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Nov 21, 2018

Analysis | The Finance 202: Trump has vastly inflated the value of the U.S.-Saudi economic alliance


By Tory Newmyer


THE TICKER
President Trump wants Americans to believe they would pay a steep price if his administration holds Saudi Arabian leaders accountable for the killing of Post journalist Jamal Khashoggi. The argument doesn’t survive scrutiny. 
Trump has been trying to advance a version of this claim since Khashoggi’s Oct. 2 disappearance stirred suspicions he was killed at the hands of his native government. And the president revived it Tuesday as he waved away any imperative to act on the CIA’s conclusion that Saudi Crown Prince Mohammed bin Salman did in fact order the assassination.
In an oddly rambling, 634-word statement announcing that he is effectively moving on from the matter, Trump said the kingdom has committed to spending $450 billion in the United States, “a record amount of money” that will “create hundreds of thousands of jobs, tremendous economic development and much additional wealth” for the country. 
The president’s assertions, which he has steadily inflated in recent weeks, are off by orders of magnitude, as my colleague Glenn Kessler has documented.
It’s not clear where Trump got the $450 billion figure. And most of the military deals Trump is counting amount to memorandums of intent — not signed contracts. Six specific sales agreements, worked out during the Obama administration and notified to Congress then, total $28 billion. The Pentagon said last month the number is even smaller, with Saudi Arabia having signed “letters of offer and acceptance” for $14.5 billion in weaponry. That is a fraction of the $110 billion that Trump said the Saudis have committed to spend in that category. (The Trump administration itself said the arms sales would produce “tens of thousands of jobs,” a figure Trump has subsequently placed as high as 1 million.)
The rest of the incoming investment Trump is touting would come from commercial deals, but his math there rests on “double-counting, wishful thinking and fuzzy figures,” as Glenn has written. For example, the White House has chalked up $100 billion to investments from a fund established by Softbank and the Saudi sovereign wealth fund. But Softbank has said only half of that sum is U.S.-bound.

Saudi Arabia's Crown Prince Mohammed bin Salman. (Reuters/Amir Levy)
Trump repeated the claim while addressing reporters Tuesday before heading to Mar-a-Lago for Thanksgiving. “They’re paying us $400 billion-plus to invest in our country. That’s probably the biggest amount ever paid to the United States,” he said.
Again, it’s not clear what Trump means. But the trading relationship between the United States and Saudi Arabia is not especially significant. Last year, Saudi Arabia ranked 20th as a destination for American goods. And U.S. exports to Saudi Arabia have actually dipped over the last two years. Switzerland, whose economy is roughly comparable in size to Saudi Arabia’s, buys more from the United States, as Bloomberg has noted.
Trump also argued for the need to protect American access to Saudi Arabian oil. “Trump also referred to Saudi Arabia as ‘after the United States . . . the largest oil producing nation in the world,’ and said the Saudis have been ‘responsive to my requests to keeping oil prices at reasonable levels,’” The Washington Post’s Josh Dawsey, Shane Harris and Karen DeYoung write. “Trump indicated that in anticipation of the reimposition of U.S. sanctions on Iranian oil exports early this month, he had made a deal with Riyadh to keep its own production high to avoid a spike in oil prices. But U.S. sanction waivers granted to most of Iran’s major customers have kept prices unusually low, and the Saudis said last week that they intended to cut production.”
U.S. oil prices dropped to their lowest levels in more than a year after the comments. But prices have already slid more than 20 percent since early October, as supplies have increased and worries about a global slowdown take hold.
The U.S. gets about 11 percent of its imported oil from Saudi Arabia, but it is now the world’s largest oil producer. And American production is rising at its fastest pace in a century, a development that hands the U.S. leverage it hasn't seen in decades.
"The U.S. energy surge presents OPEC with one of the biggest challenges of its 60-year history," Bloomberg's Javier Blas reports this morning. "If Saudi Arabia and its allies cut production to keep prices higher, shale will thrive, robbing them of market share. But because the Saudis need higher crude prices to make [more] money than U.S. producers, OPEC can’t afford to let prices fall."
But focusing on the bean-counting risks missing the bigger picture. For one, there’s a mysterious incongruence at the core of Trump’s approach. “I’m not going to destroy the world economy and I’m not going to destroy the economy for our country by being foolish with Saudi Arabia,” he told reporters Tuesday.
Yet as the president makes excuses for leaders of a relatively marginal trading partner, he continues pressing trade hostilities with more stalwart allies. The administration has yet to lift metals tariffs on Canada and Mexico, for example, and is weighing whether to slap tariffs on auto imports from Europe and beyond — developments that are already weighing on American companies and contributing to slowing business investment at home.
Then there’s the more basic question: Even stipulating that the president’s claims about Saudi investments proved true, would they justify abandoning U.S. values? A bipartisan chorus of lawmakers is answering that in the negative, ripping Trump's defense of Saudi denials and demanding stronger sanctions against the country be included in a year-end budget deal.
Programming note: We’re publishing an abbreviated version of the newsletter today and will be dark on Thursday and Friday in observance of Thanksgiving. We’ll be back to normal starting Monday. Happy holidays!
You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.
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MARKET MOVERS

