Economists warn investors are ignoring rising trade threats
BlackRock CEO Larry Fink. (Christopher Goodney/Bloomberg)The stock market keeps defying the gravity of President Trump’s mounting trade war, but top economic brains from Wall Street and beyond are warning that a reckoning is coming.
In just the past few days, economists from Morgan Stanley, Goldman Sachs and the International Monetary Fund — along with BlackRock CEO Larry Fink, who leads the largest asset manager in the world — sounded alarms about investor complacency. They see trade hostilities that look increasingly likely to rattle both markets and supply chains around the world taking a bite out of economic growth.
Fink on Monday went so far as to assign a value to the looming downside. If Trump imposes the tariffs he has threatened on $200 billion in Chinese imports, Fink projected the stock market could tank by 10 to 15 percent. That would erase more than half its gain since Trump’s election. Yet he noted that investors don’t appear to be grappling with the possibility.
“The market’s having a hard time digesting the whole change in globalization and trade,” Fink said in an interview with Bloomberg Television. “The foundations of international trade are being raised and being questioned.”
The S&P 500 dipped, barely, on Monday, only it’s second down day since July 6, when the U.S. and China each slapped tariffs on $34 billion of the other’s goods. The index is up nearly 5 percent this year.
Investment managers I’ve talked to chalk up the market's relative steadiness to a belief that the president won’t, in fact, continue to ratchet up the pain by following through with hundreds of billions in extra levies aimed at China and, separately, foreign autos and auto parts. The bet, as they see it, is that Trump is simply trying to maximize his leverage to extract more concessions from U.S. trading partners.
But Goldman Sachs economists aren’t so sure anymore. In a Friday note, the bank's team members wrote that they “now believe that it is more likely than not (60% chance) that the US imposes tariffs on the additional $200bn of imports from China that were recently targeted. While very uncertain, we would expect the tariffs could be imposed as soon as late September but possibly not until after the election.” They assign a 35 percent probability to Trump following through with auto tariffs.
Traders work on the floor of the New York Stock Exchange. (Michael Nagle/Bloomberg)“Even if all the proposed actions don’t go into effect, prolonged uncertainty alone can have a measurable impact on economic growth, and we should not underestimate the risks,” Morgan Stanley chief economist Ellen Zentner wrote in a New York Times op-ed on Sunday. She says that conditions present a distorted view of what’s ahead, estimating that stockpiling by companies preparing for a trade war accounts for about half of economic growth. But that will end if the tariffs bite. “Such a reversal is not likely to sit well with investors as they witness a potentially sharp slowdown in the second half of the year, and that could affect both stock and bond markets,” she writes.
Further, Zentner writes, swooning stocks could magnify the impact of the tariffs. “As the actual direct effects of each round of tariffs become clear, we should not assume that financial markets will continue to absorb the news smoothly,” she writes. “I believe this is perhaps the single biggest risk to the global economy: At some point, investors will start to question whether global supply chains can withstand the escalating pressures from multiple rounds of tariffs, and financial markets may start to react in unpredictable ways.”
Maurice Obstfeld, chief economist for the International Monetary Fund, wonders what's taking them so long. On Monday, he called trade tensions “the greatest near-term threat to the world’s growth,” citing projections by the fund's model that show global growth would dip 0.5 percent below the current trajectory in 2020 if the tariffs take effect. Yet Obstfeld said “investors seem ‘broadly complacent’ about the risks facing the global economy, noting that asset prices remain high in many countries,” Bloomberg News's Andrew Mayeda reports. “Financial markets are ‘susceptible to sudden re-pricing if growth and expected corporate profits stall,’ he said.”
Fink’s firm sees some evidence of investor unease. BlackRock on Monday reported investors have “pulled $22.4 billion from its equity products in the second quarter,” per Bloomberg. Fink characterized it as something meaningfully short of a freakout. He called it a “pause.”
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Treasury Secretary Steven Mnuchin at the White House on June 27. (Susan Walsh/AP)— U.S. files WTO cases. The Hill's Vicki Needham: “The United States on Monday launched five separate trade disputes at the World Trade Organization challenging trade partners' retaliatory tariffs. U.S. Trade Representative Robert Lighthizer said the U.S. is filing cases against China, the European Union, Canada, Mexico and Turkey after each imposed new tariffs on U.S. exports in response to... Trump slapping steep tariffs on aluminum and steel over national security interests. 'The actions taken by the president are wholly legitimate and fully justified as a matter of U.S. law and international trade rules,' Lighthizer said in a statement.”
