Pro Perspectives 8/2/19

August 2, 2019

We've discussed for some time, the idea that Trump has used his position of strength in trade negotiations with China to wield influence over the Fed.

He's badgered the Fed for a rate cut for more than a year.  By driving a harder line on negotiations with China, he ultimately soured business confidence to the point that the Fed was forced into a “defensive” cut.   

With that in mind, yesterday I thought we should expect Trump, with a rate cut now under his belt, to get a deal done with China.

As we know, trade talks were restarted this week, starting a timeline that would get the ball rolling on a deal coming out of the expected rate cut. But China seems to be extending the timeline, pushing off further meetings until September.

With that, today, instead of an announcement that a trade deal is getting close, Trump came with even more aggressive posturing – a threat to ramp UP tariffs beginning September 1. 

The market took this as a message that a deal was nowhere near a consummation.  I think we have Trump turning UP the heat to get a deal done — sooner, rather than later. The September 1 deadline would target getting China back to the table sooner, and a trade deal this month!

Trump has had the upper hand in these negotiations (working with the backdrop of strong economy, relative to a weakening Chinese economy).  But as we get closer to the 2020 elections, China finds itself with building leverage. 

 

My view:  The worst case-scenario for Trump is China turning its back altogether on a deal.  That would likely spiral global financial markets, global confidence, and the global economy.  And that would be a deadly recipe for the prospects of a second term for Trump. 

Regardless of your political views, that's a scenario no one should want. 

The erosion in global confidence would overwhelm (global) fiscal stimulus and monetary stimulus, leaving both with no ammunition into what would likely be a global depression (as we were flirting with in mid-2016), not recession. 

Alternatively, if Trump does a deal (any deal), into a solid economy, with global central banks in an easing direction, global markets and economies will boom.  That gets Trump re-elected.  If he wants to press China on more demands, he can do it in the second term.   

 

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