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

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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

And here

Shutdown. Markets. #2.

We thank many readers for their responses to my January 22 commentary, “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]: (

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.” (

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, 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….”  ( Pelosi and Trump are living testament to Churchill’s sagacity.

Shutdown and Markets

The stock market is ignoring the shutdown. The bond market is, too. So, too, are commodities, currencies, precious metals, fine art and other collectibles, sovereign debt, and many other asset classes. Those markets are moving for other reasons and not Federal shutdown.


Cumberland Advisors Market Commentary by David Kotok

Markets believe the shutdown is temporary. Market agents look at the childish behavior of our political leaders, roll their eyes in disdain, and move on. Markets are focused on the US-China trade war’s winding down, on earnings, and on economic issues.

If the shutdown ends quickly, markets will have ignored it. Pelosi yanks the auditorium and Trump yanks the airplane and market agents wish these folks would do better than playground politics, but market agents move right past the theater.

If the shutdown persists, all this changes as GDP growth slows, business decisions are deferred, credit problems appear, and 800,000 households run into daily living problems because their salaries are unpaid.

Right now we are still fully invested in our US ETF strategy. We expect the trade war with China to continue to de-escalate (or wind down) on the basis of the Buenos Aires truce.

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…” ( Pelosi and Trump are living testament to Churchill’s sagacity.

Zero Sum Game?

A fishing buddy (Camp Kotok regular) and thoughtful financial professional Steve Blumenthal opened one of his weekly missives with this paragraph, in which he introduced a commentary from Ray Dalio.

Market Commentary - Cumberland Advisors - Zero Sum Game

It’s not the substance of Dalio’s post that I want to focus on, but a key word usage by Ray Dalio and quoted in Steve’s introduction:

“Raymond Dalio is an American author, investor, hedge fund manager and philanthropist. Dalio is the founder of the investment firm, Bridgewater Associates, one of the world’s largest hedge funds. From a humble beginning, he learned from his failures and created a repeatable process based on the system dynamics he now openly shares with you and me. It’s a road map of sorts for understanding and investment positioning. A playbook that has enabled him to grow to become one of the world’s 100 wealthiest people, according to Bloomberg. Investing is a zero-sum game. That means for every winner there is a loser. Clearly, he and his team are doing something right. So, for me, I tune in to learn. His recent post, ‘To Help Put Recent Economic & Market Moves in Perspective,’ caught my eye and I’d like to share it with you today.”

(Note that I do not have permission to share that Ray Dalio post, so readers who want to read that will need to search for it and obtain it elsewhere.)

A couple sentences in the paragraph jump out at me: “Investing is a zero-sum game. That means for every winner there is a loser.”

I disagree with this use of the term zero-sum game.

In every trade there is a buyer and a seller. So in the immediate instance of a single security transaction, at the moment of execution there is neither a winner nor a loser; there is simply an exchange. A price is set. Two strangers reach a deal using a third stranger (an intermediary). All that single trade represents is the consensus price at a cosmic instant of time. An instant later it’s over, and the market price may then go up or down. At any future time, if the market price is higher than the price at execution, then the buyer is the winner, and the seller is the loser, at that point (and vice versa). So, yes, any particular trade is a zero-sum game.

But is investing itself a zero-sum game? It may be, from the limited perspective of any one player. Bridgewater Associates, CMG Capital Management (Steve’s outfit), and Cumberland Advisors certainly strive to consistently emerge as winners in their investing activity. That is, we want to be better, smarter investors than our counterparties are in the trades we undertake for the benefit of our clients.  But note that if the entire investment playing field was on a zero-sum game footing, the net collective result for all investors would be zero.  And that’s before the transaction costs and fees.

So how about investing as a whole – the entire arena of investing, or of economics, for that matter? It’s a fundamental tenet of our capitalist system that if all players in the game compete to be the best, most successful players they can be, the system as a whole will be healthy and dynamically stable and continue to improve over time: “A rising tide lifts all boats” says the cliché. The players may be in the game to get a piece of it for themselves, but they do produce the greater good because markets are clearing arrangements and lead to better efficiencies than other systems do.

So, obviously, on the macro level, the economic system and its investing subsystem are not zero-sum games. We all win when the system is in good shape; but conversely, we all lose if we injure the system.

