Quick Takes: The Trade War, the Fed, and More

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 20, 2019 11:47:17 AM

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quick takesI was just in North Carolina speaking to clients and got home after midnight. Frankly, it has been a slow morning! So, I thought I would provide some quick takes about points that don’t warrant a full post but are still worth talking about.

The trade war

The real impact of the trade war isn’t the tariffs. Instead, it is how this dispute will change the structure of American and global business. Put yourself in the seat of the head of GM, Apple, or any other major company. Your business depends on manufacturing abroad, and you just found out that can pretty much disappear with a tweet. What are you going to do?

You have to reposition your suppliers to minimize that risk. You will be—you have to be—changing your supply chain. If you think about it, though, the reason you had those suppliers was because they were the best: the cheapest, the most efficient, and the right fit for your business. Changing them means the replacements will not be as good: more expensive, less efficient, and so forth. By definition, the trade war means American business becomes less efficient and more expensive, which means either prices go up (to the detriment of consumers) or profits go down. These results are the real damage, not the tariffs. And they will happen almost regardless of what the end point of the tariffs turns out to be.

The Fed

I wrote about the Fed and interest rates yesterday, but one more point is worth making. The role of the Fed has changed over the past couple of decades from its statutory mandates of steady inflation and maximum employment to one of keeping the economy expanding. This change has worked because inflation has been steadily declining. But at some point, it will come back and bite us. For the moment, though, a real driver of the expansions we have had has been the Fed acting as a tailwind. Don’t fight the Fed has also become applicable to the economy—not just to the markets. This tailwind has been one of the things keeping the expansion going so far, and it is a significant reason we should not be quick to decide the expansion is over just yet.

Demographics and interest rates

I have been looking at demographics and interest rates around the world as part of my Commonwealth National Conference speech. We talk a great deal about central banks and monetary policy as a determinant of rates, but demographics are probably at least as important over medium- to longer-term time scales. When you look at the data, it is another factor that will help keep rates lower for longer. I will be writing more about this topic later.

Politics and the election

I am now hearing more questions about how the election will affect the markets. I am also getting quite a few questions about how a Democrat winning the White House or, conversely, how President Trump getting reelected would affect the markets. These questions reflect the rising edge of a wave of uncertainty that could act as a real headwind next year for the economy and the markets. Both hate uncertainty, and the policy differential between the two parties is once again at a historic high. To get these questions, this early, is a bad sign for what will happen when the primaries are over and the main campaign gets underway.

Conditions remain positive

Things are still pretty good. The final takeaway from the North Carolina trip was that there were fewer questions than usual and, in particular, fewer worried questions. When the average person is not too worried, that is a positive sign—and that is what I saw yesterday. With all of the points above, it is important to remember that conditions remain positive for most people. People remain concerned about the future, but the reason for that is they are not actually very worried about the present.

Have a great weekend!

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