Trump’s trade war should set warning bells ringing for every company and investor

There should be no surprise that President Trump has launched his trade war with China.  The real surprise is that financial markets, and business leaders, are so surprised it is happening.  He was, after all, elected on a platform that called for a trade war, as I noted originally back in November 2016 – and many times since, even just last month.

Nor is it a surprise that China has chosen to target chemicals in its proposed list of products for retaliation. As my colleague John Richardson has noted:

“On Tuesday, China’s reaction to that first round of $50bn US tariffs included proposed tariffs of 25% on US exports of low and linear-low density polyethylene.  The same tariffs could also be levied on US polycarbonate, polyvinyl chloride, plastic products in general, acrylonitrile, catalysts, lubricants, epoxy resin, acrylic polymers, vinyl polymers, polyamides (nylon) and surfactants.”

China, unlike almost everyone else it seems, has used the past 15 months to prepare for Trump’s trade war.  So they are naturally targeting the chemicals industry – which was a great supporter of Trump in the early days, and has also come to depend on China for much of its growth.

They will have seen this December 2016 photo of Dow Chemicals CEO, Andrew Liveris, joining Trump at a victory rally in Michigan.

They will also have read Liveris’ tribute to the new President, when announcing the opening of a new R&D centre in Michigan:

“This decision is because of this man and these policies,” Mr. Liveris said from the stage of the 6,000-seat Deltaplex Arena here, adding, “I tingle with pride listening to you.”

The fact that Liveris stepped down last year as head of Trump’s manufacturing council will also have been noticed in Beijing, but clearly did not change their strategy.

FINANCIAL MARKETS EXPECT THE  FED TO BE A FAIRY GODMOTHER
Industry now has a few weeks left to plan for the inevitable.  But if history is any guide, many business people will fail to take advantage of this narrowing window of opportunity.  Instead, like most investors, they will continue with “business as usual”.  The problem is simple:

  • A whole generation has grown up expecting the central banks to act as a fairy godmother
  • Whenever markets have moved downwards, Fed Chairmen and others have showered them with cash
  • Therefore the winning strategy for the past 20 years and more has been to “buy on the dips”
  • Similarly, industry no longer bothers with genuine scenario analysis, where bad things can and do happen

Another key factor in this developing drama is that not all the actors are equally important.  China seems to have been initially wrong-footed, for example, by placing its trust in Treasury Secretary, Steve Mnuchin, and US Ambassador to China, Terry Branstad, to argue its case.  They might appear on paper to be the right people to lobby, but at the end of the day, they are simply messengers – not the ones deciding policy.

The key people are the US Trade Representative, Robert Lighthizer, and his aide, Peter Navarro.  They are now being joined by arch-hawk John Bolton, who in his role as National Security Advisor can be expected to play a key role – along with newly appointed Secretary of State, Mike Pompeo.   Like everything in the Trump White House, Lighthizer’s power comes from his relationship with the President, as the Wall Street Journal describes:

“To Mr. Trump, Mr. Lighthizer was a kindred spirit on trade—and one who shuns the limelight. The two men, who have a similar chip-on-the-shoulder sense of humor, bonded. Mr. Lighthizer caught rides to his Florida home on Air Force One. Mr. Trump summons Mr. Lighthizer regularly to the Oval Office to discuss trade matters, administration officials say.

THE NEXT 6 MONTHS WILL BE A WAKE-UP CALL FOR MANY
The past 18 months have in many ways been a repeat of the 2007-8 period, when I was told my warnings of a subprime crisis were simply alarmist.  This complacency even lasted into October 2008, after the Lehman collapse, when senior executives were still telling me the problems were “only financial” and wouldn’t impact “the real world”.

Similarly, I have been told since September 2015, when I first began warning of the dangers posed by populism in the US and Europe, that I “didn’t understand”. It was clear, I was told, that Trump could “never” become the Republican candidate and could “never ever” become President – and if he did, then Congress would “never ever ever” allow him to take charge of trade policy.  Similarly, I was being told in March 2016 that the UK would “never” vote for Brexit.

I also understand why so many friends and colleagues have been blindsided by these developments, as I discussed in the same September 2015 post:

“The economic success of the BabyBoomer-led SuperCycle meant that politics as such took a back seat. People no longer needed to argue over “who got what” as there seemed to be plenty for everyone. But today, those happy days are receding into history – hence the growing arguments over inequality and relative income levels.

“Companies and investors have had little experience of how such debates can impact them in recent decades. They now need to move quickly up the learning curve. Political risk is becoming a major issue, as it was before the 1990s.”

TIME TO DEVELOP PROPER SCENARIOS ANALYSIS
Nobody can forecast everything in detail over the next 6 months, let alone the next few years.  And it is very easy to mock if one detail of the scenario analysis turns out to be wrong.  But the point of scenario analysis is not to try and forecast every detail.  It is instead to give you time to prepare, and to think of alternative strategies.

Just imagine, for example, if you had taken seriously my September 2015 warning about the rise of populism:

  • Think about all the decisions you wouldn’t have made, if you had really believed that Trump could become President and Brexit could happen in the UK?
  • Think of all the decisions you would have made instead, to create options in case these developments occurred?

