The US markets have made a very notable and rapid recovery from their post Liberation Day lows in early April. The S&P 500 and Nasdaq have both made new highs, recovering more than 20% in the process. The bleak year end targets for the indices have been forgotten and the optimistic outlook restored. All looks good from an investment perspective. But is it really?
Don’t Get Kicked in the Taco
It must be recognized that in the past few weeks there has been a monumental reshaping of international geopolitics. The recently named 12-day War, (twelve may or may not be the final figure), is highly relevant to how market participants should position themselves in the coming months. We say this not specifically in relation to the market implications for a Middle East conflict and its effects on the price of oil etc. but more so in relation to what it reveals about the dynamics of the current US administration and the bearing this will have on global trade and the financial markets.
The US President was subject to the TACO slight (Trump Always Chickens Out), which implied that all the President’s hard talk could be traded, on the supposition that it was always bluff and that he would back down. The Iran situation lays out a different proposition, presumably designed for the ears of global powers not necessarily the Iranians.
A 60-day threshold was given to the Iranians to negotiate a solution to the nuclear enrichment situation, and on day 61 Israel attacked. Given the administration’s elasticity with all its tariff deadlines and pronouncements. It was legitimate to imagine that the 60-day nuclear talks deadline, would also just be yet another bluff that could be ignored. Not so on this occasion.
Then we progress to the US bombing of the nuclear sites in Iran. This time the President’s determination of whether to strike, we were told, would take place “within two-weeks.” The TACO framework appears to already have become imbedded in media circles, so much so, that Trump’s two-week Iranian deadline was the butt of jokes. The New York Times for instance referred to it as being Trump’s favorite unit of time. Then the US strike happened three days after the announcement – in other words the key word in that announcement was “within” two-weeks. Thus, we have a second direct illustration of a US threat being literal, not metaphorical, not being fudged, but actually being carried out on a highly precarious and significant issue with potentially hugely negative consequences.
TACO has therefore to be redefined to TSCO (Trump Sometimes Chickens Out) which is much less catchy, much harder to interpret and thus by extension harder to trade.
Canada was Listening
It would appear that as all of this was happening Canada registered the meaning of the administration’s change of tack. The US successfully re-established unpredictability and undefined consequences. On Friday, June 26, Canada got a direct threat regarding its trade talks, the US was walking away from the table because of Canada’s Digital Services Tax on US tech companies. Bluff? Canada didn’t seem to think so, or at least it couldn’t afford to risk finding out. By Sunday June 29 one day before the tax was to come into effect the Canadian’s rescinded it, to preserve the ongoing trade talks. This handing of an ego-victory to the US must have seemed to be the less damaging option for the Canadian government in the circumstances.
This situation could be interpreted to indicate that the trade deals will now flow and that countries on the other side of the table will bend to the pressures applied. This though, would be a short-sighted conclusion to draw. Not every country is Canada, and not every country can be sufficiently calm to not let ego (usually personified by its leader) get in the way of things.
Anyone for a Game of Brinksmanship?
There is a difference between brinksmanship and throwing your geopolitical weight around weaker opposition. There are also the different dynamics of the geopolitical game equivalent to snakes and ladders, to be considered.
Europe for example, for many years, has been in decline in the sphere of global power and influence but due to its glorified run at the top (for several centuries) it has an inflated ego, overly sensitive and easily bruised. Just look at the teeth clenching, “Daddy” and children experience that was the recent NATO summit in the Netherlands.
To give an example of the leader ego problem – Pedro Sanchez’s “principled” stance on rejecting the NATO spending increase, has thrown a major bargaining chip to the US in their trade talks with the EU. The NATO spending increase, at least in EU Council President, Antonio Costa’s opinion solved the unbalanced trade surplus between the EU and US with the EU committing to buy more US military hardware, automatically paving the way to a trade deal between both parties. President Trump on the other hand smelled blood and directly told Spain to expect trading consequences for their defense spending decision, knowing of course that those trade negotiations are with the EU collectively not directly with Spain. A little bit of divide and conquer, strengthening the US negotiating hand.
China on the other hand is still on Mao’s Long March to global ascendency and is playing from a very different game plan. The China “deal”, it must be remembered, is still only a framework. Then of course there is the speed of the US climb down on from its 145% surreal China tariffs. An indirect acknowledgement that there had been too much bluff.
How China reads the new US stance of following through on threats is yet to be seen. Presumably, Beijing was the primary audience for the new telegraphing of US affirmative action. One thing is however, that China has shown already that it can face down the US and inevitably that will strengthen its willingness to push back against US threats even when they are perceived to be real.
China, once again playing a very long game, has cleverly and subtly outmaneuvered the US on rare-earths and in so doing has created a significant economic weapon. This reality will have to be reckoned with by the US administration, if it wants to become more forceful in its actions against China rather than just in its words.
As the North American summer takes hold, it is probably as well for investors to enjoy the current new stock market highs. There is a lot of action theoretically scheduled to take place on the tariffs/trade deals front over the summer and what would appear to be a lot of optimistic assumptions. The unanswered question is whether the market highs have priced into them these assumptions, that all is basically resolved, and it is all upwards from here on? Ironically the newly established US seriousness and forcefulness means that in the event that some countries push back and posture for a fight rather than a deal, the US carrying through on threats will be ugly for everyone. ■
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