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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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All-out War a real possibility as the last "grown-up" leaves the room ..... Trade war, that is.

March 7, 2018

You can never be sure with Donald Trump. He certainly changed the nature of campaigning to get into the Oval office (and not necessarily in a good way), and one might have assumed that the nakedly vote-catching promises he made to secure the support of differing interest groups would be ditched once the election was won. Some of them have been too, either because of the difficulties of implementing them in the real world, or because the President's commitment to them may not have been quite so steadfast as he had implied. But you've got to give him his due ...... for all the early high-profile failures (e.g. healthcare), he's come through with his version of tax reform (whatever you think of it) and he's still grinding away at some of the policies upon which he was elected which some observers might consider ... well, ....crazy (e.g. the Mexican Wall).

 

After a year or so of plenty of rhetoric but little in the way of action, he's also re-lit the protectionist fire on the issue of trade and this could turn out to have the most ramifications of all. Catching the most attention today is news that the Chief Economic Adviser to the White House Gary Cohn had quit after failing to persuade Mr. Trump that his imposition of tariffs on imported steel and aluminium (25% and 10% respectively) was a very bad idea indeed. The market's view is that Mr. Cohn was a safe pair of hands and just about the last restraining influence at the very top level against what might be seen as the President's impetuous instincts.

 

There are plenty of other senior Republican figures who oppose the move towards protectionism and away from free trade  --  most of them in fact, including Speaker Paul Ryan. But the fact that they seem to have little or no influence on the President is not doing the market's nerves any good, nor does it encourage optimism that a lid can be put on this first little skirmish before it develops into something really nasty ..... for everyone.

 

The 81,000 steel workers in the US, who've been having a very hard time of things, were one of the key targets of the pre-election Donald Trump, and in his campaign the demise in their fortunes came to represent just how an unscrupulous world had been taking advantage of the US for so long. It's just possible that artificially boosting the price of steel may benefit them in the short-term, but the problem is just what it will do for everyone else in the United States. Far more people are employed in companies that buy steel products rather than make them, and by definition the move will be a cost to retail consumers. Where's the logic in that (beyond placating a group that helped to secure your election) ? 

 

As it happens, the steel/aluminium tariff is a measure that almost completely misses its target even if you think such actions can be sensible. Mr Trump's big target is China, who he accuses of dumping cheap steel on the market at the expense of US workers in the industry. He's right that China in the past has behaved in a manner that should have seen it punished repeatedly by the World Trade Organisation, but the fact is that the US imports much more steel from its allies than it does from China.

Getting tough with China might win Mr Trump some good headlines but Canada and Mexico (for example) will suffer much more as a result of these actions. That doesn't bode well for the prospects of a happy conclusion to the NAFTA negotiations.

 

In isolation, the new tariffs on steel and aluminium are a comparatively small issue but there's a massive danger, likelihood even, that this spat will snowball  --  they generally do. It's all very well boosting the price of the raw materials, but what about products made from those materials. Such imported products are likely to cheaper than the home-made competition, so the next step is to slap a tariff on those too. Sooner or later, other countries will begin to retaliate, and the US' trading partners the world over are already lining up possible tit-for-tat moves. Meanwhile, the US is putting together further measures aimed at China and threatening punitive legal moves in response to alleged (but probably true) theft of intellectual property. This whole thing is an inch away from getting out of control.

 

There's a huge irony that in the cultural home of free markets a Republican administration has started to implement a protectionist agenda. They are arguing that they are protecting the nation from the unfair trade practices of others  --  some of their predecessors would argue that they are propping up old and inefficient industries. Those previous administrations might also be surprised that Mr Trump and his cohorts seem to believe that because the US runs a large trade deficit, it would by definition be the winner in a trade war. It's possible that they might suffer a little less than some others, but because of the damaging effect of world trade and growth, there are no winners in a trade war ..... everybody loses. And if Mr Trump really does believe that the Us will be better off, he's all the more likely to go down that route. Remember that already infamous tweet on Friday : Trade wars are good, and very easy to win.

 

So quickly, what's this done to the markets ? Strength in the usual safe-havens : Jap Yen, Swissy, Treasury and other government bonds, and weakness in stocks but these are very early days There are some interesting questions posed by the possibility of a major trade bust-up. All the talk is of rising rates and yields (could we now be looking at 4 Fed hikes this year?), but how would those expectations be undermined by stumbling global growth resulting from a trade war ? That would indeed take upward pressure off rates, but on the other hand how inflationary would restrictive trade practices be ?

 

On our return on Monday we were wondering whether the world was a different place, in terms of markets that is. Increased volatility readings imply that it probably is. Of course , the markets have shrugged off negative concerns a thousand times on the way up but for what it's worth, increased volatility looks like it's here to stay and with issues like trade wars bubbling away it's only reasonable to expect markets to be a lot more difficult than they were last year, tax cuts or no tax cuts. 

 

ref :- "Trump's follies presage more protectionism" , Martin Wolf in the Financial Times, Comment

 

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