Today, the system is under more stress than it has been in a decade. To understand why, we must turn to a fundamental principle of ecology. Our human systems are ultimately a subset of the natural system that is Planet Earth (which itself is a subset of an even larger system). And everywhere we look in the natural order, we see the same thing: Competition and cooperation go hand in hand.

No player in our global economic and investment game is an island. At the same time that we compete with one another, we also cooperate; and cooperation is just as fundamental to capitalism as competition is.

Our economy has never been more global, and while we may want America to be first – may justifiably believe that our democratic capitalist system is the best system and should prevail – we are hugely dependent on our international trading partners, as they depend on us.  Think of it in the way that about 35% of the economic results of the S&P 500 index of American companies is derived outside of the United States.

So when President Trump aggressively disrupts global trade, imposing ill-conceived tariffs that shock the system, he may hurt America just as badly as he does our allies and economic adversaries.

In an article titled “Trump Has Promised to Bring Jobs Back. His Tariffs Threaten to Send Them Away” (New York Times, Jan. 6, 2019:, author Peter S. Goodman demonstrates with several hard-hitting examples how the Trump-Navarro Trade War is damaging American manufacturing in ways that will be hard to reverse.

“‘It’s killing us,’ said the chairman of [EBW Electronics], Pat LeBlanc, 63, a Republican who voted for Mr. Trump. He now expects the president’s tariffs will chop his 2019 profits in half. ‘I just feel so betrayed. If we fail because the company is being harmed by the government, that just makes me sick.’” Across the US manufacturing base, such complaints are multiplying and intensifying as the trade war disrupts factory operations for which imported parts are critical. Says Goodman, “Trade in components has grown in recent years, as American industrial prowess has become increasingly dependent on access to the global supply chain. Back in 2009, American factories imported some 20 percent of the electronic products and computers they folded into their operations, according to an analysis by the United States International Trade Commission. By 2016, the share had risen to 25 percent.” True, Trump’s tariffs have taken a bite out of China, too, contributing to a faltering Chinese economy. But, as Goodman points out, “Those worries have filtered back to the United States, amplifying concerns about the global economy, sending stock markets plunging, and putting pressure on American companies, like Apple, that sell goods in China.”

Factory orders in the United States, China and Europe have weakened, too, deepening the sense that global growth is slowing. In the natural world, if the top predators in an ecosystem have a particularly good string of years and decimate their prey animals, then a point will be reached where the population of predators, too, collapses to a more sustainable level. That’s basic ecological science, and it’s just common sense.

It works the same way with companies and countries. What goes around comes around. Life is not a zero-sum game, and neither, on the macro scale, is investing or participating in the global economy.

We’re fully invested in our US ETF accounts. We expect the US-China truce to continue and that a form of a trade deal will result. That is why we expect the stock market to go much higher. If we are wrong and if the tariff rate goes up to 25% and expands as Trump has threatened, we will be wrong. Under that adverse scenario the Trump-Navarro Trade War will likely trigger a full blown recession. We are not in a zero sum game.

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

Trade Wars and Government Shutdowns Can Be Fishy Business

We have written with some regularity about the consequences of trade wars.


The Apple story and the potentially larger economic slowdown in China are a case in point. There are consequences to all of this for all parties involved. In general, we do support free trade in the ideal world where there are no barriers to trade. Basic economic theory suggests that these friction costs disrupt the maximum benefit available to all people when those who can produce most effectively and efficiently are not properly rewarded, thereby driving up overall costs for consumers. With lower or even no trade barriers, the law of comparative advantage is allowed to work unimpeded.

But theories can become problematic as the messiness of politics and practical concerns such as product quality, labor fairness, and environmental considerations are added to the equation. President Trump’s decades-long interest in seeking fairer trade deals for the US with other countries is now being acted upon, creating a disruption of the status quo, which in turn creates shorter-term uncertainties. Whether the long-term scenario is destined to create freer and fairer trade among countries as a result of the current trade negotiations and brinksmanship is yet to be known. We do know that it takes a fair amount of chutzpah to challenge the status quo in trade, even if the potential benefits are to lower overall trade barriers in the long term. However, the president seems to have a ready supply of chutzpah. We, like many others, are monitoring the trade war situation that impacts the financial markets so heavily.

