Instead of focusing on rebuilding the industrial economy and upgrading its creaking infrastructure, America is ripping itself apart.
Markets still like Donald Trump’s idea of the great leap forward although its funding is totally dependent on a chain of interlocking policies. The top of that chain was the repeal and replacement of Obamacare, followed closely by corporate tax reform, neither of which have made it out of the hangar yet, let alone onto the runway.
Meanwhile, TIC data released in Washington yesterday showed China to have taken over again as the US Treasury’s largest creditor with holdings of US$1.15trn. Add the US$1.09trn held by the Bank of Japan and the two together come up just short of the US$2.46trn of government securities held by the Federal Reserve. This aggregates as a chunky one third of all of the US$12.6trn of all outstanding US Treasury bills and notes. As we stand, federal tax take is around US$3.3trn per year whereas federal expenditure is running at, give or take, US$4trn.
Should the Fed really begin to try to reduce its balance sheet, which I still doubt will happen in any more than a token fashion, we know who will need to buy a bit more. Trump needs China’s dollars and Trump needs either China’s support or, at the very least, neutrality on North Korea. This is not a time to be getting into a trade war with Beijing. A test run on revised trade relations begins today as talks commence on a revision of Nafta. That’s already a long way from scrapping the free trade agreement which can, depending on where one is coming from, be interpreted as either a dawning of geopolitical and economic realism or as a failure and U-turn.
Brexit
In Europe the Brexit story drags on, and its development too is a matter of opinion. Both sides of the table are occupied by people who have no matrix from which to draw guidance. The realities of unwinding the UK’s membership of the single market are significantly more complicated than had been anticipated and the Remain camp is just as guilty of not considering the practicalities and having brought these into the referendum campaign as are the leavers of having brushed over them. If I suggest that there is guilt on both sides, am I sounding like the Donald?
Westminster’s Brexit team must feel as Prime Minister Harold Macmillan did when he sounded out membership of the Common market in the early 1960s and when he was met by De Gaulle’s resounding “Non!” Every proposal they come up with appears to be met with laughter; Brussels also needs to get a bit more pragmatic. The Irish economy has already been wiped out once by “one size fits all” policy. In the last decade the real estate market went into overdrive while low eurozone interest rates were tailored to meet Germany’s needs, which in turn led to the property bubble that nearly sank Ireland when it burst. Like it or not, Ireland needs the UK and rather than scoffing at London’s attempts to find a way forward, the eurocrati would do themselves no harm if they shut their mouths and put their brains to work in trying to find a new and innovative solution to the Irish border issue. “Non!” is not an answer.
Finally, yesterday saw the fourth largest-ever bond deal hit the market when Amazon raised US$16bn across seven tranches. At the moment Amazon rules the world, which is reflected in it being able to raise 40-year money at 145bp over the long bond. At the same time the S&P closed marginally in the red as investors leave the sinking bricks-and-mortar retail ship. I’m not sure whether selling a deal that size in the dog days of August was an act of heroism or sheer idiocy but it worked in spades. I suppose that having the deal in every conceivable index in a world, which are being taken over by ETFs and passive funds, must have helped and that alone leaves me with very mixed feelings.