The Trade War Is About To Heat Up

Tariffs Will Be A Main Driver Of Volatility

Things are about to get rocky. The market still continues to try and price in tariffs and sanctions.

This is high-stakes poker.

Trump opened with a big raise.

China hesitantly called. They slowed purchases of U.S. goods and agricultural products.

Soy and other farm prices dropped. Trump then raised again. The call was offering farmers billions to offset their losses. His raise was to schedule higher tariffs.

Then came the flop (in poker terms, a round of cards that get dealt prior to more betting).

Bad news for China: African Swine Flu has struck and it is decimating Chinese hogs.

That means demand for U.S. hogs is rising and undermines China. Pork is the #1 source of protein in China.

U.S. hog prices are down ~10% from last year, but so is the yuan. That’s before the impact of ASF takes hold.  In other words, Chinese consumers are more likely to see food inflation than not.

In the China/US poker game, China did not pull a card it needed.  But the US did.

The next move is Trump’s and he is well-positioned.

Both the selection of goods and the timing work are in his favor.

The first round of tariffs hit products where China is exposed. But the U.S. private sector is not.

Specifically, (1) no U.S. consumer products were targeted and (2) only products where buyers had sufficient alternatives (where Chinese suppliers have less than 20% market share.)

The next round is where consumer pain will be felt. Smartphones, air conditioners, and so on. Apple will have to decide whether or not to absorb the cost (put differently, Apple needs to decide if they make $50B in profit next year or $48B.)

Here is where timing is Trump’s friend. The next round of tariffs really won’t affect this holiday season, so smartphones are relatively safe. And the US consumers won’t notice much of an impact on air conditioners until April or May.