In the meantime, there are the really practical concerns of trade uncertainty, many of them very unpleasant, that are felt at the business and entrepreneurial levels. Markets and businesses prefer certainty in order to chart the future and to make plans. Uncertainty slows down business and puts people and markets into a wait-and-see mode of operation focused on risk management and capital preservation. Adding tariffs or even threatening more tariffs has specific short-term consequences, creating disruptions and costs that will ultimately reach the consumer in real ways. There are hundreds of anecdotes of the personal costs playing out now across many industries as a result of these trade uncertainties.

As one example, we know of a situation in the international fish-brokerage business (quality fish deliveries here, nothing “fishy” about it) where the uncertainties of tariffs, coupled with the government shutdown, have delivered double uncertainty and added costs, imposing a one-two punch. As the 10% China tariffs kicked in, including a tariff on fish imports, the threat of the 25% tariff became very real. Some brokers negotiated early shipping and delivery to help customers avoid the 25% tariff. When that tariff was postponed in early December, customers saw no economic reason to take early delivery. This disconnect rendered product that was in transit temporarily unwanted, causing some consternation for the brokerage. The trade relationship is therefore tested, as significant daily storage fees per container are then added to costs.

Adding to the equation, the government shutdown means that Homeland Security agents are not able to perform their surveillance checks on the containers. Product is sitting in port (refrigerated, obviously), creating further delays in the resolution of the situation. This is a case where the government shutdown has actual business costs that are not just inconveniences to consumers and government workers. These types of anecdotes are stacking up across the spectrum of businesses with international and trade connections.

We can only hope that the trade uncertainty gets sorted out soon for the benefit of all involved and certainly for our friends in the international fish business. The ongoing discussions with China, if resolved in a workable framework, will certainly alleviate much uncertainty and may also provide some needed risk appetite to the financial markets. The economic picture has been in recent times very robust. However, we are now seeing potential slowdown (cue China and the Apple shortfalls in sales) that means all of this brinksmanship has consequences on both sides of the world. Maybe it is time for somebody to blink and get moving toward resolution. Trade resolutions could put significant wind back into the sails of a stock market that has seen a nasty selloff in recent weeks. That aside, getting the government back to work is also an immediate priority for very practical reasons like import processing and other business/security functions. We will stay tuned into the investment-related aspects of these very important concerns which have market implications for the many years going forward.

Michael McNiven, Ph.D.
Senior Vice President
Email | Bio

Stock Market and Tariff Truce

We constantly get email defending the Trump-Navarro Trade War policy. The critics outnumber the defenders, but we can observe that both sides of this debate are digging in their heels.


We also get counterarguments that ask why we should permit China to steal our intellectual property. Simple answer is, we shouldn’t let any country or business or individual steal. Theft deserves punishment.

Our point is the Trump Trade War took the issue of tariffs and made it less targeted and more macro. In doing so POTUS introduced confusing elements. Example: What do soybeans have in common with algorithms? Or why put a tariff on a washing machine and invite a counter-tariff on an exported Maine lobster?

We also note that there is a time lag as tariff rhetoric segues to tariff threat to tariff notice period to actual imposition to resulting price changes. The full period of this process is about a year. So higher prices for US consumers today had their genesis almost a year ago.

Here is an example from Bloomberg that applies to consumers: “$1 Billion a Month: The Cost of Trump’s Tariffs on Technology” ( Readers may note the timing depicted in the chart. And perhaps reader critics will appreciate how tariffs levied on China are really a sales and use tax on Americans.

China is realizing that their retaliation with tariffs is having an internal negative effect. Chinese policy is now changing because growth is slowing in China and credit-cycle pressure is rising.

Will Trump-Navarro Trade War team members realize that the US is also experiencing pressure and alter policy to take advantage of the present opportunity for negotiation? We shall soon know.

I really don’t care whether Trump declares himself brilliant and victorious in his Trade War. I really don’t care about the inner workings of Xi and his government. But their respective political self interests could make for a trade truce deal, and I do care about that.

I care about resumption of growth and global exchanges that create more investment and opportunities for entrepreneurs, as well as lower risk of war. It takes statesmen to lead and reach agreement. We will soon know if we have them in Beijing and Washington.

