“This is a chaos moment. If I pay the tariffs, I don’t have any money.” – Harlan Stone, vinyl floor importer
Last week we wrapped up the re-post of our four part series on the potential pitfalls of obsessively consuming the news. In recent years we have taken the wisdom and insight from that series to heart and largely disconnected ourselves from the manic pace of the 24/7 financial news cycle. We’ve noticed our tendency to think longer term and at a higher level has been enhanced as a result. But this is not to say that it’s not important and beneficial to keep tabs on the major trends and events affecting the economy and financial markets at a structural level. So with the wisdom and insights from our recent series in mind, this week we are going to turn our attention to current events and how they are affecting the markets.
Needless to say there is a lot going on in the world right now, and for us here in the US the front page news continues to be Trump’s trade war with China. Quite honestly, we are somewhat surprised by the staying power of this issue over the past two years. We originally believed it to be a passing threat that would move off the front page and become “yesterday’s news” in no time. But here we are, well over two years since the original sabre rattling began and a full year into the first imposed tariffs. The day by day developments continue to move markets and affect strategy within the world’s largest corporations.
For review, the nearby graphic from the Wall Street Journal provides a timeline of how the trade war has progressed since the initial tariffs were levied on $50 billion in Chinese goods around this time last year. Over the course of a few short months, the tit-for-tat dispute escalated to both countries imposing tariffs of up to 25% on hundreds of billions of imported goods.
Most recently, after being frustrated by the fruitlessness of ongoing negotiations, Trump announced a fresh round of tariffs that would impact the remaining $300 billion worth of annual imports from China that had yet to be targeted. Given the fact that the Chinese are already applying a 25% tariff on virtually everything they import from the US, this time they responded by immediately devaluing their currency by lowering the Yuan/Dollar peg. The impact of lowering the value of the currency is to make US imports more expensive for the Chinese while making Chinese imports more affordable for Americans, thus partially offsetting the additional cost of Trump’s new tariffs.
Trump immediately accused China of currency manipulation, but a small adjustment to the currency peg is hardly a surprise move on their part. As the editorial board of the Wall Street Journal notes, “This is less retaliation than a recognition by Beijing and currency markets that decreasing trade flows with the U.S. and a softening Chinese economy create less global demand for the yuan. Mr. Trump with his tariffs is the architect of the weaker yuan he claims not to want.”
Just a few hours ago Trump announced that the bulk of the new tariffs would be delayed until December so as not to negatively impact the Christmas shopping season. But at this point the idea that this trade war will have negative near term impacts on the US economy is no longer just a theory. A simple Google search will produce numerous stories of day to day business operators being impacted by the tariffs. A great example is offered in the story of Harlan Stone, a vinyl flooring importer, who gave us our opening quote.
The economy at large is showing many signs of continued slowing as uncertainty creeps in and business investment tapers off in response. What’s more, this trend in the underlying economic data is now been confirmed by financial markets. Beyond the widely visible stock market selloff and rally in gold, the move in bonds has been the most notable in our opinion. The bond market, which is considered by many to be representative of the “smart money” and thus a great economic barometer, has rallied sharply on the back of a classic flight to safety as seen in the steady downward trajectory of the 10-year Treasury yield year-to-date (bond yields down = bond prices up).
This movement in interest rates portends diminishing prospects for the US and world economy. In keeping with this line of thinking the Fed recently reversed course and broke the seal on a fresh cycle of interest rate cuts, with another cut of 0.25-0.50% expected next month. The developed world has not experienced a legitimate recession since the Global Financial Crisis, and the current expansion cycle is growing long in the tooth by many historical standards. The longer we go without a recession, the more the financial world remains on the edge of its seat wondering if we are on the verge of the next “big one.”
Amidst these Chaos Moments we would offer the following advice. First of all, make sure you’re giving yourself a break from the tireless news cycle to take a step back and gain perspective (again, see our recent series on this). Regardless of how things play out, don’t panic! The worst financial decisions are the emotionally-driven ones that are born from a place of extreme fear or greed. Revisit your long-term plan as needed, and stick to the common sense financial and investment disciplines that you’ve laid out to help you reach your objectives over time. From an investment perspective we think it’s critical to remain diversified and ensure that your asset allocation is appropriate for your stage of life and emotional temperament. We’re constantly reminding ourselves and our clients that life and the markets will always bring about changing seasons and weather patterns. Weathering the storm well requires a steady hand, especially amidst the chaos.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.