Dealing with America’s trade follies
Its policies will fail to reduce deficits — for which foreigners will be blamed

by: Martin Wolf   
 Wilbur Ross, US secretary of commerce © AFP

How are trade partners to respond when US policymakers talk nonsense? That is the situation in which Europeans, Japanese and South Koreans now find themselves. The words of Wilbur Ross, US commerce secretary, and the man who Donald Trump trusts most on trade policy, show one can be a billionaire and yet not understand how the economy works, just as one can be an athlete and not understand physiology.

Objecting to warnings of protectionism from Christine Lagarde, managing director of the International Monetary Fund, Mr Ross told the Financial Times that “we are the least protectionist of the major areas. We are far less protectionist than Europe. We are far less protectionist than Japan. We are far less protectionist than China.”

He added: “We also have trade deficits with all three of those places. So they talk free trade. But in fact what they practice is protectionism. And every time we do anything to defend ourselves, even against the puny obligations that they have, they call that protectionism. It’s rubbish.”

It is what Mr Ross says that is rubbish. A trade deficit is not proof that a country is open to trade. It is proof that it is spending more than its income or investing more than it saves. This is not just a theoretical point. Solid evidence supports it.

The Heritage Foundation, no less, provides an annual Index of Economic Freedom, which includes “trade freedom”. The think-tank, which prides itself on commanding influence in the Trump administration, derives the latter from data on trade-weighted tariffs and non-tariff barriers. The US, it shows, has far from the most liberal trade policies.

These measures of trade freedom can be combined with data on current account balances, adjusted for the size of economies. (On this basis, the US deficit was 98th biggest out of 177 countries.) Just as theory predicts, no significant relationship exists between trade freedom and deficits. To the extent there is one, it is in the opposite direction: there is a weak tendency for liberal traders to run larger surpluses.

The idea that protection will reduce trade deficits does make intuitive sense. It is wrong, however, because the economy does not consist of isolated markEts: everything is related to everything else. Taxes on imports are also taxes on exports. If one imposes protection against imports, one pulls resources out of production for export. To put the point in other words, exports are just a way of supplying imports. If a country imports less, because of protection, the incentive to produce exports will, other things being equal, also fall. The mechanism through which this is likely to happen, in the case of the US, will be a rise in the dollar, as the demand for imports falls. Thus, protection reduces ratios of trade to gross domestic product (making economies more closed), not trade deficits.

Now compare the savings rates of high-income economies with their current account balances (again relative to GDP). Just as one would expect, differences in national savings rates are powerful predictors of current account balances. If we look at high-income countries alone, we find that the US is not exceptional in any way. It is a relatively low-saving country that, largely as a result, has persistently run a current account deficit.

This has allowed the US to invest more than it saves. If it wishes to reduce its external deficits, it must either lower investment (evidently, a bad idea) or raise savings. If it wishes to do the latter, the obvious start would be not to slash taxes, as planned, but raise them, instead.

Mr Ross’s misunderstandings of the economics of trade are far from harmless follies. The administration’s fiscal policies seem sure to increase the US external deficit, for which foreigners will be blamed. Its trade policies will fail to reduce US trade deficits, for which foreigners will again be blamed. The US will propose the ludicrous objective of bilateral trade balancing in a world in which commerce itself is multilateral. This too will fail, for which foreigners will be also blamed. In all, the administration could demolish the open trading system simply because it is clueless.

The trading system has been the basis of post-second world war prosperity. This period has in turn been the most prosperous for humanity in history. An excellent recent paper from the IMF, the World Bank and the World Trade Organization lays out both what is at stake and needs to be done to spread the gains from trade more widely.

In particular, it demonstrates that creating a safety net for affected workers and communities, combined with policies to support adjustment to change, is effective. Yet that is precisely what the Republicans intend to weaken. Alas, that makes protection the only policy on offer to those adversely affected by economic changes, including imports.

What is frightening about the trade agenda of the administration is that it manages to be both irrelevant and damaging. A relevant agenda would focus on the imbalances in savings and investment across the world economy. A beneficial agenda would focus on combining the necessary adjustment to economic change, of which trade is a relatively small part, with widening shares in the gains and assistance with adjustment. It would also recognise that trade has been one of the engines of economic dynamism. What is most worrying about trade has been the slowdown in its growth. That, the World Bank suggests, may be one reason for the productivity slowdown.

