The very definition of a Black Swan event is that they are rare and unexpected. We had one this past weekend in the sports world. Andy Ruiz defeated heavyweight boxing champion Anthony Joshua. Ruiz was a 19-1 underdog. The last major economic black swan event was the 2008 “great recession”. It feels like President Trump’s Trade War may be the catalyst for the next economic downturn. That’s not to say a potential recession will hit as hard as 2008. However, the Trade War itself is a black swan event. Who would have guessed a few years ago that in 2019 the U.S. would be fighting trade wars with China and Mexico? Why the self-inflicted gunshot wound? At days end it is we the consumer that bears the brunt of the trade war fallout as we are forced to absorb higher prices for finished goods (don’t expect every company to absorb 100% of the cost associated with tariffs levied on them and their trade partners).
China concerns me most insofar as a trade war is concerned. Dubbed the world’s factory, China exported $2.41 Trillion of goods in 2017 and imported $1.54 Trillion. China’s top export destinations are the U.S. ($476 Billion), Hong Kong ($255 Billion) and Japan ($157 Billion). China’s top exports are Broadcasting Equipment ($231 Billion), Computers ($146 Billion), Machine Parts ($91 Billion) and Integrated Circuits ($80 Billion). (source OEC MIT.edu)
Further, China is the largest foreign holder of U.S. Treasuries (approximately $1.1 Trillion). Suffice to say China has enough leverage points to make life economically difficult.
A trade war with Mexico would hit the Automotive industry hard. Many automotive suppliers are based in Mexico (here’s a list). Those suppliers will invariably pass expenses on to their customers, ultimately reaching the Auto OEMs. Our conclusion – automobile prices are likely to escalate this calendar year.
Enterprise Software Is A Bright Spot
The Enterprise Software Industry is one economic bright spot in these trade wars. Most Enterprise Software companies either don’t do business with China, or, China represents a very small percentage of revenue.