September 16, 2019

The analysis presented here provides a very straight forward strategy for the trade negotiations. If things work out for the better, we should expect the markets and interest rates to rise and the dollar to depreciate. The obvious implication being to increase exposure to equities and shorten the duration of the fixed income portfolios. Within the equities, we expect the rest of the world to increase by a larger percentage than the US. Hence increased exposure to the rest of the world may be warranted, to the countries that lower the tariffs the most and those who benefit from the supply chain. We focus on the foreign exchange value of the dollar and the bond yields, i.e. flight to quality and the confirming indicators of which of the two scenarios is playing out. If things do not work out, a trade war that pushes everyone into autarky could easily develop. A full-fledged trade war will make everyone worst off; the rest of the world will underperform; the dollar will appreciate and the decline in yield swill led to an increase in the duration of the fixed income portfolio. Let’s hope President Trump takes the road less traveled. Let’s hope he negotiates a direct solution and successfully stops the technology theft. The question is whether the Trump Administration will go to the mat for such an outcome. The President needs to make the calculation as to whether the benefits of his trade actions exceed the costs. If he believes what he says, the answer is a rotund yes and the president should go for it. But is he willing to risk his reelection? Only he knows.

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