So how should trade partners respond to US demands? They need to accept the significance of macroeconomic imbalances. They need to make concessions that increase trade, without damaging the global economy. They need to argue the case for multilateral liberalisation. They need to do whatever they can to protect the principle of trade rules that bind both strong and the weak. Above all, they need to be patient. The US should not be governed forever by those who have so little understanding of what is at stake.

A Permanently High Plateau

By: Captain Hook

Margin debt hits fresh new highs, but according to status quo puppets, nothing to worry about because its different this time. (i.e. just like 1929 - in the words of Irving Fisher, "a permanently high plateau" [of prosperity].) And in a sense such talk is correct, because the markets have never been more rigged, however even with this, the bureaucracy's price managers will fail at some point (stocks usually peak a few months after a margin debt peak), as all faulty and unfair systems self-destruct from within eventually. In the case of the stock market, as with all other previous episodes since 1987, it's speculator exhaustion that develops, where while the present sequence is pushing the extremes, it too will end.

That said, the extreme could always get 'more extreme'. According to Martin Armstrong (his computer?) the Dow could go to 42,000. In looking at the monthly CBOE Volatility Index (VIX) below, I'm afraid I can't agree with Marty this time, at least not with his cavalier call for a doubling of the Dow from here. Yes, if speculator betting practices don't change as we head into summer, maybe the Dow could grind up to 22,000 based on the numerics previously discussed on these pages; however, the possibility of a doubling from here appears unlikely. 

Indeed, as you would know in reading these pages these past month, a move to 22,000 (2450 on the S&P 500 [SPX]), is best-case scenario as far as we can project. Anything past these metrics cannot be long for this earth.

How could such a move happen? What is his computer suggesting? It's suggesting the European Union (EU) will break up this year, and money will flow from the Eurozone to the US in a 'safe haven bid' because the 'big money' can't buy gold (or bonds apparently). They can't buy gold because the market is too small, so the geniuses who manage money will be forced to buy stocks. That's a nice story, and knowing people, he will likely be right to an extent. However in circling back up to the margin debt situation, some people might consider paying off their debt in a time of increasing uncertainty - and this is the key (and key fault of Marty's argument) - especially if stocks are falling.

You see, Marty's argument is premised on the basis increasing volumes coming from Europe in a 'break-up panic' will flow into US stocks. And again, this might be correct, especially if the derivatives speculators still have key index / ETF open interest put / call ratios elevated. Thing is, if they are not, stocks will not rise, no matter the volumes, foreign flows - whatever. The last five years have proved volumes don't matter on a sustained basis, only speculator betting practices. And maybe it takes something like stocks rising into an EU break-up to finally burn the derivatives gamblers bad enough to get them to finally stop - but that factor in and of itself, would not propel US stocks (and only US stocks? - can this happen with all other stock market's falling?) in and of itself. The markets are controlled by the derivatives, where change will not come until the speculators start betting accordingly. It's all an illusion. (i.e. so keep an eye on the open interest put / call ratio for VXX for signals.)

That's when the VIX will breakout, and no coincidence when sentiment is 'right'. A breakout appears scheduled to occur in coming months after this period of unprecedented calm. As you can see in the monthly plot below, the trade is pushing ever-further into the apex of an extreme wedge, which should complete as we approach summer / fall. And even though the breakout could be constrained by a larger trading range / structure (the larger wedge denoted), still, important signals are being generated here that will eventually lead to a much larger breakout.

Like the '29 and '87 patterns, it appears stocks could remain buoyant longer than many educated observers believe right now.

However, once the VIX breaks out of the extreme (tight) wedge annotated in the above, deference should be attributed to the bearish case at that time. Of course if the stochastic in the chart above turns buoyant sooner rather than later, which is my thinking, then this observation might become important. (See Figure 1)

Figure 1
VIX Monthly Chart

To his credit, Marty does characterize why gold will finally rise for the right reason, which is loss of faith in government, the system, the status quo. That's right, but the move will most likely not start until the funds that are long COMEX silver right now are purged from their positions, much to the consternation of Ted Butler. The last time we had this situation, Ted was out at that time as well, calling for a magical commercial short squeeze in COMEX silver. This of course did not happen then (because the commercial traders have bottomless pockets when push comes to shove, and even if that's not true, they have more money than the funds) and it will not happen this time as well.

