…there had to be a point where the value of the Wall St economy surpassed the value of the Main St economy… Part I Here

We now look forward, and consider the question: How would the multinational underwriters, the multinational financial systems, reset all transactional tables (the bookkeeping systems underneath the valuation) if the U.S. stock market was ever forced to re-value economic nationalism over multinational globalism?

To first answer the “how” question, we must visit the “why” question. Why would the multinational financial underwriters want to reset their valuations?

Obviously, the global financial system does not act altruistically. What would motivate the global wealth valuation authority (various market investment indexes) to want, or need, a reset.

The answer to the “why” question might not be as challenging as it appears.

First, there has been a seismic shift in how the world looks at the economic exploitation of multinational systems, or globalism.  See Bernie Sanders?  See those yellow vests in France?  See what happened with the U.K. Brexit referendum?  See the shrinking EU influence?  See the open/public confrontation and push-back against China? See Trump? All examples are consequences of the rise of economic nationalism.

Secondly, the original Wall Street corporate motive (during decades of mergers and acquisitions) to shift product manufacturing to Southeast Asia (ASEAN nations) was driven by a lower cost of overall business, higher profit margins and greed.

As a direct outcome economic wealth was shifted from the U.S. to ASEAN nations, and particularly China. Low wages, low regulation, cheap operational costs, incentives and subsidies from Asia equals cheap TV’s, sneakers, furniture and durable goods.

Even with high fuel prices and overseas shipping costs, there was a big difference between U.S. and ASEAN manufacturing costs.  As hundreds of U.S. Wall Street multinationals chased profits the rust-belt was created.

However, over time (three decades) the outflow of U.S. wealth resulted in a higher wealth level in the ASEAN nations.  Over time Asian workers receive higher wages and their standard of living increased.

With 30 years of stagnate wage growth in the U.S, and with rising wages and standards in southeast Asia, the difference in labor costs starts to narrow. Simultaneously, the internal economy in China, Vietnam, S-Korea etc. all started to increase.

The ASEAN workers are now buying stuff they couldn’t afford before.

Instead of a reliance on the U.S. consumer, the internal economy (local demand on a generational scale) starts driving a need in Asia for the same products.  As a result, more U.S. and global multinationals expanded operations in those ASEAN nations because new consumers were created.

However, the multinationals were also taking advantage of (exploiting) prior trade constructs like NAFTA.  Ex. U.S. multinationals used Canada and Mexico to assemble Chinese products for distribution into the U.S.

Along comes Donald Trump who has watched all of this and he wants to change it.

President Trump starts initiating policies that specifically benefit Main Street by speeding up the process of narrowing the cost difference between the U.S. and SE Asia.

President Trump calls these policies “America First”.

Trump lowers the corporate tax rate to offset the ASEAN benefit of Chinese subsidies. A tax policy that also makes corporate tax inversion less likely.

Trump further narrows production costs by lowering U.S. energy costs. A policy to unleash all facets of energy development (ex. pipeline approvals and ANWR opening). Again, lower energy costs in the U.S. narrows the cost difference for manufacturing.

Trump deregulates various industries, again closing the gap between the U.S. and ASEAN nations. Part of this deregulation allows for expanded (easier) raw material development.

With the initial framework established, President Trump starts getting serious.

President Trump puts a big wrench into the cost dynamic with tariffs on imported goods from China and Asia.  Trump then eliminates the three-decade-old NAFTA loopholes that allowed manufacturers to work around origination rules.

The USMCA has more strict origination rules that require parts to originate in North America. The tax/tariff for violating the origination rule(s) are not particularly high, but they are a disincentive. Again, that narrows the cost difference.

All of these policies, lower corp taxes, deregulation, lower energy costs, access to abundant raw materials; closed NAFTA loopholes; and the looming threat of easy to apply tariffs; work together to narrow the cost difference between production in ASEAN nations and production in the U.S.

Then when you factor-in shipping costs & new trade rules, well, the difference is minimal.

So there’s the “why” answer.

♦ The multinational systems (Wall St. valuation underwriters) are now open to a reset in the current global evaluation indexes, because the landscape has completely changed.

A 72″ flat screen TV can be made in the U.S. for the same price as the TV in Vietnam.

However, there’s still another problem… For that, we need a metaphor… so we’ll stick with a fictional TV corporation.

A U.S. electronic multinational has a stock market evaluation based, in part, on their TV assembly operations overseas.  Assume that division of the parent company is 20% of the total company valuation. If that company wants to return the TV division to the U.S. the exit cost of the move is not worth 20% of their total valuation.

The physical land (leased or owned), physical factory (leased or owned), and physical machinery are worth pennies on the original investment dollar.

