Trade wars are infinite games

Newton’s third law states that for every action there is an equal and opposite reaction. And it’s considered a universal law. Proof of that is that China today announced a retaliatory tariff rate of 34% on all U.S. goods. We are now on a trade war, and since we imposed tariffs on every country, it wouldn’t be surprising to see more retaliations. As a result, futures are down heavily, VIX is at 35, the dollar index is down, and the 10 year treasury yield is printing 3.88%, getting closer to a point where Mr Bessent may consider extending durations and save the country a few trillions in interest expense. What’s next? Two things can happen: (1) the affected parties sit at a table to discuss a new world order, and similar to any other infinite game, whoever lasts longer, having the ability to endure pain, wins. (2) the situation escalates, and the trade war morphs into other types of war, including military. The first one may imply a prolonged period of drawdowns. The second, a more sudden move. We are entering a conflict era.

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