Trump Tariffs A Black Swan Event?
The headline grabbing story last week for the Big Four: stocks, bonds, currencies and commodities, was President Trump’s announcement to place tariffs on steel and aluminum. Following the announcement, the Dow fell more than 1,200 points and there was weakness with most commodity markets as well. The decline with stocks and commodities unfolded even though the President said, "trade wars" with other countries would be "good, and easy to win." The President may believe that, but thus far, the markets are not that sold on the idea.
The outstanding story this week was the resignation of Gary Cohn, U.S. chief economic advisor for the Trump Administration. Mr. Cohn is a strong supporter of agricultural and a “free trader.” Some consider Mr. Cohn as one of the two pillars in the White House keeping the stock market moving north and the economy on track. The other pillar is Treasury Secretary Steven Mnuchin. But when the news hit the wires that Cohn resigned, the Dow fell 450 points and commodities per se also took a hit.
Secretary of Agriculture Sonny Perdue remains in the Trump Administration and has been a voice of reason regarding trade matters, along with Cohn and Mnuchin. But with the resignation of Cohn and import tariffs placed on steel and aluminum, the odds are increasing that the Trump Administration may rip apart the North American Free Trade Agreement, that Perdue favors, in hopes of getting a better deal for the U.S.
But the tariffs are not the biggest problem with the mess that is unfolding quickly. The biggest problem lies with retaliation from other countries including our allies that may place tariffs on U.S. goods flowing into their countries. That is what a trade war is all about. It is about retaliation!
From the New York Times: “European Union officials unveiled an array of tariffs on Wednesday that they would place on American-made goods if the United States followed through on President Trump’s plan to impose penalties on imported steel and aluminum, raising the specter of a trade war.”
Also from the same NYT article: “A provisional list of items being targeted ranges from steel to T-shirts, also including bed linen, chewing tobacco, cranberries, and orange juice, among other products. The overall size of the business affected is relatively small, worth about 2.8 billion euros, or $3.5 billion, in imports, paling in comparison with the nearly €250 billion of goods the 28-nation bloc bought from the United States in 2016.”
From the final paragraph from the article above: “European leaders were quick to stress that they did not want to trigger a wider trade dispute, with Donald Tusk, the president of the European Council, saying in a tweet that trade wars were “bad and easy to lose,” a reference to an earlier tweet by Mr. Trump in which he claimed they were “good and easy to win.”
A number of analysts on Wall Street are viewing the Trump tariffs and resignation of Gary Cohn as a “black swan” event. The concept behind such an event was popularized by Nassim Nicholas Taleb, a financial professional turned writer. According to Wikipedia, “after the results of the 2008 financial crisis, Taleb argued that black swan events are impossible to predict, yet have catastrophic ramifications. Therefore, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to plan according.”
At mid-week, lean hog futures were sharply lower with values slumping to a new, three month low. The reason for the weakness was stated clearly by a Reuters News item. “Chicago Mercantile Exchange lean hog futures on Wednesday hit a three-month low, partly rattled by talk of a potential trade war if the U.S. tacks higher tariffs on imported steel and aluminum, traders said.”
The day after the oinkers did a nose dive, cattle futures slumped to a 5-week low. However, it is no secret China has already hinted they may reduce or halt the buying U.S. beef and or U.S. soybeans in the event of an all out trade war. China buys more than half of all U.S soybeans sold over overseas. And from China comes this comment from Chinese Foreign Minister Wang Yi on trade: “China would have to make a justified and necessary response.”
Based on history, the Trump Tariffs are a “black swan” event, pure and simple. Investors, traders and agriculture producers should follow the advice of Nassim Nicholas Taleb and “plan according.” I am not in the camp that believes trade wars are, “fun” and “easy to win.” Based on history no wins in a trade war.