From the NY Times, June 28: “At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”
WASHINGTON, Sept 9 (Reuters) – The U.S. Commerce Department said on Wednesday it had imposed preliminary duties ranging from 10.90 percent to 30.69 percent on $2.6 billion of steel pipe from China used to transport oil.
WASHINGTON, Sept. 11 — The Obama administration will put steep import duties of 35% in the first year on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.
So how should we interpret this? Does this mean the recession is over? Or does it mean that imposing two new tariffs in one week is not a giant, flashing neon protectionist signal? Or does it mean that we should be careful about sending protectionist signals but actually taking protectionist actions is okay? Does it mean that President Obama has decided to emulate the Bush administration he spent an entire campaign railing against and manages to blame for every ill facing the country? Does it mean, that unlike other Democrats, President Obama has a secret admiration for Herbert Hoover?
There are a lot of contentious subjects in economics, but one area of near unanimous agreement is free trade. Even partisan political hack economists who disparage their former colleagues from the pages of the New York Times favor free trade:
If economists ruled the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case – that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest. Paul Krugman
President Bush flirted with protectionism in his first term when he imposed steel tariffs. The move was intended to save a few steel jobs – and garner a few votes – but the overall economic effect was negative due to the loss of jobs in steel consuming industries. The tariffs were ultimately declared illegal by the WTO so the net result of the policy was a loss of jobs, no political gain, higher steel prices and a violation of world trading rules. Why President Obama would expect different results this time is a mystery.
President Hoover, of course, signed the infamous Smoot Hawley Act which raised tariffs in 1930 and most economists agree was a major factor in the Great Depression. Economists may disagree about the degree to which the act influenced events, but it is hard – if not impossible – to find an economist who dismisses it as a contributor. Hoover actually initially opposed the bill because he had pledged international cooperation to combat the economic downturn, but in the end he bowed to the political pressure from his party – Republicans were the protectionists back then – and signed the bill. Sound familiar?
Protectionism is not sound economic policy and as Hoover and Bush found out, it isn’t even sound political policy. The steel unions to which Bush deferred didn’t support him in the next election and FDR attacked Smoot Hawley almost from the day it was signed. By the time the 1932 election rolled around, the effects of the tariffs were so obvious even the farmers Hoover sought to protect voted for FDR. President Obama may find the political benefits just as elusive. The Chinese are already considering how to retaliate and they don’t lack for options:
Sept. 13 (Bloomberg) — China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.
Chinese industries have complained that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site today. The ministry is also looking into subsidies for the products, it said. It didn’t specify the imports’ value.
So anything we gain in the trade in tires and steel pipes will be lost in autos and chickens or something else. This might be a good time to recall that one of the few places on the planet where GM sales are rising is China. Tariffs are taxes which are borne by the consumer so the big losers in this high stakes game are American consumers and companies who will pay higher prices for tires and steel pipe. There may be a marginal benefit to US steel and tire workers, but higher prices will mean less steel and tires sold so the idea that this will increase employment in those industries is debatable at best. The effect on jobs at companies who sell the imported tires is anyone’s guess, but it won’t be a positive number. One also shouldn’t be fooled into believing the tariffs will be beneficial to tire and steel company profits. The tire companies did not support these tariffs – the steelworkers union filed the complaint – because they manufacture tires in China. In other words, the President of the United States just imposed tariffs on US based companies. Are higher prices, lower profits, fewer jobs and reduced exports too high a price to pay for union support for health care reform? Apparently not for President Obama.
President Obama’s economic policies may be sold as a benefit to the working class and the poor, but the overall effect is just the opposite. Cash for clunkers raised the price of used cars that are bought primarily by the working poor and while it was also intended to benefit GM and Chrysler workers, one cannot help but note that both companies reported lower sales during the program period. The tire tariffs are aimed at low priced Chinese tires that are bought primarily by – you guessed it – poorer Americans. The recently enacted higher minimum wages limit the ability of young Americans and especially young, minority Americans to gain entry to the workforce. It is not a coincidence that youth unemployment is at an all time high, over 25%. Higher wage costs also tend to hurt small businesses more than larger ones and therefore limit new job creation. The last administration signed off on the higher minimum wage, but President Obama supported the policy in Congress so I guess he shares the same level of concern for the poor as former President Bush. Poor Americans cannot be helped by punishing poor Chinese or by making it more expensive to hire them.
The policies of the Federal Reserve and the Treasury since the last recession have also been conducted – allegedly – with the average American in mind, but again it hasn’t worked out that way. The weak dollar policy of the Bush administration – continued by the Obama administration – was intended to correct a persistent trade deficit which many viewed – wrongly – as costing American jobs. The Fed’s maintenance of low interest rates was intended to keep the credit spigot open wide for all Americans during the last recession. The weak dollar policy pushed up the price of commodities and while all Americans pay the price at the pump and grocery store, the poor are hurt the most since a higher proportion of their earnings are dedicated to the purchase of these necessities. The low interest rate policy induced many Americans to take on debt they couldn’t afford, but again the hardest hit were the poor who took on loans they didn’t understand and never had a prayer of repaying for houses inflated in value, at least partially, by the weak dollar. The end result of these policies has cost more jobs than could ever be plausibly – or even implausibly – blamed on free trade or a lack of credit.
