In his Thoughts from the Frontline letter on Friday, John Mauldin wrapped his own strong remarks on Trump’s trade war with China around a tweet from the vastly experienced and hugely connected Harald Malmgren (https://www.mauldineconomics.com/frontlinethoughts/china-for-the-trade-win):
"Check out this unusually blunt tweet from former trade diplomat Harald Malmgren, who literally wrote the book on US trade policy, serving under presidents starting with JFK. He’s retired now but remains ‘plugged in’ to global finance better than almost anyone I know."
Neither Trump, nor trade aides Ross&Navarro, have long term trade plan. This is Trump in WWE wrestling match with Xi Jinping, waiting for Xi to submit publicly, details to be worked out later. Won't end this way. China ready to deal, but Trump wants public headline "China Caves" https://t.co/gcDHnLuX6h
— Harald Malmgren (@Halsrethink) September 18, 2018
Mauldin continues, "Now, it may be that the White House team is less talented than they think. Peter Navarro’s continued presence, and the president’s apparent confidence in him, is not reassuring. I said when his name was first mentioned that Navarro understands neither economics nor trade. He has done nothing to change my opinion.
"But another possibility is they have an entirely different strategy than we think. Some of my contacts believe the real goal is to make US businesses pull back from operating in China at all. If that’s the goal, they are off to a good start. But that is not good for US businesses or for the US.”
Then, on Friday evening, the Wall Street Journal chimed in with a news alert titled "China Cancels Trade Talks With U.S. Amid Escalation in Tariff Threats,” which outlined the Chinese response to US pressure:
"China scotched trade talks with the U.S. that were planned for the coming days, according to people briefed on the matter, further dimming prospects for resolving a trade battle between the world’s two largest economies.
"The decision to pull out of the talks follows the latest escalation in trade tensions. On Monday, President Trump announced new tariffs on $200 billion in Chinese imports, prompting Beijing to retaliate with levies on $60 billion in U.S. goods. Mr. Trump then vowed to further ratchet up pressure on China by kicking in tariffs on another $257 billion of Chinese products.
"Chinese officials have said such pressure tactics wouldn’t induce them to cooperate. By declining to participate in the talks, the people said, Beijing is following up on its pledge to avoid negotiating under threat.”
With the Trump Trade War escalating and worsening, we sought to convene a serious and civil discussion about where Trump-Navarro trade policy is inclined to take the United States. To that end a seminar was organized with the help of the Keystone Policy Center (KPC) and the Global Interdependence Center (GIC). It was held on September 20th at Keystone, in Summit County, Colorado. (For geographic orientation, since our readers are worldwide, you may think of the Keystone or Breckinridge sky areas or the towns of Keystone, Frisco, Dillon, or Silverthorne.)
The KPC has been around since the mid-1970s, as has the GIC. Both organizations have a history of neutrality and of convening civil discussions. KPC’s history is more domestic in focus, with agriculture and mining being strong areas of interest. GIC has a history of global focus on monetary and trade issues.
The Trump Trade War has now offered a bridge for policy forums like KPC and GIC to partner as they pursue truth without the intensity of political acrimony. That is what happened on September 20. At the seminar, opinions were diverse and perceptions varied, but considerable learning occurred through the civil exchange of information.
Mike Englund, Megan Greene, and yours truly as a participating moderator populated the seminar panel. Among the invited attendees were Democrats and Republicans, businesses and white-collar professionals, and public guests. The event was open to the general public at no charge.
Participants included IT businesses that work in China and that have experienced intellectual property theft. Representatives of the soybean industry, finance and market agents, and the retired executives of major institutions were also on hand..
Mike Englund of Action Economics opened with slides and a data set. He has graciously allowed them to be publicly released. Here is the link to Mike’s PowerPoint presentation: Action_Economics_Keystone_GIC_Sep_2018.pptx. (Mike Englund is principal director and chief economist for Action Economics, which offers premium intra-day commentary for the fixed-income and currency markets. They feature analysis of a wide range of global bond and FX markets, with a focus on central bank policy and market activity in the G7 countries. You can learn more here: https://www.actioneconomics.com/index.php/.)
Mike’s slides were updated to include the latest Trump escalation and China’s response. They capture what was known as of September 19. They estimate the primary effects. The second derivatives were a subject of our panel discussion. Suffice it to say, this is a negative picture for US growth and US job creation, and the secondary impacts will only make the situation worse.
