Trump’s trade war with China is starting to get out of hand

Trump’s trade war with China is starting to get out of hand

Market Commentary - Cumberland Advisors - Currency Risk Quote (David Kotok)

Excerpts below.

By Matt Egan, CNN Business
Monday, Aug 5th 2019

New York (CNN Business)The US-China trade war has always been serious. Now it’s starting to get scary. China allowed its currency to drop sharply on Monday to the weakest level in more than a decade. And China announced its companies have halted purchases of American agricultural goods. This comes after US President Donald Trump vowed last week to impose tariffs for the first time on a wide swath of US consumer goods from China.
 
China’s currency move raised the specter of a currency war, where major countries race to devalue their respective currencies.
 
“It’s the currency risk that is the most volatile, hardest to see and the fastest reacting,” said David R. Kotok. “That’s the left hook that can knock out the boxer.”

 

Read the full article here: CNN Business


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The Market Expects the Fed to Do Its Duty

Excerpt from Bloomberg.com article,

The Market Expects the Fed to Do Its Duty

by John Authers
June 14, 2019

The market expects. President Donald Trump’s threat to impose tariffs on Mexican imports has come and gone, but the market remains convinced that the prospects for the Federal Reserve have changed utterly in the last two weeks. If the fed funds futures market is to be believed, the odds now favor three 25 basis point cuts between now and the end of the year. Nobody gave such an outcome the time of day until a few weeks ago

 

Cumberland-Advisors-David-Kotok-In-The-News

“Vincero!” Or, Trump Sings Pavarotti

Finally, a moment of inspiration brought to you indirectly by David Kotok of Cumberland Associates, along with a slightly painful memory. Kotok headlined his latest market missive “Turandot,” after Puccini’s last and arguably greatest —  but incomplete —  opera. It is set in China. The analogy works, Kotok says:

“Why do I start a commentary about China and the Trump Trade War by invoking an opera to serve as a metaphor? The reason is that there is a history lesson.

“Puccini wrote the entire opera except for the final duet. He died on November 29, 1924, before completing the text. Franco Alfano was commissioned to complete the opera, but conductor Arturo Toscanini did not like the result. At the opera’s premiere on April 25, 1926, Toscanini stopped in the middle of the third act and announced to the audience, “Here the opera ends, because at this point the maestro died.” (Source: Richard Russell, executive director of Sarasota Opera)

“The operatic drama underway features Trump and Xi. The setting is China and also Washington. Instead of the three riddles of Turandot, we have tweets back and forth between the US and in China. Sadly, though, the current version is not a comic opera. The closing duet is not yet written.”

It does seem to be a good precedent (Trump used the song at campaign events). More concerning, we lack a Toscanini-like figure to call the whole thing off if the conclusion the two leaders come up with is not to his satisfaction.

Perhaps more sadly, however, the trade war so far lacks any high moment of drama to match “Nessun Dorma” (“Nobody will sleep”), the show-stopping aria from “Turandot” that made Pavarotti famous and became the theme song for the 1990 World Cup in Italy.

(Ed note: On February 10, 2006, Luciano Pavarotti made his final public performance at the Opening Ceremony of the Torino 2006 Olympic Winter Games in his home country of Italy. Watch this interpretation of “Nessun Dorma” – from Giacomo Puccini’s opera Turandot)

Read the full article by John Authers at the Bloomberg website: www.bloomberg.com

 




5G, Huawei, Trade War, Shooting War

From the onset of the Trump trade war we’ve argued that the broad-brush tariffs advocated by Peter Navarro were damaging and that a very targeted approach on security and intellectual property would have been better. Finally, the tariff fight with China is being defined over 5G, which is where critical agreements always needed to be forged.

Market Commentary - Cumberland Advisors - 5G, Huawei, Trade War, Shooting War

Here is an interesting feature article from Reuters about 5G and security and a warning to the US from Australia: https://www.reuters.com/investigates/special-report/huawei-usa-campaign/ . My thanks to Erwan Mahe for bringing this reporting to my attention.

Targeted security and defense protectionism can be understood by Americans and investment market agents. Bludgeoning soybean farmers still makes no sense. Agricultural bankruptcy rates are climbing.

Raising sneakers prices for Americans doesn’t make us safer. Remember, tariffs are a sales tax on the American consumer. Trump knows it. The people around him know it.

