If you’ve been paying attention to the stock market lately you’ll notice it’s become one of the craziest trading environments in history. Volatility remains elevated with daily 1% moves up or down in major indices with no clear direction in sight. Traders and algorithms can’t make up their minds whether to sell stocks because of bad economic data or continue to be optimistic on a potential “trade war” resolution.
The main factor contributing to market mayhem is the fight between the U.S President and Federal Reserve. The stock market has essentially become a boxing ring where it’s Jerome Powell, Federal Reserve Chairman in the blue corner and Donald J. Trump in the red corner.
Unfortunately for Powell, the President is using a rather bizarre strategy never seen before which creates a self-fulfilling feedback loop: Any time Powell speaks and doesn’t deliver a rate cute — even if it’s not an official Fed meeting — Trump ratchets up the trade war by increasing tariffs on China. Not only is this an unorthodox strategy but it’s also a huge gamble since economic data hasn’t exactly shown signs of good health over the past few months, in fact, most of the data is trending lower — and fast.
Effects of the tariffs are starting to hurt U.S manufacturers. This is evident in the recent Institute for Supply Management (ISM) report. A purchasing manager from the tech industry replied, “China tariffs are wreaking havoc with supply chains and costs. The situation is crazy, driving a huge amount of work and costs, as well as potential supply disruptions.”
Consumers are also starting to feel the brunt, “Tariffs are causing an increase in the cost of goods, meaning U.S. consumers are paying more for products.” According to the UMCSI (University of Michigan Consumer Sentiment Index), consumer confidence peaked around about the same time the “trade war” turned ugly in May after months of supposedly optimistic talks that may or not have taken place.
The feedback loop created could go down in history as a major catalyst in the inevitable popping of the delicate debt U.S bubble which sits at a whopping $22.5 trillion. Trump believes whole-heartedly that interest rates need to go to 0% in order for the expansion to keep ticking over so he can secure his reelection, but increasing the debt burden to sustain the economy through to election period will come back to bite him.
J. Powell, on the other hand, has other ideas. He is remaining vigilant and can’t see a disaster waiting in the wings, referring to the only remaining healthy statistics such as the unemployment rate, jobs numbers, and inflation whilst also identifying that the U.S economy is the cleanest dirty shirt compared to the rest of the world.
So, what are potential outcomes of the feedback loop created?
If the gamble doesn’t pay off and central bank easing isn’t enough to support economic growth after reelection then Trump could be the presidential bagholder of the worst economic crash seen in recent times, or more optimistically, it’ll be business as usual: 0% interest rates and cheap money to finance asset bubbles in real estate, stocks, and corporate bonds for years to come.