A hawkish Fed is no match for actual real-money flows

Outlook:

Today is the day the eurozone imposes new tariffs on €2.8 billion of US goods, with journalists having fun about bourbon and Harley-Davidson motorcycles but the effects far more serious and far-reaching. Then in two weeks (July 6) the US starts imposing tariffs on$34 billion of Chinese goods, something that scares the pants off even some in the White House. Bloomberg reports officials are trying to get new talks with China ahead of the deadline, but others are talking about an additional $16 billion of trade to be taxed after July 6. Yesterday Commerce Sec Ross said “If it really does get to be a big war, we have many more bullets than any of these other countries.

” Bluster is not the same thing as good economic analysis. The NYT notes that “the global nature of supply chains means the tit-for-tat tariffs are ricocheting in unexpected ways and may ultimately cost jobs in the United States. Sales of Mercedes S.U.V.s, made in Alabama by the German automaker Daimler, could be hit by the American trade dispute with China. The Swedish manufacturer Volvo faces rising prices on the imported steel it uses at its Mack Truck factory outside Allentown, Pa.” The paper reports the EU imposes its tariffs a week early, a nugget we don’t see elsewhere. And EU Trade Commissioner Malmstrom in in New Zealand negotiating a free-trade deal. She said “We did everything we could to avoid this situation, but now we have no choice but to respond. The E.U. has a responsibility to stand up for open global trade.”

Bottom line, we all know Trump doesn’t have a long game. His primary goal is disruption, with no long-term plan behind it to define the final outcome. Decision-makers at international firms are consumed with uncertainty. Even Fed chief Powell told the Sintra forum “For the first time we’re hearing about decisions to postpone investment, postpone hiring, postpone making decisions. That’s a new thing.”

Well, no. War has the same effect, and a trade war is still a war. We need to start worrying about a backlash against the US and the dollar in the form of capital flows and diversification of reserves, something Russia has already started that can become contagious. Again, a hawkish Fed is no match for actual real-money flows. This is not to name the end of the dollar rally. It is to identify a terrible risk.

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