Will Trump Ignite A Full-Blown Trade War With China?

Will Trump Ignite A Full-Blown Trade War With China? - Boxing Gloves 2


Donald Trump has repeatedly accused China of manipulating global financial markets to gain a trade advantage over U.S. industries.


The President-elect says China is intentionally weakening its currency, the yuan, thereby making U.S. dollars relatively stronger and Chinese goods appear artificially cheaper. This illusion of cheap Chinese goods hurts U.S. industries, so the theory goes, and American jobs suffer as a result.


Here's a tiny taste of Trump's China theory:


"Look at what China is doing to our country ... They are devaluing their currency and we have nobody in our government to fight them ... They are using our country as a piggy bank to rebuild China."


It's a neat theory that plays well in the Rust Belt (i.e. Trump's core constituency) but upon closer inspection of the facts reveals a more complicated truth.

Not Just China: America's Trade Issues Run much Deeper


First, the facts. As Hedgeye Senior Macro analyst Darius Dale writes in today's Early Look, China is the U.S.'s third largest export market, following Canada and Mexico. In 2015, the U.S. and China exchanged a total of $599 billion goods and services, with China netting a $367 billion surplus advantage (in other words, China exported $483 billion to the U.S.; U.S. exported $116 billion to China).


So far so good for Trump's theory.


But here's where it gets a little murky. The U.S. ran trade deficits with 100 other countries last year, Dale points out, so it's odd to single out China as the bad actor on global trade. 


"To the naked eye of a less-informed populist like Trump, the U.S.’s disadvantage comes across as the result of bad trade deals and unfair trade policies on the behalf of the Chinese government. From our vantage point, that’s only half true at best.


Specifically, the U.S. doesn’t have a series of bilateral issues with China and other key trading partners; in 2015 it ran trade deficits with 101 countries. One hundred and one. The broad-based nature of our bilateral trade deficits is not likely to be the result of “bad deals” or “unfair practices” as Trump and his national trade team have repeatedly suggested."



So what are we missing here? The U.S. consistently consumes more than it saves. Plain and simple. As you can see in the Chart of the Day below, U.S. Gross National Savings less Investments as a percentage of GDP (in short, the amount of money Americans save each year) has been negative for the past 35 years. This mirrors the U.S.'s Current Account Balance as a percentage of GDP (essentially the net trade balance, or exports minus imports, versus the broader U.S. economy).


There you have it. 


Will Trump Ignite A Full-Blown Trade War With China? - Chart of the Day 12 29 16

Why Trump's Misconceptions Matter


Facts don't always filter into policy. That's the risk. Trump's rhetoric plays well among his core constituency so there's a considerable amount of risk to investors who blindly dismiss the possibilities of a full-blown U.S.-China trade war. Trump's pick for director of the National Trade Council, Peter Navarro, is no salve. He literally wrote the book on combating Chinese trade and the country's increasing militarism. (see "Death by China" and "The Coming China Wars.") In other words, this is a risk worth watching.


More to come.



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Did Trump Change the Republican Party Forever?



Donald Trump’s Election Day victory will go down in history for many reasons.


“This is probably the most incredible election ever in that we’ve never had a time when someone lost the popular vote by so much, and won the presidency without going to a vote in the House of Representatives,” says historian, author and Hedgeye Demography Sector Head Neil Howe.


Howe is referring to the rare case where no candidate wins a majority in the Electoral College and the vote is put to the House of Representatives. This is called a contingent election. “We’ve had this two times before. Rutherford B Hayes in 1876, that was the election that ended the Reconstruction. And we had it with John Quincy Adams,” he says.


What happened?


Well, Trump attracted a new Republican party voter. In the video clip above, Howe explains the breakdown of how Trump won.


Here are a few takeaways.


  • In 2012, the gap between the percentage of voters for Democrats versus Republicans in households making $50,000 or less was 12 percentage points wide. Trump halved that gap to 6 or 7 percentage points
  • The share rural voters going to the GOP continues to climb; 53% for McCain versus Obama; 60% for Romney versus Obama; 67% for Trump versus Clinton.
  • “Hillary piled up all these superfluous votes in New Jersey and California and New York. But it didn’t do any good.”
  • Trump got a higher share of Millennial voters than Republicans did in 2012.
  • More African Americans and Hispanics voted for Trump than for Romney. “Even though a lot of that had to do with Clinton rather than Obama I’m sure,” Howe says.


All of this means: “Trump is taking the GOP and radically shifting it to a lower income, lower socioeconomic base, which is increasingly rural,” Howe says. “It gets to the future of the party. Is it going to be Trump’s party or is it going to be the high and dry neoliberal globalist party?”


We’ll see. One thing is certain. It’s going to be an interesting four years.

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Yup. A lot has happened in global markets since November 8, 2016. Here's a quick look at some of the more significant market developments since Donald Trump won the election, courtesy of Hedgeye cartoonist Bob Rich.



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Most pollsters and pundits were certain victory belonged to Hillary Clinton. It didn't. Investors were forced to (quickly) reassess the market and economic consequences.



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Small cap stocks have been the biggest beneficiary of the market's newfound optimism. The Russell 2000 has rocketed ahead and is up over 15% since 11/8.



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It hasn't been rainbows and butterflies for all asset classes. Gold has taken a dramatic tumble. It's fallen almost 11% since Election Day. 



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Could it be? The return of King Dollar? Yes. The greenback has gained almost 6% since Trump's win.



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The Dollar's gain equals emerging market pain. The Emerging Market Index was up 6.4% before the election. It's down 6.4% since.



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Last but certainly not least. Our omnipotent central market planners ... they're back! The Fed raised rates for only the second time in a decade this December. They indicated three more hikes may be coming in 2017.


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