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Political Surprises Remain Biggest Threat to Investors

Political Surprises Remain Biggest Threat to Investors

By    |   Monday, 20 May 2019 09:03 AM

Trade issues still seem to be dominating the financial markets, as well it might.

Recessions are generally triggered either by an economy overheating or by a policy error. Most economists would agree that an all-out trade war would be a policy error.

Certainly, financial markets are pricing that the costs of a potential trade war in terms of lasting uncertainty and disrupted supply chains would exceed any potential benefits in terms of easier trade and in market access.

Now, President Donald Trump said he plans to meet with Chinese President Xi Jinping at the June 28-29 summit G20 summit in Japan where he also plans to meet with Russian President Vladimir Putin and of course with the Japanese Prime Minister Shinzo Abe.

In the context of the trade dispute with China, President Donald Trump has not made a final decision yet to go ahead with tariffs on another $325 billion in goods from China.

Anyway, the Trump administration’s addition of Huawei to a trade blacklist on Thursday, May 16, immediately enacted restrictions that will make it extremely difficult for Huawei to do business with U.S. counterparts. In an interview with Fox News Channel recorded last week and aired on Sunday, yesterday, Trump said the United States and China “had a very strong deal, we had a good deal, and they changed it. And I said ‘that’s OK, we’re going to tariff their products’.”

No further trade talks between top Chinese and U.S. trade negotiators have been scheduled since the last round ended on May 10, in fact on the same day Trump raised the tariff rate on $200 billion worth of Chinese products from 10 percent to 25 percent, Reuters reported.

On Friday, May 17, the United States announced an agreement with Canada and Mexico to remove the Section 232 tariffs for steel and aluminum imports from those countries and for the removal of all retaliatory tariffs imposed on American goods by those countries.

It might be helpful to keep in mind that U.S. tariffs for steel and aluminum imports remain in place against China and the European Union.

Anyway, the new agreement on steel and aluminum removes one of the major sticking points that had been threatening the U.S.-Mexico-Canada Agreement, or USMCA’s approval by Congress, which is of course positive news.

“The biggest hurdle to ratifying USMCA has been lifted,” said the Republican Senate Finance Committee Chairman Chuck Grassley, a Republican from Iowa, where pork exports faced retaliatory tariffs from Mexico. Mr. Grassley is expected to spearhead any Senate consideration of USMCA the Wall Street Journal reported.

Thomas Donohue, president of the U.S. Chamber of Commerce, said the lifting of the tariffs “will bring immediate relief to American farmers and manufacturers. Critically, this action delivers a welcome burst of momentum for the USMCA in Congress” the Wall Street Journal reported.

President Donald Trump has also “delayed” a decision on Friday to slap duties or quota restrictions on imports of automobiles and auto parts, but said he still has the right to impose them in another “six months” as his administration pursues trade deals with the European Union and Japan.

"I concur in the Secretary’s finding that automobiles and certain automobile parts are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States, and I have considered his recommendations," Trump said in a White House proclamation outlining his decision.

So, what does this all mean for the long-term investor and where are we going to go from here?

I think that, for now at least, U.S. momentum is still positive, the economic conditions remain favorable but the pace of returns are likely to moderate from current levels.

At the same time, “uncertainties” that include “unknown unknowns” are definitively out there in the U.S. and elsewhere. There is always the possibility that something could surprise in politics and even geopolitics that could cause markets to sell off. I don’t expect such a scenario caused by economic events.

Investors could do well taking some extra protection on board for the equity part of their portfolio. One relative easy way to do that is acquiring “some” long-term Treasury bonds like the 20- and even 30-year Treasury bonds because when a financial “uppercut” should unexpectedly occur, these long-term Treasury bonds will be bought in huge amounts as safe havens, which will cause their prices to rise and yields to go lower.

No, there is no serious insurance for free.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Investors could do well taking some extra protection on board for the equity part of their portfolio.
political, suprises, investors, economic, financial
Monday, 20 May 2019 09:03 AM
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