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Dear Fellow Investor,
No one wins trade wars, but that doesn't stop politicos from declaring them. Nor does it stop investors and analysts from getting infected with a bout of mass hysteria and sensationalism.
You need not be one of them.
As I have learned from our editor and CEO, Brien Lundin:
A prudent investor looks for long-term trends, unearthed opportunities, and fundamental changes to the economic landscape — such as higher rates of inflation or new technological innovations.
In contrast, the daily noise of tit-for-tat political squabbles tend to be a distraction, an opiate of the masses. These he-said-she-said events fill newspaper presses, but they offer little in the way of concrete demand-and-supply changes.
The trade war, now underway between the United States and China, is a case in point. It is in fact a geopolitical duel, a battle of egos, with North Korea in the crosshairs. Trump has admitted the tariffs are a bargaining chip, a way to get the Chinese to come to the table and accept his broader regulatory and foreign-policy demands.
Although a net loss for both nations, the trade war's impact on economic growth will be negligible. Further, each side is smart enough to avoid inflicting severe self-harm.
Consider, for example, that even if China actually goes ahead with her full range of tariffs, these will dampen but not stop $50 billion worth of trade. That flow equates to 10 percent of total U.S.-China trade, a drop in the ocean of the $19 trillion U.S. economy.
One of the pitiful cases offered by the Los Angeles Times was the tariff on wine, even though only one out of every 250 U.S. bottles goes to China.
The Chinese want to hurt President Donald Trump politically, rather than economically. That is why they are targeting specific industry groups, rather than resorting to a blanket tariff, and often in sensitive battleground states, such as with orange juice in Florida and soy in Wisconsin and Michigan.
Those investors trading heavily in response are already finding themselves duped. On April 4, China announced planned tariff retaliation, and the S&P 500 opened 1.3 percent lower. However, media outlets had to back-track as the initial alarm bells came to naught and the index bounced back and finished well up later in the day.
Unfortunately, a similar but inverse pattern applied to gold. Kitco reported a price up 1 percent and almost cracking $1,350 on that day, only for it to fall back to roughly where it was overnight. Investors got jittery, but sanity prevailed, and people realized the Chinese are hardly ready to abandon U.S. treasuries and the dollar just yet. To do so would be an act of suicide, given how important U.S. consumers are to the developing economy under an authoritarian regime.
The irony amid all the negative coverage is that Trump is right in his diagnosis that the Chinese cannot be trusted with international agreements and routinely violate intellectual property. This is no secret, and even dear friends — motorcycle-parts manufacturers in Illinois — have shared with me that they have been victims of IP theft from the Chinese.
That makes their pleadings with the World Trade Organization against the United States a hypocritical joke. Likewise, Trump has simply declared his actions warranted under national security. This is legal under WTO rules, and it demonstrates the WTO to be another feckless paper tiger, a home for crony, managed trade with limited means of enforcement.
Whether the Chinese will back down and work with the Trump administration to protect intellectual property is up in the air. However, if it comes to pass in a meaningful way, under sustained pressure, likely Trump will show goodwill and pull back the U.S. tariffs.
The net outcome would be a blip on the short-term radar and a long-term boon for U.S. tech firms and all those relying on upfront R&D costs. Either way, the Chinese have not even announced a timeline for their planned tariffs, and we are far from a point of economic calamity.
Fergus Hodgson is an economic consultant and Gold Newsletter’s roving editor.
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