Is the Stock Market Crazy?

Many are freaking out over the steep decline in financial markets over the last couple of weeks. Not me: I haven’t lost a nickel. Why not? I haven’t sold anything.

The markets obviously will rebound, and soon. Maybe tomorrow represents a buying opportunity. Maybe the buying opportunity won’t come until next week, or next month. But it will come, many billions of dollars will flow into the markets, and prices will rise. Those who haven’t sold anything, or who locked in gains earned over the last decade by selling early, and who had the foresight to have cash on hand, will make money.

The real question is, does coronavirus threaten the U.S. economy in a way that justifies a prolonged slump in the stock market? The answer is clearly no, in my opinion. There will be temporary disruptions in supply chains, and losses in industries (like the airlines) where business will be down for a while. But those losses don’t signal any important underlying weaknesses (unlike, for example, the absurdly overpriced tech stocks circa 2000 and the financial crisis of 2008). They will be temporary, and in all likelihood short-lived.

Longer term, the coronavirus will benefit the U.S. economy. The virus has demonstrated that President Trump was right all along: outsourcing a huge percentage of our manufacturing capacity to China was dumb. It was especially dumb with regard to pharmaceuticals. But with regard to any non-trinket product, China’s low wage rates are at best a dubious trade-off against low productivity, low quality–I could write a book about this–transportation costs, and unforeseeable disruptions associated with a primitive and autocratic society, like coronavirus. The trend toward bringing manufacturing back to the U.S. was already underway, but it will accelerate and become permanent as a result of the coronavirus. That is a good thing, for us.

A year or two from now, I think this month’s stock market decline will be more or less forgotten. The real question, I suppose, is whether it will be forgotten by November. I think so, but that is a closer question.

Along these lines, Richard Rahn, chairman of the Institute for Global Economic Growth, writes in the Washington Times: “Fears of negative impact on U.S. GDP due to coronavirus overstated.”

Some have argued that the trade disruption caused by the coronavirus puts the U.S. economy in grave danger. These fears are overstated. Exports are about 11.7 percent of U.S. GDP, and imports are equal to about 14.5 percent of GDP, and much of this trade (goods and services) is likely to be little affected by the virus.
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Keeping in mind the above caveats, our biggest trading partners are Mexico and Canada, closely followed by China, with Japan, the U.K. and Germany in 4th, 5th and 6th places. These six countries account for more than 51 percent of total U.S. trade, and the top 15 countries account for almost 75 percent. Last year, the United States exported more to the U.K. than to Germany. If the proposed free trade agreement is concluded with the newly independent U.K., it is likely that it will uphold as the new 5th largest U.S. trading partner, replacing Germany in the long run.
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Most experts expect China to have negative economic growth this quarter, which will depress demand for U.S. exports, but the new trade agreement does obligate China to buy more agricultural products from the United States. U.S. imports from China will almost certainly fall, both because of supply chain problems within China due to the coronavirus, and Chinese companies’ credit problems, as well the scramble by U.S. companies to find alternative sources of supply.

The long-standing U.S. trade deficit in oil and gas has been eliminated due to the brilliant engineering and risk-taking by U.S. oilmen who gave us the fracking revolution. We still import some oil but export a lot of natural gas, so it is largely a wash in terms of the economy. If oil prices fall, U.S. consumers will benefit, and if they rise, U.S. producers will benefit. [Ed.: They are falling, at the moment.]

So, finally:

In sum, the negative impact on U.S. GDP, because of trade disruptions caused by the coronavirus, is likely to be very manageable. Some export markets will be lost, but these will be partially offset by lower prices of foreign-sourced raw materials and components, and finished products. The AI (artificial intelligence) revolution will reduce the comparative advantage of many foreign sellers to the United States, in turn, giving the U.S. economy a boost as more domestic production capability is created.

I am pretty certain that in less than ten years, coronavirus will be seen as a turning point that favored the U.S. economy over that of China and perhaps other third-world countries. Let’s hope that becomes clear by the Fall.

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