 Why We’re Ungovernable, Part 17: Europe Gets Its Doomsday Scenario

The rise of French far-right presidential candidate Marine Le Pen has made a lot of people nervous since, among many other things, she’s in favor of leaving the eurozone, which would pretty much end the common currency. But since polling has shown her making the two-person run-off round but then losing to a mainstream candidate, the euro-elites haven’t seen any reason to panic.

Here, for instance, is a chart based on February polling that shows Le Pen getting the most votes in the first round, but then – when mainstream voters coalesce around her opponent – losing by around 60% – 40%. The establishment gets a bit of a scare but remains firmly in power, no harm no foul.

Then came the past month’s debates in which a previously-overlooked communist candidate named Jean-Luc Mélenchon shook up the major candidates by pointing out how corrupt they all are. Voters liked what they heard and a significant number of them shifted his way.

Mélenchon: Far-leftist surges in French polls, shocking the frontrunners
(France 24) – In a presidential campaign with more twists than a French braid, Jean-Luc Mélenchon’s sudden play to become France’s third man — or better — is shaking up the race. 
With ten days to go before April 23’s first round vote, the colourful, cultured and cantankerous far-leftist has the frontrunners on the defensive. 
Suddenly, the grumpy far-leftist — a showman in a Chairman Mao jacket who openly admired late Venezuelan populist leader Hugo Chavez — holds the mantle of France’s most popular politician. In the course of a whirlwind month, the 65-year-old Mélenchon surged nine spots to number one in weekly glossy Paris Match’s opinion poll. A full 68 percent of those surveyed hold “favourable opinions” of the far-left candidate, the poll by the Ifop-Fiducial firm showed. 
On some polls, Mélenchon has now bypassed embattled conservative François Fillon for third place in a presidential race that will see the top two advance to the May 7 run-off. 
An Ipsos poll on Tuesday put Mélenchon a half-point ahead of Fillon for third place in the race, behind National Front leader Marine Le Pen and the independent centrist Emmanuel Macron. With 18.5 percent, the far-leftist has gleaned 4.5 percent in just two weeks, with Macron and Le Pen tied on 24 percent. 

Mélenchon wants to quit NATO, the World Trade Organization, the International Monetary Fund, the World Bank, and block European trade treaties with the United States and Canada. He promises a French referendum on whether to stick with the reworked EU he is pledging to negotiate or leave the bloc altogether.

Here’s a chart from the Washington Post showing just how tight the race for the run-off spots has become:

It’s still unlikely that both Le Pen and Mélenchon will make the run-off, but based on the above chart it’s suddenly possible. This would be the cultural equivalent of a Trump – Bernie Sanders race in the US, but with – believe it or not — even higher stakes because both Le Pen and Mélenchon would threaten the existence of both the euro and the European Union, the world’s biggest economic entity.

So it almost doesn’t matter who wins that run-off. Just the prospect of having one or the other in charge would tank the euro and set off a stampede out of Italian, Spanish and Portuguese bonds, possibly doing irreparable damage to the eurozone before the eventual winner even takes power.

To repeat the theme of this series, when you screw up a country’s finances you take its politics along for the ride. In France, the right feels betrayed by open borders and excessive regulation, the left by an unaccountable elite that always seems to profit at everyone else’s expense. And both sides suffer from soaring debt at every level of society.

So if a fringe candidate doesn’t win this time around, the mainstream will just make an even bigger mess, raising the odds of a fringe victory next a few years hence.

“Holy Wars Will Soon Begin”

by Nick Giambruno

Turkey’s foreign minister didn’t mince words.

He recently said that Europe’s politicians are “taking Europe toward an abyss.”

He added, “Soon religious wars will break out in Europe. That’s the way it’s going.”

This was not an idle warning from a fringe politician. In fact, the Turkish minister is in a unique position to understand where Europe’s migrant crisis is headed.

Turkey plays a critical role in this crisis. In many ways, it holds the European Union’s very life in its hands.

