What if the two forces of disruption are working? What if Jerome Powell is doing his job and inflation is calming down? What if President Trump's tariffs are succeeding and business is slowing, perhaps dramatically, in China?
I think we have to change the storyline here. Instead of thinking about what horrendous things can come of the tightenings that the Fed has given us and the next tariffs that President Trump will slap on China, we need to think about outcomes.
What do I mean about outcomes?
How about this. On the domestic front, the higher interest rates are really starting to squelch demand for all sorts of real estate. We have seen steady declines in the rate of growth of real estate and construction projects at a host of banks that we cover. We have seen (AEP) , the largest utility company, say that there is a downtick in activity. "For the first time we see some tempering of the economy," AEP CEO Nick Akins told us. "We saw residential and commercial growth come down a little bit. We think it's the strong dollar, certainly some of the tariffs are having an impact on non-oil and gas activities."
We know that housing starts and housing sales are miserable. And while Home Depot (HD) assured us of stronger sales it acknowledged that housing is slowing.
Meanwhile oil, a huge and negative input, is cratering. So's lumber. So's copper. The basic building blocks of chemicals and paper are sinking. Yes, labor is strong, but how long will that last if all of these metrics are turning down?
It's okay for Powell today that he is raising rates in December, that he will be eternally vigilant, but it is important to recognize that the inputs for the future of inflation are going lower and it would be imprudent not to recognize that. The man is prudent. No reason to be rash, especially not with an anti-inflationary strong dollar prevailing.
How about China?
First, we know that many of the victories over inflation that I just detailed could be laid at the feet of a weaker Chinese economy, especially the price of oil. Sure supply is up but China's newfound economic weakness can be the real source of the collapse in oil. Last night the Baltic Freight index, a great barometer of Chinese commerce, plummeted 5.42% to 1064. That's way down from just a few months ago.
We are seeing disappointments in the sales of some of the semiconductor components often associated with China's telco market, including those produced by Skyworks Solutions (SWKS) , Qorvo (QRVO) and Micron (MU) .
And, most important, I am getting inklings that our companies that do a lot of business in China could be getting hurt. I know it is early on this. Caterpillar (CAT) this morning saw some strong machinery orders out of China and its stock rallied. But how long can China handle the decline in orders from many U.S. importers that are furiously trying to move business away from China to avoid tariffs. I understand that the Chinese are giving these companies all sorts of price breaks to stay, but that's unsustainable when the President puts 25% tariffs on China come next year.
Last Friday Peter Navarro, arguably the most powerful voice on foreign trade from the White House, went off on Wall Street for its willingness to sell out workers in this country in the name of offshoring to make bigger profits. Navarro doesn't want a deal on Wall Street's terms. As he said "If Wall Street is involved and continues to insinuate itself into these negotiations there will be a stench-a stench around any deal that's consummated because it will have the imprimatur of Goldman Sachs and Wall Street."
The comments were so extreme that Larry Kudlow came on CNBC today to chastise Navarro. "His remarks were way off base," Larry said. "They were not authorized by anybody. I actually think he did the President a great disservice." That's pretty definitive as is this comment: "I think Peter very badly misspoke. He was freelancing and he's not representing the President or the administration."
That's important. It leaves room for serious negotiations between China and the U.S. leading up to the G-20 meeting at the end of the month.
So, let's watch weakness in this country and in China. As crazy as it sounds, both are bullish for the stock market even as they are bearish for the individual companies caught up in the turmoil.