors.”
To be clear, the Axios story that brought the WTO debate back to the forefront of investors’ collective imagination doesn’t contain anything that sounds demonstrably far-fetched. In fact, it just underscores what Trump has said himself in public. So when you hear Steve Mnuchin telling Maria Bartiromo that this is all just “fake news” you should keep in mind that he’s basically calling the President’s own rhetoric “fake news”.
And see that’s the problem with handling PR for Trump: there’s always a tweet or a bombastic soundbite that lends the lie to damage control efforts.
That said, Compass Point’s Isaac Boltansky reminds you that “it would take an act of Congress to withdraw from the WTO” and more importantly, Isaac notes that the Axios article simply underscores Trump’s “disdain for institutions and is capable of anything, neither of which breaks new ground.”
Right. But whether or not it “breaks new ground” isn’t really the point. Rather, the point is that Trump is “capable of anything” which, contrary to what he says, is not a desirable trait in a U.S. President. Something like this: “We’ve got a rabid badger here and clearly, rabid badgers are capable of anything, so this doesn’t really break new ground.”
Anyway, against that backdrop Moody’s is out with something called “Trade War Will Turn Ugly if Profits Shrink” and there are some notable passages that I thought it was worth excerpting. Here’s the good news:
Let’s start with the good news of operating profits’ much faster rise relative to the growth of corporate debt. During 2018’s first quarter, the 9.7% year-to-year advance by the pretax operating profits of U.S. nonfinancial corporations far outran the accompanying 5.2% increase by nonfinancial corporate debt. Moreover, for the year-ended March 2018, operating profits’ 7.2% increase also outpaced the 5.9% growth of corporate debt.
But the problem is the same as it ever was: trade tensions are set to undercut an otherwise rosy outlook. Here’s Moody’s again:
However, a still-positive outlook for operating profits is now marred by considerable uncertainty. What may degenerate into an extended trade war of attrition could preserve financial market volatility indefinitely. Given the global complexities of modern supply-chain management, a surprisingly large number of U.S.-based businesses may delay capital spending and staffing plans until trade-related uncertainties are sufficiently resolved. As it now stands, tariff-driven increases in material costs have compelled some companies to rein in employee compensation for the purpose of protecting profit margins. In addition, higher materials costs have been weighing on the credit quality of some manufacturers that use steel intensively. Tariffs explain why year-to-date advances of 40% for the spot price of steel and 21% for the most actively traded lumber futures contract are so much greater than the accompanying 0.5% dip by Moody’s industrial metals price index (which excludes steel’s price). To the degree tariffs increase the costs of materials and inventories, businesses will tighten their control of other costs, the most prominent being employee compensation.
The title of that section is: “Will Policymakers Snatch Defeat from the Jaws of Victory?”