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

  • Looks like more of the same for now
  • What will end the trade war?

Looks like more of the same for now

Well, it looks like the next deadline for trade negotiations between the US and China might have moved to the G20 meeting in Osaka, Japan on June 28-29. That pretty much guarantees more trade-war saber rattling, and a lot more market volatility. That’s too bad, because a lot of data both here and abroad (i.e. China and Europe) looks to be improving, and I don’t think that will continue with global trade rules in flux. Nevertheless, I would say that the majority of those whom I would call informed strategists still see some sort of agreement as the most likely outcome (Reuters). As it stands, China has announced that it will be raising tariffs from current 5-10% levels to 25% on about $60 billion in US products as retaliation for President Trump’s announcement that the US will raise tariffs from 10% to 25% on about $200 billion worth of Chinese imports (that according to Larry Kudlow, Trump’s economic advisor). There are other things going on in the world, like escalating tension between the US and Iran, but I would be wary of self-styled “gurus” trying to differentiate themselves. When the markets are obviously concerned about China, they point to some non-China event as the “real” reason for market sell-offs (e.g., Iran, Russia, etc.). And when the market is obviously concerned about a non-China issue (e.g. North Korea missile launches), they point to some esoteric Chinese data release as the culprit. I have seen these strategists posturing to be in-the-know and against consensus throughout my career, and I think they generate more noise than signal.

What will end the trade war?

Speaking of Larry Kudlow, it is noteworthy that he does not have a Ph.D. in economics, which is considered the minimum credential by the profession. Neither does Jerome Powell, Chair of the Federal Reserve Bank of the United States. Nor does Christine Lagarde, Managing Director and Chairman of the International Monetary Fund, or Robert Azevêdo, Director-General of the World Trade Organization (Maria Draghi, head of the European Central Bank, does). Is that a problem? I don’t really think so, and it is not because economics is unimportant. It is because politicians will tend to mainly recruit economists who share their views (Trump’s choices are a mixed bag). That was true of Reagan, Clinton, Obama, Bush, etc. Economist Thomas Sowell used to say that people don’t want an economist’s opinion as much as they want to have their own prejudices entertained. I think that explains why scientists signing letters of protest and sending them to politicians have so little impact. For example, last year 1100 economists (including 11 Nobel Prize winners) signed an open letter to Trump warning him of the danger of tariffs. I see little evidence that it had an impact. When it comes to policy, politicians will pay the most attention to what will keep them popular. So Trump is unlikely to be swayed by pleas from economists to stop the trade agitation, but he might be swayed by a sustained market sell-off. I suppose that’s the good news for this week.