The trade war between the U.S. and China has reached a whole new level of intensity and animosity. Unsurprisingly, this has caused widespread worry throughout capital markets and economies the world over.
As we discussed in the first part of this commentary, President Donald Trump's recent Twitter tirade, which promised escalation of tariffs and unprecedented corporate interventionism, has created yet another round of uncertainty. Worse still, it shows a level of isolation and loss of control that could end up playing out badly in the year ahead.
Last week, Trump did more than promise new tariffs and demand that U.S. companies obey his directives. He also took time to attack Federal Reserve Chairman Jerome Powell with unprecedented vitriol. The president declared that the central bank's insufficiently dovish (by Trump's assessment) stance made Powell an "enemy" on par with China itself:
"As usual, the Fed did NOTHING! It is incredible that they can 'speak' without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work 'brilliantly' with both, and the U.S. will do great. My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?"
Increasingly isolated within his own administration and facing ever greater pressure from the 2020 election deadline, Trump appears to have decided that his only hope of resolving the trade war is by going all-in. If he had more time to work with, he might be able to force Beijing to bend, but the Chinese government appears confident that it can outlast Trump, a point made recently by Jim Stewart of The New York Times:
"[China] plays a long game. They're not going to have an election in a year that's a referendum of how they've handled trade policy. We do ... It's more like Vietnam than WW2, if you want to use a war analogy. We've really taken on a lot, here."
Playing a bad hand
The all-in strategy is likely to fail. Indeed, Trump's attempts to "order" companies to leave China, while at the same time publicly describing the country's top central banker as an enemy of the state, appear to have already backfired. Ben Hunt, a former asset manager and current editor of Epsilon Theory, offered a particularly withering -- and compelling -- assessment on Friday:
"I think that the Trump narrative collapsed today with 'hereby ordered' and 'enemy Powell' and these tariff numbers thrown around like confetti. He became ridiculous today. Not a bully. Not a boor. Ridiculous. A laughingstock. Everything changed today...When I say that the Trump narrative changed today, I'm talking about how it changed in the financial media. That's Trump's true base, and it quit on him today. Why? Because defending 'enemy Powell' and 'hereby ordered' and confetti tariff numbers makes THEM look ridiculous ...Today's price action was TOTALLY different than last week's big decline. Last week was is wrong [with] bond market. Today was entirely a series of unforced errors by Trump."
Both Trump's power to use the presidential bully pulpit, and his reliable force-multipliers in the financial media, were severely damaged by his latest tirade, perhaps irreparably so. The president has considerable hard power with regard to trade, but if Trump appears isolated and flailing to the public, it can become something of a self-fulfilling prophecy. As a consequence, Trump may have lost control of his ability to effectively wage a trade war at the time when he most needs control.
Time to fold?
Trump sent mixed messages over the weekend while attending the G7 Conference. At first, reports suggested that he had expressed regret at the latest trade war escalation, but these reports were subsequently denied by the White House:
"[Trump responded] in the affirmative -- because he regrets not raising the tariffs higher."
Trump has tied his success to the stock market, which is a dangerous move considering the economic and financial volatility that even a limited trade war entails. His recent attempt to give himself cover in the face of flagging market sentiment speaks to this problem:
"My Stock Market gains must be judged from the day after the Election, November 9, 2016, where the Market went up big after the win, and because of the win. Had my opponent won, CRASH!"
When you are stuck making excuses and trying to shift the goal-posts of the definition of success, you are in trouble. Such seems to be the case for the Trump administration at the current juncture. According to JPMorgan (NYSE:JPM), Trump is not likely to make good on his latest tariff threats for fear of undermining U.S. consumer confidence, and thus the stock market:
"Our view is that Trump might not execute in the end on the latest tariff threat, given the increased concerns of a negative spillover onto the US consumer ... and stocks are likely to have a better footing into year end."
While Trump is apparently still committed to talking tough in spite of having apparently lost control of the trade war narrative, some Wall Street analysts now believe the president will have little choice but to fold.
The global economy looks incredibly fragile at present. The continuation of the trade war through 2020, let alone further escalation of the conflict, makes the prospect of a global recession look virtually unavoidable. Goldman Sachs (GS) opined earlier this month that no trade deal would be forthcoming until after the 2020 presidential election. That now seems almost certain.
With the Fed running out of firepower and facing increasing political interference, even as the domestic economy slows, it could be a hard landing. Investors should brace for impact.
Disclosure: No positions.
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