Trade War to Last Beyond 2020

Trade War to Last Beyond 2020

Open a paper over the weekend, and you would’ve been greeted with images of our Prime Minister Scott Morrison smiling next to President Donald Trump.

Morrison is in the US for a state dinner and perhaps a few happy snaps smiling next to other important people.

Publicly, Morrison is putting on a show, claiming to support Trump. Morrison has said that China should ‘take every opportunity’ to end the trade war with the US, stating: ‘It’s got to be a sustainable outcome, it’s got to be a durable outcome, it’s got to deal with the real issues that are there in their relationship.1

I can’t help but wonder perhaps Morrison has pleaded with Trump to put an end to the trade war behind closed doors.

We’re stuck in the middle.

Morrison’s current tour of the US is a reminder that we’ve picked Team USA over our biggest trading partner.

In spite of the temporary truce, Trump says that the trade war could take another year to play out…

Read on for Jim’s take today.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

Trump’s two-week tariff delay is all for show

Jim Rickards, Strategist

Jim Rickards

Recent news from the trade wars have been uniformly good.

As Reuters recently noted, Trump has agreed to postpone tariff increases on certain Chinese exports to the US until early October, writing:

US President Donald Trump said on Wednesday the United States has agreed to delay increasing tariffs on $250 billion worth of Chinese imports from Oct. 1 to Oct. 15 “as a gesture of good will.”

Trump said the postponement came “at the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary.”2

That’s an important date because it comes after the 1 October 2019 celebration of the 70th anniversary of the communist takeover of China in 1949.

The Chinese would like their celebration to go off without acrimony or discord (including demonstrations in Hong Kong) so they are grateful for Trump’s delay.

China reciprocated by excluding pork and soybeans from their own list of increased tariffs on US exports to China.

At the same time, both sides are preparing for a new round of talks tentatively scheduled for mid-October, when these tariff and other non-tariff barrier related issues will be addressed.

The stock market has rallied on this run of good news.

Does this mean the trade wars are coming in for a soft landing as the market seems to expect?

Not at all…

Still dodging the hard issues

Both sides have selfish reasons for these concessions.

As noted, China has its hands full with Hong Kong and would like to avoid further confrontation with the US before the 1 October celebrations.

Trump is running for re-election in 2020 and relies on a strong US stock market to help his chances.

The delayed tariffs should be understood as temporary and cosmetic moves designed to achieve domestic political goals.

None of the hard trade issues (intellectual property theft, verification processes, direct foreign investment, etc) have been dealt with at all.

Even if these matters are discussed at the mid-October meetings, they are months and possibly years away from resolution, if ever.

None of the wider geopolitical issues (South China Sea, Taiwan, Korea) are being addressed in this forum.

The stock market has a reprieve, but don’t expect it to last.

Stock markets have been up and down and back again for almost two years based on the latest good (or bad) news on the trade wars. Expect that pattern to continue.

This means getting ready for the next downswing by late October.

Lessons from 2016 lost

I maintain a proprietary model which I use to forecast major market and political events.

Three days before the UK’s Brexit referendum, when markets gave a 70% chance to a ‘remain’ vote, I forecasted the UK would vote to ‘leave’ and recommended a long gold, short sterling position. The UK voted leave and subscribers made massive profits on that trade.

In the weeks and days before the November 2016 presidential election, when polls and pundits were giving Hillary Clinton a 90% chance of winning, I was traveling around the world doing TV appearances forecasting that Trump would win in a close race.

Neither of these forecasts (and many others) were lucky guesses.

My models give clear guidance as to what the outcome should be and why. What are these models saying about the 2020 presidential race?

Right now, the model gives Trump a 67% chance of winning re-election.

That forecast is mainly based on the likelihood of a recession before the election. Since recession odds are 33%, Trump’s chances are the reciprocal or 67%.

Those odds should go up monthly from now on as the chances of a recession diminish as the time to the election declines.

There are other factors in the model.

One of the most important is to ask whether Democrats have learned anything from their defeat in 2016.

If the answer is yes, then the odds of Democrats winning go up.

If the answer is no, then the odds of Democrats winning go down.

Unfortunately for Democrats, the answer appears to be no.

The Washington Times pointed out that Democrats are offering voters little more than continued Trump bashing.;

More to the point, despite his many mistakes and offensive comments, Trump comes off as genuine. He actually means what he says.

Democrats come off as scripted, calculating and tailoring their message for the progressive wing of the party rather than the broader party and the more broad electorate.

There’s still time to change things up, but for now the Democrats appear to have learned nothing and therefore appear headed for a second straight defeat.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia