One of the more extraordinary things that investors have seen in living memory is unfolding at this precise moment. This goes for business leaders, money managers, veteran Wall Streeters, value investors, 401(k) holders, momentum traders, FX guys, gold bugs, technical gurus, chartists, pork belly speculators, quants, astrologists, Larry Summers, put option sellers, dweebs and geeks, millennial index fund enthusiasts, and everyone in between.
Pork belly speculators were among those waking up to a nasty surprise as China retaliated by imposing its own list of tariff duties. Soybean traders were also forced to rapidly adjust to an unexpected change in export fortunes (see further below). Farmers are presumably none too happy at this point. [PT]
They’re all craning their necks in unison. They can hardly believe their eyes. Up on the world stage, and on a daily basis, President Donald Trump chest bumps international leaders with wanton abandon.
Donald Tusk, Justin Trudeau, Xi Jinping, Angela Merkel, and even the new leftist Mexican victor, Juan Trump, have President Trump posturing towards them as if they’re facing off at a weigh in for a heavyweight fight. The sight is absolutely ludicrous, if one is in the mood for a reality TV show – or a practical joke.
This, of course, is all in line with Trump’s fiery brand of gamesmanship. The strategy goes something like this: Shock. Confuse. Backtrack. Counter. More shock. The more astonishing, the better the outcome will be. The more rapid the sequence, the more power it displays.
But it’s not without the potential for major upset. The stakes are high. The term is young. Something startling is bound to happen.
Say hello to Juan Andres Manuel Lopez Obrador-Trump. [PT]
Several opening jabs were aimed by Trump at China on July 6. A 25 percent tariff on $34 billion of Chinese goods entering the U.S. took effect, including duties on farm plows and airplane parts. China quickly countered with retaliatory tariffs on U.S. soybeans and automobiles.
Billionaire investor Ray Dalio commemorated the July 6 skirmish by tweeting: “Today is the first day of the war with China.” Markets, however, didn’t share Dalio’s sentiments. In fact, they didn’t flinch.
Both the S&P 500 and the Shanghai Composite Index finished the day higher than where they started. Somehow, the consensus opinion was that Trump will be more talk than action. The consensus opinion was quickly thrown into question.
On July 11, Trump went full MAGA. He identified plans to tack on 10 percent tariffs to an additional $200 billion in Chinese goods. The S&P 500 finished the day down 19 points. By Thursday, however, everything was hunky-dory; the S&P 500 gained back the prior day’s losses and then some, closing up 24 points.
Naturally, China said there will be further retaliatory measures. As of this writing, these new measures haven’t been revealed. However, many reports have been presented to document China’s deep loathing. The Telegraph headline “Beijing ‘shocked’ by Trump unveiling new tariffs on $200bn of Chinese goods as stocks slide” being one of the more inspiring renderings of the mood.
Stocks in Shanghai have been in a downtrend for some time already, and the burgeoning trade war was hardly the only reason – it has probably exacerbated the trend though. The sharp decline in Chinese money supply growth was undoubtedly a major driver as well. The “sell the rumor, buy the news” reaction to the most recent enactment of tariffs is a fairly normal development as stock markets go – but it doesn’t mean that everything is suddenly fine. It isn’t. [PT]
The True Sport of MAGA
Several months ago, President Trump commented that, “trade wars are good, and easy to win”. So far, his efforts have included hitting trading partners like China, Canada, Mexico, and the European Union with tariffs, so that the U.S. can negotiate better trade deals.
Without question, the U.S. has been getting short changed by its trading partners for many years. Doing nothing, other than diplomatic discussions, has been ineffective. But are tariff duties the solution?
Trade tariffs, and retaliatory measures, can quickly escalate into a very damaging and futile trade war – with no clear conclusion. Before long, businesses are stifled, livelihoods are lost, and all economies suffer. The desired results of the tariffs are shown to be unattainable.
The effect of tariffs with and without retaliation on US economic growth and the real effective exchange rate of the USD, according to IMF chief economist Maurice Obstfeld. Color us suspicious of “models” purporting to be able to predict the effect of tariffs on economic output growth with such precision. However, both economic logic in the form of the law of association and economic history clearly show that trade restrictions can only lead to negative outcomes. The question is therefore what Trump really intends to achieve. Is it true, as he said after the G7 pow-wow, that he merely wants everybody to rescind all trade restrictions? If that is his goal and if it can actually be achieved, there will be no problem. It seems to us though that there is a problem already: first of all, almost everything Trump says about trade sounds economically ignorant, notwithstanding the fact that he voices well-justified criticisms as well. If he really wanted to “win” a trade war, he should do the exact opposite of what he is currently doing – he should simply drop all US trade restrictions unilaterally. The US would then be set to join the countries with the largest economic output per capita, all of which have eschewed trade restrictions almost completely. Mercantilists around the world would be well and truly stumped. [PT]
But assuming a trade war is something like a sport, which can be won, what are the odds the U.S. will win the trade war with China? One popular theory is that because the U.S. imports much more from China than it exports to China, the U.S. has the playing field tilted in its favor. After all, the customer is always right, right?
So is the trade war with China a 75-to-25 percent win/lose proposition? Is it a 65-to-35 percent win/lose proposition? What about a 50-to-50 percent win/lose proposition? One chance in two, a coin flip, acey-deucy, red or black. Do these odds make the trade war something worth starting?
Obviously, a trade war is not like a World Cup match. Scores are not tallied. There are no referees. Yellow and red cards are not handed out for foul play. There is no defined end time.
It can’t really be modeled and no-one can keep score – but it will make us all poorer. [PT]
Rather, the true sport of MAGA has its own rules… and they are are made up as you go. This is a sport where Trump shines brightest. Where there is no clear winning or losing. Where grace and style are not rewarded.
This is a sport where Trump can take great big shots – at everyone – with the intention of delivering a steady and fearful beating. Whether he will be successful is no more the point than the point of football is to touch home plate. The point of the true sport of MAGA, you see, is much, much more…
In mid-July 2018, the true sport of MAGA is a whole lot of fun for Trumpians of all stripes. That’s the point. In fact, after eight years of Barry Big Ears, the true sport of MAGA feels pretty doggone great. Specifically, at the moment, the true sport of MAGA is fantastic, outstanding and exhilarating – all at the same time.
MAGA-man: the world’s greatest political entertainer, troll-in-chief Donald Trump meets with his supporters [PT]
This, you see, is what it’s all about. MAGA! What a hoot!
Charts by barchart, stockcharts, IMF/FT.
Chart and image captions by PT
MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.