{"id":76372,"date":"2019-01-15T00:03:46","date_gmt":"2019-01-14T23:03:46","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/a-modern-day-war-of-the-roses\/"},"modified":"2019-01-15T00:03:46","modified_gmt":"2019-01-14T23:03:46","slug":"a-modern-day-war-of-the-roses","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/a-modern-day-war-of-the-roses\/","title":{"rendered":"A modern-day War of the Roses"},"content":{"rendered":"<p>Students of history may recall the War of the Roses, which was waged more than 500 years ago.<br \/>\nIt was an epic battle between two rival branches of the English royal family that both had claims<br \/>\nto England\u2019s throne \u2014 the House of Lancaster, represented by a red rose, and the House of York,<br \/>\nrepresented by a white rose. While the House of Lancaster ultimately won the War of the Roses,<br \/>\nby some measures there was no real winner. The war lasted for many years and resulted in very<br \/>\nsignificant damage to both houses. In fact, by the end of the war, the male lines in both houses<br \/>\nhad been eliminated.<\/p>\n<p>I think the War of the Roses is an appropriate analogy for the burgeoning US-Chinese trade war.<br \/>\nWhile many presume the US will win this war, I believe there will be no real winner: Everybody<br \/>\nloses in a trade war in an era of globalization, and it seems we are already seeing this war take its<br \/>\ntoll on both sides:<\/p>\n<ul>\n<li>  <strong>China.<\/strong> Last week, disappointing Chinese data was released: Manufacturing PMI for<br \/>\nDecember clocked in below the critical 50 level, indicating contraction.1 However, before<br \/>\nanyone assumes China has lost the trade war and is ready to capitulate, please read<br \/>\nPresident Xi Jinping\u2019s New Year\u2019s speech. The speech doesn\u2019t sound like it\u2019s being given by<br \/>\nthe leader of a defeated nation. Xi recognizes the challenges ahead, but he promises that<br \/>\nChina will remain steadfast in its pursuits, and also pledges more stimulus in reductions to<br \/>\ntaxes and fees. We are seeing many forms of stimulus in China as the Chinese government<br \/>\nis pulling out all the stops in an effort to counter the negative effects of the trade conflict:<br \/>\nThe People\u2019s Bank of China (PBOC) announced last Wednesday that it would provide<br \/>\nsupport to Chinese small businesses by changing its rules in order to encourage more<br \/>\nlending to these entities. And on Friday, the PBOC helped ease lending conditions by<br \/>\ncutting reserve requirement ratios for banks. Not surprisingly, services data remains<br \/>\nstronger than manufacturing data in China, indicating that domestic stimulus is holding up<br \/>\nthat end of the economy. But it\u2019s clear China is feeling some pain.<\/li>\n<\/ul>\n<ul>\n<li>  <strong>United States.<\/strong> The US is feeling some pain too. Apple recently provided an ominous<br \/>\nwarning on earnings: It said iPhone sales were down and attributed it in part to lower<br \/>\nChinese demand brought on by the trade war and the downward pressure it has placed on<br \/>\nthe Chinese economy. What\u2019s more, Kevin Hassett, the Chairman of the Council of<br \/>\nEconomic Advisers, stated publicly that he believes Apple is just the beginning, that many<br \/>\nother US companies will also face similar headwinds as a result of the US-Chinese trade war<br \/>\nand its impact on Chinese demand. The Trump administration said that Apple\u2019s<br \/>\nannouncement is a sign that the US is winning the trade war. But I don\u2019t see how the US<br \/>\ncan declare victory if US companies\u2019 earnings are being negatively impacted. American<br \/>\nfarmers are also feeling significant pain. They continue to be hurt by the trade war as China<br \/>\npurchases soybeans and other food elsewhere, even though they have been receiving some<br \/>\naid from the US government and even though China agreed in December to purchase some<br \/>\nsoybeans from the US. The farmers\u2019 situation is likely to worsen in the future given the<br \/>\nTrans-Pacific Partnership (TPP) is moving forward without the US. Because the US opted<br \/>\nout, its goods will be less competitive to 11 nations in the TPP, including Japan and<br \/>\nCanada, because tariffs were slashed among the TPP\u2019s member nations. That means a real<br \/>\nloss in terms of market access for American agricultural products.<\/li>\n<\/ul>\n<p><strong>Signs of strength from the US jobs report, but what comes next?<\/strong><\/p>\n<p>Having said all that, we have to recognize that the US economy is still doing very well.<br \/>\nUnderscoring this point was last week\u2019s strong December jobs report, which defied expectations \u2014<br \/>\nnot only did nonfarm payrolls rise by more than 300,000, but wage growth was significant at<br \/>\n0.4% month over month.