Clash of the Titans


The current news cycle belongs almost entirely to the trade talks between the US and China.  Not only is this the dominant force in the media, it is also the dominant force in the financial markets.

Trade relations between these two countries is a very large and complex issue.  As such, I think this will continue to be the primary driver of the financial markets for the foreseeable future.

A few years ago, the infamous “Taper Tantrum” hit the markets when the Fed began the long process of normalizing its balance sheet.  It was an issue that needed to be addressed, and the time had ultimately come.  It was a very big deal at the time.  It proved to be temporary and it didn’t derail the economic recovery.  In a very similar sense, we now have what I’d call the “Tariff Tantrum” as we go through the unsettling process of determining the best trade relations to keep with China.  This is something else that can be classified as an issue that needed to be addressed, and the time has ultimately come.

One particularly interesting dynamic to this issue is that it is playing out so publicly.  Twitter is certainly a double-edged sword.  So too are the often bifurcated and biased media outlets.

This puts investors in a uniquely precarious position.  Information will be everywhere.  The accuracy and value of this information is an entirely different story.  An abundance of information isn’t always, or even typically, a good thing for investors. Information overload can lead to heightened emotions and a potentially dangerous lack of objectivity as we convince ourselves that our assessment of this information is right.  These are significant hazards investors need to sidestep.

This all creates the perfect atmosphere for volatility in the markets.

Both stock and bond prices can move frantically with each passing headline; more so with each tweet since it comes directly from the President.  Each little ‘bite’ is more fuel for the information-fire.  Or perhaps the mis-information fire.  After all, these are negotiations and posturing plays a big role.  This is especially true when you consider the negotiators.

This is a clash of titans not only in terms of the size and economic weight of the nations involved, but also very much true in terms of the leaders of each nation.  Presidents Trump and Xi are outsized personalities, to say the least.  In every way, this is a heavyweight fight and the gloves have started to come off.

It sounds a little like a good lead into a bad joke, “two narcissists walk into a negotiation room…..”  but the punch line is still being written.  For now the only thing certain is that this is an interesting match-up of friendly enemies.

All joking aside, this really is a serious issue.  The two largest economies on the planet are playing Trade Chicken.  My hunch is that both are likely to win.

This isn’t the proper forum for an extended economic thesis on the merits and perils of tariffs.  So for the current purposes I’ll oversimplify by saying that tariffs tend to benefit a relative few at the expense of the many.  They aren’t a sound long-term policy.  I believe both the US and China know this and will ultimately work toward some form of agreement that makes the use of tariffs a temporary placeholder for more organized terms of trade in the future.  In short, they are a negotiating tool.  Tariffs hurt both sides so the questions become: who will suffer the most and who will likely back off from this game of chicken first?  And of course, when?

A warning to those looking for a quick resolution to this would be to recognize that the differences between these two sides are deeply fundamental and extend well beyond economics.  Each nation has a rich history they need to honor and bold visions they need to strive for.  And they aren’t based on many similar tenets.

In an Op-Ed in the New York Times yesterday Thomas Friedman ended his piece with these words:

“..this is not just a front-page business news story.  What’s being written is the first page of a whole new chapter in the history of US-China relations.  And how it gets written and how it ends will shape the Trump and Xi legacies – and touch every major economy in the world.”

I believe that’s a good summary of the situation.  And given this massive scope, to think this will end in a month or whenever the next faux deadline is promised is likely naïve.  How many extensions have there been since the original deadline?  Investors will need to be patient with this process as that patience will most likely reward them well.

It’s also important to note that this is a highly charged political battle for the leaders, and also that both countries are seeing a rising wave of “nationalism” in their general populations.

An example would be that earlier this week, The People’s Daily, China’s official newspaper for the Communist Party, published a post titled “This Is China’s Attitude!” on its official WeChat account.  The post contained a graphic with three slogans touting the country’s defiant attitude in the face of trade tensions with the US.

