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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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Some Pointers Today ..... Is it a dove ? Is it a hawk ? Actually, it's really more of the same .....

March 22, 2018

 

See :- "Powell lifts Fed rates ...." and "The day in the markets" , the Financial Times

A 25 basis point rate hike, an unchanged prediction of two further hikes this year (many were expecting three more), but of another three in 2019 (from two) and a high mid-point in 2020 of 3.4% (from 3.1%). An uplift to growth forecasts and confidence that long-awaited upticks in inflation will filter through. Does that make Jay Powell's first monetary policy announcement as Fed Chairman a doveish or hawkish affair ?

Keeping a target of three hikes for the whole of 2018 suggests the former, and that's the way the markets saw it (weaker dollar, bond yields lower). But the steeper path for rates further down the line was "a clear hawkish signal", according to Nick Stamenkovich of NFS Macro Consulting.

Mmmm ..... we can see why the unchanged path for 2018 was a disappointment for some but would characterize the Fed statement as "cautious" rather than "doveish", and we don't necessarily mean that as a criticism. In fact, it seems to us that position taken by the Fed under Mr Powell is exactly the same as it would have been if Janet Yellen had still been in charge. That shouldn't really surprise anyone .... he was the continuity candidate , after all.

"Modest" and "moderate" were sprinkled liberally throughout the statement, and upgrades for growth and therefore rates were inescapable given the extra stimulus to be pumped into the economy by the administration's tax cuts and extra spending. In that light, we would find it tough to make the case that yesterday's action was actively "hawkish". And at the risk of being accused of cobbling together a tenuous link, we wonder whether anxiety over the potential economic effects of a trade war might have played a part in Mr Powell not coming over quite as hawkish as he might have done.


And talking of trade .....

See :- "Trump to use targeted tariffs against China", The Financial Times


Did you spot the tenuous link ?  Anyway, word has it that President Trump will slap up to $50 billion worth of trade tariffs on China, maybe as soon as later today. Since China is bound to respond in kind, you have to worry where this is going to lead and the concern is not much eased by indications that Mr Trump will exclude more of the US' allies from the steel and aluminium tariffs that started the whole thing off (welcome though that development would/will be).

At the heart of it is Mr Trump's belief that trade wars are a Zero Sum Game ..... in other words, for every winner there's a loser ..... or in this case (in the context of "America First" policies) America will gain at other's expense, which in his eyes would just be setting things back on a more level playing field after years of unfair practices by the US' competitors, in particular China.

Economists, not a demographic that the President holds in high regard, are just about united in believing that such thinking is outdated ("a relic of the cold war") and more to the point, discredited. EVERYBODY loses in a trade war, they argue, some just lose a bit less than others  --  the less damaged nations being those with more "closed" economies, like the USA. As such, it'd be like shooting yourself in the foot so that you could shoot your enemy somewhere more vital.

Oh dear ..... this is a dangerous route and the really difficult thing about it is that, notwithstanding all the missteps he might be about to make, Mr Trump has a point. China's brazenly unfair trade practices desperately require some sort of action, something that previous administrations have indeed failed to deal with. Few would argue with a straight face that pumping state money into Chinese corporates so that they can acquire foreign companies is playing by the rules. Or that forcing foreign companies looking to trade in China to hand over their Intellectual Property constitutes adherence to any principle of fairness. (Needless to say, Chinese companies are not required to do the same elsewhere).

So yes, something needs to be done but what, exactly ? Ay, there's the rub ..... someone needs to come up with an appropriate answer, and quickly. Section 301 of the US Trade Act allows the US to investigate unfair trade practices, and to punish perpetrators, but one can't imagine China meekly accepting punitive measures decided in Washington.  In the meantime, the one thing the everyone outside the economic nationalists is convinced of is that the indiscriminate imposition of tariffs is NOT the solution. That course of action could have very unpleasant consequences ....  economic ones of course, but also diplomatic, and even ..... dare one whisper ..... ones concerning national security ?

Oh stop it ..... now you're just being melodramatic .....


But if it does kick off ..... An investor's view

ref :- "Protect against protectionism ....." , John Authers' Market Insight, the Financial Times


It all sounds a bit cold-hearted now, but what do investors do if trade wars do break out .... just trade wars you understand, nothing worse. (There, see what we've started ? Just because the best example of all-out trade wars was the 1930's ....)

Anyway, Mr Authers' piece is definitely worth a read ..... there are some slightly more encouraging noises emanating from the NAFTA talks but of course if they were to break down it would be pretty desperate for Canadian and Mexican assets, but what about a wider, tit-for-tat trade conflict ? The first assumption is that protectionism begets inflation  --  simply, tariffs on cheaper imports mean higher prices for consumers. So structure your portfolio around instruments that perform well in an inflationary environment. Of course, everybody has their own idea of what those instruments might be ..... not everyone is a gold bug these days, for example. But a random selection in no particular order (and with no particular emphasis) might include things like :

Real Estate
Gold
Oil
Stocks (in companies that can pass on rising costs to customers)
Inflation - indexed Bonds

According to Andrew Sheets of Morgan Stanley, the US dollar might suffer in the medium term as flows move to the Euro and Yen. Currencies with lower "carry" than the US dollar (Mexican peso, Can dollar, Aus dollar) would be vulnerable, while those that might benefit include Indonesia, India and S.Africa.

With regard to geographical allocation of equities, look for those less exposed to protectionism (e.g. Australia  -- but watch out for currency risk  -- , Japan, certain Eurozone countries), and shun export-led economies (S. Korea, Taiwan)

Much would depend on whether a trade war would develop into a global affair, or be a case of US - v - the Rest. In the case of the latter, places like Taiwan and Switzerland (and Mexico and Canada, obviously) would be big losers, whilst commodity producers such as S.Africa, Brazil and Australia would be least affected.

In the case of a global flare-up, obviously those that rely most on trade (e.g. Vietnam) would fare the worst, while of those that are most self-sufficient Brazil tops the list. The US and China figure pretty highly too ....and that's a fact that provides no comfort whatsoever.

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