Meanwhile, markets wait, investors wait, business waits, employees wait, credit market agents wait. All have their patience tested in China and in the US and in the rest of world, as tariff-induced inflation pressures and growth-impairment pressures continue to build.

We expect a truce deal. If we’re wrong, the performance of our equity portfolios will suffer. If we’re right, the performance of our equity portfolios will perform well, with good reasons for doing so. The arguable trading range on this outcome is 2400 low on S&P 500 on bad outcomes and 3300–3400 on good outcomes. We think the odds favor the upside, with a time horizon of 12–18 months. We see $172–175 in 2019 earnings for the S&P. We see $180–182 for 2020. Those figures assume that a truce or at least some improvement in the US-China Trade War is coming.

Recession 2019? Chances of Economic Decline in Next 12 Months Now Highest of Trump Presidency, Experts’ Survey Finds

Excerpt from Recession 2019? Chances of Economic Decline in Next 12 Months Now Highest of Trump Presidency, Experts’ Survey Finds
By Nicole Goodkind On 12/18/2018 at 2:38 PM


Excerpt below:

Respondents mostly believed that the next recession would be triggered by a combination of rate hikes by the Federal Reserve, increased tariffs due to Trump’s ongoing trade war with China, and general uncertainty driven by the president’s wavering economic message.

Those surveyed generally gave the president higher approval ratings than did the general population, but 52 percent now say they approves of the way the president has handled the economy, down 14 points from the previous survey. About a third said they disapproved of the president’s economic job, up 10 percent.

“The Trump-Navarro Trade War policy is a threat to the entire global growth direction and magnitude,” David Kotok, chief investment officer at Cumberland Advisors, told CNBC.

Read the full article at

Today’s Employment Report

Peter Boockvar summarized a view of this Pearl Harbor Day employment report. We agree with him.

Here’s Peter: “Bottom line, the moderation in the pace of job gains coincides with the recent uptick we’ve seen in jobless claims. It’s hard not to wonder how much of this is due to a business pause on the labor front with all the cloudiness on trade and tariffs. Construction seeing only a job gain of 5k could also be reflecting the slowdown going on in real estate, both residential and commercial. Manufacturing job gains did hang in as companies front loaded inventory builds.” (Peter Boockvar, email to subscribers, Friday, December 07, 2018 8:53 AM)

Market Commentary - Cumberland Advisors - Employment Report

In our interview with the Wall Street Journal this morning we enumerated and discussed the anecdotes we see from our client base in over 40 states. There is a slowing underway because of Trump-Navarro Trade War protectionism. It is getting worse, as one would expect. We see it in New England in the lobster industry. We see it in the Western US in construction. We see it in employment composition and businesses’ deployment of assets as they build inventories in anticipation of tariffs. And we see it in delays of capital expenditures as entrepreneurs are bewildered by Trump administration inconsistencies.

Simply put: You cannot make business decisions and investment decisions based on Twitter rampages. That doesn’t work.

The Fed’s Beige Book confirms these anecdotes in reports from the twelve Federal Reserve regions. DataTrek has a compilation out this morning. We have copied and pasted it below. The key to today’s employment report is that the data from the US national report is confirming what the survey data is saying in the Fed’s reports.

Here’s Datatrek:

That’s why we look at the Beige Book when it is released eight times a year, as it offers more color on what’s happening beneath the economic surface than the national data shows. Another word we’ve been closely monitoring in these reports: ‘tariff’. It went from no mentions in the January and March reports to the following times in future editions: April (36), May (22), July (31), September (41), October (51), and December (39).

Clearly tariffs continue to worry businesses across the US, as eleven out of twelve districts mentioned them in the latest report. Also of concern: ‘Most Districts reported that firms remained positive; however, optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints.’ Not dissimilar to this quarter’s market worries… Here’s some key examples of what they’re saying about each topic from the period of mid-October through late November:


