The Trade War™ wiped over ONE TRILLION DOLLARS from the stock market on Monday. Will the market ever recover from this disaster? It turns out that a trillion bucks ain’t what it used to be. Financial reporters showed Monday’s market movement as -2.41%. Financial entertainers breathlessly echoed the ONE TRILLION DOLLARS talking point. Being down over 2% in one day isn’t good, but it was a useful tool to separate news sources that are serious about their reporting from the click-bait farms. Oh and will we ever recover? The S&P 500 was down 0.11% on the week, as of Thursday’s close, but oddly we haven’t heard any stories of the market gaining ONE TRILLION DOLLARS over the last couple of days. Weird.
There is a lot of hand-wringing over the consequences of the very public negotiation with China. Bad financial news of all sorts is inevitably traced back to tariffs. Is there a better way to negotiate trade than via Twitter? Yes, but with the media’s short attention span, it’s easy to forget why this is all happening. China joined the World Trade Organization in 2001 (after a 15 year negotiation!!!). China’s forced intellectual property transfer policy goes against the WTO agreement and the United States is finally holding them to account. The messaging on this is poor from US leadership (it’s tough to know who’s actually leading these negotiations from the US side at times), focused more on the trade deficit than the nuts and bolts of trade itself. The trade deficit is a convenient scapegoat because it polls better, but a quick look at per capita GDP blows this argument up.
Of course the US has a trade deficit with China
We have more money per capita than they do and we like to buy stuff. If not China, we’d have a massive deficit with some other country with cheap labor. Besides, China turns around and buys the world’s highest quality financial products from the United States (Treasurys and real estate). This isn’t counted in the trade deficit. Ah! But what if China decides to sell all of its US government debt? China owns a lot less US debt than is commonly believed (about $1 trillion out of $22 trillion outstanding). With high-quality European government debt yielding basically zero, US Treasurys are a bargain. They even have a positive real return, adjusting for inflation. A massive Chinese selling of Treasurys would likely push this yield higher, making them even more desirable for other investors. At the same time, this would leave China with a significantly smaller reserve of US Dollars. This would be like Dr. Evil putting his billion-dollar business empire at risk to extort ONE MILLION DOLLARS out of the UN, except the Chinese understand this would be foolish. They are playing the long game, hoping to cause enough pain to the US in the short-term that they can get this all resolved without compromise.
Despite the headlines, America is negotiating from a position of strength. The United States is much more important to China as a trade partner than China is to us. China is clearly violating agreements it made two decades ago. In spite of personality conflicts with the US President, holding China to account has bipartisan support in the United States. Other countries are pleased to see the United States confronting China. Although the negotiation process has strung the media along, promising a resolution soon (now expected by the end of the year), I wouldn’t be surprised to see this drawn out through the Presidential election. An end to the the Trade War™ could boost poll numbers and the stock market and the cynic in me says it’s a possible Trump card that will be held until needed. In the meantime, it makes little sense to trade in reaction to every tit-for-tat (or is it tweet-for-tat now?).