Tag Archives: economy

China is getting the trade war it deserves

And the US is getting the inflation it clearly wants.

Contrary to the title, this post will only be about America, because I don’t have any real insight into the CCP that hasn’t been covered elsewhere. But I read this article running cover for Biden’s disastrous policy of protectionism, and wanted to post my thoughts.

The central premise of the article is that cutting off trade with China is good because they’re a fascist and expansionist foreign adversary. Now, that’s also a great reason to cut off trade with Saudi Arabia, but America’s trade policy isn’t actually about foreign policy, as you’ll soon find out.

Even more importantly, tariffs don’t hurt the country you’re tariffing, or at least they hurt them *less* than they hurt your *own country*. Even Biden knows that, just ask the Biden of 2019

Tariffs are a great way to push up your own country’s inflation by taxing supply without reducing demand. Furthermore, even if you don’t buy Chinese products you will be paying for this inflation because of substitution effects: someone who is no longer able to buy a Chinese EV may instead purchase an American car, increasing demand for American cars and therefore driving up their price.

There’s two great ways to understand how terrible tariffs are. First, think of the oil shock in the 1970s: middle east nations cut off America’s access to oil and gas from their countries, causing spiraling prices and runaway inflation. By blocking America’s access to energy, they were able to put an economic squeeze that defined the decade.

China is being tariffed on solar power, wind power, and green industries of all kinds, and China makes up more of our imports than the middle east ever did. Spiraling prices are yet again on the menu.

Furthermore, think of Britain’s strategy against Germany during both World Wars. Britain used its powerful navy to prevent Germany from importing goods. This caused shortages and spiraling inflation, leading to riots that overthrew the government in the First World War and overwhelming shortages during the Second.

Tariffs are a way for us to do to ourselves what our enemies would do to us in war: restrict the import of needed goods.

Finally, consider Biden’s empty words about the “existential threat” posed by Climate Change. If Climate Change is dire, then why is Biden raising tariffs on solar power, wind power, and EVs, rather than Chinese oil and Chinese airplanes? Biden is essentially setting up an “anti-carbon tax,” in which polluting industries are exempt from a tax being paid by green industries.

The truth is that none of this is about national security, anymore than the Japan Scare of the 1980s was about national security. Just look at how Japan’s peaceful economic expansion was seen back then:

“The Danger from Japan.” Mr. White warned that the Japanese were seeking to create another “East Asia Co‐prosperity Sphere”-this time by their “martial” trade policies, and that they would do well to “remember the course that ran from Pearl Harbor to the deck of the USS Missouri in Tokyo Bay.

Biden is a 1980s style politician, with the (failed) economic outlook of that time. When he sees foreigners being successful it makes him scared, so he raises tariffs to “protect” American industries. But far from protecting industries, tariffs only harm them.

Industries rely on consumers to sustain them, but tariffs are a tax on consumers, sucking up consumer surplus and leaving less money for consumers to spend on domestic industries. Politicians think that domestic industries can magically appear to replace all the foreign ones, but simply put: no man is an island and nor is any country. Autarky is the failed economic policy of fascism, not an economic model for democracies.

Just look at a country like Brazil. Heavy tariffs were supposed to promote domestic industries and help consumers. Instead, consumers pay exorbitant prices for things like video games, while Brazil’s gaming industry remains anemic relative to the nation’s size and wealth. Brazilian cars, Brazilian microchips, and Brazilian steel are not the envy of the world.

And it isn’t because Brazilians are bad at industry, its because their government is doing everything it can to stop them. The high tariffs on everything from steel to cars to microchips are supposed to spur domestic industry, but who’s going to open up a factory when you have to pay those high tariffs just to import the machines and inputs needed to make your products?

Biden is a protectionist because he’s a protectionist. Not because China or Canada are scary or because he needs to fight climate change. But to be fair, Trump is just as protectionist as Biden if not more-so. It’s clear that the current crop of American politicians supports higher inflation and poorer consumers. And that bodes ill if you want to see America succeed and its enemies fail.

Vibes and the economy

I don’t want to get too political, but it’s an election year (in several countries) and The Discourse is inevitable. But I want to quickly push back on something I’ve seen all too often on social media recently.

In America, the numbers for the economy look “good.” Unemployment is low, *really* low. Inflation is high, but wage growth is higher. And the stock market is up. So why are Americans’ perceptions of the economy so poor? Why is consumer confidence lower than it *should* be?

