The Importance of Trade

Monday, July 2, 2018

The Importance of Trade

An important part of our jobs is to separate noise and biased nonsense from the underlying truths and realities that might make a difference in how we view the near future. In the daily tug-of-war between the objective and subjective, we almost always side with the objective, and only maybe will allow our collective experience in this business to regard and entertain the subjective. We prefer accurate data and statistics as opposed to innuendo and a runaway case of cause-and-effect.

Much has been made in the media regarding a trade war. Last Friday at 12:00 midnight the United States imposed 25% tariffs on $34 billion of Chinese goods, which was quickly matched by the Chinese in retaliation. Discussion and debate with my colleagues here over the years leads me to believe we are all free market oriented, and this is certainly a disappointment to us. Economic history clearly reveals that mankind’s ascent into the Middle Ages and beyond was greatly aided by open markets and trade, and remains so to this day.

At the same time we’d like to put a few things in perspective, starting with scale. In 2017 Nominal Gross Domestic Product in the U.S. was $19.4 trillion, while China weighed in at $12.2 trillion. Assuming my zeroes are correct, we could impose tariffs on China 357.8 times, while China could retaliate 569.6 times over. Our economy produces approximately $53 billion per day. While the goal here is not to make light of a potentially serious issue, the reality is that size-wise this isn’t even a shot across the bow. When we read articles attempting to relate this to the Smoot-Hawley Tariff Act of 1930 we can only roll our eyes. These writers have a political axe to grind, have never seriously studied the Great Depression, and/or believe their audience possesses very little intellectual firepower.

Thus far, real-time indicators are not reflecting any disquieting evidence. Shipping rates (aside from crude oil shipping rates) and ship charters are still high, container board demand is still very high, and the supply-demand imbalance that haunted crude oil the past few years has abated as demand has steadily increased. Copper prices are now in the mid-$2.80’s per pound, but they have struggled with the $3.00 area for months now. Other commodity prices are still holding their own.

Our GDP for the 2nd quarter is expected to grow by 3.8%, with many believing it could be above 4%. While this is a number based on the past, it would indicate positive momentum. As well, where European statistics started to get weaker two months ago, they again have picked up, particularly in Germany.

Since the tariffs began three trading days ago, the S&P 500 has risen 2.09%, one of the best three-trading-day sequences this year. Interest rates remain steady in the face of the Fed’s tightening plans, and the US Dollar continues to strengthen, counter to predictions at the beginning of the year.

We do not wish to make light of current events. One American financially damaged by them is one too many, and I have clients in manufacturing who have already been hurt. Likewise, our agrarian State is exposed to retaliation. The bulk carrier Peak Pegasus, laden with soybeans was 45 miles from port in China when the tariffs went in place. On Monday it was idle offshore, and will now be subject to a 25% tariff, or be forced to another port.

So far, sticking to what we know to be true, rather than paying attention to blatant headlines, has worked well, as we have stayed the course. We have concerns, especially as time passes and bad feelings fester. But for now we’ll pay attention to the economy and watch real-time indicators, which tend to tell a truer story. As always, please call or email with any questions or concerns.


Jamie Wright, CFA, Portfolio Manager, 
Research Director

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