HH The Important Trade Effects Are Longer-Term

The question about the impact of trade wars is really two questions, and I suppose they get conflated a lot these days. First, there’s the near-term market impact; second is the longer-term price/growth impact.

The near-term market impact is interesting. When the market is in a bad mood (forgive the anthropomorphization), then trade frictions are simply an excuse to sell – both stocks and bonds, but mostly stocks. When the market is feeling cheerful, and especially around earnings season, trade wars get interpreted as having very narrow effects on certain companies and consequently there is no large market impact. That is what seems to have happened over the last few weeks – although trade conflicts are escalating and having very concentrated effects in some cases (including on markets, such as in commodities, where they really oughtn’t), it hasn’t dampened the mood of the overall market.

In fact, the risk in these circumstances is that a “happy” market will take any sign of a reduction in these tensions as broadly bullish. So you get concentrated selloffs in single names that don’t affect the market as a whole, and when there’s any sign of thawing you see a sharp market rally. We saw a bit of that in the last day or so as Mexico’s President-elect and US President Trump both expressed optimism about a ‘quick’ NAFTA deal. Honestly, the broad market risk to trade in the near-term is probably upwards, since any increase in tensions will have a minor and concentrated effect while any thawing (especially with China) at all will cause a rally.

But beware in case the mood changes!

As an inflation guy, I’m far more interested in the longer-term impact. And there, the impact is unambiguous and bad. I’ve written about this in the past, in detail (see this article, which is probably my best on the subject and first appeared in our private quarterly), but the salient point is that you don’t need a trade war to get worse inflation outcomes than we have seen in the last 20 years. You only need for progress on advancing global trade to stop. And it seems as though it has.

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