
Image by Pau Casals
Fifty years as a financial journalist tells me that trying to predict Wall Street’s movements is a fool’s errand. But things really are different now: for better or worse, traditional U.S. stock investors and financial institutions no longer set the agenda. Rather the agenda is set by a handful of foreign financial bureaucrats, most of whom hang their hats in places like Beijing, Tokyo, Seoul or Taipei.
The question of what is ahead for U.S. stocks therefore reduces mainly to a question of what these financial bureaucrats are up to.
Little is known about them, and they would not have it any other way. But there is no doubting their importance. Their most obvious contribution so far has been to keep the U.S. dollar nicely propped up on world currency markets. Without them the dollar would likely long ago have fallen by two-thirds or more. The implications are hard to exaggerate. While a low dollar would help America’s struggling manufacturing industries, the cost of living would rocket and U.S. government finances would increasingly look like those of a Third World country.
America’s dependence on foreign finance goes back more than four decades, to when America first began running chronic balance of payments deficits. These deficits had to be financed and the surplus nations quickly set up the necessary financial plumbing. The results were most obvious initially in the U.S. bond market but they soon were also apparent in the stock market.
At first the assumption was that America’s trade imbalances were temporary and that U.S. trade would soon enough be brought back into balance . But instead of decreasing, the deficits have continued inexorably to increase — and so has the influence of surplus nations over America’s finances.
So what do the surplus nations want? It is a fair bet that they would love to lighten up on their load of U.S. financial assets. They have, however, hitherto felt badly boxed in. Any large-scale effort to lighten up would not only have depressed prices against themselves but would seriously have soured economic and diplomatic relations generally with the United States. Now, given President Trump’s love of tariffs, the surplus nations may feel they have less need to be squeamish. One powerful way to get Trump’s attention would be to drop American stocks by, say, 30 or 40 percent.
I am calling it the Trump bump.