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Although equity markets remain near all-time highs, the sense of unease among investors is almost palpable. And while stocks are still bid, other markets like bonds and currencies are considerably less bullish than just a month ago. The dollar especially has been hit hard with USD/JPY dropping below the key 112.00 level yesterday, triggering concerns that the massive rally since Election Day may have topped.
What’s creating all the angst?
The primary cause of all the concern is the prospect of a much more protectionist policy by the Trump administration. A recent report by Goldman Sachs analysts Andrew Tilton and Alec Phillips suggested that: “We believe the Trump administration is likely to make an announcement on China’s currency policy and impose unilateral tariffs on a number of products. In general, we expect this administration to be much more active in using existing ‘trade enforcement’ tools than recent administrations.”
Peter Navarro, President Trump’s trade adviser, proposed a 45% tariff on all Chinese-made goods. Such a move would essentially blow up the current economic world order and would no doubt lead to a trade war. Indeed, Chinese officials have stated that even a 1% tariff on goods would trigger a very aggressive response from China.
No one expects such radical policy moves to become a reality, but it is clear the Trump administration will be much more aggressive at enforcing the current trade rules than President Obama was. Although the Chinese are understandably upset at the current rhetoric coming from the Trump administration, they are in a far weaker negotiating position than they were just several years ago.
China’s GDP growth has slowed markedly from the 10% pace of a few years ago. The country is facing a demographic time bomb with its aging population. It has massive overcapacity in real estate and industrial production sectors, and perhaps most importantly, it is seeing huge capital outflows from the country. China has lost more than US$1 trillion of foreign currency reserves from its peak of more than US$3 trillion just a few years ago.
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| President Trump is a master at exploiting his opponent’s weaknesses. |
The much-vaunted threat of China selling their portfolio of U.S. sovereign bonds would likely hurt the Chinese more than the U.S. at this point. That’s because investors – and in a worst-case scenario, the Fed – could easily step up and purchase the securities and leave the Chinese in an even worse capital account position.
President Trump understands this situation well. He is a master at exploiting his opponent’s weaknesses. And all of the current posturing may simply be an opening gambit for establishing more favorable terms of trade between China and the U.S. Perhaps the most insightful quote about Mr. Trump comes from himself. When asked in a 1990s interview if there was some master plan that he followed in deal making, Mr. Trump stated that, “It’s much more improvisational than people think.”
There is no doubt that the Trump approach to almost every area of policy-making has been much more improvisational than his predecessors. Yet markets crave stability. Investors despise chaos, and businesses require a clear understanding of the landscape before they commit to investment decisions.
That’s why President Trump’s approach – even if it is successful in the end – could roil markets in the near term, especially if the rhetoric on trade and exchange rates ratchets up once again.
Happy Trading,
Boris
{ 15 comments }
Don’t know if trade war with China etc.; will materialize. But war with Iran will break out, soon. Just observe. World can thank hussain obama for that, as total enabler to Iran.
Trump is putting our interests first. China was able to build whole cities for the future without anyone to live in them yet while our cities are in decay. That says it all.
trump’s entire cabinet is wall street power brokers. they now have the keys to the white house. they’re going to be laughing all the way to the bank.
Yes, no doubt and they will leave a path of destruction in their wake, i.e., destroyed National Parks by mining and oil drilling; polluted air & waterways and soil; limiting our voices and that of the press; turn the masses against each other (divide and conquer, anyone? works like a charm every time); let the planet rot. He had no intention of draining the swamp, he wants to be KIng of it, since that is where the power is. He duped a lot of people. A tiger never changes its strips nor does a scorpion ever not sting. God help us all.
There is going to be a reckoning in China because these buildings weren’t built for “the future inhabitants” they were built for money to be made by renting the sq. footage. No tenants, no income, no payments to the lender. It’s a lending bubble that is going to burst.
Not so sure that that says anything, as it does not appear to make much sense. You can thank the GOP Tea Party for that (the lack of infrastructure spending. They voted that all down, as it would add to the deficit. We are broke you know. You cannot reduce taxes and then start 2 wars.
Mr Boris, thanks for your excellent analysis. Even more thanks for the good news you just delivered on the USD/JPY currency pair because I took a short position weeks ago. I was a few pips in profit and it’s only going to get bigger with the breach in the key level you identified.
Hi Boris
Remember it is fair trade not free trade. This is not a trade war. It is the US standing up for it self.
It could very easily turn into a trade war and we would lose, since the rest of the countries would join it with most of them leveling an import tax or carbon tax (if we leave the Paris climate accord) on US goods. Trade Wars are truly ugly. 45% tariffs would be insane. You need to remember who moved their factories off shore. Why, because their stockholders want better performance/profits, so that they can continue to play the ponzi scheme.
PADY
You need to be better read, about global economics. We finally have a negotiator in the WH. What we all want in a deal, is fair trade, not market manipulation or being sold down the river. Do your homework.
Currency war, trade war, cyber war. Significant aspects of each have been progressing for some time. Patents are stolen and infringed upon. Goods are copied or pirated and sold for much less than the original. Numerous companies as well as the dnc have been hacked into. Identities or stolen. Money is counterfeited The list of infractions and instabilities goes on and on. It’s a dicey world. All financial resources held in banks or bonds or stocks are digital. And it could all be blown up in a minute by a team of cyber warriors. Along with your communication devices. And maybe your power grid. The previous administration was not serious about anything except campaigning and deceiving the citizenry. I hope this administration gets dead serious about our protection. We need firewalls on our cyber borders. We need better cyber vision as to what other countries and hateful groups are up to. We need to be able to take swift action to all threats that arise against our country or our citizens. Pray for those in charge. They will need all the help they can get. They inherited a giant mess. Those who suggest otherwise are out of their minds. And protesters, rabble rousers, loudmouths, hate-mongers, troublemakers, thugs, destroyers of civility and peace and calm are only giving aid and comfort to our enemies. Their outrageous and destructive temper tantrums are not helping anyone. They are a sore spot and a cancer on the belly of truth and kindness and peace.
is it really a trade war? america’s stronger dollar has the rest of the world selling us their goods for pennies on the dollar. china is basically america’s below-minimum-wage factory. we’ve already won the trade war by having the most powerful currency. big mistake on trump’s part if he doesn’t see that. right boris?
A strong USD causes others to resent us, as it does reduce their buying capacity. Do you really think that other countries enjoy selling to us with their deflated currencies? I think not, since it takes so much more of their currency to purchase. Of course there will be trade wars, especially if we implement 45% tariffs. We will lose badly. Trade wars are good for no one, therefore, most countries hesitate to use them. Unless you have a Kakistocracy (GOVT by the worst people), who just really do not know what they are doing.
Is this all gonna lead to the dollarization of the world economy. Who knows?
The USD has been the World Reserve Currency since Brinten Woods just after WWII. That has given us a leg up all these years and has contributed to our success, since every buy/sell transaction between countries is to be conducted in USD (trade finance income). So each nation’s Central Bank keeps USD on deposit. A strong USD weakens everyone else’s currency value. And unfortunately, the Bush/Cheney Admin used this as a tool to coerce nations to join in their dirty work/war.
The rest of the World is tired of US hegemony and would like to see the USD be “dethroned” from being the Reserve Currency. China and Russia in particular would like this, which is the reason for their forming the Asian Infrastructure Investment Bank (AIIB) of which 55 other countries are now members. The BRIC countries are clamoring to have more say in World politics (WTO) and rightfully so, as their economies grow. Our voice will soon be squeezed out, as we will no longer be the dominate player.
We are headed for a serious depression, as their is nothing much to support the Stock or Bond Markets.