So can they admit their error? Not likely. But a possible compromise is to be very heavy-handed on security issues and to rescind protectionist tariffs that punish Americans. Focus 100% on security tariffs. Use quotas. But be prepared for the countermeasures. Remember, the second word of the phrase trade war is war. We are now engaged in it.

Note the implications of the word war. The modern version of warfare plays out in the economic and sanctions realm. That is not an unreasonable alternative to the traditional version. However, history warns us about economic wars turning into shooting wars.

Moreover, we need to stay abreast of where future battlelines are forming, such as the struggle for access to rare earths. (See http://www.nationaldefensemagazine.org/articles/2019/3/21/viewpoint-china-solidifies-dominance-in-rare-earth-processing.) The Chinese are already acting strategically on this front and have decisively outmaneuvered the US.

Trump’s tactics require that military prowess be sharply honed by the USA. And funded fully by Congress. That readiness has now become necessary, whether we like it or not.

We have rebalanced our position in the defense sector and continue it as an overweight selection in our US stock market ETF portfolios.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


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Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight

Excerpt from Bloomberg.com article,

Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight

By Liz McCormick
May 18, 2019

Cumberland-Advisors-David-Kotok-In-The-News

Insight Ahead

Next week, traders will gain fresh insight into the state of America’s housing market and purchases of big-ticket items. Minutes from the Fed’s last gathering will be released Wednesday and there’s a slew of speakers, including Chairman Jerome Powell. There’s little expectation that officials will waver from their pledge of patience with rates.

“The Fed will look at the tariffs as an exogenous shock and that it’s not systemic and therefore won’t change monetary policy,” said David Kotok, chief investment officer at Cumberland Advisors, which manages about $3 billion.

Fed funds futures imply the central bank’s benchmark rate will fall to 2.09% by the end of 2019, signifying more than a quarter-point cut. Officials’ most recent quarterly forecasts projected no change in 2019 and a quarter-point increase in 2020.

Given the Fed’s plans for rates and elevated Treasury issuance, Kotok says yields are too low. He expects the 10-year yield to be at 3% to 3.25% by year-end.

Still, the daily ebb and flow of information about tariffs is seen as pivotal.

“There is more risk of yields going lower given the concerns about trade,” said Justin Lederer, a strategist at Cantor Fitzgerald.

Read the full article by Liz McCormick at the Bloomberg website: www.bloomberg.com

 




Cumberland Advisors Market Commentary – Tariffs – Macroeconomic Versus Microeconomic Effects: In the Long Run We Are All Dead

Robert Brusca of FAO-Economics details some interesting information on US trade and the likely impacts that the current US-China trade war could have on prices.[1]

Market Commentary - Cumberland Advisors - Impact of Tariffs

He has provided us with a deep dive into the mechanics and macro costs of the current tariff “war.” Here are data suggesting that markets may have overreacted to this week’s round of tariff increases and their implications for the US economy.
1) US total non-petroleum imports amount to about 9.5% of US GDP, while US imports from China, though large in dollar amount, account for about 15% of US total imports, or only 1.4% of US GDP.
2) The president has increased tariffs on goods from 10% to 25%, a 15% increase on potentially 1.4% of US GDP, so the first-round impact is less than a 0.2% increase in price pressures and about .4% for the full impact of the 25% tariff.
3) Brusca clearly demonstrates that, despite the administration’s assertions, US importers initially pay the tariffs, not the Chinese exporters, and these prices are then either passed on to US consumers and/or absorbed by the importers in the form of lower profits. Of course, these tariffs increase the relative price of Chinese import products and mean that over time demand will be reduced and customers will substitute goods from other non-Chinese sources or change the mix of goods purchased, thereby lowering the impact of the tariffs in the longer run. Fortunately, ready substitute suppliers exist for most of the goods imported from China. Of course, there are exchange-rate implications as well.
4) Finally, Brusca argues that the overall price impacts in terms of changes in the CPI will be small, since goods have less than a 20% weight in the overall CPI.
5) To be sure, on selective products US producers may engage in parallel pricing behavior; and in some markets, like appliances, the price impacts already have been quite significant.

What about US exports, since China is raising tariffs on its imports from the US in retaliation?

