The United States seems to be losing the ill-conceived Trump-Navarro trade war. The evidence of this loss continues to mount.
Here is an important Bloomberg catalog of specific facts and items and actions. (Note that this is not “fake news.”) “These Products Show How Hard It’ll Be to Beat China in Trade War,” https://www.bloomberg.com/news/articles/2018-11-11/trump-s-china-cold-war-yields-hard-look-at-global-supply-chains.
Meanwhile, Peter Navarro is doing a creditable job of shooting himself (and the country) in the foot. In POLITICO’s Morning Money for Nov. 12, POLITICO's Doug Palmer reports,
“White House trade adviser Peter Navarro on Friday accused Wall Street ‘globalist billionaires’ of trying to sabotage ... Trump's handling of trade relations with China. ‘Consider the shuttle diplomacy that is now going on by a self-appointed group of Wall Street bankers and hedge fund managers between the U.S. and China,’ Navarro said in a speech at the Center for Strategic and International Studies.
“ ‘As part of the Chinese government influence operations, globalist billionaires are putting a full-court press on the White House in advance of the G-20 in Argentina. The mission of these unregistered foreign agents ... is to pressure this president into some kind of a deal,’ he said. The blustery language came ahead of a planned meeting between Trump and Chinese President Xi Jinping later this month, which many hope will lead to a deescalation of trade tensions. However, Navarro seemed to downplay chances for major progress at the upcoming meeting.”
(The POLITICO article is behind a paywall, but for those who subscribe or wish to subscribe, the article link is http://go.politicoemail.com.)
Business Insider agrees with our assessment of the Trump-Navarro actions on trade and offers what it calls “the best hard evidence yet that the tariffs are causing major disruptions in the economy.” In an article titled “Trump's trade war took a stunning bite out of the US economy, and it's the strongest evidence yet that he's shooting himself in the foot,” BI points to last week’s report on third-quarter US GDP and makes the point that while GDP growth came in at 3.5%, that figure would have been a whopping 5.3% if trade had not dragged it down by 1.9% – the largest negative contribution to GDP growth for trade in 33 years. (See https://www.businessinsider.com/gdp-trump-tariff-trade-war-us-china-2018-10.)
The Wall Street Journal’s editorial on November 13, 2018 was rightly harsh. It castigated Navarro statements and arrogance and ended with “Maybe the question to ask is whether Mr. Navarro is a Democratic Party agent.”
Trade War economic data bear out this view.
US GDP growth peaked in Q2. On examination, we can see that part of the Q3 growth was inventory building in anticipation of more tariffs. Who can rationally blame any American company from trying to protect itself from an unpredictable and incoherent policy?
Selectively, some US prices are rising as a result of tariffs. That trend is to be expected, and more prices are likely to rise if the tariffs are expanded or increased. Remember: A tariff the US imposes on an import is really a sales tax on you and me.
The Fed faces a dilemma and knows it. Does the Fed raise interest rates to fight an anticipated inflation caused by the Trump-Navarro tariffs? Or does the Fed view tariffs as a shock and ignore them? The Fed is now seeing the results of tariffs in its information gathering. At the December meeting we expect the Fed to raise rates a quarter point.
So far there are only limited indications that the Trump-Navarro trade war is impacting credit spreads. To follow this item, one must look at the spread in interest rates between the high-yield bond sector (rated below BBB) and the comparable US Treasury yield. Right now those spreads are tight, which means we aren’t seeing damage in credit sectors because of tariffs. If Trump gets a truce with China at the end of this month, we expect credit spreads to stay tight. If Trump and Navarro fail, we expect spreads to widen early next year as trade war damage mounts.
Note that an entire bureaucracy is expanding in Washington as the business of gaining tariff exemptions becomes an employment bonanza for lobbyists, lawyers, and consultants. So much for draining the swamp.
Where does this ill-advised trade war end? The best outcome is a resolved trade deal acceptable to both sides, one that has longevity and features dispute resolution, so that American business can make capital commitments with some confidence. Right now, capital investment is being deferred, since policy under Trump-Navarro is erratic.
Navarro now is under attack for the policy he has influenced. Post-election, the Trump administration is experiencing chaotic turnover. But Trump and Navarro will never admit any policy error. That is why Navarro now attacks “Wall Street” for its criticism of his policy design.
Apologies and rhetoric blaming China abound. Meanwhile, thousands of tariff-exemption applications are slowly being processed.
At the moment, US stock markets have accepted this trade war situation and seem to have completed their October-Halloween correction. The ghoulish Trump-Navarro trade war inflicted that correction. Now, the market likes the earnings picture. The market goes on climbing, finding toeholds in a wall of worry over trade war folly. But market agents are fraught with uncertainty and Trump Navarro policy is the cause. Add divided government and that uncertainty premium rises.
We now send a Saturday morning summary of the week’s commentaries and add video and press references. This a free link from the Cumberland website. Here is last Saturday’s note: “Cumberland Advisors Week in Review (Nov 05, 2018 – Nov 09, 2018),” https://www.cumber.com/cumberland-advisors-week-in-review-nov-05-2018-nov-09-2018/.
Meanwhile, the evidence of Trump-Navarro trade war damage to the US grows.
David R. Kotok
Chairman and Chief Investment Officer
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