Goldman's Currie Says Border Tax Would Help Oil, Trade

TL;DR

Border tax could reduce oil imports, affecting trade deficit.

Transcript

Jeff when you look at global trade and you think about what it means for your world do you assume they can narrow the trade deficit and what does that mean to global trade full stop well I think the only way they could narrow the trade deficit from a oil perspective is to do something like a border tax adjustment we don't see that as being a high p... Read More

Key Insights

• A border tax adjustment could potentially narrow the U.S. trade deficit by reducing crude oil imports, although its implementation is unlikely.
• OPEC production cuts are expected to lead to a significant decrease in U.S. crude oil imports, which could result in lower inventories.
• There is a disconnect between oil commodities and the dollar, indicating a new regime where past correlations may not hold.
• The Federal Reserve is unlikely to raise interest rates in March, preferring to wait for more data and budget information in May.
• The business cycle is currently in a phase where the output gap is near zero, indicating full capacity in the U.S. and China.
• In the third phase of the business cycle, commodities and real assets tend to outperform financial assets.
• Historical data shows that commodities outperform financial assets in the second half of the business cycle.
• Business cycles typically end when there is a depletion of commodities, affecting economic growth.

Questions & Answers

Q: What is the potential impact of a border tax adjustment on the U.S. trade deficit?

A border tax adjustment could potentially narrow the U.S. trade deficit by reducing crude oil imports. However, the likelihood of its implementation is low. The reduction in imports would decrease the trade deficit by lowering the amount of foreign oil entering the U.S., which could also result in lower inventories.

Q: Why does Steven Ricchiuto believe the Federal Reserve will not hike interest rates in March?

Steven Ricchiuto believes the Federal Reserve will not hike interest rates in March because it would be premature. He argues that the Fed should wait for more economic data and budget information, as Q4 and Q1 data are weaker. He compares this situation to a previous premature rate hike in December 2015, which led to negative outcomes.

Q: What is the current phase of the business cycle according to Jeff Currie?

According to Jeff Currie, the current phase of the business cycle is where the output gap is near zero, indicating full capacity in the U.S. and China. This phase is characterized by being at capacity and moving into a period where the economy is above capacity and growing, favoring commodities and real assets.

Q: How do commodities and real assets perform in the current business cycle phase?

In the current business cycle phase, commodities and real assets tend to outperform financial assets. This phase, where the economy is above capacity and growing, benefits spot assets like commodities, which perform well when the economy is at full capacity, unlike anticipatory financial assets that perform better when capacity is anticipated.

Q: What historical trend supports the outperformance of commodities in the business cycle?

Historical data since 1970 shows that commodities consistently outperform financial assets such as equities and bonds in the second half of the business cycle. This trend is due to commodities being spot assets that thrive when the economy is above capacity, whereas financial assets are anticipatory and perform better when capacity is anticipated.

Q: What is the significance of the disconnect between oil commodities and the dollar?

The disconnect between oil commodities and the dollar indicates a shift in market dynamics, suggesting that the historical correlation between them may not hold in the future. This change implies a new regime where the dollar no longer acts as a natural shock absorber for oil prices, affecting commodity markets and trade.

Q: How do business cycles typically end, according to the discussion?

According to the discussion, business cycles typically end when there is a depletion of commodities. This depletion affects economic growth as the availability of essential resources diminishes, leading to constraints on production and economic expansion, ultimately signaling the end of a growth phase in the business cycle.

Q: What challenges do progrowth policies face in relation to the trade deficit?

Progrowth policies face the challenge of potentially strengthening the dollar, which ironically can drive up the trade deficit. A stronger dollar makes U.S. exports more expensive and imports cheaper, exacerbating the trade deficit despite the intention of such policies to stimulate economic growth and job creation.

Summary & Key Takeaways

• Jeff Currie discusses the potential impact of a border tax adjustment on the U.S. trade deficit, suggesting it could reduce crude oil imports but is unlikely to be implemented. The discussion highlights the disconnect between oil commodities and the dollar, signaling a shift in market dynamics.

• Steven Ricchiuto argues against a Federal Reserve interest rate hike in March, citing the need for more economic data and budget clarity. He compares the current situation to previous premature rate hikes that led to negative economic consequences.

• The conversation touches on the current business cycle phase, where the output gap is zero, indicating full capacity. This phase favors commodities and real assets over financial assets, with historical data supporting their outperformance in the latter half of the business cycle.