1) US exports in total are about 13% of US GDP, of which goods account for about half, or 7.9%, of GDP. Services are not that important to our trade with China. The Washington Post reports that in the six-month period ending in March 2018, U.S. exports to China have dropped about $18.4 billion, some of which was offset by increases to other areas in the world.[2]
2) Total US exports to China amount to only about 6% of US total exports, or 0.6% of GDP.
3) While these aggregate macro statistics seem small when weighed against the size of the US economy, this does not mean that the tariff situation has not caused problems for key sectors of the US economy, especially agriculture, or to particular parts of the country. For example, for selective producers, like soybean farmers, the damage to their short-run and long-run production and income from the first round of tariffs (not to mention what might happen this time) has been devastating. Particularly hard-hit are farmers in North Dakota and Iowa. In 2017, China bought about $12 billion in soybeans, or approximately 25% of the US crop. In 2018 US exports of agricultural products totaled $9.3 billion, and soybeans were $3.1 billion.[3] By March of this year the figure was down to $1.8 billion.
4) Other segments hit to date have been tech and autos. Particularly hard-hit have been the states of Ohio, Michigan, Minnesota, Illinois, Iowa, Tennessee, Washington, and California. Many of these states have been supporters of the Trump administration. Funds have been allocated to provide a safety net for agriculture, but such subsidies are at best temporary, and they come out of taxpayers’ pockets. Moreover, why is it that farmers are subsidized when other producers who have been and will be adversely impacted are not singled out for support as well? Which ones will get subsidies and which ones will not? This is one game where timing is everything.
5) Finally, recent research from Columbia University on the impacts of the 2018 tariffs reveal several important conclusions. The costs to the US economy of those tariffs through the first 11 months were about $6.9 billion or .03% of GDP.  Furthermore, the costs of those tariffs were entirely born by the US and passed through in the form of higher prices with little estimated impact upon prices received by exporters to the U.S. Interestingly, US domestic producers also raised their prices.[4]

In summary, the current trade war is playing out on two fronts. At the macro level, tariffs and trade have, at best, a small and second-order knock-on effects on the US economy. Those who are predicting dire consequences are selling both our economy and producers short. However, the fact that the macro implications are minor at this date does not mean that the microeconomic impacts, especially in critically politically important parts of the country, are small or can be ignored. People and producers are being hurt, and it is often the smaller farmers and manufacturers who are not only being hurt but being driven out of business. These people won’t be around in many cases when the trade war is resolved, and the economic and political fallout from their losses will be important. Indeed, recent data suggest that family farm bankruptcies are on the rise.[5] There is an old saying in economics: “In the long run, we are all dead.” Let us hope this does not apply to the US agriculture and small-business manufacturing sectors.


[2] See “The First Round of China Tariffs Already Stifled U. S. Exports,” Washington Post, May 16, 2019.
[4] See Amiti, Redding and Weinstein, “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” Discussion Paper DP13564, Centre for Economic Policy Research, March 2, 2019.
[5] See “Corn, Dairy Farms Lead Chapter 12 Bankruptcy Filings, Report Shows, Mike McGinnis, Successful Farming, March 27, 2019. https://www.agriculture.com/news/business/agriculture-leads-bankruptcy-filings-report-shows



Sarasota financial advisor: Don’t panic over trade tariffs!

Sarasota financial advisor: Don’t panic over trade tariffs!

By Ray Collins | May 15, 2019

John Mousseau says it is important not to get caught up in concerns about a trade tariff war with China.

“If you’re sitting there and you read just the headlines, it looks like a cannon ball shot across the bow of the ship. In essence what it is, is just a shot in a longer term negotiation. I think it was long overdue to negotiate with some trading partners. The U.S. — in terms of being a world partner — has given up more than it has gotten in the last few years,” Mousseau said.

Mousseau said neither the U.S. or China wants a full-scale trade war.

Read and see more stories by Ray Collins here:  https://www.mysuncoast.com/authors/raycollins/

 




Why the US-China trade war won’t last

How Trump’s trade war is unraveling the Trump rally

Cumberland Advisors in the News

Excerpts below.

By Matt Egan, CNN Business
Tuesday, May 14th 2019

The United States and China don’t just coexist. Their massive economies are deeply intertwined in ways that make the intensifying trade war unsustainable.

