China has decided that its return volley in an “easy to win” trade war will be a devaluation of its currency:
The yuan weakened sharply after the People’s Bank of China set its daily reference rate for the currency at 6.9225, the lowest rate since December. The central bank said in a statement that Monday’s weakness was mostly because of “trade protectionism and new tariffs on China.” President Donald Trump threatened a new round of tariffs on the country last week. [CNN]
And the markets, as I type this at 1:15 Central, respond right on cue, as the NASDAQ is currently down nearly 4%. But is it significant?
Markets, once upon a time, reflected the predictions of the investing entities that used them, but I wonder if that’s true any longer. As the markets are moved increasingly by algorithms which are predicting movements in stock prices in time increments utterly irrelevant to my investing strategy, I tend to look at big drops at these as, at worst, an incident to simply ignore, and at best a chance to pick up some investments on the cheap.
I’m not saying that China’s devaluation is unimportant, but I am saying that it’s impact may have been magnified by the algorithms used by many firms in an attempt to make money off of micromovements in micromoments. They chase each other down the rabbit hole, as it were, even though they’re aware of the news that started it all.
In other words, faux-investing. I don’t know that I’d take this to be predictive of an imminent trade disaster.
On the other hand, it is indicative of the amateurism of President Trump. Trade wars are not easy to win; that’s why they’re called wars. In fact, both sides can be badly hurt by them, particularly if they’re heavily dependent on that trade. In fact, the question may be, Can the United States hope to win? Let’s skip the conservatives and liberals, and go with someone whose job is to properly predict results – an industry insider. From the same CNN report:
“Risks of Trump intervening in foreign exchange markets have increased with China letting the yuan go,” wrote Viraj Patel, FX and global macro strategist at Arkera, on Twitter. “If this was an all out currency war – the US would hands down lose. Beijing [is] far more advanced in playing the currency game [and has] bigger firepower.”
Not having even a passing interest in currency wars, I can’t guess if he’s right. But I can say this: if the President decides, or is goaded into, winning this currency war at all costs, he will in fact try to do so regardless of how many Americans he may hurt. After all, he’s a narcissist with a sensitive ego, and if he looks like he’s losing a war that he promised would be easily won, he can’t afford to look bad to his base.
And that will hurt the Chinese as well. I think this may turn into a game of chicken, and the question will be whether or not a President with a rabid base but deeply opposed opposition and independents can outlast an iron-fisted autocrat who is facing internal pressures of his own. Presidents can be impeached; autocrats can be overthrown.
This has the potential to become very interesting.
