Donald Trump surprised the markets and investors last week when he announced decisions to continue to aggressively battle China and seek significant gains in a trade agreement as his reelection year approaches quickly. Most investors believed that Trump was more concerned about the short-term gains for the economy than the long-term potential that would be derived from a trade agreement.  As a result investors likely believed that Trump would back off the aggressive tone he had taken previously toward the Chinese and either sign a compromised agreement or allow this opportunity to pass. This obviously did not happen.

Trump is either taking a strong stand at this point that he plans to fold quickly if it does not work, or Trump believes that he can keep consumer confidence strong (and hence the US economy) throughout the longer-term negotiations needed to eventually bring the Chinese to their knees.  Trump obviously knows that if the economy falls into recession over the next year he will not be reelected.  Trump will likely gauge what happens with consumer confidence and the markets over the next week or two and adjust his strategy as needed.


While Trump is an aggressive fighter and has difficulty walking away from a fight he is also quite clever and strategic in his actions and negotiations and is good at this type of strategic battle.  There are those who are pessimistic and these bearish investors are spreading fear with self-serving twisted statements that there will be significant pain for the US economy.  Maybe true if negotiating a trade agreement takes years.  However Trump will not likely let China and America stay saddled with tariffs as he negotiates what he believes America can get from the Chinese?


The reality is there is not that much short-term pain from the tariffs that are on our economy, but reality is not near as an important as perception when it comes to forecasting how markets will react and perform. Markets are not always rational. America’s exports to China are quite small and not meaningful in a $16 trillion US economy, hence Trump’s decision to sacrifice short-term pain for long-term gains makes a lot of sense.  China exports roughly 600 billion to America annually and only accepts 120 billion of imports from America.  The goal is to make that 120 billion a much larger and meaningful part of American GDP.  Currently it is less than 1%.  The higher prices on American goods are not a problem in a world where inflation is to low! Trump says why not risk it!


If this is the case why have the markets reacted so poorly over the last few days to this news? When the markets corrected in the fourth quarter of 2018 there was not a lot wrong with the US economy other than these same tariff problems as well as aggressive central bank policy to attempt to return interest rates to a more normal level.  As a result the markets returned to highs in record time. The Fed realized that the globe and the US are far too sensitive to interest rates and as a result chairman Powell decided to change course and no longer seeks to raise rates and in fact is now talking about lowering rates if needed.


When investors worried about recession in late 2018 the markets corrected 20 to 30%.  Most investors in hindsight thought they should have traded around that volatility.  However with correct hindsight it would’ve been extremely difficult to have sold early enough and bought back soon enough to have made much money on that strategy.


This type of trading has not been embraced by our firm, although we have done it for some clients who have directed us to we have mostly refrained from trading around what we perceive as volatility in the economy and Markets, within an economic cycle.  Our objective is to leave equities and real estate when the growth phase of this cycle is complete.


So again the real question that is before us is about whether or not this growth phase of the economic cycle is ending now and a recession of some sort lies on the horizon. We continue to maintain our position that this growth phase is not ending and that this cycle will ebb and flow for several more years before we slip into a recession.  We believe we are in a long-term super cycle that could last 20 years or longer.  We do not see the classic bust on the horizon but do believe that we could slip into recession quietly at some point if consumer confidence were to fall significantly because of some sort of geopolitical event. This is unlikely with an election year in front of us and central banks prepared to print money as needed to avoid any recession. There is no inflation or any reason why central banks will not act swiftly with aggressively monetary policy if our economy weakens further.  The US Economy is currently turning back upward after ebbing backward the last quarter. The tariffs are unlikely to change the direction of the economy hence something else needs to be added to the list of problems on the horizon for us to change our position.  We believe that equity and real estate assets will remain highly valued for an extended period.


We will obviously gather and synthesize every piece of data that emerges over the next few days and adjust our position as needed.