Traders and financial professionals work at the closing bell on the floor of the New York Stock Exchange on Tuesday. (Drew Angerer/Getty Images)
The stock market is now down for the year. WSJ's Corrie Driebusch: "Mounting concerns about the pace of growth spurred fresh declines in stocks around the world Tuesday, wiping out yearly gains for the S&P 500 and Dow Jones Industrial Average.What started as a selloff in shares of highflying technology companies bled into other corners of the financial markets, as investors drove down prices for everything from shares of retailers and energy companies to oil and bitcoin.
"The latest bout of selling left investors grappling anew with concerns that the nearly 10-year bull market could be running out of steam, even as ongoing growth in U.S. jobs, manufacturing, and corporate earnings signal to many that a recession isn’t imminent."
Why is this happening? One theory, via the WSJ: "Some traders who stepped in to scoop up shares in late October, hoping for a quick rebound, are now in danger of losing those potential profits and more. That puts the stock market in a tenuous position, several said. 'The buy-the-dippers are getting concerned,' said Justin Wiggs, managing director in equity trading at Stifel Nicolaus.
The stock market as a warning signal. NYT's Matt Phillips: "In recent weeks, retail stocks have been hit over concerns of rising costs, a sign that [Trump’s] global trade battles may be starting to take a toll and that higher wages are cutting into profits. Commodities and the companies that depend on them have been pummeled by the prospect of weaker demand should the global economy slow. Five tech giants — Facebook, Amazon, Alphabet, Apple and Netflix — have shed more than $800 billion in market value since the end of August, the fallout from slowing growth and regulatory scrutiny."
Top Trump economic adviser Larry Kudlow on Tuesday morning shrugged off the suggestions that a recession is looming:
Kudlow: “I’m reading some of the weirdest stuff how a recession is in the future- nonsense.” pic.twitter.com/LIpJLyuTQJ
— Eamon Javers (@EamonJavers) November 20, 2018
That in itself is less than reassuring, considering Kudlow's accuracy calling the last recession:
"There’s no recession coming. The pessimistas were wrong. It’s not going to happen." -Kudlow, Dec. 2007 https://t.co/riL48dm2H8
— Lachlan Markay (@lachlan) November 20, 2018
The threat is real. WSJ's Greg Ip writes that fading fiscal stimulus, Fed tightening and slowing global growth could force a reckoning: "The question is whether markets, in adjusting to these new realities, will overreact to the point that they endanger the expansion, on track to become the longest ever next summer. The answer for now appears to be no, but the trends are troubling. Assessing forward-looking market and economic data, economists at JPMorgan Chase & Co. put the odds of a recession beginning in the next 12 months at around one in three. A year ago, their models put the probability at 8% to 27%."
Trump blames the Fed again. CNBC's Fred Imbert: "Trump once again took a shot at the Federal Reserve on Tuesday, saying he would like to see lower rates from the U.S. central bank in answering a question on the state of the economy and financial markets. 'I'd like to see the Fed with a lower interest rate. I think the rate's too high. I think we have much more of a Fed problem than we have a problem with anyone else,' Trump said to reporters outside the White House. 'I think your tech stocks have some problems.'"
The Fed isn't likely to budge. WSJ’s Nick Timiraos and Gregory Zuckerman: "Market turbulence is leading some investors to call on the Federal Reserve to halt its campaign of interest rate increases, but the selloff in stocks and corporate bonds that accelerated Tuesday is unlikely to stop the central bank from raising rates when it meets again next month. Fed officials have signaled in recent days they plan to proceed with another quarter percentage point increase in their benchmark short-term interest rate when they meet Dec. 19, marking their fourth rate increase this year. The market pullback does underscore however the uncertain outlook for what the Fed will do after that."
CNBC's Steve Liesman sees potential for Trump's jawboning to backfire:
Trump says he would like to see the Federal Reserve lower interest rates https://t.co/puLhFCD3QQ
I really think the more the president says, the higher the bar is for the Fed not to hike as the Fed will be very keen to show that it remains independent.
— Steve Liesman (@steveliesman) November 20, 2018
From Ritholtz Wealth Management's Josh Brown:
Guy who somehow managed to go bankrupt owning casinos and Manhattan real estate has views on what interest rates should be.
— Downtown Josh Brown (@ReformedBroker) November 20, 2018
TRUMP TRACKER
TRADE FLY-AROUND: 

