guggenheim partners trade wars are easy to win” …or are they? · investment advisors, llc,...

“Trade Wars Are Easy to Win”

…or Are They?

Guggenheim Partners

October 4, 2019

Scott Minerd

Global Chief Investment Officer

For financial professional use only. Do not distribute to the public.

History of the U.S.-China Trade War

Tariffs on Washing Machines Were the First Shot Fired in the Trade War

Source: Guggenheim Investments, Bureau of Labor Statistics. Data as of August 2019.

CPI - Laundry Equipment (3-month % change)

3Please See Important Disclosures and Legal Notice at End of Document.

-8%

-4%

0%

4%

8%

12%

16%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

20% tariffs levied on

imported washing

machines

U.S. and Chinese Import Tariffs Have Risen Dramatically

Source: Guggenheim Investments, Peterson Institute for International Economics. Data as of September 2019.

Average Tariff Rates for the U.S. and China

4

0%

5%

10%

15%

20%

25%

30%

Jan

Feb

Ma

r

Apr

Ma

y

Jun

Jul

Aug

Sep

Oct

No

v

De

c

Jan

Feb

Ma

r

Apr

Ma

y

Jun

Jul

Aug

Sep

Oct

No

v

De

c

Chinese Tariffs on U.S. Exports U.S. Tariffs on Chinese Exports

Planned Tariff

Hikes

2018 2019

Please See Important Disclosures and Legal Notice at End of Document.

Trade Uncertainty Surges After 20 Years of Stability

Source: Guggenheim Investments, Ahir, Bloom and Furceri, "The World Uncertainty Index“ (based on the number of times “uncertainty” is mentioned in EIU reports in proximity to a word related to trade). Data as of June 2019.

World Trade Uncertainty Index

5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1997 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

World Trade Uncertainty Index (equally weighted average)


“Trade Wars Are Good, and Easy to Win.”

- President Donald Trump

On Balance, Tariffs Harm U.S. Growth

Source: Guggenheim Investments.

Tree Diagram of Channels Through Which Trade Tensions Affect the U.S. Economy

7

Growth Impact

Financial Conditions

Stock Prices

Dollar

Spreads

Interest Rates

Inflation

Consumption

Profits

Uncertainty

Capex Plans

Consumption

Trade

Trade Balance

Supply Chain

Global Growth


U.S.’s Overall Trade Deficit Continues to Widen Despite Tariffs

Source: Guggenheim Investments, Haver Analytics. Data as of June 2019.

U.S. Goods Deficit with China and the World, % of GDP

8

-4.20%

-4.10%

-4.00%

-3.90%

-3.80%

-2.05%

-2.00%

-1.95%

-1.90%

-1.85%

-1.80%

-1.75%

2017 2018 2019

Goods Trade Balance with China (LHS) Goods Trade Balance with World (RHS)


Tariffs Drive U.S. Price Levels Higher, Hurting Consumption

Source: Guggenheim Investments, Haver Analytics. Data as of August 2019.

U.S. Consumer Price Levels on Selected Tariffed Goods & Core Goods (Index, January 2017 = 100)

9

97

98

99

100

101

102

103

104

105

2014 2015 2016 2017 2018 2019

Selected Tariffed Goods Core Goods PCE

Recreational vehicles,

household supplies, and

parts, furniture,

appliances.


For China, the Direct Hit of Tariffs May Be Less than Meets the Eye

Source: Guggenheim Investments, Haver Analytics, China National Bureau of Statistics. Data as of August 2019.

10

China’s Exports to and Imports from the U.S.Trailing 12-Month Change in Exports to and Imports from the U.S. (% of GDP)

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

2015 2016 2017 2018 2019

Imports from U.S. Exports to U.S.

Chinese exports to the

U.S. have fallen, but so

have imports from the U.S.


Tariffs Have a Disproportionate Impact on Foreign Firms in China

Source: Guggenheim Investments, Haver Analytics, China National Bureau of Statistics. Data as of August 2019.

Industrial Production by Type of Ownership (YoY%, 3-month moving average)

11

0%

4%

8%

12%

16%

20%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Total Foreign Owned Firms

Trade War begins

Exports account for 18% of production but more than 40% of

China’s exports come from foreign-owned firms or joint ventures


China’s Economy Is Undoubtedly Slowing, but Mainly Due to Financial De-risking

Source: Guggenheim Investments, Haver Analytics. Data as of August 2019.

Total Social Financing and Contributions (YoY%)

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19

Shadow Banking Corporate Bonds Equity Other Bank Loans Total Social Financing (YoY%)

Financial conditions started to tighten as authorities undertook

a sweeping financial de-risking campaign in 2017

12Please See Important Disclosures and Legal Notice at End of Document.

Trade War Disrupts U.S.-China Capital Flows

Direct Investment Flows Between the U.S. and China Have Fallen

Source: Guggenheim Investments, Rhodium Group. Data as of August 2019. *Annualized based on YTD data.

