March 2018 Commentary

  • The Trade War: While the United States and China are not currently in the midst of a trade war, the recent rhetoric between Washington and Beijing has been a growing concern. More specifically, these fears snowballed after Trump began tweeting on March 2nd that, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” Since then, the tough talk has led to an exchange of threats where the U.S. may apply tariffs against steel and aluminum as well as tariffs of 25% on Chinese products worth $50 billion and where China may retaliate with tariffs of the similar rate on also about $50 billion worth of American imports. Interestingly enough, the tariffs from the U.S. would affect about 1,300 types of Chinese goods while the retaliatory tariffs from China would affect roughly 100 types of American goods. The catch here is that although China’s tariffs would affect less categories of goods, they are strategically targeting higher profile goods such as soybeans, commercial aircraft, sport-utility vehicles, and liquid propane. All-in-all Trump’s stated goal with this heightened aggression towards trade with China is to reduce the trade deficit by $100 billion. To put that in perspective, the U.S. trade deficit with China was approximately $347 billion in 2016 and approximately $375 billion in 2017.

    • Our Takeaways: So far, this looming trade war between the United States and China has been entirely all bark and no bite. Looking at the broader picture and beyond the trending buzzwords, one will quickly realize how insignificant the tariff threats are to each side’s economy. In terms of nominal GDP, the U.S. economy ($19.4 trillion) and China’s economy ($11.8 trillion) are unsurprisingly the world’s two largest super powers by far (Japan is third at $4.8 trillion). However, Donald Trump and Xi Jinping insist on taunting each other with multi-billion dollar tariffs that won’t come close to moving the needle for either country. In other words, instead of a severe dog bite, the current threats amount of more of a bee sting or that of a red ant – stings for a minute, but doesn’t ruin the picnic. With all of that said, what’s the point or the real goal here for Trump prodding the bear? Well, aside from maybe reducing the trade deficit, this could potentially open the door for a full review of trade practices where Chinese policies have allowed for American intellectual property to be easily and routinely infringed upon.

  • More Market Swings: Throughout March, we saw global markets continue to take dramatic swings just as we had seen in February. Much of this increased volatility was likely spurred by fears of the aforementioned trade war with China rather than the release of any alarming economic data. On that note, the March employment numbers (103,000 jobs added), while not bad by any means, were a disappointment given high expectations after last month’s stellar performance (313,000 jobs added), the unemployment rate has held steady at 4.1%, and the Federal Reserve increased interest rates by 25 basis points on March 21st. Moreover, according to a statement from the Fed, “"The economic outlook has strengthened in recent months. The committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong."

    • Our Takeaways: As we have stated before in our previous investor letters and have echoed Bridgewater’s Ray Dalio, the largest threats to markets have been and continue to be more political than economic. To expand upon this, we have seen a tumultuous administration attempt to flex the country’s military might on a global stage, an ongoing investigation into Russian interference with the 2016 election, a strong fiscal stimulus (last year’s tax reform bill) in the late stage of the business cycle, a silently ballooning amount of corporate debt, and a threat of an impending trade war with the second largest economy (by nominal GDP). As a result, the Dow Jones is down roughly 2% and the S&P 500 is down roughly 1% for Q1 of 2018. Going forward, we maintain that the greatest threat to the markets will be related to political turmoil and that we anticipate the onset of a bear market as investors grow increasingly weary of such turmoil.

  • U.S. & North Korean Relations: At this time, the upcoming summit between Donald Trump and Kim Jong Un is anticipated to take place in May. However, former CIA Director and current nominee for Secretary of State Mike Pompeo has supposedly been leading back-channel communications with North Korea ahead of time in order to prepare for the summit. In recent weeks, officials from both countries have also been meeting on neutral ground to discuss acceptable summit locations. One persistent suggestion from North Korean officials has been to hold the summit within their capital, Pyongyang - an option that likely won’t be acceptable to U.S. intelligence agencies and the Secret Service to say the least. Another proposed option is Ulaanbaatar, the capital of Mongolia. In any case, the purpose of this summit is to discuss the denuclearization of North Korea in exchange for the lifting of severe sanctions.

    • Our Takeaways: Considering the fact that back in August of last year, both of these leaders were threatening each other with nuclear warfare, this summit appears to be a significant step in the right direction for everyone’s sake. While just getting to the table may have been decades in the making and such a meeting will be a first for a sitting U.S. president and a North Korean leader, our main objective of North Korean denuclearization might not be as straightforward as it sounds. For the first time in a long and bruised history, the North Koreans have the power (kind of) to hit any part of the continental United States with an ICBM, and now they are willing to discuss the potential of giving it all up? Not likely. To North Korea, denuclearization throughout the Korean Peninsula most likely means that they will call for the elimination of the South Korean/U.S. alliance as well as an end to the U.S. nuclear umbrella that defends the interests of South Korea and Japan – neither of which are demands we would likely even entertain. Overall, our takeaway is that this summit, while historic, will not yield any substantial progress to curb the development and dispersal of nuclear weapons. If anything, meeting with a sitting U.S. president only adds credibility to Kim Jong Un’s gruesome regime.

  • Trump’s Turbulent Administration – Follow Up: Last month, we discussed how the turnover rate among top-level positions for the Trump Administration is at a record setting 43% and how the Trump Administration is becoming less and less suitable for effectively governing since there are a growing number of vacant positions. Reflecting back on March, conditions have not improved.

    • New Exit – Gary Cohn (January 20, 2017 to March 6, 2018): Cohn served as Director of the National Economic Council and the Chief Economic Adviser to the President. While Cohn has not stated his reason for leaving the Trump Administration, he resigned following Trump’s insistence on imposing tariffs on steel and aluminum imports.

    • New Exit – John McEntee (January 20, 2017 to March 12, 2018): McEntee served as Personal Aide, but was escorted out of the White House on March 12 due to security clearance issues after Chief of Staff John Kelly began reviewing security clearance for all White House staffers earlier this year. If you recall from our February investor letter, security clearance issues led to Rob Porter’s exit and remains to be a significant point of contention between Kelly and both Jared Kushner and Ivanka Trump who serve as Senior Advisors to the President.

    • New Exit – Rex Tillerson (February 1, 2017 to March 13, 2018): Tillerson served as Secretary of State up until Trump announced that he would be replaced by CIA Director Mike Pompeo (still to be confirmed by the Senate). Throughout Tillerson’s tenure, he and Trump routinely clashed on a variety of foreign policy issues ranging from North Korea’s ballistic missile program to the nuclear weapons deal with Iran. In one case, Tillerson reportedly called the president a “moron” back in October of 2017.

    • New Exit – H.R. McMaster (February 20, 2017 to March 22, 2018): McMaster served as the National Security Adviser and has been replaced by John Bolton. He stepped into the position after Michael Flynn’s exit and often fought with Chief Strategist and Senior Counselor Steven Bannon (who left in August of 2017) and Defense Secretary James Mattis.

    • New Exit – David Shulkin (February 14, 2017 to March 28, 2018): Shulkin served as the Secretary of Veterans Affairs under both the Trump Administration and the Obama Administration. His dismissal came via tweet from the President after an internal investigation alleging ethics violations and the misuse of taxpayer dollars. Adm. Ronny Jackson, the Physician to the President, has been said to be replacing Shulkin.


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