<\/p>\n<p><quote>But I must stress that the payrolls number is a coincident indicator \u2014 it illustrates the current state<br \/>\nof the economy rather than indicating future growth \u2014 while the unemployment rate is a lagging<br \/>\nindicator; it\u2019s the economic equivalent to looking in the rear-view mirror.<\/quote><\/p>\n<p>Leading indicators such as the ISM Manufacturing Index are showing weakness, which clocked in<br \/>\nwell below consensus expectations last week. The December ISM Manufacturing Report includes<br \/>\nsome instructive comments from respondents:<\/p>\n<ul>\n<li>  \u201cGrowth appears to have stopped. Resources still focused on re-sourcing for US tariff<br \/>\nmitigation out of China.\u201d (computer and electronic products industry)<\/li>\n<li>  \u201cCustomer demand continues to decrease (due to) concerns about the economy and<br \/>\ntariffs.\u201d (transportation equipment industry)<\/li>\n<li>  \u201cStarting to see more and more inflationary increases for raw materials. Also, suppliers<br \/>\n(are) forcing price increases due to tariffs.\u201d (food, beverage and tobacco products industry)<\/li>\n<li>  \u201cTariffs continue to impact business direction and profit.\u201d (miscellaneous manufacturing<br \/>\nindustry)<\/li>\n<li>  \u201cThe ongoing open issues with tariffs between the US and China are causing longer-term<br \/>\nconcerns about costs and sourcing strategies for our manufacturing operations. We were<br \/>\nanticipating more clarity (regarding) tariffs at the end of 2018.\u201d (machinery industry)<\/li>\n<\/ul>\n<p>I must also note that, unfortunately, this jobs report does not help the cause of the many market<br \/>\nparticipants who would like the US Federal Reserve (Fed) to hold rates steady this year \u2014<br \/>\nparticularly the wage growth number. It certainly makes the Fed\u2019s role more complicated.<br \/>\nConsider the confusion around the economic picture \u2014 the dramatic stock market drop over the<br \/>\npast few months has caused some market participants to believe a recession is coming (this has<br \/>\nhappened in the past, but not in all cases).<\/p>\n<p>There is some validity to these concerns, as US gross domestic product growth estimates for<br \/>\n2019 have been downwardly revised. And that, by the way, is the collateral damage of a trade<br \/>\nwar. It\u2019s not just the US and China \u2014 I believe the overall global economy will be damaged by such<br \/>\nconflict. Reflecting concerns about the economic picture, fed funds futures currently indicate that<br \/>\nthe market expects zero Fed rate hikes in 2019. Fears were running so high earlier last week that<br \/>\nI received questions about whether I expected the Fed to actually cut rates in 2019. It seemed<br \/>\nlike the sky was falling as the new year began. The yen, commonly viewed as a safe haven, was<br \/>\nrallying dramatically (although there were admittedly other reasons for the dramatic currency<br \/>\nmove). And then sentiment changed during the week. Not only did the price of crude oil rally, but<br \/>\nwe got that strong US jobs report.<\/p>\n<p>So where are we today? The global economy remains solid but is slowing \u2014 and runs the risk of<br \/>\ngreater deceleration if the trade wars escalate and\/or Fed policy is too tight. Those two risks<br \/>\nremain very real. However, I am optimistic that the Fed will be data dependent, which at this<br \/>\njuncture likely means one or two rate hikes. Recent comments from Fed Chair Jay Powell suggest<br \/>\nthe Fed could hit the \u201cpause button\u201d for rate hikes at some point next year. Last Friday, Powell<br \/>\ntook a reassuring stance, stressing flexibility and explaining that, \u201cWe\u2019re always prepared to shift<br \/>\nthe stance of policy and to shift it significantly if necessary.\u201d I will reiterate that I do not believe<br \/>\nthe Fed will cut rates this year unless the economic situation changes dramatically. The key<br \/>\ntakeaway is that this is a very fluid situation \u2014 today\u2019s leading indicators are tomorrow\u2019s<br \/>\ncoincident indicators, and we must hope the Fed is very holistic in the data it reviews to make its<br \/>\ndecisions.<\/p>\n<p><strong>US-China trade talks begin this week<\/strong><\/p>\n<p>And so, as the US-China trade talks get underway this week, I will take the approach of hoping for<br \/>\nthe best but preparing for the worst in terms of negotiations. As I\u2019ve said before, there are few<br \/>\nreasons to believe China is willing to make any major concessions. China\u2019s recent actions to<br \/>\nstimulate the economy, both monetary and fiscal, suggest to me that it is preparing for an<br \/>\nextended fight. As Xi\u2019s speech laid out, China will continue its efforts to institute reform and open<br \/>\nup its markets \u2014 but that will clearly be on China\u2019s timetable and will follow China\u2019s preferences.