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McMurtry Investment Report Newsletter – July 2018

July 2018 – How far is Trump and the US administration willing to go in their trade war?

Peter McMurtry, B.Com, CFA, Financial Writer for Do-It-Yourself Investors

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Most strategists still believe that an all out trade war is unlikely and that common sense will eventually prevail before any real damage is done to the global economy.


In fact almost all economists still feel that the auto pact between the US, Canada and Mexico will never be compromised as a result of auto parts crossing borders many times before the final assembly of an automobile is completed.


However I am gradually coming to the conclusion that the US combination of Trump, Navarro and Ross are quite willing to escalate the trade talks to an all out trade war in order to accomplish their ultimate goal of more US jobs.


Why is the US willing to increase the trade tensions at this time?


First of all the US economy is currently very strong, propelled by tax cuts and regulatory reforms. Trump firmly believes that the time to act is now while his personal credibility is boosted by a robust domestic economy.


Both Navarro and Ross have a history of favouring US trade protectionism with the former writing a book on the evils of China’s intellectual property policies. Wilbur Ross made his fortune by buying bankrupt US steel companies and encouraging George H. Bush to impose import tariffs on Chinese steel coming into the US.


Trump is a negotiator and deal maker who is highly motivated by his political popularity in the upcoming midterm elections this fall. He is taking a particularly harsh negative stance on Canada to appease his hard right supporters. His opinion on Canada is not substantiated by hard facts as our country actually has a trade deficit with the US when you include both goods and services.


The US economy is much less export oriented than many other countries including China, European Union, Canada and Mexico. Consequently a trade war will hurt these global countries and regions much more than the US. over the short term.


The recent strength of the US greenback puts enormous pressure on Emerging Market economies whose debt is payable in US dollars.


The recent trade retaliation measures introduced by Canada, Mexico, European Union and China make Trump even more determined to escalate the trade issues.


In my opinion a full trade war will not benefit any country, including the US. While certain uncompetitive domestic industries will be protected, the negative effects in other industries will more than offset any short term benefits.


According to a JP Morgan economist, a prolonged trade war will reduce global economic growth by up to 1% and this is particularly significant in the current 3% plus domestic US economy.


Global business and government leaders are very concerned with the escalation of trade policies and this is creating a lot of uncertainty. Uncertainty clearly does not bode well for business and government spending.


I do not expect these current trade wars to end in the near future and fully anticipate more damage to the global economy will be felt before anything is resolved.


The Chinese President has ensured that his political mandate is for life, differing markedly from the maximum eight year term of Trump. This gives him a lot of time to negotiate and not to give in to Trump in the near term.


Thus I am recommending an additional 5% of equities be switched into cash and equivalents. This will increase my cash weight in my Income and Growth portfolios to 35% and 30% respectively.

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