Ideologues vs Pragmatists

President Donald Trump has so far presided over a raging stock market and an economy improving at a slightly better rate than what his predecessor had seen over the first eight years of the recovery. So, of course, now is a great time to throw a giant wrench into the machinery…

The corporate tax cuts enacted late last year were helpful – they boosted the S&P 500 earnings outlook and then were supportive of what the consensus believes could be a record year for stock buybacks. Consumer confidence has followed business owner confidence higher. The global growth picture brightened as well last year, which added a whole ‘nother leg to the case for owning large, multinational companies levered to consumption and productivity around the world.

This summer, the narrative is starting to shift into reverse. The trade stuff seems to be pissing everyone off, domestically and internationally, with just about no one happy other than a small handful of economic illiterates and xenophobes, who see the world as zero sum rather than a growing pie.

Trump economic advisor Larry Kudlow falsely claimed the other day that “the deficit is coming down fast” on the Maria Bartiromo program. It is actually skyrocketing but neither she nor her producers are aware of this so it went unchallenged. If you believe something hard enough, I guess you can convince yourself to the point where making any statement is possible. Supply-siders truly believe that unleashing the economy from taxes and continuing to spend will ultimately lead to faster growth which should offset the deficit. Despite the fact that this has never happened. The only thing that’s turned deficits into budget surpluses over the last fifty years is a stock market bubble, producing enormous capex spending and enormous cap gains taxes. The late 1960’s and the early 2000’s. That’s the only time we’ve seen it and it wasn’t sustainable in either case. Gigantic secular bear markets followed both occurrences. Look it up.

But if you’re an ideologue, none of this is necessary to think about. It doesn’t even enter the conversation.

My friend Cullen Roche wrote a very good explainer about why the deficit is going up, and some reasons for why it’s not actually the worst thing in the world. Larry would be better off making this case rather than repeating the lie:

Let’s Talk About that “Rapidly” Falling Deficit (Pragmatic Capitalism)

The deficit is not what’s causing consternation these days, though. It’s the trade war. No one wants it. It’s not going to save jobs, it’s going to crush jobs, hurt consumer confidence, raise prices, alienate us from our allies and trading partners, strengthen China’s hand and probably cause all kinds of negative adjustments for US manufacturers, our export markets and the global supply chain.

The one thing it does really well is tie into the narrative that foreigners are f***ing over white  blue collar Americans from the heartland, so you can expect the ideologues to stand pat and keep fighting. It’s easier to make this claim than to discuss automation, the need for increasing technical skills and the benefits of education.

Wilbur Ross, who ought to know better given his experience in global industrial investing, is still play-acting from the land of make-believe for the benefit of his boss’s feelings. This morning he said the stock market’s jitters don’t enter into the equation.

Wilbur Ross: There’s no downside level in the stock market that would change Trump trade policy (CNBC)

We also know that this isn’t true, because if it were then Trumplandia’s economic officials wouldn’t be courting the financial media so ubiquitously.

After appearing on @CNBC, Sec. Mnuchin stayed plugged in to hear recap + stock market reaction.

After past appearances, Peter Navarro, Kevin Hassett and Larry Kudlow did the same thing.

The administration cares very much what its words and policies do to the market. pic.twitter.com/doPTR8pFmC

— Kayla Tausche (@kaylatausche) June 27, 2018

Obviously there is a level. But we’re probably nowhere near it. The President can’t go into the midterms with weakening economic data or a stock market in prolonged correction. And he doesn’t have to. So long as the damage between the US and the EU / Canada isn’t permanent, a lot of the rhetoric and proposed tariffs can still be cooled off. Maybe that’s how things resolve themselves later this summer.

We’ll see if there’s a pragmatic side to the ideologues after all. Until then, the stock market churns its through the day to day headlines. You don’t have to spend your summer churning along with it.