"Kee" Points with Jim Kee, Ph.D.

  • Volatile Week Ahead
  • Some Key Points

Volatile Week Ahead

A great jobs report (263,000 new jobs in April) and a low (3.6%) unemployment rate certainly got markets enthused last week, but those gains and more could easily be unwound this week as President Trump ramps up the trade war rhetoric. Both the US and China were expecting some broad trade agreements by May 10 (Friday), but on Sunday (May 5th), Trump tweeted threats of higher tariffs on an expanded number of Chinese imports, evidently over frustration with China’s lack of commitment on reform in areas like technology transfer. China, in return, has threatened to stay home rather than travel to the US this week for planned negotiations. I think it will be an uncomfortably volatile week for investors, so it is a good time to reiterate the well-established fact that volatile markets tend to punish investors who actively respond to the volatility. Most investing “sages” over the past fifty years or so, when asked about the most common and repeated mistakes that investors make, usually place “reacting to volatility” at the top of the list.

Some Key Points

Economists focus on production and exchange as the fundamental wealth creating activities of any society. In an increasingly global economy with intricate global supply chains, exchange is critical, and at some point trade-war threats will sideline forward looking wealth-creating activities. Advisors to the President have argued that he is a free trader, but that the rest of the world is not, so tariff threats are the only means he has to bring other countries to the bargaining table. But the President’s own comments have often contradicted this, advocating instead a protectionist program over a hypothetical pure free trading relationship with other countries. The President’s interview with Maria Bartiromo a few weekends ago provided several examples of this, and that is what is making markets nervous. There is a difference between using tariff threats as a negotiating tactic, versus advocating them as a preferential policy of restricting imports — and markets know it. This is an important week because much of the market’s enthusiasm this year has been based upon a perceived convergence toward a conciliatory trade agreement with China. Backsliding to where we were during the fourth quarter of last year will predictably bring about a negative market response like we saw then. The key issue appears to be over a proposed enforcement mechanism that China has called one-sided. It ostensibly allows the United States to impose punitive tariffs on China in the event of future infractions, while forbidding China to do the same (Asian Times). This seems to be a fairly easy impasse to resolve, and I certainly hope to see progress towards that this week.