What Trump never told you about the price of a trade war "win"

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Neutral*
• Trading model: Bearish*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.


War is hell
War is hell, even trade wars. The world is again at risk of lurching into a global trade war. Last Friday, Trump announced the imposition of 25% tariffs on $34 billion in Chinese exports, with another proposed list totaling $16 billion that is subject to public comment and review. China has responded with retaliatory tariffs on $34 billion in American exports, mostly in agricultural commodities and automobiles.

Under these circumstances, it is useful to revisit my analysis written in January of the possible fallout under such a scenario (see Could a Trump trade war spark a bear market?). I had highlighted analysis from the Peterson Institute in 2016 modeling the effects of a full blown and abortive trade war on the US economy. The economy would lapse into a mild recession in the former case, but sidestep a recession in the latter case. However, the results did appear anomalous as I pointed that that the observation of (then) New York Fed President Bill Dudley that the economy fell into recession whenever unemployment rose 0.3% to 0.4%, as it would in the modeled result of the abortive trade war.

President Donald Trump tweeted in the past that "trade wars are good, and easy to win". What if he is right, and trade partners either backed down from retaliatory tariffs, or only imposed limited tariffs?

How would "winning" a trade war look like? Let's put on our rose colored glasses and take a look.

The full post can be found at our new site here.