What follows is about trying to make money or at least preserve capital in the current unpredictable times, it is not an attempt at a political critique of these wild times. Sadly long gone are the days when looking at a balance sheet was all you needed to do to decide wether to get into a solid investment position. Everything is now heavily pivoting on the output of the Whitehouse.
I wrote a few weeks back how disastrous US tariffs would be and the market melted down, bonds Treasury bonds wobbled, and disaster looked imminent. The Whitehouse paused its course, kicked the can and the market reversed as if it knew tariffs were dead. Then on the 14th May, this week, China tariffs were rolled back to a lower level than they were under Biden (20% odd,) down to generally 10%. (News sources are mixed with the BBC claiming 30%)
So tariffs with China have imploded from 145% to 10% for a 90 day truce.
Now lets pull back. What was the point of these wild tariffs in the first place. High tariffs wherever they were to be finally set, were to rebalance trade so the US trade deficit would be erased. Yet there was more to it than that. It was to bring back manufacturing to the US, in effect to reestablish it as the ‘workshop of the world’ or at least a workshop of the world, with all the geopolitical implications of that reversion.
Doing that via tariffs might work, though history would inject a huge amount of scepticism, but you could see how the idea has merit if you are prepared to risk and take massive economic pain in the process. The financial markets gave the idea a massive ‘nope’ threatening to bring the roof down.
So here we are, in a truce with tariffs running at lower levels than under Biden, which is not a recipe of instant trade rebalancing and far, far away from the rhetoric of only a few weeks ago. If tarrifs stay at these levels they would only make trade deficit matters worse.
So what next for the August deadline?
Firstly, meantime what is going to happen is a US restocking blitz from China, and as you can get the supply chain goods from China to the US in 70 days before the 90 days is up. As such the supply chain shock of huge tariffs also gets kicked down the road and there will only be a few weeks dent, you might hope, in the pipeline fetching up at US ports in the coming weeks. This means the inflation wave caused by the past tariffs will be minor. This will buy time.
So what then?
There are two roads.
Plan A Whack up tarrifs again and revert to the old trade war track.
Or
Plan B Keep tariffs in the old range or perhaps, this is Trump after all, lower than the old 20% at 10%.
So under plan A, the stock market collapses, and we get recession, depression, inflation, the only thing that doesn’t show up is the zombie apocalypse, but even that might feel like a possibility. The US marches through economic hell to rearm its manufacturing might. That will be epic, but probably not in a good way.
Under plan B?
It’s a go for growth scenario and this would be the logic.
America doesn’t want cheap jobs, it wants the sort of jobs they bake in Silicon Valley. The US wants to make all the apex stuff in the US leaving the cheap consumables to the rest of the world. To do that the US needs growth, lots and lots of growth. Now it won’t be said but that means low interest rates and low dollar and elevated inflation. Highish inflation is what you get with tariffs anyway, so that’s a wash.
You also don’t have to slash and burn the government sector if you can just keep it from growing, because economic growth rises it outrun expenditure and lowers the scale of the deficit. (Well at least in theory) Clinton pulled off a surplus during the dotcom boom, so this idea has a proven track record and a lot better one than tariffs. Sadly, though this is the previous failed economic strategy because government simply spends its way back into trouble. Yet this strategy has seen the US establish a massive GDP per capita lead over everyone else, at least in dollars, whileit bleeds out in fiscal and trade deficits.
So you fix the trade deficit you weaken the dollar which ends up looking a lot like a tarrif.
Now take a look at a long term chart dollar chart. This is versus the Yen, but you can see the dollar is mighty against this trading partner making it easy for the Japanese to export to the US.
It you can drop the dollar to, for example, to this long term level, lets say its by a third, which is sustainable and palatable as far as history is concerned, import prices go up by 33% which is as good as a tariff and that supresses demand, while US exports go down in cost 30% which boosts them significantly. If you get China to revalue its currency and Europe too, all of a sudden, the trade tide turns.
But you don’t have to get Europe or China to agree you get there by lowering interest rates and if you need to, you QE. This is of course currency manipulation, something all countries do and claim not to do, but if the US kicks it off, away they all go on a reflationary battle of devaluation. That’s better than a cycle of trade war though…. Maybe.
So in Plan B you get:
Economic boom
Inflation
Jacked up asset prices: Real Estate and Stocks
A new boom bust cycle version of the asset jucing mechanism the US has been on for years now. Hopefully inflation doesn’t go full on 1970s style.
… if only you can get the Federal Reserve to go along with it. Faced with an implosive trade war, what are the Fed’s options?
But wait, there is a plan C.
Talk big and not implement.
That would mean ongoing confusion and uncertainty and general mild bearishness.
There is of course an alphabet of what ifs, but both Plan A and Plan B are front and centre and we can track the likelihood by watching the markets.
If the market tanks, it says Plan A, if the Dollar starts to fall off, it says Plan B.
If its Plan A, its hold gold and cash and wait it out.
If its Plan B, long stocks and if you get scared about inflation go for gold or any other inflation hedge you like.
Basically, uncertainty is the mother of unstable money supply and is therefore the mother of inflation and we certainly have oodles of uncertain for years to come. As such it seems we are in for one wild ride as we are back with the global economy trying to go hell for leather for growth. Make no mistake, uncertainty and unpredictability is not good for good outcomes.
Yet as Chuck Prince at Citicorp said as the US financial system was crashing around Wall Streets ears, ‘when the music plays you got to get up and dance.’