Annual Value of FDI Transactions Between the U.S. and China ($bn)

14

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

Chinese FDI in US US FDI in China

Capital flight after a failed

attempt to liberalize the

exchange rate


Will Capital Inflows Taper off as the Trade War Heats Up?

Source: Guggenheim Investments, Haver Analytics, China State Administration of Foreign Exchange. Data as of Q1 2019.

15

Non-resident Purchases of Chinese Stocks & Bonds ($bn) Resident Purchases of Offshore Stocks & Bonds ($bn)

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

$70

2014 2015 2016 2017 2018 2019

Thousands

Equity Debt

Ou

tflow

s

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

$70

2014 2015 2016 2017 2018 2019

Thousands

Equity Debt

Ou

tflow

s

…while residents have

added to foreign holdings

in an effort to diversify

Foreign holdings of

Chinese securities have

risen…


Accessing the Collateral Damage

Global Manufacturing Is Bearing the Brunt of the Downturn in Trade

Source: Haver Analytics, Guggenheim Investments. Data as of August 2019.

JP Morgan Global Composite Manufacturing & Services PMIs

17

48

49

50

51

52

53

54

55

56

2012 2013 2014 2015 2016 2017 2018 2019

Global Manufacturing PMI

Global Services PMI

Falling new export

orders weighing

on manufacturing


Tariffs Disrupt Global Supply Chains

Source: Guggenheim Investments, Haver Analytics, OECD. Merchandise trade only. Data as of 2018. Countries are selected based on their contribution of value-added to U.S.-China trade.

18

Origins of Value-Added (VA) Embodied in US-China Trade Taiwan, Korea, Australia, and Japan Are Most Vulnerable

China

Korea

Taiwan

Malaysia

Singapore

Australia

Saudi Arabia

Japan

Russia

U.S.

Germany

Canada

Mexico

Japan

Germany

U.K.

Korea

Saudi Arabia

France

India

Italy

U.S.

Tariffs

Non-Chinese value added

accounts for 20% of

Chinese exports to the U.S.

Non-U.S. value added

accounts for 10% of U.S.

exports to China

Major origins of

non-Chinese VA

embodied in

China’s exports

to the U.S.

Major origins of

non-U.S. VA

embodied in

U.S. exports to

China

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Taiw

an

Kore

a

Austra

lia

Japan

Mala

ysia

Saudi A

rabia

Canada

Russia

India

Sin

gapore

Mexic

o

U.K

.

Germ

any

Fra

nce

Italy

Value-Added Embodied in U.S. Exports to China (% of exports)

Value-Added Embodied in China's Exports to U.S. (% of exports)


Japan Has Been Caught in the Crossfire …

Source: Haver Analytics, Guggenheim Investments. Data as of June 2019.

Japanese Real GDP Growth & Contributions to Real GDP Growth (YoY%)

19

-2%

-1%

0%

1%

2%

3%

2014 2015 2016 2017 2018 2019

Consumption Investment Net Exports Real GDP


… As Exports to Asia Have Fallen …


20

Japanese Exports By Geography (YoY%, 6-month moving average)

-10%

-5%

0%

5%

10%

15%

2016 2017 2018 2019

Oceania

Asia

Midde East & Africa

Europe

Americas

Exports YoY%, 6m m.a.

U.S. strength not

enough to offset

weakness in Asia.


… And Consumption Is About To Be Tested by the October Tax Hike


Japanese Household Consumption (YoY%)

21

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Domestic Household Consumption, YoY%

April 1997

consumption

tax rate hike

from 3% to 5%

April 2014

consumption

tax rate hike

from 5% to 8%


Disclosures and Legal Notice

Disclosures and Legal Notice

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim

Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds

Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners

Europe Limited and Guggenheim Partners India Management.

The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or

a solicitation of an offer to buy or sell, any security or fund interest or any financial instrument.

No representation or warranty is made by Guggenheim Investments or any of their related entities or affiliates as to the

sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data,

information or summaries contained herein for any specific purpose. The views expressed in this presentation are

subject to change based on market and other conditions. The opinions expressed may differ from those of other entities

affiliated with Guggenheim Investments that use different investment philosophies. All material has been obtained from

sources believed to be reliable, but its accuracy is not guaranteed. Forward looking statements, estimates, and certain

information contained herein are based upon proprietary and non-proprietary research and other sources.

Past performance is not indicative of comparable future results. Given the inherent volatility of the securities markets, it

should not be assumed that investors will experience returns comparable to those shown here. Market and economic

conditions may change in the future producing materially different results than those shown here. All investments have

inherent risks.

The views and strategies described herein may not be suitable for all investors. This material is provided with the

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The comparisons herein of the performance of the market indicators, benchmarks or indices may not be meaningful

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for any specific purpose.

Forward-Looking Statements. This discussion material may contain forward-looking statements. Forward-looking

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be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions

underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions

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