Translated to English, the graphic reads:

             “Negotiate, sure!”

                      “Fight, anytime!”

                               “Bully us, wishful thinking!”

Couple this with the loud voices of support from President Trump’s heartland base and you can see how entrenched each side can become.  Both men perceive they have the full support of their people.  This emboldens them and makes negotiations more complicated since each feel as though they hold the stronger position.

One advantage on the side of President Xi is that he doesn’t have to worry about alienating centrist voters in a general election that’s right around the corner.

One advantage on the side of President Trump is that since this tariff war started last year, Chinese equities have fallen substantially relative to US equities.

The major disadvantage to each man is quite possibly the public forum of these proceedings.

A growing concern of mine is that so much negotiation in public might make it harder for either side to save face.  History suggests that when these men seemingly ‘lose’ on any given point they have an artful way of changing the definition of ‘winning’.  For sure, President Trump has shown the uncanny ability to fly very close to the sun and not get burned.  But the more public awareness of details, the harder it will be for each man to control a self-promoting narrative to their people.

There are a lot of advantages to taking these negotiations in a more diplomatic, closed-door direction.  Not just for the respective Presidents, but likely for financial markets, too.

We know that negotiations, especially these high-stakes types, involve a lot of orchestrated chaos.  Misinformation, manufactured mayhem, bluffing, threats, ultimatums, insults; these are the unseemly components of a lot of negotiations.  Not pleasant, but true; again, especially given the seasoned negotiators involved in this dance.

But these are not healthy backdrops for financial markets.  Tweets and news blurbs laced with that type of tone are likely to toss markets around as they react to each scene of the play rather than wait to see the final outcome.  We have already seen this behavior and I would say we’re likely to get more of this type of action as trade talks get more tense before any truce is made.

When markets swing between euphoria and misery on every tweet, investors need to remember their own individual purpose.  We invest for our personal futures and those of our families.  These are noble and long term ambitions, so it can be frustrating to think our investment values are sometimes used as pawns in a political chess match.  Both discipline and perspective must be maintained.  As I’ve said many times before, there are emotional taxes that must occasionally be paid to benefit from the long term growth engine of the markets.

These are not times to make significant adjustments to a portfolio and this isn’t the type of volatility to try to ‘game’.  Simply put, things have the potential to move too quickly in either direction at the random drop of a tweet.  There’s no sense in trying to time temporary market mood swings.  The day to day action is essentially arbitrary while the basic trend stays upward.

Incidentally, I think China has many ways to benefit from a calm resolution that aren’t being immediately recognized by most.  China’s sheer size allows it to survive if it were to only look inward.  But if they were to adopt policies outlawing corporate espionage and intellectual property theft, and put an end to its practices of unfair legal treatment, imagine how this would open their opportunities worldwide.  Forget about surviving, they’d be thriving.  If many of the concerns that hinder Western multinational companies from making significant investments in China were addressed, the cash inflow could be massive.

So in the end, the market mood swings of this “Tariff Tantrum” will likely subside when the two leaders figure out a face-saving way of capitulating and declaring victory.  Theatrics aside, this shouldn’t be too hard since it ultimately will lead to a positive result for both the US and Chinese economies.  And as we enter an election cycle, this is something President Trump values greatly.

The takeaways: 

  • I don’t believe this issue fades away quickly. We need to get used to it being front and center for a while.
  • China has much to gain by having constructive trade relations with the Western world.
  • The United States has plenty to gain by right-sizing our trading policies throughout Asia.
  • Each country has enormous geo-political benefits from a healthy political and economic relationship.
  • Each leader gains favor in the eyes of other world leaders if they show principled compromise.
  • These are but a few of the many realities behind the current drama. Facts don’t always win, but they usually do.  If facts ultimately prevail in this matter, this season of the Tariff Tantrum will echo the season the Taper Tantrum.  This means we would expect a period of high market volatility that proves to cleanse the system of excesses and extend the global economic expansion; not put an end to it.




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