10% On $300 Billion In Goods Is Minuscule In $21T Economy

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“The market was given two reasons to sell off this week, the Fed’s weak performance with last week’s interest rate cut, and President Trump’s escalation of the Chinese trade war (and China’s response in allowing the RMB to break below the psychologically significant 7RMB-to-the-dollar level).  

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“As markets more than exemplified, at least a mini “hissy fit” has begun. We can’t say that it’s all that surprising to get a correction in stock prices here, as the market has been driving forward with quite a bit of strength since the beginning of 2019. However, it’s never fun to watch the force of sharp market corrections (3 and 4% down in a single session seems more and more commonplace). That said, it was not all that long ago (4th quarter 2018) that the market experienced similar — and worse — down days and we have certainly survived; we will survive this one too (as all those before!).

“With regard to the two “reasons” for the selloff, cited above, we believe the Fed displayed weakness in its statements after the meeting in which they decided to lower the target rate for Federal Funds by a quarter of a percentage point.  Chairman Jerome Powell seemed to struggle to justify the rate drop, suggesting it was a “mid-cycle adjustment.”  Huh?  Yeah, that type of weak statement doesn’t go far to assuage the manic traders who stake their financial lives on every breath taken by the Fed Chairman. 

“We are on record that despite what Donald Trump wants (have you ever known a real estate guy that doesn’t want lower rates?) interest rates do not need to be lowered.  In fact, as virtually every economic data point of late has indicated, the economy is doing just fine, and we believe much of the weakness the economy experienced in the wake of the 2008 – 2009 financial crisis was exacerbated by zero percent interest rates for far too long.

“As for the trade war with China, we want completely free trade.  No tariffs anywhere, levied by anyone!  We also know that is wishful thinking. 

“For most of our careers (now in the fourth decade for the oldest of us at Taylor Frigon Capital), we have believed two wrongs don’t make a right. In other words, it was for the better of all concerned that even if the Chinese government wanted to charge tariffs on goods coming into China, raising prices on goods for their own consumers, or otherwise forcing them to buy inferior products, it was their prerogative, and the US should not follow suit and do the same to its own consumers.  It certainly benefitted US consumers and businesses and aided growth in the global economy, (especially in the developed world, China being the largest developing country at the time). No doubt there were geopolitical benefits as well.

“That said, there were other costs absorbed by the US which were not as visible. Particularly rust belt manufacturing companies and their workers took a major hit (folks are not so worried about the cost of consumer products when they don’t have a job). Additionally, the theft of intellectual property (IP) in China has been rampant. Certainly, technology firms would fare better if they could sell software under terms similar to the western world and not worry about seeing bootleg copies on the shelf in Chinese stores; that’s just one of the many IP-theft issues.

“We think that what this trade battle is really about is asking China to step into the first world.  They are not an emerging economy any longer and while it may have been prudent to “look the other way” in the interest of geopolitics, global economic growth or whatever, the time has come to demand adherence to the rule of law. 

“Many of our colleagues who equally tout “free enterprise” and a loathing for tariffs are staying “pure” to the doctrine of free trade, even if it is “one-sided.”  We thoroughly understand that and respect it.  However, we think the view we are taking now is worthy of consideration, and may be the correct course of action in what is a very complex topic. 

“Regardless, we think these trade issues will ultimately be resolved, as it is not in either party’s best interest to have them linger on.  It should also be understood that the amount of goods subject to trade tariffs that Trump recently announced would take effect 9/1/2019 is 10% on $300BB in goods.  This in an almost-$21 Trillion economy in the US, is minuscule, so some perspective is in order.

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