THE BULL MEETS THE BULLY

Linus, our 3-year old grandson often pretends he’s Catboy! I doubt he truly believes it but nobody really cares? He’s just a beautiful, innocent, loveable, inoffensive Catboy.

President Trump claims he is the Tariff Man! I am certain he means it because of his avowed long time views of trade deficits.

Mr. Market has awaken to the fact that the president of the USA truly believes the Tariff Man can definitively cure the country of its dangerous trade deficit with China. At the same time, Mr. Market is discovering that the Tariff Man has a totally ill-conceived notion of what causes trade deficits (he should read this), knows actually little about trade and very little about economics in general.

Mr. Trump’s limitations on most things economics are unnerving investors as they become increasingly evident and potentially dangerous.

Ironically, he could very well succeed. If he keeps on damaging the economic foundation of the U.S., he could end up creating such a serious and lengthy recession that the trade deficit with China will solve itself the only way it can: Americans sharply reducing their goods consumption.

Linus’ loving entourage happily lets him live his fantasy. Tariff Man’s team of experts also allows him to live in his fantasy world:

Mr. Trump said he views tariffs as a trade negotiating tactic. “We don’t even have tariffs,” he . “I’m using tariffs to negotiate. I mean, other than some tariffs on steel—which is actually small, what do we have? … Where do we have tariffs? We don’t have tariffs anywhere.”

Last two years, U.S. imposed tariffs on imports per the WSJ compilation:

• $7B of solar cells and panels;
• $2B on washing machines;
• $48B on steel and aluminum imports;
• $250B on 5,745 Chinese-made goods ranging from industrial materials to components to consumer goods.

In the real world

Domestic hot-rolled coil — the benchmark price for American-made steel — has gained 28 percent in 2018 as the Trump administration implemented tariffs on imports. The levies helped push prices to about $920 a metric ton earlier this year, the highest in a decade. U.S. steel currently costs about $260 more per short ton than steel in China, which accounts for more than half of global demand. (…) [Ford] sustained a roughly $1 billion hit to profit despite the fact that it sources most of its metals from the U.S. (Bloomberg, Oct. 22, 2018)

But Tariff Man has his own view of the reality. This tweet was liked by 94,000 Twitter fans:

(@realDonaldTrump)

These “Billions of Dollars pouring into the coffers of the U.S.A ” are actually paid by American importers who either pass the costs on to their customers or take a profit hit.

Investors basked in the Trumpian world in 2017. They became uneasy early in 2018 but the fiscal boost and the huge tax cuts won them over… until they realized that they are increasingly running the risk of waking up in Tariff Man’s not-so-fantasy world where a recession would be seriously amplified by the debt accumulated by his other self, the King of Debt.

While the Tariff Man can, in reality, be a negotiating ploy, however ineffective, the debt is real and getting bigger by the day. Investors are getting nervous that Tariff Man turns into more than just a ploy and gets caught in a real fight, in which case the King of Debt would work a terrible trick on everybody’s reality.

So far, Tariff Man has had very limited success. The modified trade accords with South Korea, Canada and Mexico are far from being trade shatterers outside of presidential tweets. But it has created enough uncertainty across the world to freeze investments and risk taking.

The chess game with China, however, has the complicated but very important additional dimension of technological and intellectual property issues. In truth, voluntarily or not, the U.S. may have made significant strategic moves with the ZTE and Huawei affairs. Given these companies’ importance to China’s growth plans, the recent events must be destabilizing for China. Trump can actually kill these companies simply banning U.S. companies from selling them their wares. It looks like China finally got the message, paving the way to a resolution of the conflicts early 2019.

In fact, all recent signals from both Beijing and the Oval Office point to a strong willingness from both sides to find a negotiated settlement.

The bull has met the Bully but the Bully actually needs the bull. From the WSJ:

(…) several people close to the president say he places as much importance on the health of the Dow Jones Industrial Average for validation of his job performance as he does with his polling numbers. (…)

Problem is, the Bully has precious little feedstock left to feed the bull.

Jerome Powell and his friends need to make sure they don’t totally starve this indebted bull. Fortunately, low and weakening inflation will allow the Fed to get dovish. It has little choice, years of abnormally low interest rates have created the Great Wall of Debt around the world. And the Bully has painted the U.S. government into its own debt corner.

Topic of discussion at tomorrow’s FOMC: the 3-month LIBOR, read interbank lending rate, keeps rising amid slowing economies and declining longer-term rates and, at 2.8%+, is nearly equal to the 10-Y treasuries. The financial blood needs to flow freely.