Liberated From The Prosperity Yoke
The Trump administration has liberated the US economy from its exposure to trade in a demented country-based tariff move. Let us only say that, by 9 April, the tariffs on China will reach a staggering 54% and those on Lesotho will be 49%. Lesotho like St Pierre et Miquelon (same tariff bracket) is clearly the backbone of global trade. Canada and Mexico, already tariffed at 25%, were essentially exempt from additional duties. This is the only unexpected good news and creates an arbitrage option for a number of manufacturing industries.
With the figures completely disjointed from reality, puzzled (but still polite) economists (from major US banks) ran their models to conclude on a 1% hit to global growth (1% for Europe, 2.5% for China and 3% for the US) even before the retaliatory tariffs which are likely to hit US services as far as Europe’s answer is concerned.
The precedent of the Smoot Hawley tariffs is a bad omen. Indeed, back then, the average tariff rate on dutiable imports rose from about 40% in 1929 to 59% by 1932 (substantially less than the current tariffs announced by the US on most countries). The then US trading partners imposed counter-tariffs within months, targeting U.S. exports. World trade volume fell by approximately 66% between 1929 and 1934, from USD36bn annually (in 1929 dollars) to about USD12bn.
At least, back then, the move could make sense as net trades were settled in gold. While mercantilism is probably not the best economic theory, the idea that prosperity could be measured by the net amount of gold a country possesses means that trade deficit restriction helped keep gold at home. But Trump has not received the 15 August, 1971 memo which provides that net international trades are settled in USD, a massive privilege from which the US benefited. The higher the trade deficit, the larger the amount of dollars available outside the US to be recycled in US Treasuries and financing the budget deficit.
Economists and X-based self-appointed game theory experts will try to make sense of the senseless: Doge cuts to the budget deficit, the slashing of personal tax, arm-twisting the Fed, returning to gold or moving to bitcoin as part of a “sound money system”. This is nuts.
The only thing that trade wars will achieve will be to liberate Americans from more prosperity. Prosperity is derived from cooperation that enables a better usage of productive resources. Since 1945, part of the extraordinary growth the world has enjoyed has been linked to globalization, which is the inclusion of more production factors in worldwide production. Equity markets are about growth potential meaning that the Trump contraction music can only be discordant.
Frederic Bastiat, a classical liberal economist, once said: “it makes no more sense to be protectionist because other countries have tariffs than it would to block our harbours because other countries have rocky coasts”. Unfortunately, international relations and trade aren't a one shot game and in an iterated game, theory hints that retaliating may bring the situation back to a Nash equilibrium, even though it would mean losing more for both parties. We therefore fear that most countries will retaliate, escalating a trade war that makes no sense for anybody.
Net net, we stick to our very defensive approach and believe domestically exposed sectors with defensive profiles will continue to outperform although equities will be best avoided as an asset class as long as the Trump wrecking ball goes on.
If one has no choice, Telecoms, Utilities, Food Retail and Banks are the obvious ports of call. Pharma may not be far off.
With the figures completely disjointed from reality, puzzled (but still polite) economists (from major US banks) ran their models to conclude on a 1% hit to global growth (1% for Europe, 2.5% for China and 3% for the US) even before the retaliatory tariffs which are likely to hit US services as far as Europe’s answer is concerned.
The precedent of the Smoot Hawley tariffs is a bad omen. Indeed, back then, the average tariff rate on dutiable imports rose from about 40% in 1929 to 59% by 1932 (substantially less than the current tariffs announced by the US on most countries). The then US trading partners imposed counter-tariffs within months, targeting U.S. exports. World trade volume fell by approximately 66% between 1929 and 1934, from USD36bn annually (in 1929 dollars) to about USD12bn.
At least, back then, the move could make sense as net trades were settled in gold. While mercantilism is probably not the best economic theory, the idea that prosperity could be measured by the net amount of gold a country possesses means that trade deficit restriction helped keep gold at home. But Trump has not received the 15 August, 1971 memo which provides that net international trades are settled in USD, a massive privilege from which the US benefited. The higher the trade deficit, the larger the amount of dollars available outside the US to be recycled in US Treasuries and financing the budget deficit.
Economists and X-based self-appointed game theory experts will try to make sense of the senseless: Doge cuts to the budget deficit, the slashing of personal tax, arm-twisting the Fed, returning to gold or moving to bitcoin as part of a “sound money system”. This is nuts.
The only thing that trade wars will achieve will be to liberate Americans from more prosperity. Prosperity is derived from cooperation that enables a better usage of productive resources. Since 1945, part of the extraordinary growth the world has enjoyed has been linked to globalization, which is the inclusion of more production factors in worldwide production. Equity markets are about growth potential meaning that the Trump contraction music can only be discordant.
Frederic Bastiat, a classical liberal economist, once said: “it makes no more sense to be protectionist because other countries have tariffs than it would to block our harbours because other countries have rocky coasts”. Unfortunately, international relations and trade aren't a one shot game and in an iterated game, theory hints that retaliating may bring the situation back to a Nash equilibrium, even though it would mean losing more for both parties. We therefore fear that most countries will retaliate, escalating a trade war that makes no sense for anybody.
Net net, we stick to our very defensive approach and believe domestically exposed sectors with defensive profiles will continue to outperform although equities will be best avoided as an asset class as long as the Trump wrecking ball goes on.
If one has no choice, Telecoms, Utilities, Food Retail and Banks are the obvious ports of call. Pharma may not be far off.
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They may claim that they cannot compute the impact as things are moving too fast. This is not accep...