By: Kent Engelke | Capitol Securities
President Trump may soon label China a currency manipulator. While I will skip the obvious notion that all countries manipulate their currencies either overtly (devaluation) or covertly (monetary policy), such a declaration may have wide ranging implications.
China is an export dominated country, defined as its economic wellbeing is dependent upon the financial health of its trading partners. A dated Commerce Department statistic suggested about 45% of Chines production is slated for export, exports dominated to Western Europe, Japan and the US. In other words, China is in a position of inherent weakness.
I reiterate a reason why electronic equipment and many other products are so inexpensive is because of trade policies, permitting exports from regions where labor is extremely cheap as compared to western wages. If the cost of production rises, either margins contract or prices go up. Either scenario may create more uncertainty.
If these increased production costs are unable to be passed onto the consumer, margins will drop, hence stock valuations will also drop.
If these higher costs could be passed on, inflationary pressures may accelerate.
The loudest protesters of Trump’s trade (and immigration) proposals are the technology companies, companies dependent upon cheap labor costs which permit greater access to their products via low prices.
Regarding stock valuation, in my view the technology companies are overvalued, representing about 24% of the capitalization of the S & P 500, eclipsing 2000’s record level which was then viewed as an absolute mania.
What happens if technology margins erode because of higher prices and inflationary pressures accelerate that forces a more hawkish Federal Reserve? Technology companies would get killed from lower than expected future cashflows discounted at a higher risk free rate, amplified by lofty valuations suggesting there is no room for error.
Against this backdrop, it is no wonder the technology companies are ardent detractors of the Trump administration, falling under the guise there is no interest like self-interest.
For the record, I think a trade war between the largest and second largest economies will end poorly… albeit I am in favor of free trade, whatever this may mean, for such will support the common man and Main Street versus a few.
We do live in interesting times where life is indeed stranger than fiction. So much for last year’s mantra that Donald Trump was behaving in such a manner to enable or permit Hillary Clinton to win the presidency for Trump then was also viewed as an elitist entrenched in the Establishment.
Last night the foreign markets were up. London was up 0.30%, Paris up 0.78% and Frankfurt up 0.55%. China was up 0.53%, Japan down 0.53% and Hang Sang up 0.17%.
The Dow should open nominally higher. The 10-year is off 9/32 to yield 2.36%.