Research & Advice

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Trump’s trade wars sink markets

World markets declined again this week. Despite world condemnation, which included most of America’s economists and corporations, Donald Trump unilaterally forged ahead in implementing his own brand of protectionism. Investors fear the consequences.

While tariffs on imported steel and aluminum are still being negotiated, the president has upped the ante and is now pursuing China. The United States has long accused China of stealing our intellectual property. The Chinese, of course, have denied that and so, for years the discussions went round and round–until now.

On Thursday, our president announced his intention to slap $60 billion of tariffs on 1,300 product lines of Chinese imports. As a result, all three averages experienced a major market sell-off. Investors and corporations alike fear China’s response. The media is spewing out lists of companies that will get hurt the most by a Chinese trade war. One of the most vulnerable areas is America’s bread basket.

China imports a lot of food from us. We are, in fact, China’s second largest trading partner in the agricultural area. Investors are worried that China could hit that sector hard. That makes sense since that area of America is where Trump’s base is strongest.

The Chinese are well-schooled in American politics. Remember the response of our European trading partners on steel and aluminum tariffs. They responded by threatening tariffs on export items important to Paul Ryan’s and Mitch McConnells’ home states. But unlike steel and aluminum workers that together only amount to a few hundred thousand jobs, a Chinese tariff on soy beans, for example, could decimate our farming sector. What better way to retaliate against our country and attack Trump personally where it hurts–in the support of his base approaching the mid-term elections.

Republicans are already worried about keeping their majority in the House come November. Recent election contests have not gone well for Trump or the GOP. Political strategists believe that if the Democrats do re-take the House, they most certainly will begin impeachment proceedings against Trump.

It does not matter whether that effort will succeed, only that Trump will be so tied up (think Nixon) in defending himself from the Russian probe, sexual harassment lawsuits, etc. that all legislative progress (including his trade war) will halt for the remainder of his term. That would suit the Chinese just fine.

In addition, it is entirely possible that a Democratic-controlled Congress will rollback a sizable chunk of the tax reform act. Thus far, there is no evidence that the tax cut benefits anyone but the Republican’s corporate campaign contributors and the wealthy. There has been no pick-up in investment nor jobs beyond what would have normally occurred.

Given that the tax cut is not popular with most Americans, (especially in states with an income tax), the stock market could be in for a shock in the second half of the year depending on who wins the House. These dynamics go a long way in explaining the volatility in the stock market.

For most of last year, Trump claimed credit for the market’s advance, boasting that the averages were a clear signal of his approval rating in the country. Of course, he ignored the fact that over half the population cannot afford to be in the stock market. But this year he has been strangely silent when it comes to the market’s decline.

As the White House becomes a revolving door where experience and knowledge are on the way out and “Yes” men are on the way in, investors are beginning to realize the potential downside of an amateur in the White House.

I am still of the opinion that much of this tariff talk is simply Trump being Trump. Unfortunately, what may have worked well in a real estate deal, or naming a winner in a reality tv show, does not work all that well in the global arena.

“Breaking a few eggs” in bringing in a new casino or selling a building was all well and good, but using similar tactics on a global scale can generate very different consequences. Let’s hope you and I do not end up in the frying pan. In the meantime, hang tough, stay invested, and grin and bear it.

Posted in A Few Dollars More, At the Market