Nation should brace for trade war: brutal but short-lived - North Atlanta Business Post
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Updated Nov 14 @ 1:05PM

Rajeev Dhawan economic forecast:

Nation should brace for trade war: brutal but short-lived


ATLANTA – Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center, says to buckle your chinstraps, it’s going to be a bumpy ride.

Speaking at his quarterly forecast for the economy May 18, Dhawan said that if President Donald Trump continues his promised trade protectionist policies it will likely force Wall Street to retreat from the lofty 20,000 perch it recently reached. Interest rates will rise, but the battle will be short-lived as China, the chief culprit in trade deficits will not want to fight.

“China has a trillion dollars in U.S. treasury bills, they don’t want to see our economy in the tank,” Dhawan said. “China wants its factories operating so that their people are employed. What China does will do is build factories in other countries then send its own people to run them and work in them.”

The Chinese have a different use for trade. Greater profits are less of a motive than keeping millions of Chinese employed. China’s leaders’ greatest fear is a revolution, Dhawan said. Keeping its population working is Job 1.

Eighty percent of China’s output goes to Europe and the United States. For that reason, China does not want a prolonged trade war.

However, the short-term effects will mean higher interest rates if Trump is committed to the protectionist trade policies he has espoused.

And Trump is committed to protecting jobs in America’s heartland, because that is his political base.

The price of oil is always a factor, and it is “making a comeback,” i.e. rising, but prices are approaching the $50bbl territory. The $100bbl is not in the cards in the foreseeable future, he said.

But Dhawan warned the Southeast has to keep its eye on Venezuela. Instability there is threatening its oil exports which feed into the New Orleans refineries that serve the whole region. When the Colonial pipeline burst and threatened the supply, the panic alone caused cars to line up at gas stations.

Should an internal collapse of the Venezuela oil imports occur, New Orleans is shut down.

Canadian oil, which accounts for 80 percent of American oil imports, has no way to get to New Orleans’ refineries.

It is a cautionary warning, but still a distinct possibility, he said.

Meanwhile, Trump has fueled a lot of confidence in the stock market just getting elected. Bank stocks rose 20 percent November 2016.

“Following the housing bubble, there was a backlash against the banking sector in the form of new rules and regulations,” Dhawan said. “As usual after a financial crisis, there is an overreaction, and the last administration was perceived to be hostile in this regard. The Trump administration is seen to be more ‘business-friendly’ and market participants have bet big on banks.”

And all of this is without anything actually having been done yet.

“But perception is key here,” he said.

Wall Street has reacted with extreme confidence for the new regime. Nevertheless, bank stock returns have been weak.

“If I had gone by [bank stock] calculations done in April, the stock market gains would have been half the current size with gold as the best performer.”

Dhawan sees the resurgence of gold’s popularity not as a hedge against inflation but a safe port in a time of geopolitical uncertainty. While the Middle East seems somewhat contained, North Korea is unpredictable.

France’s flirtation with Marine Le Pen and her vow to leave the Eurozone also spiked uncertainty.

First quarter GDP growth was “an anemic 0.7 percent, with a pathetic 0.3 percent growth in consumption, he noted.

While consumer confidence is up along with a rise in business confidence, apparently the rise in both indexes and the stock market is based more on the euphoria of Trump’s election.

There is a “disconnect” between soft indicators and hard economic data, he said. The hard data is that retail sales have been lackluster in February and March.

There are pluses in the economy, however. Dhawan noted one very good statistic in the GDP: equipment investment grew by 9.1 percent. Nonresidential structures showed an even stronger 22.1 percent growth.

That is the kind of “Trump bump” Dhawan said he is looking for.

His only caveat on equipment investment is that it appears to be merely deferred maintenance rather than gearing up for growth.

So look for some bumpy roads in the near term, Dhawan said.

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