Nafta Good, China Bad, Now What?

It was not suppose to be this way.  Remember around the time of Davos when many of the market elites were talking of the equity market “melting up”?  Although no one would consider the market in “melt down”, the air does seems to be coming out of the balloon.  It is still easy to find talking heads that are pounding the table about buying on dips, reminding us of the global synchronized growth and an acceleration of earnings.  Oh and that Trump thing with a trade war with China, no big deal, it is all part of the master plan that the “art-of-the deal” maestro has to make the world a fairer place to barter in.  Besides, they say, cooler and smarter heads will prevail within the White House and pull the President away from doing anything stupid.  Really?  I should remind you that the Obama’s took their dog Bo when they left, so after a number of high profile exits, that just leaves trade savants Wilbur and Bob.     

Many in the market remain convinced that the same guy who brought them tax reform which benefited the market tremendously and might even help the economy, cannot be the same guy that could bring increased taxation through tariffs and hurt the market and maybe even the global economy (despite what Wilbur might say).  What seems to be missing from their analysis is the motivation.  What if the primary motivation for getting tax reform done was political and not economic.  If the true motivation in the White House is to do the right thing for the economy, then this tit-for-tat with China will dissipate as the repercussions quickly become evident.  However, if the motivation is politics and is an attempt to appease his base ahead of November, the risk that this truly becomes a “we’ll show them” trade war over the next six months rises dramatically.   

In the meantime, this just gives the Bank of Canada another legitimate reason to stay on the sidelines.  An unexpected high level provisional agreement on Nafta would certainly be a positive for our economy, but it probably would not be sufficient on its own to immediately boost domestic business investment.   I suspect that the Bank would not get too excited either until they analyzed the economic impact of the deal and had some assurance of any agreement getting through the political process.  The bears will have to remain patient.