Not long ago, in a land not far away, people chanted these words with almost religious conviction: “Houses never lose value.”
We all know how that ended. Investors who trusted this assertion as an article of faith obviously got hurt. What if, looking back, their real mistake wasn’t misunderstanding real estate or taking too much risk? What if the real error was taking something for granted and assuming it would always be true?
What if the failure to question assumptions cost everyone a ton of money? It’s occurred many times in the history of finance, and I’m seeing two other areas where it may be happening right before our eyes. (Although this time the potential cost is less clear.)
The first assumption is that “trade wars are bad for business.” Regardless whether you love or hate this Administration, there is not much empirical evidence that its aggressive stance on trade has hurt the broader economy or employment. If anything, the media’s obsession with tariffs has overshadowed bigger positives flowing from deregulation.
Just look at last week’s data from the Institute for Supply Management. The manufacturing index crushed every forecast and rose a 14-year high amid a surge in orders, demand, shipments and production. ISM’s services index also surprised to the upside. These numbers follow a surprisingly positive second-quarter GDP revision on August 29 and a steady drumbeat of solid employment trends.
So much for the first assumption about trade wars hurting business. The next assumption we keep hearing is that President Trump will resolve his trade wars and make nice with other countries before mid-term elections on November 6.
The problem with this assumption is that it also lacks much evidence. So far deals simply aren’t coming together. Remember back in mid-August White House officials spoke of an agreement with Mexico? Despite ink being placed on paper, it’s now at risk as Trump tightens the screws against Canada by demanding a major overhaul of their dairy exports.
And, of course, last week’s threat to tax an addition $267 billion of Chinese goods showed relations with Beijing may not get better any time soon.
You also have to ask whether Trump even has an interest in calming trade tensions before the mid-terms. After all, his upset victory in 2016 resulted from attracting blue-collar votes in states like Ohio, Pennsylvania and Michigan. Playing “hardball with China” seems to appeal to that constituency. Why would he drop a winning issue before the election?
In conclusion, our only interest is trading and not politics. But a big part of trading is to stop following a certain course of action when it’s not working. Right now, the common wisdom has been wrong about both the harm of trade wars and the timing if their resolution.
What if a different path unfolds, with the economy continuing to improve — even with trade wars remaining an issue? It’s not yet clear what that will mean for the market, but it’s also worth considering the possibility.