Tariffs are the weapons of choice as both sides attempt to improve their negotiating leverage. Consumers and businesses find themselves caught in the crossfire. The levies will increase costs, muddle supply chains and drive up debilitating uncertainty.

UBS cut its 2019 GDP growth forecast for China from 6.4% to 6.2%. While Beijing will try to soften the blow with stimulus, UBS said growth could slip below 6% in 2019 and 2020 if the trade war deepens.

“The risk is monstrous. It’s very troubling,” said David Kotok, chairman and chief investment officer at Cumberland Advisors.

The interconnectedness of China and the United States has been driven in part by the millions of people in China that have been lifted out of poverty.

“You have an expanding middle class wealth effect,” said Kotok, who also serves as director of the Global Interdependence Center, an organization advocating for the expansion of free trade.

Read the full article here: CNN Business


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites. Sign up for our FREE Cumberland Market Commentaries Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

Bloomberg Daybreak Asia
May 9th, 2019, 9:10 PM EDT
Bloomberg-This Is a Serious Confrontation Between World’s Biggest Economies, Says Kotok

David Kotok, chairman and chief investment officer at Cumberland Advisors, discusses the U.S.-China trade negotiations and their impact on markets. He speaks on “Bloomberg Daybreak: Asia.” (Source: Bloomberg)

Watch at on Bloomberg.




Bloomberg Daybreak Asia: Wear a Helmet When Doing Falconry With These Hawks (Radio)

David Kotok, Chief Investment Officer/Co-Founder, Cumberland Advisors, joined Doug Krizner and Rishaad Salamat on Daybreak Asia. He says markets have been thrown a curveball by President Trump’s threats on tariffs. He goes on to discuss how China may react.

Running time 04:25

Cumberland's David Kotok on Bloomberg Radio

This is a Bloomberg podcast.

LISTEN HERE: Bloomberg Audio

NOTE: Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.


If you like podcasts, check out this one from 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/




Shutdown. Markets. #2.

We thank many readers for their responses to my January 22 commentary, “Shutdown and Markets” (https://www.cumber.com/shutdown-and-markets/).
Cumberland Advisors Market Commentary by David KotokResponses were varied, as expected. Some folks maintained their sense of humor. Others blamed one side or the other and criticized my final sentence, in which I suggested that both sides share a measure of the blame. So let me expand on that point and then offer some responses from our readers. The culprits of this shutdown are now seven to be named. Those names are Trump, Pence, McConnell, Pelosi, Hoyer, Schumer, and Durbin. One could add a lot more names and come up with a list of over 500. We elect them. We get what we vote for.

Below is what some folks think of the situation:

Raphael asked, “Who elected Anne Coulter President and Rush Limbaugh Secretary of State?” Trump has caved in [to] the wrong people, and they will sink him.

Richard G. wrote, “I was at the Winter Antiques show in NY this weekend. A lot of lookers but few buyers. The effect on the art and antique market is significant. Some of the auctions, such as Sotheby’s, [were] reasonably good this weekend. The mega rich are still buying, but the ‘somewhat’ rich are not feeling as rich! That’s the extent of my grass roots research.”

Mindy wrote, “Didn’t Trump win on the wall?” She meant in 2016 and clarified when I asked her. She also said, “Maybe the markets want the wall, and maybe they are tired of the Dem’s BS.”

Anonymous wrote, “Markets don’t care about the wall. 5.7 billion is a rounding error in a 20 trillion economy. The shutdown has already cost more, and the cost is increasing daily and accelerating exponentially and not arithmetically.”

Bob wrote, “Granted. But if a child gets behind the wheel of his dad’s car and runs you over, you are still dead. It is childish behavior, but it is starting to have an impact… There is weakness around us. The Fed has hiked rates and damaged the housing sector; the danger is that weakness gets to a critical mass, and then uncontrollable weakness cumulates. I think there is more real risk here. The markets sometimes brake too late or, like Thelma and Louise, keep their foot on the accelerator far too long.”

Here is a link to an article [“Shutdown’s economic impact is a forceful reminder of why government matters”] by two distinguished economists [Andrew J. Hoffman and Ellen Hughes-Cromwick of the University of Michigan]: (https://theconversation.com/shutdowns-economic-impact-is-a-forceful-reminder-of-why-government-matters-105940).

