In his infinite wisdom, President Trump has chosen to take the path of confrontation regarding global trade. It is clear that he has in mind to fulfill much, if not all, of his campaign promises. The commitment, though most honorable, is nevertheless fraught with all sorts of dangers whether by his style of negotiation or the usual unintended consequences.
The threat of a tit-for-tat, which would possibly lead to an all-out trade war, is well-known. We have certainly seen the fear that has led to the extraordinary volatility in the marketplace. What is also well-known are the numerous examples of Chinese “appropriation” of American technology and know-how.
Perhaps what is not addressed is that the President of the United States and his senior staff have openly insulted the 1.3 billion Chinese and their leadership without thinking through the ultimate repercussions. The Chinese are a very proud people and they have only recently begun to assert themselves on the global stage, not only economically but also politically and militarily. We know that what they have done is factual. However, accusing them of being thieves and cheats will not induce them to negotiate or cooperate.
Furthermore, there is the issue of timing. Xi has only recently been re-anointed as the paramount ruler of the People’s Republic. Therefore, all Chinese eyes are upon him. So therefore, the White House must think through how little elbow room we are creating for him in the eyes of his people when we repeatedly make such accusations about his policies. From the experience and perspective of a former mega-real –estate-operator, this may be a standard practice in negotiation. However, it is quite apparent that there is a fundamental ignorance of international diplomacy. Threatening and insulting rhetoric will not elicit the kind of outcome the President is seeking. Everything that has been tweeted, may well be accurate and well-justified, but nevertheless, one has to have an awareness of what kind of reaction is likely on the opposite side.
So far, Xi seemingly has risen to the occasion in playing the role of a global statesman. In a recent speech, he has appeared to be reasonable and conciliatory. Even though skeptics will claim that there was really nothing new in his proposals; nevertheless, Xi has sounded the voice of reason and calm. To us, the key will be at what speed the Chinese implement the policies Xi has announced.
Realistically, the likelihood of Xi backing down in front of his Communist Party cadres and the Chinese people is minimal. However, so far, they have shown familiarity with Trump’s standard practice of posturing.
Furthermore, we all know full-well that incremental tariffs mean escalating consumer prices for American markets. Ultimately, when the Chinese impose the retaliatory tariffs, American manufacturers, in turn, will suffer greatly. They are President Trump’s electoral base and the risk is that the midterm elections and beyond we be impacted.
In addition, we have the global hot spots of North Korea and the Middle East. History has taught us that anything can happen when it comes to North Korea and therefore we will have to keep our fingers crossed. The Middle East is another matter completely. Specifically, we are not just taking on Syria as a target, but in doing so Russia and Iran come into sharp focus as targets. President Trump will honor the American commitment regarding THE RED LINE and there is no going back. So it is a matter of how comprehensive will the military strikes be and how soon will they be implemented. It is also very clear to the administration that the last exercise with cruise missiles was insufficient. So therefore, more firepower may likely be committed thereby increasing the possibility of the Russians and the Iranians being drawn into the conflagration.
The fact that the President is being deliberate in making this particular decision is a wise one.
We, as money managers, have numerous challenges confronting us at this juncture. Conventional wisdom dictates that current global events suggest that a healthy amount in a cash position is called for. Yet, a rising economy with possible record earnings soon-to-be-announced suggests the possibility of sharply higher stock prices. These opposite forces are providing the volatility in the current market. We believe that this is likely to follow for an extended period of time. Simply put, this is a market for those with strong stomachs and convictions. We are in the camp that believes that as life goes on global economies and especially that of the U.S. are on a much sounder footing so we should therefore ignore the very near term but focus upon the intermediate to longer term positive outlook.