I understand that you may worry about being mocked for being “stupid” and “alarmist”.  But you should simply remind the mockers of the lesson learnt by insurer Aetna’s CEO, from his failure to undertake proper scenario analysis, as he described in November 2016:

“When Aetna ran through post-election expectations, the idea that Donald J. Trump would win the presidency and that Republicans would control both chambers of Congress seemed so implausible that it was not even in play.  We started with a fresh piece of paper yesterday — we had no idea how to approach it. What we would have spent months doing if we thought it was even remotely possible, we had to do in a day.” 

There is no doubt that he was the one feeling stupid, then.

 

 

The post Trump’s trade war should set warning bells ringing for every company and investor appeared first on Chemicals & The Economy.

Trump’s $1tn infrastructure plan likely dead as focus moves to tax

President Trump’s defeat on healthcare makes it very unlikely that he will be able to push through his proposed $1tn infrastructure boost, as I discuss in a video interview with Will Beacham, deputy editor of ICIS Chemical Business
Healthcare Mar17BARCELONA (ICIS)–Donald Trump’s infrastructure plan is unlikely to be approved because of a legislative bottleneck, denying the US chemical sector a key source of demand growth to absorb the 4.5m tonnes/year of new polyethylene capacity due on stream this year, according to a chemicals industry consultant.

In a video interview, International eChem chairman Paul Hodges said that the US chemical sector will have to find innovative ways to stimulate domestic demand in the face of possible restrictions on global free trade in petrochemicals and polymers. The industry cannot rely on the infrastructure programme or President Trump’s strategy to re-shore industrial production to create enough demand growth, he added.

New Presidents only have a very short window for action, Hodges said: “The record of the last few administrations is that Congress can only deal with one topic at a time. The battle on healthcare had been getting in the way of tax reform, which was President Trump’s top priority. And as for infrastructure – his third priority – I can’t see Congress getting through three major programmes in the next 12 months.

YouTube Mar17

Hodges believes US presidents only really have the first year of their term to achieve major goals. By 2018 the run-up to the mid-term elections will make it very hard to achieve change. He points out that it took President Ronald Reagan until his second term to achieve his tax reforms.

We have to assume infrastructure is dead. There is no magic wand to be waved and the industry has to look at self-help,” says Hodges, unless President Trump does a deal with the Democrats. However, he believes there are huge opportunities for innovative US chemicals and polymers in serving the water and food sectors with commodity and specialty polymers to help reduce waste.

The US has a major water shortage problem, says Hodges, and yet 30-40% never reaches the customer because it leaks out of the system. It also has a major problem with food where 30-40% is thrown away because of wastage.

According to the consultant: “The industry has a fantastic opportunity to employ a lot of technical development people to work with the utility and food companies in order to stop that waste. You have to employ more people … or the product just won’t be sold – let’s get out there and do something to sell more PE and PVC into the water and food industries.

Please click here to watch the full interview.

Chemical production continues to slow across most regions

ACC data Sept14Chemical production is currently the best leading indicator for the wider economy, as financial markets have lost their power of price discovery due to the impact of central bank stimulus.

The above chart, based as always on the excellent American Chemistry Council (ACC) data, continues to flash the orange warning signal first seen last month.  The key issue then was the very worrying slide in operating rates during the seasonally strong Q2.  As the ACC had noted then, ”growth stalled in Q2“.

Today, it seems the weak performance is continuing with production slowing almost everywhere:

  • Global growth peaked at 5% in April, but has since fallen to just 3.3% (black line)
  • N America improved in August, but as the ACC comment, ”even with a competitive edge and some-what stronger recovery, production has been limited by weakness elsewhere in the globe (green)
  • Latin America has fallen very sharply, down from 1.2% growth in March to a 3.9% fall in August (red)
  • W Europe has fallen from 4% growth in May to 2.9% in August (light blue)
  • Central/Eastern Europe has collapsed from 2.4% growth in February to a 3% fall in August (orange)
  • Middle East/Africa has slowed from 8.4% growth in February to 6.7% in August (dark blue)
  • Asia has slowed sharply from 8.3% growth in March to 5.6% in August (purple)

Some individual countries have also seen very sharp falls.  Germany, for example, has gone from 4.8% growth in February to a fall of 3.5% in August.  India has crashed from 12.9% growth in January to 3.4% in August.  Japan has fallen from 9.2% growth in March to just 0.8% in August.  Mexico has gone from 1% growth in April to a 2.8% fall in August.  Russia has gone from 4.2% growth in January to a fall of 10.4% in August.

Only one major country has maintained a relatively strong growth level – China.  It peaked at 11.1% in April, and saw 8.8% growth in August.  But, of course, this stability is due to its shift to become an exporter, rather than importer, following the loss of its downstream markets in the West.  This confirms the blog’s conclusion yesterday when discussing Sinopec’s financial performance.

China is now well on the way to becoming a major exporter of many key petrochemicals.  And it will continue to reduce its import needs from Asia and other regions as fast as possible.”

The sharp global slowdown now underway confirms that companies and investors have been the victims of a collective delusion in recent years.  We accepted the assurances of the central banks that they could easily restore growth to previous Boomer-led levels, despite the ageing of the global BabyBoomer population.

But central banks can only print money, they can’t create babies.  And only babies, when they grow up, can create sustained demand growth.

Chemical production data doesn’t lie.  It makes clear that we are instead heading for an abrupt change of economic course as we enter the New Normal.