Javblog

Javblog

Tuesday, June 19, 2018

Trading down...

Whilst some aspects of the Trump trade tirade have elements of logic - China, for instance, has long practiced both subtle and not so subtle efforts to encourage or force the transfer of intellectual property - much does not: the likely efforts to unwind or significantly restructure NAFTA and the continued bizarre pressure on trade with the EU. At some point, those other countries will start to view the US as an unreliable partner (assuming that they don't already), and therefore start factoring that into future negotiations: US political polarization will lead to short-term policy swings rather than long-term relationships.

The as yet unnoticed effect of the growing trade restrictions will be in the ultimate effect that these will have on consumer prices, and therefore on US interest rates. As Bloomberg notes today: 

"U.S. consumers may be front-line casualties in a trade war. China's exports tend to be consumer goods, and the U.S. is near the limit where it can push up prices without voters noticing. Trump better be ready with an explanation before midterm elections..."

This is particularly so since the tariffs so far announced have not yet been fully implemented:


Even though there are plenty of people who are still - perhaps bravely - characterizing this as a "negotiating strategy", the price of getting it wrong will be high: higher prices and higher interest rates. The Fed has already lifted it's guidance to indicate a total of four rate increases this year... tariff pressures mean that this could be insufficient, even though the likely possibility of an inverted yield curve in the near future is suggests that rate pressures will ease. We hope so.

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 65577185
Find us on Facebook: http://www.facebook.com/JavelinWealth
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.

Tuesday, April 10, 2018

Trade & twitter


2017 was a year in which markets were seemingly able to focus on the positives of a US economy that seemed business and investment friendly - reduced regulation, tax cuts and and interest rate environment that promised continued gradual moves by a Federal Reserve with new leadership in the face of continued steady growth.

2018 has so far seen not much change in that core narrative: the economy continues to grow steadily and the Fed remains on track with its long stated programme of gradual rate increases in line with that. The Trump tax cuts have injected a bit of extra fuel to the corporate sector, such that we're now looking at earnings growth this year of 16% or so, with this being evident in the soon to be released Q1 earnings numbers.

If all that is steady as she goes, why then have markets been notable since February for a big jump in volatility?

Trade policy, announced on Twitter.

Whether or not this is a reflection of a real change of strategic tack away from free trade to one which is much more unilateral is still to be seen: one school of thought suggests that this is merely a negotiating tactic and that once some sort of publicity friendly "win" has been secured, we'll all go back to something approaching normality.

At present, the response to the Trump administration's trade belligerence has been measured and proportionate - especially on the part of China. Any damage done so far has been relatively modest and mostly confined to hurt feelings since the threatened tariffs have yet to be implemented since they are subject to a period of review and negotiation.

We assume that some sort of reason and logic will prevail, but as Trump's main leadership characteristic seems to be the embrace of government by chaos, there is always the possibility that this will not happen. 

If so, then the effect on market sentiment will go from the existing one of day to day volatility, but with an underlying strength based on a healthy global economy, to one  which marks move to a more "risk off" mentality, as investors gauge the effect of globally more restrictive trade. If that happens, then the risk averse investment approach could stay in place for an extended period.

The next month will give an indication of likely direction.

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 65577185
Find us on Facebook: http://www.facebook.com/JavelinWealth
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.