Tag Archives: markets

A Useful Self-Identification

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The People’s Republic of China has decided not to apply its across-the-board 125% tariffs on certain goods that it imports from the US.

China’s government has exempted some US imports that the country would struggle to immediately source from elsewhere from its retaliatory tariffs, people familiar with the matter said.
Chinese authorities have told some importers of American goods that they would waive the most recent 125% increases in tariff rates for certain US imports. Those products include certain semiconductors and chipmaking equipment, medical products, and aviation parts, the people said.

These, then, are precisely the goods that we should cut off from exporting to the PRC.

On the other hand,

The Trump administration, similarly, announced exemptions on its “reciprocal tariffs” for China-made smartphones, laptops, and other electronics earlier this month, a recognition of the US’s reliance on China for such goods.

This is a mistake if the purpose is anything other than a negotiating tactic. There is a critical difference between the two sets of goods. The goods the PRC is exempting are critical components and component-making goods whose cutoff would severely impact that nation’s ability to make downstream products. The goods the Trump administration is exempting are finished products. Their supply chains can be adjusted to flow from non-PRC sources, including domestic, an adjustment that might be difficult, but an adjustment that both is eminently possible and is absolutely necessary: we should never have ourselves dependent on an enemy nation for such goods.

Republican Silliness

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This time it includes more than just a few members of the Republican Chaos Caucus. The Senate passed its version of a reconciliation bill that includes a suitable start on tax rate reductions, and the House Republican caucus agrees with that—those reductions are consistent with the earlier House-passed reconciliation bill. However, the Senate’s bill doesn’t include enough spending cuts to suit the House Republicans, and the House Republicans are right on that.

This is where the silliness comes in. A few Republicans, including some from outside the Chaos Caucus, have announced enough “No” votes before the Senate bill comes to the House floor to kill the bill outright. That’s silly.

Instead of just killing the bill, or refusing to take it up at all, the House Republicans and those one or two Progressive-Democrat Representatives capable of reasoned argument should debate the Senate’s reconciliation bill—they’d be the big boys in the room, since the Senate Republicans ducked away from the House’s bill altogether—and then pass the Senate bill amended to include spending cuts acceptable to the House. That would create a House-Senate disagreement in the same bill, which would send the modified bill to the normal House-Senate Conference, wherein the tax rate cuts would be preserved, and badly needed much larger spending cuts could—should—be inserted into a Conference-approved bill for up-or-down majority votes in each house. Likely the much larger spending cuts still would be less than the House so correctly wants, but they’d likely be much larger than the Senate’s going-in proposal.

And, as is the case with budget framework reconciliation bills, it would set the terms of debate for those spending cuts in each appropriation bill. The difference this time, though, would be those much larger spending cuts in the framework would set a much higher floor than heretofore for spending cuts in those dozen appropriation bills.

Bargaining Chips

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The People’s Republic of China is avidly intent on keeping its bargaining chips, of which two truly important ones are its TikTok app and its port businesses at each end of the Panama Canal.

What gets lost, even ignored, in this, though, is that bargaining chips have only the value the bargainee assigns to them, not what the holder of the chips claims to be their value. Not a red sou more than that.

TikTok, for instance, can be viewed as utterly without value as a chip to be played: current US law requires it to be shut down entirely and banned from the US unless and until it is sold in toto to an entity not under the control of the PRC. The only thing standing in the way of that way is the law’s provision that the deadline for sale can be moved back if our Federal government deems negotiations for the sale to be making sufficient progress. That’s where things stand under President Donald Trump, and that confers exactly zero value to the app as a PRC chip.

So it is, nearly, with those PRC businesses that are Panama Canal bookends. A BlackRock-led group has concluded a deal to purchase those two port businesses along with a number of others around the world from CK Hutchison Holdings, a PRC-domiciled (Hong Kong) company. The PRC is actively interfering to delay and potentially prevent that deal from coming to fruition. The appropriate response here is for the US to restrict, even block as far as may be, the ability of those two ports to get any business from the US or any other nations. That would deny those ports any value as PRC chips.

This would be a Mistake

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President Donald Trump (R) laid significant tariffs and tariff rates on the People’s Republic of China. The PRC’s President Xi Jinping responded with matching tariff rates, but with escalatory moves added:

…restricted exports of certain rare-earth minerals, added US companies to trade blacklists, and aimed an antitrust probe at the China operations of US chemicals and materials company DuPont.

