Toldkrig. Authers: Hvad komme der til at ske nu

Next Move, Rest of the World

The obvious intention is to spark a negotiation. But it’s politically difficult for foreign leaders to negotiate with a US president who has just insulted their country, while the obscure math makes it difficult even to start a discussion. “I don’t see how many leaders could pick up the phone to negotiate after this,” commented Tchir.

The single biggest decision rests with China, and whether it will allow its currency to devalue further. For several years, the yuan has been weak but hasn’t slipped below 7.4 to the dollar. It’s a clear ceiling, and as this terminal chart shows, the offshore yuan is already very close to breaking it:

In Europe, always slow-moving, a 20% tariff rate makes it easier to organize retaliation. It will be hard for member countries to convince their electorates to take quite such a big penalty lying down. But retaliation comes in different forms.

Tina Fordham of Fordham Global Foresight argues that an important unintended consequence of the trade rhetoric to date has been “the fomenting of a growing anti-US alliance, including between such strange geopolitical bedfellows as China, Japan and South Korea — historically bitter rivals” who had already indicated a joint response to US tariffs. Europe’s sudden moves toward coordinating investment for defense are another example.

There is also the possibility that “retaliation” could take the form of fiscal policy, not tariffs. George Saravelos, head of FX research at Deutsche Bank AG, said:

Put simply, a tariff retaliation would be a big growth negative. Alternatively, a fiscal retaliation (= offsetting fiscal stimulus) would be much more positive. Our expectation is increasingly leaning towards the latter; consumption subsidies and corporate tax breaks.

Trump might just badger the rest of the world to find new trading partners, and to borrow money to create their own growth. That would be much better for the global economy. It wouldn’t bring back US manufacturing jobs.

Pre-Liberation Markets

“Part of the pullback process is the churn involved in changing global leadership,” says Chris Watling of Longview Economics. “That is, the switch from portfolios dominated by growth stocks, to those with higher cyclical ownership (via defensive sectors).”

Within the US, that turn has meant a move into large-cap value stocks, which enjoyed a spectacular first quarter — the best compared to growth, according to the Russell indexes, since the extreme conditions of the bursting dot-com bubble in 2001:

Bank of America Corp’s Savita Subramanian suggested there was further upside for large-cap value stocks because they represent “quality and old economy cyclicals.” It’s noticeable that defensive stocks that do well in tough times also enjoyed a rotation in their favor:

Also logically, US investors had already been exiting the stocks that were particularly dependent on overseas revenues, as illustrated by S&P indexes. If these tariffs stay in force for any significant period, we can expect this rotation to go a lot further:

Emerging markets offer the greatest cause for concern; Asia’s, in particular, are the biggest losers from this package. And yet EM credit held up well in the months leading up to Liberation Day, and stocks outperformed.

While there may be emerging cause for concern, there has been one very clear winner so far. Put together a market preference for old economy stocks deriving their income primarily from the US, and for value, and you get Warren Buffett’s vehicle Berkshire Hathaway. Indeed, its stock price has on its own raised the S&P 500 by 17 points so far this year, more than any other company. Nvidia Corp. had accounted for a loss of 70. These are the 10 greatest leaders and laggards for the year to date:

Zeroing in on the contest between Berkshire and Tesla Inc., or old economy versus new, the turnaround is remarkable. Since the beginning of last year, Berkshire is up almost 50%. Tesla, judging by the after-hours move in its stock, is underwater:

Buffett’s uncanny genius even spreads to an opportunistic acquisition he made in the turmoil of September 2008: a stake of roughly 10% in Chinese battery-maker BYD Co. That worked out well, even if Liberation Day will make life harder. And of late, Warren’s vehicle has even outpaced Elon’s:

There’s a new order. The world has been turned upside down. Markets were (kind of, a bit) ready for it. And even at 94, it appears that we can still rely on Warren Buffett.