Trade War – A Game of Chicken
In a car game of chicken, only 2 possible outcomes exist. Either someone gives up and swerves away in time to avoid the crash OR the cars crash. The US and China are engaged in a very dangerous game of chicken… trade war style.
Of course, when you watch cars charging 100mph at each other, as a common sense observer you innately assume that no one can be that stupid and eventually someone will swerve. Most of the time, this is the outcome since it is a greater benefit to give in than to crash both cars. Trade wars may create equality….but equality with both countries worse off is probably not the desired outcome. In our view, countries should always be pursuing freedom, not equality.
“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” – Milton Friedman
In the game of chicken, both drivers know the largest reward awaits the boldest and perhaps craziest one who can out commit the other. The winner is often the one who commits to accepting a complete crash as part of the necessary solution to advance his reputation in the pecking order.
I am not sure where the US and China stand in the emotional spectrum of chicken. Often times the game of chicken will appear as if a crash is obvious until the last second as both cars swerve away and you realize one or both had some common sense.
If the crash happens….and no trade deal gets completed, hindsight will say it was so obvious and how could we have missed the fact a trade war was going to happen. Of course, if the countries swerve last minute and a deal is done, hindsight will say it was so obvious and clearly countries were just negotiating. At any point, day, hour we could get a headline that everything is resolved. Or we could see a continued march into the abyss of trade war complications. It is impossible to know what the real outcome will be, what damage will take place and how the trade talks will conclude.
We know the markets do not like uncertainty. American companies do not benefit from tariffs and the cost of goods being higher. Assuming the current admin wants to have a fighting chance at re-election in 2020, then they will be forced to eliminate some uncertainty, reduce or eliminate many of the tariffs to see markets move forward in the next 12 months or face quite a blow to the ego and possible re-election. Unfortunately, the Chinese negotiators know this as well and are likely in a better position short term to use this to there advantage, making this a dangerous game of Chicken.
As always, investors best defense is time and patience. Ignore the short-term noise and allow companies to adjust over the long term. Given enough time we believe some sort of deal will be done, uncertainties will eventually be removed and this will likely be a past headline. If the politics create declines or a recession then we stand ready to be opportunistic within our long-term focus.
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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