On Wednesday, Steve Mnuchin – who is in Davos where he was shocked to find rich people – seemed to suggest that the washing machine wars ushered in by his boss earlier this week might be just an opening salvo in what could eventually morph into an all-out “hot” trade war.
In addition to the “weaker dollar is good for trade” soundbite that sent the already-downtrodden greenback even lower on Wednesday, Mnuchin said this:
Trade wars are fought every single day. So a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart.
Ok, so that’s a little aggressive, wouldn’t you say?
Ol’ Steve also sought to play down concerns about the possibility that China could retaliate by pulling their support for the U.S. Treasury market.
Over the past two weeks, we’ve variously documented the evolution of the commentary emanating from analysts with regard to whether it is or isn’t feasible for China to make good on that “threat” (note that the official word from Beijing is that the original Bloomberg story was something akin to “fake news”).
Generally speaking, it’s probably not possible for China to get too aggressive because i) economic reality dictates that the U.S. Treasury market is going to be the preferred conduit for Chinese flows, ii) getting overly aggressive when you’re still sitting on a massive pile of USTs would be Plaxico-ish, and iii) even if there is an epochal shift away from USD assets in global reserves, China might not be the “marginal diversifier“.
Still, the Trump administration is setting in motion something that has serious long-term consequences and Trudeau’s announcement of a “CTPP ex-U.S” this week only serves to underscore the contention that globalization and open trade is going to proceed apace with or without America.
Leaving aside the short-term implications (e.g. the consequences of a sharply lower dollar for the ECB and the BoJ’s plans to get more hawkish), what are the above-mentioned long-term consequences?
Well, that’s a question the scope of which isn’t amenable to a short blog post, but Bloomberg’s Richard Breslow took a stab at highlighting a couple of points on Wednesday following Mnuchin’s comments in Davos.
“Consider what long-term effects such go-it-alone unpredictability will have on reserve allocations,” Breslow implores, before adding that while everyone seems steadfast in the “belief that the size and depth of the Treasury market makes it too alluring to be shunned, it’s a big risk to take [and] any sort of buyers’ strike would be felt quickly and definitively.” Or, to quote Kim Jong-Un, “surely and definitely”.
As to the investment implications for economies that might suffer in a “hot” trade war, Breslow notes that while “investing in emerging markets from the Pacific Rim is a widely popular expression of risk, actions so far this week have put the growth outperformance story for that region squarely in the trade war cross-hairs.” Here is perhaps the most important read-through from a geopolitical perspective:
Consider what this all means for Chinese hegemony in that part of the world and the standing of the U.S.
It’s deeper than residential washing machines, folks.