Then the WSJ‘s news writer posited this:

What lies ahead is likely to be a cycle of tit-for-tat retaliation, making it hard to even start negotiations in the near term.

If the Trump’s purpose with the tariffs is to (re)balance trade with the PRC’s tariffs, that would be one thing—his reciprocal tariff regime. However, if his purpose is to persuade the PRC to change its overall international trade behavior, particular vis-à-vis the US, then tit-for-tat would be a foolish mistake.

Tit-for-tat only gives the other side time to adapt and maintain. What’s necessary, if Trump’s move is persuasion rather than rebalancing, is to escalate tariffs (and other economic moves) higher and faster than the PRC can respond, and that’s what Xi will attempt as demonstrated by his opening response. Simply matching Xi—as tit-for-tat does generally—is surrender to Xi the initiative in this extension of the PRC’s long-running trade war, with its cyber aspects as well, against us.

The Market Lost Money

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Really? How much did “the market” lose, really? Economics news writers, who really should know better, claim

The stock market went off a cliff last week after President Trump announced the highest tariffs in more than a century, vaporizing more than $6 trillion of wealth in two days.

No, $6 trillion in wealth was not vaporized, not even lost. These are purely paper losses, not real losses, and the only ones who were hurt financially by the decline in monopoly money value are those who bought stocks on margin—borrowed money from their brokers to buy stock shares. Those folks are subject to margin calls and must reimburse their brokers with real dollars, or with remaining stock shares which the broker will sell for real money, even at the currently depressed rates.

No one has lost real money in the precipitous drop unless they sold shares for actual money in the throes of last week’s hard drop. These are, to be sure, emotionally trying times, and real losses can still occur, but so far only for those who use their stock shares as collateral for this or that purpose.

Later on, were the economy to start behaving in the same way as the market and itself start to stutter, real losses can occur, but from the market’s perspective, the losses will be from “forced” sale of some fraction of an individual’s remaining stock shares at depressed prices in order to raise real cash with which to make good on real obligations like rent/mortgage, food, energy, and so on.

In that regard, it’s important to keep in mind that the market leads, predicts the future of, the real economy—where real gains and losses of real, spendable money occur—by highly variable amounts ranging from a few months to lots of months into a couple of years, and occasionally the market is plain wrong. The latest example of this occurred early in ex-President Joe Biden’s (D) term when the market priced in a coming recession. That recession never occurred.

Today’s underlying economy remains strong, albeit the figures are prior to the new tariff regime, which won’t be fully laid on for another week or two. The economics news writers do recognize this much.

Whether the real economy will follow is impossible to know. But the risks are tilting in that direction.

The risks are real, but the economy so far has this:

The available evidence suggests US economic fundamentals remained strong through March. Job growth accelerated, with nonfarm payrolls rising 228,000, unemployment low at 4.2%, wages rising at a healthy clip, and layoffs rare.

Couple things on that. It’s private—real—economy layoffs that are rare. Layoffs from Federal government employment are rising, as are the numbers of those employees who are accepting the enormously generous buyout/severance packages in return for their resignations. But reducing the physical size of the Federal government is on the whole good for our economy.

The other is that the tariffs may well lead to restructuring of our economy with associated job losses and alternative job creations, but those effects will take months to begin to have effect and more months to work through.

What’s happening currently is the development of a buying opportunity, and a recession only broadens that buying opportunity. The economics news writers cited a JPMorgan research piece titled There Will Be Blood which raised JPMorgan’s assessment of a global recession to 60%. That’s simply a repeat of Baron Nathan Rothschild’s advice to buy when there’s blood in the streets, even if the blood is your own.

Or the disruption might cause permanent losses. That’s the real risk, not a risk of a recession, which is a fact of free market economies.

Free market economies have long periods of prosperity and boom interspersed with recessions which do not fully undo the prosperity, so the economy trends upward over the longer run. The alternative of a government directed economy, though, is permanent recession relative to free markets.

In the end, tariffs don’t undermine free market economies so much as they undermine a globalized “free market” by segmenting the globe back into national (or regional) markets. Whether that’s a good or bad outcome is for a separate discussion.