Short-Lived China Truce Gives Way To Greater Risk

I would never have guessed Door County, Wisconsin, would be a preferred family destination. My children are active and cosmopolitan, qualities that are mismatched with the slow pace and rustic settings characteristic to the peninsula. What’s more, the cellular service is spotty, which leaves them intermittently disconnected from all they hold dear.

Nonetheless, the gang looks forward to the summer sojourn. Door County is a place where laziness is allowed, even celebrated. The most complicated decision faced during the week is which of the 30 flavors to choose at the ice cream shop (Mocha Chip, for me). And the remove from the never-ending news and opinion cycle is incredibly restorative.

Unfortunately, the reverie can end quickly upon re-entry. Such was the case this year. As I caught up on reading during this past weekend, it became clear all was not well with the world. Economically, the threats to global growth are escalating, while the leadership to deal with them is in decline. More broadly, the risk of an adverse tail event is uncomfortably high. We will do well to make it to the end of the year without incident.

Following are our views on the most challenging situations we presently face. I suspect we’ll be talking quite a bit about each of them in more depth as the year wears on.

  • The U.S./China Trade Conflict. On this front, we have been assuming provocation would eventually give way to negotiation. The issues between the two countries are numerous and complicated, but we have been assuming that economic and political forces would lead to a trade agreement this year. There are still almost five months left in 2019, but that forecast seems very much at risk.

WEC Chart 1

When Presidents Trump and Xi announced the resumption of talks at the June G20 meeting, we were skeptical (see here). We didn’t expect much progress, but we didn’t expect tensions would reach new heights less than six weeks later.

Frustrated by a lack of movement in negotiations (the two sides reportedly spent only three hours together at their recent summit in Shanghai), President Trump announced the broadening of tariffs against Chinese products. China retaliated by forbidding purchases of American agricultural products and allowing its currency to decline in value. The barbs passing back and forth between Beijing and Washington have sharpened.

“Economic relations between China and the United States have hit a new low.”