WindRock - Displaying items by tag: Recessions

Winter is Coming

Published in Articles
Monday, 27 August 2018

The Tariffying Prospect of a Trade War

Published in Blog
Friday, 20 July 2018
July, 2018

David Letterman, Oprah Winfrey, Phil Donahue, and Larry King – future President Donald Trump hit the talk show circuit extensively in the 1980’s and 1990’s.  These interviews provide an insightful look into his core beliefs.  Consistently, the most passionate commentary concerned foreign nations “taking advantage” of the U.S. – either by failing to contribute more to their own national defense or by running significant trade surpluses (U.S. trade deficits).  In these interviews, the latter of which was usually directed (given the time period) at Japan.  Today it is China.

Some argue that President Trump is actually in favor of free trade but wishes to renegotiate various trade treaties.  That is, by embracing protectionist policies, free trade can be broadened on more “appropriate” terms.  For example, some of the stated NAFTA renegotiation objectives include the elimination of “unfair subsidies, market-distorting practices by state owned enterprises, and burdensome restrictions on intellectual property.”1  Perhaps this is indeed President Trump’s ultimate goal, but this interpretation is contrary to significant evidence in addition to his own talk show confessions.

First, protectionism is theoretically consistent with President Trump’s immigration position.  If one believes immigrants take away American jobs, then logically one would also fear cheaper foreign goods which destroy the profitability of American companies – and by extension, cost U.S. workers their jobs.

Second, the protectionist measures enacted so far have been consistently indiscriminate in affecting both allies (e.g., Canada, Europe, etc.) and potential foes (e.g., China) – and thus almost all trade agreements – alike.

Third, President Trump, almost immediately upon taking office, pulled out of the Trans-Pacific Partnership.  While one could easily argue this agreement actually hindered free trade given its excessively burdensome and complex rules and regulations, the rationale given for withdrawing was a protectionist argument: the preservation of American manufacturing.

Fourth, he has surrounded himself with advisors notorious for their protectionist policy advocacy.  Most notable among them is economist Peter Navarro who authored the book Death by China.

If President Trump truly believes in protectionism, and if such advocacy largely helped him win the election, then we should expect this trade war to continue, broaden, and deepen.  It likely would have begun last year but for the need to secure China’s cooperation in dealing with North Korea.  As evidence, note that the first major tariffs (March 1st) were issued just after U.S.-North Korean relations started thawing with Kim Yo Jong’s (sister of Chairman Kim Jong Un and special emissary) overtures at the Winter Olympics (which ended on February 25th).

If the trade war escalates, can it directly cause a U.S economic recession?  Many mainstream pundits, citing the infamous Smoot-Hawley Act of 1930, warn as such (which is odd, especially since the Great Depression was well underway before it was enacted let alone took effect).

It is rising interest rates which directly cause recessions as the origin of recessions lies in the preceding, artificial boom.  When a central bank increases the supply of money, interest rates are artificially lowered.  Since interest rates are a universal market signal to all businesses, investments which previously appeared unprofitable now make economic sense.  However, the attractiveness of these projects is a mirage.  These borrowed funds are actually being “malinvested” given the “true” level of interest rates absent the artificial stimulus.  When interest rates eventually rise as monetary stimulus is lessened, the disruptive liquidation of the malinvestments in the ensuing downturn is known as a recession.

But tariffs may indirectly cause a recession.  Currently, U.S. Treasury debt held by “Foreign and International Investors” is almost $6.3 trillion.  China alone accounts for almost $1.2 trillion and may not be interested in more.2 In May of this year, it was reported that China had halted its purchases of U.S. Treasuries.3

If foreign demand, led by China, for U.S. Treasuries cools (let alone if China liquidates its holdings); expect higher U.S. interest rates (all things being equal).  If this, combined with the Federal Reserve’s planned liquidation of bond holdings in the face of increased U.S. budget deficits, develops, interest rates may rise significantly.  A recession and financial market distress would surely follow.   It is a tariffying prospect.

 

1) “USTR Releases NAFTA Negotiating Objectives” Office of the United States Trade Representative.  July 2017.

2)  “Federal Debt Held by Foreign and International Investors.  Federal Reserve Bank of St. Louis.  https://fred.stlouisfed.org

3) “We Understand the Chinese Government has Halted Purchases of U.S. Treasuries”  ZeroHedge.  4 April 2018.

 

Whether it is the Empire State Building with the Great Depression, Dubai’s Burj Khalifa building with the 2008 Great Recession, or the Shanghai Tower and this summer’s stock market meltdown in China, the construction of the tallest skyscraper uncannily coincides with major financial and economic downturns.

WindRock interviews Dr. Mark Thornton, Senior Fellow at the Mises Institute, about this phenomenon known as the Skyscraper Index.  Dr. Thornton discusses: why the Skyscraper Index has coincided with financial crises and economic recessions; what the underlying causality is between the construction of skyscrapers and financial downturns; when the Skyscraper Index has been wrong, and why; and what the Skyscraper Index tells us today in light of Saudi Arabia’s Jeddah Tower which, upon completion, will be the tallest skyscraper in the world.  November 2015.




Two Great Threats to Your Investment Portfolio

Published in Podcasts
Tuesday, 24 November 2015

Christopher Casey of WindRock Wealth Management was recently interviewed by Gordon T. Long of the Financial Repression Authority.  Their conversation addressed the following topics to better prepare investors for future recessions and inflation: what really causes recessions; why the mainstream financial community’s misplaced understanding of inflation will blindside them in the next inflationary period; why, despite the massive increase in the money supply since 2008, the economy has not yet experienced significant inflation; and how investors can better protect their portfolios from recessions and inflation.  October 2015.






A Recession is Coming in 2016

Published in Webinar
Wednesday, 16 September 2015

WindRock interviews Bud Conrad, Chief Economist of Casey Research, on his prediction that the U.S. will soon enter a recession.  Mr. Conrad discusses: how the next global recession could exceed the downturn in 2008; why the next recession will again force the Federal Reserve to respond by printing money; which investments investors should contemplate to protect against a recession and the ensuing inflation due to an acceleration in money printing; and what risks are associated with the U.S. dollar eventually losing its unique status as the world's reserve currency.  September 2015.




GDP: Where's the Beef?

Published in Blog
Monday, 02 June 2014

June 2, 2014
It’s official.  The US economy contracted in the first quarter with GDP recently revised to -2.1%.  Like the old Wendy’s ad, we are wondering “Where’s the Beef” of economic growth? 

The Federal Reserve has continued to promise growth just over the horizon on the false belief that record low interest rates and quantitative easing can bring the economy back to health.  In fact, at Ben Bernanke’s final meeting as Federal Reserve chairman in February, the Committee was optimistic about the recovery, stating that they “expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline.”

Dissecting the 1st quarter numbers, GDP declined by approximately $350 billion.  Even the $195 billion of quantitative easing during the first quarter couldn’t boost the economy (not that we thought it would)!  We believe we are getting closer to a point where papering-over a broken system will be harder to disguise for policy makers.

Following our view of recession first and inflation later, bond yields have hit new lows on the year, with the 10-year treasury now at 2.4%.  However, stock markets remain dangerously complacent.  We foresee the potential for another wave down in equity markets that will lay the foundation for new rounds of money printing around the world.  Hunker down now, but be fearful of inflation in the years ahead as printing money is increasingly an act of desperation.

Source:  Bureau of Economic Analysis
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