<br \/>\nAnd China has the ability to play a long game, which the US does not; Xi is president for life, while<br \/>\nPresident Donald Trump is preparing for a reelection bid in less than two years that will likely<br \/>\nultimately hinge on the state of the US economy. This suggests to me that the US will ultimately<br \/>\nhave to capitulate; the question is how long it will take and how much damage will be done first.<\/p>\n<p>To me, success will be the US accepting small concessions from China and ending the trade war<br \/>\nsoon; that is my best-case scenario in this modern-day War of the Roses. The good news is that,<br \/>\nif this were to happen soon, much of the economic damage could be reversed relatively quickly,<br \/>\nand markets, which seem to have priced in a significant trade war, would likely rebound<br \/>\ndramatically, in my view.<\/p>\n<p><strong>Happy anniversary to the euro<\/strong><\/p>\n<p>I would be remiss if I didn\u2019t mention that the euro celebrated its 20th anniversary on Jan. 1.<br \/>\nConceived many years ago, this common currency did not come to fruition until 1999. The euro<br \/>\nhas had its challenges over the years \u2014 not the least of which is that it is the currency of a<br \/>\nmonetary union that does not have a corresponding truly fiscal union. However, to paraphrase<br \/>\nMark Twain, reports of its demise have been greatly exaggerated.<\/p>\n<p>I do expect continued challenges for the eurozone and the European Union in 2019: Eurozone<br \/>\nPurchasing Managers\u2019 Index data remains disappointing, political disruption appears on the rise,<br \/>\nand there is uncertainty over who will replace \u201cMagic\u201d Mario Draghi at the helm of the European<br \/>\nCentral Bank. However, even as more Europeans reject their traditional political parties in favor of<br \/>\nmore populist parties, they overwhelmingly support the euro. In an October 2018 European<br \/>\nCommission poll, 74% of respondents across the eurozone said they believed the euro was good<br \/>\nfor the European Union \u2014 the highest level since the annual survey began in 2002.<\/p>\n<p><strong>Looking ahead<\/strong><\/p>\n<ul>\n<li>  <strong>FOMC meeting.<\/strong> We will want to focus on the Federal Open Market Committee (FOMC)<br \/>\nminutes to be released this week, which should provide some insight into how Fed<br \/>\nparticipants perceive the state of the US economy \u2014 and how worried they are about a<br \/>\nglobal deceleration.<\/li>\n<\/ul>\n<ul>\n<li>  <strong>Bank of Canada.<\/strong> We will also want to closely follow the Bank of Canada\u2019s (BOC) meeting<br \/>\nthis week. At its December meeting, on the heels of three rate hikes in 2018, the BOC<br \/>\nnoted that it \u201ccontinues to judge that the policy interest rate will need to rise into a neutral<br \/>\nrange to achieve the inflation target.\u201d However, in the face of lower oil prices and a slowing<br \/>\nglobal economy, the Canadian economy could benefit from the BOC hitting the \u201cpause<br \/>\nbutton\u201d and offering more dovish language on future monetary policy \u2014 especially as the<br \/>\nyields on 2-year and 10-year Canadian government bonds moved within several basis<br \/>\npoints of each other in recent days, coming dangerously close to inversion.<\/li>\n<\/ul>\n<ul>\n<li>  <strong>US government shutdown.<\/strong> We will also continue to closely follow negotiations around the<br \/>\nUS government shutdown. As this domestic War of the Roses continues with no end in<br \/>\nsight, I expect the biggest casualty could be business confidence. Business leaders may<br \/>\nwonder what might happen in the face of a crisis such as 2008, when both parties needed<br \/>\nto work together to pass legislation in order to combat the Global Financial Crisis.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>A modern-day War of the Roses: Is a real winner possible in the US-China<br \/>\ntrade war? In an era of globalization, trade wars mean losses for all sides<\/p>\n","protected":false},"author":1,"featured_media":76370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1809,1655,2073,1651,1437,2087,2068],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/76372"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=76372"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/76372\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/76370"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=76372"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=76372"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=76372"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}