• Boston: ‘An industrial distributor said they expected tariffs to contribute 50 to 100 basis points to price increases for their products… Looking ahead to 2019, retailers expressed significant uncertainty about the impact that tariff increases will have on prices–beyond some point, they will pass the increases on to consumers.’
• Philadelphia: ‘One firm reported that it has passed along its costs from 10 percent steel tariffs but that it expects customers to push back if the tariffs increase to 25 percent.’
• Cleveland: ‘Contacts noted that tariffs were lifting prices further down the supply chain. Selling prices rose with less intensity than they did for input costs.’
• Richmond: ‘Wholesale and retail services saw higher prices for goods affected by tariffs… Tariffs were a significant concern noted by manufacturers, as they were believed to raise costs of raw materials, thereby raising prices and lowering demand… Several retailers reported narrowing profit margins as cost of goods increased as a result of tariffs.’
• St. Louis: ‘Contacts expressed concern over the ongoing tariffs leveled at U.S. agricultural products. There are reports of storage shortages as soybeans that are normally exported to China are being stored in large quantities rather than exported.’
• Dallas: ‘Manufacturing sector slowed during the reporting period, and outlooks were less optimistic than they have been all year. Output growth softened notably in November, with the tariffs, labor constraints, and trade policy uncertainty cited as damping factors.’

‘The upshot: several districts continue to express concern and uncertainty about tariffs and potential changes in trade policy. Tariffs have already increased input costs, which many indicate they will have to pass on to consumers if they haven’t already.'” (Datatrek Morning Briefing, Dec. 6, 2018, “Beige Book: Ghost(ing) of Recession Future”)

Markets are already reacting to the outlook for slowing growth. Future Fed hiking is being repriced to fewer and fewer rate rises. There is good reason, as inflation remains subdued while the economy is slowing to a 2% or lower growth rate.

For bonds this is bullish; and for tax-free municipal bonds, which have been yielding higher than taxable Treasury bonds, this is doubly bullish.

For stocks, this removes or lessens the risk that the Fed will go too far with its hiking strategy. It remains to be seen if the stock market will see a glimmer of positive news in this weaker-than-expected jobs report. News of the arrest of a Chinese firm’s executive casts a pall over any trade negotiations.

For POTUS, this is another warning that the Trump-Navarro Trade War policy is accelerating damage to the economy. One at a time, businesses and investors are becoming disillusioned. We are in the camp that the tariffs are damaging and are spreading like a financial cancer. The Trump-Navarro policy is metastasizing.

We again reiterate that we believe the Trump policy is unsustainable. And we believe that the American business community will overcome it. We continue to use the instability in the equity markets to our advantage by selectively adding to our positions. We believe the time to buy stocks is when no one wants them and when the tape is red. If the Trump-Navarro policy leads to a full-blown cold war with China, we will be proven wrong. But if the mounting evidence reaches into policy enough to alter it, we will be right and markets may soar to new all-time highs within the next two years. Time will soon tell.

Trump Trade War Tariffs & Markets

“We’ll not mince words here: The president’s characterization of himself as “Tariff Man” is juvenile and unpresidential. We cannot imagine Mr. Eisenhower, Mr. Kennedy, Mr. Johnson, Mr. Nixon, Mr. Ford, Mr. Carter, Mr. Reagan, Mr. Bush, Mr. Clinton, Mr. Bush or Mr. Obama ever… EVER… making a juvenile statement such as this to any other nation, much less to a nation as consequential as is China. But Mr. Trump has threatened China, and his base has enthusiastically endorsed his comments. We can only shake our heads in wonder and dismay.” Source: Dennis Gartman, his eponymous daily letter, December 6, 2018.

Trump Trade War Tariffs & Markets

We agree. Markets agree. The red on the tape agrees. The flattening yield curve agrees. The deterioration of business sentiment agrees.

Culprits in order of responsibility are POTUS Trump, US Trade Representative (aka Trade War negotiator) Lighthizer, and Trade War advisor Navarro. The new Senate is planning on a debate to limit presidential trade war authority and to relocate US security provisions to the defense department and not commerce. Remember that this entire trade war narrative has been based on an executive branch’s taking a narrow, half-century-old law and interpreting it loosely to permit protectionism.

The Congress can change that. Will they? We will see.

Meanwhile the Trump administration has undone more than half of the benefits derived from tax cut, deregulation, and repatriation. Navarro poorly advised POTUS, who showed poor judgment and now likes his tariff money, since he has misled Americans by creating a de facto national sales tax imposed on the American consumer.

