Image for post
Image for post
The CSCL Globe with a maximum capacity of 19,100 twenty-foot containers, one of the world’s largest container ships transporting goods. Source: Wikipedia

Trade wars matter, but not that much

Matt Phillips made an unambiguous conclusion in the New York Times this week, warning Wall Street’s Sky-High Expectations Are About to Collide With Reality. Phillips points at the bleak outlook following the most recent corporate earnings trends. He is right in reminding investors of the real signs we should pay attention to — but too often ignore.

What is the disconnect?

Guy De Blonay, fund manager, states that “eighty percent of daily volume in the U.S. is done by machines, so what you get is a lack of focus on earnings, a lack of focus on outlooks and you just get short-term movements based on very specific data that is released every day and that creates noise.”

Instead, political instability, economic slowdown, and the uncomfortable increase of the US budget deficit and public debt are crucial to understand the long-term financial climate.

International trade: the misguided focus on China

Image for post
Image for post
Source: MarketWatch

The US GDP is around $20 trillion, imports represent $3.1 trillion or 15% of the GDP. The deficit itself represents $1.4 trillion or 7% of the GDP. Those numbers do not include services (75% of the GDP): this is where the US dominates the world. The biggest dependency of the United States on imports is in automotive and consumer goods, where the trade deficit amounts to $600 billion.

Reading the media, it seems that the United States is fighting a trade and monetary war with the entire world, and especially with China. Market fluctuations are reported to reflect the sentiment of investors confronted with these sanctions.

But let’s look at the stakes. In 2018, US imported $539 billion from China, or 2,5% of the US economy and 15% of the US imports. The trade deficit with China is therefore limited to 2% of the US GDP. The value of stocks should not follow the vicissitudes of an absurd negotiation, directed by an immature President who would like the Chinese to collect dirt on his opponent for the next presidential election.

Furthermore, the US’ largest deficit with China is in consumer and electronics ($ 160 billion): it is massively due to the import of electronic equipment by US companies who prefer to produce their smartphones and tablets in China.

The budget deficit in an economic slowdown is the new reality

A slowdown of the forecasts for the growth will definitely reduce the revenues of Uncle Sam and will increase the fiscal deficit in 2020. The growth of the GDP in 2018 was 3.1%. At best 2019 will be 2.4%.

The new reality is a country whose financial stability is vulnerable: Wall Street knows those numbers, but shrugs its shoulders, as if it did not matter — at least not for now.

Written by

CEO at Galileo Global Advisors and Adjunct professor Columbia Law School.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store