In this Thursday, July 12, 2018, file photo, the container ship Maersk Emerald is unloaded at the Port of Oakland, Calif. (AP Photo/Ben Margot)
U.S. accuses China of IP theft. Bloomberg's Shawn Donnan and Jenny Leonard: "The U.S. on Tuesday accused China of continuing a state-backed campaign of intellectual property and technology theft even as the world’s two largest economies have descended into a tit-for-tat tariff war. The new accusations came in a detailed 53-page report released by U.S. Trade Representative Robert Lighthizer’s office just 10 days before [Trump] is due to meet Chinese President Xi Jinping on the sidelines of a Nov. 30-Dec. 1 Group of 20 summit in Buenos Aires.
"The timing of the report’s release appeared to be a move by some of the more hawkish members of Trump’s administration, such as Lighthizer, to bolster their case ahead of the summit and as other cabinet members such as Treasury Secretary Steven Mnuchin push for a resumption of negotiations.  'China fundamentally has not altered its acts, policies, and practices related to technology transfer, intellectual property, and innovation, and indeed appears to have taken further unreasonable actions in recent months,' the report said."
(Read the report here.)
China takes veiled shot at U.S. over APEC breakdown. Reuters's Ben Blancard: "The failure of the countries attending a major Asia-Pacific summit to agree on a communique resulted from certain countries “excusing” protectionism, a top Chinese diplomat said, in a veiled criticism of Washington that further sours China-U.S. ties ahead of a meeting of the G20 nations. In Washington, a White House official rejected the Chinese line as 'complete spin and propaganda' and said the standoff did not raise hopes for a positive meeting between [Trump] and [Xi] at the G20 next week."
White House invites German car CEOs to talk. Bloomberg's Jenny Leonard and Jennifer Jacobs: "The Trump administration has invited the CEOs of three German automakers for talks at the White House as European and U.S. government officials try to negotiate a new trade agreement, according to people familiar with the matter. [Trump] is tentatively planning to meet with the chief executives of BMW AG, Daimler AG and Volkswagen AG after the Nov. 22 Thanksgiving holiday, one of the people said on condition of anonymity because the deliberations are private. The executives are consulting with the German government in Berlin before their meeting with Trump administration officials...
"For the U.S. president, the talks could be a way to push the European Union toward a broader trade deal. Discussions between Washington and Brussels have bogged down recently as the U.S. threatens tariffs on auto imports and the EU warns of imposing a digital services tax that could hit technology companies from Apple Inc. to Amazon.com Inc."

President Trump’s former chief strategist Steve Bannon is teaming up with one of the Chinese government’s fiercest critics on a $100 million effort to investigate what they view as abuses of power by President Xi and the Communist Party.
WSJ
MELTDOWN WATCH: 
POCKET CHANGE

Facebook CEO Mark Zuckerberg. (Matt McClain/The Washington Post)
Zuckerberg stands his ground. CNN Business: "After spending much of this year apologizing for Facebook's many missteps, CEO Mark Zuckerberg was defiant in an exclusive interview with CNN Business on Tuesday. Zuckerberg resisted growing calls for changes to Facebook's C-suite, reiterated Facebook's potential as a force for good, and pushed back at some of the unrelenting critical coverage of his company after a year of negative headlines about fake news, election meddling and privacy concerns. ‘A lot of the criticism around the biggest issues has been fair, but I do think that if we are going to be real, there is this bigger picture as well, which is that we have a different world view than some of the folks who are covering us,’ Zuckerberg told CNN Business' Laurie Segall at Facebook's headquarters in Menlo Park, California."

AP Exclusive: Department of Education report shows evidence that student loan servicing company Navient steered borrowers into high-cost repayment plans. The education department withheld report from states and federal agencies suing the company
Ken Sweet | AP

Japanese media report prosecutors will hold Nissan Chairman Carlos Ghosn, 2nd executive for another 10 days
Yuri Kageyama | AP
MONEY ON THE HILL

The former president said he was “not going to wade into House Democratic caucus politics” but proceeded to deliver what amounted to an unqualified endorsement.
Mike DeBonis

The proposal comes amid a scramble to rescue failing pension plans that more than 1 million Americans are counting on.
Erica Werner and Damian Paletta

Walmart asked Republican Sen. Cindy Hyde-Smith of Mississippi on Tuesday to return its campaign donation after outrage from "Will and Grace" actress Debra Messing over the lawmaker's controversial comments about attending a hypothetical hanging.
CNBC
BULL SESSION

Source: The Washington Post

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