Some partisans and twitterati have decided that Trump Was Right and the problem is fake news. Legacy media and social media are both driving relentlessly negative press and this is brainwashing people into believing that the “good” economy is “bad.”

But instead I’d like to take take a step back and see if polls are telling us something that “the numbers” just aren’t. And I think I have good evidence that they are.

First, here’s a graph from the Federal Reserve Bank of Dallas. It shows that housing affordability is lower than at any time since the 80, lower even than during the housing bubble that precipitated the Great Recession. If you’re a millennial or a zoomer, *never in your life has housing been less affordable than it is today*.

And housing isn’t just a “nice-to-have,” it sits at the bottom of Mazlo’s Hierarchy of Needs for a reason. A stable housing situation is (for most people) a necessary ingredient before they feel confident starting a family, putting down roots, or just feeling like they “belong” to where they live.

Now, you *can* have a stable housing situation in an apartment, but it’s much harder. Rent increases can drive you out, and rent-controlled apartments are hard to come by. Apartments also aren’t always conducive to the types of living that people want in their life.

So the price of housing is driving a *real crisis* in millennial and zoomer living, as people with otherwise high earnings are unable to obtain what lower-earnings folks could get in the past, namely a house to live in.

Then there’s the fact that datapoints about “all” millennials are missing key differences *between* millennials. See the next graph

The *median* millennial is doing worse than the median boomer was at this point in their life, in terms of net wealth, net assets, and housing. But the top 10% of millennials are doing way better than the boomers ever could, so taken together it seems like millennials are doing well overall. It’s like looking at a city where 1 person is a billionaire and 99 are destitute and saying that overall the city is very wealthy.

These kinds of mean/median differences are well-known to people in liberal circles, because they signal high inequality. But because a liberal is currently president, these differences are ignored by much of the twitterati.

I could say more about this topic, and I wish I had the energy to, but I’ve been so tired lately with my new medicine. Nevertheless, next time you see someone like Will Stancil screech that the kids are all morons and that everyone is rich, note that he is a member of that top 10%, not the median.

When people’s answers in polling are different than what “the fundamentals” suggest, it may be that the people are just stupid. But it’s far more likely that polling is capturing something that your data is ignoring. And right now that’s housing costs and growing inequality.

Are analysts’ opinions anti-correlated with the market?

This time 2 years ago, we were still riding high on the post-pandemic surge, and analysts were expecting the S&P could break 5,000. This time last year, we were still in what felt like the 2022 doldrums and analysts were predicting a recession. This time 3 months ago, people were declaring inflation was whipped. And then a few days ago, CPI and PPI came in hot.

I’ve written before about how the Efficient Market Hypothesis may imply that there is *no* correlation between analyst opinion and the stock market. Analysts are just as likely to be wrong as right, but people only remember the examples which agree with their biases. On the other hand, I read an article recently (I’m sorry I cannot find it to link) arguing that analyst opinion is in fact *anti*-correlated. That is, the Short Cramer ETF is correct, and analysts are so stupid you should do the opposite of what they say.

Speaking of, the Short Cramer ETF “SJIM” is down about 20% from when it began. But no matter, should you do the opposite of what analysts say or is that as irrational as following their advice?

One argument is that analysts are inherently *backward-looking*, they generally assume trends will continue forever. Some are perma-bulls or perma-bears, but on average when the market is down analysts predict a down year, and when it’s up they predict an up year. In this case, if the market is a random walk then it’s very unlikely to simply continue it’s current trend, thus an analyst is more likely to be wrong than right.

On the other hand, shouldn’t wisdom of the crowds have an affect? On the aggregate, many gamblers who bet on real world events (either sports of politics) are betting on what they *want* to happen, and many have no real knowledge whatsoever. Yet Nate Silver and others have argued that betting markets are often more accurate than not, whether it’s politics, sports or what have you. Some how, a million idiots adds up to something better than our smartest mind.

If that’s the case why don’t all the analysts of the market add up to something smart?

It just reminds me to be humble, because all too often I’ve seen people caught out badly by a trend. The late 2023 “inflation is beaten, start thanking Joe Biden” narrative won’t seem as smart if inflation stays persistently hot, any more than the “recession around the corner” narrative of 2023. Overconfidence when you really know nothing is the hallmark of an analyst, and maybe that’s why they’re so often wrong.