May Update, 2019: Bull In A China Shop

“There must be some way out of here said the joker to the thief.” -Bob Dylan

By the time this note reaches you, China and the U.S. will have gone to the next level of self-destructive behaviour causing their citizens to pay more for each other’s respective goods and services. I’m sure if you read the papers this morning, the pronouncements of doom and impending recession will be on the front page. Maybe even a picture of a trader on the New York Stock Exchange holding his head in his hands? You’ve probably seen him before, he’s somewhat of a celebrity.

Here is our take: this will pass because neither side can afford to behave in a self-destructive manner for an extended period of time. Neither side wins by causing their consumers and companies to lose.

China needs to sell things to America, and they also need to reform their system of economic protectionism and stop the theft of intellectual property. They no longer need to steal—they have an abundance of local talent and are quite capable of competing on the global stage. But change is difficult, old habits die hard, and we don’t like being told what to do.

Until now China has been the biggest loser in this tussle but the pain to the U.S. consumer is about to be felt. This new round of tariffs will apply to items that you buy in retail stores. Think handbags, clothes, shoes and furniture. China is by far the largest supplier to the U.S. of consumer goods. There are very few substitutes. It will likely cost the average American family of 4 about $790 more a year to get dressed, walk, sit in a chair and watch TV. President Trump’s loyal fans and farmers in the rust belt are already getting smacked in the head from existing tariffs, and now he’s hitting the whole country. Not a smart election move. He might be firing himself.

President Xi Jinping in China must make some decisions and figure a way to deliver the message to his aging population that their kids, who are expected to pay for their retirement, are losing their jobs and their stock market is in free fall. All because he thinks it is ok to steal from America and have unfair trade relationships. He may be able to crack down with his big police force and population surveillance but that doesn’t put food on the table.

China may be able to mess with Canada because we are small, but President Trump runs a bigger show and for the time being, he has the upper hand. His problem is that his hand is taking money out of his voters’ pockets.

This fight had to happen eventually. We are in the late rounds of the battle. Look for both dummies to return to their respective corners sooner rather than later. Neither side wants to fight that long. It’s golf season and that’s a far more genteel way to work out differences.

The effects on the stock market should wear off over time. Our portfolios have reasonably small economic exposure to this spat. The impact on the profits of the companies you own should be relatively muted. The headlines will be more exciting than the reality—kind of like how the pre-show to the big game is better than the game itself. It’s all about the message to their fans. The biggest impact will be on sentiment and valuations will bounce around with every bellicose tweet.

In the end, this will pass and the resulting trade agreement will make for a better world order where companies compete on fair(er) grounds, and markets for companies’ goods and services are large(r).

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