“There are decades where nothing happens; and there are weeks where decades happen.”
I don’t normally quote Lenin on this blog—or anywhere, for that matter—but this line is just too appropriate today. With everything going on, I thought I would offer some brief comments on subjects that, I admit, deserve—and will get—greater attention. But for now, here are my quick takes.
Today’s jobs report
The economy added more jobs than expected in June. That’s good news. And it gets better: the unemployment rate rose. How could that be good news? Because it means people are moving back into the labor force at unexpected levels, suggesting that the expansion may have more room to run than we thought and that companies may not face higher wage bills just yet. From an investing standpoint, this is a sweet spot, with continued growth in effective demand but sustained high margins.
The trade war
U.S. tariffs on China went into effect last night, and Chinese tariffs on U.S. goods went into effect today. We are now, so the papers say, at “war.” What most of the media is not saying, though, is that this is a cold war so far, not a hot one. What I mean is this is still playing out at the political level; U.S. tariffs are big enough to make a point but small enough that the point is not yet an economic one. Likewise, the Chinese tariffs are designed to hurt, but they are targeted so the pain is political more than economic.
Remember the original Cold War, the U.S./Soviet Union confrontation, where a full-scale war never happened because it would have been too damaging? Instead, they fought via proxies in political confrontations. The logic is the same today, and so far, the U.S./China trade war is playing out the same way as well. Now we need to watch to see whether negotiations start quietly. This could well end up being a major problem—but not yet.
This problem is back—and it’s serious. I was going to write about it today, after receiving several questions from advisors and clients, but other events (see above) caught up with us. We will talk about the deficit problem next week, as it is a definite risk but, again, not an immediate one. Briefly, the important question here is not whether this is a problem—it is—but whether it is a solvable one. The good news? It is solvable, but in terms of how and when, the news isn’t so good. We need to take a closer look, so we can prepare ourselves for what may come. Just as with the cold trade war, things can turn hot pretty quickly.
It's not over yet
If you want to look at the big picture on all of this, consider the stock market. Despite all of these concerns, it continues to recover from what was really not a very big pullback. We are still close to all-time highs, and we look likely to reach them again. As the U.S. economy is healthy, this is not all that unexpected—and it supports the idea that the end of the run isn’t here just yet. Keep that in mind as you read the news.