The Trump-Navarro trade war rhetoric ratchets higher. And jawboning the Fed is now added to the turmoil; our colleague Bob Eisenbeis has recently reflected on that one: https://www.cumber.com/fed-independence. Meanwhile most of the world is now labeled a currency manipulator by POTUS in his latest salvo.
For those who missed the discussion I had on Bloomberg Radio with Bryan Curtis and Rishaad Salamat about trade and the secondary impacts of the trade war, here is the link: https://www.bloomberg.com/news/audio/2018-07-19/secondary-effects-of-trade-war-only-just-surfacing. The clip is seven minutes.
The stock market remains somewhat immune to the Twitter storms. The US Treasury yield curve remains in flat to flattening mode. And the earnings from the second-quarter reports mostly exceed expectations.
We enter August and the summer hurricane season with a blizzard of bizarre policy lurches originating in Washington. Meanwhile the evidence of damage from the trade war grows daily. Markets may want to ignore these anecdotes. We think they deserve more respect.
Bullets:
For those who missed it, here is the Trump threat of the $505 billion tariff war escalation: “Trump says he's 'ready' to put tariffs on all $505 billion of Chinese goods imported to the US. President Donald Trump has indicated that he is willing to slap tariffs on every Chinese good imported to the US should the need arise”: https://www.cnbc.com/2018/07/19/trump-says-hes-ready-to-put-tariffs-on-all-505-billion-of-chinese-.html.
“Steel prices have gone up after the trade war broke out,” says Torsten Slok, Deutsche Bank Securities. Torsten notes a 40% rise in the futures prices of Midwest Domestic Hot-Rolled Coil Index futures.
“The Trump administration announced last Tuesday that it is prepared to impose 10% tariffs on $200 billion of Chinese-made products, ranging from clothing to television parts to refrigerators. Together with other tariffs already in the works, the latest move threatens to raise import prices on almost half of everything the US buys from China, which means that Inflation could be one of the biggest disruptions to US equity and bond markets from the escalating trade war.” – Joe McAlinden, former CIO and Chief Global Strategist at Morgan Stanley Investment Management, where he oversaw more than $400 billion dollars in assets.
Here is Steve Roach’s warning about Trump trade war tactics: “Trump trade tactics sabotaging the economy and markets, Stephen Roach warns. Yale senior fellow Stephen Roach says the markets are too complacent when it comes to trade war risks.”
Read more: https://www.cnbc.com/2018/07/18/trump-trade-antics-sabotaging-economy-and-markets-stephen-roach-warns.html
Here is Danielle DiMartino Booth, focused on clues that we may discern about trade war damage: “Unlike some states with waning manufacturing sectors dominated by a handful of factories that have lingered, US Steel is but one of many manufacturers populating the state of Indiana.... Some of the biggies include pharmaceutical giant Eli Lilly, engine builder Cummins, Calumet Specialty Products, a refiner, plastics manufacturer Berry Global, and medical device maker Zimmer Biomet…. Add up all the manufacturers, big and small, from Lake Michigan to the Ohio River, and you’re talking about a powerhouse state. At 28.6% of its gross state product, Indiana relies more than any other state on its manufacturing sector. According to the Indiana Manufacturing Association, the Hoosier State’s manufacturing output passed the $100 billion for the first time last year. Only California, Illinois, North Carolina, Ohio, and Texas have larger sectors…. In the event you don’t know where this is headed, the Hoosier State is also the 11th largest exporting state. Its economy relies more on its factory sector than any other, and it is thus the primary state to monitor for damage emanating from the trade war…. Combine the trade war headwinds, Indiana’s strengths cum weaknesses of manufacturing and export industries and the state’s richly valued jobless claims, and you have a recipe for a correction on your hands…. Applying the same three gauges – manufacturing as a share of the state’s economy, exports, and jobless claims trends – to the rest of the country, we can identify the other nine most exposed states to round out our Top Ten list. They are, listed in descending order of exposure, North Carolina, Oregon, Wisconsin, Washington, Ohio, Michigan, South Carolina, Alabama, and Georgia. These are the states where the good economic deeds accomplished can perversely come back to haunt them.”
Politico on July 19 (Morning Money) reported that “The Commerce Department is holding a day-long hearing on Thursday to hear from 45 witnesses in their investigation into whether imported automobiles and parts present a national security threat and should be subject to tariffs of up to 25 percent. It is not likely to go well for proponents of such tariffs. Per POLITICO trade ace Doug Palmer, all but one of the scheduled witnesses will testify AGAINST the tariffs. The U.S. automotive industry almost uniformly opposes the tariffs.” Note this item revealed by Senator Doug Jones: "Just one of out 45 witnesses today is expected to testify in favor of imposing tariffs on autos and auto ... The lone exception is Jennifer Kelly, research director of the United Automobile Workers, which revealed its support in public comments filed last month with the department.”
More on autos from Politico: “Nearly all of the 44 other witnesses filed comments expressing opposition to President Donald Trump's threat to impose a 20 or 25 percent duty on foreign-made autos and parts. Those include the Alliance of Automobile Manufacturers, which represents Ford, GM, Fiat-Chrysler, as well as foreign brands such as Mercedes-Benz, Honda, Toyota, Hyundai, Volkswagen, Nissan and Subaru. Auto dealers and parts manufacturers also will testify in opposition to the tariffs, which a forthcoming paper by the Peterson Institute for International Economics estimates would raise car prices by $1,408 to $2,057 for a $17,000 vehicle; $2,093 to $3,066 for a $22,500 vehicle; and $4,708 to $6,972 for a $35,000 vehicle.”
Dear readers, we will stop here. We have already mentioned in previous writings the trade war impacts unfolding in the agriculture sector, from soybeans to lobsters. Now this round is about the manufacturing sector.
The lessons of history are clear and have no exceptions: Everyone loses in a trade war. The Trump-Navarro policy is hurtling toward a disaster if history is any guide. Many believe that the present policy direction will undo all the benefits of the tax cuts, repatriations, and fiscal stimulus. We are among those who are seriously worried about these outcomes.
We expect upward inflation price pressures, slowing of growth rates, and lurching gyrations in the foreign currency exchange markets. We don’t know where this ends. We are applying caution in all portfolios.
David R. Kotok
Chairman & Chief Investment Officer
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