Can the TPP Save the Global Economy?

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

TPP Trans-Pacific Partnership

This week, President Barack Obama was in Vietnam and Japan drumming up additional support for the Trans-Pacific Partnership (TPP), and meanwhile I was in the U.K., where Brexit drama is dominating headlines and airwaves. Only a month remains before voters decide whether the country will stay in or leave the European Union. As I said last week, an exit could trigger a currency crisis with both the euro and pound, in which case owning gold might be a good idea.

Speaking of the yellow metal, I had the opportunity to meet with the World Gold Council (WGC) while I was in London. It’s a pleasure to share with you that the group’s CEO, Aram Shishmanian, has agreed to join me as a special guest during our next webcast, scheduled for Wednesday, June 8. We’ll be discussing gold, specifically the reasons behind its rally this year and the pullback we’re seeing this month. I highly urge you to register for the webcast because you won’t want to miss Aram’s rich insights into gold.

Aram Shishmanian, CEO of the world council

As Oil Hits $50 a Barrel, Americans Hit the Road

I was disappointed to see that U.S. manufacturing activity showed more signs of slowing growth, according to preliminary purchasing managers’ index (PMI) data. The PMI posted a 50.8, just above the neutral 50.0 threshold separating expansion and deterioration. What’s more, the index fell below its three-month moving average, which we’ve found to be a headwind for commodities and energy three to six months out.

Markit Flash US Composite PMI Falls below Three-Month Moving Average

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This could threaten additional recovery in the oil and gas industry. For the first time this year, West Texas Intermediate crude briefly touched $50 a barrel yesterday. Prices between $50 and $60 are widely seen as a “goldilocks” scenario: high enough for oil companies to stay profitable yet low enough for consumers.

Gas prices, in fact, are expected to be the lowest in 10 years this Memorial Day weekend, according to the American Automobile Association (AAA). The motor club estimates prices will average around $2.26 a gallon, or 45 cents less than last year. More than 38 million Americans will travel this weekend, AAA says, the second-highest volume on record. If you’re one of them, I wish you happy, safe travels! But however you plan on spending the weekend, remember to honor those who bravely served the U.S. and gave the ultimate sacrifice.

Memorial Day, Remembering America's Heroes

TPP – The U.S. Can Now Export Weapons to Vietnam

On Monday, Obama lifted the 40-year-old weapons embargo against Vietnam, ending what many see as the last vestige of the U.S. and Southeast Asian country’s former animosity. It was also part of his administration’s “pivot” to Asia to deepen relations with countries in the fastest growing region of the world.

Indeed, Vietnam is in an exciting position right now. In the fourth quarter of 2015, its gross domestic product (GDP) growth rate expanded an impressive 7.01 percent, and Goldman Sachs predicts its economy will become the 17th largest by 2025, up from 55th today. The most populous city, Ho Chi Minh City, commonly known as Saigon, has blossomed into one of the world’s premier manufacturing and tech startup hubs, with huge investments flowing in from companies such as Samsung and Intel.

Vietnam’s defense spending has also been growing rapidly in recent years, and today a lot of business is up for grabs. Between 2011 and 2015, the country was the world’s eighth largest arms importer, just one rung above the U.S., according to the Stockholm International Peace Research Institute (SIPRI). This year it’s expected to spend $5 billion, a dramatic increase from the estimated $1 billion it spent in 2005.

With the embargo out of the way, American aerospace and defense contractors such as Lockheed Martin and Raytheon have the opportunity to move into this new Asian market. Boosted by recent geopolitical fears andterrorist activity, both companies are trending near their all-time highs.

Lockheed Martin Raytheon Trending Near All Time Highs

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They also provide attractive dividends, which are increasingly sought-after in a world that’s seen a third of all government bond yields around the world turn negative.

Read how negative interest rates are also pushing foreign investors into American muni bonds!

TPP – Selling it

One of Obama’s main objectives in visiting Vietnam and Japan was to shore up support for the TPP, the historic trade agreement that, if ratified by all 12 participating countries, is designed to eliminate as many as 18,000 tariffs. Sixteen to 30 years after ratification, 99 percent of all goods trade among these countries will be entirely liberalized.

In the map below, you can see the massive scale of who’s involved. TPP countries have a combined GDP of $28 trillion, close to 40 percent of world GDP, and they account for almost a quarter of total world exports.

The United States Total Trade with TPP Countries

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Vietnam has the most to gain from the TPP Eliminating thousands of tariffs should allow its important apparel and textile industry to export even more goods to the U.S. In turn, the U.S. would have the opportunity to sell more vehicles in the Asian country. The World Bank estimates a 10 percent bump in Vietnam’s economy over a decade as a result of the deal.

Among the TPP countries, the U.S. runs the largest trade deficit, which widened to $57.5 billion in April. As you can see, the U.S. has an unfavorable (and worsening) trade gap with Vietnam (-$2.7 billion in March) and Japan (-$6.7 billion). The TPP could help rebalance this.

Americas Ever Widening Trade Deficit with Vietnam

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Americas Ever Widening Trade Deficit with Vietnam

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According to the Peterson Institute for International Economics (PIIE), the TPP “will increase annual real incomes in the United States by $131 billion, or 0.5 percent of GDP, and annual exports by $357 billion, or 9.1 percent of exports, by 2030.” For all member nations, the deal is expected to add $492 billion in real income.

TPP  – Challenges Ahead

Of course, none of this will come to pass if the TPP can’t be ratified. The PIIE warns that delaying the TPP’s launch by even a year could lead to a permanent opportunity loss of between $77 billion and $123 billion for the U.S. Obama has repeatedly said he wants to see it passed by the end of 2016.

Unfortunately, a delay at this point appears highly possible, with both major U.S. presidential candidates opposing it. Support in Congress is muted. Of the 12 TPP countries, only Malaysia has ratified it.

But there’s still strong support for the deal. The U.S. Conference of Mayors, responding to recent positive findings by the International Trade Commission,

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