David Garrity on Bloomberg: Trade War Stifling Capital Commitment Into Real Economy

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Trade War Truce Would Be Best Near-term Option For Capital Markets

With a recent survey indicating 74% institutional investors view the equity market as having peaked at the end of June 2019 and only 6% seeing the equity market as being in an expansion phase, one must ask the question “what will serve to keep the market from correcting here?”. Clearly, with U.S. corporate profits falling -10% since 3Q18 and likely pullbacks in employment and buybacks to follow, the earnings driver to economic growth and share prices is weakening. If earning growth fails, then monetary policy easing moves to the fore in propping up the market. On that score, the Fri 8/23 speech by Fed Chairman William Powell at the Jackson Hole conference left a sense that while U.S. monetary policy is turning towards easing, it may not do so at a pace that will meet the expectations of market participants or the current administration. Furthermore, the fact that on Tues 8/27 former Fed Governor William Dudley would publish an editorial questioning the wisdom of the Federal Reserve easing monetary policy to offset the negative economic impact of the present Trump-induced trade war with China should put market participants on notice that the Federal Reserve is not for turning simply to accommodate the short-term Trump 2020 re-election agenda. With this as backdrop, it is timely to see the Wed 8/28 NYT editorial calling for a 6-month truce in the U.S.-China trade war not only for the extent to which it may serve to lessen the mounting uncertainty that is undermining both current economic activity and long-term investment, but also for the opportunity it may provide for a broader multi-party effort to establish a global rules-based trade regime to benefit all participants rather than the uncertainty attending the proliferation of inconsistent bilateral trade agreements. Economic growth requires more than a “zero sum” game, an insight the current administration fails to comprehend. Until then, the capital markets remain poised on a tightrope from which there does not appear to be an easy way down as risks begin to outweigh prospective returns. Time to call time on the trade war.

Facebook Moving Forward With Libra Digital Currency Despite Absence Of Regulatory Approval

The trade war challenge is further complicated by the fact that the U.S. Dollar continues to strengthen against other currencies as short-term U.S. interest rates are now the highest globally. Recent discussions on dollar strength have offered the following observation: “the fundamentals of the dollar just keep getting stronger and stronger with every global cycle. Every time the world trips up, debt issuance by other countries goes down, and the supply of non-dollar safe assets shrinks. As such, the network effects — the ability for people all around the world to transact with a lingua franca — improves for the dollar, which is the only game in town.” Note with interest that at the Federal Reserve Jackson Hole conference Bank of England Governor Mark Carney endorsed the idea of creating an alternative global digital currency. Into this gap, Facebook in June 2019 announced its plans to launch its own digital currency, Libra, but demurred when its announcement was met with almost universal pushback from regulators across the globe indicating that the effort would only move forward if and when regulatory concerns were addressed and approvals received. Given this, we are surprised by Facebook appearing intent on moving forward with an early 2020 Libra launch. Classic Zuckerberg – move fast and break things, this time the global monetary system.