It is the operation, and the preceding financial result, that carried the Wall Street valuation.  If the TV division is going to relocate into the U.S, Mexico or, less likely Canada, that division is going to have to invest in the move and only recapture a few dollars from the sale of land, factory or equipment they leave behind.

How do they pay for the costs to return to North America?…

…and, more importantly…

How do the multinational underwriters who assigned the divisional valuation, and the investors who subsequently inflated the valuation, lower the divisional valuation to reset for an entirely new landscape and growth/profit opportunity?

In essence what this “TV” example shows is a corporation detaching their valuation from globalism, and reattaching their valuation to economic nationalism, Main Street USA, again.

That’s the opportunity behind Coronavirus….

A very big picture discussion requires a considerable baseline.

The stock market is not the U.S. economy; the stock market is an investment instrument that determines valuations of economic activity company by company. The valuation is considerably arbitrary, based on the determinations of the arbiters (investors). This is empirically true.

However, that said, how would the multinational underwriters, the multinational financial systems, reset all transactional tables (the bookkeeping systems underneath the valuation) …if the U.S. stock market was every forced to re-value economic nationalism over multinational globalism?    Enter “Coronavirus”.

Four years ago CTH first explained a new way to look at the U.S. economic system and how Main Street was/is disconnected from Wall Street.  We presented a metaphor to explain. Before going deeper into the discussion of tomorrow; and at the request of several people who now accept the era of “deglobalization” is upon us,  I first present that prior reference & then will use this as the baseline to describe what could come next.

There is a key phrase at the fulcrum of everything past:

…there had to be a point where the value of the second economy (Wall Street) surpassed the value of the first economy (Main Street).

What we are going to outline in part II is the possibility what happens when this natural truism is reversed.  The objective is to answer: How, specifically would Wall Street reset its evaluative systems if Main Street once again emerged as the priority?

But first, a baseline revisit is needed.

2015/2016 – Traditional economic principles have revolved around the Macro and Micro with interventionist influences driven by GDP (Gross Domestic Product, or total economic output), interest rates, inflation rates and federally controlled monetary policy designed to steer the broad economic outcomes.

Additionally, in large measure, the various data points which underline Macro principles are two dimensional. As the X-Axis goes thus, the Y-Axis responds accordingly… and so it goes…. and so it has historically gone.

Traditional monetary policy has centered upon a belief of cause and effect: (ex.1) If inflation grows, it can be reduced by rising interest rates. Or, (ex.2) as GDP shrinks, it too can be affected by decreases in interest rates to stimulate investment/production etc.

In short, FEDeral intervention.

However, against the backdrop of economic Globalism -vs- economic Americanism, CTH is noting the two dimensional economic approach is no longer a relevant model. There is another economic dimension, a third dimension. An undiscovered depth or distance between the “X” and the “Y”.

I believe it is critical to understand this new dimension in order to understand Trump economic principles, and the subsequent “America-First” economy he’s building.

As the distance between the X and Y increases over time, the affect detaches – slowly and almost invisibly. I believe understanding this hidden distance perspective will reconcile many of the current economic contractions. I also predict this third dimension will soon be discovered and will be extremely consequential in the coming decade.

To understand the basic theory, allow me to introduce a visual image to assist comprehension. Think about the two economies, Wall Street (paper or false economy) and Main Street (real or traditional economy) as two parallel roads or tracks. Think of Wall Street as one train engine and Main Street as another.

The Metaphor – Several decades ago, 1980-ish, our two economic engines started out in South Florida with the Wall Street economy on I-95 the East Coast, and the Main Street economy on I-75 the West Coast. The distance between them less than 100 miles.

As each economy heads North, over time the distance between them grows. As they cross the Florida State line Wall Street’s engine (I-95) is now 200 miles from Main Street’s engine (traveling I-75).

As we have discussed – the legislative outcomes, along with the monetary policy therein, follows the economic engine carrying the greatest political influence. Our historic result is monetary policy followed the Wall Street engine.

[…] there had to be a point where the value of the second economy (Wall Street) surpassed the value of the first economy (Main Street).

Investments, and the bets therein, needed to expand outside of the USA. hence, global(ist) investing.

However, a second more consequential aspect happened simultaneously. The politicians became more valuable to the Wall Street team than the Main Street team; and Wall Street had deeper pockets because their economy was now larger.

As a consequence Wall Street started funding political candidates and asking for legislation that benefited their interests.

When Main Street was purchasing the legislative influence the outcomes were beneficial to Main Street, and by direct attachment those outcomes also benefited the average American inside the real economy.

When Wall Street began purchasing the legislative influence, the outcomes therein became beneficial to Wall Street. Those benefits are detached from improving the livelihoods of main street Americans because the benefits are “global” needs. Global financial interests, investment interests, are now the primary filter through which the DC legislative outcomes are considered.

