Ever since Donald Trump announced his surprise tariffs on steel and aluminum last week, the world of finance has been wondering "What the actual fuck, bro? " And in response, Trump and the people most responsible for this seemingly bizarre decision are basically saying "We don't really know."
The president's increasinglynonsensicaltradetweets are conveying a troublingly weak understanding of what he's doing here, and also a sense that he's maybe doing all thisto negotiate a "Better" version of NAFTA. Considering that the response to the tariffs has been concern and anger leading the markets to slide hard and fast, this feels like Trump is threatening self-harm unless Canada and Mexico give him what he wants. Which makes even less sense when you remember that both those countries would like nothing more than to watch Trump self-immolate while whining about how he can't get what he wants.
On top of that we've all been treated to the pleasure of watching Wilbur Ross and Pete Navarro go on live television and basically tell everyone that these tariffs will have no real impact anyway, and that Trump will probably exempt a bunch of countries anyway when push comes to shove. All in all, it's almost begun to feel like this whole thing is a scattershot bad idea that lacks only forethought and follow-through.
And while a lot of people are tiptoeing around the fact that the emperor has no tariffs, one man is eschewing subtlety in favor of a more, dare we say radically honest, approach.
Yup, guess who...
The markets’ reactions to newly imposed tariffs and, more importantly, the possibility of a US-China trade war convey appropriate tip-of-the-iceberg concerns of what a trade war would mean for the US, China, and world economies and markets. To me, these concerns are reminiscent of the markets’ first reactions to the possibility of a military war with North Korea—i.e., the seemingly aggressive posture of Donald Trump conjures up pictures of war that are very scary, so the markets react, but that doesn’t mean that such a war is likely (at least in the near term).
That's our old pal Ray Dalio dousing the fire of panic with a cold bucket of "hold on, dummies" because Ray as seen this show before and he's not a fan. After explaining that the Chinese negotiate in a way that prizes nuance and subtle leverage, Dalio seems to wonder aloud if Trump even knows what he wants before offering his real hypothesis of what the hell is really going on here...
However, as important as the real trade issues is politics, which is especially important at this very political moment in both countries (i.e., ahead of “elections”). Politics can make politicians act tougher than they should be if they were operating solely in their country’s best interests because looking tough with a foreign enemy builds domestic support. Politically for Donald Trump, two of his three biggest strongman promises were 1) to build the wall with Mexico and 2) to reduce the trade deficit with China, by getting tough with them both. Xi Jinping has similarly made commitments to be strong in dealing with adversaries, including the US.
Dalio knows when someone isn't being bold and ruthlessly honest (just ask him) and this whole feint of looking tough on trade is just another one of those bullshit half-ideas that lacks the kind of conviction and genius that Ray looks for at Bridgewater. And he's also pretty sure that Trump will flinch first in this fake game of idiot chicken.
I believe that what is happening now is more for political show than for real threatening. The actual impacts of the tariffs that have been announced on the US-China trade balance will be very small. If tariffs are imposed as indicated, I would hope and expect the Chinese response to be small and symbolic so that both sides will have rattled their sabers without actually inflicting much harm. What will come after that will be more important. I wouldn’t expect it to amount to much anytime soon.
But even Ray Dalio has to admit that he has no clue just how crazy Trump might ply this...
If on the other hand we see an escalating series of tit for tats, then we should worry.
And Ray admitting a lack of certainty might be the scariest thing we've seen yet.
A US-China Trade War Would Be a Tragedy [Ray Dalio via LinkedIn]