(The action came as China filed a WTO complaint of its own, aimed at Trump's threat of new tariffs on $200 billion of Chinese imports.)
— E.U. inks deal with Japan. NYT's Jack Ewing writes that it is the E.U.'s “largest trade deal ever, a pact with Japan that will slash customs duties on products like European wine and cheese, while gradually reducing tariffs on cars. The agreement will cover a quarter of the global economy, and is the latest in a string of efforts either concluded or in the works with countries like Australia, Vietnam and even China. The deal with Japan — and the others being negotiated — point to a more assertive Europe, one that is looking past the frosty ties with the United States, and even the upcoming withdrawal of Britain from the bloc. In recent months, European Union leaders have voiced ever more confident rhetoric in favor of free trade, refusing to back down in the face of the threat of tariffs from Washington and instead aggressively courting new relationships.”
— Whirlpool's regrets. The Wall Street Journal's Andrew Tangel and Josh Zumbrun: “Put into practice, tariffs are a complex economic weapon that can ricochet through an economy in ways even proponents don’t expect. That’s what happened with washing machines, which were among the first consumer products targeted by the Trump administration. In the months since washing-machine tariffs took effect in February, LG and Samsung have pressed on with investments in the U.S., given that they now face the higher cost of shipping goods in from abroad. The overseas companies and Whirlpool have also increased hiring in the U.S. But appliance prices have risen for consumers, and there are signs of waning demand. Whirlpool had campaigned for protection from what it called unfair foreign competition. Things became more complicated as the trade conflict spread beyond its industry... Most of the 200-pound weight of a washing machine is in its steel and aluminum parts."
Meanwhile, companies denied relief from the metals tariffs are howling over a process they call opaque and unfair, Bloomberg reports.
— Warning signs in China's economy. WJS's Chao Deng: “Fall-offs in factory output and investment in buildings, machinery and such are weighing on China’s growth, complicating Beijing’s task in managing the world’s second-largest economy amid a trade conflict with the U.S. The Chinese economy clocked a 6.7% expansion rate in the second quarter from a year earlier, down slightly from 6.8% in the January-March period, the statistics bureau reported Monday. While that rate is within Chinese leaders’ comfort zone, some economists said more troubling are the drop-offs in business activity and domestic demand. Industrial output rose 6% in June from a year earlier, markedly down from a pace of 6.8% in May. Meanwhile, investment in fixed assets grew 6% in the first half of the year — a notch down from the 6.1% rate in the first five months and a level not seen since the late 1990s.”
— China courts Silicon Valley. WSJ's Kate O’Keeffe and Eliot Brown: “Tighter national security reviews have curbed Chinese deal-making in the U.S., but a new study shows China is pouring money into cutting-edge American technologies at a record pace this year through loosely regulated venture capital investments. Chinese foreign-direct investment into the U.S., made through deals such as acquisitions, fell into negative territory during the first five months of the year... Yet the figures belie China’s sustained interest in U.S. technology, which it is continuing to target through relatively unrestricted investments in startups in Silicon Valley and elsewhere.”
— Canadian chain drops Ivanka Trump's brand. The Washington Post's Amanda Erickson: “On Friday, Hudson's Bay Co. pulled all Ivanka Trump products from its website. And it says it will stop selling her products in its 90 bricks-and-mortar stores across the country. (Hudson's Bay also owns Saks Fifth Avenue, which also offers no Ivanka Trump merchandise online, and Lord & Taylor, which does.) In a statement, the company said the decision was based on the brand's 'performance.' 'As part of our regular course of business, we review our merchandise offerings and make appropriate changes,' the company said in a statement. Officials also said Trump's company had been notified of the decision last fall.”
Commerce Secretary Wilbur Ross on Capitol Hill in Washington on June 22. (Manuel Balce Ceneta/AP)— Wyden calls for a probe of Ross. The Washington Examiner's Joseph Lawler: “Ron Wyden is seeking a criminal investigation of Commerce Secretary Wilbur Ross’ financial dealings, and is pushing to make sure he doesn't get just a slap on the wrist. The Oregon senator, the top Democrat on the Finance Committee, asked the Department of Justice Monday to investigate transactions in which the billionaire Ross shorted companies from which he was supposed to have divested. Last week, the Office of Government Ethics reprimanded Ross, saying that the trades put him 'a position to run afoul of the primary criminal conflict of interest law.' ”
— Trump sparks outrage. The Post's Philip Rucker, Anton Troianovski and Seung Min Kim: “Trump handed Russian President Vladimir Putin an unalloyed diplomatic triumph during their summit here Monday as he refused to support the collective conclusion of U.S. intelligence agencies that Russia had interfered in the 2016 U.S. presidential election. Trump’s warm rhetorical embrace of Putin, who he said had given him an 'extremely strong and powerful' denial that Russia assaulted U.S. democracy, marked an extraordinary capstone to the first formal meeting between the current leaders of the world’s nuclear superpowers and sparked trepidation and horror among many in Washington and around the globe.
