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Tariffs: A Timely Scapegoat

John Rowland

Posted on June 25, 2018 15:07

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With many throwing a hissy fit about the recent flare-up over tariffs, one group can use this current state of affairs quite nicely: to create a convenience out of desperate necessity.

"Wall Street pummeled by escalating trade row."

"Stock Markets Slip on Trade Policy Fears."

"Stocks drop as Trump and China ramp up trade war."

"Stocks suffer biggest weekly drop in more than 2 years amid trade-war worries."

These, and other headlines, have seized on the swirling talk of tariffs as the reason -- the bogeyman -- behind most any loss experienced by any financial market.

Heck, don't be surprised to learn that new tariffs are to blame for many things: climate change, one's favorite sports team losing, your car breaks down, bad hair days . . . just think of the possibilities.

But, while many "analysts" are claiming the sudden onset of a Trump-induced "trade war," there has in fact been an effective trade war going on for decades, certainly with respect to China. The Chinese weapons of this war have included a tariff trading structure roughly 10 times higher than that of the US, along with an unrelenting manipulation of its currency (rather than allowing currency markets to freely operate efficiently -- voiding the settlement process); mainly the valuation pegging of its yuan to the dollar in order to maintain an ongoing export advantage -- call it militant mercantilism.

Given all this, China's basically been engaged in trade war tactics for many years.

Trump has stated things even more bluntly, saying that the so-called trade war is over, already "lost," the latest volleys over tariff/trade issues notwithstanding.

But what all of this blame-it-on-the-tariffs nonsense conveniently ignores is 30 years of central bank monetization of equity and other capital markets; e.g., the borrowing of essentially free debt money by large corporations to pay dividends, to fund pointless M&A deals and to massively purchase their own stock (buy-backs).

A chief enabler of this has been forced negative real interest rates; 2% on the Fed funds rate with a recent inflation rate of 2.46%.

So basically, tariffs may not be the only factor weighing on the stock market.

To help explain market downturns, instead of endless tariff talk, perhaps one should consider that some equity market valuations (PE multiples) have simply been too high -- bottled air. Factoring into this is the realization that the free-lunch carry trade of central bank monetization is (already) coming to a presumed end.

But while spooked financial markets may not be solely due to some trade tariff bugaboo, the actions of the central bank monopolists housed in the Eccles Building are a decided factor -- the prime culprits in fact. And with the Fed now in a scheduled mode of monetary tightening, tariffs provide a wonderful excuse on which to blame the desperate by-product and fallout resulting from its decades-long exploits.

Of course, even without trade tariffs as a gift of deliverance -- a convenient scapegoat -- the current-day monetary central planners and all of their dutiful enablers would find someone or something else as a necessity to blame for their deeds . . . the monopolists always do.

John Rowland

Posted on June 25, 2018 15:07

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Source: FOX Business
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If this is the start of a serious trade war, you wouldn’t know it from the way Wall Street has shrugged off the salvos so...

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