An Economic Update
 
April 28, 2018
 
In my yearly December 29th article Looking Forward 2018 I projected...
 
The first and foremost concern facing us (in 2018) is the prospect of a trade war. We are challenging China, Canada, and Mexico -- our three biggest trade partners -- to substantially change the terms of trade between them and us. If they don't comply, we are threatening to impose tariffs and/or quotas on those countries’ goods. This, in effect, would impose a tax on all of us.
 
I think it's a bluff - a negotiating position. I think it is an attempt to get a better trade deal. But even if it is an error in judgement and we actually go the trade war route, I seriously doubt that it would last long. As soon as the Trump Administration saw the results of tariffs on the economy, I think they would reverse course. After all, Trump is first and foremost a pragmatic businessman and has a very low tolerance for economic failure. The goals of the Trump Administration are higher growth, lower unemployment rates, and a strong stock market. A trade war would lead to exactly the reverse.

But to the degree we ever move in that direction, expect a major market reaction. The mere threat of a trade war will lead to at least a thousand points shaved off the DOW. [We got that and more.]

Selective tariffs may be imposed as a shot across the bow of our trading partners in an attempt to get a better deal, but that's where it should end.

Also upcoming - and also an event that bears watching - is the future of the money supply. For the first time in history, we could see trillions of dollars pouring back into this country from abroad in a very short period of time. Where this money goes could be a good thing or a bad thing. If the money goes into investments, it could be good. But if a lot of it begins chasing goods and services, expect a burst of inflation. [End of excerpt]

To my astonishment, nothing of the kind has occurred yet. In fact...just the opposite.
 
The yearly money supply figures as defined by M2 NSA, show a flat money supply. In every year except this one we see a gently up-sloping trend of increasing money supply, which is just what one would want to see. In 2018, a year when trillions of dollars of repatriated money held abroad was supposed to flood our economy, we see instead a flat money supply, which is falling after adjusting for inflation. This is a mystery.

What makes this money supply phenomenon even more mysterious is that the stock market has been falling, and you'd expect to see the money raised go into the banking system, at least to some extent. But…nothing! We'll continue to monitor this unusual situation...but it isn't good. The exact opposite of what markets were expecting is happening. I think someone needs to point this out to the Federal Reserve Governors.
 
The reason I bring this monetary situation up is that it is a red flag of potential stagnation. Low or falling money supplies are associated in many cases with recessions and potential deflation. I think the falling stock market has had as much to do with slowing growth concerns as trade concerns.
 
Also, the velocity of money has not moved off of all-time lows. That is another mystery in what is supposed to be a "great" economy. Another red flag. When contradictions exist, "check your premises". There's something wrong.
 
My third concern in that article was geo-political events that could get away from us. I mentioned Iran, Russia, Syria, and North Korea as hot spots. Also, the dangers of cyber-hacking continue to mount. All of those are hanging over us today. We are beginning to see the first signs, that these frictions may lessen. Let's hope so.
 
We live in a dangerous world, and the volatility we see is testimony to that fact. I remain aggressively positioned in the metals market and moderately bullish on the longer term direction of the economy. My main holdings consists of young exploration resource companies that have lowered costs, accumulated new properties, and are exploring and developing new resources.
 
I'm not wedded to resource stocks and am willing to sell out on a dime if the market goes against me. But so far, so good.
 
For more information, check out my Market Update at paulnathan.biz.