The Year of Dichotomies Winds To Its End

‘Twas the night before Christmas and all through Asia America increased its exports – of panic. President Trump, whose tariffs many Asian policymakers feared would derail their economies, attacked the Federal Reserve’s chairman, blaming him for turning the man who appointed him into “another Hoover”. Another Great Depression in store? This, after treasury secretary Steven Mnuchin announced he had called the heads of the six largest banks seeking reassurance that their liquidity positions were adequate to meet, er, meet what? A financial collapse on the scale of the one that wreaked havoc on world markets a decade ago? Neither the President nor his treasury secretary seemed to understand their ability to rattle markets.

On Tuesday, Japan’s Nikkei plunged over 5%, the already battered Shanghai composite more than 2% and benchmarks in Thailand and Taiwan turned sharply down. When the American President and his secretary of state speak, Asia listens.

America is in an odd state. Dichotomies abound: consumer confidence, although slipping a bit in recent months, remains high even though a majority believe the nation is headed in the wrong direction; big tech companies are exuberant about their prospects while gloomy investors drive the prices of their shares into bear market territory; and a robust economy co-exists with stock markets in disarray.

Start with consumers. They have just engineered the biggest holiday shopping season in six years – sales up over 5%, and have cash left over to spend in 2019. Jobs are so plentiful that there are more openings than there are unemployed workers, and couch potatoes are drifting back into the work force in response to rising wages. Yet, despite satisfaction with their own positions, 55% of Americans think the country is headed in the wrong direction, while only 37% believe it is headed in the right direction.

No surprise. Americans woke Christmas day to Trumpian chaos. He had shut down the government, or part of it, because he wants money for a “wall” with Mexico while congress will only fund a “fence”. Despite his offer to negotiate, the Democrats went home without responding lest Nancy Pelosi say anything to antagonize the final few supporters she needs to assure her election as Speake of the House. The President announced by tweet, without notifying the Chairman of the Joint Chiefs of Staff, that he is ordering a complete withdrawal from Syria, abandoning our Kurdish allies to the tender mercies of Turkey’s president, Recep Tayyip Erdogan, who is about to launch an offensive aimed at destroying the Kurds. Other beneficiaries of Trump’s Syrian-policy Christmas largesse: Vladimir Putin and the leaders of Iran and Hezbollah, now in unrivalled control of Syria and perhaps the Middle East. When Trump also tweeted plans for a draw-down in Afghanistan, the Taliban’s Muslims felt a bit of joy on a holiday season they do not usually celebrate.

There’s more. Investigators are closing in on Trump, and it is no longer certain the President can count on the 35 votes he would need in the Senate – 66% of Republicans – to obtain a not-guilty verdict should the House impeach him. After Jim Mattis, the much-respected Secretary of Defense, honorably resigned in disagreement with his President’s policies, effective February to allow him to attend his final Nato meeting, a petty Trump fired that “grandstander” effective January 1. A sort of “You can’t resign, you’re fired.” The Brookings Institution reckons that turnover in the top ranks of the administration stands at 65%, and Trump wants more: he is asking his staff to bring him the head of Fed chairman Jay Powell.

The next dichotomy stems from investors’ grim view of the future of big tech companies, and the rosy outlook in the companies’ board rooms. Consider these companies, all of whose shares are down from this year’s highs, even after the year-end jump in the market:

  • Apple (-32%) announced the construction of a $1bn, 133-acre campus in Austin Texas as part of a 5-year, $30bn, 5-year capital expenditure plan that by 2023 will add 20,000 jobs to its 90,000-person work force.
  • Amazon (28%) has announced major expansions in Brooklyn and the DC area, with 50,000 new jobs, average wage $150,000, divided equally between those new headquarters, with subsidies contributing to the optimism.
  • Google (-17%) will invest $1billion to create a 1.7mn square-foot Hudson Square campus and double its New York work force to 14,000 over the next decade.
  • Netflix (-39%) is planning to borrow enough money to finance 55 new films, some with budgets of $200mn, and to continue luring talent from such as Fox and Disney with $300mn multi-year contracts.

There may be times when falling share prices produce conservative managements, but this does not seem to be one of them for these one-time high flyers.

The final dichotomy is the difference between an advancing economy and retreating markets. Start with a bit of perspective: the S&P 500-share index, down 15% from this year’s peak, remains about 10% above what it was on the day Trump took office. The fact that the economy has grown at an annual rate of 3%, with low unemployment and nil inflation, is a view from the rear-view mirror. Stock markets reflect investors’ view through the windscreen, and they do not agree with the Fed and other forecasters that the view down the road in 2019 is for only a moderate slow-down, to a growth rate of about 2%. Through the fog, they see a world-wide slowdown with trouble ahead for China, Italy, Britain, Germany, Japan – the list goes on. Add Trump’s trade wars, and the fading effect of the Trump tax cuts, and the pessimists see a recession by mid- or late-2019 – 2020 at the latest.

There is little question that Trump has decided after two years in office to rely on his impulses rather than his advisers. But as Julian Jackson, author of a magnificent new biography of Charles De Gaulle, quotes France’s great soldier/statesman, “…Impulse alone is not sufficient as a basis for action. …Intellect and impulse must go together. … Great men have both intellect and impulse. The brain serves as a brake upon pure emotional impulse….” It is unlikely that Trump recalls this statement from his reading of the 887-page tome.