Over the past few days there have been a slew of negative headlines about tariffs and trade wars:
The prevailing media narrative is Trump is that these tariffs will provoke a trade war that will doom the U.S economy.
There is also concern over the yield curve:
For these reasons the S&P 500 has fallen a lot recently:
My predictions are that the yield curve flattening and possible inversion is not due to anticipated economic weakens but due to the fed raising rates too aggressively. This is pushing up the short-end of the curve. The yield on the 10-year Treasury bond is just 3% whereas during past inversions it was as low as 6%, so that is a big difference, making the signal possibly less reliable. If the fed raises interest rates to 3% and stops, which is what most analysts are forecasting, likely the curve will by flat rather than inverted and there will be no recession. So overall, not concerned.
I stand by my earlier 2018 prediction that the tariffs will not cause inflation and will not harm the U.S economy. An explanation for why the Trump tariffs are not inflationary is discussed in further detail here. The media is sounding the alarm over something that will prove inconsequential, in order to generate fear and hence more ad clicks. A 10% tariff on $200 billion of goods is tiny relative to total trade with China. Every president in recent history has imposed tariffs, usually on raw goods such as steel. Bush, Clinton, and Obama all have. Not once did the economy enter recession or come anywhere close due to those tariffs.
“The big picture is the Chinese exports have so far held up well in the face of escalating trade tensions and cooling global growth, most likely thanks to the competitiveness boost provided by a weaker renminbi,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
This lessens the fear of a trade war.
Also the scope of the tariffs is very limited, affecting only washing machines and solar panels (the steel tariffs target all countries, not just China). When was the last time you remember buying a solar panel or a washing machine? Overall, the stock market will recover, probably within a few months or so. I’m not worried about this.