Psychological bias stood out early on with Mr. Trump's signature show of “pride” and of “prejudice”, giving titles to our earlier notes
Reflecting the President's preconceptions, the suite of tariffs on foreign imports aimed to shock the US trade partners into submission
This is why the current excesses could not surprise and why the foreign exporters exposed to US market loss, as well as the American importers suffering heightened costs, would underestimate the length of the tariff wars at their peril
The global economy will indeed suffer
And it is impossible to predict who will blink first in this game of chicken
- President Trump? - if the S&P 500 index keeps blinking red and the Republican mid-term elections become a looming disaster
- The Fed? – if recession fears and confrontation with the US president override real concerns of tariff-induced inflation and lead to one (or more) rate cuts
- President Xi? – if the deflationary trends in the Chinese economy, boosted by the partial loss of US export markets, become too much to bear
These three players seem all that really matter to support the American equity market and neither can envision a climb down
President Trump will avoid a loss of face at all cost, making negotiations with the major exporters – China but also Europe, Japan and South Korea – impossible
The Fed is keenly aware of the market-perceived inflation risk and consequently potentially rising bond yields (already a fact in the high risk – high yield segment), which leaves little margin for flexibility as a rise in cost of US debt would destroy any semblance of budgetary rigor
President Xi, in the commanding position of his regime, controlling all the political and financial tools of government, is no less cautious in the full knowledge of his country’s frail and indebted financial institutions
Setting aside Europe as a smaller player in this argument because the region has never managed to integrate its capital markets, which could have been a potent instrument in the circumstances, the deadlock between the three major players will feed uncertainty and unpredictability
In the end, Mr. Trump might be best positioned to drape a tactical retreat from trade war extremes in a ‘winning’ argument at a much lower cost than would be extracted from the Fed (igniting inflation and driving yields higher) or from China (still healing from real estate wounds…)
Hardly predictive, these calculations cannot ignore the underlying systemic challenges which the U.S. has to address
Since 1945, America has been in the enviable position to set the rules, rules of international trade, rules of global governance and rules of geopolitics
In fact, with the sense of entitlement belonging to the superpower, the U.S. achieved three goals at once
- nurturing a highly successful economy for the benefit of Americans
- guaranteeing security and physical integrity within the country’s borders, and for the benefit of its allies (East and West)
- relying on a “no holds barred” dominant position in the geopolitical frame
In more than one sense, this is the world President Trump is referring to with a keen sense of the loss his country is grappling with
Yes, the economic performance has been great but with the consequences of globalization – and of robotization – to say nothing of the AI take-over – the probability of job losses is high, failing the promise of a better life for all Americans
Yes, Mr. Trump insists on the security guarantees of America ensconced behind wide oceans but in this unusual stance, doubts are creeping in – the probability of potential insecurity may in fact be higher than the President lets on
Yes, Mr. Trump, ever the salesman, makes a big show of his initiatives on the world scene, but the “no holds barred” fights the President envisions with America’s competitors, with contests free of restrictions or hampering conventions, seem on second look forlorn, nostalgic and untrue
Undoubtedly, America is still a land of promise for investors, for entrepreneurs and for anyone willing to achieve success with hard work and the country will remain a ‘primus inter pares’
But the sense of loss which taints so many of Mr. Trump’s provocative assertions is eerie, an invocation of the superpower that was and isn’t anymore …