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Tariffs, Redux


The Chinese-American Trade War is No More than 'MidCycle'

President Trump has punished his good friend Xi with a new round of tariffs.

What this means for the markets is not clear, though it almost certainly hurts investors' returns in the short - and perhaps medium - runs.

China's President Xi Jinping can't be a happy camper today (or tomorrow, since he's in China). US President Donald Trump has announced the imposition of a new round of tariffs, 10% on an additional $300 billion of Chinese goods. The President has said repeatedly that such tariffs only damage the Chinese economy, which he sees as weak and vulnerable, though nearly all economists believe that tariffs - logically enough - affect companies and consumers that buy imported Chinese goods.

Donald Trump is not an easy man, something that can be said about most politicians. He is also quite stubborn, according to many that have worked with him. He is convinced that the US has been taken advantage of by many foreign countries. Interestingly, Trump has named the European Union as more exploitative of the American side than the Chinese, though this opinion is not reflected in tariffs similar to those slapped on China - the latest round to be imposed at the start of September.

Many commentators have seen this Tariff War as a reflection of Trump's personality and his desire to win. Others claim that he wants the tensions as a campaign tool to inspire his 'nativist' base. Still others, perhaps more perceptively (or perhaps they are reaching) believe that the world is at the beginning of an Economic Cold War between the two Great Powers that may last decades. In this regard, it is worth remembering that Russia, for all its destructive nuclear weapons power, can't rival either the US or China economically.

The stock market is not happy with the announcement of the latest China-directed tariffs. The averages, which were up sharply after yesterday's sell-off in the wake of Jay Powell's confusing commentary at his rate-cut press conference, turned sharply down. As of this writing, with a few minutes to go  before trading closes, the losses are considerable.

Still, readers would be wise to avoid quick conclusions about the directions of the markets given that data and opinion fly in all directions. Bears have a doom clock countdown based on a repeat of the 2008 crisis, a view that is closely linked to the size of deficits and relatively rich stock valuations. Bulls rely on the intrinsic strength of the US economy in particular and the habit of investors around the world to seek safe haven in US stocks.

One thing is clear - whatever his motivations, President Trump appears absolutely committed to teaching China a lesson. Rumor has it that he believes the Chinese want to 'wait him out' on the theory that a Democrat will take the White House after the 2020 elections. Given his temperament and the hawkish nature of key economic advisors such as Navarro, Lighthizer and even Larry Kudlow, Trump is unlikely to offer inducements to President Xi to lower tensions. Shareholders are in for an interesting end-of-summer scenario.