"At a remarkable 46-minute joint news conference inside the Finnish presidential palace, Trump would not challenge Putin’s claim that the Russian government played no role in trying to sabotage the U.S. election, despite the Justice Department’s indictments Friday of 12 Russian intelligence officers accused of hacking Democratic emails as part of a broad subterfuge operation to help Trump win the election. Trump went on to condemn the expansive federal investigation of Russian interference as 'a disaster for our country' and 'a total witch hunt,' arguing that the probe, along with 'foolish' American policies, had severely impaired relations between the two countries.”
And defends Putin. The Post's Aaron Blake: “Standing alongside Putin, Trump not only downplayed if not doubted Russia's 2016 actions, but he also regularly volunteered defenses for Putin and repeatedly blamed both sides for the strained relationship. ... When a reporter asked Putin about Russian election interference in 2016, Trump actually volunteered to answer the first part of the reporter's question, practically offering his own defenses of Putin. He used the time to assert that Democrats were coming up with excuses for their electoral loss. ... When Trump was again asked about Russian interference and whether he had told Putin to never do it again, he ignored the question and riffed for a couple minutes on a conspiracy theory about why the Democratic National Committee didn't turn over its server to federal authorities.”
More from the Post's coverage:
- Advisors briefed Trump extensively in the hopes he would confront Putin, but he ignored them, Ashley Parker, Josh Dawsey and Carol D. Leonnig report.
- Trump's performance draws bipartisan condemnation from the Hill, via Michael Scherer.
- The moment called for Trump to stand up for America. He chose to bow, Dan Balz writes.
- It amounted to a "astonishing repudiation of U.S. intelligence services and the American system of justice," Greg Miller and Shane Harris write.
- Salvador Rizzo and Meg Kelly fact-check some questionable claims by Trump and Putin.
Federal Reserve Chair Jerome Powell. (AP Photo/Jacquelyn Martin)— Powell to the Hill. WSJ's Nick Timiraos writes that the Fed chief is "unlikely to surprise" when he kicks off two days of hearings today with an appearance before the Senate Banking Committee, starting at 10 a.m.: "Fed officials are growing more nervous about rising trade tensions, according to minutes of their June meeting released last week. Watch for how Mr. Powell responds to questions about the implications for the U.S. economy and Fed policy. He is likely to repeat that it is still too early to know—with many threats still in the air and considerable uncertainty about what proposals will go into effect."
He's invested in his Hill ties, Timiraos and David Harrison write. Powell "has met individually with 18 lawmakers—10 Republicans and eight Democrats—during his first four months as chairman, according to his public calendar. He also had eight calls with lawmakers, equally split between Republicans and Democrats. By contrast, former Fed Chairwoman Janet Yellen met with just three lawmakers—two Democrats and one Republican—during her first four months as the central bank’s leader. She spoke with four Democrats by phone. 'As far as meeting with Congress is concerned, I’m going to wear the carpets of Capitol Hill out by walking those halls and meeting with members,' Mr. Powell said in a radio interview on the Marketplace program last week. 'I feel like that’s a really important thing that the chair can do.'”
— So what if the yield curve inverts? CNBC's Jeff Cox: “A trend in the bond market that has a long history of foreboding accuracy has kindled talk of a recession, but it could be a long conversation. Current conditions suggest little danger of a significant economic downturn. Consumers and business owners are confident, corporate profits are soaring and the unemployment rate is headed toward the lowest level since the mid-20th century. One danger looms, though: the ever-growing possibility that the 2-year Treasury note yield soon could be higher than its 10-year counterpart, a condition known as an inverted yield curve which has accurately predicted each of the last seven recessions, including the devastating one that began in 2007.”
— Retail sales rise. Bloomberg News's Katia Dmitrieva: “U.S. retail sales rose for a fifth month in June and figures from May were revised upward amid gains at auto dealers and nonstore vendors, capping a quarter that probably saw consumer spending pick up after a tepid start to the year.”
The Barclays sign in London on July 29, 2015. (Kirsty Wigglesworth/AP)— Barclays eyes U.S. expansion. WSJ's Max Colchester: “Barclays PLC is considering doubling down on America. Under pressure from activist shareholder Sherborne Investors, the British bank is scrambling to boost its stagnant share price. One path forward: Chief Executive Jes Staley is weighing whether to scale up Barclays’s online U.S. retail bank... Other moves could include rolling out its dominant U.K. payments platform stateside. The bank, which is locked in a grinding battle with giants like J.P. Morgan in investment banking, is also putting more capital behind its U.S. credit card operations... The lucrative U.S. market has long drawn European banks trying to expand out of saturated home economies. But they also have a history of getting burned.”
Amazon.com chief executive and founder Jeffrey P. Bezos in Seattle on Jan. 29. (Jason Redmond/AFP/Getty Images)— Bezos's wealth makes history. Olivia Carville and Tom Metcalf: “Jeff Bezos is the richest person in modern history. The Amazon.com Inc. founder’s net worth broke $150 billion in New York on Monday morning, according to the Bloomberg Billionaires Index. That’s about $55 billion more than Microsoft Corp. co-founder Bill Gates, the world’s second-richest person. Bezos, 54, has now topped Gates in inflation-adjusted terms. The $100 billion mark that Gates hit briefly in 1999 at the height of the dot-com boom would be worth about $149 billion in today’s dollars. That makes the Amazon chief executive officer richer than anyone else on earth since at least 1982, when Forbes published its inaugural wealth ranking.” (Amazon founder and chief executive Jeffrey P. Bezos is the owner of The Post.)
And Amazon employees plan a strike. Reuters: “Thousands of workers will walk off the job on Tuesday at Amazon warehouses in Germany to demand better working conditions, joining colleagues in Spain and Poland in taking action that coincides with a major sales promotion. The Verdi services union called the one-day strike to back its demand for labor contracts that guarantee healthy working conditions at fulfillment centers run by the world’s largest e-commerce company.”
— Musk tweet rattles Tesla investors. Bloomberg's Esha Dey: “Elon Musk can’t follow his own advice. Even after admonishing himself for engaging with detractors on Twitter, the Tesla Inc. chief executive officer was at it again this weekend. Shares of the electric-car maker fell as much as 3.6 percent after the CEO called a British cave explorer who had criticized him a pedophile. The tweet has been deleted. Controversial outbursts are neither new nor unusual for Musk, who frequently spars with critics and investors betting against his company.”
Sen. Elizabeth Warren (D-Mass.) delivers the keynote address to the Nevada Democratic Convention in Reno, Nev., on June 23. (Scott Sonner/AP)— Warren's ready to fight. The Post's Michael Scherer: "Ever since Donald Trump’s inauguration, voters at each of Sen. Elizabeth Warren’s 29 town halls have greeted her with the same pleas, sometimes multiple times in succession. 'Tell me how else to get in the fight,' she says, paraphrasing the entreaties. And she is happy to oblige... The suspense now is whether Warren’s brand of pugilistic populism is what Democratic voters outside of her home state want in their next presidential candidate.
"Although she denies pursuing a 2020 run, Warren has been positioning herself for one — joining the Senate Armed Services Committee and traveling the country for 2018 candidates while building an oversized campaign operation for a reelection bid this year that she is likely to win by double digits. She is not the only one with a fighting spirit in her party, but none of her potential rivals has so identified with bare-knuckle combat, against banks and credit-card companies, Democrats and Republicans."
- Municipal Finance Conference at the Brookings Institution in Washington.
- Federal Reserve Board Chair Jerome H. Powell appears before the Senate Banking Committee.
- House Energy subcommittee hearing on oversight of the Federal Trade Commission tomorrow.
- House Agriculture Committee hearing on cryptocurrencies tomorrow.
- House Ways and Means subcommittee hearing on the effects of tariffs on U.S. agriculture tomorrow.
- Senate Finance subcommittee hearing on trade and commerce at ports of entry tomorrow.
- House Oversight subcommittee hearing on “regulatory divergence” tomorrow.
- House Intelligence Committee hearing titled “China’s threat to American government and private sector research and innovation leadership” on July 19.
From The Post's Tom Toles:
Putin was grilled on Russian election meddling, and things got awkward:
The hosts of late-night shows give their takes on the meeting between Trump and Putin: