{"id":103825,"date":"2017-03-24T02:41:00","date_gmt":"2017-03-24T06:41:00","guid":{"rendered":"http:\/\/countingpips.com\/?p=103825"},"modified":"2017-03-23T08:43:12","modified_gmt":"2017-03-23T12:43:12","slug":"g20-dilemma-falling-trade-soaring-market","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/03\/g20-dilemma-falling-trade-soaring-market\/","title":{"rendered":"G20 Dilemma: Falling Trade, Soaring Market"},"content":{"rendered":"
March 24, 2017<\/div>
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By Dan Steinbock<\/strong><\/p>\n

There is a deep chasm between America\u2019s historical rebuff of G20 efforts, which seek to re-ignite trade, and markets, which remain at record heights. This rift is untenable.<\/strong><\/p>\n

Historically, Baden-Baden\u2019s spas are famous for their healing waters, which have healed ancient Romans\u2019 arthritic aches, Prussian queens\u2019 rheumatism and European aristocrats\u2019 paralyses. Nevertheless, the G20 Summit is fresh evidence that even Baden-Baden cannot do miracles.<\/p>\n

As US Treasury Secretary Mnuchin rebuffed the push by the masters of the global finance to renounce protectionism, concerns are mounting that the Trump administration will execute its \u201cAmerica First\u201d policy, even at the risk of unleashing waves of retaliation worldwide.<\/p>\n

As world trade is frozen but markets remain close to record-heights, contraction is looming in the horizon.<\/p>\n

(Bad) History in Baden-Baden<\/strong><\/p>

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History was made in Baden-Baden, but not the kind of history that the world economy needs. For the first time since the global crisis year of 2008, the world\u2019s leading finance ministers, dropped the commitment to free trade. It amounts to the most consequential shift of the international trading community since World War II.<\/p>\n

Following pushback from Treasury Secretary Steve Mnuchin, the G20 Summit backtracked from a joint position that would have explicitly renewed the long-standing pledge to free trade.<\/p>\n

The timing could not have been worse. Before the global crisis, world investment soared to almost $2 trillion. Today \u2013 almost a decade later \u2013 it remains below that level. The state of world trade is even worse. World export volumes reached a plateau already two years ago. World trade has stopped growing.<\/p>\n

In turn, the third leg of globalization, global migration, is plunging or stagnating, while refugee crises escalate. In the past year, more than 65 million people \u2013 more than ever since 1945 \u2013 were displaced from their homes by conflict and persecution.<\/p>\n

To foster global recovery, finance ministers should have hammered a compromise in Baden-Baden. Instead, the White House tied their hands, which reinforced concerns about new US protectionism and increased trade friction in the coming months.<\/p>\n

But if that\u2019s the case, why are markets smiling?<\/p>\n

Bubbling markets<\/strong><\/p>\n

At the peak of globalization in May 2008, the Baltic Dry Index (BDI) – a barometer of international commodity trade – soared to a record high of 11,793 points. Today, even before trade friction, the Index remains 90 percent lower than a decade ago.<\/p>\n

That\u2019s not the case with US equity markets, however. Since March 2009, the broad Dow Jones Industrial Average (DJIA) has more than tripled to soaring to more than<\/p>\n

20,900. The blue-chip S&P 500 Index (SPX) has kept its gain at close to 2,380. And the tech sector\u2019s Nasdaq Composite Index (COMP) exceeds 5,900.<\/p>\n

According to the cyclically-adjusted price-earnings ratio (CAPE), the average now exceeds 29, which is about the same as amid the Wall Street crash in 1929 that heralded the Great Depression.<\/p>\n

Historically, the CAPE average has been higher only once \u2013 in December 1999 \u2013 when the technology bubble finally burst and markets crashed. Of course, history does not always repeat itself in the markets, but it does rhyme. If the century-long CAPE median is about 16 and the current figure is 50 percent higher, markets appear to be substantially overvalued.<\/p>\n

Looming contraction<\/strong><\/p>\n

What makes the huge discrepancy between fundamentals and markets extraordinary is that valuations have ignored the negatives of the Trump administration\u2019s measures, while touting the positive consequences of Trump\u2019s executive decisions and signs of accelerated deregulation, privatization and liberalization. Also, as the Fed will continue to tighten, it will conflict with the administration\u2019s infrastructure plan but also subdue growth prospects.<\/p>\n

In the long term, markets penalize investors for such discrepancies. After all, the leading movers of those markets feature America\u2019s largest companies from financials (American Express, Goldman Sachs, Visa) to industry giants (Caterpillar, Disney, McDonald\u2019s) and tech leaders (Apple, Cisco, Microsoft).<\/p>\n

Indeed, these are corporate titans, which earn an increasing share of their revenues in foreign markets – especially in those country markets that the White House is about to challenge.<\/p>\n

About the Author:<\/strong><\/p>\n

\"\"<\/a>Dr Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http:\/\/www.differencegroup.net\/<\/a><\/p>\n

The original commentary was published by Shanghai Daily on March 22, 2017<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By Dan Steinbock There is a deep chasm between America\u2019s historical rebuff of G20 efforts, which seek to re-ignite trade, and markets, which remain at record heights. This rift is untenable. Historically, Baden-Baden\u2019s spas are famous for their healing waters, which have healed ancient Romans\u2019 arthritic aches, Prussian queens\u2019 rheumatism and European aristocrats\u2019 paralyses. Nevertheless, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-103825","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/103825","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=103825"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/103825\/revisions"}],"predecessor-version":[{"id":103826,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/103825\/revisions\/103826"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=103825"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=103825"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=103825"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}