June 17, 2019

We worry a great deal about the trade issue. There are two distinct scenarios depending on which way the administration chooses to deal with international trade. If the focus is on the trade balance deficit, we would be bearish and quite concerned about the future. On the other hand, the administration focuses on tariffs while a troublesome process the final outcome could end up being quite bullish, if the US focuses on reciprocity and is able to convince other countries to reciprocate by lower their tariffs to our tariffs. Here we view the trade issue as the wild card. Our outlook for a non-recessionary slower growth rate points to a decline in the real rates of return and thus the real interest rate, something that they have been observing lately. The Fed focus on reducing the size of its balance sheet means a reduction in the quantity of high-powered money circulating in the economy points to an inflation rate below the Fed target range. Finally, if the trade issue is resolved, one can expect any risk premium associated with the trade situation to decline. Under this scenario we would expect the long end of the fixed income market to outperform the short end. Also, as the yields decline relative to the rest of the world, we would look for the US dollar to give up some of the gains of the recent past.

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