Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

What you should know about the Trump Trade War

There are a few important points about U.S. President Donald J. Trump’s (R-New York) “trade war” with China that everybody should understand. In particular, investors, traders, and speculators need to understand these realities if they want to make money.

For one thing, a good understanding of the realities of the trade war could show you where to invest. For instance, investors and speculators can discern which stocks a trade conflict might impact.

 The most important implications of the Trump Trade War

With this in mind, I have listed the most obvious but overlooked implications of the trade war. Those implications include:

  1. To survive the trade war the United States will have to devalue the dollar. Obviously, there is no way American remain competitive in trade with a strong dollar.


  1. At the present time many of its competitors including India and China have far weaker currencies. Obviously, that gives an importer that brings in Chinese or Indian goods far more “bang for his buck.”

  1. Therefore, some effort to lower the dollar’s value is inevitable.


  1. Nobody knows how long the trade war will last. In particular, Jack Ma thinks it will last for 20 years. On the other hand, I think it will only last for a year because the United States lacks the political will for a prolonged trade war.


  1. There is no political support in the United States for the trade war. Despite all the anti-China sentiment there is no grassroots support or even discussion of a trade war.


  1. The trade war is not affecting average Americans–yet. So far the Trump administration has avoided tariffs that will raise consumer prices. I suspect fear of a backlash from voters motivates that policy.

  1. The trade war could soon impact average Americans. America’s largest retailer Walmart (NYSE: WMT) supposedly urged US Trade Representative Robert (Bob) Emmet Lighthizer to leave a variety of goods off the tariff lists in a letter, The Hill reports.


  1. “The immediate impact will be to raise prices on consumers and tax American business and manufacturers,” Walmart’s letter warns.


  1. The United States is an oil exporter. America recently became an oil exporter thanks to a drilling boom. Therefore, the United States can live without a large currency reserve and can live with a strong dollar. For example; America can reinvest money normally spent on oil, on infrastructure construction.


  1. The US Congressional election schedule scheduled for November 6 will decide the fate of the trade war.

  1. If Republicans win control of the Senate (upper house) Trump will probably tone down the war or possibly end it. The U.S. Constitution gives the Senate the power to oversee trade.


  1. Trump can lose his trade authority instantly. If Trump goes too far, Republicans; who are theoretically free traders, might take his trade authority away.


  1. Democratic control of the Senate might embolden Trump to expand the trade war.


  1. Many Democrats share Trump’s basic ideas about trade (that Chinese imports hurt American workers). Taking a tough line on trade is one of the few ways Trump can score points with Democrats.

  1. A long-term trade war favors China over America. Chinese leaders do not have to run for reelection every few years like Americans do. Therefore, they can afford to wait out a trade war.


  1. China could probably survive without American exports such as grain and oil.


  1. The present US consumer economy is unsustainable without cheap Chinese goods.


  1. An aggressive trade war will put the US consumer economy at risk.

  1. High consumer prices could cause a collapse of the US retail sector and wipe out millions of jobs.


  1. No American politician will survive the backlash of a collapse of the US retail sector.


  1. Therefore, a serious trade war is unlikely.


  1. There is a strong possibility that the trade war is a political stunt designed to help Republicans in the November elections.

  1. Moreover, there is a possibility Trump and Chinese leaders have worked out a face-saving political settlement they will announce in November (after the election).

Under these circumstances, no investor or speculator should any moves until after November 6, 2018. My advice is to wait until after the US Congressional elections before making any investment or speculation related to the trade war.

We will not know if the trade war is for real until 7 November 2018. Remember that date.