Yesterday at Morning Money, Ben White quotes Pantheon’s Ian Shepherdson regarding the shutdown’s impact on growth: “Our base case for true Q1 growth was 2.5%, but we expected a print of about 1.75% because of a persistent seasonal adjustment problem…. Adding in our guesstimate of the direct shutdown hit, reported growth looks more like 0.5-to-0.75%. Second-round effects could then bring that number to zero”

White notes, “Sentiment surveys are also declining. The University of Michigan consumer sentiment survey for January dropped from 98.3 to 90.7, the lowest level of Trump’s presidency. The Conference Board’s expectations index recently plunged from 112.3 to 99.1.” (https://www.politico.com/newsletters/morning-money/2019/01/22/shutdown-continues-to-drag-on-the-economy-487289).

Fred sent this: “Good points, but your bias was showing. You ignored what I think is the real problem, and McConnell. He, we, and Pelosi all know Trump is a world-class louse. Trump thinks keeping the gov closed will, eventually, force the Mueller probe to stop along with the third branch, the judiciary. He won’t let go because he is now caught in “dictators’ dilemma.” Mueller has him for “bribery” and “treason,” so worry over what “high crimes and misdemeanors” means is now over—when the gov. reopens the path to impeachment begins, and Trump’s entire team knows the process will end Trump as a national figure…. I suspect Pelosi mastered the art of decimating bullies by having overcome her five older brothers. She is clearly a master of that art—a capacity that is essential to ending the national scourge of our war-brat-baby president.”

Journalist Joe asked, “Question – do you have any reason to believe small businesses are more vulnerable to the shutdown? I’ve been hearing from SBA lender and borrowers who say they are stalled and very concerned where this is headed. Most businesses don’t have new loans let alone SBA loans in a given month, but maybe this is an important group of expansion-minded firms not getting capital, hiring or building acquisition funds they were counting on. Significant impact beyond what’s measured?” Our response was that we may see this in NFIB survey data in a couple of months. Remember US government data is shut down.

Glenn said, “Pelosi? Someone must stand up to Trump’s BS. He is dangerous. The wall is complete BS which will further feed the ignorance of the Republican base (Fox News-deluded goofballs). Dems are fed-up with a con-man felon in charge.”

Joel asked, “Just wondering… at what level would the unemployment rate concern you that the ‘slowdown’ would impact consumer sentiment and spending? I think with so many looking for or calling for a recession that it won’t happen in the traditional way.” We thought about this and recalled that TLR (formerly The Liscio Report, http://www.tlranalytics.com/) is a high frequency user of state-sourced data and that it is a particularly good reference when federal government data sources are compromised by the shutdown.

Frank asked, “How do we get Pelosi and Trump to stop thinking that each one has the other in a bathtub? Or over a barrel? Or up a tree? Is there a way both of them can agree that they can compromise without appearing to blink? David, I remember you said your dad had words for three levels of craziness. I never knew how to spell them, but the most chaotic level sounded, as I recall, like ungecacht. I recall the words of the Notre Dame boosters, to, I think, Rockne, or maybe it was Parseghian, “We’re with you, win or tie.” (It was before football decided there could be no ties.) Can the bases of both P and T be energized enough to adopt that as something their leaders can hear? Constantine locked all Christian philosophers in a room in Nicaea in 355, I have heard, and would not let them out until they agreed on what Christianity was and what it was not. Can we get his ghost to come and lock D and P in a room? Is there some way of locking them both in a room filled with the misery of 800,000 cries for common sense? Quo usque tandem abutere?”

Bob didn’t know my father, but he does know who Frank is and was copied on Frank’s email to me. Bob answered “ongepotchket: ungepatshkey, ongepotchkeyed, ongepatshky, overly elaborate, excessively decorated, slapped together senselessly. Consider: A shandeh un a charpeh: A shame and a disgrace. So much for a Yiddish lesson.” Thank you, Bob.

We end with a repeat of the famous Churchill Quote and our original final sentence. And we thank Steve Blumenthal for his kind words about our usage of the Churchill quote.

Regarding the shutdown and the behavior of our politicians, we recall Sir Winston Churchill’s take on the messiness of the democratic process. In 1947, in the House of Commons, he said, “Many forms of government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time….”  (https://winstonchurchill.org/resources/quotes/the-worst-form-of-government/). Pelosi and Trump are living testament to Churchill’s sagacity.