As I write, Turkey is threatening to destroy the European Union (EU). This could all start in a matter of days.

In recent years, over 1.5 million migrants from Africa, the Middle East, and South Asia have flooded into Europe. It’s already one of the largest mass migrations in history. But it’s just getting started. At least 2 million more migrants are bottled up in Turkey. There are millions more in Africa.

Most of these migrants are unskilled. They don’t share the same race, religion, or culture of most Europeans. Few speak the language of their new countries. Almost all of them end up on welfare, further draining already bankrupt European states.

This is where Turkey holds the key to the EU’s future…

Turkey’s relationship with the EU recently hit new lows. The Turkish government has threatened to open the migrant floodgates… just in time to tip the scales for anti-EU candidate Marine Le Pen in France’s presidential election.

This is all adding up to a historic crisis.

Of course, when there’s a crisis, most people only see danger. But these are actually opportunities.

Crises often allow you to buy a dollar’s worth of assets for a dime or less.

Spotting these bargains is our specialty. Doug Casey and I fly around the world chasing turmoil and the profitable opportunities it creates.

The unprecedented flow of migrants was the deciding factor in the Brexit vote. It was also the big issue behind the defeat of the Italian referendum last December that forced Prime Minister Matteo Renzi to resign—both events I predicted correctly.

The migrant crisis is fueling the rise of anti-EU populist parties all over Europe. It is the No. 1 political issue on the Continent right now.

In short, the migrant crisis is accelerating the collapse of the European Union.

It’s a simple relationship. The more migrants that arrive in Europe, the more popular anti-EU political parties become, and the weaker the EU itself becomes.

Now Turkey is threatening to dramatically escalate the migrant crisis.

Turkey is a major transit point for migrants headed to Europe. The Turkish government doesn’t want the 2 million or so migrants stuck in Turkey to stick around. So it has little reason to keep them from leaving for Europe.

This gives Turkey leverage with the EU. The Turks have essentially said, “Give us what we want or we’ll open the floodgates.”

What the Turks want is a lot of money.

Last year, Brussels partially gave in to the blackmail—to the tune of $6 billion. In return, the Turks agreed to stop migrants from illegally entering Europe.

This arrangement worked for a while. But recent tensions between the EU and Turkey have reached a boiling point.

The EU has started to harshly criticize Turkey for eroding democracy and the rule of law. This is no way to make friends.

Turkey has responded by calling European officials “Nazis” and “fascists.” It’s the most serious breakdown in ties in recent memories.

It’s actually incredibly stupid for the Europeans to pick a needless fight with Turkey. They know Turkey could quickly and easily flood Europe with millions of more unwelcome migrants.

Turkey’s deputy prime minister recently said:

Europe has not kept its promises on the migrant deal, for us that agreement has ended.

Then Turkey’s interior minister threatened to “blow the mind” of Europe by sending 15,000 migrants a month into the EU. Many European countries have already absorbed their absolute limit.

Remember, over 2 million migrants are stuck in Turkey. So 15,000 per month seems like a conservative estimate.

In any case, if Turkey sends a new wave of migrants into Europe just before France’s presidential elections, it would seal the EU’s fate. Every single migrant increases the chance that Marine Le Pen, an anti-EU populist, will win.

Then there’s the ISIS factor. Over the past couple of years, ISIS has repeatedly hit France with deadly, horrific attacks. The government seems unable to stop them.

If ISIS or any other group attacks France again before the election—especially if migrants are involved—it would all but ensure a Le Pen victory.

This election is effectively an existential test for the EU. Given the stakes, it might be tempting for ISIS (or someone else) to deliver a pre-election surprise.

So, why should Americans or anyone outside of Europe care?

It’s simple…

The EU is the world’s largest economy.

The euro currency is the second most widely held currency in the world.

Financial chaos in Europe means financial chaos worldwide.

The Financial Times commented on what would happen if the EU were to collapse:

It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.

But first, let me explain why this situation is so urgent.

Brexit and the Italian referendum were body blows to the European Union.

Trump’s surprise win was another big hit. He’s the first US president since WW2 who doesn’t support European integration.

Trump said Brexit would “end up being a great thing.”

