Experts try to make sense of Monday’s market drop. The first four-digit Dow drop in history and was also the first time that the Wilshire 5000 index of all U.S. stocks dropped more than $1 trillion.
Steve Rattner, a former Treasury Official and Richard Haass, President, Council on Foreign Relations joined Morning Joe to make sense of what happened.
According to Steve Rattner, most likely there is nothing unusual or inappropriate with recent pullback as we had a five-year-long bull market within which it has doubled.
Recently adopted Tax Bill was introduced at the worst time possible. Richard Haass said, in general, that economy was doing pretty well and there was no need to have tax cuts in place.
Richard Haass highlighted the issue of the growing debt which also would become more expensive with rate hikes. According to Haass, the bad cycle has potential to affect confidence.
Undoubtedly, what Steve Rattner and Richard Haass said is correct. Perhaps due to lack of time, they could address a few issues which may show that the recent stock market drop is not usual “correction”.
In my opinion, historic four-digit Dow drop might not be a result of a long period of the bull market. Instead, it is possible that Donald Trump’s “America First” began to produce the first results.
THE REASON WHY “AMERICA FIRST” SLOGAN IS STUPID.
The U.S. economy is the largest in the world with a nominal GDP forecast to exceed $20 trillion in 2018 and represents about 20% of total global output. The U.S. economy is dominated by services-oriented companies in areas such as technology, financial services, healthcare and retail which accounts for about 80% of its output.
The U.S. economy is projected to grow 2.4% in 2018 and 2.0% in 2019.
Economic growth is a good news for any country. However, considering the sheer size of #1 world economy, it is important to know what are the contributing factors to such growth.
A.T Kearney published “The 2017 A.T. Kearney Foreign Direct Investment Confidence Index” whereby it highlights that the United States tops the FDI Confidence Index for the fifth year in a row. This is likely because of the size of the US market and strong fundamentals of the economy.
According to the U.S. Department of Commerce Economics and Statistics Administration Office of the Chief Economist, in 2016, the foreign direct investment position, or the stock of foreign investment, in the United States was $3.7 trillion on a historical-cost basis, $6.6 trillion on a market value basis or $4.4 trillion.
The data collected on the direct investment surveys are reported at historical cost because that is how companies keep their financial records. Manufacturing (41%) and banking, finance, and insurance (19%) comprised the majority of FDI, followed by “other industries” (16%), and wholesale trade (10%).
U.S. affiliates of foreign-owned firms in the high-tech sector also spend nearly $42 billion on research and development (R&D). In 2015, they also contributed $154 billion towards U.S. goods exports and more than $373 billion towards value-added activities.
The U.S. affiliates of foreign-owned firms typically offer higher wages compared to domestic firms. In addition, companies engaged in FDI in high-tech industries offer higher average pay compared to FDI companies in other industries – more than $101,000 per worker.
Majority-owned U.S. affiliates of foreign entities employed 6.8 million U.S. workers in 2015, up from 6.6 million in 2014, and provided compensation of nearly $80,000 per U.S. employee in 2015. That is higher than the U.S. average of $64,000 in the economy as a whole for the same year.
In addition, the 2016 list of top ten global (largest) corporations is dominated by American companies.
The Motley Fool highlights that globalization has played a key role in driving U.S. GDP expansion, as well as in pushing sales and profits higher for some of America’s biggest companies.
According to The Motley Fool, American companies have looked overseas for products and services in order to keep material and labour costs down. Additionally, they’ve turned to foreign countries to seek out faster growth potential that simply may not be present in a saturated U.S. market.
The Motley Fool stresses that whether we like it or not, globalization has been a big reason the U.S. stock market has performed so well since the 1990s.
In December 1991, the Bureau of Economic Analysis (BEA), an agency within the Department of Commerce, announced that with the upcoming comprehensive revision of the national income and product accounts (NIPA’s), BEA will feature gross domestic product (GDP), rather than gross national product (GNP), as the primary measure of the US production.
GDP covers the goods and services produced by labour and property located in the United States. GNP covers the goods and services produced by labour and property supplied by U.S. residents and may be located either in the United States or abroad.
