There was one glorious moment on Wednesday, when simultaneous interviews on Bloomberg TV and CNBC perfectly captured the market we’re in right now.
On CNBC, billionaire fund manager David Tepper was telling a spellbound Joe Kernen that “animal spirits” had been awoken, and that the promise of deregulation alone had the power to send the economy into bliss-mode.
“Japan’s doing well, China’s doing well, we’re doing well,” he said. Tepper, the founder of Appaloosa Management, is even long European stocks.
“Not one more regulation is happening and … you have tax cuts coming here,” he said. “So unless there’s a mess-up in the administration … nothing’s going to get in the way until inflation starts picking up.”
That was one half of the picture.
On the always more sober network — Bloomberg TV — Commerce Secretary Wilbur Ross, a Wall Street billionaire in his own right, was explaining the landscape of global trade with the US by saying quite simply, “…we’re in a trade war.”
“We’ve been in a trade war for decades. That’s why we have a deficit… The reality is the Mexicans know, the Canadians know, everybody knows the times are different. We are going to consume new trade relations with people. And they all know they’re going to have to make concessions,” he told Bloomberg’s David Westin.
Westin was simply asking if Ross was concerned about trade spats as the administration renegotiates trade deals that Trump has promised will lead to dramatic economic change.
Quite the contrast, no?
Billionaire Tepper sees an America that will smoothly roll along into riches, and is piling into stocks as a result.
At the same time, Commerce Secretary Ross seems to be looking at an America desperately in need of shock therapy — and wants to apply a shock that could easily ripple across the world before it violently returns home to our markets.
This is exactly what has some investors unnerved right now. One view is that the promise of tax cuts and government spending and a government controlled by the Republican party (and, you could argue, Goldman Sachs) is huge for the investing class. On the other hand, that same government is promising to tear up the rule book, take a hostile stance even with friendly countries, and penalise American businesses and consumers who have adapted to a globalized world — all of which should scare the pants off investors.
Say what you want but, like, Dow 20,000.
“I don’t think the market’s cheap…. but you can’t be short in that kind of setup. It’s hard to go short when you still have the drugs being given… the punch bowl’s still on the table,” Tepper said.
What he means by “drugs” is that central banks around the world are still keeping rates low and money easy.
“Whether people are heroine addicts or cocaine users around the world, I don’t know,” he joked. Obviously, he thinks this policy should end. And to his point, The US Federal Reserve looks more and more like it will hike rates in March, a sign that policymakers see the stability Tepper sees.
And of the dramatic changes the Trump administration and House Republicans are promising in terms of leaving a border adjustment tax on imports?
Now, there’s a lot of talk in economic circles about what such a policy would do. For it to go smoothly, the dollar has to rise to make up for the cost of importing goods into the country. But a lot of people, including the New York Fed, think the dollar won’t rise enough, and in that case, policy will just jack up prices while making our trading partners angry, hurting exports.
Tepper thinks that if the policy is phased in over 5 years, there might be some tiny initial shock but “competition” in the economy will take care of the rest. He thinks Ryan and friends in DC have figured that out, and that it’s “not that complicated.”
He is referring to the same Paul Ryan who proposed a healthcare bill with no numbers in it on Tuesday, just in case you were wondering. And yes, Tepper bought Snapchat when it IPO’d, in case you’re wondering that too. The only risk he sees coming toward the world in 2017 is a potential Marine Le Pen victory in France’s presidential election.
Everything else is gravy (it’s not like 2016 had any curveballs or anything).
“Everyone has to be on the negative side of life,” he said to CNBC hosts Melissa Lee and Becky Quick, who dug in a little on policy topics, “you’re behind.”
Did he just say we’re at war?
Meanwhile over on Bloomberg TV we’re at war. But don’t worry.
“No, it’s not going to be a shooting war,” Ross assured Westin. “The people know you have the big bazooka, you probably don’t have to use it.”
One of the central tenets of Trump trade policy is that multilateral agreements will be torn up, and instead we will renegotiate bilateral agreements with countries individually. This notion has trade experts on both sides of the aisle crying foul, not only because this is expensive and likely more time consuming than the administration thinks — Ross thinks his team can renegotiate NAFTA with Mexico in a year — it also creates a climate of intense risk.
When you tell your trading partners you’re already at war, the game is zero-sum. It’s not win-win anymore — and thinking in big picture win-win situations for a bunch of countries at once has been the aim of trade policy for about 70 years.
Yes, there are problems in these deals. Ross and his White House colleague National Trade Council head Peter Navarro hate that part of the US automaker’s supply chain is located in Mexico thanks to NAFTA.
But the same deal also lead to American corn farmers crushing smaller Mexican corn farmers in the 1980s, which resulted in a wave of Mexican immigration to the United States.
These things are complicated, and we have an administration that has shown that it willing to use a lot of pressure, and walk right up to the line to get its way. When you walk the line, it’s hard not to get tipped over. On the other side, Trump’s rhetoric has only hardened and unified Mexican politicians against the US. This is not a climate of speedy negotiations.
And it’s not a time for hasty policy either. Ross isn’t totally sold on the border adjustment tax that Tepper said was “not that complicated.”
On Bloomberg TV, Ross made clear that the policy had trade implications beyond tax reform:
And so you have several issues. One is the question whether or not to do a border adjustable. The second is what magnitude of it is needed.
Then third are the intricate details, how does it really work. If you’re a solely domestic producer who does some exporting, that’s one set of facts. If you’re mainly an importer, a different one. If you’re both, even more complicated.
So it isn’t a very simple thing to analyse. And because it’s so important and such large numbers – as you know, they’re talking about potentially $US1 trillion over a ten year period, that’s way too big a number to get wrong.
None of this is “not that complicated.” In fact, it’s all very risky. It’s even riskier when trade negotiators go into every meeting flashing the “bazooka” (which we’re assuming/hoping just means tariffs).
But then again who knows, maybe Tepper is right and everyone is creeped out for absolutely no reason at all.
This is an opinion column. The thoughts expressed are those of the author.
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