Trump, Trade & The Federal Reserve


By Miles Clyne

Trump’s Battle with Trade and the Federal Reserve escalates, putting markets at risk.

Escalating trade tensions between the US and China have stoked concerns that global trade could slow even more. At a minimum, this puts energy and base metal prices under pressure. This past week, three Asia Pacific interest rate cuts indicate that central banks have become concerned about the fallout which is a warning to investors that economic risks have increased. A combination of weakness in International markets and rising bond prices validates this concern. 

 The world needs cooler heads to prevail when tensions run high. This doesn’t look like the narrative that will play out in the short-term.  My way or the highway may not be the stated mantra, but it is the underlying message of President Trump.  If we are to believe his words China has been abusing the US, aggressive tariffs will set everything right, and Presidential pressure on the Federal Reserve to lower interest rates is prudent. Then we must believe President Trump knows more about the economy than the economy knows about itself. 

 The reality is that the market/economy will figure its way around obstacles, as China did in letting its currency get devalued to offset the tariffs imposed. Now the US consumer is paying more for goods and China may be no worse off. Given the consumer is bearing the brunt of tariffs, the Federal Reserve is considering lowering interest rates to help support the economy. Net effect is likely a lose–lose scenario for most Americans and others globally while President Trump gets his wish from the Feds.

 I’ve regularly shared my belief that the primary cause of market risk is driven by either politics or natural disasters. In the scenario we are living through what is the upside for Trump to create all of this chaos?  In my opinion, President Trump wants a second term come 2020.   The narrative that unfair trade deals are the cause of why the US is struggling of late, and that the Federal Reserve isn’t cooperating by cutting interest rates is what Trump would have everyone believe are the problems.

If Trump can get enough buy-in, which is entirely possible given what we have seen him capable of, then all he has to do to fix the issue is make a trade deal with China. He is likely going to get the Federal Reserve to cut rates which may keep the economy from falling into recession, but given the ongoing tension, growth in the market should be limited. When Trump signs the trade deal with China there could be a significant global relief rally in the markets and he can label himself savior to the American people and the economy. 

 As with any good joke, it is all in the timing. This means we could struggle along in a mostly sideways market for about another year. Signing a trade deal too soon puts risk on the table if the rally is short lived.  How this plays out can change day to day.  If there is limited downside to the markets given the likely direction of interest rates and if there is a substantial lift in the markets come the fall of 2020 being out of the markets could be as risky as staying invested through the fall of 2020. The old adage of “Don’t fight the Fed” comes to mind. See the chart below as to why. The chart only goes to 2006, but the message is clear.

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