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Why The ‘Ill-Conceived’ Trade War Must End, According To Marko Kolanovic

Searching for the elusive "pot of gold."

How’s your 401(k) doing?

About a year ago, Donald Trump began testing that line out at campaign rallies.

It was the culmination of 10 months’ worth of tweets about the stock market which had risen steadily since the election and which was on the verge of a pretty epic melt-up in January, when the S&P blew through multiple analysts’ year-end targets in the short space of three weeks.

The problems with Trump’s 401(k) references were manifold. For one thing, it’s never a great idea to take credit for the stock market if you’re the president. That’s tempting fate, and it sets the stage for a scenario where, if the market falls, you either have to own the selloff just like you owned the rally, or else find a scapegoat. For Trump, that scapegoat is Jerome Powell and for once, the President isn’t entirely wrong.

Another problem with Trump’s “How’s your 401(k) doing?” strategy is simply that it’s not entirely clear what percentage of the President’s base actually has a 401(k). The data shows a very small percentage of workers in the lowest income quartile participate in workplace retirement savings programs and the figure for the 2nd quartile, while significantly larger, is still just ~35%.

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In any case, assuming you’re a Trump voter and you do have a 401(k) or otherwise care about the stock market, the answer to “how’s it doing?” in October was “not great, thanks for asking.”

While you can plausibly attribute some of the October equity malaise to Jerome Powell’s ill-fated “long way from neutral” rookie communications misstep, the trade tensions undoubtedly played a role as well. And those two things aren’t mutually exclusive. A dovish Fed would have helped offset the souring trade sentiment, but a hawkish Fed combined with increasingly shrill rhetoric on trade following the imposition of tariffs on $200 billion in Chinese goods from September 24 was too much for the market to handle.

Well, with all of the above in mind, it’s worth noting that in his latest missive, profiled here earlier on Monday, JPMorgan’s Marko Kolanovic cites the 401(k) issue in the course of explaining how touting the trade conflict ahead of the midterms went wrong for Trump.

“The trade war did not yield the desired political results in the US mid-term elections”, Kolanovic writes, adding that “it did not rally the lower-income and rural base, it crippled middle-income 401(k)s a month before voting, and it alienated the business community and wealthy political donors.”

Not exactly a “tremendous” (to use a Trump-ism) outcome, despite the fact that this president pretty clearly believes his political capital at least partially depends on having a battle to fight somewhere.

Kolanovic has long contended that Trump’s “market scorecard” is critical (or at least important) to his political preservation. He reiterates that on Monday.

“We stated previously that US-China trade dynamics are largely driven by the US political cycle and performance of the US equity market”, Marko says, before laying this out in the simplest possible terms:

We believe, simply speaking, that the administration cannot afford a falling market, large trade related layoffs, and fleeing donors in a pre-election year.

That of course refers to 2019 and it speaks to Kolanovic’s contention that trade tensions will probably ease from here if for no other reason than the political ramifications from escalating things further would be too much for the administration to stomach.

Marko then delivers an incisive (and strongly-worded) critique of how the ill effects of free trade and globalization on certain segments of the workforce have been trotted out by political opportunists seeking to parlay the plight of blue-collar workers into an anti-globalist message that resonates on both sides of the aisle despite being inherently misguided.

“We would like to note that over the past 20 years, global trade was responsible for significant gains in the US economy, stock market, income and wealth of the US population”, Kolanovic reminds you, before lamenting that “some of the issues around trade with China have prejudicial/racial undertones.” To support that contention, Marko cites “disgraceful statements [on] how the Chinese are ‘not capable of innovating’ and hence have to steal IP, or how proponents of free trade are part of ‘globalist elites’ conspiring against white blue-collar workers.”

Regular readers know that we have consistently bemoaned the proliferation of implicit (and in some cases explicit) xenophobia and anti-globalist conspiracy banter. It’s a poisonous narrative and while it’s not always clear whether the folks who push it are wholly cognizant of the historical parallels they are conjuring, the bottom line is that it’s deleterious at best and outright nefarious at worst.

Ultimately, Kolanovic says that in his view, “the ill-conceived trade war with China is ending”. In what is perhaps the best line in a note full of great lines, Marko turns Larry Kudlow’s “pot of gold” characterization (delivered at a presser last week) on its head as follows:

We all know that there is no pot of gold at the end of a rainbow, and that searching for one is a misguided effort.

Nothing further.


 

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3 comments on “Why The ‘Ill-Conceived’ Trade War Must End, According To Marko Kolanovic

  1. Maybe there is nothing that can be done to arrest the global economic fragility short of globally synchronized reform. But that isn’t winning is it?

  2. Marko assumes Trump will be rational but a man that has shown signs of instability, ignorance, delusions, hubris and many many other things (to use words he would use) combined with additional stress (back against the wall) and a possible innate self destructiveness makes me wonder if I want to bet on him being a “very stable genius”. I think we are dealing with the likes of no one we could imagine and thinking rationally may not lead to the outcome that will be realized.

    • The markets down today suggest the thinking posted here is more mainstream than it seemed yesterday. A new Gandalf????

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