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Smoot-Hawley

Cullen-

What are the similarities/differences between Smoot-Hawley and the recent escalation of what now appears to be a real trade war between the US and China?

Is this a potential catalyst for a black swan type economic event?

Is the bond market (& the FED) simply assigning a probability to this scenario and cutting interest rates in anticipation of a potential negative outcome?

Significant Fiscal stimulus measures won’t be able to be taken until there is an actual recession and considerable market downturn.  That is likely still at least 6-9 months away.     So I expect the FED to cut rates a lot more and a lot sooner than the market is pricing in.

Our most powerful ATM is the value of our homes and our ability to borrow against it at a super low rate.

We need to return to ZIRP ASAP.

Trump is really playing with fire here. He thinks the global economy is a zero sum game where we win by crushing our competitors. The reality is that the global economy is a positive sum game and we're all better off when everyone does well. Crushing China doesn't help the USA. In fact, it hurts the USA because it reduces demand from China and boomerangs back to the USA in many ways.

The weakness we see in the global economy is directly attributable to all of this. Trump has been getting extremely bad advice on this matter and is stubbornly sticking to his guns despite evidence showing how wrong it is.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Great point Cullen.   The direct impact of these tariffs might turn out to be fairly benign.    But the impact of a significantly weaker Chinese economy will have indirect effects on everyone.

Trump is betting that China will blink first.   Right now it looks like he is miscalculating, and China is going to hold out until the 2020 election in hopes of a left wing softy. The market is not taking this very well and rightfully so.

Trump has no understanding of China and it appears also true for his advisors.    China will not blink first.   Labeling China a currency manipulator when its interventions in currency markets over the past few years have been to strengthen the renminbi isn't going to help.   Standard economics would suggest the renminbi should weaken if tariffs damage the Chinese economy, which has happened.   Is less government support for the renminbi manipulation?  No!  It's less manipulation.

History shows tariffs behave similar to unemployment rates, a rapid spike and a very long decay.  By artificially raising the price of the same real output they are, at the limits, either inflationary or depressing real output.    People trade because it is mutually beneficial.   But there is an asymmetric response to tariffs because resolving the frictions is slow because trust has been broken, and tariff protected segments of the economy fight to preserve their unnatural gain.  The 25% tax on light trucks is a classic example.

Even if Trump is defeated I don't expect a rapid reduction in tariffs.   I think it best to assume that GDP growth, in the US and the world,  has been reduced and this impact will be protracted.  The size and length of the tariff impact is unknown.  But we do know that it is a net negative in aggregate.

Again, I think it naive to think the tariffs are going away any time soon.

Trump doesn't seem to understand how authoritarian regimes operate. He's shown a consistent level of ignorance trying to navigate Russia, North Korea and China. None of these regimes will bend to his will. They would rather burn their own economies than lose face in their own country.

At least someone is taking them on.  I've got a hard time seeing Hillary Clinton doing the same.

China will come out of this worse as they're closer to being on the gold-standard for Smoot-Hawley than the USA is.  They're gonna pull out all the stops to keep their Ponzi Economy afloat, though.