There is a natural disconnect. (more)

Here is an example of the resulting impact as felt by consumers:

♦ TWO ECONOMIES – Time continues to pass as each economic engine heads North.

Economic Globalism expands. Wall Street’s false (paper) economy becomes the far greater economy. Federal monetary policy follows and fuels the larger economy. (Note: size is determined by value, not by production.) In exchange for policy the Wall Street benefactors pay back the politicians.

Economic Nationalism shrinks. Main Street’s real (traditional) economy shrinks. Domestic manufacturing drops. Jobs are off-shored. Main Street companies try to offset the shrinking economy with increased productivity (their limited fuel). Wages stagnate.

Now it’s 1990 – The Wall Street economic engine (traveling I-95) reaches Northern North Carolina. However, it’s now 500 miles away from Main Street’s engine (traveling I-75). The Appalachian range is the geographic wedge creating the natural divide (a metaphor for ‘trickle down’).

By the time the decade of 2000 arrives – Wall Street’s well fueled engine, and the accompanying DC legislative attention, influence and monetary policy, has reached Philadelphia.

However, Main Street’s engine is in Ohio (they’re now 700 miles apart) and almost out of fuel; there simply is no more productivity to squeeze.  Technological gains, used as fuel for productivity, start to level-off. The engine starts to slow.

From that moment in time, and from that geographic location, all forward travel is now only going to push the two economies further apart. I-95 now heads North East, and I-75 heads due North through Michigan. The distance between these engines is going to grow much more significantly now with each passing mile/month….

However, and this is a key reference point, if you are judging their advancing progress from a globalist vessel (filled with traditional academic economists) in the mid-Atlantic, both economies (both engines) would seem to be essentially in the same place based on their latitude.

From a two-dimensional linear perspective you cannot tell the distance between them.

It is within this distance between the two economies, which grew over time, where a new economic dimension has been created and is not getting attention. It is critical to understand the detachment.

Within this three dimensional detachment you understand why Near-Zero interest rates no longer drive an expansion of the GDP. The Main Street economic engine is just too far away to gain any substantive benefit.

Despite their domestic origin in NY/DC, traditional monetary policies (over time) have focused exclusively on the Wall Street, Globalist economy. The Wall Street Economic engine was simply seen as the only economy that would survive. The Main Street engine was viewed by DC, and those who assemble the legislative priorities therein, as a dying engine, lacking fuel, and destined to be service driven only….

Within the new 3rd economic dimension, the distance between Wall Street and Main Street economic engines, you will find the data to reconcile years of odd economic detachment.

Here’s where it gets really interesting. Understanding the distance between the real Main Street economic engine and the false Wall Street economic engine will help all of us to understand the scope of an upcoming economic lag; which, rather remarkably I would add, is a very interesting dynamic.

Think about these engines doing a turn about and beginning a rapid reverse. GDP can, and in my opinion, will, expand quickly. However, any interest rate hikes (monetary  policy) intended to cool down that expansion -fearful of inflation- will take a long time to traverse the divide.

Additionally, inflation on durable goods will be insignificant – even as international trade agreements are renegotiated, and/or as tariffs are applied. Why? Simply because the originating nations of those products are going to go through the same type of economic detachment described above.

Those global manufacturing economies will first respond to any increases in export costs (tariffs etc.), by driving their own productivity higher as an initial offset, in the same manner American workers went through in the past three decades. The manufacturing enterprise and the financial sector remain focused on the pricing because the consumer is the most important variable. Ultimately prices are determined by wages.

♦ Inflation on imported durable goods sold in America, while necessary, will ultimately be minimal during this initial period; and expand more significantly as time progresses and off-shored manufacturing finds less and less ways to be productive. Over time, durable good prices will increase – but it will come much later.

♦ Inflation on domestic consumable goods ‘may‘ indeed rise at a faster pace. However, it can be expected that U.S. wage rates will respond faster, naturally faster, than any monetary policy because inflation on fast-turn consumable goods become re-coupled to the ability of wage rates to afford them.

The monetary and fiscal policy impact lag, caused by the distance between federal monetary action and the domestic Main Street economy, will now work in our favor. That is, in favor of the middle-class.

Within the aforementioned distance between “X” and “Y”, a result of three decades traveled by two divergent economic engines, is our new economic dimension….

“We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment,” said the platform released by the Republican National Committee. (link)

/snip/

Notice how each of the most critical parts of that predictive outline from four years ago essentially became our reality as President Trump applied his ‘America-First’ agenda.

Now, here’s where it is going to get interesting again as we look forward another four years. 

In part II we will answer: How, specifically would Wall Street reset it’s evaluatory systems if Main Street once again emerged as the priority?… and I will outline how COVID-19 can be the spark to reset that evaluation system.