It appears that domestically and from an international trade point of view the United States, so far, benefited more than any other country.
Considering that globalization is a golden goose for the U.S., the only explanation for Trump’s “America First” is “Stupid”.
Jack Ma, one of China’s most successful and richest entrepreneurs, has responded to America’s growing globalization backlash, arguing that the superpower has benefited immensely from the process – but that it has largely squandered its wealth.
Ma said that American international companies made tons of money from globalization. The question is: where did that money go? It was wasted, Ma explained.
“In the past 30 years, America has had 13 wars at a cost of $14.2 trillion. That’s where the money went.” He also questioned America’s decision to bankroll Wall Street after the 2008 financial crash, arguing the money would have been better spent in other areas.
“What if they had spent part of that money on building up their infrastructure, helping white-collar and blue-collar workers? You’re supposed to spend money on your own people.”
Jack Ma said that it’s not globalization and everything that comes along with it, like free trade and outsourcing – that’s to blame for America’s woes. It’s the way the country’s elite managed the process.
All I can say is – well said.
PROMISED TAX REFORMS ARE REPLACED WITH TAX CUTS
According to CNBC, the Republican tax overhaul, which the self-proclaimed “king of debt” Trump signed into law in December, lowered the corporate tax rate to 21 percent from 35 percent. The Congressional Budget Office estimated the tax bill will increase the deficit by $1.5 trillion over the next decade and by $136 billion in fiscal 2018.
Stocks definitely boomed. The Dow spiked 45% between Trump’s election and its all-time high less than two weeks ago after the tax cut was enacted.
According to CNN Money, worries about inflation could force the Fed to cool things off by raising rates more aggressively than investors had been bracing for. If new Fed chairman Jerome Powell moves too fast, it will further rattle a stock market that has been addicted to extremely low rates.
“The real risk has been that the economy will overheat,” said Greg Valliere, chief global strategist at Horizon Investments. “Finally, the bond market realizes that things are heating up: deficit, inflation and wages.”
“We are dealing with a fiscally unstable long-term outlook in which inflation will take hold,” Greenspan said in an interview on Bloomberg Television last Wednesday. “I think we’re getting to the point now where the breakout is going to be on the inflation upside. The only question is when.”
FOREIGN INVESTORS CONFIDENCE: Risks to globalization and the postwar economic order as the 45th president of the United States is inaugurated.
In January 2017, The Centre for International Governance Innovation published “The Economic Consequences of Mr Trump”
In it, CIGI indicated that the ability of the US to run large current account deficits is dependent on foreigners’ willingness to hold US debt. Since World War II, in times of global uncertainty foreign investors rush to the safe haven of the US dollar. This confidence in the dollar reflects not just the size of the US economy, but also the principles on which the US was founded — a society of laws in which independent institutions uphold and enforce the rule of law and provide the stability necessary for long-term prosperity.
CIGI underlines that Trump’s policies may have unanticipated consequences that extend far beyond the short-term effort to manage aggregate demand. They may force foreign investors to question the long-term role of the dollar as the international reserve asset and vehicle currency for international transactions.
CIGI indicates that if foreigners lose faith in the underlying institutions supporting the US economy may trigger irreversible process with catastrophic consequences.
- Fading the US leadership role
- Deteriorating relationships with long-standing US allies
- Withdrawal from major international treaties
- Friction between the US and the rest NATO members
- Falling number of international tourists visiting the country
- Rise of racism
- Deteriorating infrastructure
- Trump-Russia investigation
- Republicans-Democrats faceoff
- Increasing polarization in the society
- Growing inequality gap
- Ballooning debt.
During the recent government shutdown, it became clear that Donald Trump is dysfunctional. Just one year ago nobody would believe that the US President had not be isolated while Democrats tried to negotiate with Republicans critical issues and reopen the government.
Images of wondering around Trump were broadcasted worldwide. It was absolutely clear that the President of the United States is dysfunctional. The world could see that the United States is virtually headless.
If we couple the dysfunctional government which implements harmful policies with all of the above, it might provide us with some clues. It could show that the pullback might not be just usual “correction”. It might be a warning signal that something big is heading towards us.