Investment Conclusion
Stick to the conservative asset allocation in the Wealth Preservation Portfolio at the end of this note. President Trump’s postponement of reciprocal tariffs and conciliatory texts about China do not indicate a reversal or softening of policy. China controls the trade war as much as the US does and it has little reason to make things easier for President Trump. President Trump tried to woo China this week and stopped threatening the US Fed. It can go the other way next week. And as regards the Fed, this is merely a truce; the big battle to come will be when stagflation is at the window.
These are the reasons why you should stay away from the current relief rally in risk assets:
1. The current level of US tariffs (before substitutions) is 8 – 9 times higher than the 2% average tariff rate when President Trump took office. That is plenty to cause tariff-driven recession in the US. If the US unilaterally cuts Chinese tariffs in half but imposes “reciprocal tariffs” on the EU and half of the countries previously targeted for reciprocal tariffs, the US average Tariff rate would rise to 35%-40%.
2. President Trump has buckled before China, but China has little interests in doing so before Trump. The conflict for China is a wider issue than trade and China holds escalation dominance. It can pursue its broader goals of weakening the US in other domains by escalating. Several QS reports deal with China’s escalation dominance in the trade war and why its economy can survive the storm – see Note 1 under footnotes.
3. Trump’s bilateral deals are likely to be few and far between within the time frame he has set. This report looks at the practical and cultural reasons why bilateral trade deals will not replace “reciprocal” tariffs being imposed after 90 days. Europe will be in the crosshairs.
4. The US’s Russian-Ukrainian Peace Proposal’s failure will probably result in further US withdrawal from Europe and further confrontation but not quite yet. NATO will consequently be dysfunctional. It is getting harder for European governments to deny that security and trade are just a single silo of the collapsing US- European relationship.