He also thinks the EU will unravel further. He believes “others will leave.”

Trump knows the migrant crisis is speeding this up. He’s said:

People, countries want their own identity and the UK wanted its own identity… I do think keeping it together is not gonna be as easy as a lot of people think. And I think this: if refugees keep pouring into different parts of Europe… I think it’s gonna be very hard to keep it together, because people are angry about it.

Now Europe’s populists are moving in for the deathblow.

France’s May 7 presidential election could end the EU and the euro currency.

Marine Le Pen is a French nationalist. Think of her as a French Donald Trump. In fact, she was the first foreign politician to congratulate Trump on his victory.

If Le Pen becomes France’s president, she has promised to take France out of the euro currency.

She’s called the euro “a knife stuck in our ribs to make us go where others want us to go.”
Le Pen has a real chance of winning.

This would have earth-shattering consequences.

Jamie Dimon, CEO of JPMorgan Chase, has said “the eurozone may not survive” if Le Pen wins.

That’s putting it mildly.

France isn’t a peripheral member of the eurozone. It is a core member. If Marine Le Pen wins, the euro is doomed.

The euro is the economic glue holding the EU together. Without it, the entire EU won’t survive to the next morning.

The migrant issue is the deciding factor in the May 7 French election, just as it was in the Brexit vote and the Italian referéndum.

Samsung Galaxy S8 Review: Great Phone, But That’s Not All That Matters

Samsung’s phone isn’t ready for the future until the company delivers its next-gen voice assistant Bixby—and reassures us its phones won’t combust

By Geoffrey A. Fowler

Samsung has figured out what we really want: A giant smartphone. That’s also small.

The $720 Galaxy S8, which arrives in stores Friday, boasts more gorgeous screen area than the gargantuan iPhone 7 Plus—and is nearly as capable as my office computer. Yet it isn’t hard to hold the S8 in one hand while riding the train. My thumb can crush all the candy on its far side.

And it doesn’t look like a paperback stuffed into my jeans.

The S8 is a milestone in the evolution of the phone. Instead of just getting bigger, the phone is becoming more useful by fitting you.

How did they accomplish this? The S8 and its larger sibling S8+ (which costs $840 at Verizon) are nearly all screen. Sure, phones already have a lot of screen. But Samsung attacked the face of this phone with the gusto of a Beverly Hills surgeon. It snipped all but a sliver of the metal forehead and chin and replaced them with screen to make it taller. Then it tucked the OLED screen into the left and right edges, making it spill over like an infinity pool.

Using the Samsung Galaxy S8 camera. Photo: Jason Henry for The Wall Street Journal 

Yet I’m torn. To buy the S8 now requires a leap of faith in Samsung. Its software is incomplete:

The hyped talking assistant Bixby won’t be functional at launch, and we don’t know how it stacks up to the Assistant in Google’s excellent Pixel phone. There is a decent chance whenever Bixby is ready, Apple will be close to launching a 10th-anniversary iPhone with an improved Siri—and a whiz-bang screen of its own. Besides, Samsung hasn’t made me forget how, for months, every airline in America warned passengers Samsung phones catch fire.

A More Useful Smartphone

This is an important moment for screen tech, which Samsung does better than any other phone maker. Because it no longer needs that frame (“bezel” in nerdspeak), Samsung squeezed a 5.8-inch screen in a form that is taller than the S7 with a 5.1-inch screen. Diagonal measurements can be misleading, but there is a lot more total screen area for reading or watching movies.

This is an ergonomic improvement: A taller phone is preferable to a wider one, because it interferes less with your thumb’s ability to grip. And that is a relief, because thumbs aren’t evolving as fast as phones.
From left, Apple’s iPhone 7 Plus, Samsung’s Galaxy S8 and Apple’s iPhone 7. Illustration: Jason Henry for The Wall Street Journal 

LG’s G6 phone actually went long-screen first—the S8 goes further by curving it all the way down. In past Samsung designs, like the S7 Edge, the curved screen made the phone feel slippery, but the S8’s new symmetrical shape is easier to grip. Still, I wish the phone’s back weren’t made of glass.

