Trade War Realities Weigh More Heavily

An Inescapable Truth

In June, 2018, I made the following claims and observations (with fresh emphasis):

“…at the end of the day, Trump is determined to drive the U.S. trade deficit as close to zero as possible. This cannot happen without some substantial economic disruptions. To the extent the market refuses to price in these risks, I think I see opportunities for hedging and in some cases benefiting from potentially substantial downside. My conviction on the seriousness of the Trump administration was confirmed after digging into a report the White House released on Tuesday titled “How China’s Economic AggressionThreatens the Technologies and Intellectual Property of the United States and the World.” It is a well-written report that lays out the case for economic grievances against China…while focusing on two key areas: “1) Acquire Key Technologies and Intellectual Property From Other Countries, Including the United States, 2) Capture the Emerging High-Technology Industries That Will Drive Future Economic Growth and Many Advancements in the Defense Industry.” The U.S. versus China trade war really IS an economic WAR. Wars always produce casualties and collateral damage…

As I watch hopeful pundit after hopeful pundit, I keep that White House report imprinted in my mind. The folks who declare on TV that they want to bet on a resolution to the trade war have created a thesis based on little to nothing more than hope. That hope likely helps explain how and why the stock market is still as high as it is.

Jim Cramer Says “No Deal!”

So I took GREAT interest when I noticed an interview with CNBC’s Jim Cramer where he came to the (reluctant) conclusion that President Trump acts like someone who is not really interested in a deal with China.

You have a game plan for a reason. @JimCramer says it's more important than ever to stick to it: https://t.co/xsVGWTr5vR pic.twitter.com/IY1oXOygvO

— TheStreet (@TheStreet) August 27, 2019

Here are some highlights from the 3-minute clip:

• The President is willing to try jawboning the stock market higher (the 401K Stock Market!)
• Anyone who believes in the PRC (People’s Republic of China) is a fool.
• U.S. businesses did not care about what China did as long as they could sell into the market.
• President Trump is not willing to make compromises to continue selling into the largest market in the world.
• The President’s current approach is ill-advised; if Trump really wanted a deal, he would be less vocal.
• If Trump really wanted a deal, he would emphasize it’s time to stop caving to big business.
• The President wants companies out of China, and he wants to deprive China funding for their military and their Belt and Road.

A fascinating conflict exists in trading and investing in the faith that the President will figure out a way to prop up the stock market (what I am now calling the 401K Stock Market) versus recognizing that action against China will hurt U.S. business interests (at least in the short-term). A breaking point has to occur: persistent economic weakness on both sides of the Pacific.

In my June, 2018 post, I demonstrated how Cramer himself twisted and contorted around concerns and confidence over the trade war headlines. He finally ended that week making fun of people who were worried about trade headlines. In a compete dismissal of potential risks, Cramer even challenged viewers to find a single CEO who thought the trade war would ruin the global economy.

Worried Retailers

An increasing number of prominent members of the business community are indeed raising alarm bells – partially because the list of tariffed goods keeps expanding. On August 26th, The Nightly Business Report reported on three business associations from the retail industry who issued interviews and press releases decrying Trump’s trade war. This display is just a small example of how Trump IS ignoring at least some concerns from the business community.

David French, the Senior Vice President for Government Relations for the National Retail Federation, interviewed with CBS News. Toward the middle of the interview, French worried that the latest round of tariffs would “make the goods we sell more expensive; it would also slow the economy. We’re talking about the potential for millions of lost jobs, less investment, slower GDP growth, unemployment, higher prices…”

The Footwear Distributors and Retailers of America (FDRA) issued and updated a fiery and feisty response to Trump’s threat of 10% tariffs that will include shoes (emphasis mine).

“The announcement today that the Trump Administration will be delaying the additional 10% tariff on some footwear until December 1st is an acknowledgement that tariffs are indeed paid by Americans. It is no coincidence that the Administration is allowing certain shoes to come in without raising taxes in hopes that prices do not rise at retail during the holidays. Our industry’s loud unified voice left a clear impression that shoe tariffs are already extremely high, upwards of 67.5%, and any further tariffs would directly raise costs on consumers and cost footwear jobs.  While we are pleased with the decision to delay new tariffs on certain shoes, we are not satisfied.  We will continue to fight for any exclusions on new tariffs and we will fight to delay new tariffs on shoes until the entire tariff threat is lifted off the backs of American families…

In 2018 alone, consumers paid $7 billion more than needed at checkout. Another 10% on top of that means consumers would pay nearly $10 billion more for their shoes each year thanks to tariffs…

It is clear political considerations are outweighing economic common sense…President Trump is, in effect, using American families as a hostage in his trade war negotiations…We will not take this news lying down. This is one of the largest tax increases in American history and it is vitally important that we fight this action on behalf of our consumers and our industry.”

The complaint from the FDRA included detailed quantification of the impact of tariffs.

Even the Retail Industry Leaders Association (RILA) has weighed in with a press release including the demonstrative and provocative title “End This Trade War Before the Damage is Irreversible“…

“The President’s continued escalation of tariffs has already rattled the U.S. market. If uncertainty spreads from Wall Street to Main Street, the record expansion we’re enjoying will undoubtedly come to an end and it will be the American consumer, not China, who will suffer.  
 
Mr. President, we implore you to end this trade war before the damage is irreversible.”

The Coming Epilogue

As I noted earlier, something has to give. The burdens on the global economy are clearly increasing. Even the Federal Reserve is sending subtle hints that it is tiring of the abiding presumption that it will underwrite the damages from the trade war with deep rate cuts (more on these developments in another post!). Financial markets are currently expecting 75 basis points of cuts by January. On the way there, the coming months promise to produce yet more volatility if not another steep sell-off during the year’s most dangerous months.

Be careful out there!

Full disclosure: SHORT AUD/JPY