Another important aspect that most investors forget is that the business cycle transition matrix is very sticky meaning that as soon as the leading indicators on the business cycle enters the recession phase (below trend and declining) then its stays in this state with an 87% probability. In other words, the state transition to the upswing phase has a low probability and most likely need an external policy decision as the catalyst for the transition.
US-China trade war will likely get worse
What is becoming increasingly clear is that the US and China has entrenched positions, and no one is willing to cave in. Both nations have put themselves into a corner where they can almost only lose face domestically for striking a deal. The path from here will be rocky and it looks like increasingly that the two countries will decouple to a large degree.
The US president has lately urged US companies to move production from China citing the International Emergency Economic Powers Act (IEEPA) which was passed in 1977. But regardless of whether the US president makes an executive order or not, US companies are already in motion in terms of reconfiguring their supply chain to other countries. The change will be painful and costly, but in any case, it’s a good idea to diversify one’s supply chain. Too many companies in the West have been too concentrated in China, but they did it because the country offered a compelling infrastructure and low-cost base for increasing their competitiveness.
Over the weekend a new round of US tariffs worth $112bn went into effects on consumer goods such as shoes, nappies and food. This comes on top of new tariffs from China and Trump administration has more tariffs in the pipeline with the intention to go into effect in mid-December. Also, China will celebrate on October 1, 2019 the 70th anniversary of the founding of the People’s Republic of China which means that Xi Jinping will most likely not soften any stance against the US as this is an important milestone for China.