There are new annoyances. It took me a while to get used to the pressure-sensitive home button in the screen, which remains lit up when the phone is locked, but isn’t carved into the glass like on an iPhone. And since the fingerprint reader is on the back next to the camera, I smudge the lens a lot. (This is a serious crime against photography, Samsung.) I would use the new iris reader or facial recognition capability to unlock, but they just aren’t fast enough on the fly.

The Samsung Galaxy S8 has biometric facial login recognition. Photo: Jason Henry for The Wall Street Journal 

Even with that extra screen real estate burning up battery, Samsung managed to improve battery life. In my S7 test last year, I got over seven hours. This year, using the same test and parameters on the S8, I got under 10 hours. That’s still short of the iPhone 7, however. (For people who go for a bigger phone, even at the cost of some grip, the S8+ matches performance in most ways and its battery lasted about half an hour longer.)

The S8’s evolution in usefulness isn’t just about shape. It’s got a magic trick for those times when even 5.8 inches aren’t sufficient to get work done: It can transform into a surprisingly full-featured desktop computer. Yeah, you read that right. I wrote this column on the phone with a keyboard, mouse and a 32-inch monitor. There are resizable windows, a file manager, even the Android equivalent of a Start menú.

The Samsung Galaxy S8 in a docking station that turns it into a computer on the go. Photo: Jason Henry for The Wall Street Journal 

This mode requires Samsung’s $150 DeX cradle, into which you plug an HDMI screen and USB peripherals. There were a few rough edges, but for the most part I marveled at how smooth it was to use, and—with access to my whole mobile life—at times superior to my Windows laptop.

With Android, this desktop has access to apps that are core to my life. Some, including Microsoft Office and Adobe Lightroom, are updated to take advantage of desktop mode. Most other apps are just stuck as vertical windows, but are still somewhat usable. The only app that wouldn’t open for me at all was Spotify.

Why I’m Torn

Animated GIF comparing the phone cameras on the Samsung Galaxy S8 and the Apple iPhone 7 Plus. Photo: Geoffrey A. Fowler/The Wall Street Journal 

These fundamental evolutions might be enough to make me overlook that the S8 costs $50 more than last year’s S7, and has only a marginally improved rear camera (which was already great).

But—and this is a super awkward “but”—it is hard to recommend the S8 when it is incomplete.

It is increasingly clear the future involves operating smartphones (and lots of other things) with our voices. Bixby’s voice control, which Samsung bills as an improvement on Google’s Assistant and Apple’s Siri, won’t be in the phones arriving in the U.S. Friday. And Samsung has a checkered history with software sometimes making its phones more confusing. Software is what gives an edge to Apple’s iPhones and Google’s own upstart Android phone, the Pixel.

(Google’s Assistant works on the S8, but is limited. For example, you can’t call “OK Google” while the phone is locked and unplugged.)

The Screen Takes Over

Samsung’s new Galaxy S8 has a longer screen that measures 5.8 inches diagonally, and less bezel at the top and bottom. Here’s how it compares with its predecessor and other flagship phones.

Samsung’s new Galaxy S8 has a longer screen that measures 5.8 inches diagonally, and less bezel at the top and bottom. Here’s how it compares with its predecessor and other flagship phones.

And I wish Samsung would be more transparent about the changes it has made to ensure the S8’s batteries don’t catch fire. It has a new 8-point plan to test for manufacturing defects, but it’s difficult to evaluate its impact in the secretive electronics industry. Samsung says it has an advisory group of outside experts, yet it hasn’t been able to put any of them on the phone with me.

As strong presales of the S8 have shown, loyalty to Samsung phones seems to be relatively fireproof. The S8, like its predecessor, allows you to add your own storage for far less than makers like Apple charge to build it in. It hasn’t messed with the standard headphone jack. The company’s proprietary payments service, Samsung Pay, works at cashiers sporting new tech, and old magnetic card-swipe tech. And the S8 plugs into Samsung’s newest Gear VR headset and controller (sold separately for $130 or free with some phone deals), by far the best way to dabble in VR games and experiences without investing thousands in a home VR rig.

Customers are also loyal because—despite Apple’s reputation—it is actually Samsung that has been on the leading edge, particularly with evolving the design of phones. That is clearly the case with the S8, which pushes the whole smartphone game forward in ways I expect will soon become the new normal.