Tuesday, May 2, 2017

Trump's deal of a lifetime

The value of global equities, according to Bloomberg's index, will probably set a new record high this week of just over $73 trillion. (To avoid double-counting, Bloomberg excludes ETFs and ADRs from its calculation.) The U.S. market is within inches of its record high $26.8 trillion set two months ago. But it's not just the U.S. stock market that is booming: U.S. equities today represent almost 37% of the total, whereas they were almost 45% in early 2004. We are a smaller (but growing) piece of an even-faster growing global pie, and most of the growth is happening in the lesser-developed countries. China's equity market today is worth almost $7 trillion, which is 15 times greater than its value in early 2004 ($440 billion). India's stock market has risen by a factor of 7 since then, and now totals almost $2 trillion.


This surge in global wealth has almost certainly been driven by an expansion of global trade. 18 years ago China's exports to the U.S. were a mere $2.4 billion per month; they now average $32.5 billion per month. Over the same period, India's exports have exploded from a mere $300 million per month to now almost $3 billion per month. Trade is a win-win situation for everyone, with the world's poorest benefiting the most even as developed countries continue to prosper.


As the chart above shows, the volume of world trade has almost doubled over the past 17 years, and it rose 4% in the year ended last February. Most importantly, world trade volumes surged at an annualized rate of almost 12% in four months ending last February, an excellent sign that global economic fundamentals are solid and improving. It's not a coincidence, I suspect, that the value of global equities has risen almost 10% in the most recent four months.

As I and many others have noted, the most troublesome thing about Trump was his failure to understand how international trade works, and in particular his aversion to trade deficits, which any economist worth his salt knows are effectively meaningless. His apparent willingness to impose tariffs on Chinese imports posed a grave threat to international trade and prosperity. Two weeks ago Trump may have made the deal of his lifetime when he offered to forget about our trade deficit with China if the Chinese would in turn help us solve the problem of North Korea. He gave up something that was worthless in exchange for—we hope—a solution to the NoKo problem, which would be priceless.

9 comments:

Matthew Pool said...

Interesting.

Heinz Geyer said...

The 'Wealth' is only on Paper, the only wealth the stock market creates is the flow of dividends, the rest is hot air, otherwise we could just double the price of all shares and claim we have doubled our wealth. A few insiders who sell out at IPO and later may walk away with wealth, but it is just a transfer from the duped buyers.

Scott Grannis said...

Heinz: you would do yourself a favor by studying the history and theory of markets. Start with the classic: "A Random Walk Down Wall Street," by Burton Malkiel. The weath that is reflected in the stock market is not just paper wealth. It is the value that millions of investors attribute to each company. Of course, things can change and a company can either prosper or go bankrupt, but the overall market—and the economy—invariably continues to grow. Unless you are a pro, stay away from the high flying stocks and stick with an index fund (e.g., IVV).

Rich said...

Axing Navarro and Bannon would convince me of a true lesson learned.

Scott Grannis said...

From what I gather, Bannon is on his way out. Navarro faces an uphill battle. I too would be happy to see him go.

KB said...

Scott

You seem to miss the point Trump made, both before and after inauguration. First, he put China and other countries on notice that one-sided trade deals were a thing of the past. Two, he convinced China he would retaliate against currency manipulation, thus adding credibility to his trade stance. Three, he then 'gave' up that issue in return for actual Chinese assistance against North Korea.

Once the NK threat is neutralized, I guarantee he will get back to the 'free trade must be fair trade' issue.

Scott Grannis said...

Trump never had a case against China. It was all bluster, but he managed to turn bluster into an asset. That is my point. It's almost impossible to make the case that China is a currency manipulator, since the yuan has appreciated significantly over the years against virtually every currency on the planet.

KB said...

Scott

You are missing the point that Trump is a master negotiator. We are China's biggest market. For the first time, we have a President who knows how to use that Leverage.

KB

Scott Grannis said...

That's precisely my point with this post. He is a master negotiator