The lesson from Trump’s first big trade fight

You have to hand it to Trump, he’s incredible at bluffing.

He took the negotiations with Mexico and Canada to the limit, leaked all kinds of reports about tariffs rising or other measures and then called it all off in exchange for some token border measures, most of which were already announced. It looks like we will do it all again in 30 days.

I called the bluff from the start but it was a deeply unpleasant ride and if doubt doesn’t creep in, you’re not paying attention.

But that’s the name of the game. You need to have intense conviction that you’re right to hang on. You need to stay in your chair and watch the show when everyone in the theatre is yelling ‘fire’. It’s a tough way to make money when the market is panicking over a trade war.

Timing it isn’t easy either.

Last week Trump said “there was nothing Mexico and Canada could do” to avoid tariffs. A few days later, Mexico and Canada announced pretty much nothing and there were no tariffs.

One of the great truisms of negotiations is that they’re hardest at the end. That’s particularly true of trade and international negotiations. Still, the sequencing of the Mexico and Canadian deals added to the uncertainty.

There were a few tells.

The big one was Kevin Hassett yesterday morning who kicked off the big White House pivot to making a deal all about fentanyl. This was obviously a change in messaging from the President himself but was part of a re-framing of negotiations to secure a ‘win’. There was so much nuance in what he said that I transcribed the entire interview and posted it.

The message around drugs was the main tell but Hassett also came right out and said it, which isn’t something a guy trying to establish credibility early in the job would do if he knew tariffs were coming.

I think this is going to be one of the biggest supply side positive
shocks that we’ve ever seen. And finally, I just want to say going back
to Canada, if, you know, if I’m a market guy as Scott was, you know, I’d
be, I’d be getting bullish on Canada and Mexico because the political
pressure on these people have been making really, really bad choices.
It’s going to be very, very great.

Even CNBC’s Becky Quick called it after that.

Kevin, I mean, I know you well, we’ve known each other for a long time.
It doesn’t sound to me, yeah, it doesn’t sound to me like you think
these tariffs are either going to go into effect or if they do, that
they will last for long.

In terms of trading, the currency market might have been the best spot. There were obviously stocks that got beaten up and reversals in many markets but the FX market captured the moves clearly and without any real directional whipsaws.

We’re now two weeks into Trump 2.0 and I think market participants should feel slightly more confident in the belief — one I’ve long touted — that Trump’s #1 goal is trade deficits, or fiscal deficits or anything else; it’s still the stock market.

The other thing is, it’s hard to bet big on anything like this. The first rule of trading is ‘don’t blow up’ and if you get a call like this wrong, it can’t be fatal. So the risk-reward around the whole song-and-dance isn’t great and it isn’t fun but that’s going to be the name of the game for four years.

This article was written by Adam Button at www.forexlive.com.