The Trump bonanza continues across the world.
Profits are up on Wall Street. Earnings season is wildly exceeding expectations for companies like Amazon. Founder Jeff Bezos saw his wealth surge $12 billion in a day. Facebook shares were up 10% as none of the feared consequences of its recent scandals materialised.
Caterpillar is seen as a bellwether for the global economy, so it’s particularly good news that it beat earnings expectations. The stock soared.
Subway and Starbucks are the disappointers so far. But even they weren’t terrible.
On foreign policy, Donald Trump’s belligerence is working too. A truly historic occasion is taking place in Korea as I write this. Only time will tell if Kim Jong-un is playing for time to fix up his nuclear arsenal, or keen on some sort of reconciliation. It’s much easier to negotiate after you’ve lobbed some missiles around and tested some bombs.
Given I’ll soon be moving to a small Japanese town within range of Kim’s confirmed missile technology, you’ll be hearing plenty about this in coming weeks.
Iran is next on Trump’s list of problems to solve by creating a bigger problem. Already the barbs being hurled are reminiscent of Korea a few months ago.
Even trade policy seems to be going well for the American president. The Financial Times reports that the “Emerging market current account surplus falls to 20-year low” as “Global trade patterns start to normalise.”
There hasn’t been much retaliation in the trade wars. Key European leaders are heading to the US to avoid a clash. Japan is seeking to help the US export its gas to get on Trump’s good side and rebalance trade.
The president is sending three of his key staff to arch-enemy China to negotiate too. Two of them are particularly noteworthy.
Trade representative Robert Lighthizer helped President Ronald Reagan pressure Japanese car manufacturers to move their plants to the US. That policy worked well from the American perspective, with huge Japanese and German car manufacturing bases in the US today.
The new head of Trump’s economic team, Larry Kudlow, has got his wish lately too. He’s famously in favour of a strong dollar, which broke a yearlong downtrend overnight.
Before they even arrived, China’s president announced he’d lower car tariffs. That’s a huge boost to car companies around the world, including German and Japanese ones…
If Trump can continue to improve global trade relations and balances, de-risk geopolitics and let the US economy roar, people might actually like him, secretly. But I suspect the key to his success is being disliked.
The problem with good news all round is what it implies for the future.
The implications of good news
The synchronisation of business cycles is the most dangerous economic development of my lifetime.
The entire world seems to go through booms and busts together these days.
The business cycle used to be known as the trade cycle for a reason. Trade flows would balance out economies at different stages of the business cycle. The world’s economies were on countercyclical business cycles.
A booming economy would eventually see its trade balance worsen, thereby stimulating a struggling economy. The countercyclical nature of these trade cycles kept the world as a whole on an even keel. Trade flows helped nations recover from downturns.
But with everyone moving together on the same cycle, the world has changed completely. The booms and busts are going to be far worse without the dampening effects of trade cycles.
Right now, we’re supposedly in the midst of global synchronised growth. But that good news gives away its own problem. After synchronised global growth, you are bound to get a global synchronised bust.
The problem with this is that we don’t get the balancing effect of trade flows to drag nations out of the doldrums. The coming bust will be worse than ever.
Has the downturn begun in Europe?
Hours after Caterpillar’s impressive earnings beat hit the news, management made some startling admissions on the follow-up conference call. The outlook suggests that the first quarter of 2018 was the high-water mark for the company. The stock tumbled and the global economy’s prospects don’t look so rosy anymore.
While corporate America announces impressive results, the eurozone is already turning down.
The European Markit Purchasing Managers’ Index has dropped sharply for services and manufacturing since the beginning of 2018. The German ZEW economic indicator fell to a five-year low last month for the eurozone’s key economy. The one providing most of the growth.
The European Central Bank’s Mario Draghi acknowledged the recent slowdown in his remarks. He clearly and conclusively explained everything, telling the world he believes in “caution tempered by unchanged confidence”. As Australian politician Kim Beazley once said, “the myrmidons have gone through a process of obfuscation.”
Economists are blaming the flu and strikes in Germany and France for the recent disappointments in economic news. Because both are unusual…
The morbidly amusing part here is that Europe only managed 2.3% growth in 2017 – the highest in a decade. If that was the boom, what’ll the bust be like?
The political implications are a real worry too. Emmanuel Macron’s popularity is falling. Italy’s government is poised for populism. Germany is hamstrung with an awkward coalition. Eastern Europe is turning on the EU. And the EU itself wants to expand its budget while shifting funds away from the east towards the south.
Economic growth has covered up the world’s growing risks. Next week, you’ll hear about the biggest one of all. Stay tuned.
Until next time,
Nick Hubble
Capital & Conflict
Category: Geopolitics