Dr. John Rutledge: Far from Equilibrium Economics, Finance and Investing

Summary: I have strong memories of Voice of America from my days living in West Berlin in 1968 when VOA played an important role in getting the US message through the Iron Curtain. So, when they called today with questions, I gave them a quick answer, which you can see below.

VOA Question 1: What are the fundamental reasons that cause the current stalemate/escalation of US-China trade talk?

JR Answer: There are reasons on both sides why the agreement that was almost signed failed to be signed. I have met privately with and advised the US team. I was surprised how little experience or knowledge our team had regarding China, its history, culture, economy, and politics. Their approach is strictly controlled by President Trump. Competing groups of advisors vie for Pres. Trump’s ear. One group, led by Mnuchin, Ross, and Kudlow, is focused on a trade solution and market access; they could achieve an agreement if allowed to do so. The other group, led by Navarro, is focused on limiting China’s global influence overall; they were the drivers for the currency manipulation charge.

Finally, the American public is largely uneducated about China. This makes it easy for political leaders from both parties to score points with voters by being anti-China. Because of this, the trade war is going to continue to be an issue through the next election.

On the China side, Xi Jinping is under pressure from other leaders, especially the group led by Zhang Zemin, to present a strong front in negotiating with the US and not be seen as kowtowing to the US. I advised the US team that a solution must allow Xi Jinping to present it as a victory inside China. Any agreement must be consistent with China’s sovereignty and growing influence in the global economy.

VOA Question 2: Is there still opportunity for US and China to ease off the situation? Which side is more likely to back off first? What are the motivations?

JR Answer: I don’t think that an agreement will be reached until after the next election.

An agreement must reflect the following. It must not encroach on China’s sovereignty in respect to verification of agreed changes. It must not force China to change it’s fundamental strategy of moving from low-margin assembly work to high-tech products. That makes Huawei center stage in any possible agreement.

JR

Summary: The Manheim Index for July show that values of the nearly 200 million cars in people’s driveways are up 2.6% over last July, a good positive consumption indicator. You can see the Manheim Index here.

To a first approximation, all major economic events start in the economy’s balance sheet, not its income statement. The simple reason is that asset markets are huge relative to GDP. At the end of 2018, the value of US assets added up to $356 trillion, roughly 17x our $21 trillion annual GDP. roughly 30% of those assets ($106 trillion) are real assets like houses, cars, and trucks. Even small changes in values of real assets can be important for consumers, both because they impact net worth and provide sources of liquidity (think eBay). For vehicles, the Manheim Index is the best source of information. I watch it every month. You can see a chart of the Index above, and the historical data below. Click on their site. I think you will enjoy it.

As you can see, the index for all vehicles is up +2.6% over the last year. In many ways, used car prices and home prices are better measures of inflation than the CPI that gets all the attention. Most of the CPI is made up of services (haircuts and guitar lessons) that don’t compete with TBills and stocks for a home in people’s balance sheets. At the moment, real asset price are rising faster than CPI prices, a positive indicator for spending on both goods and services. Real asset inflation gives you a better measure of real interest rates too.

Manheim also shows you which types of vehicle prices are rising. Notably, prices of pickup trucks are upmost of all, at +3.0%. Pickup prices are a good proxy for the liquidity of small service companies like plumbers and construction workers.

JR