Money Pulse Bulletin: Trump Trade War Temper Tantrum

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July 13, 2018
Money Pulse Bulletin: Trump Trade War Temper Tantrum

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We recently received a note of the following concerns from a client about the current ‘Trade Wars’. After speaking with him we thought it likely that he was not the only one to feel this way.

So, in light of current rumblings across the financial media in particular, we thought it might be helpful to share a few points of his concern and our response with you all.

We’ll call our client “Bill.” Bill wrote of, “concerns regarding the current trade war …”  he’d been reading about in articles from several prominent and popular sources in which it was reported that the administration, “…is threatening over $500 billion in tariffs and last year’s total exports from China to the US were $130 billion.” Additionally, are worries China could retaliate by cashing in their US Treasuries. Bill wanted to know our view of this probability and what repercussions, such a move might have on the markets.

We responded to these understandable anxieties with our view in a global economic context and important facts associated with those concerns in the following manner. First, we’re not sure what sources these articles were based on, but it may help to begin with a broader context here:

From the Office of the US Trade Representative, Executive Office of the President:

“U.S. goods and services trade with China totaled an estimated $648.5 billion in 2016.” (this includes both directions). “Exports were $169.8 billion; imports were $478.8 billion.”  – (Tariffs are levied on goods brought into the US). “The U.S. goods and services trade deficit with China was $385 billion in 2016.

Let’s start with the ‘Trade War’. In our view this is a loaded term used by the media in general and the financial media in particular to peddle fear which harvests much useless attention and helps to drive the ‘fear trade’. Wall Street, of course, loves this as much as politicians love to follow the political winds (polls) for gathering votes. Consumer attention drives revenue to the media and fear sells as well as greed. For the moment, greed is out of fashion for Wall Street. We believe these articles do not inform long term investors for several reasons:

  1. There is no long term strategy to accommodate this particular brick in the ‘wall of worry’. The market is still climbing this wall based on strong, very-strong, stronger-than-seen-in-nearly-a-decade, fundamental, Leading Economic Indicators (LEI’s) for the US and globally.
  2. The trade war narrative which, like all narratives, holds a kernel of truth, cannot be acted on because there is no strategic action to take on something that has not happened—and in our opinion, is not likely to happen.
  3. If a bad case scenario emerges, from this brick in the wall, a global strategic asset allocation as we have in place across our accounts is designed to weather that storm for the long term. This is while remaining fully invested with liquidity and having some shock absorber allocations for the shorter term. Of course, no strategy can guarantee a successful navigation of something that has not yet happened.
  4. If the worst case scenario emerges that is implied by the ‘trade war’ narrative imbedded in these articles, there is NO shelter for that storm. The capital markets will have been destroyed. This seems to us no less scary than Korean atom bombs reigning down on the US. We probably came closest to that scenario in the monetary meltdown of 2008-2009 as anytime in modern history.

From a purely pragmatic perspective, we think the administration is just as likely to succeed in its gambit as not. This also fits the president’s well publicized style and widely known negotiating tactics. We would also note this approach can only succeed if based on a highly informed understanding of the global actors, their strengths and weaknesses. We think it’s likely the administration has entered this fracas believing it has fully assessed these factors. Whether its assessments are accurate or not, remains to be seen.

We observe, in this case, that nearly every other trading partner has much more to lose than the US. A fact which US trading partners almost certainly also understand. This approach, unique as it is to traditional US trade negotiation tactics and the strategic implications attached, is getting nearly zero media attention.

From an investor advocate standpoint, we would recommend ignoring stories of this type except for purely entertainment purposes. However, since it’s nearly impossible to remain informed and to avoid this kind of material, we offer the following additional observations.

We think it unlikely for China to cash in Treasuries and even if it did, it only owns about 4.8% of total U.S. debt. Japan actually holds more US debt. There are mainly two economic reasons China owns as much U.S. debt as it does. We believe this makes such a move unlikely, even counterproductive to the Chinese government’s interests.

  • The first is that China sees strategic value in pegging its currency, the yuan, to the dollar. A dollar-pegged yuan inhibits the cost of China’s exports, and its government thinks this strengthens its position in international markets.
  • Also, a dollar-pegged currency brings greater stability to the yuan, because the dollar continues to be seen as one of the safest currencies in the world. Treasuries are redeemed in dollars.

It’s very difficult for individual investors to separate noise from useful information in our society’s information over-loaded environment. So, it’s important to have confidence in sources possessing an independent, objective understanding of how the global economies and markets work. Also, while it’s just as difficult for investors to do so, it’s wise to separate our political views from our portfolio strategy.

At worst, we view the current attempt to reset the global trading table as disrupting, even disconcerting for many. And, while we remain vigilant of the process, we expect U. S. trading partners will ultimately and seriously reassess the status quo before taking measured steps to preserve their best possible share of a healthier-than-in-a-long-time, growing global pie. Of course, in the short run, we could be wrong. We have been before and no doubt, will be again.

For long term investors, we believe the outlook remains strong. A global, strategic, asset allocation approach, as our portfolios are constructed upon, is designed for worst case scenarios short of completely annihilated global capital markets. We hope this is helpful to our reader’s concerns about the drum beat, trade wars narrative. Please, contact us if you have any further questions or concerns. We’re always happy to chat!

Have a great weekend!