Megan Greene is the chief global economist at Manulife Asset Management, whose team includes more than 325 investment professionals, located around the world, who manage a full spectrum of asset classes. You see her on TV and can read her column in the FT. She added a global perspective and described how trade-war effects spread internationally, citing many anecdotes of global interactions. If anyone needed convincing that this Navarro-conceived, Trump-directed policy is now on an irreversible course toward failure, they had only to listen to Megan’s rundown and extrapolate to logical outcomes.
I added a few observations to the discussion and will summarize them here.
1. Shrinking the US trade deficit means shrinking the capital account surplus. To do this when the federal deficit is headed above $1 trillion is to invite a financial crisis. We should be expanding the capital account surplus and enhancing the US dollar’s status as the reliable world reserve currency of choice. Instead, this administration is doing the reverse. Trump and Navarro are shooting our country in both feet.
2. Americans don’t want this. A majority (75%–80%) think that free trade is opportunity. Survey sources include Gallup, 2018 (https://news.gallup.com/poll/228317/positive-attitudes-toward-foreign-trade-stay-high.aspx); Chicago Council Survey, 2017 (https://www.thechicagocouncil.org/publication/chicago-council-survey-data); Pew, 2015 (http://www.people-press.org/2015/05/27/free-trade-agreements-seen-as-good-for-u-s-but-concerns-persist/); and WSJ/NBC, 2017 (https://www.wsj.com/articles/americans-back-immigration-and-trade-at-record-levels-1493092861?mod=wsj_streaming_latest-headlines). Thank you to Barclays research for pointing us to some of these polls.
3. The same political views with regard to trade are held by Democrats, Republicans, and independents. The polling data show that disdain for the direction of this Trump-Navarro policy is bipartisan and growing as the anecdotal evidence of negative effects pile up at Trump’s doorstep.
4. Trade still ranks low in issue importance when voters are asked. Guns, terrorism, education, and immigration rank much higher; but that picture is changing slowly. Remember, trade-war rhetoric has been around all year, but actual policy implementation is just getting underway, and measurable effects are just beginning to appear. Look at Mike Englund’s forecast slide to get a sense of where this is heading.
5. "The United States federal excise tax on gasoline is 18.3 cents per gallon and 24.3 cents per gallon for diesel fuel” (https://www.eia.gov/tools/faqs/faq.php?id=10&t=10). Every penny change in the price of fuels amounts to about $1.5 billion spent annually in the US. At present, with the announced and threatened tariffs, the total cost imposed on Americans will be the equivalent of nearly one dollar of additional tax per gallon of gasoline and diesel fuel. That reference may help readers understand how serious an economic growth threat may greet our nation by early next year.
My takeaway is that the stock markets and bond/credit markets are only starting to worry. Companies are, however, warning about possible future negative earnings surprises from trade-war effects. Credit spreads are still tight. The pain is seen in emerging markets and foreign debt issues. While the amount of US corporate debt is at a record high and the junk-credit portion is high, we haven’t seen credit spreads widen yet. We are minimizing that risk for clients. When markets are priced for perfection, they are fraught with risk. At Cumberland we won’t take that added risk for our clients.
Last thought. For decades we have focused on monetary issues and numeracy and trends that exhibit linearity and mean reversion. At our September 20 seminar, the professionals in attendance admitted how difficult it is to model trade shocks. Unintended consequences are often larger than the initial actions that precipitate them, and the multipliers are unknown. Trade shocks are sequential cliffs. They are nonlinear. Many are irreversible.
We thank the leadership of the Keystone Policy Center and the Global Interdependence Center for agreeing to this first joint organizational forum. We thank the invited attendees and the public guests for taking a few hours away from the beautiful golden Colorado fall foliage to sit in a meeting room and civilly discuss this critical inflection point in America’s trade policy. Many of our participants expressed the wish that our national political leadership might act as we were doing and cease the bellicose, offensive behavior. That wish applies to both Democrats and Republicans.
I was fortunate to moderate this session and to learn from those who attended. Thank you.
Sixty years before the founding of the GIC and KPC, silent movies were the latest rage. The Keystone Kops may now be little-known, but they were a big hit in their day. (See https://www.britannica.com/topic/Keystone-Kops) We all do well to keep our sense of humor in these trying days, and so we can’t help but wonder whether the Keystone Kops might have been the inspiration for today’s trade war police ensconced in Washington. Here’s a taste of those crazy constables: https://www.youtube.com/embed/a8jphxpi1ro.
David R. Kotok
Chairman and Chief Investment Officer
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