Tough Climate

Tough climate.  Stocks fell yesterday as the United Nations General Assembly focused on climate change and the President took an opportunity to rail on China, social media companies, and globalism.  Volatility was abundant as House Dems prepared to announce a formal impeachment investigation and Trump promised to release call transcripts.

 

MY TWO CENTS

 

1.  Practically speaking, do we have a deal, or not?  Yesterday morning, stocks looked to have a positive session on the heels of China giving several companies wavers to purchase soybean from the US, tariff free.  Vice Premier Liu is expected to travel to the US in two weeks time to have more comprehensive trade discussions.  Things are looking up, right?  Tell me if you have heard this story before…  Trump, in his address to the UN General Assembly spent roughly 45 minutes denouncing globalism aiming his ire at China.  Stating that he would be unwilling to accept a bad trade deal with China, he referred to them as a currency manipulator while asserting that they stole intellectual property.  Now, this all may be true but basic diplomacy is generally not achieved by insulting ones opponent… on the eve of a possible breakthrough.  But is a breakthrough really around the corner?  Looking back on the recent concessions offered by China, specifically in their purchases of soybeans and pork.  Concessions?  Maybe, but more likely pragmatism on the part of the Chinese.  China is going through a rough patch as its economic growth has slowed noticeably in the past 18 months.  Signs of weakness were already apparent before Trump announced the first tariffs and the trade conflict only made things worse.  One of China’s first retaliations on the US was to stop purchases of agricultural products.  The move had an immediate impact on farmers, who are heavily reliant on China as a customer.  Farmers are near and dear to all Americans (up there with apple pie and Netflix), so an attack on their livelihoods really hurt.  But what about the impact on the other side?  China has around 1.4 billion citizens, nearly 4 times more than the US!  All of those citizens need to eat.  The US is the largest soybean producer in the world, cultivating 108 million metric tons annually compared to China, which produces only 12 million tons.  Wanna’ give a guess which country is the largest soybean importer in the world?  Why, of course it is China, who imported roughly 88 million metric tons in the 2018/2019 period.  So cutting off purchases of soybeans from the worlds largest producer is not so easy, especially for an extended period of time.  Now, on to pork.  China consumes roughly 54 billion metric tons of pork annually, according to the most recent USDA report.  While China is generally able to meet local demand with domestic production, European swine flu has drastically reduced the country’s output.  The only answer is to increase imports.  In a populous country like China which is governed by socialism, keeping your citizens well fed is critical.  So perhaps recent purchases of farm products by China is more practical rather than conciliatory.  Add that to the ongoing rhetoric that comes from the administration, one wonders whether a real deal will ever see the light of day.

 

2.  Guns and butter… and coal.  Basic micro economic theory proposes a world in which only two goods exist.  Those two goods are tied so closely together that in order to get more of one, you have to give up some of the other.  Freshman economics students are presented with the Production Possibilities Frontier that charts this relationship between the two goods.  The classic example given is “Guns and Butter”.  Economists are strange folks who take every opportunity to state their veiled opinions on social issues while remaining neutral.  Guns and butter can be a way of noting the tradeoff between military and food… war versus peace… bad versus good.  Well you get the picture.  The important thing to note is that you can’t ever have more of one thing without giving up some of the other thing.  We all understand this basic concept.  This week a sixteen year old girl boldly dressed down world leaders at the UN General Assembly.  She told them that they were giving up the health of the world in exchange for the “fantasy of eternal economic growth”.  Her audacious statement left many politicians and economists scratching their heads.  Canwe have economic growth while saving the climate?  If you shut down a coal plant, people lose jobs.  The US is the second largest producer of coal globally, mining around 775 million short tons in 2017.  The burning of fossil fuels is the leading cause of global warming and amongst them is the burning of coal used in power plants.  Back to Freshman Econ 101.  Do we have to give up GDP to get less global warming?  OF COURSE NOT!  If you continue reading past chapter 1 of the book, you will find that there are things referred to as substitutes.  Butter can be substituted for olive oil.  Renewable energy can be a substitute for fossil-based energy while maintaining economic growth.  The problem heretofore has been the unpopularity of that substitute which is more like substituting cake for bread (you all know how that one ended up).  In any case, economists are starting to look at things differently, so we can expect to see changes, albeit slow, going forward.

 

 

THE MARKETS

 

Stocks sold off yesterday as Presidential comments on China caused some trade indigestion, Consumer Confidence fell for the month, and Congress turned up the political heat.  The President also hinted that social media platforms are too powerful leaving traders wondering if more regulation is coming for their beloved FAANG stocks.  The S&P500 fell by -0.84%, the Dow Jones Industrial Average dropped by -0.53%, the Russell 2000 traded off by -1.58%, and the tech heavy NASDAQ Composite Index pulled back by -1.46%.  Bonds traded up for another session and 10-year treasury yields slipped by -8 basis points to 1.64%.  For reference, the S&P500 still yields more with a dividend yield of 1.93%.

 

WHAT’S NXT

 

– The Census Bureau will release New Home Sales, which are expected to have grown by +3.6% compared to last month’s fall of -12.8%.

– Chicago Fed’s Charles Evens, Kansas City Fed President Esther George, Fed Governor Lael Brainard, and Dallas Fed Chief Robert Kaplan will all speak today.

– The treasury will sell $18 billion 2-year notes and $41 billion 5-year notes.

– KB Homes will announce earnings after the bell.

daily chartbook 2019-09-25