The Navarro, Trump tariff policy is digging an economic hole for states, locals

Clearly, after last week’s chaos, culminating in the magnification of the trade war and the sharp drop in the stock market last Friday, there is a considerable amount of uncertainty regarding the outlook for the overall economy and for regional components—and for varied concerns of state and local governments.

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A key point is that whatever happened during the days leading up to Aug. 23, issues of great concern for state and local governments spiked in magnitude and importance on Friday, when the trade war with China was expanded and the stock market responded in fear with a 623 point drop in the Dow.

I start with a note from our friend David Kotok, chairman and CIO at Cumberland Advisors:

"George Santayana said 'Those who cannot remember the past are condemned to repeat it.' "

In 2019, nearly every economist has disagreed with the Peter Navarro-advised Trump tariff policy. At a recent gathering in Maine we polled the group, which represented about $2 trillion of assets under management and thousands of households and many hundreds of thousands of beneficiaries of retirement plans, along with millions of investors and savers in the U.S. Asked about Navarro, one supported him, 36 opposed, and three weren’t sure. Asked about the Trump trade policy, about three-quarters of our group opposed it and saw it doing increasing damage to the U.S.

The late Allan Meltzer noted in "A History of the Federal Reserve Volume 1: 1913-1951" that “Research suggesting a small effect [i.e., from tariffs] ignores the pronounced effect on farm exports, distress, bankruptcies, and bank failures in farm states” (p. 564, note 299). Readers are invited to check the rising bankruptcy statistics in farm states in 2019. The Trump-Navarro trade policy is the cause; the correlation between the Trump trade war and rising distress is very high.

How historic and vital are the fundamental economic lessons of the Smith-Hawley Tariff Act and its consequences? As Milton Friedman and Anna Jacobson Schwartz note in "A Monetary History of the United States, 1860-1967": “To find anything in our history remotely comparable to the monetary contraction of 1929-1933, one must go back nearly a century to the contraction of 1839 to 1843” (p. 299, chapter 7). I recommend that readers who wish to take a deeper dive study all of chapter 7.

Peter Navarro owns the advisory role and the argument in favor of the present U.S. trade war policy. President Trump owns the decisions. Together they are digging a hole, and that hole is getting deeper. Market agents know it. Farm-state voters know it. Financial agents know it.

No matter what Navarro says and whom Trump blames, the truth is that the responsibility for the economic slowdown and the financial volatility lands squarely on the Oval Office desk and in the lap of the president and his advisors.

There is a fitting adage attributed to Will Rogers: “If you find yourself in a hole, stop digging." Navarro, Trump: read history. You are digging a deeper and deeper hole for the nation and the world. Stop digging.

From the viewpoint of CSG, we will simply add to this a number of the additional concerns/holes we find ourselves in that affect state and local governments.

It seems to be clear that the potential weakness of the U.S. economy—whether it can avoid a full-blown recession—has just been magnified. We will note several specific concerns that have just gotten greater. These include:

  • The inability to respond to any economic weakness through fiscal policy, in an environment where the deficit is already about to hit an untenable $1 trillion level.
  • Growing fears among consumers as the erratic trade policy outlook hits home, after consumer confidence in July had already taken a sharp spike downward.
  • Worries about pressures on the normally independent Fed coming out of the administration.
  • Worries for manufacturers about pressures to move supply chains away from China over a short period of time.
  • Worries about the global economic environment that were already showing up in a large number of countries before this week’s economic messes.
  • There are now new regional economic pressures that are likely to hit home as a result of the combination of global pressures and the trade war, affecting state and local revenue levels and resultant credit strength.
  • The environment of potentially sharply weaker stock market behavior and extremely low interest rates, generate new and growing concerns for state and local pension systems, involving larger-than-anticipated shortfalls against expected annual returns.

These factors, in turn, can feed back onto increased pressures on state and local credit ratings and on market pricing of credit spreads.

Now, we also recognize that the current environment of exceedingly low Treasury and municipal yields may limit the impact on credit spreads. Nevertheless, the world changed on Friday, and any examination of investment conditions affecting investors in municipal bonds ought to be re-examined during the coming week—and we shall. Nevertheless, with Labor Day coming up, we recognize that measurement of market conditions is unusually difficult in any event, as the muni market gets thinner in anticipation of the upcoming de facto summer-ending holiday.

One last point for now: we have been noting for several months that the outlook for state and local governments both in terms of credit and in terms of planning for impending challenges and changes has become unusually sensitive to the political environment. In our view, the extent to which this has become the case just spiked again on Friday. As noted, we will be back during the week, to observe how the global economy, the bond markets generally, the municipal bond market specifically, credit spreads and investor patterns respond to what has just occurred, and what it might mean for state and local governments going forward.

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Economy
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