No Deal: Trump Nixes Stimulus Talks, Jeopardizing US Recovery
Keeping up with economic data these days is like drinking from a fire hose… it comes at you incredibly fast.
And while I spent a lot of time today writing up this morning’s release of the US Balance of Trade data, its relevance as a headline was rendered useless at 2:48 PM by a single tweet.
In it, President Trump instructed his representatives to abandon stimulus negotiations until after next month’s election, and instead focus on pushing SCOTUS nominee Amy Coney Barrett into the current Supreme Court vacancy left by the death of Justice Ruth Bader Ginsburg.
When I wrote about that a couple of weeks ago, I said the vacancy was “already causing tension between the parties, but is largely viewed as more galvanizing for the Democrats, regardless of whether or not it is filled immediately.”
With that single tweet, President Trump has all but assured to rally the opposition. And given recent polls, it may signal that Republicans are giving up prospects of his re-election to focus on delivering one last victory.
Unfortunately, the pullback from stimulus negotiation falls at a time when small businesses throughout the country – which account for nearly half of US GDP – are running out of money.
Down and Out in “Every” Hills
According to a recent survey conducted by Lending Tree, 43 percent of small businesses are showing significant declines in revenue this year (51% or greater), while another quarter of them are enduring a 26-50% decrease.
Source: Lending Tree
Moreover, the sheer number of outright closures that have occurred over these last few months have been massive. Data from Visa and Economic Insights show the number of open businesses has declined by 23.7% relative to January 1st, while overall revenue is down 20.6%.
Source: Visa, Economic Insights
The slight discrepancy between closures and revenue implies that the smallest of small businesses are losing out to their larger competitors. Other sources, such as small business data provider Cortera – confirm this trend, showing a roughly 5-6% spread in favor of companies with more than 500 employees.
Source: Cortera, Moody’s Analytics
And because the bulk of employees at these businesses are paid on an hourly basis, we should be able to see the same pattern in hours worked. This information – tracked by data provider Homebase – clearly confirms much of the same.
Source: Homebase, Bloomberg
As I discussed a little last week, the effect is not being felt evenly across the socioeconomic spectrum. Low-income workers and those without a college degree have been disproportionately affected by the COVID-induced downturn.
Source: Evercore ISI, US Department of Labor
Worse, younger generations tend to fit this bill more so than their older counterparts. So, when we look at what age groups are most affected, it should come as no surprise to anyone that Millennials and Gen Z top the list.
Source: Morning Consult
Because so many people in those generations are being affected, the likelihood that consumer spending is going to significantly rebound in the next few months appears increasingly grim. Data from the Fed confirms as much.
Source: Federal Reserve
And somewhat ironically, this brings me back to my initial topic – the US Balance of Trade data.
White Christmas Looking Awfully Gray
As I mentioned above, the US trade deficit hit its worst point since 2006 in August, clocking in at negative US$67.1 billion.
Source: Bloomberg
And when we look at the breakdown of imports, exports, goods and services it becomes clear that US businesses are making a desperate bet on a big holiday season.
First off, I should note that the US is a net exporter of services and a net importer of goods. While service exports had been increasing steadily since the financial crisis, the trade war caused that surplus to pull back, while decreasing the deficit in goods as US importers shunned Chinese products due to tariffs.
Source: Bloomberg
In 2020, however, both figures have lunged decidedly in the opposite direction as businesses ratchet back overhead expenses and consumers pull back on overall spending.
When we dig into the imports and exports of goods, however, a slightly different trend emerges. US exports of goods – which had boomed through 2019 as Trump’s heavy-handed trade negotiations reverberated around the world – have utterly collapsed in the wake of COVID.
Source: Seawolf Research, US Customs
Imports, on the other hand, have soared in recent months as retailers clamor to restock shelves ahead of the holiday season.
Source: Seawolf Research, US Customs
And when we sum everything up at the balance of trade level, we can see that while Asian countries have gained, the overall level has not risen meaningfully above the previous baseline.
Instead, the massive imbalance has shifted toward Europe.
Source: Seawolf Research, US Customs
That shouldn’t be that much of a shock, as I wrote at the end of September that the ongoing second wave of COVID is likely to have significant consequences.
But this outsized level in August is not likely to last, as retailer’s push to restock is largely over, and holiday spending in the US is likely to disappoint.
In turn, that means that European exports to the US have peaked, and the Continent is unlikely to reap any more near-term benefits from trade. As such, I think it’s time to deploy our last ¼ stake into Proshares UltraShort Euro (NYSEArca: EUO), especially since speculative bets on the currency remain historically high.
Source: Hedgopia, CFTC
I should note that the US Dollar Index bounced off of its 50-day moving average today following Trump’s tweet today, and while I don’t expect it to explode this time around, a rebound to the 100-day moving average at around 95 is certainly in the range of possible outcomes.
Source: Bloomberg
We will also be looking to add to gold and silver positions on any further weakness, as precious metals will benefit from any further foreign currency weakness.
And in the meantime, we’ll be hoping our own second wave of coronavirus cases doesn’t make things worse.
Take care and stay healthy, everyone… the economy depends on it.
All the best,