Trade and recession fears hit Wall Street
Nick Beams, WSWS, Dec 5 2018
Wall Street plunged on Tuesday, with the Dow falling by 800 points and all major indexes down significantly, as the purported trade deal between Trump and Xi Jinping, announced on Saturday night, began to unravel. However, the fear that nothing has been resolved in the trade war was by no means the only factor in the market sell-off, which followed a surge on Monday. A major issue was growing concern that Pindostan could be entering a recession with yields on bonds falling, an indication that investors are seeking a “safe haven.” The growing negative sentiment over the outlook for the Pindo economy was seen in a flattening of the yield curve, the difference between the interest rate on shorter and longer-term bonds. At one point, the difference between the yield on two-year and ten-year bonds was under 10 basis points, its lowest level for 11 years. A flattening yield curve is widely regarded as indicative of a recession. The market slide went across the board, with companies that are dependent on global markets such as Caterpillar and Boeing incurring losses of 6.9% and 4.9% respectively. High-tech stocks sensitive to trade war fears also fell, with Apple down 4.9%. The tech-heavy NASDAQ index dropped 3.8% and is now more than 10% below its August high. The S&P 500 index dropped by 3.2% and fell below its 200-day moving average, a key indicator of the market trend. According to the WSJ:
Bank stocks were also down, as investors’ worries of a recession and the strength of the economy grew. An index of bank shares fell nearly 5%.
The doubts over the possibility of any agreement with China started from the top with tweets by Trump indicating he doubted whether anything had been achieved. He wrote:
My economic team will be seeing whether or not a REAL deal with China is actually possible before the deadline expires on Mar 1. If it is, we will get it done. If not, remember I am a tariff man.
According to the Pindo report of the talks, China agreed to talks on so-called “structural” changes in its economy in response to Faschingstein’s claim that it is engaging in the theft of intellectual property (IP) and using forced technology transfers to enhance its technological and industrial base. Failure to reach an agreement on this issue would see Pindostan lift the tariff rate imposed on $200b worth of Chinese goods from 10% to 25%. But there has been no acknowledgement by China on whether negotiations on this key demand have reached agreement. The Financial Times commented:
Claims by the Pindo side have either not been supported by the Chinese side or are mired in confusion. Not only did this cast doubt on whether the two sides would be able to reach a comprehensive deal within the next three months, it raised the possibility of a collapse even before then.
Throughout yesterday, doubts were cast over the purported deal as the contrast between what the US said and the Chinese version of events became more apparent. In the wake of the meeting with Xi, Trump claimed that China had agreed to cut tariffs on US cars, but this was not mentioned in the statements from either side. White House economic adviser Larry Kudlow insisted on Monday that such an agreement had been reached. However, he was forced to backtrack yesterday, saying Faschingstein did not have a “specific agreement,” though the tariff reduction was highly likely. Kudlow was also corrected by the White House after saying that the 90-day deadline would start in January. The starting date is Dec 1. The changing story on car tariffs, while important in itself, has broader significance as it casts doubt on what was actually agreed. Agriculture is another area where the situation is unclear, to say the least. Pindostan said that there would be a “very substantial” increase in exports, but this was not reflected in Chinese statements on the talks. Amid the confusion and conflicting accounts of what was and was not agreed in Saturday night’s meeting between Trump and Xi, the key issue remains the Chinese program of industrial and technological development under its “Made in China 2025” plan. In a comment published in the Financial Times on Monday, former IMF economist and Bank of India governor Raghuram Rajan noted that the issues dividing Pindostan and China go far beyond the question of trade. The strongest indication of the extent of the conflict was the speech by Pindo Vice Pres Pence in October, “where he all but declared a new cold war.” Rajan, one of the very few economists to warn of a financial bubble prior to 2008, said:
While it is reasonable to demand that China bring its intellectual property practices in line with western norms, the Chinese fear this is not the ultimate Pindo aim. They believe that even if they comply, Pindostan will not allow a significant presence in frontier industries including robotics, artificial intelligence and semi-conductors. That, to the Chinese smacks of a ceiling on development. It is simply non-negotiable. Simply piling tariffs on tariffs will lead to China becoming a country under siege, precipitating a cold, even hot, war. Major powers need to come together to negotiate changes in China’s IP practices. But the quid pro quo has to be to recognise that the world is multi-polar, that China should have more power and responsibility in global institutions, which will require compromise on both sides.
However, the major obstacle for this would-be rational scenario is that the conflict is not governed by the laws of reason but by material economic and geo-political interests. Pindostan is not prepared either to recognise the need for a “multi-polar world” or to make concessions to China’s increased economic power. Faschingstein fears this will undermine its global economic and military dominance, which it is determined to maintain at all costs and by whatever means necessary. This determination will assume even more belligerent forms under conditions of a significant downturn in the Pindo economy or the development of a recession, the signs of which are growing.
Niqnaq 