That is correct, dear reader. You and I pay the higher costs tariffs impose. Trump blames others and says we are imposing tariffs on “them.” Nope. The payment comes from my pocket and yours.

Business doesn’t know how to plan. So it waits. Capital investment waits. And growth slows.

We asked Mike Englund of Action Economics to update his slide used last summer on the panel we did together at a Colorado conference on Trade War effects.

We are reproducing his update below. And we thank Mike for a quick reply and superb effort. We endorse and recommend Action Economics as a basic research service. Mike writes,

“Thanks for the request. I revised the slide I believe you are referencing to include an “All China” tariff by 2020, whereby we have the 90-day cease-fire now; then a 25% tariff as previously threatened for January; then tariffs of 10% on the remainder of Chinese goods at some fall deadline, perhaps in August or September; and a hike to 25% at the end of December 2019. This scenario creates multiple ‘ledges’ for a compromise to be made.”

Dear readers, the classic aphorism holds true: In a trade war the guns are pointed inward. No one wins.

To end this misguided and failing Trump-Navarro tariff policy requires an inflection in policy. Because of trade-war-driven economic deterioration and business slowing, we expect a change to come. When it does, growth will pick up, and stock markets will recover. We cannot replace the business and wealth losses already inflicted on Americans by the Trump-Navarro Trade War. But we can stop the bleeding, and it may take the new US Senate to do it.

Stocks are cheap, and American business wants to grow. Our ETF selections continue to focus on domestic US sectors we like. Healthcare is an example.

Whack a Mole

In the latest on US trade policy, we are now starting to see the economic consequences of starting a tariff war. Farmers have been complaining that they are being hurt irreparably by the imposition of tariffs in retaliation for the tariffs being imposed on China and our allies. The Trump administration is now proposing to employ $12 billion in emergency funds from the Department of Agriculture to subsidize losses of US farmers resulting from the imposition of retaliatory tariffs, specifically on soybeans, pork, sorghum, corn, wheat, cotton and dairy products, just to name a few.


What is clear is that the expenditures are not subject to congressional approval. The administration is employing the Depression-era facility called the Commodity Credit Corporation (CCC) established to fund payments to farmers as part of a three-part program that includes direct assistance, the purchase of surplus agricultural products (1), and trade promotion of agricultural products. Two things are missing so far from the discussion of the bailout program. First, there is no mention of when payments will be made or the process by which these payments will be apportioned and paid. Second, since the funding authority under the CCC is capped at $30 billion, we don’t know if this is just the first tranche of future draws.

Not only should Congressional approval be sought for such a program; but also this is only the tip of the iceberg, because the administration has imposed tariffs on many other products, like steel, autos, and electronics, whose producers will also be hurt. Will a life raft be given to Harley-Davidson? Where will the additional emergency funds to help those firms come from – if they come at all?
We now see that not only will taxpayers pay for the misguided approach to adjusting trade barriers in the form of higher prices of goods at home, but this use of taxpayer funds to rescue farmers evidences the administration’s willingness to divert funds from other priorities to fund its trade war. To be sure, the payments to farmers smell of pure politics, since those hardest hit live in states that supported the president in 2016. Does this imply that help will only be extended through the mid-term elections?

Given that only emergency funds are being used on what the administration claims to be a one-time expense, the political claims of others who are being or will be hurt can’t be far behind. And because funds are limited, the administration will be picking winners and losers as it subsidizes some products but not others that have been targeted for retaliatory tariffs. Will funds to support Detroit automakers and US steel producers be available on the same terms and in as timely a fashion?

A more measured strategy to rationalizing trade relationships, one that permits affected parties to adjust, would seemingly involve first working with allies to resolve differences there and then turn to identifying and addressing critical issues, such as the restrictions that China has imposed that have transferred US intellectual property to their domestic industries. The meeting President Trump had yesterday with European Commission president Jean-Claude Juncker and the kind of process and organization that appears to have been agreed upon as a path forward is exactly the kind of baby step that should be taken first. Negotiations that are coordinated with and supported by our allies are sure to be more powerful and less disruptive than attacking both allies and abusers alike and then backfilling with bailouts. We can only hope that this most recent turn represents a more considered strategy going forward.

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio

(1) For background on the CCC see

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