Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

This Is the End of Trump’s Economic Sugar High

Economics / US Economy Dec 07, 2018 - 11:38 AM GMT

By: Patrick_Watson

Economics By most measures, the US economy is performing okay. GDP growth is still near 3.5%. Unemployment is below 4%. Inflation is up a bit but still historically low.

Yes, the data has flaws. There’s plenty of regional variation. Your mileage may vary. But conditions could be a lot worse.

The problem: Sometimes the economy weakens beneath the surface.


This fools even experts like Larry Kudlow, one of President Trump’s top economic advisors. In December 2007, he wrote,

Economic growth may indeed pause to roughly 2 percent in the next couple of quarters, the result of two years of overly tight money from the Federal Reserve and the ensuing upturn in sub-prime defaults and foreclosures. You can call it Goldilocks 2.0. But you can’t call it a recession.

We now know the economy was already in recession when Kudlow said this. Breakdowns aren’t always obvious in real time.

Hence, the current not-so-bad numbers don’t guarantee smooth sailing. Rough seas could still lie ahead… and I think they do.

Sugar-High Inflationary Rally

Mistakes like Kudlow’s are an occupational hazard for writers. Reviewing my own archives can be pretty humbling too.

However, I just re-read a story I wrote a year ago, and I think it’s held up pretty well: How Tax Cuts Will Trigger Recession.

I didn’t predict immediate recession. Instead, I showed how the economy was growing above capacity, how the corporate tax cuts (which had not yet passed) would increase the deficit and raise interest rates, and how growth would eventually slow.

Meanwhile, I wrote:

If this tax bill passes in its current form, the recession may happen sooner and go deeper. The combined fiscal and monetary tightening could be the triggers.

However, first we might get a sugar-high inflationary rally, which could last a while. GDP ran above potential for four years in the late 1990s and for over a year in the housing craze.

Those were fun times while they lasted. Then the fun stopped.

As it’s turned out, “sugar-high inflationary rally” is a pretty good description for 2018. Two particularly sweet events made it a good year.
  1. Business tax cuts enabled trillions in stock buybacks, which increased earnings growth and drove share prices higher. The resulting “wealth effect” enhanced consumer confidence — at least for those who own stocks — and made them spend more freely.
  1. President Trump’s tariffs, both threatened and actual, made importers accelerate purchases and build inventory to get ahead of new taxes. We already had Overheated Highways before his trade rhetoric ramped up, and it intensified further.

These events created jobs, made employers raise wages for high-demand occupations, and stimulated spending on warehouses, trucks, and other logistical infrastructure.

Then what’s the problem?

As the old proverb says, all good things must come to an end.

Weird Events

Every parent knows sugar-stimulated kids do crazy things. So does a sugar-stimulated economy.

A November 15 Wall Street Journal story reports that desperate employers, unable to fill openings in this tight job market, are hiring workers sight unseen. Apply online, quick phone interview, you’re hired.

These aren’t small companies either. The story mentions Macy’s, L Brands, Boeing, and CVS Health. A Macy’s spokesperson said proudly, “We are providing candidates with a fast and easy hiring process.”

Get that? The employer feels it must provide applicants with a fast and easy process. This is not normal. It’s the kind of thing we see just before trends change.

Here’s another one.

US soybean farmers are storing tons of soybeans in every nook and cranny they can find. And in some cases, they are plowing down perfectly good crops because China has stopped buying them.

This is Beijing’s retaliation for US tariffs. Some economists said other buyers would replace China. To some extent they have, but not nearly enough.

And since you can’t store soybeans indefinitely (they spoil if not kept dry), the unsold crop is rotting away.

But fear not, farmers: The USDA has bailout funds available, since China is (for now) still buying our Treasury bonds.

That’s right. We are borrowing money from China to rescue our farmers from the harm inflicted on them by our quest to punish China.

Jobs Will Disappear

The bean-laden farmers are hoping for a trade breakthrough, and it could happen.

Right now, the US has 10% tariffs on most Chinese goods. The rate was supposed to rise to 25% on January 1, but President Trump agreed to postpone the jump for 90 days when he met Xi Jinping at the G20 summit in Buenos Aires.

Here’s the problem, though.

A huge amount of inventory is already on the shelves or on the way. Companies have been scrambling to get ahead of the increased tariffs that could yet happen. But even if the tariff threat disappears, all that inventory won’t.

What will disappear are the newly created jobs. Once the warehouses are full, companies won’t need as many trucks, drivers, and other logistics workers. They will need customers to buy the stuff… which will take time.

So, contrary to the idea that tariff threats are useful negotiating tools, the threats themselves are harmful. They change business decisions and kill jobs, even if never implemented.

Other things could compensate, of course. Maybe the Fed will reconsider its tightening policy. Maybe Xi will surrender to Trump’s demands. Maybe soybean-hungry aliens will land in Iowa and buy all the excess supply. Anything is possible.

But I wouldn’t bet on it.

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules