These are interesting times. We hope it doesn’t get more interesting! Trump’s wild policy gyrations have already shaken markets and investors badly, with many conversations now dominated by people trying to outdo one another prophesizing scenarios of gloom and doom. S&P 500 equity index is down about 14% from the top, while tech focused NASDAQ is down about 19%. The loss of paper wealth that equity investors had built over the last 1 year till February is hurting. Credit spreads have also widened sharply, though are still below other peaks of recent years (see chart of single-B credit spreads below). Treasury yields are all over the place, and people are wondering if the faith of bond markets in the US government is getting irreparably harmed.
Trump, tariffs, trade wars, market tantrums
How long can Trump sustain his tough stance on tariffs? Will he reverse course and grant exemptions for a longer time? We feel that it is not the equity market or bond market tantrums that would make him change. As shown in the chart below, half of US households have less than 5% of their wealth in stocks; so, the stock market going down may not affect his public support from his loyalist base, even though the wealthy class would make a lot of noise through the media. Instead, the eventual shortage of daily consumption items (which would inevitably happen when the inventory runs out if imports grind to a halt) can cause a price spike which would spook people a lot more.
Trade wars – or any kind of wars – can only be sustained with the support of the peoples of a country. Are the people of the US ready to sustain the pain of shortages and high prices? Is the narrative propounded by Trump (of other countries milking the US economy through trade surpluses) strong enough to keep the public support for his trade policies? We feel that herein lies the weakness in Trump’s negotiating strategy. As consumption per capita in US is quite high, a trade war would force a large adjustment in people’s consumption habits – for which they may not be ready. In a noisy democracy like the US, and when information wars are thrown in the mix, the narrative of public support can quickly slip from Trump’s hands. That’s why we feel that he has only a limited time window to strike deals with most countries and bring back policies to normal.
