One of the funniest things to observe in the world right now is the widespread level of Trump Derangement Syndrome (TDS) you see across the establishment media. No matter what Trump does, the TDS-infected media will tell you he is unhinged, reckless, and unfit for office.
Take the recently threatened tariffs on Mexico. Markets sold off on the news, as Trump was widely criticised. Soon after, the Fed came out and said they were ready to cut rates if need be, which pushed stocks prices higher.
Then, on Friday in US trade, news surfaced that Mexico had agreed to US demands, and that the tariffs wouldn’t go through. So Trump got some concessions from Mexico to assist with the illegal immigration problem on the southern border, and he got the Fed to signal a rate cut…all with only the threat of a tariff.
The leftist mainstream media (The New York Times, The Washington Post, etc) couldn’t deal with it.
So The New York Times ran with an article with the misleading headline, ‘Mexico Agreed to Take Border Actions Months Before Trump Announced Tariff Deal.’
This implied that Trump’s tariff threats and subsequent deal was all show.
But as the article concedes further in:
‘Officials involved with talks said they began in earnest last Sunday, when Kevin K. McAleenan, the acting secretary of homeland security, met over dinner with Mexico’s foreign minister. One senior government official, who was not authorized to speak publicly about the closed-door negotiations that took place over several days, insisted that the Mexicans agreed to move faster and more aggressively to deter migrants than they ever have before.’
In other words, Mexico wasn’t acting on a prior agreement. Trump threatened tariffs unless they started to do something. New negotiations occurred. And Mexico responded.
But the TDS suffering media had to spin it differently.
They really are shooting themselves not just in the foot, but in the head. TDS will end up destroying the credibility of the establishment media.
Meanwhile, the market liked the positive Mexico tariff outcome and the promise of more easy money. As you can see in the chart of the Dow below, stocks have rebounded strongly over the past week or so.
The bigger concern of the US/China trade war
However, there is still the much bigger concern of the US–China trade war playing out. While this remains unresolved, it’s hard to see how stocks can make new highs.
But the message from the Fed (in that it stands ready to act) is also a comfort to the market. So while company earnings continue to hold up, don’t expect this market to do much. That is, it’s likely to trade in annoying ups and downs without really going anywhere.
Meanwhile in Australia, last week saw the release of economic growth data for the March quarter. While it’s not of much value for investors given the time lag (it covers economic activity from January–March), it’s worth pointing out a few things given the RBA gave us a panicked and unnecessary rate cut last week.
The headline growth number for the quarter came in at just 0.4%, and a weak 1.8% for the year to 31 March. Low household consumption growth and a slumping housing market — both in terms of dwelling construction and selling activity — were the main culprits behind the low growth number.
‘Gross national expenditure’, which is basically the domestic economy (not including the impact of exports), didn’t grow in the March quarter, and increased only 1.6% over the past 12 months. This looks dire, and on the surface warrants an interest rate cut.
But as I explained last week, this period covered the lead up to the Federal election, in which a disastrous Labor government with growth-sapping policies was set to win government. My view is that this likelihood changed the behaviour of both consumers and businesses.
Given that scenario didn’t eventuate, my guess is that you’ll see a post-election bounce. That won’t show up in the data for a while, though.
There are two other important numbers in the data to consider. When you include the effect of strong bulk commodity prices (via the terms of trade) the economy looks much stronger.
‘Real net national disposable income’ increased a robust 0.9% for the quarter and is up 3% over the year. So on this broad measure of growth, the economy isn’t doing too badly.
Then there is the nominal growth rate, or broad growth plus inflation. This came in at 1.4% for the quarter (5.6% annualised) or 4.9% over the past 12 months. This is the figure that matters for the stock market, and it’s not too shabby.
No wonder the stock market is near record highs. Around 5% nominal growth and 1.25% interest rates! What a combination for asset prices.
The quarterly nominal growth rate was the best since March 2018.
It is against this backdrop of weak domestic growth (but not as weak as the headline number suggests) and a booming export market that the RBA cut rates last week. As I’ve previously said, it wasn’t necessary. The underlying numbers prove it.
At some point in the next few years, the export market will slow, and the economy will really need something to offset that loss of income.
The question is, will the RBA have any ammo left at that point?
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