The bailouts of various financial institutions over the last two years were also sold as being in the best interests of average Americans. Saving too large to fail banks, brokers and insurance companies was seen as critical to maintaining access to credit for US businesses and consumers. Tried to get a loan recently? One begins to suspect that no matter what party is in power, policy is driven more by concern for campaign contributors than the well being of the nation as a whole. The special interests may change somewhat (although the financial industry seems to be bipartisan in its politician buying), the rhetoric may change, but political corruption is eternal and bipartisan.
There is a lot of debate now about the health of the US economy. Is the recession over? If so, how robust will the recovery be? How long will it last? Will we have a double dip? A triple dip? Over the last few months, I have consistently predicted a more rapid recovery than most commentators and to this point I think I’ve been proven correct. I have also consistently said that the quality of the recovery will leave a lot to be desired. The reason for that is that the improvement in the economic statistics is primarily due to the intentionally inflationary policies of the Federal Reserve. Inflation provides an illusion of economic growth, but it cannot produce real growth. Real growth is encouraged through all the other policies that affect economic performance – tax policy, trade policy, regulatory policy, etc. And on that front, I see little that can be called encouraging.
President Obama’s rhetoric produced an historic political victory, but his smooth delivery cannot substitute for good economic policy. Paying lip service to free trade while enacting policies that are proven beyond any reasonable doubt to be economically damaging will not fool the market. The dollar’s recent descent is a warning about current economic policy that should not be ignored as it was by the Bush administration. The nascent recovery in economic activity is not self sustaining and could be derailed quickly if supportive pro growth policies are not enacted soon. Setting off a trade war would be right at the top of a long list of things we can’t afford right now.
Weekly Economic and Market Review
It was a light week for economic reports but the general tone was still fairly positive. Mortgage applications surged 17% with both purchase and refinance applications rising. The rise in purchase applications is probably tied to the impending expiration of the first time buyers’ tax credit as these buyers rush to close. The trade deficit increased more than expected as imports rose more than exports. The rise in imports was primarily a function of a weaker dollar and its effect on prices for oil. The report on import and export prices Friday reinforced that perception as import prices rose 2% in August while export prices rose only 0.7%. And that is why a weak dollar will not solve the trade deficit. Unemployment claims fell by 26,000 but the total is still too high at 550,000. Consumer confidence rose more than expected as the University of Michigan survey came in at 70.2. That’s obviously better but it is still a long way from good. Overall, the picture hasn’t changed. Economic activity is recovering and positive GDP growth seems likely to begin in the current quarter.
Markets continued to defy the consensus with stocks moving to new highs for the year. While sentiment has turned more bullish over the last few months, it is still not at levels which are of concern. The average individual investor is not participating in this rally but is instead still pouring money into bonds. In fact, domestic equity funds have seen outflows over the last few weeks while foreign funds have seen inflows of nearly equal size. The net effect is that equities are seeing negligible new money while bond funds are swamped with new investors. I wonder if these bond investors have any clue how much they can lose if interest rates spike higher.
The big news of the week was of course the move in gold which finally managed to break above the $1000 barrier. The move in gold was accompanied by a continued fall in the dollar but really gold is rising against all fiat currencies. Excessive spending and money printing is not confined to the US and neither are the consequences.
While the trend in risk assets is still higher for now, I can’t help but be concerned about the course of the dollar. The stock market crash of ’87 was in large part due to a rapidly falling dollar. So far the decline has been fairly orderly, but if it accelerates, there could be nasty repercussions in dollar assets, particularly stocks and bonds. The commodity indices have so far been fairly well behaved. Some individual commodities have risen dramatically – copper, oil and sugar come to mind – but the indices have not performed that well due to offsetting drops in other commodities. Natural gas is still in a bear market and agricultural commodities have been flat, but if that changes we could have a general commodity inflation that captures the attention of traders. Stocks would likely not act well in that environment.
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The S&P 500 made new highs for the move. My target is still in the 1100-1200 area where the long term downtrend line falls:
Natural gas is still in a bear market and is holding back the commodity indices, but had a dramatic move off the lows last week:
The move in natural gas helped move the GSCI higher on the week:
REITs continue to show surprising strength:
But foreign real estate still looks more attractive:
The dollar downtrend continues. There is minor chart support at 76 and its a bit oversold so a bounce may be in the works. Major support doesn’t come in until the low 70s.
Gold has broken out to the upside but is very overbought. There is little overhead resistance, but I don’t think I’d chase it here:
With all the focus on gold, platinum may be a better choice. It is also trying to break out to the upside:
Corporate bonds continue to march higher:
I’ve seen lots of articles recently about the potential risks of high yield bonds, so naturally they had a good week:
And lastly, Taiwan which I highlighted last week, broke out of its consolidation pattern: